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Senior and Post-Acute Healthcare News and Topics

Leading Age in Nashville

Once again, and in reply to a series of inquiries (those already in and those yet to come in), I will be in Nashville for the Leading Age Annual Conference.  And yes, I am speaking again – Monday, October 20th at 8:15 AM.  The session title is the “Intersection of Pricing and Marketing”.  The title is a bit misleading as the presentation is primarily focused on developing proper pricing strategies for CCRCs – financial, strategic and from a marketing perspective.  As always, the presentation will post on this site shortly after the Conference.  Hope to see everyone in Nashville!

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October 6, 2014 Posted by | Senior Housing | , , , | 2 Comments

CCRC Update 2014

Earlier this spring (a couple, three moths ago), I spoke at a marketing/P.R. conference and when my session was over, I sat and visited with a number of the attendees.  My presentation was about value propositions and marketing; how to align your organization’s core economic value components within a marketplace, within a customer segment.  Within the short additional time I spent with these attendees, I learned that a number of their organizations (CCRCs) were still struggling post the recent economic recession/slow-down.  In fact, a number of them expressed that in their areas/region, recovery hadn’t yet begun.

Since that event and over the course of the past three months or so, I took notes on various client engagements, discussions and research reports on how the CCRC industry is fairing these days.  Before I break down my conclusions/observations, some general prefacing comments about the industry are required.  First, the CCRC industry is truly different by location and thus, it is expected that some areas/regions, etc. are faring better than others. Second, established projects have fared differently than newer projects; not always better but different.  Third, the capital structure of a CCRC (how much debt and how the debt is structured in terms of rate, etc.) is a major component of how well or not well, certain projects are doing.

Below are my observations/conclusions of how the CCRC industry is doing mid-way through the third quarter of 2014.  As stated, most of my observations are first-hand (client engagements)* followed by research and conversations with those that work in and around the industry. *(My firm and in many cases me specifically, does capital development/corporate development work within the industry including consultant’s reports when covenant defaults occur, strategic planning, turn-around consultation, M&A work, research for banks and investment banks, and economic, market, and financial feasibility studies.  My comments do not reflect any specific client or series of clients or any engagement former or current).

  • Late 2013/early 2014, Fitch issued their outlook on the CCRC industry as “stable”.  Their conclusion was that improving occupancy rates, stable expenses due to the non-inflationary economy and access to low (historically) cost capital was favorable and thus, their rating.  In general, I concur that where real estate rebounded (used inventory down, prices stable and climbing) and general economic conditions improved (unemployment falling, commercial activity rising, etc.), demand for units returned to near pre-recession levels and occupancy increased.  However, as I mentioned at the beginning of this post, there remains pockets of weakness, some fairly profound, across the country.  The regional/local outlook as opposed to the 20,000 foot national trend is more relevant to the success/struggle of any one project.  For example, our clients in “rust belt, heavy manufacturing” areas in Ohio, Wisconsin, Illinois, West Virginia and New York would mount a stiff argument that the outlook is far from “stable”.
  • Pricing has remained relatively flat and in many areas, occupancy gains have occurred as a result of discounting and promotions.  I don’t see this changing any time soon as while demand is good in some areas, demand is tempered by recent events and still, a large amount of economic uncertainty.  The wealth profile of the current demographic has shifted, especially on the income component.
  • Approximately half of the projects that were in the development queue in 2008 evaporated or re-scaled.  Only recently has the industry returned to a somewhat robust, new development outlook.  Access to continued low-cost capital is a key element of fuel for this emerging (again) trend and even though rates ticked-up in November/December 2013, they have since stabilized.  Rate however, is just one component.  Demand for debt on the part of investors is still at low ebb.  Suppressed yields have moved investors out of fixed rate, tax exempt debt en-masse.  Deals still are competitive but nowhere close to pre-recession levels.  Banks are only now starting to revisit commercial lending to the sector and again, not with the same fervor as pre-2008. The overall number of outlets has declined and the debt to equity levels are still conservative (70/30).  Valuations remain a bit low as comps are still weighted by one-off deals, distress deals and work-outs and bankruptcies.  Book remains the valuation arbiter and as such, cap levels remain in a narrow range.  Overall, the capital outlook is fair but caution and uncertainty remain prevalent and thus, valuations are flat and good deals get done but marginal deals still struggle.
  • Rising occupancy and improving economic conditions have slowed defaults and tempered bankruptcies but not eliminated them.  Again, certain projects in improving economies have rebounded though others in regions/markets of slow to no-recovery languish.  Though average occupancy has once again moved into the low ninetieth percentile across the industry, I still see projects below this level on a regular basis and some, profoundly below.  In virtually all instances when I encounter low occupancy, two elements are present.  First, the market area is struggling economically – real estate, jobs, infrastructure, etc.  Second, the project itself is really viable or relevant.  More on this latter point toward the end.
  • Projects that have done well, rebounded, stayed vibrant exhibit the following key elements, aside from being in a market area that isn’t still declining or not recovering.   First, they were not overly leveraged.  Second, they had/have investments and cash reserves.  Third, they didn’t defer maintenance to any great extent.  Fourth, they stayed relatively lean on the expense side. Fifth, they have diversified revenue streams/bases.  Sixth, their pricing was market balanced and actuarially sound.  Finally, their management was forward-thinking and had plans in place to address the changing environment.  They have a good senses of the economic and market conditions impacting their organization and they plan and address these conditions fluidly.
  • Projects that haven’t fared well exhibit the opposite characteristics from above and/or, they simply exist in market areas that haven’t rebounded.  The most common element of struggling projects that I see is ineffective senior management and governance.  They simply never moved beyond a paradigm that was shifting, shifted and won’t ever return.  They aren’t relevant  and  haven’t learned or developed the current competencies required to compete in a different economic and market environment.  For many, the writing is on the wall and for some, revival is possible but a complete turn-around is required.

What I have concluded over the last few months is that industry success is a function today of five components;

  1. Being in a market area that is economically stable and modestly improving.  Real estate fluidity and price stability is important but equally  important is the general economic outlook, government infrastructure and commercial economy.  Projects that aren’t in this type of environment won’t, no matter what they do, improve beyond a point of mere survival (thriving just isn’t possible).
  2. Marketing and pricing today require a completely different set of competencies and strategies to achieve success.  Pricing must be strategic and financially validated and demonstrative of a clear value proposition.  No longer can a project succeed on guessing, market comparables and eyeballing what “management thinks” the budget will support. Marketing is different as well.  This is no longer a real estate driven sale and the economic axiom of elastic demand applies.  CCRCs have a very elastic demand curve and such, pricing and marketing must unite in the creation and communication of the economic value proposition.  More leads than ever are required to generate sales and build and hold, market share.  Traditional print and media ads won’t get it done.
  3. A highly diverse revenue stream/platform (multiple service lines) such that liquidity and debt service covenants can comfortably be made within normative occupancy levels (90th percentile or lower is best). If this is the case, the CCRC also tends to be more market competitive and capable of self-referral and internal market development.  In other words, it has multiple channels for referral development.
  4. Strong, capable management/leadership that isn’t necessarily, tied to the industry conventional wisdom.  They are adept at planning, forecasting, and keeping operations structured on high-quality, efficient service delivery.  They know the market, know their place in it, know the economic outlooks and demand elements and adjust their products accordingly.
  5. A relevant physical plant environment for the market.  A project doesn’t have to be new and/or the most glitzy.  It does have to fit the market however and be current – minimal to no deferred maintenance.  Economic value proposition are about proper product value, inclusive of warranty, for the customer to evaluate the tangible and intangible relevance.  The physical real estate elements are a major component of the proposition and properly positioned within the overall project, priced and communicated correctly, the prospects for sales and success are high.

August 15, 2014 Posted by | Senior Housing | , , , , , , , | Leave a comment

Boards of Directors: Success, Mediocrity and Sometimes, Failure

As a follow-up to a recent post on Boards of Directors and corporate governance (http://wp.me/ptUlY-gq), this post addresses how boards promote success, can often drive mediocrity and in some cases prompt organizational failure.  The take-away where success, mediocrity and failure occur isn’t structure, terms or committees rather, a consistent excellence or break-down in terms of structural clarity, roles, and organizational focus.  Governance which exists, regardless of the framework, to enhance and perpetuate corporate/organizational value, reputational integrity, and shareholder/stakeholder security and return is the foundation for success.

If there is a single condition more preeminent than another that drives mediocrity and failure for a board it is conflict of interest.  This condition is not unique to non-profits or for-profits but in my history, I encounter it more frequently in non-profits, likely due to the inherent lack of compensation available for directors.  The non or limited compensation component in non-profits is more ripe for a “quid pro quo” reward structure in which, the director is a de facto player in the organization’s business via a vendor relationship of some sort.  Even in the best of circumstances, the vendor representative on the board scenario defeats the concept of independence producing an air of duplicity and insider dealing.  If judgment is clouded, opinions suppressed or decisions focused on the inter-relationships among directors and the entity beyond the absolute best interest of the organization, governance cannot be optimal.

Effective governance requires independence and to the greatest extent possible, a board level series of tests and policies that promote independence and police conflict.  Below are the common tools I find most helpful in achieving and maintaining independence.

  • Recruitment of individuals that are unrelated in any regard, to the organization (not vendors, no familial employment, no familial relationships, etc.).
  • Policies that require annual disclosure of employment, board memberships for the director and director’s family, investments where applicable, etc.  This is to insure that directors don’t have relationships, ownership, investments that mask independence.  Note: Disclosure is not enough as once disclosed, remedy becomes the key.
  • An annual review of major vendor relationships such that the same is given to each director as part of his/her annual disclosure.  If a director is anything more than a passive investor in a vendor relationship, the director is no longer truly independent.
  • In healthcare organizations, annual background checks with the OIG, licensing boards (where applicable, DEA (where applicable), and criminal checks are warranted.
  • Policies that require reviews concurrent with major capital purchases, capital projects, mergers/acquisitions, etc. to assure that independence remains among the board.

The element second in importance to independence at the board level is role clarity and policies and organizational structure that clearly delineates the role of the board, the duties of directors, and the key performance elements for the board.  Again, these pieces lacking is a certainty for organizational mediocrity and/or, potential failure.  A board’s primary objective is to assure the viability, health and well-being of the organizational entity.  In this realm, its role is clear.  Where I have seen boards struggle and thus the organization, is when a lack of this clarity exists.  Below is my top seven item list that identifies where boards can assure role clarity for the board and each director.

  • The Board must have a job description or functional description and should each director.
  • Shareholders (and for non-profits, stakeholders) must be identified (not individually necessarily).  This element is where I see non-profits struggle mightily.  For example, for a non-profit CCRC shareholders/stakeholders are not residents.  Residents are customers, even in entry-fee communities.  Shareholder/stakeholders are for certain, any holder of public debt and any holder of mortgage paper.  Major vendors and insurers are stakeholders as well.  The definitional clarity begins at the “organizational level” in terms of where lies, for a board, the duty to assure organizational stability, reputational solidity and organizational viability and financial fluidity.  Yes, customers such as residents are tangentially impacted when things aren’t well-off but truth be examined, a debt failure causes irreparable harm to residents if a board isn’t engaged in securitizing organization viability.
  • A formal function, policy, etc. for board performance review and director performance review.
  • A formal function and structure at the board level for long-term planning – financial, strategic, etc.
  • A plan at the board level for CEO review, retention and succession.
  • A formal function for board development and education.
  • A communication element for discussions/feedback from/with shareholders/stakeholders.

Returning to the title: Success at the governance and thus, organizational performance level is when the board is truly committed and has put into place, the structural elements necessary to fulfill the boards primary duties;

  • Assure independence.
  • Focus on the financial, reputational and legal risks and the securitization thereto, of the organization.
  • Plan for and understand, the environment in which, the organization operates.
  • Assure plans for operating in this environment meet and exceed, the requirements in the second bullet above.
  • Understand and have policies and procedures in place, that clearly delineate the role of the board from that of management.  Maintain a fertile environment for a qualified CEO to garner appropriate feedback, support, reward, and security.  Boards need to assure, for the organization’s viability, retention of high-performing leadership and the succession thereof.
  • Be open and literally virtual, to shareholders/stakeholders.

When I encounter mediocrity and unfortunately, failure or the likelihood of failure, I see the same set of issues repeatedly.  As before, I have seen these most often among non-profits but not exclusively.

  • Lack of independence for directors.  In some circumstances, the conflict of interest is so clear (directors in high-level, influential posts with major vendors) and in some cases, subtle where familial relationship are involved.  Suffice to say, in non-profits this is one is the most prevalent.
  • Involved or have a tendency to become involved in operational issues.  This element is perilous in so many ways.  First, the board exists to function separate and distinct from management.  A board’s job is to procure and secure, competent capable management not to dabble in operations.  If management is underperforming, it is the board’s duty to identify the performance gaps and to assist management in achieving correction but not by becoming involved in operations.  Likewise, boards that find the need to meddle don’t empower management to take risks, drive performance and seek innovation.  Think about it: The presence of board members in operations creates sufficient tension for management and thus, management tends to guard what it does and how it does it.
  • Insufficient knowledge for the industry that the board operates within.  Boards need education sufficient to understand the key risks, shareholder interests, etc. in the applicable industry.  Uneducated boards equal poor decisions.
  • Lack of knowledge and engagement with stakeholders and shareholders.  Remember, this is a key issue even for non-profits. My non-profit clients goof this one all the time.  They believe that the shareholder/stakeholder is whomever they are serving (patients, residents, etc.) and thus, they lose sight of where the organizational risks and commitments (legal and other) truly lie.  Boards engage shareholders and stakeholders, management engages customers.  I can literally write dozens of pages of case studies where boards, especially non-profits, lost sight of (or never had in sight), the actual stakeholder/shareholder and ultimately, what happened and how painful it was.
  • Lack of a risk management structure at the board level.
  • Lack of a process and commitment to strategic and financial planning.
  • No or a deficient process for board recruitment, review and performance measurement.

In the final installment of this three-part series, I’ll cover best-practices for governance, specifically in the healthcare/post-acute care/seniors housing environment.  In so doing, I’ll cover the issues such that regardless of tax status (exempt or taxable), the information is relevant.

 

 

 

April 8, 2014 Posted by | Assisted Living, Home Health, Hospice, Senior Housing, Skilled Nursing | , , , , , , | Leave a comment

Boards of Directors: Outside Looking In

Over the course of many engagements plus my years as an executive, I’ve addressed and been asked to address, the theme of effective governance, particularly at the Board level.  To bring this topic into full context, one of my many “hats” that I wear (periodically), is as an advisor to graduate and post-graduate students working in the arena of health policy and healthcare management. One of my students currently, is researching this topic of governance especially as the same (effective v. not effective) correlates with organizational prosperity.  Her area of concentration in this research is non-profit health care organizations, though for-profit organizations are included as a contrast subject.

Her research and our conversations, reviews, etc. are fascinating as the content leads me across my many experiences serving on boards (non-profit, for-profit and publicly traded) as well as my many client engagements working with and/or in conjunction with, senior executives and their boards.  Upon further thought it thus occurred to me that I haven’t written anything as of late on this whole issue of governance – what it is, what it should be, where effective and ineffective collide in terms of organizational prosperity, etc.  Of course as always, my episodic journey (fits and spurts over a few weeks where time permits) led me through tons of stuff from my notes on engagements to former lectures and presentations to other research I have gathered.  Being brief: Wow.  I have a collection; quite a bit deeper than I thought/remembered.  The net of my review is that this topic of “governance” lends itself to a series of posts.  This is the first and for simplistic sake, it covers the core duties and the counterbalance of liabilities, for any Board (non-profit or for-profit).

To start, the core duties of a board are completely separate and thus, different from the core duties of management.  A board has a bifurcated role and responsibility.  The first duty is the advise and consult responsibility with management concerning the strategic and operational direction of the company.  The second and equally important duty is to monitor company performance at the macro level (financial, compliance, risk, etc.).  Topically, the latter element includes but is not necessarily limited to (not in particular order);

  • Approval of strategic plans and strategies.
  • Testing of performance measurements and oversight of risk management.
  • Succession planning for the top executive(s) and the process of selection, when required, thereof.
  • Audit – assuring the completeness, compliance and integrity of financial statements
  • Compliance – assurance that the company/organization complies with all federal, state and other related laws and regulations.
  • Approval of major capital investments
  • Protection of company assets and reputation, including tangible and intangible assets (intellectual property, trademarks, name, etc.)
  • Assure adequacy of executive compensation packages and develop and implement, the same in order to assure the security of key executive(s).
  • Represent the interest of shareholders and/or stakeholders (non-profits).

The key issue for a board is the concept of independence; the independent director.  In this regard, the ideal is that a board is solely interested in the welfare of the organization and thus, each director is free of self-interest such that the same would compromise his/her judgment and/or render him/her unable to take positions opposite of management when required.

The board is headed by the Chair(man or woman) who is responsible for agenda, meeting schedules and structure, committee coordination and overall communication within and across the board.  Boards make decisions on a majority rule basis unless specifically required otherwise (certain actions may require a super-majority) and such decisions are based on the information and input from management.

Board committees may exist in large numbers or in smaller numbers.  In healthcare, the following committee functions/board committees require specific attention.

  • Quality/Compliance: This is a major risk area and it is perhaps, the most critical oversight function for a healthcare board today.
  • Governance: Boards need to address new member recruitment, director performance, board performance, board education, etc.  This element also includes CEO performance and may/may not encompass compensation for the CEO.  Some organizations split compensation into another committee.  I have found both split and shared equally as effective if properly managed.
  • Audit/Finance; Second only to compliance in terms of risk, boards need to engaged in the review of investments (capital, other), financial statements, the engagement of auditors, the review/approval of financial plans, budgets, forecasts, and where applicable, any organizational financing activities from feasibility through completion/non-completion.  This function also encompasses financial risk management and review of public release information.

Board terms are all across the map today but the two best practice models I favor are one-year, annual election of members or staggered two or three-year terms.  Each have merit and each have flaws.  The true test of effectiveness of any “term” condition is how effective the governance function is in terms of director review, board review, etc. Boards that have effective director performance review, clear criteria and effective board performance review self-police and thus, make term conditions work regardless of length.

Finally and key for all boards and members to understand is that boards have specific legal duties, typically identified under their respective state laws or as embodied in case-law.  These duties are typically identified as “fiduciary” in nature.

  • Duty of Care: The requirement that decisions are made via deliberation and investigation/data.
  • Duty of Loyalty: The requirement that directors act in the best interest of the corporation or enterprise.  This duty has also been, in some case-law decisions and state laws, expanded to include the best interest of shareholders.
  • Duty of Candor: This is more applicable to publicly traded companies but I have found it universally applicable.  It essentially means that the Board provides all relevant and transparent information to any party where the organization solicits business, solicits investment, or is inclined to be or involved in transactional business.  Effectively, this is the full and honest disclosure rule or as I like to call it, the tell the truth”  principle.

In my next post, I’ll explain how the implications of board duties, structures, etc. play out in real life and how public vs. private (non-profit vs. for-profit) situations compare and contrast.

March 18, 2014 Posted by | Assisted Living, Home Health, Hospice, Senior Housing, Skilled Nursing, Uncategorized | , , , , , , , , | 2 Comments

CCRC/Seniors Housing Outlook 2014

Using characterizations, 2013 was a year of gradual ascent for the industry but not necessarily, uniformly so.  After a series of years preceding classified as industry malaise, occupancy began to trend forward and absorption rates stabilize.  Industry wide, overall occupancy is hovering around 90% for CCRCs though again, this number is broadly misleading.  Non-profit CCRCs, the bulk of the industry, fell-off slower and less dramatic and thus today, have risen back in generalized occupancy above 90%.  For-profits, fewer in number and newer in market, remain below 90% in overall occupancy (88%).  Interesting to note is that the bulk of non-profit CCRCs are entrance fee communities whereas the for profit variety trend toward rental models.

The question for 2014 is will a growth trend emerge?  My answer is “no” but the tide will remain somewhat positive.  What needs expansion is the following;

  • CCRCs and Seniors Housing is very local and regional.  Effectively, market dynamics at the local and regional level will play more directly than national trends.  As each economic region and market have recovered differently and are pacing recovery differently, so are the prospects for Seniors Housing.
  • The real estate market, while better, remains vulnerable nationally and moreover, regionally.  Some regions and municipal areas have rebounded nicely and days on market have returned to historic lows (averages) and prices, increased to pre-recession levels.  Conversely, other regions remain stuck or have only marginally rebounded (the Detroit area, portions of Chicago are current examples).  For true CCRC prosperity to return, the residential real estate market must continue to strengthen.
  • The overall economy is still mired close to neutral.  Job gains are somewhat phantom and Labor Department unemployment numbers a misleading gauge.  The job gains made are not career oriented jobs with moderate to high wages and solid benefit packages.  The gains are part-time, lower wage, service sector and seasonal/temporary work.  The overall participation rate remains at 40 year lows (fewer numbers) and the long-term unemployment number, grudgingly high.  Inflation remains low and accommodative monetary policy has suppressed fixed income yields at record lows.  Essentially, this means price inflation remains checked, even for seniors housing.  With seniors feeling the pinch of income suppression (low social security increases, low fixed income returns, etc.), the income component of the rent equation remains compressed.
  • Available product in many markets is still fairly high.  While new projects are coming on, the rate is still slow and recent upticks in financing costs have changed the capital components on project cost.  Recall that in April of 2013, unrated and rated tax exempt debt  was at record lows and volume in terms of issuance on the uptick.  Essentially, demand was equal to and often greater, than supply.  Nine months later, the cost in terms of interest is 25 to 50% higher across all rated  and unrated categories  with new project/new campus debt cost today hovering around 8.5%.  Though capital markets remain relatively fluid for projects, the costs today have moved high enough to re-shape new product entries in terms of timing and scope.  Similarly, the fluidity that does exist is subject to short-term volatility as Fed policy (the degree of tapering), global shifts in monetary fortunes via emerging market currency valuation changes (a far lengthier discussion is warranted for this but not now), and the fixed income bias to “short” duration (fearful of upward rate volatility) shifts liquidity and funding dynamics.

Given the above, my outlook is good but not great.  I see continued occupancy improvements but incrementally.  I also see continued regional struggles as some locations are just not in recovery mode.  I see enough volatility economically to keep things moving cautiously forward.  Similarly, the same volatility can rear a period of distraction and even retrenchment, though I think such a period is brief.  Projects will emerge cautiously and then again, given funding dynamics, will evaporate and re-scale.  I think the wholesale raft of tax exempt debt refinancings will cool substantially as the cost of a refunding without enough interest savings has narrowed or tipped, especially for less than A rated credit. I think price compression will continue as rates will remain suppressed by fixed income fortunes and low inflation.  Revenue improvements will continue to come from rising occupancy and improved operational efficiencies though the latter is probably, mostly wrung out.

Non-profits will continue to out perform for-profits in most markets if for no other reason than their time in-market.  For consumers, these sponsors and projects have been around long enough to garner trust and build reputational stability.  This isn’t to say that for profits can’t succeed and many will but as a generalized industry trend, the non profits are ahead of the curve.  This gap however, will narrow if and when, the industry fully rebounds.  A challenge for non-profits is that while they lead in reputational time in-market, they do so often with older physical plants.

Where vulnerability for organizations remains is at the capital structure level.  I still see a tough year with a continued high volume of technical covenant defaults (usually liquidity covenants).  Rate compression and the inability to pass along too much rate inflation (if any at all) coupled with occupancy challenges was the driver in 2013 and will continue to 2014.  We saw some salvation with low rate refinancings but that window has closed for the majority.  The key solution for most is recovering occupancy and for some, this will remain difficult given regional economic challenges.  What I do know however, is creativity in solutions and positioning is key and will continue to be so for at least 2014.

A key element for all providers that seems missed to me in numerous discussions is the true demographic picture and thus demand equation within the market.  For lack of a better term (or terms), I call this the Baby Boom Fallacy.  Too many developers and providers have reached the conclusion that the market is rich with and growing exponentially because of Baby Boomers.  In reality, nothing is further from the truth today, and for the next number of years.  The true baby boom period is 1947 to 1963.  This means that the oldest Boomers are just above 65 (67 to 68).  Using the real age math for seniors housing and CCRCs in terms of average age of initial occupancy (non-hybrid projects like Del Webb communities aise) at 80, the impact of the Boomers is still a decade away.  Their impact today is as adult children and influencers of the current resident prospects; not prospects themselves.

The current resident demographic demand is the baby bust generation or war babies.  The World War II era babies are part of time where birth rates declined due to depression recovery and the war.  The target range lies within the group born between 1930 and 1943 – pre Baby Boom.  This period in time is more bust than boom in terms of numbers.  The shift in numbers evident within this group (today) over prior periods is evolutionary due to survival, not due to birth rate.  There are more of these 75 plus folks than ever before solely due to increased life expectancy; nothing more.  Targeting this group, their cultural norms and their experiences (social, economic, etc.) is where marketing and planning should be – not focused on Boomers.  The Boomers, contrary to rhetoric, aren’t here yet as the consumer.

January 28, 2014 Posted by | Senior Housing | , , , , , , , | Leave a comment

LeadingAge Presentation Uploaded

My presentation from this morning’s LeadingAge Annual Meeting session, “Data Driven Marketing Strategies” is available for free download on this site.  Go to the page titled “Reports and Other Documents” to access the Power Point.

October 29, 2013 Posted by | Senior Housing | , , , , , | Leave a comment

Emeritus/PBS and a Window on Assisted Living

PBS is planning on airing a segment tomorrow (Tuesday, July 30) on its program Frontline, highlighting Assisted Living care in the United States (titled “Life and Death in Assisted Living”).  Much of the content focuses on Emeritus and other large, for-profit operators.  A link to the PBS website follows as summary to the broadcast. http://www.pbs.org/wgbh/pages/frontline/pressroom/frontline-propublica-investigate-assisted-living-in-america/

I have seen a first-run of the program on a pre-release basis finding it fascinating, troubling, accurate and inaccurate all at the same time.  The core takeaway that I found relates to an issue I have written on, lectured on and consulted on for a number of years now.  This issue dominates the conundrum that is Assisted Living.  The issue is what I label as “appropriateness”.

Routine readers and followers of mine know that I am of the opinion that the Assisted Living industry is essentially over-developed in most major markets.  By over-developed I mean more units than true “appropriate” demand.  The PBS piece reflects this to a learned viewer.  Like Hospice, the true niche’ for Assisted Living and particularly, Memory Care in Assisted Living, is rather small if we apply the “appropriateness” criteria.  Taking the analogy a bit further (Hospice and Assisted Living), the fraud trend that has enveloped a major portion of the Hospice industry via primarily Vitas (and others) bears striking similarity between the PBS/Emeritus feature segment; a large supply of outlets, a drive for continued earnings growth, and a lack of truly appropriate patients and/or residents to fuel the occupancy/encounters required to support continued earnings growth, increasing sales, etc.

While I realize the above is a bit esoteric, the logic is economically sound at all ends. More is often not better and the principal of diminishing utility is easily visible, especially to the customer when supply exceeds demand in health care. The plain fact of the matter is that the Assisted Living market has flourished due to a drum-beat fallacy that it is a suitable replacement in many regards, for structured institutional care.  This myth is perpetuated by policy makers who crave relief within their Medicaid programs (transition nursing home residents from institutional care environments to assisted care facilities and save big money).  It is perpetuated by senior care advocates.  It is fostered by marketers for AL companies that ply families with a mixed message of phenomenal care in non-nursing home settings, etc. In the end, no matter what the rhetoric, the reality rises – appropriateness.

Before anyone assumes that I am a basher of the Assisted Living industry, think again.  I have run Assisted Living facilities, developed them and consult for Assisted Living operators, investors and developers.  Like Hospice, I think Assisted Living is phenomenal, when used and structured “appropriately” (there’s that word again). The problem is that the “appropriateness” definition has morphed and incorrectly so.

Assisted Living is a growth industry primarily because it remains essentially unregulated in terms of development and minimally regulated in terms of operating.  True some states are a bit more rigid than others but for the most part, building an Assisted Living facility is primarily a capital-raise challenge as opposed to a licensing challenge. The sole impediment, once capital is available, is community zoning ordinances in most states.  Even then, working with most communities and through zoning is not an insurmountable challenge.  With a fueled belief that an onslaught of baby-boomers will chew-up unit supplies (these boomers not yet even close to Assisted Living age profiles), units spring forth.

As units sprung forth, what many developers and operators first noticed is that the promised circle of consumers was a bit “short” for occupancy targets.  No problem.  Thus, a re-labeling or re-purposing began to take shape.  Turn the excess into Memory Care via new labeling and plow another niche’.  This re-purposing worked enough to beget a new trend; build new Memory Care Assisted Living units.  Fueled by all of the same non-realities as mentioned before and a rather simplistic and easy development environment supply of Assisted Living and Memory Care cranked-up.

By definition in most states, Assisted Living and Memory Care is a non-skilled environment.  To that point, most operators don’t consistently staff a registered nurse or other skilled personnel on a daily basis and to this point, they aren’t required to by regulation.  The typical model includes varying degrees of professional or licensed presence ad hoc as opposed to directly purposed.  In this ad hoc system, professional staff act more like consultants rather than direct caregivers.  Most states don’t require a specific license or education component for the building administrator or manager; typically a minimal training or vocational course with a test.  I have literally encountered Assisted Living managers who have a high-school education and were formally, food service personnel or in one rather larger organization, a failed insurance salesman.  His training consisted of a three-day state endorsed program, followed by a multiple choice test earning him a “license”.  He was hired despite never running a facility or working within an elder care environment. The company brought him in as a “trainee” and promoted him within three months to a manager of a 70 unit facility; Assisted and Memory Care.

Where the industry challenges lie are at the appropriateness level.  Assisted Living is appropriate, properly structured, for residents requiring minimal to no direct professional care.  It exists to provide a structured, non-institutional environment and care level that includes meals, ADL care, cueing, activities, and wellness.  The bulk of the care can and should be provided by non-licensed, non-professional individuals.  Correlating to regulatory requirements current in most states, this is the basic premise and thus, definition.  Given today that in many locations, supply of units exceeds individuals who truly require this minimal level of direct care, operators in need of occupancy and revenue, introduce higher-care level residents.  Since the regulatory environment is minimal and structurally, ill-equipped to monitor the number of Assisted Living facilities, operators could freely expand the “appropriateness” criteria to suit their business needs.  Unfortunately, as the PBS segment implies, the infrastructure for many operators (particularly staff levels, skill and training levels) didn’t adjust to the actual care needs of residents.

It is important to note, not all operators are guilty or frankly even the majority, of stretching the appropriateness definition and when more challenges arise, they have staff and programs in-place to adjust their care accordingly.  As in hospice, the typical bad-actor pattern is apparent arising from a fundamentally flawed business model, incongruous with the customer.  I like profit and so do my clients, including my non-profit clients.  The problem arises when profit becomes too short-term, short-sighted and drives all decisions separate from the underlying needs of the customer.  As in Hospice for certain organizations, the economic realities of the industry that is Assisted Living , primarily supply and demand, are working against it.  What I fear most for the industry is a regulatory back-lash that like all back-lashes regulatory, will be onerous, ill-conceived and punitive for the providers doing it “right”.

July 29, 2013 Posted by | Assisted Living, Senior Housing | , , , , , , | Leave a comment

Improving Real Estate Economy Leading to Improving Seniors Housing Trends?

Among the improvement laggards in the current slow economic recovery was the real estate sector of the economy.  Despite record low borrowing rates, home sales seemed stuck in neutral even as positive GDP growth resumed, modest gains in employment occurred, and consumer confidence improved.

Starting late summer 2012 and accelerating in to 2013, the real estate economy has strengthened and improved nicely.  Historically, a healthy real estate economy correlates to strong seniors housing starts, sales and occupancy.  With many major markets over-supplied as of late in terms of seniors housing units (demand perspective), an improving real estate economy, if trends hold true, imparts hope for the seniors housing sector – or does it?

Seniors housing, as I have written before, has a very price elastic demand curve.  Essentially, this means that potential buyers and the universe thereof, is directly influenced by the cost of the housing option.  Even when costs remain stable, the demand equation changes dramatically if the buyer for the units experiences change (real or perceived) in his/her economic capacity.  Negative changes such as falling real estate prices, constrained ability to liquidate real estate, or reduction in the number of potential buyers for the real estate contribute directly to a senior’s ability and willingness to purchase a seniors housing option.  The most dramatic impacts occur within projects that are above-market priced or higher-end as the elasticity of demand for the most expensive options is greatest.  In effect, the higher the price the more the consumer of the product or service, will shift to lower cost alternatives, if his/her ability or capacity to purchase has changed (again, real or perceived).

What is most interesting about the real estate economy compared to other economic sectors is that national trends don’t play-out directly, in regional or local markets.  Take for example, markets or regions where oil and natural gas production has exploded.  Even during the slowest, most depressed times for the real estate economy nationally, the real estate sector in these regions and locales was booming.  Housing of any form in areas such as Casper, Wyoming  and Williston, North Dakota was (and remains) scarce, pricy, and by timing (supply and demand), development scarce.  Conversely, some markets fared far worse than national trends in terms of foreclosures, time on the market and price deflation (Las Vegas and Chicago, IL are examples). Given the regional drivers that impact the real estate economy, recovery will vary dramatically.

Correlating a recovering real estate economy to an improving seniors housing sales and occupancy cycle is simplistic from a global perspective but at the site-specific end, a bit more daunting.  What we know generally is that a more fluid, stable real estate market generally improves the occupancy, unit absorption and sales results for seniors housing.  We also know that in general, by occupancy and ultimately, price inflation, it improves the operating results of seniors housing projects.  What we don’t yet know is whether this recovery is a harbinger of longer-term real estate stability and does the improvement tide wash over all markets at some point and in what time frame.

Arguably, this recovery is perhaps different, certainly less uniform and due to other over-arching economic issues, more complex than any post recession period prior.  In certain markets, those that were the least impacted by too much existing supply, rapid increases in unemployment and a large number of foreclosures (REO or REJ properties), recovery is impactful for seniors housing projects, especially if the unit supply is normative or about par with pre-recession demand.  In other markets where prices fell dramatically, foreclosures were heavy and unemployment greater than national average, recovery will be slow.  Even the latest positive economic news regarding the real estate economy is a tad misleading.  Yes, most markets are improving.  Yes inventory is down, days on the market is improving, listing prices are recovering, etc. (a few markets such as Columbus, OH, Philadelphia, PA and Spokane, WA continue to see price deflation) but the improvements are from a very, low point.  In short, the improvements are signs of “recovery” not a validation of stability – yet.

While the road ahead appears somewhat smoother, the opportunity for pot-holes exists and thus, the relationship between real estate fortune and seniors housing is still rocky.  My considerations worth noting are as follows.

  • Employment and wage growth (personal income) is still stubbornly slow.  Under-employment at record highs.
  • In some markets, employment and under-employment will never return to post-recession levels.  Certain jobs and companies are gone from the landscape for good.
  • Interest rates today are less of a function of improving sales even though low rates improve affordability and thus, general increases in eligible buyers.  Changes to federal lending laws and mortgage requirements have tightened credit requirements for borrowers.  These changes, regardless of how low rates remain or go, preclude a large universe of individuals from securing favorable term mortgages.  In short, the supply of buyers has shrunk and permanently so.
  • Given how low rates have been and for how long, rate rise to a certain degree is forthcoming.  Rising rates inversely impacts the supply of buyers (negatively).
  • Price increases for individual homes won’t broach pre-recession levels (actual or inflation adjusted) for years in many markets.  In certain markets such as the Metro Chicago region, price increases in terms of realized sales, are years out to achieve pre-recession par.
  • The overall economy is still vulnerable and the consumer, still leery of what can lie ahead.  Confidence is better but not great.  Consumer confidence is critical to a buyer’s willingness to leverage long-term, arguably as critical as financial capability to buy.
  • Seniors housing costs are at their low-ebb as expressed by monthly rental and in some communities, entry fees.  While costs continue to rise, albeit not dramatically, the pressure to begin to inflate fees is present for many projects.  Fee inflation during a recovery period or stabilization period is anathema to improving unit sales and developing new prospects.  With the elasticity of the product, rising rates in a market that still isn’t healed can “chill” prospective buyers.

Is the trend improving for seniors housing?  Yes but not universally and the real estate economy in many regions remains disconnected.  Additionally, I think the direct correlation between a strong real estate economy and the prospect for seniors housing sales has changed.  Yes it remains a major factor but property sales cycles will remain slower than prior periods, prices lower than prior periods, and buyers for individual homes, in lower numbers than in prior periods.  The take-away is this: The improving real estate economy is good news, not necessarily great news or for that matter, a sign of salvation for projects looking to ramp-up sales with urgency. The trend is improving but full improvement, is still down the road and for certain, the road is different in direction than before.

June 4, 2013 Posted by | Senior Housing | , , , , , | Leave a comment

Five Things Every Healthcare Executive Should Focus On: Updated, Revised

More than two years ago I wrote a post regarding “five” things every SNF administrator should focus on and lo and behold, a reader asked late last week if I would revisit this subject.  She (the reader) is not an SNF administrator so she asked if I could focus more globally; sort of a “best practices” approach.  While each health care industry segment has its nuances, in reviewing my travels, the challenges and successes leaders have, where failures occur, and where careers are made and sustained, I quickly found commonality in approaches and focused competencies.

Healthcare leadership is complex and very dynamic.  The alchemy is nearly one-part inquisitor, one-part psychologist, and one-part theoretician.  Those that do well and thrive, regardless of industry segments, are today “global” thinkers capable of transitioning to tactician seamlessly.  They are outcome oriented and know the pieces of the puzzle well enough to be bull**it proof.  They think and act as if synergism is their main duty and they understand (acutely) the law of unintended consequences.   Bottom line: They see cause and effect and constantly seek ways to shorten the distance between the two.

Industry issues aside regarding changing reimbursement, regulation, etc., the focal core that I find as key and thus, displayed in action by the successful executives is as follows.

  1. Quality: This is an oft used buzzword but very skilled and successful executives can articulate this for their business immediately.  In healthcare, quality is all about tangible outcomes that patients experience.  Going one step deeper, quality today is also about a measurable outcome at a particular cost.  In my economist jargon, this is about utility and warranty.  Utility is maximized in healthcare when the payer and the patient receive a desired, tangible outcome at a market or below market price.  Warranty in healthcare is about the outcome’s sustainable benefit to the patient and the payer.  Technical yes but this theory is a key focal area for healthcare executives.  Think about it tangibly in light of today’s issues.  Hospital executives need to understand this because it impacts re-hospitalizations.  The outcome must match the warranty or in other words, the care must be complete such that avoidable readmissions are low or non-existent.  For SNF executives, the same holds true but with a slight twist.  The SNF executive must deliver excellent care all while minimizing the risk areas that lead to re-hospitalizations such as infections, falls, and medication errors.  As a core competency, the best executives I work with didn’t wait for the government to tell them to reduce their falls, reduce their re-admissions, etc.  They knew these issues years ago and had already understood the relationships between quality or utility and warranty.
  2. An Outside-Inside View: Where I find failings in healthcare leadership it almost always starts with executives that believe their challenges and their industry are utterly unique.  They not only bought the healthcare executive manual but they memorized it.  They seek only peer knowledge or interaction, often I believe to validate that “they” are doing the same thing everyone else is doing.  Alas, the story of the Lemmings on their way to the sea is cogent.  What I see as key competency among the best is that they have an “outside-inside” view competency.  This outside-inside view is characterized by looking beyond their industry at analogous problems or issues and seeking solutions that are applicable.  Yes, healthcare is unique but certainly not so unique that strong parallels in marketing, customer service, project management, systems design, etc. can’t be found via other industries.  Across my career, the best ideas I’ve used came from other industries – not healthcare.  I simply altered the concept to fit the situation.  Philosophically, “the coolest things in life exist in places where their aren’t any roads”; a quote from a former camp counselor to my son.  Developing this competency is all about forcing oneself to explore well beyond the industry noise, rhetoric and ideologies.
  3. Small Spaces and Closet Organizers: As odd as this heading sounds, it makes sense to me when I see it applied.  The industry has run through its hey-day where bigger was better and, “if you build it, they will come”.  Really strong executives today have learned how to creatively adapt and re-adapt and they realize the core competency of “revenue contribution” per square foot is the new reality.  This competency area is all about revenue maximization and in a go-forward universe of revenue stagnation via reimbursement cuts and flat payments, using space efficiently and keeping the closets organized rather than overflowing with stuff not needed nor ever used, is the requirement.  Gone are the days where more is better or additional lines of inventory make sense.  This focus is truly a trend from manufacturing where realities on plant size, productive capacity and just-in-time inventory came to roost many years ago.
  4. The True Meaning of Health Policy: This is about the Paul Harvey requiem; “the rest of the story”.  Health policy impacts are point in-time in terms of regulatory implications and reimbursement implications but woven together, a trend is evident.  This competency area is about knowing what the policy trends are, where Medpac is going and why and how the enterprise led should position accordingly.  I have written repeatedly that regardless of regulation and new laws like the PPACA, core issues about entitlement financing, sustainability of funding, etc. will beget certain and permanent changes in health policy.  Ignoring these realities and the resulting policy trends is akin to committing hara-kiri with a butter  knife; no one blow is fatal but the culmination of all blows leads to a slow, painful death.  Much is trending right now regarding networks, ACOs, bundled payments, pay-for-performance, accountability, fraud, etc.  Knowing not only the implication of each but how the same is directing the future is a core executive competency.
  5. Freakonomist: OK, I’m stealing from a book title here but the point is simple: Healthcare executives need to understand at a certain level, core human behavior and economics.  I’m not talking about finance or reimbursement but behavioral economics.  One of the major problems or arguably, the single most demonic problem with healthcare today lies in the axiom that “what get’s rewarded, get’s done”.  We have lived too long on the native belief that acute, fee-for-service, episodic medicine or care is how the U.S. health system thrives.  Thus, we have overspent and over-taxed the system without regard to a potential breaking point.  We have arrived at such a point.  Today’s healthcare executive must realize this core reality and to survive and thrive, re-define his/her leadership to developing systems and services that prevent utilization or revise utilization to more of a minimalist plane.  Those that embody the philosophy that “better is better” rather than “more is better” will understand this innately.  This competency is about “solving” core problems and not chasing root, flawed ideologies of the past.  Profit and success will come via innovation and system-thinking not from finding new ways to exploit Medicare and Medicaid.

November 13, 2012 Posted by | Assisted Living, Home Health, Hospice, Senior Housing, Skilled Nursing | , , , , , , , , , | 3 Comments

Presentation from Leading Age Annual Conference in Denver

I have uploaded the Power Point portion of the presentation I did at the recent Leading Age Annual Meeting and Conference in Denver per reader and attendee request.  You can find it and download it on the Reports and Other Documents page on this site.  The presentation is titled, “Value Propositions and Marketing”.  The content essentially covers the application and development of economic value propositions and their resulting use in developing marketing and pricing strategy.

October 25, 2012 Posted by | Senior Housing | , , , , , , , | Leave a comment