As nursing home operators continue to decry staffing shortages as a contributor to access issues for residents, new construction of facilities to meet demand appear to be lagging as well.

New construction has become especially difficult for operators trying to add Medicaid beds for low income residents, given notoriously low reimbursement rates – which are only now seeing a boost – and as construction costs skyrocket and financing options dwindle, according to industry experts.

Only three new nursing homes have opened so far in 2023, a stark number when one considers the amount of closures seen in the industry – 579 closures from 2020 to present. That’s according to a report from the American Health Care Association (AHCA) released in August.

And, the new builds didn’t add beds to the marketplace as facilities continued to downsize. There are 45,217 fewer nursing home beds available today compared to pre-pandemic, which has led to roughly 21,508 residents displaced as of early summer.

More than 30 counties across the country became “nursing home deserts,” a trend which may worsen when adding the federal minimum staffing proposal to the equation.

Escalating costs in construction, no additional revenue and an inability to cover the debt service of a new build are all contributors to depressed levelsl of builds this year, according to Dana Wollschlager, partner and practice leader with Chicago-based CPA and business advisory firm PlanteMoran.

“When you’re talking about $500 a square foot to build a brand new nursing home, even if there’s some sort of an uptick in reimbursement for new construction, in terms of a replacement it’s still not going to cover the debt service,” she said.

SNF clients are coming to PlanteMoran with facilities built in the seventies, looking to replace 80 beds with 80 beds, but the problem is that they’re adding a huge amount of debt with no new revenue.

“You can’t get the math to work. Unless the Feds or the state are going to cover the cost of that debt service through reimbursement, it’s not going to happen. They’re already at a negative margin,” said Wollschlager.

Some operators like Vivage Senior Living are being innovative with financing as it’s getting harder to go a more traditional route with a bank lender. The Colorado provider used a USDA loan along with a city sales tax 1% increase in La Junta, Co., to pay for a small home model property made up of 14 private rooms per house for a total of 56 beds.

“We have a very long waiting list,” said Heather Terhark with Vivage. “They’ve been without a skilled nursing facility all of this time. Folks have had to go to other counties and other cities.”

Other operators have opted for renovations to bring down cost and add beds to a given market, that is if they’re creative, representatives from Georgia-based Care Facilities Construction told Skilled Nursing News.

One Majestic Care property in Indiana, formerly half skilled nursing and half assisted living, is converting its assisted living side into SNF beds, noted Justin Abshire, co-founder and executive vice president at Care Facilities Construction.

A need for Medicaid beds

Financing for Bluestem Village in La Junta was approved following the closure of the city’s former SNF, she said. The La Junta property will eventually take both Medicare and Medicaid beneficiaries, a rarity with a new build, Moskowitz added.

“Most of the builds we’ve seen in the last few years have really been driven by Medicare, with higher reimbursement,” said Moskowitz. “There aren’t a lot of Medicaid builds because it’s very expensive to build a facility, especially when there’s emphasis on private rooms.”

Private rooms is a directive for new builds set to take Medicaid beneficiaries, he said.

The average operating margin in a nursing home is at a negative 17%, according to AHCA reports. There’s no excess money to fund new development and facilities are already losing money, added Sally Heffernan, certified public accountant and certified managerial accountant with PlanteMoran.

The real crisis in access, and where policymakers need to devote their time and energy, will be with the indigent poor and elderly, Wollschlager told Skilled Nursing News. This population is usually on Medicaid.

“This is a little misleading, from my perspective, to think that we need all these skilled nursing beds – we need them for people that cannot afford it,” said Wollschlager.

During the pandemic, an average of 64 nursing homes opened per year. Other care settings, including more than half continuing care retirement communities, plan to reduce their skilled nursing footprint in the coming years according to a report from CliftonLarsonAllen.

PlanteMoran is working on a SNF project in Philadelphia with a nonprofit organization, which plans to downsize from a 44-bed facility to an 18-bed property, replacing a building built in the seventies.

“That will show up I suspect as a brand new skilled nursing facility, but it’s not new beds – they actually downsized,” said Wollschlager. “I’m not as concerned about the loss of skilled nursing beds, because we have added so many other alternatives that the consumer would prefer.”

Of PlanteMoran’s development projects, there is only one nursing home replacement, she added, financed entirely by fundraising.

“It’s a Catholic organization that only serves the poor population. Every single person will be a Medicaid resident. They fund their operating losses, anywhere from a million to $2 million a year, through fundraising,” said Wollschlager.

Skilled nursing builds in states with certificate of need (CON) requirements usually need to buy beds from another existing provider, while in other states they need to get legislative approval to move them from one location to another, according to Wollschlager and Heffernan.

The ‘have-nots’

The more concerning issue here is where the have-nots – or those on Medicaid – are going to go, if not the nursing home. County-owned nursing homes and the Medicaid system were designed for the indigent, poor elderly. It’s this population that will fall through the cracks if leaders in the industry aren’t thinking about their care setting.

“From a policy perspective, we have got to focus on that demographic, the indigent poor and elderly, and then we need to make sure that we’ve got the skilled nursing safety net that is being adequately reimbursed,” said Wollschlager. “We also need to be very thoughtful from a policy perspective about continuing to move to leverage Medicaid waivers in housing and services settings.”

A Medicaid waiver is a provision in Medicaid law that allows the federal government to waive rules that usually apply to the Medicaid program – with the intention to allow states to accomplish certain goals.

Minnesota was using Medicaid waivers in the eighties and nineties, and Illinois recently tied waivers to a light technology program, she said, but other states like Florida don’t have any such waivers in place.

“They’re going to have this huge gap of where [indigent people] are going to go. We’re going to have a huge homeless population, I’m afraid,” said Wollschlager.

On the opposite end are those going to continuing care retirement communities (CCRCs), said Heffernan.

“They are the wealthy. The majority of our CCRC clients are able to adequately and safely take care of those folks in [independent living, assisted living] and memory care without ever needing that to move them into a nursing home setting,” noted Heffernan. Patient preference is driving SNF reduction in CCRCs, she said, along with the ability of assisted living communities within CCRCs to care for higher acuity patients compared to more than a decade ago.

They’re essentially rightsizing their business structure to have one SNF bed for every eight to 10 memory care or assisted living beds, said Wollschlager.

Alternative means to an end

If a nursing home operator can jump through the “flaming hoops and mental gymnastics” to get approved for a USDA loan, Wollschalger says it’s worth it. Incredibly low interest rates are appealing – in one case 2% for 35 years amortization – but funding is only available for clients in rural environments.

The financing of the Vivage property in La Junta, Co. includes a 1.0% increase in La Junta sales tax and a USDA loan, Moskowitz said.

La Junta voters approved the 1.0% sales tax increase in the November 2017 election. Once all debt is authorized, city sales tax will be reduced by 0.50% to 7.40% from 7.90% for ongoing facility maintenance, operations and upgrades.

The city founded its own health service district composed of five elected board members focused on getting its nursing home up and running – what could be a national model, said Terhark.

The property is built and Vivage is waiting to get licensing for the building with move-ins happening immediately after, along with Medicare and Medicaid certification.

However, for large metro areas, the funding source will have to be different.

“That’s not going to work here in Chicago, that’s not going to work in San Francisco,” said Wollschlager. “We have to get somewhat creative and maybe leverage some HUD funding, where you maybe access a non-recourse loan from HUD, but your loan devalues, it doesn’t change the fact that your costs are through the roof.”

Ultimately, the focus needs to be on how to leverage Medicaid waiver dollars in an environment where there are better care outcomes, providers are able to get the staff they need and residents are in a preferred care setting.

But, these programs don’t necessarily solve the housing problem, with Medicaid dollars only paying for care and the services received.

Industry leaders should look to incentivize the for-profit side to want to invest in these tax credits.