The Costs of Clinical Risk

The nursing home industry has often been described as one of the most regulated industries in the country. This is not surprising, as nursing homes care for the most fragile individuals within the health care spectrum and are predominately reimbursed through government programs. The financial instability that can arise as a result of clinical and operational risk can affect refinancing efforts in various ways, which explains why risk management is a major area of focus for nursing home providers.

The high cost of risk is easily demonstrated by a quick glance at recent legal actions brought against nursing homes around the world:

  • A nursing home in Tennessee was fined $1.2 million following 35 deficiencies for medication errors, dirty bathrooms and neglect of residents.
  • Thirty-six nursing homes in Pennsylvania were sued by the state’s attorney general’s office for alleged understaffing and depriving residents of their basic needs.
  • Two of the largest nursing home chains were accused of routinely billing for therapy services that were either unnecessary or not medically reasonable.

As seen in the chart below, only 10.3% of nursing facilities were citation-free in 2015. Although that number has steadily been improving since 2009, there clearly remains ample room for improvement when it comes to risk management at nursing homes nationwide.


The financial cost of risk not only involves expenditures related to risk remediation, as seen in the last two examples, but can require increased facility staffing or reduced service delivery which can directly decrease a facility’s cash flow and ability to borrow. These are just a few examples of actual unforeseen expenses that can devastate the game plan of predictable results and financial stability for an operator.

When lawsuits against nursing homes occur, even if a civil judgment is found in favor of the nursing home, the fines associated with Centers for Medicare and Medicaid Services (CMS) citations and disputing the allegations can be detrimental to a facility’s financial stability. Costs of risk include the sum total of self-insured losses, civil monetary penalties (CMPs), denials of payment on new admissions (DPNAs), lost admissions, additional staffing and legal/consulting fees as well as reputational risk through media or word-of-mouth. A proactive approach to minimizing risk should include establishing achievable goals measured by industry ratings such as the Nursing Home Compare 5-Star system, onsite reviews and third party databases. In doing so, operators should recognize, measure and monitor the areas of greatest exposure. Steps to success include:

  • Check information in the public domain. Validate that publicly reported information for the facility is accurate
  • Be prepared. Identify trends and conditions that lead to costly compliance and regulatory risk as well as potential litigation
  • Understand the risk and revenue spiral. Anticipate a facility's reputational risk and the sponsor’s ability to attract the most desirable patient mix including Accountable Care Organization (ACO) referrals
  • Link risk to financing long-term care (LTC) assets. The total cost of risk is an ongoing predictive aspect and includes determining how it affects cost availability of debt.  

Check Information in the Public Domain

By using public data sources such as; investors, sponsors and principals can identify patients with high-risk conditions (such as a high likelihood to fall or develop pressure ulcers) so that appropriate care planning can take place and provide insight to assist in managing family expectations. The source document to capture this patient health information for government reimbursement purposes and acuity statistics is the Minimum Data Set (MDS) record. This is also factored into the 5-Star rating and determines the acuity and staffing ratings for their state. Despite the various critics of the 5-Star system, it is still considered the industry benchmark and providers as well as lenders would do well to understand how the scores are calculated in order to place the numbers in context. After all, these data sources are used by consumers, insurers, plaintiff attorneys and regulatory agencies for the purpose of sizing up nursing home providers.

In health care organizations, reputation is directly and positively correlated with financial success. Health care reform has increased the amount of information available to the public and requirements for transparency will provide more insight into an organization’s capital structure. As ACOs are launched, reputation and results will drive referrals and facilities that don’t perform will lose revenue opportunities. Not surprisingly, prospective patients and their family members are reluctant to select a health care provider with below average performance or a high number of complaints, making it critical to manage risk and mitigate non-compliance. Furthermore, referral sources, such as physicians and hospital discharge planners, have access to public information (along with word-of-mouth) for the purpose of making good placement choices for their rehabilitation patients. 

Be Prepared

The time and cost of preparing for the CMS-directed State Department of Health Inspection process (approximately every 12 months) can be extensive for most facilities. The initial cost is in management and staff time, but if the survey does not go well, added costs will come from responding to citations, revising care processes, and covering consulting or legal expenses. Surely the greatest cost, although more difficult to quantify, is the business lost or reputation damaged by deficiencies. Bad health inspections can strain relationships with the referring hospital, resulting in physicians that no longer feel comfortable referring new patients to a particular nursing home.

Tools are available today that enable a facility to benchmark its performance against others in its survey district or state and anticipate the next likely citation. The most popular is the Nursing Home Compare 5-Star report. It is important to dig below the surface, however, to understand what is driving the scores in the areas of health inspections, staffing and quality measures in order to put the report in context and to understand if the facility is improving or declining. Realistically, many events can be anticipated and avoided with a deliberate Quality Assurance Performance Improvement (QAPI) program to manage risk.

By utilizing public and private databases, information such as occupancy, payer mix, staffing, survey citations and quality measures can be combined with loss history to provide a quantitative model for measuring risk. Once benchmarks are established for the potentially modifiable risk factors, risk management prescriptions are developed to focus on those areas that can have significant adverse impact on the overall risk of the facility. Should an adverse event occur, remediation efforts to correct non-compliance issues can impact cash flow, causing the facility to forgo other important expenditures and ultimately perpetuating more risk. 

Understand the Risk and Revenue Spiral

When risk-related adverse events occur and they are communicated to referral sources, a disruption in referral flow with a reduction in revenue can occur. The direct effect of any severe citations can be devastating to an operator’s revenue stream, not to mention a public relations nightmare. Therefore, a damaged reputation from survey deficiencies, resident complaints and poor-quality measures, whether valid or not, can have a negative impact on the cost of risk and trigger a downward spiral that can be difficult to stop. Lost revenue equates to lower investment in quality improvement programs, less money available for staff improvement, and a reduction in cash flow and the capitalization rate required to meet a lender’s conditions.

Since staffing is the largest line item in a LTC facility’s budget, this is where the axe most often falls. Some facility administrators respond to diminishing revenues by adjusting the staffing matrix from registered nurses (RNs) to less expensive licensed practical nurses (LPNs) or reducing certified nursing assistants (CNAs). Over the long term, however, these shifts will not deliver the expected savings. When facilities fail to properly staff to meet patients’ needs, risk increases. It takes one claim or one citation to cancel out any expected savings from using a lower-cost staffing matrix. Inappropriate staffing also leads to turnover, which results in utilization of contract workers and discontinuity of resident care. Each of these impacts quality of care and can result in more unanticipated costs and increased risk. 

Quality of Care

With nearly two million licensed beds in the U.S. and an increased national focus on the quality of long-term care, nursing homes must be diligent in assessing and improving their facilities by closely monitoring their areas of risk and greatest exposure. The total cost of risk is ongoing and includes determining how predictable trends affect future profitability. When adverse events occur, they result in fines, expenditures to regain compliance, defense costs (internal and external) and harm to the nursing home’s reputation. Ultimately, when a facility gets a reputation as a provider of poor patient care, it is difficult to regain the trust of the community and maintain a consistent referral flow.

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