Someday, most of us will return to life before COVID-19. Nursing homes will not.

The deaths of more than 16,000 of their residents from COVID-19 has profoundly disrupted senior living facilities–especially nursing homes– and will drive historic change in the industry. Robert Kramer, president of the consulting firm Nexus Insights and a long-time observer of nursing home finances, told me, “There never will come a time when we will return to the old normal.”

Operators are being crushed by higher costs and shrinking revenues. The values of publicly-traded nursing home firms have collapsed. The share price of nursing home Genesis Healthcare  fell from $1.77 in late February to $0.82 on May 4.  Share prices of real estate investment trusts that lease senior facilities to operators have similarly plunged by half.

A dual business model

To understand the future of nursing homes, it is helpful to understand their unusual business model. Like defense contractors, nearly all of their revenue comes from government and is highly sensitive to changes in payment rates.  And most operate two vastly different businesses in the same building—skilled nursing facilities (SNFs) and long-term care.

Short-stay skilled nursing is mostly paid by Medicare. For many facilities—though not all—it is quite profitable. Traditional fee-for-service Medicare pays about $500-a-day,   although Medicare managed care—a growing share of the business—pays closer to $400. Overall, average Medicare margins in 2017 were about 11 percent, according to the Medicare Payment Advisory Commission (MedPAC), a group that advises Congress.

By contrast, Medicaid pays at least some costs for about 80 percent of long-term care residents of nursing homes. Medicaid payments vary widely by state but average about $200-a-day—often less than the cost of care. On average, Medicaid margins are negative. Nursing homes often make up the difference by providing a wide range of ancillary services, such as medications.

Assisted living, by contrast, is almost entirely private pay.

Using Medicare to subsidize Medicaid

Even before COVID-19, the mixed business model of nursing homes was extremely challenging for all but the most efficient providers. It was becoming tougher to use excess Medicare payments to offset insufficient Medicaid rates. Facilities were filling fewer beds with lucrative traditional Medicare patients, and more beds with Medicare managed care and Medicaid residents. Overall occupancy was about 83 percent and has been falling since 2015, according to the National Investment Center for Seniors Housing and Care (NIC). At 80 percent or lower occupancy, nursing homes are in financial trouble.

Then came COVID-19. Now, eight in ten senior living executives report that residents are moving out faster than others are moving in.  Consumers likely are responding to at least three trends: the risk of COVID-19 in facilities, the inability of family members to visit patients during a lock-down likely to last for months, and high costs at a time of widespread economic distress.

Some of those short-term challenges may fade over time. But some will not.

Costs:  Expenses are exploding. Many facilities will have to redesign interior space to maximize infection control. They may lose beds if they must close shared rooms. Labor costs, already under pressure, could increase substantially as facilities have to both increase staffing and raise pay. Increasingly, nursing aides are unwilling to do this difficult and now dangerous work at the current average wage of about $13/hr.

Balancing Safety and risks of social isolation: Of course, facilities have an obligation to keep their residents as safe as possible. But after the pandemic, they will be under enormous regulatory and consumer pressure to maximize infection control. So far, facilities have been doing that by effectively keeping residents in their rooms—no visitors, few activities, no community dining. The challenge: No one wants to live like that. And social isolation is itself dangerous. Facilities must find a way to strike a balance between safety and a comfortable, engaging, and social community.  It will not be easy.

Revenues: Even as costs increase, overall per patient revenues from current sources are likely to continue to fall. Financially-stressed states will cut Medicaid payments to nursing homes, even as politicians decry the facilities’ inability to control COVID-19. Rehab increasingly will be done with less-costly outpatient physical therapy. For those who still require a SNF stay, traditional Medicare payments are likely to shrink, as federal budget deficits skyrocket. And Medicare Advantage managed care plans will continue to squeeze payments.

Marketing:  Nursing homes struggle to sell a product that few consumers want. Even before COVID-19 older adults strongly preferred at age at home. Whenever possible, they’ll be even more motivated to stay home now. And their adult children may be increasingly reluctant to move them into a facility. A resident of one facility says of the lockdown and the uncertainty, “I feel like I am on death row.”

Unless they can fundamentally change the way they deliver care, facilities will have a hard time marketing around those attitudes.  And they can’t survive with just Medicaid residents, who are there only because nursing homes are the only setting where Medicaid pays room and board.

Legal liability: Unless Congress grants them some waiver of legal liability, nursing homes and assisted living facilities are facing a massive wave of lawsuits from families of residents who became sick or died. And even with a waiver, which the facilities are lobbying hard for, it is uncertain whether insurance companies will be willing to cover them for future pandemics.

These enormous pressures are likely to result in significant losses for facilities unable to adapt, and a massive ownership shakeout.  Some analysts predict that as many half the current operators may go out of business, unable to find the capital they need to keep going.  Industry analysts disagree on whether this will result in ownership consolidation or a net decline in beds—or both.

But Kramer is right. For nursing homes, things never will be the same.