A traditional funding source to help close the innovation gap in nursing homes | So Good News
A recent report from the National Academies of Sciences, Engineering, and Medicine (NASEM) presented an ambitious vision for the future of nursing home care in the United States. Among its recommendations, the report urges nursing home owners to “provide smaller, home-like environments and/or smaller units in larger nursing homes that promote infection control and person-centered care and activities.” The report further calls on the Centers for Medicare and Medicaid Services (CMS) and the Department of Housing and Urban Development (HUD) to develop incentives that support these changes.
Experts, researchers and advocates have been calling for tiny homes and home-like retirement homes since at least 2001, when Bill Thomas, MD, founded the Green House Project and received a $10 million grant to support it from the Robert Wood Johnson Foundation. 50 Green House development. Since then, Green House has helped transform the physical and organizational environment of the typical nursing home, characterized by large buildings, shared rooms, and a segmented staff structure that confines staff to specific roles.
Additionally, Green House Cottages typically accommodate 10-12 residents and have private bedrooms located around the communal dining and living areas. Additionally, Green House’s organizational structure has little or no hierarchy. A small team of general practitioners licensed as Certified Nursing Assistants work across functions and share responsibilities, supporting flexible and permanent staffing from a resident perspective. Green home operators have also shown better outcomes, including higher infection control, compared to traditional nursing homes. Unfortunately, the model was not widely distributed. Today, only 2 percent of the country’s 15,000 nursing homes are Green Houses. Medicare and Medicaid reimbursement models may be partly to blame. Dr. Thomas switched from amortization costs in nursing homes to future payments while developing the Green House tiny house model. The change introduced more variability in Medicare reimbursements, creating greater risk for operators and their capital providers, making capital-intensive projects like Green House unattractive or even impossible.
But the lack of adoption of the small home model is also directly related to the basic characteristics of nursing home care. Nursing homes provide housing and health care; therefore, changes in the physical environment often require significant capital investments from outside parties. Nursing home operators rely on scale (using a large building footprint) to raise the necessary private real estate capital to support modifications, renovations, and new construction, and most importantly, weather changes in an unpredictable payback environment. In other words, the scale requirements of a single nursing home inhibit the ability to scale the small home model more broadly. A large community of tiny homes may have the same number of beds as a typical nursing home, but in many tiny home settings, there are greater resident needs (and therefore staffing), as well as capital and square footage requirements.
Fortunately, the challenges that have hindered the development of the tiny home model (including relatively higher daily rates caused by initial construction and higher construction costs) can be partially addressed by the single largest source of capital in the nursing home industry: HUD.
A sustainable capital provider for nursing home operators
Basically, the HUD program insures loans made by HUD-approved private commercial lenders. In doing so, it protects lenders and helps nursing home operators obtain loans at much better rates and terms than would otherwise be available outside the program. The HUD program has long been a mainstay of nursing home capital structures. In fact, for some rural, single-facility operations, HUD may be the only available and obtainable loan option. In the past two years of the pandemic, HUD’s role has become even more important as many nursing home commercial lenders have been left on the sidelines. The growth in HUD nursing home lending since 2019 demonstrates the reliability of HUD’s program despite the uncertainty of the health care emergency. HUD is much more than private equity—it provides substantial capital to operators looking to build, refinance, or renovate nursing homes. In 2021 alone, nursing home operators received most of the $4.9 billion in HUD loans.
Over time, HUD loans have remained attractive to nursing home operators across the country, given their long-term financing terms and low interest rates. In turn, the program produced very low default rates. The “low drama” on both sides of these deals has kept the program largely under the policymaking radar, especially compared to larger industry transactions financed by a combination of debt and private equity.
While the NASEM report said HUD has a major role to play in promoting nursing home innovation, the program in its current form has failed to stimulate capital investments consistent with larger federal policy goals to improve the physical environment and clinical and operating models. can provide the high-value care patients and residents deserve.
HUD loans can contribute to an updated physical environment and improved care for nursing home residents
Below are some immediate steps HUD can take in collaboration with CMS to enable and reward nursing home innovation.
First, HUD and CMS could work together to identify an approved set of nursing home innovations that could qualify operators who choose to adopt them for faster access to HUD funds. The list of approved items can relate to the physical plant (such as the design of a small house) as well as to innovations that require less capital (such as technology and telecommunications upgrades and air purification systems). Importantly, these special funds can be structured as direct grants, shortening the time to provide capital and stimulating the kind of change needed to modernize the nation’s nursing homes. These special grant structures may be tied to permanent ownership and the operator’s commitment to use the funds for a specific purpose within a specific period. HUD’s affordable housing models have used grants in the past, and this model can complement HUD’s core loan process by supporting specific construction and other innovative goals, rather than replacing it.
Second, growth and innovation initiatives are underweighted in the current HUD loan process; innovative and innovative operator can access credit at the same rate. The developed HUD program can maintain minimum rates for classified innovative borrowers by assigning points for certain activities, such as developing private rooms, implementing telemedicine/remote patient monitoring, and investing in and using data systems and analytics. This could encourage operators to invest more in innovations that directly benefit their populations, as well as support a successful transition to value-based care.
Finally, given the importance of CMS quality measurement and the ways in which innovation can affect the achievement of established goals, CMS and HUD could build on the proposed collaboration to promote the aforementioned HUD credits as an important resource for quality-based operators. Operators who invest in initiatives that support CMS quality thresholds (including tiny houses and low-capital clinical and operational innovations) can access a favorable class of HUD loans with low rates and favorable terms. For example, operators who implement creative staffing models, such as using a high ratio of universal workers, may be considered for these credits. Importantly, the potential benefits of these initiatives, including consistency in patient-staff relationships, reduced morbidity, and reduced staffing gaps in specific specialties, are consistent with CMS quality goals.
New HUD housing policies can align with and support calls for change in nursing homes. Renewing HUD’s existing public-private infrastructure with grants and loan terms focused on specific innovations such as tiny house designs offers a logical place to begin much of the proposed reform, which is supported by policymakers and consumers.
Given the HUD program’s dominance among nursing homes of all sizes, it has the potential to rapidly drive change across the board. For many small, family-owned and often rural operators, HUD represents a lifeline. In addition, carriers across the country are expanding their limited capital base to invest in new initiatives such as Medicare Advantage institutional special needs plans and technology upgrades. A progressive HUD program can speed up these activities. In an evolving healthcare environment, there is a significant opportunity to further support all of these operators and their communities by encouraging new models of care that ensure the long-term viability of nursing homes.
Robert Kramer is co-founder and strategic advisor to the National Investment Center for Nursing Homes and Care, which funded ATI Advisory (founded by Ann Tumlinson) to produce a related report on the nursing home sector.