State Construction Rules Encourage, Stifle Senior Living Innovation

As senior living organizations nationwide look to reinvent the traditional “nursing home” model, those in two states will have very different opportunities to do so in the coming years.

On one hand, a proposed bill in Indiana is seeking to ban construction of new nursing homes for three years, which industry participants say will stifle quality and innovation in the space.

At the same time, Florida has temporarily lifted its 14-year-long moratorium on nursing home construction, leading to the recent approval of 22 new facilities and the expansion of 11 existing sites.

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One senior living organization is in the midst of it all: Mainstreet, the nation’s largest developer of post-acute health care properties.

The Carmel, Indiana-based developer has long focused on Indiana as its target market, until recently branching out to other states. Currently, Mainstreet is developing in 11 states and has more than 50 active projects in its pipeline.

Last year, Mainstreet made headlines when Health Care REIT (NYSE: HCN) entered into a partnership with the developer to acquire 17 of its NextGeneration communities in addition to 45 communities in its future pipeline.

Now, with the lifted ban on skilled nursing construction in Florida, Mainstreet is already in the throes of planning its entry into the state.

But there are more widespread implications — both good and bad — arising from the two states’ moratoria, which could significantly impact the industry in the near future.

Indiana’s Proposed Ban

Senate Bill 460, authored by Republican Sens. Patricia Miller and Ryan Mishler, would prohibit the state department of health from approving: the licensure of nursing homes; new or converted skilled care beds; and the certification of new or converted skilled care beds for participation in the state Medicaid program through June 30, 2018.

The proposed bill would exclude properties that are under development, small-house health facilities, replacement facilities and continuing care retirement communities (CCRCs), as well as those properties located in counties whose occupancy exceeds 90%, and those that are undergoing a change of ownership for certain purposes.

“To me, it’s utterly ridiculous that Indiana is even considering this,” says Mainstreet Founder and CEO Zeke Turner. “I still can’t even get my mind around the fact that this has any traction. It goes against exactly what is needed in health care today: greater efficiency in health care dollars, improved care, and innovating. Amazingly, Indiana is embracing the idea of stopping all that.”

Currently, Indiana represents about 10% of Mainstreet’s overall business, Turner says, noting that if the moratorium takes effect, Mainstreet will just redirect its work elsewhere.

While he doesn’t expect the company’s financial footing to be impacted significantly by the potential ban, he says the state of Indiana — and its residents — have a lot to lose.

“What’s being proposed is to roll back the clock about 20 years, setting health care in Indiana back by a couple of decades,” he says. “The group that will suffer will be the consumer. Mainstreet wouldn’t be financially harmed by it because we’ll redirect our work, but Indiana will be harmed substantially.”

Widespread Implications 

Indiana’s proposed moratorium is expected to reduce state Medicaid expenditures by $2.2 million, but research suggests these savings could come at a steep price.

Some argue that the nursing home moratorium would strongly damage Indiana’s job market, as the average nursing home project in Indiana represents a $15 million dollar investment and employs more than 300 construction workers while providing business to other construction-related firms.

Additionally, researchers and industry participants argue that a moratorium, or certificate of need (CON) restrictions, increases health care costs for consumers by as much as 5% by hindering competition and forcing patients into older facilities.

On the other hand, proponents of Indiana’s proposed bill argue that the state already has too many empty beds in nursing homes.

Indiana currently has roughly 530 licensed nursing facilities and more than 50,000 licensed comprehensive care beds with an average occupancy rate of 76%, according to state figures. Nationally, nursing facility occupancy is approximately 83%.

However, Turner suggests that the occupancy issue isn’t linked to bringing new competition into the market. Instead, it’s a reflection of the older facilities that lack updated amenities and services, he says.

“The industry’s had about 30 years to innovate and improve, and they’ve not done that — that’s what’s causing the occupancy to decline,” he says. “The consumer is just rejecting the product. New product coming in that’s desirable to the consumer doesn’t have an impact on the old product.”

Dozens of other states have similar CON restrictions limiting nursing home construction, but several are pulling back or reviewing their moratoria to allow for skilled nursing innovation.

“Mainstreet is very active in other state discussions about the opportunity to take a fresh look at this to open up the market to innovation,” Turner says. “We know of five to six other states that are actively considering opening up the moratorium to new construction.”

One state that has already done so is Florida.

Florida Opens Door to Opportunities 

Due to the growing demand of nursing care facilities, Florida temporarily lifted its 14-year ban on nursing home construction last year, and recently approved proposals for 2,600 beds in 25 counties, according to local reports.

“What Florida realized is that the market has changed,” Turner says. “But rather than repeal [the moratorium] completely, it has created a pressure relief valve on the system to allow for some movement of beds and some new development.”

In 2001, the Florida legislature placed a moratorium on the issuance of CONs for additional community nursing home beds until mid-2006. The construction ban lasted until July 1, 2014, when its lift was effective.

As a result, the Agency for Health Care Administration (AHCA) has been authorized to approve new, converted or expanded nursing home beds under the CON process.

However, the bill prohibits AHCA from issuing any CONs for new nursing home beds once a total of 3,700 new beds have been approved from July 1, 2014 to June 30, 2017.  On July 1, 2017, the ban’s lift is set to expire.

With the moratorium at least partially repealed, Mainstreet will now be able to enter the state, and has been awarded several CON certifications to do so. The developer is partnering with different operators and is already in the site-selection phase.

Despite the newfound opportunities available for senior living developers and providers, some elder care advocates have raised concerns that an increase in nursing homes may overstretch regulators who could, in turn, have trouble monitoring the quality at all of the new facilities.

Additionally, legal experts have suggested that there could be increased provider litigation over rejected requests to build.

Still, the state’s decision could positively impact more developers and providers in the future, as Turner believes Florida may eventually repeal its moratorium completely.

“The most likely case is that it’s headed toward a market-driven system,” Turner says.

Written by Emily Study

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