Subacute: the rise of hospital competition.

Interview with Harriet S. Gill, Gill/Balsano Consulting, Atlanta, GA

For years skilled nursing facilities have dominated the fast-growing subacute care market, partly becaue of their role as hospital's DRG "escape valve," and partly because they've been perceived as the lowest-cost providers. It's been thought that high-tech hospitals could never hope to compete with SNFs on overhead. Consultant Harriet S. Gill debunks both notions, and says it is time for SNF's to wake up to some new realities in the subacute market: Hospitals have new problems in confronting subacute needs, and whether SNFs survive as part of the solution or fall by the wayside is pretty much up to the SNFs themselves. She bases her observations on her consulting firm's contacts with a predominatly hospital-based clientele - indeed, her firm has done its share in advancing a rapid growth of hospital-based SNF's that saw their ranks increase nearly 60% in the past five years (and accounting for nearly a third of hospitals). What should subacute-oriented SNFs start thinking about? Gill elaborated, in this interview with Nursing Homes Editor Richard L. Peck

Peck: Are hospital-based SNFs becoming a major competitive factor in subacute?

Gill: Absolutely. The bottom line is that hospitals "think system," and when they see managed care capitation coming down the road, they know that they have to have control of that system. And subacute is an important part of that.

Peck: But what about that overhead advantage that nursing facilities are said to have, i.e., they can do subacute for almost half the cost?

Gill: That's a fallacy, for the simple reason that we're talking not about costs, but about price - and hospitals can price subacute care quite competitively if they choose. Hospitals don't have to allocate costs fully across all units; they can manage on what is called a contribution line, i.e., how much a unit is actually contributing to overhead - and price it accordingly. For traditional Medicare, you can fully allocate a hospital-based SNF for its first three years under the Medicare reasonable cost allowance, of course. Under current reimbursement, this works extremely well for hospitals.

There are other reasons, though, why hospitals' interest in subacute is picking up. Hospitals want to keep their medical staffs happy - and physicians tend to be less happy when subacute is provided at a freestanding facility down the road. Because these patients are entering sub-acute sicker and sicker, the physicians prefer to keep them close by in case they crash. They also want to be able to conveniently make rounds - and get rounds fees; a decrease in convenience leads to fewer rounds and fewer fees. Physicians are also more likely to transfer patients quickly when the unit is in the hospital.

Peck: You mentioned hospitals wanting more "control of their systems." Would you elaborate on that?

Gill: It is crucial that nursing homes understand this, and I am amazed at how few really do. They can't really present themselves to hospitals as the "solution" to their problems if they don't understand what those problems are.

Hospitals realize that, under capitation, giving patients to someone else is not in their best interest. They lose control. They also don't want to be giving money away, and subacute reimbursement is available. Contrary to what HCFA might think, hospitals are not trying to gouge the system, they're simply playing by the rules as they exist. When the rules change, as under managed care, they want to be ready.

Peck: What impact might adoption of a Prospective Payment System (PPS) have on all this?

Gill: It will have a tremendous impact on the entire post-acute care system and how care is delivered. Specifically, home care should see greater volumes. If sub-acute programs have an incentive to discharge patients earlier than they do now, home care will be the vehicle to provide the remainder of the patient's care. We are already seeing a significant growth in hospital-owned home care agencies. Home care has been utilized by hospitals as a mechanism to shorten length-of-stay in acute care, and will be so utilized by subacute units.

Hospitals are in the best position to develop home care agencies, as it takes significant volume (15,000-20,000 visits per year) to be successful. Hospitals also look to their own agencies to develop the right programs to meet the needs of their acute care patients. Also, as long as home care agencies can take advantage of being hospital-based, there are reimbursement advantages to hospitals.

That is also why I would caution nursing homes considering going into the home care market themselves. They may be going into competition with the hospitals that fill their beds. Most hospitals don't appreciate the competition, and may decrease inpatient referrals because of it.

There is an interesting sidelight to this: As part of "control," hospitals are developing much more aggressive critical pathways, so that patients can move directly from the hospital to home care, which is quite technologically driven already. As this occurs, the demand for subacute beds will likely go down, perhaps dramatically.

Peck: Assuming, though, that there will be a subacute market for the foreseeable future, what is the approach hospitals are taking these days?

Gill: They have five orders of priority: 1) convert the available beds that they have; 2) find beds that have been approved but not built and buy them; 3) find beds that have been approved and built, and buy them and move them; 4) buy a freestanding SNF; and 5) joint venture with a SNF.

Peck: Which seems to leave freestanding SNFs pretty much on the outs, doesn't it? What does this mean concerning their subacute future?

Gill: It means that they have to think about what they're doing vis-a-vis hospitals, and plan accordingly. First, they should look at what sort of subacute care they can in fact do best. An example might be orthopedic rehabilitation. Orthopedic surgeons are paid a flat fee, no matter how many rounds they make, so they are more amenable than other physicians to making these referrals. Also, these patients tend to be in relatively good shape medically - they have more disability than disease. Nursing homes can manage these patients more cheaply. (By the way, this is also true of many short-term neurologic rehab cases, as well.) There is something to be said for the sheer experience nursing homes have had in getting things done cheaply. Given the appropriate cases, they really can't be beat.

Second, if nursing homes understand where hospitals are coming from these days with the issues of capitation and control, they will then realize that they can enhance their attractiveness to hospitals as subacute care partners by taking on shared risk. Shared risk contracts can mean shared control.

The important word to remember in all this, though, is "control." Many nursing homes that are getting subacute referrals today may think they're doing well, but they just may find themselves out in the cold in a few years, when hospitals figure out how to work all this out to their financial advantage. The bottom line, after all, is that hospitals have the patients, and therefore they can control patient flow.