Plans and Considerations for Closing a Nursing Home
|BY JEROME T. LEVY|
|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.|
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:
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.
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.
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
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.
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 (215) 979-7300 or visit www.duanemorris.com. To send your comments to the author and editors, please e-mail email@example.com.
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