Mapping The Future:

Enhancing LTC for Older Minnesotans

, 2005 to 2030

Nancy E. Rehkamp, Principal Dave Schuh, CPA, Principal Jim Rice, PhD. , Principal Lars P. Johnson, Senior Manager February 24, 2007

Mapping The Future: 2030 – Key Conclusions

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• • The need for skilled care beds will decline by 7,300 beds over the next 25 years.

The investment in Home and Community Based Services & Assisted Living may delay or eliminate the need for some stays in SNF. Increasingly, assisted living may substitute for SNF stays in the future, but over 16,600 new assisted living units will be required to achieve the estimated bed decline.

• • Services provided in care centers will shift dramatically as more and more residents seek short term care at care centers following an acute illness or ambulatory surgery Admissions to SNF for short stay recovery and rehabilitation are expected to double over the next 20 to 25 years and will represent 70% to 80% of all SNF residents.

The payer mix is likely to change with Medicaid paying for less than 40% of all customer stays and Managed Care playing a larger role.

Studies are showing that Minnesotans have not saved enough for their long term health care needs. For an increasing number of older Minnesotans, this will limit their choices and increase the financial burdens on families and public programs.

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Mapping The Future: 2030 – Key Conclusions

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• • Capital costs to replace aging and outdated skilled care facilities are expected to be about $4.1 billion over the next ten years and almost $10 billion over the next 25 years.

Many of Minnesota’s SNFs are older, do not meet customer requirements and cannot be easily adapted for new technology. The analysis indicates that Minnesota skilled care facilities may have insufficient financial performance and creditworthiness to fund capital and facility replacement. • A continued deterioration in the current fragile financial condition of skilled care facilities will result in a significantly greater reduction of skilled beds over the next 10 years than historical trends.

The consumer demand for SNF may not match the supply of SNF beds in certain regions of the State as beds close due to deteriorating financial performance.

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Where is SNF bed capacity expected to change?

East Central Northeast Northwest Southeast Southwest Metro Twin Cities West Central Statewide

Model Base 2005 4,801 2,806 1,615 5,554 4,078 13,684 3,000 35,538 2030 Low Scenario 4,046 2,339 1,526 4,494 3,992 8,642 3,147 28,186 Bed Change

(755) (467) (89) (1,060) (86) (5,042) 147 (7,352)

% Change -15.7% -16.6% -5.5% -19.1% -2.1% -36.8% 4.9% -20.7% 4

The Changing Landscape

Top Issues for Older Adults:

• Finding meaningful work and/or activities following “retirement”.

• Financial preparation for later years.

• Health care costs, including long term care.

• Preventing health decline and frailty.

• Decline in available caregivers.

• Communities that can care and honor elders.

• Gaps in current social and financing mechanisms for programs and services.

• Creating a workforce to serve elders.

• Available information about the array of services and programs.

• Providing services and programs that meet the diverse needs.

• Care delivery through transitions.

Source: Review of current geriatric literature & Transformation 2010, DHS, 2005 & 2006 Reports 5

Tomorrow’s Older Adults Will Be Different

Today’s older adults are a generation of the fortunate  Property – the significant appreciation of housing can be used in retirement  Pension – most have a defined benefit pension plan   Prudence – this generation did not use credit cards, had greater savings habits and did not have high debt Parents – many inherited at a much younger age than this generation of adults will experience Today, 22% of adults over 50 are forced to retire an average of 8 years earlier than planned due to:  Health 46%   Downsizing 44% Caregiving responsibilities 10% 6

Preview of the Future…lots to do….

A reduction in skilled care bed demand relies on: 1.

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An addition of Home & Community Based spending on about 2,500 to 4,400 people each year at $8,000+ Acute care utilization per 1000 population remaining constant. Even with a constant utilization rate the admissions from acute care will increase from 31,700 to 60,000 or more per year by 2030 An additional 16,649 Assisted Living units constructed by 2030 Those 65+ living alone will grow from 184,500 in 2005 to 347,000 of which about 100,000 will be 85+ by 2030 and many will not have family or others to provide informal care Each year up to 90,000 individuals 65+ whose resources are inadequate may need assistance 7

Understanding Today’s Use - Leading the Way

There are a number of reasons utilization of SNF and other formal care services is different in Minnesota than in other states.

• • • • • • More women work outside the home than any other state at 66.4% in 2004 Minnesota has the second longest life expectancy in the USA with a large segment of the population over 85 years.

The percentage of older Minnesotans, 85+, living alone is about 62.4% in 2002.

Minnesota ranks #1 in the per capita spending for Home & Community Based Services (2004) shifting people from SNFs to other community settings. Minnesota has substituted SNF with HCBS by shifting the number of non-A case mix clients to HCBS. This number has grown from 35.7% in 2000 to 42.3% in 2004. Minnesotans use SNF care following an acute care stay about 150% more frequently than the national average for older adults and more frequently for the 45 to 64 age cohort.

Sources: Kaiser Family Foundation Research, DHS Report to the Legislature on Future of Long Term Care; MHA Discharge Reports for 2000 through 2004; CMS Website accessed summer, 2006, & Mn. Transformation 2010 & DHS Staff.

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Understanding Today’s Use

Discharges by LOS Group

40,000 30,000 20,000 10,000

This now represents about 82% of all discharges

2002 2003 2004 2005 0

Tot. DCs DCs < 1 yr DCs 1 - 3 yrs DCs > 3yrs

Total discharges from SNFs are increasing, but the discharges for the residents who stay one year or less are increasing faster. Additionally, the number of residents whose stays are one year to three years are about the same and those with lengths of stay longer than three years are declining.

Based on the data we analyzed we believe the significant decline in average daily census is attributable to residents who had lived in nursing facilities for more than 3 years who are not being replaced by similar long stay residents.

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Provider Demand – Availability of SNF Beds

Factors Impacting Demand

Modeling Process Overview

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Capital Demand

• • 2005 Imperative Data used as basis • Breakouts include Freestanding vs. C&NC and Regions (Metro, Northeast, etc)

Financial Performance Groups

created to model future financial capital requirements

Financial Health Grouping

Distressed

Total Margin

Negative

Days Cash

<10 Days Negative Watch Negative Positive >10 Days <10 Days Stable Positive 10-69 Days Positive Positive 70+ Days

C&NC's evaluated as 1 financial health Grouping in addition to above

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Factors Impacting Provider Demand

Current Condition (Financial Position Groups)

Current Financial Condition

Distressed

Facility Count

48

Beds

4,588

2005 Long Term Debt

$70.4 M Negative 40 3,774 $134.4 M Watch Stable C&NC Totals 67 77 32 264 6,378 7,642 2,737 25,119 $131.0 M $258.6 M $52.1 M $646.5 M

Estimated Impact of 10 Year Continuation of State MA Rate Future Operator Capital Demand? (2015) Facilities with < $0 Cash Reserves

Facilities Beds

48 4,588 40 3,774 17 0 28 133 1,332 0 2,413 12,107

50% of Facilities at risk by 2015 from weak revenues and cash flows Imperative Survey Respondents Only

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Provider Demand – Estimated Bed Availability

2015 Projected Beds Available

• State Projection

Based on Historical Trends

28,000 – 29,000

(80% of Current)

• Imperative Financial Modeling

Continuation of Current State Reimbursement Policies

17,000 – 18,000

(50% of Current)

• Potential Gap in Available Beds 11,000

OBSERVATION

Current financial condition of nursing facilities with continuation of state reimbursement policies will result in a significantly greater reduction in available beds over the next 10 years than historical trends.

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Capital Demand Executive Summary

Timing Considerations: Nursing Facility Replacement

Based on the current average age of plant of respondents to the Imperative survey, approximately 58% of nursing facilities will likely need to be replaced or significantly renovated in the next 10 years.

When Will Today’s Nursing Facilities Need to be Replaced 5-10 Years 35% 10 - 15 Years 17% 15+ Years 25% 3-5 Years 23%

Source: Imperative Survey. Average Age of Plant = Accumulated Depreciation / Depreciation Expense

3-5 Years 5-10 Years 10 - 15 Years 15+ Years

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Capital Requirements: Facility Replacement

Based on the discussions with architects and recent facility replacements, the estimated replacement cost per bed for a skilled nursing facility “of the future” in current dollars is as follows: • • Construction and Related • Equipment & Technology • Financing and Related

TOTAL PER BED Replacement Cost / Bed ($000s)

$140,000 - $175,000 $15,000 - $30,000 $10,000 - $20,000

$165,000 - $225,000

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How Will Required Capital be Financed?

Long term financial models projecting the future financial performance of Imperative facilities based on a continuation of current State reimbursement policies were evaluated. The table below reflects the projected financial performance of the “surviving” facilities (> $0 cash reserves at 2015) with replacement need in the next 10 years.

Imperative Financial Modeling Dashboard

This long term analysis indicates that facilities in the Imperative survey

OWNER/OPERATOR PERFORMANCE PLANNING DASHBOARD Key Planning Assumptions Environment

Market Inflation Index (Costs)

Financial Performance (Debt Capacity Sizing)

Target Debt Service Coverage 4.0% 1.50 x

Reimbursement

Operating Rate Spread

Capital Reimbursement

Embedded Capital IRR

(NOTE: Moratorium = 7.3% Embedded Capital IRR)

-1.0% = 3.0% Rate Inflation 7.3%

PROJECTED KEY METRICS Current State Projected 2015 Future State Beds (Facilities) Beds (Facilities)

may have insufficient

Available Beds 14,578 (145)

58% of Survey Beds

fund capital and facility

Capital Required (Replace All)

financial performance and creditworthiness to replacement.

Financial Performance Metrics Debt Service Coverage Cash Position Cash Reserves (before Existing Debt Repayment) Less: Existing Debt Cash Reserves Cash to Debt

Debt at Risk Due to Financially Distressed Providers

Net Debt Capacity 7,535 (73) $2,126.2 M 0.82 x $157.1 M ($148.9M) $8.1 M 0%

$120.5 M

($998.5M)

52%

of Current Beds

Cumulative Increase in Medicaid Revenues (2015 vs. 2005) -16.3%

-1.8% CAGR

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Key Conclusions

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The transition to fewer SNF facilities and beds will occur slowly over the next 25 years.

Without changes to reimbursement from MA SNF facilities will close much faster & may leave some areas of the state without beds.

Facilities have already begun to transition to greater numbers of short stay residents.

Providing greater health services in Senior Housing will grow at an even faster rate encouraging naturally occurring retirement centers.

Personal health services demand will continue growing and will increasingly be funded by the family or individual. These services need to be designed, offered and priced for private pay residents.

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