A recent report by the National Academy of Sciences, Engineering, and Medicine (NASEM) laid out an ambitious vision for the future of nursing home care in the United States. Among its recommendations, the report calls for nursing-home owners “to provide smaller, more home-like environments and/or smaller units within 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 smaller homes and more home-like nursing-home environments since at least 2001 when Bill Thomas, MD, founded the Green House Project and secured a $10 million grant from the Robert Wood Johnson Foundation to support the development of 50 Green House homes. Since then, Green House has helped revolutionize the typical nursing home’s physical and organizational environment, which is characterized by large buildings, shared rooms, and a segmented staffing structure that confines employees to specific roles.
Alternatively, Green House cottages usually accommodate 10–12 residents, and have private bedrooms situated around community dining and living areas. Furthermore, there is little to no hierarchy in a Green House organizational structure. A small team of universal workers, licensed as certified nursing assistants, work across functions and share responsibilities, supporting a more agile and, from the resident’s perspective, consistent staff. Green House operators have also demonstrated solid outcomes, including superior infection control, compared to traditional nursing homes. Unfortunately, the model has not proliferated at scale. Today, only 2 percent of the nation’s 15,000 nursing homes are Green House homes. Medicare and Medicaid reimbursement patterns could be partly to blame. Nursing home reimbursement shifted from cost to prospective payment around the same time Dr. Thomas was developing the Green House small-home model. The change introduced more variability into Medicare reimbursement, creating greater risk for operators and their capital providers, which made capital intensive projects such as Green House less attractive or even feasible.
But the small-home model’s lack of prevalence is also directly related to a fundamental characteristic of nursing-home care. Nursing homes offer a blend of housing and health care; therefore, changes in the physical environment often require significant capital investment from external parties. Nursing-home operators rely on scale (using the building’s footprint to serve large numbers of residents) to attract the necessary private real estate capital that can support modifications, renovations, and new construction, and importantly, to weather changes in an unpredictable reimbursement environment. Put another way, the requirements for scale within a single nursing-home facility hampers the ability to scale the small-home model more broadly. A senior community of small homes may have the same number of beds as a typical nursing-home facility, but across many smaller-home settings, with greater resident needs (and therefore staffing) as well as capital and square footage requirements.
Fortunately, the challenges (including comparatively more expensive daily rates stemming from greater upfront building and high development costs) that have hindered small-home model development could in part be addressed by the single largest source of capital within the nursing-home industry: HUD.
A Steadfast Provider Of Capital For Nursing-Home Operators
By way of background, the HUD program insures loans issued by HUD-approved private commercial lenders. In so doing, it protects lenders and helps nursing-home operators secure loans at potentially better pricing and terms than they would have otherwise been able to obtain outside of the program. The HUD program has long been a mainstay of nursing-home capital structures. In fact, for some rural, single-facility operations, HUD is likely the only affordable and obtainable debt option. HUD’s role became even more important during the past two years of the pandemic, as many nursing-home commercial debt lenders remained on the sidelines. The continued growth in HUD nursing-home lending volume since 2019 attests to the HUD program’s reliability, despite the uncertainty of the public health emergency. It is HUD—much more than private equity—that provides the substantial capital to operators looking to build, refinance, or remodel nursing homes. In 2021 alone, nursing-home operators received a majority of the $4.9 billion in loans made under the HUD program.
Over time, HUD loans have remained attractive to nursing-home operators across the country given their long-term financing conditions and lower interest rates. In turn, the program has produced extremely low default rates. The “low drama” on both sides of these deals has largely kept the program under the policymaking radar, particularly compared to the larger headline-making transactions in the industry funded by a combination of debt and private equity.
Although the NASEM report hinted at HUD playing an incrementally larger role driving forward nursing-home innovation, the program in its current form has failed to incentivize capital investments that align with larger federal policy goals of improving the physical environment and the clinical and operating models that can deliver the high-value care that patients and residents deserve.
HUD Loans Could Promote A Modernized Physical Environment And Enhanced Care For Nursing-Home Residents
The following are some immediate steps HUD, in collaboration with CMS, could take to enable and reward innovation within the nursing-home environment.
First, HUD and CMS could work together to identify an approved set of nursing-home innovations that could qualify operators who chose to adopt them for quicker access to HUD funds. The list of approved items could be related to the physical plant (such as small-home design) as well as less capital-intensive innovations (such as technology and telecommunication upgrades, and air purification systems). Importantly, these specific funds could be structured as outright grants that would decrease the time to secure capital and incentivize the type of change needed to modernize the nation’s nursing homes. These special grant structures could be contingent on consistent ownership and the operator committing to using the funds for a specific purpose over a specified duration. HUD affordable housing models have used grants in the past and this model could supplement, rather than change, HUD’s basic loan process while supporting specific construction and other innovation goals.
Secondly, growth and innovation initiatives hold little weight in the current HUD loan process; an innovative and a non-innovative operator can access loans at the same rate. An evolved HUD program could reserve the lowest rates for innovative borrowers, as classified by assignment of points for certain activities such as developing private rooms, implementing telehealth/remote patient monitoring, and investment in and use of data systems and analytics. Doing so can incentivize operators to allocate more funds to innovations that will directly benefit their population as well as support a successful transition to value-based care.
Finally, given the importance of CMS quality measurement—and ways in which innovation can influence achieving specified targets—CMS and HUD could build upon the proposed collaboration noted above to promote HUD loans as an important resource to quality-driven operators. Operators investing in initiatives (including small homes as well as less capital-intensive clinical and operational innovations) that support CMS quality thresholds could receive access to a favorable class of HUD loans such as those with lower rates and better terms. For example, operators who implement creative staffing models, such as employing a high ratio of universal workers, may be considered for these loans. Importantly, the likely benefits from these initiatives, including consistency in patient-staff relationships, minimized disease exposure, and reduced staffing gaps in particular specialties, all align with CMS quality goals.
New HUD housing policy can align with and support calls for change in the nursing-home industry. Updating HUD’s existing public-private infrastructure with grants and loan terms targeted at specific innovations such as the small-home design, presents a logical place to originate much of the proposed reform that policy makers and consumers are advocating.
Given the HUD program’s predominance among nursing homes of all sizes, it has the potential to drive change across the industry quickly. For many small, family-owned, and often rural operators, HUD represents a lifeline. Furthermore, operators across the country are already stretching their limited capital base to invest in new initiatives such as Medicare Advantage Institutional Special Need Plans and technology upgrades. A more progressive HUD program could accelerate these efforts. A significant opportunity exists to further support all these operators—and by extension, their communities—by incentivizing new models of care that promote the long-term viability of nursing homes in an evolving health care environment.
Robert Kramer is co-founder and strategic adviser at the National Investment Center for Seniors Housing and Care, which funded ATI Advisory (founded by Anne Tumlinson) to prepare a related report on the nursing home sector.