On Christmas Eve, the New York Times published an article describing measures the Centers for Medicare and Medicaid (CMS) took during 2017 to reduce fines levied against skilled nursing properties. The skilled nursing industry may view this change as a welcome respite from real or perceived government over-regulation, especially in an era of downward pressure on occupancy and constrained budgets. Nursing home resident advocates, on the other hand, may view this move as an affront to resident safety. Deregulation remains a top priority for President Trump, and therefore efforts to reduce penalties for nursing homes should not come as a surprise.

Jordan Rau, author of the Times’ expose, cites several memos from CMS in his analysis of fewer and less severe fines for skilled nursing providers. The first was released in July, 2017. The memo explains revisions to the analytic tool used by CMS Regional Offices to determine the Civil Monetary Penalty (CMP) to be imposed on a nursing home found to be in violation of federal regulations. The impetus for the revisions, according to the CMS memo, is to reduce variation across facilities. The most impactful change resulting from this new guidance is the limitation of daily fines, which may now only be imposed on nursing homes if the violation is discovered during an active survey, which occurs about once per year. Violations occurring prior to the survey visit would only result in a one-time fine. Both daily and per instance fines “are intended to promote a swift return to substantial compliance for a sustained period of time, preventing future noncompliance,” the memo states.

The second set of guidelines issues by CMS came in October, 2017. This memo makes explicit revisions to the State Operations Manual, which instructs officers on the imposition of CMPs and other remedies for nursing homes found to be in violation of federal regulations. The revision to the manual reiterates the guidance in the July memo, stating: This guidance does not apply to past noncompliance deficiencies […]. The determination to impose federal remedies for past noncompliance is at the discretion of the CMS Regional Office. The gist of the revisions is to discourage the imposition of fines on nursing homes where a violation appears to be a one-time offense, rather than an on-going problem.

The final memo issues in 2017 delays the enforcement of violations related to Phase 2 requirements. Properties found to be noncompliant with certain regulations related to the updated Requirements for Participation rules issued in 2016 will not be fined for 18 months. The regulations remain in place and surveyors are instructed to note citations, but fines will not be imposed. Furthermore, facilities’ five-star scores will not be impacted by violations on the survey that occur between November 2017 and November 2018. Again, violations will be reported, but the five-star score will not be adjusted as a result of those violations.

These measures to deregulate the skilled nursing industry may be a welcome respite for operators. Indeed, David Gifford, senior vice president for quality for the American Health Care Association, said, “What was happening is you were seeing massive fines accumulating because they were applying them on a per-day basis retrospectively.” In March, AHCA wrote in a letter to then-Secretary of Health and Human Services Tom Price, “The use of CMPs is out of control.” AHCA contends that a financial penalty should not be used as a punishment but as a corrective measure, which the July memo apparently agrees with. A recent example of how steep penalties can be occurred in Pennsylvania, where a single facility was fined almost $800,000 in a single year for two major violations.

Not unexpectedly, many advocates for nursing home residents have expressed disappointment in this rollback of regulations. Following the New York Times article, opinion pieces cropped up in Mother Jones, Bustle, and the Minnesota Star Tribune expressing opposition to deregulation of the nursing home industry. Even former CMS administrator Andy Slavitt tweeted about his opposing view, citing the Times article. The timing of the article, published on the day after Christmas, may have served to limit the amount of public backlash to which nursing homes are often subject in the news.

The bottom line for operators is that they can expect to face fewer financial penalties this year than in previous years for violations on the survey. Five-star scores could still change, but will not change as a result of violations for the new regulations from Phase 2 of the Requirements of Participation. At a time when consistent downwardz pressure on occupancy continues to plague nursing home operators (see NIC’s 3Q2017 Skilled Nursing Data Report), a reduction in fines may be welcome. Providers will likely continue to focus on improving quality, as other levers reinforce the importance of quality.  This includes competition for managed Medicare contracts and benefits for 3-star-and-above facilities. Because the Trump administration has been rolling back regulations across the federal government and CMS Director Seema Verma’s background in drafting CMS waivers and expressed interest in giving states more flexibility, even more federal measures to deregulate the industry could occur in 2018.

The Labor Department reported that there were 148,000 jobs created in the U.S. economy in December.   This was below the consensus expectation of 190,000 jobs.  This marked the 87^th consecutive month of positive job gains for the U.S. economy.  Revisions subtracted 9,000 jobs to the prior two months.  For all of 2017, the economy generated 2.1 million jobs and averaged 171,000 per month.  This marks the second time on record that the economy has created at least 2 million jobs a year for seven consecutive years (the first time was in the 1990s). The 2.1 million increase was the smallest since 2010, however.

Health care added 31,000 jobs in December. Health care added an average of 300,000 jobs in 2017, down from 379,000 in 2016.

The unemployment rate remained unchanged for the third consecutive month at a 17-year low of 4.1% in December. This is below the rate of what the Federal Reserve believes is the “natural rate of unemployment” and suggests that there should be upward pressure on wage rates.

Average hourly earnings for all employees on private nonfarm payrolls rose in November by nine cents to $26.63. Over the past 12 months, average hourly earnings have increased by 65 cents, or 2.5%. This is down from the 2.6% average in 2016.  In 2015 this figure was 2.3% and in 2014, it was 2.1%.

Over the course of the year, the jobless rate fell 0.6 percentage points.  The trend in monthly payroll employment gains would have to drop to less than 100,000 per month to stop the ongoing downward trend in the unemployment rate from continuing.  In annual revisions to data based on the household survey, the unemployment rate for June 2017 was lowered to 4.3% from 4.4%; rates for other months during the year were unrevised.

The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.5 million and accounted for 22.9% of the unemployed. Over the year, the number of long-term unemployed was down by 354,000.  A broader measure of unemployment, which includes those who are working part time but would prefer full-time jobs and those that they have given up searching—the U-6 unemployment rate—increased to 8.1% in December from 8.0% in November, but was down from 9.2% as recently as last December.

The labor force participation rate, which is a measure of the share of working age people who are employed or looking for work remained at 62.7%.  This measure has generally been very low by historic standards, at least partially reflecting the effects of retiring baby boomers.

Today’s report will support expected increases in interest rates through 2018 by the Federal Reserve, with the first 25 basis point increase likely happening in March 2018.  The Fed has raised rates by a quarter percentage point five times since late 2015, and most recently to a range between 1.25% and 1.50% in December 2017, after keeping them near zero for seven years.

A recent study conducted with financial support from the National Institute for Health Care Management, part of the National Institutes of Health (NIH), and published in the journal Production and Operations Management found that California nursing homes may be artificially inflating their self-reported data to the Centers for Medicare and Medicaid (CMS) for the five-star rating system on Nursing Home Compare, a website used by consumers, payors, and others to evaluate nursing homes. The five-star rating, discussed at length in a previous NIC blog post, is comprised of a health inspection, staffing levels, and quality metrics. The authors of the study argue that many California nursing homes inflate their self-reported quality metrics, which measure the quality of care patients and residents receive in skilled nursing properties. Their analysis considers the financial incentives that drive such false reporting, providing one of the first analyses of how five-star scores impact profitability. The study demonstrates the need for operators and investors to consider multiple data sources and follow quality metrics closely.

According to the study, the quality metric sub score steadily improved for all properties over the period of 2009 to 2013, while the health inspection and staffing sub scores remained stable. The authors argue this difference is not the result of improved quality across the industry and is instead a reflection of nursing homes’ improved ability to falsely self-report on the quality metrics sub score. They compared California properties with similar overall five-star scores to complaint data supplied by the California Department of Public Health.

The authors found that often properties with higher overall five-star scores as a result of improved quality metric sub scores within the study period did not have fewer customer complaints as compared to their peers whose scores did not increase over time because of the quality metrics component. In other words, one would expect to see complaints decrease over time for properties with overall scores that improved because of improved quality, but the researchers did not find that to be true in this case. Another finding was that improvements in quality metrics did not lead to improvements in the health inspection component of the overall score, which the authors believe to be a red flag regarding the sincerity of the quality metric reporting.

Using a California data set on profits reported by the Office of Statewide Health Planning and Development, the researchers were also able to demonstrate the importance to profitability of the CMS five-star score. In the five-year study period, they found properties with an overall score of five earned $19.80 in daily per patient profits, while those with a one-star score earned only $9.29. Three-star properties earned $10.79. They conclude that lower-rated properties have a financial incentive to improve their quality metrics, the only component of the five-star score over which they have significant control in how the data is reported. The financial incentive does not necessarily equate to falsely reported quality metrics on the part of properties just to get a bump in profitability, but it led the researchers to further analysis. When the complaint data and financial incentive data were combined, the researchers concluded that financial incentives drive some skilled nursing properties to falsely report quality metrics in an attempt to increase the overall five-star score.

This study is important to both operators and investors for a number of reasons. First, it underscores the importance of considering multiple data sources when evaluating a property’s performance. CMS data can be outdated and according to these researchers, easily manipulated and may not always be an accurate tool to evaluate a property’s quality of service delivery. Indeed, complaints from the industry about the accuracy and timeliness of CMS data led NIC to develop the Skilled Nursing Data Initiative, which does not address quality, but does speak to occupancy and revenue trends and serves as a valuable resource for the industry. But the Skilled Nursing Data Initiative, like CMS data, is only one resource and the need for more data resources is clear.

Furthermore, the importance of the five-star rating to property financial performance is often discussed in the abstract. This study is unique in that it delivers clear data demonstrating what we sometimes hear—the higher the five-star score, the more profitable the property. This concept influenced NIC to integrate quality metrics from multiple data sources in NIC MAP^©, to be launched in 2018. Stay tuned for details!

Lastly, the study stands as yet another example of how closely the skilled nursing industry is being watched. Indeed, investigations, new regulations, and studies like this one continue to put skilled nursing operators under a magnifying glass. CMS is constantly updating regulations to improve the five-star system, such as the move to payroll-based journaling to record staffing levels launched in 2016 or the addition of new metrics to the quality component of the score. In this era of constant revision to regulations that have real impact on the bottom line, it is more important than ever that the industry focus attention on quality.

Download 3Q17 Skilled Nursing Data Report