How the VA Continues to Build New Nursing Homes When Few Others in the Space Can

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With most states operating under certificate of need (CON) laws and access to scarce capital for skilled nursing providers, new construction isn’t expected to pick up for skilled nursing until greater strides are made in COVID-19 recovery for the sector.

While there has been some momentum with federally and state-backed projects, primarily through the US Department of Veterans Affairs, skilled nursing construction continues to be too risky and not attractive for private investors, leaders in the space say.

“In the private sector … the only thing I know that’s ever happening is the buying and selling of current properties, I don’t know of anybody who is building anything,” Douglas Hughes, deputy commissioner of veterans health care for the Minnesota Department of Veterans Affairs, said. “I don’t know of any new construction other than the three new veterans homes in Minnesota.”

Inflation hasn’t helped either.

The national average for building inflation hovered around 14% for 2021 – in some markets soaring to over 20% – according to the winter 2022 senior living construction costs report from construction firm the Weitz Company. Supply chain issues are likely to continue through the year but should improve by year-end as manufacturers get back to full production and shipping ports become less crowded, the report noted.

The Weitz Company predicted inflation escalation in the 6-8% range for 2022 considerably less than the 14% in 2021, but still much higher than the normal 3-4%.

Still, with the White House proposed plans to accelerate phasing out rooms with three or more residents and promote single-occupancy, according to Biden’s nursing home reform, one organization getting a jumpstart on that movement is the VA.

Veterans home construction sees ‘unprecedented’ growth

Recent projects in Minnesota, Florida, Tennessee and Michigan show the VA sees a need to invest in capital improvements at its nursing homes as the industry shifts more towards private rooms and person-centered care.

“With these new buildings, what we’ve tried to focus on is a single story,” Anne Zerbe, executive director of the Michigan Veterans Homes, told Skilled Nursing News. “We’ve also moved toward private rooms with ensuite bathrooms and each of the homes is comprised of neighborhoods. I think it’s a big shift from what we’re used to.”

She said one development precipitating this shift has been the growth of the small home model, which the VA has become “big advocates” for.

“A lot of times what hinders you when you’re trying to think about how to provide more person centered care is bottom line cost,” she said. “So for us, yes, the construction was a little more expensive. Bigger picture, it’s a much better operating model to be able to take all of the available sources of revenue that are out there to help pay for our residents’ cost of care.”

According to Minnesota VA’s Hughes, the small home design, with single room and bathroom designs, are now requirements to receive federal VA grant dollars.

Both he and Zerbe have received support through the VA State Veterans Home Construction Grant Program – a partnership between the VA and states to construct, renovate and repair state-owned and operated nursing homes.

A new 152,000-square-foot nursing home was completed in Michigan last year through the construction grant program.

For Hughes and the Minnesota VA, he hopes to see three new nursing homes completed in the state by the summer of 2023.

In a state that currently operates five veterans homes, Hughes described the flurry of activity in new veterans home construction as “unprecedented.”

“I think the most in the past was two at one time,” he said.

Access to funding is much different for Veterans Homes than for a private operator, Hughes admitted. Veterans homes approved through the Veterans Home Construction Grant Program receive a 65% match from the federal VA to construct the new home with the state covering the other 35%.

“We had some very generous donations from the community, but the budget went up quite a bit,” Hughes said. “[On one of the projects] we drywall alone went up over $3 million and combined with the labor shortage and material shortage, it’d be very risky to figure out if that was a worthwhile project.”

While veterans’ homes get some funding through reimbursement from the Centers for Medicare & Medicaid Services (CMS), they aren’t as dependent on it as other private operators are, Hughes said; he can see how it might be challenging to make new construction a worthwhile investment.

With occupancy still down for skilled nursing – reaching 71.9% in February compared to February, 2020 pre-pandemic levels of 86% – new construction may not any easier for operators.

“I’m sure that there’s going to be somewhat of a capacity problem with people still aging, I don’t know that we’ve hit the peak yet in the baby boomer group that will be needing skilled nursing, and so I don’ I don’t know what that is going to be,” Hughes said.

With other alternatives out there, he’s concerned that skilled nursing’s current return will steer investors away from the sector.

“There’s an absolute explosion of assisted living and I think that’s an option that a lot of people are looking at [construction wise] versus the last resort of a skilled nursing facility,” he said.

The SNF development landscape

The number of Americans ages 65 and older is projected to nearly double from 52 million in 2018 to 95 million by 2060, as the demand and need for new nursing homes could grow along with it.

Without much new development in recent years, especially in more restrictive states to build in, Hughes is not the only one who thinks it could create a capacity problem down the line.

“Right now we have a supply and demand imbalance in terms of the data,” Bill Kaufman, senior principal at the National Investment Center for Seniors Housing & Care (NIC), told Skilled Nursing News. “It sounds like demand is there and demand is growing, but unless you start getting occupancy up at a higher level, it’s hard to justify bringing more operational beds online.”

Since Q4 2020, bed counts and property inventory have dropped every quarter in the skilled nursing space.

Since the start of Covid SNF inventory across the country has remained relatively stable, showing slight upticks from Q2 2020 to Q4 2020 in bed counts and properties online. The numbers have decreased every quarter of 2021, however, with 479,720 beds to start of 2021 and 477,011 beds to end the year.

In fact, nursing home inventory has been on the decline since 2005 despite a growing aging population.

“For the fourth quarter of 2005, in the top 31 largest areas in the country, they had 3,653 properties and many years later had 3,586 with bed counts showing a greater decline,” Kaufman explained.

In some areas, however, there has been more nursing home construction activity than others.

Kaufman said it was all “market-specific”, but looking at the industry as a whole, the trend is pointing “down.”

“If occupancy continues to stay significantly lower than pre-pandemic then you’re going to be hard pressed to bring new aggregate beds to the market,” he said. “You can have some properties pop up or have a renovation but when you look at the industry as a whole, it’s going to be hard pressed to ramp up construction.”

After construction across the board was at a “standstill” in 2020, Blima Ehrentreu, founder and CEO of The Designers Group, is starting to see renovation projects pick up in the industry.

“We worked with facilities that had vacancies over Covid and had units that they were able to redo,” she said.

Ehrentreu is working on a project in Chicago that was paused due to the pandemic but is back on track, with case counts declining and restrictions easing up.

“At that facility we’re redoing the units and some of the amenities. They felt like the facility was tired and beaten and they really wanted to bring it up to date to reflect the care that they provide,” she said.

One factor in nursing home construction continues to be certified of need (CON) laws.

Kaufman said he continues to see more activity in states without a CON.

“Dallas, Texas, for example, in the fourth quarter of 2005 had 20,456 beds, fast forward to Q4 2021 it’s actually increased to 25,726 so that does suggest that the state does not have the CON law so that does make it easier to build, ” he said.

Yet, the state continues to struggle with occupation challenges.

“The interesting part here is you’re bringing more inventory, and demand is not meeting that inventory,” he said. “In Dallas, you had occupancy in the fourth quarter of 2006 at 84.3%, fast forward those additional beds and demand not meeting that, fourth quarter of 2021 occupancy was at 63.5%.”

He added that the decline was not due to just the pandemic as occupancy had already declined to 71% by the fourth quarter of 2020 for the area.

Property count also jumped from 164 to 206.