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.

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