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What's ahead for subacute.

An Interview with Harold M. Ting, PhD, Ting Healthcare Consulting

In the competition for the burgeoning subacute care market, free-standing skilled nursing facilities have enjoyed a strong head start, thanks to their cost advantages and lack of certificate-of-need requirements. And there is much more growth to come. However, nursing homes' window of opportunity is closing fast, and more and more competitors are entering the flay. If a skilled nursing facility has serious intentions of ever offering subacute services, the time to start the process is now.

These are some of the major conclusions to be drawn from the recently published "Subacute Care: Analysis of the Market Opportunities & Competition" by Harold M. Ting, PhD, a Seattle-based health care consultant. Published by the Center for Consumer Healthcare Information (Newport Beach, CA), the study offers an unusually broad and deep depiction of how this market is likely to develop through the year 2000.

As things stand today, Dr. Ting reports, 90% of today's more than 700 subacute providers operate under a SNF license, perhaps two-thirds of them as part of multi-facility chains. Perhaps another 1,500 SNFs are treating patients who need subacute care, but do not have full-fledged subacute programs. Profit margins for these facilities are, in general, ranging around 15%. The subacute care market is expected to grow at about 18% a year through the year 2000.

Not surprisingly, acute care hospitals and rehabilitation hospitals are starting to sit up and take notice, concluding that retaining subacute care patients may not be such a bad idea. Recently, Nursing Homes Editor Richard L. Peck asked Dr. Ting to expand on competitive developments and other key findings of his study.(*)

Peck: How do you size up nursing homes' current positioning in the subacute care market?

Dr. Ting: There is plenty of room for growth. Right now we are at about half the potential utilization for this market. But there's going to be quite a bit of competition for this. I analyze it this way: In a metropolitan area of 1 million people, there will be a need for 6 average-sized (about 30-bed) subacute units. In that geographic area you will find 38 SNFs, 4 rehabilitation hospitals and 21 other DRG-exempt specialty hospitals - a total of 63 providers to meet a need for 6 subacute units. And this doesn't include, of course, the acute general hospitals. This will, of course, vary from area-to-area according to demographics and other market circumstances, but that gives you some idea of the competitive situation.

Peck: How competitive are hospitals becoming?

Dr. Ting: Until recently acute care hospitals were happy to let SNFs do the job, and some rehabilitation hospitals were in a state of denial about the field. Now they see that the subacute market is real and growing and has considerable economic potential. About 25% of current subacute capacity is in the hospital setting, including hospital-based SNFs. To be cost-competitive, hospitals may simply choose not to allocate general overhead to these units. Many can find the flexibility to do this, just as they have with ambulatory surgery.

Advantages hospitals might offer would include backup for higher-end subacute patients, who will not need as many transfers as they undergo now. Hospitals also have long-standing close relationships with physicians, who play an important role in subacute care.

Peck: Against what competitive advantage for nursing homes?

Dr. Ting: Skilled nursing facilities still have a general advantage in costs. There are other strategies they can capitalize upon as well. They can specialize in subacute services, focusing for example on wound care or rehabilitation. Nursing home chains have an advantage, too, in that they frequently can offer multiple facilities in an area, something that hospitals can't readily do.

Peck: The vast majority of nursing homes still seem to be hanging back from getting involved in this market. What seem to be their biggest obstacles?

Dr. Ting: It's just such a different mode of operations. They have to change their paradigm to more medical treatment, development of skilled nursing and therapist staffing, working more closely with physicians, including specialists and, down the road, dealing more with managed care and private insurance. They need to become accustomed to dealing with case management and using sophisticated cost accounting systems.

Peck: How does the capital market look for nursing homes wanting to get involved in this?

Dr. Ting: First of all, the facility is looking at an expenditure of $250,000, minimum, to establish a subacute care unit. This includes the expenses involved in program design, staff training and hiring, remodeling, equipment purchases and so forth. Then, if they are not establishing an acute hospital program, they have to deal with Medicare's Reasonable Cost Limit exceptions process, which has delays and, as a result, puts pressure on operating capital. Medicare policy is a very serious consideration in the subacute market today, since the program accounts for about 75% of the market and is likely to continue to predominate.

Obviously, the chains will have advantages over independent nursing facilities in having economies of scale to develop necessary accounting systems, case management, treatment protocols, training programs, outcome tracking systems and so forth, and capital is usually more available to them, as well. In addition, they can draw from the equity markets to finance the associated costs. Independents can raise capital from joint venturing with management companies, such as Mariner, National Healthcare Affiliates and Transitional Health Services - or by being acquired by chains that do have these capabilities.

Peck: Does that mean that independents ought to give up on attempting to enter this market themselves?

Dr. Ting: Not necessarily. If they have a strong position in the community, a good location, well-qualified nursing staff, good working relationships with providers and reliable referral sources, they have the basics. These facilities might do well, however, to get some independent consultation on getting started in this market.

Peck: Coming, as they do, from a chronic long-term care background, what factors should these facilities keep in mind in attempting to integrate subacute care?

Dr. Ting: There is no question that nursing homes must re-examine their mission. As noted, subacute is more of a medical model than they are accustomed to. Who do they want to serve? Will it continue to be primarily the elderly? Can they adapt to managing younger patients? Do they have the management time and capability to manage subacute care services without damaging their long-term care commitment?

They might also want to consider their relationships with other providers in the community. For example, will this put them into competition with a hospital with whom they've had a longstanding relationship? If so, that might undermine, rather than reinforce, integration.

Peck: Even though Medicare predominates in this market, how available to nursing homes are subacute contracts from HMOs and hospitals?

Dr. Ting: HMO contracts are quite available in areas where HMOs - particularly Medicare HMOs - are highly concentrated. California, Florida, Arizona, Oregon and New York are the top five states where that pertains right now. In areas where HMOs have not achieved much penetration, most payers are not contracting for subacute services explicitly. That's where identifying referral sources is the key question for facilities looking to enter the market.

As for hospitals, subacute contracts with freestanding nursing homes are not very common right now. These might come with the continued development of integrated delivery systems.

Peck: What about Medicaid managed care, which it seems reasonable to assume should have direct impact on long-term care eventually?

Dr. Ting: So far this hasn't been a factor in the subacute care field. Some states, such as California, Virginia and New Jersey, do have special Medicaid rates for subacute care, but the market really isn't very sizable as yet.

Peck: What sorts of trends do you see for reimbursement for subacute care?

Dr. Ting: Much depends on what Medicare is going to do in the next few years. Obviously, Medicare is concerned about possibly "paying twice" for patient care - DRG plus subacute - and is also not very happy about the fact that most of its reimbursement is still cost-based. I anticipate some recalibration of DRG rates for subacute. Also, Medicare has proposed a prospective reimbursement system for nursing homes to begin next year. Meanwhile, Medicare is continuing to pay Medicare HMOs a capitation - although I'm not convinced that capitation is the way to go for subacute.

Peck: Why is that?

Dr. Ting: Capitation works because it puts the physician - the decisionmaker - at-risk. The incentive is for them to use the lowest-cost yet still effective level of care. Subacute care is a level of care, not a decisionmaker - except to the extent it may decide to reduce its quality of care and achieve savings that way. This is obviously not a healthy incentive, and it discourages rather than encourages the use of subacute services - just the opposite of what the subacute market needs.

I think per-case reimbursement - a sort of DRG approach - is a more workable model for subacute care. This takes into account the resources that are needed for a "typical" subacute case, and builds in provisions for exceptions.

Peck: Aside from possibly better reimbursement, one of the key attractions of subacute care to nursing homes is that it is relatively unregulated. Will that change? If so, what regulatory trends do you see?

Dr. Ting: HCFA may develop special regulations for subacute care to accompany its prospective reimbursement. Also, I think the three-day hospital stay requirement will be reviewed; there are patients in subacute units who have had only one day's hospitalization or, in some cases, none at all, because they've come directly from a hospital emergency room to the unit. HCFA may also allow respiratory services to be contracted directly by nursing home-based traits, rather than having to contract through hospitals, as they do now.

There will probably be certification standards, as well. My hope is that the JCAHO/CARF standards will be adopted by HCFA so that facilities with either or both of these accreditations will be deemed federally-certified. There is no certainty of that, however.

At the state level, we are already seeing battles over certificate-of-need, with hospitals complaining that their CON requirements put them at a competitive disadvantage with SNFs, which don't need them to convert beds for subacute. We'll see how that works out.

Peck: Given the apparent fact that many nursing homes are at a decision point right now about participating in subacute care, what should they view as their "key to success"?

Dr. Ting: There are actually several keys: careful market assessment, especially in large urban areas; access to experienced personnel, whether hired or trained; JCAHO and/or CARF accreditation to attract private payers; quality medical leadership, including nurses as well as physicians; access to capital; and strong marketing.

Peck: In other words, it's a snap.

Dr. Ting: Right.

* Information on " Subacute Care: Analysis of the Market Opportunities & Competition" available from the Center for Consumer Healthcare Information, 4000 Birch St., Suite 112, Newoport Beach, CA (714)752-2335, (800)627-2244.
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Article Details
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Title Annotation:Cover Feature; subacute health care
Author:Peck, Richard L.
Publication:Nursing Homes
Article Type:Interview
Date:May 1, 1995
Previous Article:The Subacute Saratoga story.
Next Article:Adopting the "product line" focus in subacute.

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