On Lok In San Francisco, The First PACE Center, Expanding Again
The On Lok Senior Health Center in San Francisco opened back in the early 1970s in response to a local need — and that move, in a sense, redefined quality senior health care. At the time, the mostly low-income Chinese, Italian, Korean and Filipino seniors who had lived in the city’s Chinatown and North Beach neighborhoods for most of their lives had few alternatives other than entering a traditional nursing home — usually outside the local community and absent of any cultural ties — when they became old and frail. Armed with a fresh idea, some common sense and an initial grant from The San Francisco Foundation, On Lok opened the first community-based senior health center that combined clinical services, recreational activities and a social environment, as well as transportation to and from the facility, in an organized way. On Lok now operates seven such centers in San Francisco and one in nearby Fremont.
Last month, Cain Brothers structured a $22,710,000 bond offering for On Lok Senior Health Services, part of which will be used to finance a new center in San Jose.
On Lok was the prototype for Program for All-Inclusive Care for the Elderly (PACE), a national initiative that integrates acute and long-term senior care with respective funding streams and today boasts 46 centers in 25 states throughout the country. Nearly as many new centers are in various stages of development, including several that are opening this year. A federal grant for rural providers to develop programs in communities that don’t have the population density of more urban areas is one reason for so many new openings.
PACE basics
PACE centers provide a full spectrum of adult day health-care services, from primary to acute to long-term care, for poor, elderly, frail individuals who, at the time of enrollment, meet the state’s nursing home level-of-care determination and are able to live safely in their own homes with the support of PACE services. Needing assistance with at least three basic activities of daily living (ADLs) is the most common standard. About one-third of current PACE participants live totally independently, another third live with a loved one, and a third live in close proximity to a loved one or in a supportive housing environment. Basically, PACE provides five main services:
1. Intensive primary care — a full-time staff physician and nurse practitioner for every 150 people in the program.
2. An interdisciplinary team — medical practitioners, physical therapists, social workers, the day center CNA, the home-care coordinator and the transportation coordinator meet daily to keep people out of hospitals and nursing homes and in their homes, with loved ones, or otherwise connected to their community.
3. An English-style day hospital — patterned on an English model and the On Lok concept, the components include a physician clinic, a rehab center and adult day care. Participants attend three days a week, on average.
4. Home care — a CNA visits the home to help with basic activities of daily living.
5. Transportation — a van and a full-time driver is required for every 15 people in the program.
“Once a person qualifies for enrollment in the program, we take full responsibility for their health care,” explained Robert Greenwood, VP of Public Affairs at the National PACE Association (NPA). “And if they do have to go into a nursing home, we pay for it. Their participation in the program continues until they either disenroll or die.”
Organizing the aging process and taking full responsibility for program participants are key to making the model work. “The professional and clinical incentives of the caregiving staff are perfectly in line with the financial incentives of the organization,” Greenwood stressed. “There’s never any thought that an individual is becoming too frail or too expensive. Since we pay for nursing home care, too, we have every incentive to invest in the person up front with preventive care so the reimbursement funds provided to PACE aren’t diverted to a third party.”
The average PACE participant is 80 years old. And as a testament to the program’s overall success, data from a 2007 study sponsored by The Milbank Fund showed that 61% of PACE enrollees reported no decline in functional skills after three months and 43.3% still reported no decline by 12 months. Another interesting statistic: People over 65 have a 14% chance of dying in their own home and a 50% chance of dying in a hospital; for PACE participants, the figures are the exact opposite.
PACE centers are funded through a combination of Medicaid and Medicare reimbursements for low-income participants and some private pay premiums for those with higher income levels. “The PACE benefit includes all medically necessary long-term care and services, including prescription drugs,” said Greenwood. “It’s all-inclusive.” Private-pay participants pay the Medicaid portion.
Setting up a PACE center
According to Dan H. Gray, president of Continuum Development Services, a successful PACE program manages three areas extremely well: (1) end-of-life care; (2) resources for the elder and support for the caregiver;
and (3) program compliance by the participant and family members (e.g., avoiding emergency 911 calls that may lead to a stay in a non-participating hospital). Gray is currently involved in developing eight separate PACE centers and has already opened four others.
“Traditionally, PACE has been able to blur the lines between what Medicare or Medicaid pays to benefit the people we serve without worrying about who pays for what. PACE can provide whatever care will help the person remain out of a nursing home or hospital.”
The cost of setting up a PACE program depends upon the organization’s starting point. Some have a building available or can lease community space for $1 a year, but any space will need at least some renovation. Having a transportation system in place is a big cost saver. And the organization must have (or hire) staff physicians, nurses, therapists and aides with core competencies in delivering chronic care for a geriatric population, including primary care. The need for occupational and physical therapists is much greater in a PACE program, because there’s no limit to how much therapy can be provided. Another consideration is whether other health-care providers in the community will support a PACE program and make referrals — or whether they will view it as competition.
As a managed-care organization, PACE receives a set payment for each person enrolled. Typically, it takes 80 to 100 people to meet all the fixed costs and may take up to 18 months to reach that level. Mature PACE programs with one center target 120 and 150 enrollees to stabilize inevitable attrition. So part of the startup cost must include liabilities incurred prior to break-even, which will vary depending on the number of initial enrollees. When opening with 20 enrollees instead of eight, for example, break-even occurs four months earlier and operating losses in the first year drop by $500,000, according to Gray.
A PACE program serving 300 people that costs $3 million to $5 million to set up is likely to generate the same annual revenues as a new, 400-resident CCRC that might cost $75 million or more to develop. “For a minimal investment, PACE is fairly revenue-intensive,” said Gray, “in that it provides $60,000 to $65,000 per person per year in revenue from the two primary sources. The average payment from Medicaid is nearly $3,000 per person per month; from Medicare, between $2,000 and $2,200 for Parts A and B and another $500 for Part D. That’s almost $6,000 per month per person.” PACE is fully capitated for all hospital, nursing home, physician, therapy, and drug costs, but the centers don’t have to play by the usual rules — no three-day hospital stays to access Medicare, no therapy caps, no Part D donut hole, etc.
PACE’s weakness is that it’s harder to address people’s needs when they’re spread over a large area. So far, PACE programs have all been located in metropolitan areas, because bringing people to the center is more difficult in a rural environment. The 14 rural PACE programs about to open across the country are an experiment.
PACE and housing
Most existing PACE programs look for supportive housing in their communities. “Whenever we can arrange supportive housing instead of placing a person in a nursing home, it’s to the participant’s benefit and the program’s financial benefit,” Greenwood explained. So once again, On Lok is ahead of the curve. Its original PACE center has the clinic and day center on the first floor and HUD 202 housing above. Residents pay rent, sometimes with their SSI check, for “very vanilla” studio apartments, according to Bill Pomeranz, Managing Director of Cain Brothers in San Francisco, who spearheaded On Lok’s recent financing. “It’s home for them and efficient for the caregivers,” he said. “Once the new San Jose center is operational, housing will be built around it.”
“Combining housing with PACE is the wave of the future,” Pomeranz continued. “And banks really like this type of program, because of its very diversified income stream. As an indication of On Lok’s strength, we got an A- rating and a 65 basis-point bank LOC for the recent financing. That’s about one-third of the market cost.”
Since PACE is not a “place-based” delivery system, a lot of theoretical studies have been done on how PACE and CCRCs might work together. Making space available for a PACE center, for example, could enhance the CCRC’s offerings and allow residents to remain in their homes longer. The CCRC could also offer PACE services to non-residents, including low-income people who live nearby and could never afford to live on campus. “That would bring in added revenues to keep the program operating properly,” Greenwood noted. “The challenge is to figure out a way to finance PACE services for middle-income people. One possibility would be for the CCRC to pre-fund PACE, making it a benefit at the end of the resident relationship. Part of the premium that well elderly pay could be set aside in anticipation of their accessing PACE benefits when they qualify for nursing home care.”
Many hospice organizations and adult day centers are interested in developing PACE programs, as well. “A lot of sponsors see the limitation of being one part of a fragmented continuum,” said Greenwood. “The attraction of PACE is that it is totally responsible for all the needs of the participant. And the fact that there’s a revenue benefit to being a PACE provider is attractive to sponsors, too.

September 1, 2008