It appears that continuing care retirement communities (CCRCs) are in for another strong year.
Coming off a rebound in 2015, nonprofit CCRCs are expected to continue robust financial performances and high occupancy levels, a 2016 outlook from statistical rating organization Fitch Ratings revealed.
Fitch analysts noted that while CCRCs took a beating during the economic downturn, the operating environment has been revived over the last few years. A more stable residential real estate market, high occupancy levels and more favorable payment systems have contributed to a stronger environment, even with possible interest rate tightening from the Federal Reserve on the table and potentially mounting wage pressures.
Health Reform Equals Benefits
Changing health care payment models and shifting dynamics from the Affordable Care Act (ACA) have benefitted CCRCs, the outlook revealed, though not all the new initiatives have had an impact.
“While CCRCs have little direct exposure to the changes under the Affordable Care Act, the emphasis on reducing hospital admission and delivering high-quality post-acute/rehabilitation care has benefited many CCRCs, positioning them as desirable partners,” the 2016 outlook reads.
A focus on reducing hospital readmissions from the Centers for Medicare & Medicaid Services (CMS) has led to stronger partnerships with area hospitals for many CCRCs looking to become a preferred provider of post-acute services. The strategies include increasing their post-acute exposure to capitalize on higher reimbursements in this space.
Gary Sokolow, a director at Fitch Ratings and one of the authors of the outlook, told Senior Housing News that CCRCs with a bigger post-acute presence are positioning themselves with strong quality measures to partner with hospitals.
“The better ones have electronic records, can track their patients,” Sokolow told SHN. “They can show their outcomes and quality indicators. Given hospitals are looking to become as efficient as they can be, I think they are really anxious to find good post-acute partners.”
However, a recent report from the Office of the Inspector General (OIG) that recommended greater scrutiny by CMS over reimbursements for rehab services has cast a shadow of doubt over the future of this service line.
“It’s been a good service line for the industry, this short-term post-acute rehab,” Sokolow said. “Medicare, like a lot of other service lines, is beginning to look at whether they are getting the most for the dollars they are spending in this area.”
In 2012 and 2013, skilled nursing facilities (SNFs) increased Medicare billing by $1.1 billion, largely driven by the highest levels of rehabilitation therapy that allow for higher reimbursements.
The OIG’s report recommended a reevaluation for how these services are billed. If acted upon, a change in reimbursement by Medicare could impact the profit margins for CCRCs, analysts noted.
As a result, some CCRCs are anticipating some “headwinds” along this service line, said Sokolow, which marks a notable shift from just a few years ago.
Another challenge some CCRCs are anticipating are rising labor costs as the economy continues to improve.
“If wages begin to rise and the job market get more competitive, that could be a minor stressor on some budgets,” Sokolow told SHN. “Some CCRCs are building increases into their budgets for that already in certain markets, which wasn’t the case a few years ago.”
One Word: Stability
Despite ongoing changes in health payment systems, analysts were bullish on the overall operating environment for CCRCs, noting that an improving economy and better real estate sector is driving higher occupancy levels.
“The bigger story here is that the ability for the housing market to absorb sales is moving things along,” Sokolow said. “Prices may not be increasing, but there’s confidence you can sell your home and be able to move into a senior living facility. That confidence is a big marker.”
Fitch analysts anticipate that occupancy levels will continue to remain strong in 2016 and improve CCRC performance.
“Higher occupancy means a better revenue flow and better entrance fees, which can then really outpace expenses and keep operations stable,” Sokolow said.
Capital investments will also likely rise next year as a result of higher occupancy rates, as CCRCs will continue to look for ways to expand once hitting near-full occupancy. According to Sokolow, some of these investments will be directed toward improvement projects for newer, higher-end amenities, more dementia care facilities and expansions within independent living.
“Solid operating results, improving occupancy, growing demand for services and low cost of capital will trigger capital investments to keep communities competitive and address certain service-line needs (e.g. memory care) and/or unit-mix issues,” the outlook states.
Investments in these areas are likely a reaction to high occupancy rates.
“Once occupancy has reached a certain level and tends to perform stable, some of the challenges are for the places that are at 95% occupancy,” said Sokolow. “That will put pressures on finding other ways to expand.”