SNF Industry and Evolving Revenue Models August 2016

Medicare Challenge and Opportunity

CMS must encourage decreased SNF lengths of stay through non-FFS payment models in order to meet the needs of a surging patient population, as Medicare funds are limited. Nevertheless, overall SNF Medicare patient days are projected to grow with increasing Medicare enrollment. Sophisticated, Value-Driven SNF Operators Will Thrive  Shifting payment systems will incentivize patient outcomes and cost efficiency  Demographic trends and increasingly selective networks will provide volume

SNF Industry and Evolving Revenue Models, August, 2016

2

Medicare Payment System Continues to Evolve

Shift Away from Traditional Fee-for-Service (FFS) from 2010 to 2015, Continued but Slower Growth in Alternative Payment Going Forward

2010

2015E

2020E

Sources: CMS Office of the Actuary for Spending and Enrollment. Avalere analysis for alternative payment model projections. SNF Industry and Evolving Revenue Models, August, 2016

3

Medicare Payment System Continues to Evolve

Increasingly FFS Payments will be Bundled or Subject to Value-Based Adjustments

Sources: CMS Office of the Actuary for Spending and Enrollment. Avalere analysis for alternative payment model projections. SNF Industry and Evolving Revenue Models, August, 2016

4

Attractive Fundamentals: Increasing Volumes

SNF days projected to grow due to increasing enrollment, even while Medicare patient lengths of stay decline under alternative payment models (bundling, managed care, ACOs) Yearly Medicare SNF Volume (Days) 110

105.79 101.53

100 (Millions of Days or Beneficiaries)

92.40 90 80

81.97 81.97 81.97

91.22 91.22

96.59

Total Medicare Enrollment (Beneficiaries) Conservative

70

Moderate 64.47

60

Source: SNF Volume from November 2015 Avalere Health projection model (“Assessment of SNF Reimbursement and Utilization Landscape” Report); Medicare enrollment from 2015 Medicare Trustees’ Report

55.83

50 47.72 40

2010

2015

Aggressive

2020

Note: Conservative, Moderate, and Aggressive refer to model assumptions about rate of growth in alternative payment models (not traditional fee-for-service)

SNF Industry and Evolving Revenue Models, August, 2016

5

Goals of the Centers for Medicare and Medicaid Services (CMS)

 CMS Quality Strategy developed to align with the three broad aims of DHHS National Quality Strategy: 

Better care



Smarter spending



Healthier people, healthier communities

 CMS Goal #1: 50% of Medicare payments tied to quality or value through alternative payment models (ACO’s and bundling programs) by end of 2018  CMS Goal #2: 90% of Medicare payments tied to quality or value through alternative payment models or value-based purchasing by end of 2018

SNF Industry and Evolving Revenue Models, August, 2016

6

Types of Alternative Payment Models and Bundling Programs to Date

 Medicare Advantage (MA)     

Commenced in 2006 as Medicare Part C benefit Plans include HMO’s and PPO’s Replaces traditional Medicare FFS for Part A and B services Medicare beneficiaries can enroll voluntarily Plans bill Medicare for A and B services based on beneficiary risk assessment; bill beneficiaries for out-of-pocket costs or additional coverage options

 Accountable Care Organizations (ACO’s)  Authorized by 2010 Affordable Care Act (Obamacare)  Networks of doctors, hospitals, and other providers responsible for coordinating care for large groups of Medicare beneficiaries (min. 5,000)  Replace traditional Medicare FFS for Part A and B services  Unlike MA plans, must meet quality standards to realize savings, and beneficiaries can choose out-of-network providers SNF Industry and Evolving Revenue Models, August, 2016

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Types of Alternative Payment Models and Bundling Programs to Date

 Value-Based Purchasing (VBP)  Authorized by Protecting Access to Medicare Act of 2014 (PAMA)  Commencing October 2018  Traditional Medicare FFS discounted by 2%  SNF’s can earn back some or all of discount based on ranking of rehospitalization rate for prior calendar year  Only 50% to 70% of total discount will be returned to SNF’s, resulting in overall savings to Medicare

SNF Industry and Evolving Revenue Models, August, 2016

8

Bundling Programs

 Comprehensive Care for Joint Replacement (CJR)  CJR 1: 5-year pilot bundling program commenced 4/1/16 and runs through 2020, covering hip or knee joint replacements  CJR 2: 5-year bundling program to commence 7/1/17 and run through 2021, covering surgical hip or femur fracture treatment  Provides episodic payments (capitation) for hospitalization and post-acute care (PAC) for 90 days’ post-discharge  Mandatory participation by 800 hospitals in 67 MSA’s (covering 25% of nation’s population)  PAC for hip/knee joint replacements and for surgical hip/femur fracture treatment represents 7% and 6%, resp., of SNF Medicare revenue nationally

SNF Industry and Evolving Revenue Models, August, 2016

9

Bundling Programs

 Cardiac Bundle  5-year bundling program to commence 7/1/17 and run through 2021, covering heart attacks and bypass surgeries  Provides episodic payments (capitation) for hospitalization and PAC for 90 days’ post-discharge  Mandatory participation by hospitals in 98 MSA’s to be selected randomly  PAC for heart attacks and bypass surgeries represents 2% of SNF Medicare revenue nationally

SNF Industry and Evolving Revenue Models, August, 2016

10

Bundling Programs (cont’d)

 Bundled Payments for Care Improvement (BPCI)  3-year pilot program now in year 3; just extended by CMS for 2 years to allow for better evaluation of effectiveness in improving care and reducing costs  Voluntary participation by over 1,500 providers to date (hospitals, physicians, SNF’s, and other PAC providers), including 5% of SNF’s nationally  Provides episodic payments under varying bundling models for up to 48 diagnostic conditions  Other Payment Concepts:  In March 2016 MedPAC recommended to Congress a unified PAC PPS system to replace FFS system  AHCA advocating legislation for similar SNF-bundled PAC payment system, currently under review by the CBO

SNF Industry and Evolving Revenue Models, August, 2016

11

Keys to SNF Success

1.

Patient Satisfaction

2.

Patient Outcomes

3.

Cost Efficiency

4.

Coordination of Care with Other Providers

SNF Industry and Evolving Revenue Models, August, 2016

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Keys to SNF Success: Patient Satisfaction

 Best single measure of quality of care and services  Key element of CMS star ratings of hospitals  Harvard study (JAMA, April 2016): strong positive correlation between hospital patient experience and hospital patient outcomes  Opportunity to cast SNF’s in positive light vs. negative perception from compliance surveys  For hospital discharges to SNF’s, patient choice trumps network preference  Omega to commence CoreQ satisfaction surveys of facilities

SNF Industry and Evolving Revenue Models, August, 2016

13

Keys to SNF Success: Patient Satisfaction (cont’d)

2015 National SNF Patient Satisfaction Survey Results (Short-Stay upon Discharge)

Source: National Research Corporation, 2015 surveys in 5,478 SNFs SNF Industry and Evolving Revenue Models, August, 2016

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Keys to SNF Success: Patient Outcomes

Notable New CMS Quality Measures Effective April 2016: 

Rehospitalization Rate (all-cause, 30-day, risk-adjusted) 

National average currently 21.1%; estimated target at three points below average for full return of Value-Based Purchasing discount that commences October 2018



Joint replacement episode cost doubles with rehospitalization



Discharge rate to the community – reflects improved condition from SNF treatment



Functional ADL improvement during SNF stay

SNF Industry and Evolving Revenue Models, August, 2016

15

Keys to SNF Success: Patient Outcomes (cont’d)

Majority of CMS Quality Measures can be Misleading: 

Limited to issues of compliance and patient incidents, rather than outcomes



Do not account for patient conditions upon admission



Quality Measure ratings to date can provide misleading results based on characteristics of patients SNF’s choose to admit



New Quality Measures (rehospitalization, discharge to community, functional improvement) represent better indicators of SNF outcomes

SNF Industry and Evolving Revenue Models, August, 2016

16

Keys to SNF Success: Patient Outcomes (cont’d)

Star Ratings Can Be Misleading: 

Do not denote quality of care, just degree of regulatory compliance or rate of adverse incidents



Nevertheless, ratings used in establishing some networks and for 3-day stay waiver under CJR and cardiac bundles



Examples: 

“Perfect” survey yields a 5-star Health Inspection rating but does not address quality of care in meeting patient needs



Overstaffed facility can achieve a 5-star Staffing rating but could be incurring excessive operating costs and operating inefficiently



A facility choosing to treat high-acuity patients with complex nursing issues could yield a 1-star Quality Measure rating but could be providing good quality of care

SNF Industry and Evolving Revenue Models, August, 2016

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Keys to SNF Success: Cost Efficiency



Continued necessity given revenue limitations from government funding sources and move toward episodic payment models



Eventual return to expanded group and concurrent therapy protocols with episodic models



Improved care coordination to reduce episodic costs

SNF Industry and Evolving Revenue Models, August, 2016

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Keys to SNF Success: Coordination of Care



Patient medical records – shared electronically with other providers (hospitals, doctors, home health agencies, etc.) to facilitate efficient care delivery



Care pathways – treatment protocols (evidence-based practices, telehealth, patient education, etc.) developed in consultation with other providers



Discharge follow-up – patient progress monitored periodically to reduce risk of rehospitalization



Medicare hospital/PAC networking will provide census opportunities for top SNF performers in each market – potential narrowing of SNF discharge partners by hospitals

SNF Industry and Evolving Revenue Models, August, 2016

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Attractive Fundamentals: Primary PAC Site

SNFs – preferred post-acute care environment with growing demand and limited supply

SNFs 48% HHAs

Medicare Acute Hospital

43% Sent to Post-Acute

Discharges

39% IRFs 9% LTACHs 3%

Source: MedPAC Data Book, June 2016

SNF Industry and Evolving Revenue Models, August, 2016

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Attractive Fundamentals: Demographic Trends Will Drive Volume Projected Population Growth: Aged 85+ 2015 to 2030 10,000

9,132

9,000 8,000

Population

7,000

Percentage of U.S. SNF Residents by Age

7,482 6,304

6,727

6,000 5,000 4,000 3,000 2,000 1,000 -

2015

2020

2025

2030

Source: US Census Bureau, December 2014 Release

Projected Population Growth: Aged 80-84 2015 to 2030 12,000 10,513 10,000 8,061

Population

8,000 6,000

5,792

6,470

4,000 2,000 -

2015

2020

2025

Source: Avalere analysis of U.S Census Bureau Projections.

SNF Industry and Evolving Revenue Models, August, 2016

2030

Source: CMS Nursing Home Data Compendium, 2015 Edition

21

Growth in Post-Acute Usage, By Age Cohort Discharges to Post-Acute Care (PAC) are expected to increase by 64% in the next 20 years, fueled by the 75-84 and 85+ age cohorts. If SNFs continue to receive 48% of PAC discharges and average length of stay remains constant, current SNF bed supply will be insufficient to meet demand in less than 10 years, likely requiring the expansion of both SNF supply and home health PAC services.

Discharges to Post-Acute Facilities

9,000,000 8,000,000 7,000,000

2,537,487 1,945,734

6,000,000

1,594,347

5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

85 or More

1,433,250 1,343,325

1,417,238

1,692,609

2,171,329

2,619,429

2,966,516

75 to 84 65 to 74 64 or less

1,107,184

1,327,144

1,488,322

1,573,947

1,531,215

1,205,769

1,225,715

1,240,487

1,257,585

1,283,196

2015

2020

2025

2030

2035

Source: Xcenda analysis of 2013 Healthcare Cost and Utilization Project’s National Inpatient Sample for volume of post-acute care hospital discharges by age cohort and of U.S. Census Bureau Data for population growth projections for 2015-2035.

SNF Industry and Evolving Revenue Models, August, 2016

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Attractive Fundamentals: Limited SNF Supply

Supply of facilities and beds to meet increasing future demand is limited due to CON restrictions, increasing occupancy prospects for existing facilities Trend in Certified Nursing Facilities, Beds and Residents 1,700k

16.0k 15.9k

1,650k

15.8k 15.7k

1,550k

15.7k 15.7k

15.6k

15.7k

15.7k

15.7k 15.6k

1,500k

15.5k 15.4k

1,450k

15.3k

1,400k

15.2k

1,350k 1,300k

15.6k

Certified Facilities

Beds & Patients

1,600k

15.1k Dec '09

Dec '10

Dec '11

Dec '12

Dec '13

Dec '14

Dec '15

Certified Beds

1,667k

1,670k

1,665k

1,667k

1,666k

1,663k

1,662k

Patients in Certified Beds

1,400k

1,394k

1,384k

1,383k

1,372k

1,368k

1,357k

Certified Facilities

15.7k

15.7k

15.6k

15.7k

15.7k

15.6k

15.7k

15.0k

Source: Compiled by American Health Care Association Research Department from CMS OSCAR/CASPER survey data (2009-2015) SNF Industry and Evolving Revenue Models, August, 2016

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Attractive Fundamentals: Stable Occupancy Rates

 Stable Occupancy Rates 100.0% (1)

95.0% 90.0% 85.0%

Occupancy

80.0% 75.0% 70.0% 65.0% 60.0% 55.0% 50.0%

2009

2010

2011

2012

2013

2014

2015

OHI Occ. %

84.6%

84.0%

83.9%

83.3%

83.3%

84.3%

82.1%

Industry Occ. %

84.0%

83.4%

83.1%

82.9%

82.3%

82.3%

81.6%

Source: Industry data compiled by AHCA Research Department from CMS OSCAR/CASPER survey data (2002-2015)

1) 2015 OHI occupancy reflects inclusion of legacy Aviv REIT facilities SNF Industry and Evolving Revenue Models, August, 2016

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Attractive Fundamentals: Reimbursement Outlook

Medicare  2.4% FFS rate increase on October 1, 2016 Medicaid  Rates expected to increase modestly on average across Omega’s states  Omega's geographic diversification helps minimize impact of rate changes in any particular state Average Medicare and Medicaid Rates by Quarter for Omega’s Entire Portfolio (1) (through March 31, 2016)

Medicaid PPD

Medicare PPD $500

$PPD

$475

$215 $205 $195

$450

$185

$425

$175

$400

$165

$375 $350

$155 $145 $135

$325

$125

$300

$115

1) Rate for each month is calculated by dividing total Portfolio Operator Medicare/Medicaid revenues by total Portfolio Operator Medicare/Medicaid days.

SNF Industry and Evolving Revenue Models, August, 2016

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Medicaid Considerations

 Medicaid will remain an important funding source for the majority of SNF long-stay residents.  Can Medicaid eligibility reform create future funding stability and enhance long-term care insurance as an important SNF payer source?

SNF Industry and Evolving Revenue Models, August, 2016

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Appendix – Supplemental Information Percent of CY14 SNF Medicare Payments by Major Diagnostic Categories & Bundles MDC/Bundle Description

CJR Bundle 1 (a) CJR Bundle 2 (b) Cardiac Bundle (c) Musculoskeletal (d)(f) Circulatory (e)(f) Repiratory (f) Nervous (f) Infections/Parasitic (f) Kidney/Urinary Digestive Factors Influencing Health Endocrine/Nutritional/Metabolic Skin/Subcutaneous/Breast Mental Remaining 14 MDC's

National

7% 6% 2% 12% 11% 11% 9% 9% 9% 6% 5% 3% 3% 2% 5% 100%

Omega

5% 5% 2% 10% 10% 12% 10% 10% 10% 6% 4% 4% 3% 4% 5% 100%

Source: Xcenda analysis of CY2014 Medicare inpatient and skilled nursing facility Standard Analytic Files (a) Hip and knee joint replacements (b) Hip and femur fractures (c) Heart attacks and bypass surgeries (d) Excluding CJR bundles (e) Excluding cardiac bundle (f) See breakdown on following slide SNF Industry and Evolving Revenue Models, August, 2016

27

Appendix – Supplemental Information Breakdown of CY14 National SNF Medicare Payments Within Five Largest Major Diagnostic Categories MDC/DRG Description Musculoskeletal System & Connective Tissue (a): • Back problems • Lower extremity procedures, excl. hip, foot, femur • Hip/pelvis fractures • Fractures, excl. hip, femur, pelvis, thigh • Spinal fusion • Revision of hip/knee replacement • Tendonitis, myositis, bursitis • Other