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Senior and Post-Acute Healthcare News and Topics

Better Productivity, Better Retention: Labor Strategy for 2010

For the vast majority of providers, productivity and retention are ongoing labor hassles.  Salaries and benefits are typically, the single largest expense item for health care providers and when analyzed by all of the components, a surprising percentage is allocated for labor related expenses that can and should be, reduced.  Expenses such as Worker’s Compensation, recruitment, turnover, lost productivity due to turnover, pool staff, etc. are resources spent with minimal to no return.

For nearly twenty-five years, I ran a very large multi-site, multi-corporation health system with nearly 1,000 employees.  A number of years back (ten or so), the organization decided to focus on our labor costs and our manpower strategy.  Our turnover was about the industry norm, we had some pool use, our recruiting costs were higher than they should have been, our Worker’s Comp premium was trending up and our overall comp and benefits package, while attractive, wasn’t strategically aligned with who we were trying to recruit – principally experienced, stable employees.  Altogether too often, we hired someone in a panic mode to fill a spot only to find out we hired the wrong people, termed them or they termed themselves,  and then went back to the drawing board.  In the interim, to fill the vacancies resulting from the revolving door, we used pool or temporary staff; premium dollars for no commitment, no real productivity.

By the time I retired in early 2009 and for the seven to eight years preceding, the organization had turned to become the employer of choice in the market area.  Our turnover was less than 10% of our total staff, the majority occurring in non-clinical staff.  Average staff tenure had exceeded ten years and our recruitment budget was less than $100K per year.  Our Worker’s Compensation “modifier” (the factor that correlates work related accident/injury loss experience to premium) was the lowest in the industry – so low that we annually received high five and six figure rebates on our premiums.  We never posted ads for management or administrative positions, never had any employment actions (legal) taken against us save unemployment claims which we universally won on appeal, and had totally eliminated pool or agency use.  Our productivity was extremely high and our Medicare, Commercial and Private Pay payer mix for our reimbursed businesses (SNF, Hospice, Outpatient Rehab, etc.) was fully 75% of our patient days and billed encounters.  We also ran multiple sites, completed multiple acquisitions, and had over a dozen complex service lines (vent, wound, inpatient hospice,, etc.) that required us to recruit and maintain, highly skilled clinical staff.

The point of this post for me, is not to brag but to share some common sense, workable strategies that will, if employed (pardon the pun) properly, increase productivity, increase retention, and reduce non-essential labor related expense.  I have actually used each tactic or strategy below and each has worked (in conjunction with the others) and produced real, tangible results that every provider organization can benefit from.

  • Change hourly and salaried compensation to a very flat scale that compensates each employee for the requirements of the core job – nothing more.  There is no real correlation between longer-term employees being paid more and their relative worth to the organization.  I know this sounds incongruous in light of a retention strategy but trust me, longer-term employees well compensated and performing will be just fine and as we all know, pay doesn’t keep or attract any key staff members.
  • In light of above, increases in hourly and salaried wages should be tied to “market” only or to skill levels.  Career ladders are fine provided they actually correlate to necessary skills, demonstrated competency and ”jobs” that actually exist or need to be filled. 
  • Re-work job descriptions for all non-management and non-supervisory positions such that the core of the job description is divided into two thematic areas – job required competencies and behavioral standards.  Job required competencies are the core, functional requirements (demonstrable) that must be completed by the person doing the job, routinely (daily, weekly, monthly, etc.).  Behavioral standards are the requirements established by the profession and/or the organization and are essentially universal to every position or every position within a particular job category.  Examples of behavioral standards are attendance requirements, dress codes, CEU requirements, etc.  Behavioral standards are not things like, “treats co-workers with respect” – this should be an organizational given and the purview of management.  Eliminate from each job description, any non-demonstrable, non-verifiable requirement.
  • Change job or annual performance evaluations to nothing more than a competency based review, based on the job description.  Competency testing should be annual or as frequent as needed when job descriptions change or competencies are altered/added.  Eliminate “compensation” from the discussion as compensation or wages should be determined entirely based on the market, the organization’s budget and its manpower plan (a component of which should include a provision of how the organization determines what level of compensation it will offer in light of the market).  Include in the review, an optional discussion for employee development but such a discussion should only occur based on the desire or choice of the employee.
  • Re-work hiring and orientation practices (non-management, non-supervisory) such that new hires are essentially automatic if the candidate meets the essential requirements of the job.  Orientation thus becomes a very didactic, competency-based process during which, the new hire is fully tested and indoctrinated in his/her job and the organization’s standards for employees.  Require absolute attendance and use tests and/or other forms of demonstration to assure that the new employee has successfully grasped the knowledge and/or demonstrated the core competency of the position.  Be prepared to “terminate” employees that don’t meet the requirements or standards at a high level.  Past experience suggests that employees that “don’t get it” within the first ninety days or less will likely be problem employees throughout their career and certainly, take  far more organizational resources to supervise and manage than what their performance will be worth.  Lastly, don’t let any new hire “start” their full position until he/she has successfully completed every facet of their orientation.  The organization should view this phase as the most critical step toward long-term retention and success of a new hire.
  • With respect to benefits, I am a big fan of unbundling every possible, non-mandated benefit and creating a cafeteria or flexible benefit program that allows each eligible employee to “purchase” the benefits that fit their circumstance or lifestyle.  I am also a big fan of providing lots of choices or voluntary plans such as additional life insurance, extra disability income protection, hospital indemnity, etc.  We even allowed employees to buy additional days off.
  • Create an “employee activities” committee and provide the committee with a budget.  Encourage employees to create almost weekly activity programs and events, mostly simple.  I prefer breaking these activities into four categories: Fun, Education, Wellness, Community Involvement.  Examples of things that we did were food drives, walking programs, wellness fairs, sports themed lunches, ice cream float days, cookouts, etc.  The only requirement for these events is that they must be “open” to every employee on every shift.
  • Share as much information as possible with employees about operations including budgets, strategic plans, census, staffing, quality data, etc.  I also believe that getting employees (hourly especially) involved in quality and customer service/customer satisfaction activities is essential.  The more knowledgeable and involved employees are, the more committed to the organization they typically become.

Assuming the points above are implemented or are in the process of implementation, the next group or set of strategies is undoubtedly the hardest to implement as each involves organizational change and management acumen or competency.  Arguably, without these changes or strategies in-place, the results attained will be weaker and produce much less return for the organization.

  • Rewarding performance must become a group and an individual function, tied to true performance.  The organization should be willing to provide significant bonuses or other tangible rewards to individuals who demonstrate exceptional performance or to groups that demonstrate exceptional performance.  The organization must be exceptionally clear about how it determines performance (must be measurable) and what performance is (outcomes).  Examples of performance are census goals, payer mix, survey results/outcomes, budget/financial performance, clinical indicators and quality measurements and of course, customer satisfaction.  I am a fan of using “scorecards” on key performance outcomes and then posting these measurements for staff to review.  The organization should become willing to “gain share”‘; passing along a percentage of actual gained revenue or saved expense to employees. For example, we shared the dividend we received from our Worker’s Comp experience with employees. Employees knew that the safer we maintained the workplace, the gain we received as result of our safe practices benefitted them.
  • In light of the point above, rewards must be timely and personal.  We used cash, vacations, time off with pay, deferred compensation into retirement plans, etc. for larger rewards.  For small incentives, we used gift certificates, movie passes, flowers, pizza parties, etc.  The whole point here is that performance must be rewarded rapidly and tangibly and the behavior that is part and parcel to good outcomes needs immediate recognition. 
  • Management at every level is key and the organization must commit to developing professional management staff and developing core managerial competencies.   I like the following approach.
    • Require managers to complete an organization sponsored or conducted training program on key managerial competency.  Completion and demonstrated competency is required to maintain the management position.
    • Never promote someone into a management position simply based on tenure or job skill.  Make sure that each manager has managerial competence.
    • Tie managerial compensation to the achievement of organizational objectives, direct objectives of the job and employee/direct report outcomes.  Managers must know that their compensation and future is directly tied to how well their reports and staff perform.  Measure constantly, employee turnover, customer satisfaction, quality and financial outcomes.
    • Give managers the authority and a budget for rewards for their staff.  Measure how frequently the manager is using these tools to reward outcomes and behavior.
    • Make it difficult for managers to take job actions against employees without the involvement of a “higher authority” (senior management, human resources).  Organizational policy should reinforce that employees only get fired or suspended for not performing their job as detailed in their job description (competency) or for behavioral standard infractions (attendance, dress code, etc.).  Managers should understand and embrace the concept that their role is to coach, to plan, to develop and to implement organizational strategies and policies.
    • Create opportunities for managers to interact, to solve problems jointly, to develop new ideas and programs, and to be a part of the overall organization – not just their individual department or function.
  • At the organization level, set a clear standard and practice for very quick termination of employees, regardless of tenure, that do not meet expectations.  Consciously limit written and oral discipline tendencies so that managers know that their responsibility is to lead and to work on performance issues, not simply spend hour after hour disciplining poor performing employees that will likely never be terminated.  If the organization has clearly outlined performance and behavioral standards for each job, employees that don’t meet the standards should be quickly eliminated from the organization.  Documentation thus becomes very simple; a function of matching employee behavior or work product to the job description and the competency testing material that should be a part of each employee’s record.
  • Consciously reinforce to all levels of management that interaction with every level of employee is a necessity and that visibility and knowledge of the core business and the customer is critical.  To do this, the organization must commit to limiting non-essential meetings as well as to an ongoing review process of management that incorporates key performance outcomes that cannot be attained unless management is fully engaged with staff, with customers, and with the process and outcomes of the jobs they (management) lead and direct.

Putting these concepts into action is not an easy or quick process, taking at least a couple of years from start to finish.  Maintenance is also somewhat difficult as the organization must be disciplined to not let creep in, the natural tendencies of humans to want to short cut the steps or to not repeat the maintenance steps (training, orientation, performance monitoring, etc.) frequently – a must.  Without question, the first two or so years will be years with some additional turnover and necessary management turnover as managers will be the most resistant to their new levels of accountability and their new focus of “keeping” employees productive rather than “micro managing” conduct, etc.  What I do know is that when the steps above are flushed out on an organization specific level and implemented, the results in terms of productivity and retention are amazing – well worth the investment and the effort.

January 4, 2010 Posted by | Assisted Living, Hospice, Senior Housing, Skilled Nursing | , , , , , , , , , | Leave a Comment

CCRCs: Ready, Set, Market!

Not that I am enamored with the current pace of economic recovery or even a true believer in the sustainability of the present trajectory of recovery, there are now enough signs that should encourage CCRC operators hardest hit by the recent downturn to return to an aggressive marketing strategy.  Truth be told, no CCRC owner/operator should have abated their marketing efforts during the doldrums period but many certainly pulled back or restrained their spending to coincide with flagging census and revenue periods.  As we head now into the new year, it makes sense for CCRCs to pre-ordain the recovery just a bit and move back into a modest-aggressive posture, qualifying and securing new residents.  Consider the following if need be, as fuel for a re-tooling initiative on the marketing plan for 2010.

  • Existing home sales in most markets is “up” and should continue to stay modestly up as result of Congress extending the first-time home buyer credit.  As most seniors considering a move to a CCRC must sell their existing home, now is a good time to re-encourage them to take that step as “activity” for sales remains and should continue to remain, better than any period within the last twelve months.
  • Mortgage rates remain low and for the foreseeable future, show no signs of significant upward movement.  Lenders while still more cautious in their lending practices, are less skittish and seemingly more willing to write new mortgages for new/existing home sales.  Another positive sign for the senior that needs to sell his/her home in order to facilitate that move.
  • While still a distance from fully recovered, the stock market has rebounded and helped many seniors recapture some if not the majority of the wealth they lost on paper.  For those prospective residents that did not materialize their paper losses into real losses via wholesale selling as the market was tumbling, their wealth prospects have likely improved enough to entertain a possible move into a CCRC.  In other words, their economic pessimism measurement has softened enough that good salesmanship and planning can probably sway them into looking at the CCRC as a proper move.
  • The New Year brings about a set of opportunities that most CCRCs can capitalize upon, especially non-profits.  Within this list is the chance to position against rising property taxes, the ability to offset gains on investment sales with the applicable deductibility of a portion of the entrance fee relegated to pre-paid healthcare, and the advantage (assuming your CCRC has it) of a predictable history of rent/occupancy fees versus rising home ownership costs.

Even with a glimmer of light at the end of the tunnel, no CCRC owner/operator should expect there to be a great deal of pent-up demand.  Seniors aren’t monitoring CCRC opportunities and the market and economic conditions favorable for sales – that frankly is the CCRC’s job.  The demand for CCRC units is very, very elastic and the more elastic the demand curve, the less attentive and the more fickle buyers are at any given point in time.  Even for those seniors on the “hot” prospect list (some who visited, some who have previously paid deposits, etc.), the economic conditions have been such that their profile has changed and they will need a certain amount of reinvigoration.  Re-channeling their attention and presenting the opportunities of considering a move again is a tactical and deliberate process as remember, their attention has waned and moved to other concerns.

In order to get “back in the game” so to speak, a CCRC’s marketing approach may need to be tactically tweaked.  The next generation of marketing plans will need to be different, for quite some time, from those of say two years ago.  I’ve listed below a series of ideas and concepts that should work and ideally, be incorporated into an updated marketing plan or at minimum, a review of existing marketing plans.

  • Review and Re-Work Entry Fee Pricing: CCRCs need to critically review their entry fee structures and make sure that their prices reflect the residential real estate trends in their primary markets.  If entry fees are at a significant premium to residential real estate values (current), the required value proposition is out of alignment and new sales to new residents will be difficult.  Consider adding new options for financing, lower entry-fee levels in exchange for less refundability, less guaranteed healthcare, and/or quicker amortization.  Offer buy-up plans for additional healthcare guarantees allowing new residents to gain entry (with lower benefits) but still buy additional healthcare (if qualified) at some point certain in the future.  Bottom line: If a CCRC does not have pricing that is reflective of the current real estate and general economy in its market area, no marketing plan ever created will budge new sales enough to justify the expense of the activity.
  • Re-Evaluate Your Value Proposition: All CCRC sales (or at least nearly all) are to prospective residents with enough financial means to pursue a myriad of other options.  To hone in on prospects and convert them to residents requires the CCRC to qualify a value proposition that makes emotional, social and economic sense.  In order to fully understand the value proposition, re-survey current residents, analyze the trends in the market place (economic and other) and the healthcare trends in the market area as well as regionally and nationally.  Finally, take all of the gathered intelligence data and place it on a plus/minus grid that can be qualified against the price of moving into and staying within your CCRC and be prepared to make adjustments (if possible) to any weak areas or at least, to intelligently counter the weakness with a positive intangible (assuming the intangible is weighty enough to offer a counter-balance impact).
  • Market the Current, Not the Past: Remember, CCRC sales are fairly esoteric and always occurring across a very elastic demand curve and as such, psychology is as important a factor as economics.  Marketing the current means getting in experts in areas such as real estate and investments that can speak to how things have changed and why the progression is now forward.  These “current” condition testimonials help to create a new thought paradigm for the senior, moving from “pulled-back” to “ready to explore”.  If the CCRC can sell optimism, promise and a sense of positive energy now and going forward, the senior is much more likely to re-explore the move opportunity.
  •  Update Tactics: Sales will now occur in a totally different environment and as such, tactics need to be updated.  The United States has just bottomed-out from the worst recession since the Great Depression and been through a period of economic decline unwitnessed by most, including potential new residents.  New sales will need lots of consultation, creativity and reinforcement.  Sales persons will need to be re-trained to understand the mind-set and to provide new information and new resources.  The CCRC itself should be well-armed with a multi-media approach, fully deploying web technology, e-mail, radio and television, print, and direct mail.  If a sale two years ago took six touches to get through the qualification process, the sale today will take double – be prepared and expand the number, quality and accessibility of possible touches. 
  • Focus on Brand/Focus on Information: Effective CCRC marketing requires a solid brand and a commanding presence across the range of housing options within the marketplace.  If your CCRC is not a “destination” for seniors and senior related information, it needs to be.  Build rapidly, the number of resources that the CCRC can deploy to seniors throughout the market with respect to finances, economics, real estate, healthcare, etc.  Information is key to keeping seniors engaged with the project and to qualify consistent, high-value leads.  Most important, brand is built on reputation and consistency and if the CCRC has not consistently stuck with an aggressive marketing campaign, even during the downturn, reinvigorating brand will be key to building a solid constituency of prospective seniors.

Even though most CCRCs won’t feel or see results right away, getting back into the game now, slightly ahead but in pace with the gradually recovering economy will be key to reaping new sales and staying positioned as the recovery hopefully, gains additional momentum in 2010.

November 30, 2009 Posted by | Senior Housing | , , , , | Leave a Comment

CCRCs and Problems: Much Ado About Likely, Very Little

A product that has seen its share of struggles in the economic downturn is entry-fee CCRCs.  To clarify, not all CCRC models are struggling and not even all entry-fee based CCRCs are struggling as certain regions have seen less housing market fall-out and concurrently, operators have done the right things to keep their census stable during the “down times”.  Where problems have cropped-up is in new primarily new, unstabilized developments, CCRCs in markets where housing sales are significantly depressed, and in larger suburban and urban market locations where options within the price range are plentiful.

The demand curve for virtually all senior housing that is not low or moderate cost is very elastic; many options exist for seniors when it comes to housing.  Perhaps the most elastic of all demand pertains to entry-fee CCRCs, especially those whose pricing is above the median housing price within a geographic region.  As median housing prices fell in virtually every major metropolitan real-estate market, unless CCRCs recast their entry prices to coincide, their new resident markets may have all but dried up.  Certainly, slow housing turnover via sales would chaste the market regardless but all things being equal, pricing would be considered the icing on the cake.  An entry-fee CCRC seeking a premium price (twenty or so percentage points above median housing prices) in a market where housing values were falling and sales were slow should anticipate significant new sales problems and possibly, few to no new sales at all.

Sales/marketing strategy for an entry-fee based CCRC requires a value proposition to be solidly in-place.  The most common entry-fee CCRC includes some form of healthcare coverage (nursing care, assisted living, etc.) for either a period certain or as use to be the most common, for the remaining life of the resident.  Ideally, the balance of the fee (the non-healthcare portion) was set aside as a capital reserve or a combination of capital reserve and debt reserve.  This set-aside allowed for monthly rental prices to remain more stable, reflective of truly the economic costs of occupancy (the market rate philosophy).   If in fact, a CCRC has held to this formulaic standard and is a stabilized community, it should not be too difficult to continue to create a value proposition attractive to new residents.  Healthcare for example, is a hot topic and one that should easily be leveraged for most senior consumers.

Alas, problems have arisen in the sector, most notably with Erickson – one of the largest CCRC developers nationally.  On a case by case basis, there have also been a few other headliners – the Franciscan Sisters in Chicago who built a high-rise CCRC in high rent downtown and a CCRC in Pennsylvania (bankruptcy) sponsored by B’nai B’rith.  The “wind” of these problems has prompted the GAO to conduct an investigative study on the industry and report the same to the Senate Committee on Aging (see my related post on the GAO and CCRCs).  In Erickson’s case, the issues of insolvency have not cost any resident any funds, at least to my knowledge.  While investors and debt holders will take a hair-cut, there appears to be no drastic consumer issue that will arise.  Erickson’s fate occurred as a result of being overstretched on new development, a bit upside down in pricing (see paragraph above), and locked into some management agreements in locations that were heavily impacted by the economic downturn.  The Franciscan Sister”s issue in Chicago mostly involves an expensive, rather upscale project that has struggled making its value proposition clear to potential residents. This project was an enormously expensive undertaking and as such, pricing is at the premium end of the market in an environment that has seen drastic slow-downs in real estate sales and a large fall-back in property values.

With the GAO taking a look at the CCRC industry, there’s bound to be a bit of fall-out and perhaps, a few calls for added regulations and/or consumer protection activity on a state to state basis.  In my opinion, the Feds, busy with other matters more pressing, will do nothing in the form of federal regulation.  The reality in this situation is that the economy was bound to create a few setbacks for a few providers and developers.  CCRCs require a reasonably stable economy and a solid real estate market in order to flourish and prosper.  As such as has been the case across the last two plus decades more often than not, the track record for the industry has been solid.  For those operators in stabilized projects, well-known and priced accordingly, better times are soon ahead.  For developers of new projects, it will likely take another couple of years before the market is ready to assimilate more units, especially those that are priced at a bit of a premium – or higher.

October 22, 2009 Posted by | Senior Housing | , , , , | 3 Comments

Assisted Living/Senior Housing Update

For the past nine months we’ve watched the cap rates trend up, occupancy trend down and the transaction market remain stagnant.  The credit crisis of one year ago definitely chilled the “buyer” side and as a result, shoved values downward.  The deals we did see done were few and far between, lots of one off deals in regional markets and clearly, value plays.   Where we did see some larger deals in the works, these deals were slow in closing and in some cases, did not close at all due to appraisals that did not support the purchase price or sellers that were unrealistic about values once the appraiser confirmed the “lower” market value.

Despite the fact that the credit markets haven’t really expanded dramatically and lenders are still a bit gun-shy and conservative on terms, we are seeing the makings of more deals and predict that the third and fourth quarter will see more closings.  The two biggest factors contributing to this “modest” rebound in market dynamics and deal dynamics are sellers coming to terms with where the values are today and occupancy rates that have moved upward (in general) across the industry.  This is not to say that these occupancy increases have come without a price as many providers have been forced to get creative in terms of discounting and packaging to fill incremental units.  Incidentally, as the residential real estate market is still lagging  in most geographies, we don’t see the discounting trend to fill units abating any time soon.  Many markets are border-line overbuilt and/or close to saturation and as a result, demand is still lagging compared to the supply of units available at traditional, pre-recession price per unit levels.  In short, providers will still be challenged to stay creative if they wish to keep their occupancy numbers trending upward or stable.  Interesting to note is that in comparison to a year or so ago, the incremental additional unit sales for most providers are not contributing to profitability at the same rate as a result of the discounting that was required to fill these units.  We believe that it may take as long as an additional year to wash this effect through the market, essentially returning to post-recession per unit pricing levels in mid 2010 or the third quarter of 2010 (of course, some regional markets may take longer and some may recover a bit quicker).

On a product level, Assisted Living facilities that offer a higher-level of care within a more bundled pricing structure have tended to weather the down times better.  For example, we have seen better performance and stronger occupancy levels from facilities that “specialize” in areas such as memory care and/or are specialized to a targeted population such as extremely frail elderly.  Additionally, facilities that are connected with an SNF, CCRC or hospital have performed better than those that are free-standing.   This trend may remain for quite some time as the maturity of the market implies that the next step toward success for the Assisted Living industry is less real-estate focused and more program and product specific.  Without question, values in the industry will rebound but likely not soon to the to the pre-recession levels witnessed in 2007 and early 2008.  For free-standing facilities, especially those that are non-distinct in terms of their product via a specific program or other twist (connected to a CCRC or SNF), their value expressed in a CAP rate may not return anytime soon to 2007 early 2008 levels, especially if they continue to struggle for occupancy or have to discount fees to attain higher occupancy levels.

In specifics, this remains a Buyer’s market for Assisted Living facilities.  Sellers should continue to be prepared to be creative and reasonable if they wish to sell their property.  What is reasonable?  As few sellers are attempting to rid themselves of Grade A properties, the majority of the market is full of product that quite honestly, has some “hair” on it.  By “hair” I mean either a dated building or a building in need of some improvement, one that has some occupancy problems or both.  Sellers also need to be conscious of the market area in which they are attempting to sell their properties.  Regardless of what anyone quotes as deals done with a particular cap rate of “X”, the reality is that cap rates are regionalized and definitely market specific.  In other words, a deal done at an 8 cap in suburban Illinois does not translate to the same cap rate for a deal looking for a buyer in suburban Green Bay, Wisconsin.  Similarly, rural markets and even over-bedded suburban and urban markets can dramatically influence pricing and valuations.  Even facility size and of course, age of plant can have a dramatic impact on what a Buyer is willing to reasonably pay for a particular property.  In some cases, Seller creativity can also play a role in what level of deal is attainable.  Sellers, for example, that have some wherewithal to assist with financing either via a land contract or a similar lease to own or installment sale clauses can add value to the transaction without taking a “price haircut” to get the deal done.

On the Senior Housing side (non- ALF), the market remains rather tepid.  Similar to the ALF side, financing is difficult to obtain and values are down, though not as dramatic as in the ALF market. Perhaps the strongest product remains the CCRC and as such, precious little volume in terms of transactions is occurring.  Occupancy rates in this product are wide-ranging with nearly all markets seeing a continued softness in demand, though some far less so than others.  Free standing, older congregate style (apartments) remain the most common type of property on the market and cap rates seem to have stabilized for the most part, north of 9.  Again, markets and regions play a major factor as does the actual property, in terms of what cap rates are tied to what deals.  For example, I have seen listings with occupancy problems seeking a 7 cap that have been on the market for a substantial amount of time – wholly unrealistic.  I’ve also seen decent properties, solid A minus or B plus facilities that as little as a year or so ago that would have sold in the 8.5 cap range sit, even though the pricing is negotiable above a 9.5 cap.   And still, I see properties close at 10 caps and higher; deals that literlly make sense.  Projects that remain fairly attractive in the market are modest to lower income sites with stabilized occupancy, a clean building and are tax-credit financed or HUD financed.  As the initial owners/operators explore the “out” windows in these deals, buyers still seem willing to step in and pay solid prices for these properties (no wonder). 

Where the ALF market will take perhaps another year or more to recover, the Senior Housing market appears to be less far away from recovery.  New development is still occurring, though not at the pace it was a couple of years ago.  Lenders also seem to be a little more willing to work on straight senior housing projects, perhaps because the real estate component is the majority of the finance.  Older projects with deferred maintenance or occupancy issues will still encounter wary buyers and depressed prices.  A seller needs to be particularly cautious and understanding of the economics of the market and his/her property.  If for example, the project is older and needs some upgrades, a buyer will be looking to acquire the property based on the “up-side”, necessitating a pretty solid discount to replacement cost.  If the market area has a depressed economy and modest to declining wealth demographics, the buyer will be cautious and may have to seriously consider a re-development or re-packaging stategy to turn the project to profitability post-deal, again necessitating a more sizable discount than perhaps, the seller had considered.  In summary, the projects most likely to find buyers are those that are priced at 50% to 60% of replacement cost, in decent economic markets with solid demographics, and can be viewed as having “up-side” potential, either in terms of additional occupancy, additional room for expansion, or capital upgrades that can position the project for new, higher rent paying occupants.  A final word of caution for sellers is to be extremely cautious about current pricing for current tenants and the occupancy demographics thereto.  Depressed rents, while presenting an up-side to a buyer in theory, may also foretell a problem that a buyer does not wish to inherit; having to play market “catch-up” with a tenant base that cannot afford it or within a market area that will view rapidly rising rents as “negative”.

On a final note, for non-profit owners of ALFs and Senior Housing projects, the most fertile ground for transactions today remains sales to or mergers with, other non-profits.  The economics make far more sense for a non-profit to seek another non-profit as a partner and value can be extracted out of the deal for the “seller” in ways that a true asset sale to a for-profit buyer would never allow.  This is not to say that a non-profit owner should seek exclusively a non-profit buyer, especially if the product for sale has solid occupancy and is well positioned in the market.  It does mean however, that non-profits can leverage value and take advantage of a  presently, more flexible and fluid market for transactions, by exploring a transaction (merger, other) with another non-profit – food for thought for non-profit buyers and sellers.

August 18, 2009 Posted by | Assisted Living, Senior Housing | , , , , | Leave a Comment

Diversification: Staying on Top in a Changing Industry

Without question, the post-acute healthcare industry is changing.  Every sector, from skilled nursing to assisted living to senior housing to home health and hospice has and will continue to undergo, some form of transformation.  The reasons are many ranging from federal health policy changes, reimbursement changes, regulatory changes, the economy in general and the real estate economy in specific plus many more.  As a friend of mine said recently, these are the “Baskin-Robbins” times; every day there are new and different flavors from which to choose.  He of course meant “flavors of poison” or simply put, a new twist on the theme of what else negative can happen.

Over the years, I’ve watched organizations take two approaches to dealing with changing market dynamics.  The first approach is the “lean down” approach; the notion that somehow by shrinking capacity and shrinking operating costs one can combat economic, revenue and demand down-cycles.  To be certain, this approach can work in very short cycles of downturn, similar to laying fallow, a production line in a manufacturing plant.  The difficulty lies however, in guaging the length of the downturn and the longer-range marketability and economic implications of a leaned down operation that may no longer be able to compete within the changed market climate.  In the process of focusing on matching lower revenues and lower demand cycles with lower costs and lower capacity, one can easily lose sight of the gradual, longer-range shift that is occurring in the marketplace.  Without some plan to build back or to create a new level of operating equilibrium (costs and capacity equal to revenue streams and the demand for capacity available that maximizes the revenue objective per unit), an unwanted spiral of operating efficiency and effectiveness generally occurs.

The second approach focuses on the development of an integrated and complementary group of product lines and service lines that effectively, spread the risk of market and revenue downturns.  Inherent in this strategy is the belief that the marketplace is dynamic and that economic cycles and policy cycles will constantly, over time, tinker with the operation’s capability to match revenue with available service capacity.  Adopting this approach thus begins a never-ending cycle of a “diversification” strategy; an attempt to consistently bring on new product lines/service lines while reformatting existing product and service lines. The goal is to consistently lever overhead, capacity and labor with the objective of keeping available capacity (e.g., units) full and revenue per square foot of capacity, as high as possible.  A secondary goal (frankly, the desired result)  is to maximize labor productivity and to insulate one or more product lines from a revenue or demand downturn via the capture of a more robust cycle in other product lines.

Organizations that are more diverse in products and services have the advantage of being able to capture multiple market segments and to take advantage of more logical self-referral patterns and resident flow opportunities.  For example, a CCRC which by design is a somewhat diverse organization, can theoretically capture resident days at any one of a number of different entry points (independent housing, assisted living and/or SNF).  Following this analogy, in a down real estate environment, the CCRC can offer a number of complementary products or services such as transitional housing, rehab to assisted or rehab to independent as a means of keeping units full and creating current and future demand.  In other words, the emphasis does not have to entirely be on “selling” units to a particular group of residents.

A SNF that has traditionally attracted a high Medicare payer mix can diversify away from the Medicare reimbursement risk by using the same honed rehab or clinical skills to target difficult to place, privately insured patient days.  By targeting certain medical or physical rehab specialties, new complementary products and services can be easily built that are attractive to different payers.  Product lines such as ventilator care, dialysis, wound and infection specialties can be targeted and sold directly to insurance payers who presently, view payment for such services as a “hospital” premium.  Assuming that the SNF level of care brings forth a lower cost base to begin with, these product lines can be developed and priced at a  discount for the insurance payers even though such discounts still engender large profit margins for the SNF.

Even free-standing facilities such as an Assisted Living can build diversification strategies that work effectively.  As is the typical case with senior housing, the “nut” is always occupancy – keeping units filled.  If the traditional market (such as it has) is slow and perhaps, a bit over-sized (too much capacity for the traditional demand), targeting niche’ resident days becomes a very realistic strategy.  For example, building a higher acuity specialty is a very real strategy that can attract “bridge” occupancy – residents that ordinarily are somewhere between needing skilled care and assisted care.  An in-home dialysis program is an example of an opportunity to attract “bridge” residents.  Typically, a dialysis resident without other significant medical complications is shunned from Assisted Living or is asked to “go out” for their dialysis care to a dialysis center.  An Assisted Living that develops the capability to do the dialysis on-site, either via a partnership or developing the program internally, has a positional advantage over the facilities that don’t offer such service.  Other analogous opportunities exist with hospice, rehab, even IV therapy – all of which can be incorporated for targeted Assisted Living residents.

The key with a diversification approach is the commitment to constantly plan “forward” – to be proactive.  Consistent recognition of changing environmental factors (demand, product life cycles, competition, reimbursement, regulation and policy) drives the organization to consitently develop new and complementary services.  Sometimes, the development of new service or product lines may take several months or even years but as the base grows wide enough, it becomes much easier to lever expertise and infrastructure between existing programs and services thereby, reducing time to market or implementation of the new service offerings.   Most important in this strategy is the recognition that the objective is long-term insulation from market and public policy swings that can severely shock a one or two dimension organization – negatively.

July 8, 2009 Posted by | Assisted Living, Senior Housing, Skilled Nursing | , , , , | Leave a Comment

Senior Living vs. Senior Lifestyle: Adjusting the Development Curve

Not too long ago, when  I was the CEO of a large provider organization, we began to investigate the “next” generation of senior housing products and communities.  We even went so far as to put in-play, one adaptation and had completed significant research on what we hoped would be, our next development foray.  In addition, we began the process of “re-developing” via a series of planning exercises, our existing “older” style housing products, best described as higher density, congregate style communities.  The reason? My personal belief, born out through research, that most traditional style, apartment or congregate style senior housing communities are virtually like the dinosaurs – two feet stuck in the tar pits and ready to become extinct in the seniors housing marketplace.  Of course, moderate to lower cost housing options will remain in the style genre but in reality, most of the current communities are not presently situated as moderate or low-cost housing options.

Like most sociological changes, the shift has been gradual.  When I first entered the “business”, it was not uncommon for seniors near or immediately post retirement to look at moving into the CCRC that we then owned.  The average age of the cohort was 72 and the average age of entry was just shy of 70.  Heck, we had people in their late sixties moving in – voluntarily!  The units were nice, modern and sized appropriately for the “then”demographic.  The community amenities were also nice and spacious, accessorized by a large dining room, craft rooms, game rooms, and specialty rooms (woodworking, weaving, ceramics, etc.).  We were an attractive and desirable option for this group and frankly, an upscale option in many respects from their existing homes.

Over the passage of time, roughly the last twenty or so years, much has changed.  The group that moved in at 70 is now 90 plus and likely deceased.  Their kids are the next target and boy has that group changed.  Unlike their parents, few if any of them (certainly those who can afford a CCRC or middle to upper class housing option) are coming from a home with only one “shared” bathroom.  Most have homes that average 2,000 square feet or larger and already have two cars, a den or recreation room, a jacuzzi, a large kitchen, walk-in closets, and belong to a health club or have a home gym.  Face it, some  of the smaller one-bedroom units I have been in in older senior housing communities aren’t much larger than the master bedroom, master bath suites that their kids are presently enjoying in their current homes.  This generation also has wholly different expectations about the “design” of the space as well.  After all, this next generation has ditched long ago, doing their own dishes, having vinyl on the bathroom floor, using a tub/shower combination with a shower curtain, and the galley kitchen.  Their space frankly, is far different from the space occupied by their parents.

Aside from the spacial considerations, other things have changed equally as dramatically over the past twenty-plus years.  The next generation is far more concerned with “lifestyle” issues.  This isn’t to say that the parents of this next generation weren’t concerned with their lifestyles but to say more succinctly, that the comparison is like a Chevy to a BMW; the latter far more accessorized and tailored than the former.  Being on the “junior” end of this next group, I can attest that my expectations about things other than space are radically different than those of my parents.  For example, I eat different foods and at different times and frankly, food and menu will be incredibly important to me.  I exercise routinely and have a very active lifestyle built around sports and hobbies.  I use the Internet throughout my house.  I am far more health conscious and I am far more socially active across a wider community base than my parents ever were – ranging from sports, to fine arts, to civic events.

To jump back where I began, these changes necessitated (in my former career) movement beyond the existing industry paradigm.  In other words, we needed to re-think and re-develop our products and communities for the next generation of seniors.  The question however, was “how”.  Fortunately, our own research and studying the building trends in the areas we operated gave us significant insights.  For new developments, we focused on the following.

  • Dwelling units that were more free-standing or in smaller groupings rather than “stacked” units in a apartment style buildings.  In all cases, where we could, the units would be one level, barrier free entries and grade level accessible.  Full basements would be minimized as they really were not necessary when the upper level or main level was planned right.
  • Pricing would be based on an “equity” basis allowing for “ownership”, complete unit customization and the owner to have market return.
  • All units would incorporate maintenance free exteriors or at least, exteriors that were minimal maintenance (e.g., brick, cement board, covered gutters, aluminum, forty-year roofs, etc.).  The initial cost would be a bit higher but the life-cycle payback/return would far outweigh the costs on the front-end. 
  • Interiors would incorporate universal design features such as three foot doors, minimal corridors, lever handles on all doors, barrier free showers with integrated seating options and bar options, walls that are pre-backed for grab bars and railings, no-seam floor transitions, non-slip flooring, specialty designed cabinets with readily adjustable heights, cabinet hardware with integrated pulls, and walk-in closets.  Laundry facilities would be on the main level and adjacent to the master bedroom.  In addition, wireless and RFID technology would be built into the structure.
  • The development would incorporate a community center and where applicable, commercial activity (shops, banks, etc.) on the perimeter.  Formal landscaping would be minimized but extensive buffer zones of natural landscape would be used to break up the views and create a more natural environment with walking/biking paths incorporated.  The Community Center could include as many “unique” features as the development could support such as an exercise/fitness center, a bar or pub, meeting space, concierge service, food service facilities/restaurant, etc. 

Re-developing existing projects proved tougher, mostly because units often were sized incorrectly.  In some cases, unit combinations are possible; the process of taking two smaller units or one larger and one smaller and joining them together.  I experienced this with some success but in all cases, the best you get is an enhanced version of the same existing box.  What can be done “best” is what needs to be done “first”, to steal an old adage.  Where space and the building and the infrastructure permits, the addition of any universal design concepts will pay dividends.  It should always be possible to upgrade decor and finishes and to add wireless, cable, dishwashers, microwaves, and other features required by the next generation of seniors.  To the extent possible, even smaller spaces can be made “better” by improving cabinet layouts, bathrooms and living areas by opening space and using contemporary design elements to re-imagine what had been before.

The common areas and the “program” tend to be far more critical in existing projects, primarily because the units themselves will always be somewhat flawed.  In order to modernize to a more lifestyle driven community, space will need to be re-allocated.  In addition, functions will need to be adjusted.  I was in a community in Connecticut where I saw some wonderful examples of exactly how this approach could and did work.  While the community was an apartment or congregate style, it was organized in neighborhoods and decorated to reflect these unique resident driven touches.  The community’s Manager was tasked with “facilitating” resident activity and thus, cocktail parties, dinners, events, lectures, wine tastings, smokers, card clubs, etc., were the norm.  You had the feeling that in the common areas, you were in a private club that catered to a very special community.  The reality is, to adapt an existing community takes careful planning along with community and resident input – current residents and ideally, future residents.  A common theme of priorities that I have discovered is below.

  • Programs are as important as spaces and should truly reflect the social mores and norms of the resident population.  For example, in Milwaukee the Friday night fish fry is a “norm”.
  • Programs and spaces need to be created to attract non-resident seniors into the community. 
  • Integrating formal and informal space is critical and heavy emphasis needs to be placed on adaptable, flexible, multi-use space.
  • Community personalization is key and it should be matched or as closely tied as possible to any branding activities already in-place as part of an overall marketing strategy.
  • Making the environment as unique and reflective of resident and community interests as possible is the key and where applicable, community buy-in is critical.  For example, I know of one community where a local bar/restaurant operates a small scale sports pub/bar that attracts not only regular resident patronage but has become a destination for area seniors.
  • Health, wellness, technology and culture will be critical to incorporate both in the form of space planning and in programming.  The community in Connecticut had a connection with Yale and their academic health programs – highly touted by the residents and a benefit for the broader community as well.

Realizing that costs are always an issue, I have done research in this area as well and as one can expect, the numbers can be anywhere from modest to daunting.  I can safely attest however, that any planning done well can minimize the initial an ongoing outlays and maximize the return on investment.  Most assuredly, the devil is in the planning and without sufficient expertise, thought and time spent, the results will not follow the capital investment.

June 17, 2009 Posted by | Senior Housing | , , , , | Leave a Comment

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