How Rising Inflation is Eroding Margins as the Nursing Home Industry Readies for Possible Recession

With interest rates and inflation rising and prices up 8.6% from a year ago — the fastest increase since 1981 — there seems to be a growing fear that a recession may be on its way.

In fact, inflationary concerns continue to erode consumer sentiment, according to the University of Michigan Surveys of Consumers, as the June consumer sentiment reading was at an all-time low for the survey compared to numbers reached during the 1980 recession.

The survey is based on a nationally representative sample with interviews conducted throughout the month by telephone.

As the average consumer feels the burnt of an unforgiving economy, with mortgage interest rates going up and commodity pricing continuing to fluctuate, skilled nursing may be one industry that can ride out a recession better than most.

Michael Perry, CEO of NexCare WellBridge Senior Living, described the sector as a needs-based business, meaning that regardless of the state of the economy it still provides a vital service.

“If you have a procedure and you need rehab or some type of skilled nursing care [you can’t just put it off],” he told Skilled Nursing News. “I think any needs-based industry, which we are, is a little bit better equipped to handle a recession.”

He wouldn’t go so far as to call the industry “recession proof,” but he does think the sector can withstand a recession better than others.

Robert Applebaum, director of the Ohio Long-Term Care Research Project at Miami University, went one step further, noting that a recession could even be good for nursing homes amid the current staffing shortages.

“When unemployment goes up, nursing homes do better on the worker side because they can still get workers. When unemployment is low, like it is right now, they are in a world of hurt,” he told SNN.

On a national level, more than 400,000 long-term care employees have left the workforce since the start of the pandemic, according to data from the Bureau of Labor Statistics (BLS).

While Robyn Stone, senior vice president of research at LeadingAge and director of the LeadingAge LTSS Center at UMass Boston Stone, agreed that historically recessions have been good for the industry, it remains to be seen if those patterns hold up through Covid.

“Ironically, recessions historically have been very good for the nursing home industry in terms of workforce because people do not leave their jobs during recessions,” she told SNN. “In the 2008 recession, for example, turnover was probably lower than it had been in years and the same thing was true for earlier recessions.”

She’s learned, however, to expect the unexpected with the Covid pandemic and “wasn’t sure” that a recession would play out the same way it has in the past.

The American Health Care Association (AHCA) did not paint as optimistic of a picture should a recession come.

“Our residents and staff cannot afford another economic blow, such as a recession,” AHCA said in a statement to SNN. “Many facilities are being forced to limit new admissions because of staffing shortages, which hurts our ability to recover. Any additional economic pressures could push more nursing homes over the financial brink.”

Recessions tend to stabilize staffing

While nobody is rooting for a recession, Perry thinks one way it could help nursing homes is by giving the sector the push it desperately needs with regards to the labor shortage.

“If a recession were to happen and the economy slowed down a little and it created available workers, I think that would help us,” he said. “I think that’s one of our biggest challenges right now is finding people that want to work in our industry.”

Recent BLS data shows that the seasonally adjusted number of employees at skilled nursing properties dropped by 238,500 jobs or 15.1% from March 2020 to March 2022 and while employment in the sector increased by 5,400 jobs in May, it still has a ways to go to make up for the 233,100 jobs lost over the course of the pandemic.

ProMedica Vice President for Government Relations and Advocacy Brian Perry said the nursing home workforce is at the lowest levels he’s seen in 15 years. 

ProMedica is now in line with national standards with six in 10 nursing homes turning away patients in the last 12 months due to staffing. 

“Nobody with a conscience goes out and hopes for a recession but I do think that some of the workforce challenges may ease,” he said.

A far bigger concern to Perry is how rising inflation will impact the sector, and he expects inflation to impact operators in a number of ways.

“Let’s say you’re a vendor and somebody that services nursing homes and you’ve got contracts with DHL or UPS or FedEx, the next contract you sign is going to go through the roof,” Perry said. “We have no choice but to give into fuel costs, staffing shortages and everything else.”

He doesn’t think the sector has seen the “full realization” of how the current inflation is impacting nursing homes.

How states and the federal government react to an economic downturn in terms of Medicaid payments to nursing homes is another thing Perry keeps an eye on.

“We saw that happen in the 2008 housing crisis, a lot of states went dry on Medicaid funding and typically when there’s a funding crisis at the state level, nursing homes are not necessarily the most popular kid in the room looking for funding,” he said.

Stone said that inflation is bad for the nursing home workforce because about “60 to 80%” of the care received in nursing homes is provided by front-line staff.

“[Low wage workers] are going to feel the pinch a lot more which is going to put more pressure on nursing homes,” she said.

If the rate of inflation keeps going up, states aren’t likely to increase Medicaid reimbursement at the same level as inflation, Applebaum predicted.

“High inflation is going to be a big problem for the industry, but a moderate recession could actually help with the labor pool,” he said. 

Why a recession may be imminent

While a recession is not a “foregone conclusion,” as Beth Mace, chief economist and director of outreach at the National Investment Center for Seniors Housing and Care (NIC) put it, economists tend to think it is heading in that direction given market conditions.

“The Federal Reserve is acting very boldly by raising interest rates and is expected to continue increasing interest rates through this year,” Mace said.

She likened the economy to a large ship that takes some skill to course correct.

“The only tool the Fed has right now is to increase interest rates in an attempt to slow the economy,” she said. “It’s trying to slow the economy because it’s trying to reduce inflation.”

High inflation has already hit the skilled nursing industry in several ways.

General inflation for nursing home goods and services increased by 8.5% between March 2021 and March 2022, according to a recent report from CliftonLarsonAllen (CLA), and by 1.3% between February and March alone.

“Post-Covid, supply chain impacts and limited supplies coming in are pushing prices up,” Mace said. “The Federal Reserve is trying to tamp down on demand and the only way to do that is to increase interest rates.”

From a skilled nursing point of view, Mace expected demand to stay the same but it’s the cost of the goods and services that operators will be forced to address most.

Mace said she’s more concerned about a recession in terms of its impact on wages, as average hourly earnings have been going up for some time in skilled nursing — putting further pressure on operating margins.

Hourly wages for nurses have increased by 28 to 34% from 2020 to 2022, according to CLA.

Other potential impacts include PPE prices going up as well as food and gasoline.

While construction and new development is not as prevalent in skilled nursing, inflation may cool down a skilled nursing transaction market that has seen record-setting valuations over the past year.

“In terms of acquisitions, the price of an acquisition is going to go up because the cost of financing is going to increase so that could cause some deals to fall out,” Mace added.