Penny Wise, Margin Foolish

There is a common business axiom, one I have used/repeated many times over: “You can’t save yourself to a profit(able business)”. In health care and in senior living/senior housing, challenges abound and almost daily, new ones arrive. Staffing is incredibly challenging, supply costs are rising, inflationary pressures have increased utility costs, investment portfolios are beat-up (hopefully full of primarily, paper losses), reimbursement is nowhere near up to date with inflationary costs, litigation risk and cases have increased insurance rates, and CMS continues to add cost with additional regulations and oversight. Tons of organizations are mismatched revenue to expense right now with expense greater than revenue. Naturally, the correct thing to do is to cut expense, or is it?

For most provider organizations of all types, expense management is a difficult proposition. Most expenses tend to be more fixed in nature than not and most, involve personnel. The largest expense for health care organizations and senior living is typically (aside from debt and depreciation), staff and related personnel costs. Yes, it is possible to be efficient with staffing costs but generally, not at a ratio that can generate big changes in margin if occupancy and payer mix are below expectation. In other words, cutting too much produces an undesired consequence of bad care outcomes and staff dissatisfaction (short-staffing). Cutting other things is possible and I’d argue that reducing layers of management is a great place to start. I once worked with an organization that had supervisors that existed on second and third shift to, as one exec. told me, “To make sure staff did their jobs and not sleep on the job”. Oh, boy…

This morning while reading and having coffee with my wife, she shared an article from McKnight’s (e-news) that was really quite good and germane to this post. The link is here: Many good takeaways in this piece but particularly, the focus on having to grow and diversify the typical senior living business. I think the article’s focus on strategy makes the most sense for communities/CCRCs/Life Plan organizations. Good tips herein…

  • Focus on revenue driving opportunities and expense monitoring.
  • Don’t fall short of revenue increases because the organization does not understand its pricing potential.
  • Develop partnerships and niche growth opportunities.
  • Stop looking at the organization as an island and start focusing on generating more revenue by additional services.
  • Identify niche markets – capitalize on existing resources to provide services to the greater community.

Across many years in the senior living and health care industry, I’ve seen many organizations make the same mistake over and over again. As times get tough, they reach for the saw and seek to cut to make a profit.  Assuming they were perhaps fat to begin with, some trimming was needed but the focus on expense reduction is simply not the answer.  The fact is, return on investment is the answer and therein lies the flaw in cutting.  Maintaining a balance between the inputs (expenses and investments) and the revenue produced is what successful business requires.  In other words, if the revenue productivity is not there for the dollars being expended, perhaps the issue is not to spend less but to spend better.  Additionally, sometimes the issue is that the overhead is not productive or simply put, the scale is large enough to support more business.  In senior living, this often the case.

I have been in many, many communities that have phenomenal infrastructure, poorly used.  In other words, lots of fallow real estate/common areas and office spaces that don’t generate revenue or are minimally used.  Opportunity abounds in terms of how much more productivity and revenue, can be generated from the overhead. Similarly, I have watched organizations ooze lost opportunity, failing to capture revenue from services residents/patients are getting from other vendors.  Home health, personal care, hospice and expanded food and environmental service packages are the easiest to identify.  There are more.

Pricing is also a missed opportunity.  I lost track of how many senior living communities I have worked with, including in default and bankruptcy work, that had no idea how their pricing matched the community at-large or how the model made economic sense for the business.  The common method has been to simply escalate a prior year’s level by some percentage and then maybe, look at the rates for the surrounding competitors (assuming the comparison is accurate). I’d argue the case to worry less about the competition and more about valuing the services the organization provides within a proper pricing/business model.  A number of years ago, I did a presentation on pricing for senior living communities.  The presentation can be found in the Presentations page on this site: Intersection of Pricing and Marketing v.2  The referenced worksheets are here:  Entry Fee Pricing Worksheet      Pricing Worksheet

The simple fact remains is that there is no real strategy in business that involves cutting or reducing expenses to create a sustainable margin. Business is about playing a “long game” – looking and anticipating forward.  Short-term thinking nets a reaction that typically, produces only short-term results, if that, negating the longer-term problem: the business must constantly evolve, grow, and seek to return maximum value (economic) on its investment (people, equipment, plant, property, etc.).  Without continued investment in marketing, equipment, new businesses and product lines, strategic partnerships, and infrastructure (IT, software, etc.), the organization becomes non-competitive, incapable of attracting the desired customer at the desired revenue level.  Similarly, staff desperately needed these days, choose to work elsewhere as the business is no longer investing in them (more than wages).

I read a lot, an occupational hazard.  In so doing, I come across all kinds of interesting articles and reference documents.  My curse is not the amount I read but the amount I save (tons of documents, links, etc.).  I pulled one link that I thought fit this subject matter quite well.  Here it is and it is generic but awfully, on-point:

To my Jewish friends and colleagues, I wish you all a blessed Passover.