An Examination of the Long-Term Healthcare Industry in the United States

According to the most recent National Population Projections provided by the United States Census, the following two demographic trends are expected to occur:

1. From 2015 to 2060, the percentage of people aged 65 and older will grow from 14.88 percent to 23.55 percent of the population. It is the only age group that will grow as a percentage of the population [Exhibit 1].
2. From 2015 to 2060, life expectancy for men will increase from 77.1 to 84 years of age and women’s life expectancy will increase from 81.7 to 87.1 [Exhibit 2].
   These trends suggest that there will be increased demand for services that cater to a large demographic of aging people who will live longer than previous generations. As people age, the demand for healthcare increases. One study found that people aged 65 to 74 spend about 3 times more on healthcare-related expenses than 35- to 44-year-olds; those 75 and older spend over 5 times as much.1 Consequently, the size of the long-term healthcare industry has been estimated to be between $210.9 and $317.1 billion,2 and the healthcare and social assistance industry is expected to be the largest employing sector during the next decade.3 Seeing an opportunity to fulfill this need, a host of firms have rushed to take advantage of these changing demographics.

EXHIBIT 1 Percent Distribution of the Projected Population by Sex and Selected Age Groups for the United States: 2015 to 2060
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Under 18 years 22.91% 22.16% 21.60% 21.22% 20.91% 20.56% 20.26% 20.06% 19.90% 19.75%
18 to 64 years 62.20% 60.97% 59.42% 58.16% 57.69% 57.78% 57.98% 57.85% 57.40% 56.70%
65 years and over 14.88% 16.87% 18.98% 20.62% 21.39% 21.66% 21.75% 22.09% 22.70% 23.55%
Data Source: U.S. Census Bureau, Population Division. (2014a). Table 6. Percent Distribution of the Projected Population by Sex and Selected Age Groups for the United States: 2015 to 2060. Retrieved 4/22/2016, 2016, from http://www.census.gov/ population/projections/data/national/2014/summarytables.html.

EXHIBIT 2 Projected Life Expectancy at Birth: 2015 to 2060
2015 2020 2030 2040 2050 2060
Both Sexes 79.4 80.2 81.7 83.0 84.4 85.6
Male 77.1 78.0 79.6 81.2 82.7 84.0
Female 81.7 82.4 83.7 84.8 86.0 87.1
Data Source: U.S. Census Bureau, Population Division. (2014b). Table 17. Projected Life Expectancy at Birth by Sex, Race, and Hispanic Origin for the United States: 2015 to 2060 (NP2014-T17) Retrieved 4/22/2016, 2016, from http://www.census.gov/ population/projections/data/national/2014/summarytables.html.

• This case was contributed by David Thornblad Ph.D. and Zachary Sumner.
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Health Related Services for an Aging Population
General terms for the services these firms provide are “long-term” and “post-acute” healthcare. Post-acute encompasses an array of healthcare services after an injury, illness, or disability. It is estimated that 35 percent of patients need follow-up care after they are discharged from the hospital.4 Some of the common services that are provided include:
• Home Healthcare: These services allow patients to remain at home and still receive any medical support they require. Healthcare providers come to the patient’s home to take vital signs (blood pressure, temperature), make sure the patient is eating and drinking, and taking their medica- tion.5 Home healthcare is generally less expensive than a hospital or skilled nursing facility.
• Rehabilitation Services: These services can be provided in many settings (hospitals, skilled nursing centers, at home) and seek to restore or improve a patient’s independence after an injury.
• Skilled nursing facilities: These facilities provide skilled nurses on a 24-hour basis to patients that do not require more advanced services that a hospital can provide.
• Assisted/Senior Living Facilities: These facilities provide simpler services to elderly patients who do not need 24-hour care. These facilities provide meals, medication management, hygiene support/dressing and transportation services.
• Hospice Care: Hospice facilities are for terminally ill patients, allowing them to finish their life in as much comfort as possible. Hospice patients do not receive treatments that attempt to cure an illness, but they do provide bereavement services to families and loved ones.
As may be deduced from the types of services listed above, the majority of patients for post- acute firms are elderly. This is because as people age normally simple injuries, such as injuries due to falling down, can have profound health impacts. Further, elderly people tend to have weakened immune systems and can have difficulty fighting illnesses.6

Industry Participants
Three major firms that focus on healthcare for the elderly are Genesis Healthcare, National HealthCare Corporation, and The Ensign Group. Each firm has a slightly different strategy as to how to service the needs of the aging population.
Genesis Healthcare offer inpatient services through a network of skilled nursing and assisted/ senior living facilities. Additionally, they supply rehabilitation and respiratory therapy to more than 1,700 locations in 45 states as well as the District of Columbia. Their assisted/senior living facilities are usually located in urban or suburban areas. In terms of strategy, the firm states that it seeks a higher profit margin than some of its competitors. Genesis believes that the most important factors that influence its performance are its reputation, the cost and quality of services, responsiveness to patient/resident needs as well as the ability to provide support in other areas such as third-party reimbursement, information management and patient recordkeeping. The firm also suggests that some competitors may not adhere to the Anti-Kickback Statute that prohibits payments for referrals, which allows these competitors to attract more patients.7 Kickbacks to obtain patients may allow competitors to compete at lower profit margins due to economies of scale.
National HealthCare Corp (NHC) was founded in 1971, and its primary business services include skilled nursing facilities in association with assistant living and independent living facilities for seniors. At the end of 2015, NHC operated 74 skilled nursing facilities in nine states with over 9,400 beds. The firm has over 13,000 employees, and NHC offers tuition reimbursement to employees in order to recruit, retain, and maintain a qualified workforce. The company faces competition in every market in which they have a presence and in which no firm has a monopoly with the exception of some smaller rural markets. NHC attracts patients through referrals from hospitals, doctors, as well as church groups and community service organizations. Their annual report notes that the patients’ families often play a vital role in selecting a nursing home for their loved ones. Therefore, NHC believes their competitive advantages are their reputation and the physical appearance of their facilities in order to encourage family members to take their loved ones to a NHC facility.8
The Ensign Group was started in 1999 with the vision of establishing the standard of excellence in skilled nursing care. During the 2001 recession Ensign acquired multiple facilities that offered skilled nursing, personalized rehabilitation, and technologically advanced medical care services to a wide clientele. With a focus on acquiring underperforming medical facilities and turning them around, Ensign has been adding facilities across the United States.9 Ensign Group follows a differentiation strategy by maximizing the value they can provide to clients and charging them appropriately. The company provides state-of-the-art facilities, in-home therapeutic services for patients who are unable to leave their homes, and tailored care—the focus is providing quality care for patients who do not mind paying for such services and facilities, even if Medicare does pay for part of it. The company has faced criticism and lawsuits, alleging that they filed false claims with Medicare and that they would provide rehabilitative services that the patient did not need, culminating in a $48 million lawsuit settlement in 2013.10
One strategic concern shared by all firms in the industry is that while demand for their services will be growing due to an aging population, it is fairly easy to enter the industry.11 A 2016 report, in association with the U.S. Centers for Disease Control and Prevention, on the long-term healthcare industry found that there were approximately 67,000 regulated providers servicing 9 million people in the country.12

Sources of Revenue
Firms in this industry receive the majority of their revenue from government sources, particularly Medicare and Medicaid. However, these revenue sources only cover certain services that these firms provide, therefore it is important to understand the types of Medicare and Medicaid.
Medicare is provided by the federal government to people 65 or older as well as the disabled. In general, there are three types, or parts, of Medicare that are important for patients to understand.
• Part A—Covers inpatient stays at hospitals, skilled nursing facilities, nursing home care, hos- pice, and home health services.
• Part B—Covers services and supplies needed to treat chronic conditions, as well as preven- tive care like flu shots. It can also cover obtaining a second opinion from a doctor, as well as laboratory tests and ambulance services. Patients pay a monthly fee for this coverage.
• Part D—Provides prescription drug coverage through private insurance companies that have contracts with the government.
Medicaid is provided by state governments, with matching funds from the federal government, to patients or families with low incomes or little resources. Elderly patients can receive Medicaid in additional to Medicare, but patients only become eligible for Medicaid once they have exhausted their other assets.
Medicare and Medicaid are the main sources of income in the senior and post-acute healthcare industry. As shown on Exhibit 3, in 2015 Genesis Healthcare, Ensign Group, and National HealthCare received an average of 32.93 percent of revenues from Medicare and 37.63 percent of revenues from Medicaid. This totals to 70.57 percent of revenues coming from government-related sources. Complicating the issue for the industry is that Medicare and Medicaid have been steadily lowering reimbursement rates for taking care of patients, or increasing reimbursements by lower rates than expected.13 Given the importance of Medicare and Medicaid, government sources of revenue are uncertain in the long term.

EXHIBIT 3 Sources of Revenue for Major Senior Healthcare Firms (Percentage of Total Revenue)
Genesis Ensign National HealthCare Average
Year ended December 31 2015 2014 2013 2015 2014 2013 2015 2014 2013 2015 2014 2013
Medicare 26 27 28 32.8 34.9 35.8 40 39 40 32.93 33.63 34.60
Medicaid 53 53 52 34.9 35.5 36.4 25 26 25 37.63 38.17 37.80
3rd Party Insurance / Managed Care 11 10 9 15.4 14.2 13.1 11 11 10 12.47 11.73 10.70
Private assets and other 10 10 11 16.9 15.4 14.7 24 24 25 16.97 16.47 16.90
Data Source(s): Ensign Group, 2016; Genesis Healthcare, 2016; National HealthCare Corporation, 2016.

Affordable Care Act
President Obama signed the Affordable Care Act into law on March 23, 2010. The law aimed to trans- form the practices of doctors and hospitals to lower cost while driving better health outcomes for patients. To do so, United States citizens were mandated to have health insurance. This requirement sought to lower healthcare insurance costs since there was a larger pool of consumers, which lowered overall financial risk for insurance companies. It also required that insurance companies could not deny people coverage for pre-existing conditions. A year later, the Congressional Budget office estimated that the Affordable Care Act would “significantly decrease Medicare outlays relative to what they would have been under prior law.”14 The major components of the legislation are as follows:
• All individuals were required to obtain healthcare insurance through some entity, which may include their employer’s healthcare plan, Medicare, Medicaid, or another public insurance plan. Individuals that did not do so were subject to a penalty.
• A minimum healthcare insurance coverage was established.
• Insurance companies were no longer allowed to deny coverage to people with pre-existing conditions, which companies could do before the law took effect.
• The government established healthcare exchanges where individuals could purchase healthcare coverage.
• Dependents, generally children, could stay on their parent’s healthcare insurance until their 26th birthday.
While the legislation is highly controversial, it could be argued to have both positive and negative results for hospitals as well as the long-term and post-acute healthcare industry. On the positive side, when more individuals have insurance, there are more patients that can pay for the services these firms provide. However, if people have insurance, they may go to a doctor for preventative care. Such care may prevent devastating illnesses, which would lower the number of patients that need post-acute healthcare services.
When President Trump took office, he and the Republican-controlled Congress worked to repeal or replace Obamacare immediately. Some of the arguments to repeal or replace the Affordable Care Act include:
• The cost individuals pay for insurance each year is increasing.
• Insurance companies are pulling out of regions that are not profitable enough for them; likely due to a low and decreasing percentage of young and healthy people buying insurance.
• The cost the government pays to subsidize low-income individuals, so that they can afford insurance, is increasing.
These concerns suggest that the long-term financial feasibility of Obamacare may not be sustainable by the federal government, though this contention is highly debated. Congress was unable to pass repeal or replace legislation within the first 2 years of the Trump presidency.

EXHIBIT 4 Estimated Percentage of GPD of Tax Revenues and Cost of Social Programs
Fiscal Year Tax Revenues Social Security Medicare Medicaid, CHIP, and Exchange Subsidies
2015 17.7 4.9 3.0 2.2
2020 18.1 5.2 3.1 2.4
2025 18.3 5.7 3.6 2.5
2030 18.6 6.1 4.2 2.6
2035 19.0 6.3 4.7 2.7
2040 19.4 6.2 5.1 2.9
2045 19.9 6.0 5.5 3.0
2050 20.3 5.9 5.9 3.2
2055 20.8 5.9 6.3 3.3
2060 21.2 6.1 6.7 3.4
Percent Change from 2015
Fiscal Year Tax Revenues Social Security Medicare Medicaid, CHIP, and Exchange Subsidies
2025 3% 16% 20% 14%
2060 20% 24% 123% 55%
Data Source: U.S. Congressional Budget Office, “Long-Term Budget Projections – June 2015,” 2015, https://www.cbo.gov/ about/products/budget_economic_data, accessed April 22, 2016.

Future of Medicare and Medicaid
As noted at the beginning of the case, people aged 65 and older will become the largest population demographic in the United States (Exhibit 1) and people are living longer than ever (Exhibit 2). Given that the US government is paying for the majority of hospital treatments as well as post-acute treatments for this demographic, it is important to understand the stability of Medicare and Medicaid as revenue sources to the industry.
As shown in Exhibit 4, the United States Congressional Budget Office estimates that from 2015 to 2025, federal government expenses paid to Medicare will increase 20 percent, and Medi- care as well as expenses related to the Affordable Care Act will increase 14 percent, while tax revenues will only increase 3 percent. Additionally, Social Security is paid to individuals over the age of 65, and expenses associated with it will increase 16 percent. When examining the rate of change from 2015 to 2060 (the year in which the demographic changes on page 1 refer), Medicare expenses will increase 123 percent, Medicaid and Affordable Care Act expenses will increase 55 percent, and Social Security expenses will increase 24 percent. However, it is estimated that tax revenues will increase only 20 percent, which may be because the typical tax paying demographic, age 18–64, will become an increasingly smaller percentage of the population (Exhibit 1). This suggests that in the long term, the government may not be able to maintain Medicare, Medicaid, and Social Security without additional tax increases.

Future of the Healthcare Industry
Given the increasing costs of healthcare for an aging population, the current healthcare industry model may not be sustainable in the long term. What options do individuals, firms, and the govern- ment have to deal with this issue?

References
1U. Reinhardt, “Does The Aging of the Population Really Drive the Demand for Health Care?,” Health Affairs, 22(6) (2003), 27–39. doi: 10.1377/hlthaff.22.6.27
2L. Harris-Kojetin, M. Sengupta, E. Park-Lee, et al., “Long-term Care Pro- viders and Services Users in the United States: Data from the National Study of Long-Term Care Providers, 2013–2014,” Vital Health Stat 38 (2016).
3Bureau of Labor Statistics, “Employment Projections: 2014–24 Sum- mary,” 2015.
4Genesis Healthcare, Inc., 2015 10-K Annual Filing (2016), p. 3.
5Medicare, “What’s Home Health Care & What Should I Expect?,” 2016, https://www.medicare.gov/what-medicare-covers/home-health-care
/home-health-care-what-is-it-what-to-expect.html, accessed April 22, 2016.
6American Accreditation HealthCare Commission, “Aging Changes in Immunity,” Medical Encyclopedia, 2014, https://www.nlm.nih.gov
/medlineplus/ency/article/004008.htm, accessed April 22, 2016; Cen- ters for Disease Control and Prevention, “Important Facts About Falls, 2016, http://www.cdc.gov/homeandrecreationalsafety/falls/adultfalls
.html, accessed April 22, 2016.

7Genesis Healthcare, Inc., 2015 10-K Annual Filing, 2016, p. 31. 8National HealthCare Corporation, 2015 10-K Annual Filing, 2016. 9Ensign Group, Inc., 2015 10-K Annual Filing, 2016.
10US Department of Justice, “Nursing Home Operator to Pay $48 Million to Resolve Allegations That Six California Facilities Billed for Unnecessary Therapy,” 2013, https://www.justice.gov/opa/pr/nursing
-home-operator-pay-48-million-resolve-allegations-six-california
-facilities-billed
11Genesis Healthcare, Inc., 2015 10-K Annual Filing, 2016, p. 31.
12L. Harris-Kojetin et al., op cit.
13Genesis Healthcare, Inc., 2015 10-K Annual Filing, 2016.
14D. Elmendorf, “CBO’s 2011 Long-Term Budget Outlook,” Congressional Budget Office, 2011, p. 44.