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.
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.
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."