Plans and considerations for closing a nursing home: when thinking about the unthinkable becomes a viable option.

What was unthinkable five years ago is slowly happening today: Nursing homes are closing. Not because they have been forced to by federal or state regulators, but because owners have voluntarily decided to abandon the business of providing care to frail, elderly people. Voluntary closure of skilled nursing facilities more than doubled in the late 1990s, according to the Centers for Medicare & Medicaid Services, and anecdotal evidence suggests that this pace is continuing. As more facilities go out of business, and their property is dedicated to alternative uses, the question looms as to what will happen over the next ten years, when all demographic indicators point to an increased need for long-term care beds, driven both by the increasing number of aged persons and the fact that the elderly are living much longer into their senior years.

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Since the advent of the modern nursing home in the late 1960s, driven by recently enacted Medicare and Medicaid reimbursement, it has been axiomatic in the nursing home industry that nursing homes should not close. Usually only catastrophic results on federal or state quality surveys or gross financial mismanagement leading to bankruptcy would cause a facility to close permanently. Generally, when facilities were terminated from the Medicare program or when operators decided that they could no longer continue in business, a person, group, or corporation would be waiting anxiously to step in and operate the facility, whether through a receivership or transfer of ownership. This pattern continued for years. Facilities "closed" by the federal government or the states would reopen under new ownership and continue operation.

In recent years, however, a number of emerging factors are encouraging operators to choose voluntary and permanent closure. Such closures are becoming more common and are likely to increase in the months and years to come. The principal factors are as follows:

* Pressure from the federal and state governments on Medicare and Medicaid reimbursement is making it increasingly difficult for nursing homes to provide care in accordance with the standards demanded by the programs and still obtain a return on their investment or, in the case of not-for-profit facilities, fulfill their program missions and maintain margins.

* Nursing homes are no longer the first choice of individuals discharged from hospitals. The growing number of alternatives for posthospital placement has led to a "softness" in the nursing home census that was unthinkable ten years ago. The availability of home care, either through private insurance or government sources, has allowed individuals being discharged from hospitals to return to their home settings with appropriate care. Moreover, the growth of the assisted living industry, which after 25 years is beginning to mature, has allowed those who do not require highly skilled nursing care to choose a less intensive alternative. The more homelike, less institutional environments of many assisted living facilities, coupled with their lower cost, have made them attractive to people who have this choice of settings.

* Over time, in a number of areas, land use and community growth patterns have made nursing homes no longer the "best and highest use" for certain facility properties. There are cases in which land values for commercial development for hotels, or even residential development, have created situations in which the facility operators or owners of real estate can obtain a more effective return on their invested equity by dedicating the facility property to an alternative use.

* Particularly with an individually owned nursing home, as the generation that developed the nursing home retires, the adult children often do not want to stay in the business. They may decide that closing the facility and dedicating the property to an alternative use is a more efficient and profitable way of structuring their family affairs.

While precise figures on voluntary closures are difficult to determine, it appears that 13 skilled nursing facilities closed in New York State within 12 months between 2003 and 2004. What about the rest of the country? Will your facility be among them? Are any of the factors listed above coming to bear on you?

Before any facility reaches the decision to proceed with a closure, operators should carefully consider and plan for a variety of issues, including regulatory, labor, financial, and practical matters of coordinating an orderly transfer of residents. There also may be concerns about the facility's financing arrangements and the fact that most loans based on nursing home properties contain a covenant specifying use of the building as a long-term care facility.

Regulatory Concerns

Closing a facility will involve more than merely mailing the Operating Certificate back to the state capital. Most states require an administrative approval prior to the closure of a nursing facility. For example, in New York State, the health department regulations provide "[n]o medical facility shall discontinue operation or surrender its operating certificate unless 90 days' notice of its intention to do so is given to the commissioner and his written approval obtained."

New York requires that a "closure plan" be prepared and submitted 90 days before the projected closing date, which will include a contact person who is to coordinate between the state department of health and the facility, a copy of the letter proposed to be used to notify residents and their sponsor or relative of the closure and, significantly, a description of the plan to manage media contacts throughout the process. A facility is also required to indicate its process for identifying appropriate placement for patients or residents. Interestingly, this is not the problem it might have been five or ten years ago, as shortages of residents in many facilities mean that the closing facility will instead have the problem of managing eager former competitors fighting over acquiring its residents, rather than of seeking beds in already crowded facilities. The closure plan specifically requires notification of residents and next of kin, sponsor, and physician. The Department of Health also demands involvement of the facility's ombudsman, if one exists. Finally, the maintenance, storage, and safekeeping of residents' medical records are required. The closure plan must identify where the records are to be kept and who is to be responsible for coordinating access to the records.

In addition to regulatory concerns, there are the practical human concerns of informing residents, most of them frail and elderly, many of them with limited mental skills, that they will be leaving a place that they regard as their home. Management of resident fears and expectations becomes an important part of the process and will consume much of the nursing home operator's time during the closing period.

Although federal regulations require review of the discharge of residents from the facility, these will not apply to a facility's closure; the specter of a facility that is not economically viable being forced to stay open while "fair hearings" are held before residents' discharge is illusory. Nonetheless, the facility may have "hard-to-place" residents who will create problems and delays. The social work staff and admissions department (retooled for this purpose) will have to work long hours managing resident expectations and fears to reach the desired result.

With respect to maintenance of nursing care during the closure period, it is important that facilities be closed "unit by unit." This enables the facility to pare its employee roster in an orderly fashion. A unit must be fully staffed until it is empty. While nurses' aides may be eliminated, professional staff must remain in place on all shifts until the last person is discharged from the unit. Therefore, relocating residents to consolidate remaining units is an appropriate interim step, although an attempt should be made to minimize the number of transfers of any individual resident, as multiple transfers could concern regulators (and families). Even if the state agency approves the closure plan, the state will be supervising and monitoring during the closing process. It is in the facility's interest to adhere to the state's suggestions and guidelines with respect to avoiding multiple moves when possible.

Labor Issues

One issue that has been of great concern to a facility contemplating closure is its relationship with its employees. Under the federal Worker Adjustment and Retraining Act (also known as the WARN Act), when a facility with more than 50 employees is closing, it is necessary for it to give 60 days' notice to each of its employees prior to the closure. In the event that the closure does not occur on schedule, it may be necessary to re-notice the employees, which could create delays in final closure.

If the facility has a collective bargaining agreement, there could be further complications. Some labor contracts provide for severance pay to employees, which could place an additional financial burden on a facility that will be carrying a heavier payroll than is justified by the falling census. Even if the collective bargaining agreement does not provide for severance pay, the employer may need to offer severance payments to key employees, particularly department heads and social work staff, to ensure that they will remain at their jobs during what will be an emotionally exhausting period. The problem is always that the best employees will be besieged by competitors with offers of employment and may decide to "abandon ship" at the time when their skills are needed most.

Pension considerations play an important role in closure strategy. Depending on the kind of pension plan maintained for union and nonunion workers, employer contributions may be necessary upon termination of operations if the plans are underfunded. An operator cannot close a facility without consulting an Employee Retirement Income Security Act (ERISA) expert because the liabilities in the event of pension shortfall could be significant.

Finally, the owner must review and resolve the status of nonunion employees or executives who have written employment contracts. Often employees at this level have significant severance obligations or their contracts extend for periods long beyond the closure. Since, as noted above, cooperation of these executives is often needed to carry out an orderly closure, employers often will have to promise severance packages and bonuses even where none are called for in the employment contracts.

Liabilities to Third Parties

There may be ongoing liabilities to third-party payers, including governmental payers, which may become due immediately upon filing of the closure plan. For example, with Medicare, and with Medicaid in many states, there are ongoing audit situations that require facilities to pay back money over time in rate adjustments. Usually, when there is an ongoing relationship, Medicare or Medicaid is content to adjust the overpayment by recouping a small percentage of the ongoing program check. However, when a facility files for closure, the regulatory agency becomes aware that future ongoing checks will not be available. Government agencies may demand immediate satisfaction of the overpayment as a condition for closure. While this approach has not been tested in the courts, it is not hard to imagine a state health department taking the position that, if the facility wants to close, it must have a plan for satisfaction of its audit liabilities. Although Medicare, which does not control state licenses, is not in a position to exercise this kind of control, Medicare overpayments are a factor that must be considered by any facility contemplating closure, particularly if it is part of a multiprovider system.

Operators also cannot overlook outstanding payables to vendors and others owed in the ordinary course of business. The facility should reach out to its trade creditors to advise them of the projected closing and to reassure them, to the extent possible, about their prospects for payment. The danger is that rumor of the closing will reach creditors who might proceed to take unilateral, precipitous action if not provided a full understanding of the situation. A facility balancing the human, regulatory, and financial problems of a closure does not need the additional problems created by vendor lawsuits, heightened collection efforts, or a cutoff of essential supplies and services.

Finally, thought must be given to the question of the facility's financing--specifically, whether closure will trigger a default under any outstanding mortgage or credit line. Most facility mortgages, including all FHA guaranteed mortgages, have a "use clause" under which the facility is to be maintained as a skilled nursing facility. Typically, the borrower covenants that the premises covered by the loan will remain in service as a nursing facility. A change in this purpose or "use" would be viewed as a default under the mortgage, thus requiring acceleration of any outstanding indebtedness. If a facility is planning to close, it must first consider alternative plans for the property that would include a "takeout" or a restructuring of the existing mortgage financing. This can be done if the lender is amenable to maintaining the mortgage on the premises for an alternative use. In a case where closing is not brought about by a sudden regulatory act, this would take some planning or preclosing discussions with the lender in order to create a smooth transfer. In extreme financial circumstances when there is no immediate alternative use, it is clear that such a cessation of operation could trigger a default, which in turn would likely cause a bankruptcy.

Conclusion

The foregoing has been a consideration of some of the many factors involved in closing a long-term care facility. If the executives responsible for the facility plan carefully, closure can be accomplished with precision and minimal loss. This was the case, for example, for a 500-bed New York City facility that was closed earlier this year in 90 days without serious difficulty, although with a significant and budgeted cost. With advance planning and a focus on quality of care, orderly closure of long-term care facilities can be accomplished.

Jerome T. Levy, a New York partner in the 30-member firm Healthcare Practice Group of Duane Morris LLP, provided counsel recently to a large nursing home in New York that closed this year. For further information, phone [phone] or visit www.duanemorris.com. To send your comments to the author and editors, please e-mail [e-mail].