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Economic Value Analysis, Value Propositions and Marketing

Recently I gave a presentation on strategic pricing and senior housing (see Reports and Other Documents page on this site for the presentation power-point).  A key theme that I often refer to centers around the “value proposition” or in other words, the concept that pricing is both monetary and non-monetary and as such, the value proposition is about not only the price but also about the functional and psychological value of the service or product.  In short hand, the utility; how the product/service satisfies both functional and psychological needs at or for the given price.  During the presentation and since, I’ve received a fair number of questions regarding “how” a value proposition is determined and thus, how the same is correlated to price.  Knowing how complicated senior housing and all forms of long-term care (SNF, ALF, Senior Housing, etc.) are today to market, understanding the core concepts of pricing, economic value analysis, and value proposition can make a real difference in establishing an effective sales and marketing program.

Initially, the primary concept to understand is demand and how demand and price work together.  Demand, for purposes of this article and simplicity, is the ability and willingness on the part of an individual to buy something.  In general, demand and price have an inverse relationship such that the demand for a particular good or service (the quantity thereof) tends to increase as price decreases.  Of course, a variety of factors impact demand including the actual nature of the product or service.  Funeral services for example have a fairly steady level of demand and in actuality, the demand only changes by a change in supply of dead people (morbid as this thought is).  If for example, a major pandemic began to sharply increase the number of people dying, the demand for funeral services would increase.  Conversely, if a break-through in genetic research produced a series of cures for diseases such as diabetes, heart disease and cancer, the demand for funeral services would gradually decrease.  In the example of funeral services, price is less of an influencer on demand as once an individual has died, few alternatives exist (legally) to disposition of a corpse.  While there may be multiple options for pricing inside the range of possible mortuary services (cremation, caskets, size and style of services such as wakes, etc.), there remains a core price that is basically inelastic; doesn’t really change demand as it rises or falls.

For goods and services such as senior housing and to a lesser extent, other long-term care such as Assisted Living and SNF care, demand is more elastic as price changes.  The simple reason is that alternatives exist to each level of care that are available, supply or provide the same basic utility and range in cost (expressed as price).  In the case of senior living, many options exist at a great many price points.  With SNF care, fewer options exist but still, many providers exist and home care and even in some cases, Assisted Living present alternatives at different prices.  The net result is that demand is influenced by price as well as a host of other factors.

  • The service’s core price is a factor such that all products and or services have a “going rate” calculation.  When demand is highly elastic such as with senior housing, the safest presumption is that the core price is equal to living in one’s existing residence as normally, a move to a senior housing facility is equal to or more expensive per month.  If the costs associated with a senior housing option are rising, demand will taper off.
  • The price of related or alternative goods will impact demand, especially when substitution products or services are widely available.  For example, using the funeral home example, if prices for a particular line of wood caskets drop substantially below the prices of metal caskets, the demand for caskets stays essentially the same but the demand for wood versus metal rises substantially.  For senior housing, the demand can be widely impacted by the cost associated with alternatives such as market rate apartments, condominiums, or staying at home with certain services.
  • The ability of the consumer to buy in terms of economic resources changes demand.  If the consumer’s purchasing power changes as a result of loss of income, lower income or lower overall resource levels, the demand for particular goods and services at current price points declines, perhaps shifting to less expensive substitute products/services.
  • An increase or decrease in desire or preference on the part of a consumer can change demand positively or negatively.  The greatest mover here is consumer confidence.  A consumer with a more positive outlook on the economic condition of his/her situation is simply more motivated to consumer.  Consumer expectations about prices also impacts the decision to buy.  A consumer that believes that prices will rise in the near future is more likely to buy immediately and conversely, an expectation of falling prices triggers a delay in consumption.

Taking the above into account regarding demand, economic value analysis and the determination of a value proposition is fundamentally about determining the monetary value of the product or service as well as the functional and psychological value.  The monetary value is not the product/service price but the value, expressed in dollars, of the total cost of a product or service’s ownership.  In this regard, the monetary costs also produce monetary benefits.  For example, using senior housing, calculating the monetary costs requires an analysis of the following (minimally);

  • Rent or mortgage payment
  • Monthly amortized cost of any entry fee including interest cost and negative amortization costs (loss of refund as applicable)
  • Utilities
  • Taxes
  • Insurance
  • Other fees such as parking, etc.
  • Other cost intangibles such as free health care, reduced cost health care, delivery of medications, meals as part of rent, rent increase guarantees (limits), etc.

Calculating the monetary value thus becomes an exercise in quantifying the above elements over a reasonable period of time such as five years, etc.  Once this is complete, the result is used as a comparison against like or alternative options.  Below is an example for a non-profit, senior housing provider with a fully refundable entry fee compared to a person remaining in their home in the community, with no mortgage payment (a fairly typical situation).  The costs I’ve illustrated are over a five-year period (rent for example is monthly times 60 months).

  Sr. Housing Home          
Rent $72,000 $0.00          
Mortgage $0.00 $0.00          
Prop. Taxes $0.00 $25,000          
Insurance $3,000 $7,000          
Utilities $0.00 $18,000          
Depreciation $0.00 $6,250          
Repairs $0.00 $5,000          
Lawn Service $0.00 $1,200          
Parking $0.00 $0.00          
Meals (1 x day) $0.00 $6,400          
Entertainment $0.00 $2,500          
Healthcare (1) $0.00 $1,500          
Misc. Transport $0.00 $1,000          
Entry Fee (2) $18,924 $0.00          
Home Price +/- (3) $0.00 $5,400          
  $93,924 $79,250.00          
(1) Sr. Housing provides free wellness services such as flu shots, blood pressure monitoring,
medication assistance, setting appointments, education, screenings, etc.    
(2) Entry fee is fully refundable ($150,000) at no interest.  Interest yield is assumed at
2% compounded monthly            
(3) The home price increase or decrease reflects what the resident can safely assume
the home price will be in five years.  A negative number is an increase in value whereas 
a positive number reflects a decrease in selling price.  Price of the home is assumed  
to be $300,000 in current dollars.          

In this example, the monetary value of the senior housing option is greater (negative) than the monetary value of remaining at home or simply, it costs more to receive the same basic utility to move to the senior housing community.  The value essentially becomes negative with the inclusion of the entry fee interest loss or cost.  On the surface, this appears to be a negative value proposition for the senior housing community.  The key to achieving a balance or a higher proposition value for the senior housing option is to monetize the functional and psychological costs between the two options.  Ideally, the spread between the two is worth at least $14,674 or the present negative difference between the senior housing option and remaining at home.

In monetizing the functional and psychological costs and benefits between the two options, the trick or key is to have a clear understanding of the profiled consumer.  This means having a true handle on current customers and seniors living in the community.  For example, a psychological benefit to senior housing versus remaining at home is security.  It is possible to measure the value of security by talking to your current customers and imputing a value for a security service to the remain at home option.  A functional value is transportation and convenience.  If for example, the senior housing option provides shopping trips to local grocery stores or has an in-facility delicatessen and convenience store, the cost between the two options in terms of convenience and transportation is measurable.  Other examples such as activity, access (even at a cost) to prescription drug delivery, on-site medical care, check-in services, laundry, housekeeping, etc. are all items with a potential functional and psychological benefit.  Perhaps the most under-valued is the access to on-site, future health care such as an incorporated Assisted Living or Skilled Nursing Facility, even if such access is nothing more than guaranteed accommodation without a price reduction.  The important point here is that each functional and psychological benefit that is discernible and tangible to current customers has a value that is quantifiable and comparable across each option or living alternative.

The value proposition is the accumulation of the monetized values for the core product or service plus the functional and psychological factors.  Consumption activity incorporates all three elements and effective marketing strategy is grounded in communicating the value proposition of a product/service as compared to all other alternatives. Of course the largest difficulty arises in communicating values ascribed to psychological factors.  The key in doing so is the heavy use and reliance upon, current satisfied customers.  They are the source of input as well as the ground for determining monetary values associated with the related psychological factors.

As senior housing demand is highly elastic, creating and communicating a value proposition is critical in terms of developing potential customers.  I would argue that the same approach is as critical for SNFs that are looking to attract certain types of patients with certain payer sources.  In using the above approach, an SNF would complete its economic analysis against its competitors, again monetizing the core service, the functional and psychological factors.  In many regards, completing the analysis against existing competitors is an easier exercise as quantifiable data is far more plentiful.

Pricing strategy comes into play when the value proposition is imbalanced.  Pricing strategy re-weights variables and allows the value proposition to change favorably against key alternatives or competitors.  For example, in the senior housing analysis above, pricing change involving the entry fee instantly changes (positively or negatively) the initial calculated proposition.  For an SNF, adding amenities within service offerings or adding clinical competence improves the value proposition, even under a fixed-payment scenario such as Medicare.  The objective from a marketing strategy approach is to maximize all elements of the value proposition as compared to the competition or to the alternatives.  Taking this approach and then developing an effective sales and communication strategy dramatically improves the opportunities for successful new customer conversions – sales.

October 27, 2010 Posted by | Assisted Living, Senior Housing, Skilled Nursing | , , , , , , , , | 1 Comment

Due Diligence and Acquisitions: A Review of Common Pitfalls

A regular, although not necessarily routine, exercise that I go through is a re-evaluation of recent acquisitions in the senior housing/long-term care industry to see “how they are doing or performing” post transaction.  Perhaps the primary reason that I do this is my curiosity regarding the effectiveness of the due diligence process and the accuracy of the valuation or economic value proposition created by the acquirer as translated into purchase price.  In short, I’m always curious as to whether the buyer got what he/she/they expected at the anticipated cost (purchase price plus other investments required over the first year or so) he/she/they expected to pay.  As the mechanics and theory behind valuations and due diligence vary between deal to deal (from what I have observed), it is interesting to look at “how things are turning out” once the feeling of accomplishment and the haze of the deal  have passed.

When things don’t go well or aren’t going well at the one year mark, something I find more common in health care transactions (SNFs, Home Care, Hospice, etc.) and less so in Assisted Living or Senior Housing, it nearly always seems to a be a flawed due diligence process that led to an over-estimation of value.  More succinct: Because the due diligence process missed too many issues the price became over-stated as the costs associated with achieving stable operations were under-estimated or the classic, “he/she/they paid too much for what they got”.  Where I notice the largest number of errors occurring during due diligence is when the due diligence is treated as a justification for the purchase price or, a process of validation rather than a process to quantify the economic risks and benefits that are modifiers to the valuation and ultimately, to the negotiated price.  Proof of a what a friend of mine always says; “It doesn’t take a rocket scientist to overpay”.

Separating the issues a bit, valuation is effectively a financial quantification of the relative worth of the business as it stands today, including business/commercial value (cash flow, revenues, expenses, etc.) and tangible and intangible asset value (bricks and mortar, equipment, trademarks, name, etc).  When Buyers capably test the values against their own business models and the available universe of comparable values, the Buyer has established a range of possible purchase price points.  Ideally, within this range lies a number that the Seller will accept or that matches closely, the Seller’s asking price.  At this stage, I would argue that a Buyer should never impute any assumptions on a go-forward basis about “how much” expenses could be lowered or revenues increased to massage an improved value.  A wise Buyer would best assume that upon acquisition, almost all aspects of the business “as is” are set as constant and these same constants are the financial constraints that place the boundaries on the project’s range of values.  This is not to suggest that a pro forma assumption about “go forward” operations that assumes lower debt costs (if applicable), some efficiencies via scale and some reduction in overhead may not be applicable (if in fact they are real and quantifiable).  It is however, a caution based on too many valuations completed at the behest of or by Buyers, that include unrealistic assumptions of census increases, revenue increases, expense reductions, etc., that are hardly quantifiable or even in fact, justified for the particular transaction.  To illustrate: A few years ago I helped an out-of-state buyer get into a particular nursing home transaction (nursing home was for sale).  The buyer owned nursing homes in other locations so the industry was not totally foreign.  The location of the facility was decent but the plant was old and the facility’s reputation marginal.  The asking price had yet to be set “in stone”.  The buyer, accustomed to paying higher prices in other areas, began talking numbers that were far too high for the project, justifying the price with claims of significant improvements in Medicare census and Medicare revenue per day that were unrealistic for the facility (never happened at this location before) and were beyond the norms of the market area.  While I tried to counsel the buyer to be more judicious, the buyer went ahead and acquired the facility.  Within two years, the buyer abandoned the site, having substantially over-paid, never achieving the projections for revenue and census “touted” for the facility. 

Due diligence encompasses the financial valuation but extends the tasks into a level of greater detail that adds or subtracts (creation of debits and credits) from the range of possible values/prices.  In the best of due diligence processes, the methodology also incorporates a review of risks and assists in quantifying costs associated with these risks.  In reality, due diligence should attempt to paint a complete picture of all elements of the transaction, providing final quantification of the price and qualifications to the transaction that must be accounted for by the buyer.  Thought of or approached this way and using the example I presented above, the buyer would never have paid what they paid for the facility and would have realized that achieving a stable, successfully operating SNF in that location would take them years and significant financial and human capital investments.

While buyers tend to approach due diligence and valuation different, each varying upon a theme and using their own methodology and checklists, I’ve found that the problem transactions that I follow each tend to miss one or more of the following elements.  Some of these elements are absolutely critical if the buyer is out-of-state or out of the area and the acquisition represents his/her/their first foray into a given market area.

  • Economic Location Analysis: Not to be confused with market research principally relying on demographics, this analysis looks deeper into the key economic location elements that are critical to the success or failure of the transaction at the given purchase price.  For example, location analysis would quantify labor resources and costs – key elements for a healthcare provider.  Location analysis would also quantify the strength and depth of referral patterns and the quality of such referrals by desired economic value (payer sources, etc.).  Location analysis also examines the market economy and the up or downward trends that are present.  Too many providers over-estimate the value of a particular location without understanding the economic factors that create or detract from the project’s value.
  • Provider Status Assumption Risks: Buyers that are acquiring healthcare projects with existing Medicare business and expecting to assume the former provider’s Medicare number (most common in acquisitions) need to understand that the assumption of the Medicare number brings the assumption of risk.  While it is true that lawyers will create indemnities and warranties that seek to limit the buyer’s assumption of risk, using these clauses to enforce terms when risks are present or encountered is often an expensive and fruitless exercise.  In other words, the seller may no longer exist or as is often the case, will require the buyer to use an expensive legal process to enforce the indemnity and warranty provisions, all while the compliance requirements are inescapable to the current owner. Preferably, although not an expeditious process, buyers should obtain a new provider number and status for the project from CMS, targeted effective on the change of ownership – for Part A and Part B as applicable.  It can be done as I have done it with each of my “former” acquisitions.  By not assuming an existing provider number, the buyer avoids a whole host of issues and compliance problems that may or may not be disclosed or even known by the seller.  CMS, as one would suspect, will only chase the “owner” of the existing provider number when problems arise or are detected and if that is the new owner, regardless of whether the issues pertained to a former operator/owner, the new owner is expected by CMS to be the sole source of remedy.  CMS does not care about the terms of the deal between private parties.
  • Billing Risks and Revenue Accuracy: This is a problem area that I see all to frequent.  The buyer relies on the seller’s representation of revenues and does no further testing.  I lost count of how many times buyers relied on accountant prepared or audited statements as being “gospel” only to find upon ownership that the revenues were over-stated.  Why?  First, even during an audit, accountants do not devote sufficient time or have often, sufficient expertise to analyze, the accuracy of the Medicare claims submitted by the seller.  The typical tests are for basic paper-trail elements such as RUGs groups in SNFs matching the billing, matching the revenue postings.  What needs to occur is a much more in-depth, technical review to determine if the Medicare claims that correlate to patients are in fact, correct.  Again, I have seen circumstances where the Medicare revenue per day is grossly incorrect as the seller had no idea how to properly bill Medicare claims.  Last, I rarely see buyers benchmark the revenue and occupancy numbers against area comparables.  Payer mix and revenue per day numbers across the industry tend to fit pretty narrow ranges and when, in any transaction, they are out of this normative range, a red flag should rise.
  • Compliance Risks: Another area that I see cause buyers problems time and time again.  Compliance with certification, survey and accreditation standards is a function of past and yet to be.  Acquiring a provider with past problems in these areas requires very careful analysis and discussions with regulatory authorities.  Regulators need to be queried extensively and even, negotiated with when the buyer is acquiring a provider with a record of moderate to serious non-compliance.  Don’t have the discussions or do the additional analysis and assuredly, run into compliance problems that cannot be deemed as “owned” by the prior owner/operator.  Likewise, acquiring a provider with a reasonable or decent history doesn’t mean that the current status of compliance is clean.  Sellers tend to wane on their commitments to compliance the closer the time comes to deal “certainty” or closing.  A fair amount of time may also have passed since the current owner was re-accredited or surveyed.  Complaints may be pending requiring regulatory review.  What is certain is that once the acquisition is complete, regulators/surveyors will descend on the new owner in fairly short order.  Take the time necessary to thoroughly review the past and current status of compliance.
  • Market and Reputation Risks: Simply stated: How is the current provider viewed within the market?  New ownership doesn’t mean new perceptions about the quality of the current operation.  If the current operation is viewed marginally or even negatively, a new owner will have a great deal of work ahead to establish an improved or new reputation.  If the business relies heavily on referrals (and most health care provider organizations do), it pays to check referral sources and other common influencers to understand the “market” perception that is in place.
  • Environment and Infrastructure Risks: Assuming that acquiring an existing provider means that existing brick and mortar and equipment doesn’t require improvements immediately can be a false assumption.  Existing providers may operate under waivers or as in some states, new ownership necessitates that the entirety of the project be brought to current code with the issue of a new license.  Such is the case in Wisconsin.  A thorough review of the environment and the infrastructure tied to building code requirements, completed by qualified individuals/organizations will minimize this risk.
  • Employment Related Risk: Here I am not talking about the legal risks associated with handling employment issues during the closing processes.  The risk that I am talking about occurs when buyers make one of two (or both) assumptions about the quality and stability of existing management personnel and/or, their own management personnel.    The error I see too often made occurs with out-of-state buyers not acquiring sufficient local or area expertise and/or, having enough local support available via contractors (consultants, etc.) to ease the transition.  Each market area and certainly, each state brings forth nuances and issues that require stable management and unique knowledge requirements.  I’ve seen too many new owners underestimate the resources needed and over-estimate the ability of their management to handle new areas and states foreign to them.

August 10, 2010 Posted by | Assisted Living, Home Health, Hospice, Senior Housing, Skilled Nursing | , , , , , , , , , , | 10 Comments

Health Care Reform and Assisted Living

In a bit of an indirect manner, Assisted Living got a boost from health care reform, albeit in a typical governmental fashion.  With the Feds willing to use Medicaid as the vehicle for expanded coverage programs for underinsured (those within 150% of the poverty limit with high-deductible plans) and the uninsured, coupled with additional funding for Home and Community Based Services, an expanded source of potential residents for AL providers comes forth.  Of course, this new source of residents is not wholly unfamiliar to some providers and as the providers already working within Medicaid waiver programs will attest, not without problems.

Over the past decade, the movement to deinstitutionalize certain at-risk seniors and the chronically disabled has continued to gain momentum initially at the state level, then through the federal level.  The first concerted efforts back in the late eighties and early nineties focused on moving the developmentally disabled and mentally ill from institutional settings to community based settings, typically group homes and residential facilities.  The dominant majority of this group was (and remains) Medicaid eligible and thus, the shift from an institutional focus for care to a community-based focus tied directly to savings for Medicaid.  Without question, tangible benefits in terms of quality of life were also achieved for the resident population.

Fast-forward through the nineties and up to 2009, the transitional movement of deinstitutionalization gained momentum.  The focus continued to be on Medicaid eligible individuals and dual-eligible individuals (Medicaid and Medicare) with moderate to minimal care needs placing them “at risk” of institutionalization (generally SNFs or Intermediate Care Facilities).  The “at risk” element wasn’t related to their care needs but to the benefit structure of Medicaid which without permissive changes made by the applicable state and the federal government, could only pay for care delivered in a federally certified care center (SNF or ICF).  As the Feds became more open to allowing states to “waive” the core requirements for benefit and service eligibility contained within state plans and still receive FMAP (Federal Medicaid matching dollars),  the migration of seniors from institutional care to community-based options (principally Assisted Living) picked-up pace.  During this period, the popularity of Medicaid waiver programs increased as more Assisted Living providers became willing to accept this source of residents, states enjoyed the benefit of reduced institutional care utilization (a savings) and various advocacy groups touted the quality of life improvements afforded to seniors living in residential care environments as opposed to nursing homes/institutional care centers.

Looking reflectively however, illustrates that this transitional period and the gain in popularity of Medicaid waiver and home and community based care options wasn’t without a series of problems.  First, states were often ill-equipped to care manage the targeted group of seniors.  As a result, systems for access, payment and ongoing certification of eligibility were often fragmented and ineffective.  Second, states and the Feds, under-estimated the demand for residential care.  Third, costs associated with these programs soared and providers, while still phasing in to accepting Medicaid waiver residents, encountered (in some cases) rate cuts, mounting paperwork, slow payments and in some cases, no payment.  Other problems also occurred such as access issues in various communities (insufficient services to meet the demand), spousal impoverishment qualifications under Medicaid that the Feds had not addressed, and insufficient additional federal funding to grow the waiver programs to meet the rising demand.

Understandably, the Federal government during the creation of health care reform legislation, sought to address some of the more pressing issues that the states encounter within Medicaid waiver programs and in delivering an expanded array of home and community based care options.  The result of the recent passage of the Patient Protection and Affordable Care Act is that to a reasonable extent, the issues noted above were addressed.  Like all major Federal social policy initiatives, the legislation also has flaws.  The benefit potential for Assisted Living providers and home health providers is fairly plain; at least for those provider groups that wish to continue to care for Medicaid waiver residents and/or are targeting an increase in their existing programs.  There are also potential opportunities for new service and care programs integrated within senior housing and affordable senior housing projects.  Below is a summary of the “pluses” I pulled from the legislation.

  • Community First Choice:  Allows states to cover the cost of attendant (non-skilled, non-CNA) services for a Medicaid beneficiary if doing so would prevent the individual from being hospitalized or residing in a nursing home.
  • Allow states to cover more home and community based services via a plan (state Medicaid) amendment as opposed to a waiver.
  • Extends the Money Follows the Person demonstration under Medicaid until 2016 (pays for more home and community based and residential services as needed by the individual rather than a payment targeted toward a specific provider care level such as SNF).
  • As of 2014, requires states to provide the same spousal impoverishment protection to a spouses receiving home and community based services (no longer limited only to SNF residents).
  • Provides an increased federal match to states that presently spend less than 50% of their Medicaid budget on non-institutional care alternatives provided the states submit plans to rebalance their Medicaid spending, increasing the resources provided to non-institutional care.
  • Eliminates the cost-share under Medicare D for dual eligible individuals receiving home and community based services (dual eligibles in a nursing home are already exempt from the cost share).
  • Funds the extended Medicaid match (FMAP) that was created under the ARRA (Stimulus Bill).  Beginning in 2014 and through 2016, provides 100% federal funding for additional Medicaid costs incurred as a result of expanded Medicaid coverage provisions for lower-income individuals

As I indicated earlier, the legislation does have its share of flaws or imperfections.  Below are some of the obvious issues.

  • Creation of the CLASS Program (Community Living Assistance Services and Support) which is touted as a voluntary form of taxpayer-funded long-term care insurance that provides payments to individuals to pay for necessary home and community based support and care upon evidence of a disability or disabilities.  Unlike traditional long-term care insurance plans, CLASS would cover a very broad array of formal and informal assistance, even on a non-licensed basis.  Benefit amounts are self-selected upon enrollment ranging from $50 to $100 per day.  The problems with CLASS are many including the fact that upon enrollment, an individual must pay into the program for five years prior to receiving any benefit.  Second, the benefit levels are rather paltry, especially at the $50 per day level.  Finally, and very unreported within the analysis of the reform bill to date, the premium levels are likely too low for the levels of benefits.  In other words, CLASS is actuarially, out of the gate, underfunded and necessarily, premiums will rise. In fact, CMS estimates that premiums, once utilization begins to steadily occur and enrollment levels-off, could rise as high as $180 per month.   Since it is in fact, a voluntary plan, it is likely that few will enroll and among those that do enroll, they are likely to already have some level of existing disability or a trend toward early disability – a problem of adverse selection.  CMS predicts that the CLASS participants will use benefits at an “exceedingly higher” level than a typical individual purchasing a long-term disability or long-term care plan.
  • The legislation maintains the existing Medicaid funding system which already is a convoluted and an economically unsustainable mess.  In as much as the Feds are ponying up some additional money and relaxing the bureaucracy on states to expand their Medicaid plans to offer more home and community based care support and options, they are doing so within the same idiotic paradigm that presently has state Medicaid budgets swimming in red ink.  In other words, the Fed’s money comes only after states commit to spending and thus funding, the expanded services.  Garnering additional FMAP is akin to getting five Big Macs after buying the first one, then being required to continue to buy the additional five to keep the match coming, etc.  On the back-end of course, having gorged on all the Big Macs, you now have to pay for the diet and the by-pass surgery.  States simply cannot sustain the level of expansion that the Fed is promoting (California is the classic example).
  • No one is quite certain how much of a burden the additional level of newly insureds will be under an expanded Medicaid program.  Dozens of states are already suing the Federal government over the expansion, primarily because of my point above but also from the perspective that they (the states) will get stuck with an enormous additional Medicaid cost item.  As the expanded Medicaid program will contain fairly lavish and generous benefits, including expanded home and community based care options, the risk of adverse selection is enormous (the risk that people with pent-up demand and existing uncared-for disability will now use the system and the benefits at a level far greater than was initially anticipated).  Personally, I believe the adverse selection risk is enormous and terribly misrepresented within the legislation.

April 6, 2010 Posted by | Assisted Living, Policy and Politics - Federal | , , , , , , , , | Leave a comment

Assisted Living Update

As 2010 comes in and looking back on 2009, the Assisted Living market has been on a bit of a roller-coaster.  Without question, the downturn in the economy caused some provider pain most notably among some of the larger, heavily leveraged companies (e.g. Sunrise and Sunwest).  Occupancy rates were soft in many parts of the country, particularly those regions with very to moderately distressed housing markets.  As residential housing sales have modestly improved, the occupancy rates have gradually moved higher.  This is not to say that the housing sales improvement alone has contributed to this trend as providers have also been busy creating incentives to attract additional residents. Providers that have fared the best have been those that are more modern or more updated, less leveraged, already stabilized, in market areas that are not significantly over-built, are priced moderately, and have a solid array of specialized care services to serve a differentiated resident population.  The opposite end of this spectrum is where providers have struggled with one addition; newer projects, especially those that are not geared toward Medicaid waiver residents but more so toward the upper-middle end of the price range, have struggled to achieve occupancy projections.

Looking ahead into and for the balance of 2010, I don’t see significant changes in the current trend coming out of 2009.   I believe the economy will still negatively impact the housing market through at least mid-year and while sales of existing homes have picked-up somewhat, there is not question that the present demand has been bolstered by federal stimulus/tax credits.  Once these dollars evaporate in April, and with a continued slow to no growth job market, demand within the housing market may all but flatten-out or recede.  Important to note as well about the housing market is that while sales have moved up, prices continue to fall suggesting that the supply of properties still exceeds the real demand by quite a margin.  In fact, a significant percentage of homes sold in the last quarter of 2009 were foreclosures or distressed sales of one type or another.

Another issue which plagued the industry in 2009 was the lack of reasonable cost, available credit.  Again, in the mid to latter part of 2009 credit availability softened a bit and the availability of funds via the HUD Lean program helped.  Going into 2010, credit remains however, tight and terms still rather stringent compared to four to five years ago.  Similarly, banks remain tentative about additional commercial loans as their commercial portfolios have taken the biggest beating over the past year to eighteen months.  Regardless of the source of the loan collateral (non senior housing), commercial loan portfolio losses equal tight credit and lending decisions for all industries.  Additionally, if these factors are not enough, the Obama adminstration is pushing a new “bank” tax policy that if passed, could significantly chill the credit markets even more.   If Washington maintains a negative stance toward the banking industry, all health care lending and senior housing lending will more than likely suffer and any softening that occurred in late 2009 will reverse.  Unfortunately, this means that an already tepid transaction climate will cool equally as rapid and prices per unit will need to fall further for any deals to close.  In short, tight to no credit means that the realizable asset and business wealth in the industry at least point-in-time, regresses.

Turning to the overall market today and the macro view, what’ s been evident over the last three years is that the Assisted Living market has reached a bit of a maturity stage.  This doesn’t mean that growth cannot and will not continue to occur.  It does mean however, that the building for building sake boom has ended, operators now predominate the development process rather than real estate developers, and certain markets in certain areas have become truly over-developed.  Clearly, the demand curve is far more elastic than originally thought, made plainly evident by the economic downturn.  The market also has become more niche’ or specialty driven, moving toward a more integrated and appropriate care model versus a housing model with ala carte services.  All that said, the growth in the industry will still primarily come from consumer choices; opting for more residential accommodations to receive basic care services versus an institutional setting such as a nursing home.  According to a series of surveys conducted by Genworth Financial, the average annual cost of assisted living care in 2009 was $34,000 compared to $74,000 for a semi-private room in an SNF.

An element of the industry that is changing and perhaps, will shape the industry along a different path in the coming years is the expansion of government as a payer source.  A push within the states and at the federal level to reduce the cost of institutional care has created a new market within the traditionally dominant private-pay, ALF arena called roundly, Home and Community Based Services (HCBS).  Within the broad HCBS arena, Medicaid waiver programs have had the biggest impact on the ALF industry as a source of once, financially ineligible residents.  With both the states and feds embracing more uniformly, the concept of using Medicaid dollars to pay for assistive care as opposed to using a larger pool of funds for institutional care (typically SNF care), Medicaid or Medicaid waiver programs have gradually inched upward as a legitimate consumer of ALF capacity.  As this expansion of HCBS and Medicaid waiver programs continues, the industry should not be surprised by a movement at the Federal end to begin to federalize a regulatory framework for ALFs.  The fact remains that once government pays for something, it tends to want to regulate it or perhaps more appropriately stated, it will regulate it.  As the Feds typically use a very broad brush when it comes to regulations, the industry’s players, regardless of their participation in Medicaid waiver programs, will feel the effect of government regulations.  As a friend of mine says, “it is what it is”.

Up until the time that the Feds become more directly involved (and I believe they will in due time), the industry will remain non-centrally regulated.  This means that for all intents and purposes, no single licensure or regulatory category is yet in effect and the same will continue to vary widely state to state.   As an approximation based on data available, there were 38,000 ALFs (by the broadest definitions) in 2007 consisting of 975,000 units.  It is a certainty that the industry has grown somewhat since then.  In comparison, the SNF industry has approximately 16,000 facilities and 1.6 million beds.  Unlike the ALF industry, the SNF industry has actually been shrinking, somewhat due to the diversion of Medicaid dollars to waiver programs and HCBS programs, eliminating certain residents from the SNF mix as well as other reimbursement and economic pressures across the industry to become more efficient.  It is highly likely that the two opposite trends will continue over the next ten years with SNF capacity continuing to slowly decline and ALF capacity continuing to increase, albeit at a much slower pace than in the previous decade.

Looking across the ALF industry today, a summary of its key demographic facts is presented below.

  • The dispersion or penetration of ALFs varies widely across the nation.  The national average number of facilities per 1,000 elderly was 22.9.  The states with the greatest number per 1,000 elderly are Minnesota (104),  Virgina (46) and Oregon (43). Hawaii (2), Connecticut (4) and West Virgina (7) had the fewest number of facilities per 1,000 elderly.
  • Where the largest penetration of ALFs exists, the demographics in terms of education, median income, and median home values are more favorable than in other areas.  There also tends to be a correlation between ALF location and the presence (lack thereof) of minorities.  Rural areas tend to have very few to no ALF penetration and the same is true with inner city environments, heavily populated with or by minorities.  Not coincidentally, these areas also have lower levels of education attainment, lower levels of median income and lower median home values.  Predominantly, ALFs are found in suburban or outer-suburban markets and their census is heavily skewed toward middle to upper-middle class caucasian residents.
  • Not too surprising, in areas where there is a greater penetration of ALFs there is also a greater presence of SNFs with stronger Medicare and private pay occupancy levels.  In short, there are fewer ALFs congregated close to SNFs with high Medicaid censuses.
  • The states that spend the most on Medicaid waiver programs and HCBS programs have higher penetrations of ALFs compared to states with lower spending levels.  There is also a correlation between the percentage of the population with long-term care insurance plans and the penetration levels of ALFs – more ALFs, higher percentage of individuals with long-term care insurance.

January 25, 2010 Posted by | Assisted Living | , , , , | Leave a comment

Sharpen the Sales and Marketing Efforts in 2010

I lost track this past year of how many people I talked to that told me that, “organizationally, we are kind of stalled in developing new business because of the economy and health care reform”.  I know that in down economic periods, promotion budgets (advertising, sponsorships,etc.) are some of the first line items trimmed but to me, that’s not really marketing; more of an adjunctive tool that organizations use, typically with limited impact.  I understand the health reform subject creating an air of uncertainty although, for most organizations very little changes immediately post-passage (when and in what form that occurs).  The reality of the health reform debate is that for every possible implication there is a strategic opportunity that most post-acute providers can develop, capitalizing on the new policy changes.  Further, as I have written in previous posts, Congress has shown very little will-power in terms of enforcing the punitive elements of additional Medicare cuts and as such, while I don’t advocate a wait and see strategy, in this case, a bit of skepticism about how much pain will ultimately occur with health reform is warranted.  I’m generally more concerned about here and now health policy problems such as Medicaid and the status of state budgets, combined with an overarching concern that economic recovery has a ways to go to qualify as “fully progressing”.  All this said however, and in spite of a still lagging economic recovery, the time is right to sharpen the sales and marketing efforts for this new year.

What is different this year (as opposed to last or years before) is that society is still shell-shocked by the economic fall-out.  The traditional rules or approaches to a new year marketing and sales strategy will no longer net the same results.  In one regard, it is unlikely that any organization’s sales and marketing budget is “bigger” this year than last or better yet than in say, two to three years past.  I am literally unaware of any organization (not that some might exist) that has added substantially more resources (dollars or people) to their marketing area.  This means, more will have to be done with less or at least, the same level of resources. To that end, creativity and strategy are the terms that best fit.

Strategically, health care marketing has traditionally been focused on selling three “tangibles”: Convenience (ease of access, location), Quality (outcomes), and Depth of Service (capacity, expertise, etc.).  Today, I would add two more focal areas to the mix – Value and Stability.  I would also re-work the first three to make certain they were in concert with the latter two.  Thinking about the latter two, does anyone really ever say that health care doesn’t cost too much?  Even at the heart of the health reform debate, while most Americans don’t want the government to necessarily take over their current health plans, they also openly state that solutions that lower the cost of health care (save government take-over) are a priority.  Psychologically, when someone believes something costs too much, the rub is not price but value received for that price, particularly in light of the resources available to pay the price.  Without being too technical, in a down economy, people become even more price and value conscious, even those who have been somewhat unaffected by the down turn.  The news of job losses, falling home values, etc., reinforces caution and conservatism to people even though arguably, health care when needed can’t be completely, competitively shopped or for that matter, deferred for too long.  The trick or strategy thus becomes, how to craft a marketing strategy around a value proposition and reinforce that proposition with the concept of stability.  Providers that can demonstrate a consistent track record of stability (low turnover, solid financial management, continued reinvestment in products, services, and physical plant) will undoubtedly lower the level of trepidation present in would be referral sources, current referral sources and patient/resident bases (families/significant others included).

Strategically repositioning the marketing program or plan to integrate value and stability looks something like this at a high level (organization specifics of course, would flesh this out deeper).

  • Value and Convenience: Review the target market, especially the primary market area.  Can customers and referral sources get to you quickly and easily?  Are you fully accessible for referrals across all channels (phone coverage, internet, e-mail, etc.)?  Are your coverages for referrals responsive and available across elongated business hours?  Weekends? Holidays?  Do you have a system in place for dealing with emergency referrals or odd hour referrals?  Will you go “to” the referral?  Do you or can you automate or reduce the paperwork and approval process on a referral?  Can referrals access a website for pre-completion paperwork?  The more of these tactics you can integrate into your marketing arsenal, the more you can create a value proposition around convenience. 
    • Key Concepts:  Value and convenience tied together is all about delivering more touch points or connections to your products/services than otherwise available in the market area.  In a worst case, it may simply be about keeping up with the competition so as not to lose referrals or business – being as convenient.  I like a full embrace of reasonable, simple web-based technology and e-commerce applications where possible.  Facebook, Twitter, etc. are emerging tools that no provider should ignore as viable means of getting and staying in touch with potential customer sources or current customer sources.
  • Value and Quality: This is all about the quality of your service warranty or the notion that price and outcomes are clearly aligned.  Health care leaders today would be well served to take a look at other industries and products where price and quality are clearly packaged, marketed and used as competitive tools. I like reinforcing the concept of, “better, faster, and cheaper”.  Adopting this mantra means a consistent review of  and communication about, how the organization delivers its products and services to its customers in a way that creates a better outcome, a quicker response or in a quicker period of time for the same price as a competitor or hopefully better.  This concept is not about convenience or location, though these concepts play-in.  This concept is about warranty or the reliability of the service and an implicit and well-communicated promise that customer’s expectations about the reliability and quality of a given service will be met or hopefully, exceeded.  Remember, consumers exist across the price spectrum from low price seekers to high price or premium consumers.  Products and services can fare equally well across this spectrum, provided that the service or product is aligned with the price paid and the customer clearly understands what the warranty or promise of the service/product quality is in relationship to the price.  Arguably, in periods of economic decline or slow-down, premium priced services or products require the most amount of adjustment as pure luster and past reputation will not alone be sufficient to maintain market share.  The opposite side of the argument however, is that products or services once viewed as premium can attract the interest of prospective customers faster if price can be adjusted even modestly and quality increased or warranty improved modestly.  Everyone loves a bargain and if the market senses or believes that something once unattainable is now available, new customer inertia can be changed (ala the premium outlet mall concept).
    • Key Concepts: Value and quality is principally about drawing a bright correlation between the price or cost of the product or the service and what a customer can expect to consistently receive.  This is about creating a distinct and clear warranty or promise of the service’s/product’s utility(tangible) and the cost and communicating the same.  Nothing hurts marketing and sales efforts worse than products priced too high in relationship to their utility.  Conversely, products or services that are priced too low may be undervalued by the marketplace and perceived as “gimmicky”.  Down economic periods place trepidation into the minds of consumers and as a result, it is incumbent to marketers to be aware that holes or gaps in their product’s/service’s warranty compared to the price or cost, must be adjusted rapidly.  I am less in favor of price cutting as opposed to perhaps, a price maintenance strategy.  I am always in favor of pushing the value proposition by improving quality (tangible outcomes) upward and holding price in check.  The key however, is that health care providers need to sharpen their communication around their product’s/service’s warranty and the cost thereto.
  • Value and Depth of Service: Can you or do you provide more services or have more service availability than your competitors for the same price?  Alternatively, do you do the same things better or identical to another provider from an expertise stand-point for a lower cost or price?  This concept is not about “doing more” (not that additional service depth is bad), it is about comprehensiveness within the product offerings.  Taken to the core; products or services, even few in number, should be flushed-out fully so that staff providing the service are viewed as experts, the capacity for comprehensive delivery is in effect and the price associated with such an exceptional level of service is of great value to the customer.  Thought about differently perhaps, it is akin to a strategy used by Wal-Mart to constantly expand the amount of goods one can buy while shopping, all at a perceived or real “better” price.  Now, Wal-Mart focuses on a particular market with a particular strategy but frankly, few do it better from a classic marketing perspective.  My point here is not to say health care providers should be like Wal-Mart but to draw forward, the concept of value correlated to depth of service.  The same strategy can apply (and does) to more limited product or service offerings.  For example, in my community, a jewelry store named Kessler’s has had continued success and growth by applying this concept, although their focus is just on diamond jewelry.  Their marketing strategy consistently drives home a depth of experience, service and even products, focused entirely around diamond jewelry, principally for couples celebrating engagements, marriages or anniversaries.  Kessler’s, like Wal-Mart, even correlates price to their service and products and boldly so, I might add. 
    • Key Concepts: This concept is about taking the very core of what an organization provides or does and making sure that it is extremely well thought out, as good or perhaps better than what is available in the market and then correlating this to cost or price, communicating the same to the customer.  It is definitely not about doing more, unless that is a real possibility; it is about doing what you do better or to the best of your ability and making sure that the price reflects, uniformly, the depth of service provided.  For healthcare providers, I like leveraging internal capacity and programs to do more across the board or to improve other products and services thereby creating a deeper level of service organizationally. For example, if your organization has hospice as part of your service or product offerings, use the hospice to improve your symptom management expertise and pain management programs and then,  promote this capability. Every area of excellence can and should be leveraged to improve others or to add new niches, new depth that creates additional value for customers.
  • Value and Stability: For lack of better words, this is the foundation in the current climate from which all other strategies emanate.  Customers, community and referral sources need to believe and hear over and over that the value proposition created by the organization is permanent and regardless of the current climate, the organization will remain committed to providing the best products/services for the cost or price (whatever and however this plays out within a market or for any provider).  Once customers or referral sources believe or feel that a service or product is diminishing or that prices are in-flux (usually upward), the ability of the organization to draw attention to any other key marketing strategy is significantly damaged.  I don’t know of too many customers that are willing to trade for a poorer or weaker warranty or accept poorer service or quality for the same price or for that matter, even for a slightly reduced price.  In reality, unless the organization was already offering “second-rate” quality or service for a deeply discounted price (ala scratch-and-dent), maintaining and building upon value and stability strategically, is a first priority to developing additional sales.

It should be somewhat apparent (hopefully) now that these concepts wrap around each other and build or feed off each component. From a sales perspective, the marketing strategies above create the tools that sales people need.  Improve the marketing strategies and the sales tools are improved.  To achieve better sales outcomes, the organization needs to clearly communicate to the sales staff a set of behaviors and activities that reinforces and makes real for the customer, the organizational strategies (illustrated above).

For providers today, the key is not to avoid via less or no activity, the current economic and health policy issues but to strategically and tactically engage them.  The economy in my view, has fundamentally changed the consumption dynamics within the market place, for referral sources and patients.  The emphasis is on value and that emphasis is unlikely to shift any time soon.  The health policy/reform discussions only sharpen the issues around cost and quality.  For providers that can leverage their quality and build a clear value proposition, there is no reason to believe that 2010 won’t be a very good year to attract and develop new business and to solidify existing referral sources and customers bases.

January 12, 2010 Posted by | Assisted Living, Hospice, Senior Housing, Skilled Nursing, Uncategorized | , , , , , , , , , , | Leave a comment

Getting Risks Under Control: Improving Organizational Prosperity

Healthcare is a risky business; particularly in heavily regulated environments such as nursing homes and home health and hospice.  The fact that a certain level of risk is omnipresent means that the opportunity constantly exists for an organization that improperly identifies and manages its risks, to suffer expensive damages ranging from financial loss to loss of reputation to ongoing compliance problems.  All too often, organizations tend to rely on industry normative practices such as committees, policies and procedures and audit tools as means of combatting risk exposure.  This information sharing and gathering process coupled with the “hoped for” Hawthorne effect (watched people tend to be compliant is the desired outcome) in reality, falls quite a bit short of performing the optimal function – that of mitigating large risk exposure.  In reality, the steps of information sharing and gathering and auditing can have almost a somnambulant effect – putting the organization to sleep under the false pretense that all is well.

Taken apart, the flaws or gaps if you will, in this normative style of risk management are many.  The first is the assumption that what the organization is auditing is actually where the real risk begins.  For example, auditing charted documentation assumes that the age old adage of, “its documented its done” is correct.  What occurs in reality is that charting and documentation becomes the focus of compliance and without a methodology in place to correlate the activity of charting to a specific completed event, the risk actually lies in the documentation.  In other words, it is entirely possible (and I have seen it happen) where the charting or documentation doesn’t really reflect the care being delivered or the condition of the patient point-in-time creating an enormous legal and compliance risk.

A second and equally flawed assumption is that the results of audits and information shared actually is put to use by the people who receive the information.  Meetings filled with reports about one risk area or the other are only as productive and beneficial as the willingness or the requirement of the people in the room to do something with the information.  All too often, the wrong people receive the information; they lack the authority or the organizational standing to actually address the points functionally, that are identified as risks.

A third and final flaw is the notion that activity, no matter what it is (auditing, committees, reports) alleviates risk (e.g., we have a system in-place to identify and deal with risk).  What typically happens is the activity breeds only a system of non-reporting, over-documentation, compliant behavior ( the biggest potential area of risk) and a false sense that whatever it might be, will be detected and corrected by “our program”.  As John Dewey would say, the only activity that is beneficial is purposeful activity and to have purposeful activity, one needs to have a process in place of hypothesis, inquisition, testing and final analysis.

In order to develop a more functional organization-wide approach to risk management, certain assumptions of where risk begins need to be clarified and understood.  I like to use the following categories.

  • Management: Ineffective management and managers improperly trained and tasked then not held accountable is undoubtedly, the largest risk area for an organization.  Managers at any level that are illegitimate in terms of their organizational authority or their training will consistently either miss areas of risk or fail to seek and act on identified risk areas, causing enormous levels of ongoing risk.
  • Employees: Similar in many regards to management in so much that ill-trained, ill-equipped employees are an enormous risk to the organization.  In many regards, employee risk is a by-product of ineffective management and a dysfunctional organizational structure.  All too often, organizations incur unnecessary employee risk by not addressing bad employees and bad employee habits quickly and efficiently for a whole host of specious reasons.
  • Organizational Structure and Culture: Mitigating risk is an enterprise wide endeavor and organizations that realize this address the totality of the risk profile.  In the best of cases,  culture evolves around identifying and solving problems, improving processes, consistently learning and engaging the totality of the organization in “doing the right thing”.  In order for this to occur however, the organization must provide training, reward, resources, and support across all levels.
  • External Environment: All too often, organizations view risk as something that is within their purview, within their walls.  In reality, the world beyond the walls constantly creates new levels of risk that need to be addressed, analyzed, and re-addressed again. 

Starting to craft or perhaps, re-design an organization’s risk profile logically starts with the development of a structure and culture that by its nature, mitigates risks.  Crafted correctly, an organizational structure can address the risks associated with management, employment and the external environment.  Below are some (not an exhaustive list) key structural elements that are important in developing a structure that better identifies and mitigates risk.

  • Lean: Organizations which fight bureaucracy and remain clean and lean are far more adept at identifying and mitigating risk than organizations heavily structured and replete with bureaucracy.  In healthcare, the tendency is for organizations to become highly bureaucratized with layers of managers and supervisors.  An organizational structure that is more functionally created with limited layers between the lowest employment level and senior or upper management is easier to navigate and quicker (if all other elements are in place) to identify and solve potential risk creating events or processes.
  • Education/Learning Based: Organizations which place a heavy emphasis on continuous learning and staff development are better equipped, from a knowledge base, to identify and address risk.
  • soliciting Information and Feedback: Organizations which place a heavy emphasis on gathering input from multiple sources via multiple methods will be in a position to quickly identify areas of possible risk.  The information loop should be through and across employees, customers, referral sources, vendors, contractors, the community at large, and any other major consistent constituency the organization deals with on a regular basis.  Tools need not be fancy but in all cases should encompass surveys, phone, face-to-face, web, and periodic focus groups.
  • Gain Sharing: Organizations that are focused on sharing the results of good and fruitful activity are more likely to gain employee buy-in; critical to reducing risk.  In an organization I led, we shared the dividends from Worker’s Comp experience with the employees – dollar for dollar.  When our self-funded health plan had better utilization experience and costs therefore reduced, employees received the benefit in lower premiums.  Ideas that saved money and improved safety or patient experience received cash prizes and/or other rewards.
  • Excellent Employee Relations: Having good employee relations is less about being “nice” to employees and more about being a good employer.  For an organization to be a good employer, it must adhere to some very basic principles and practices and consistently communicate the same to employees. 
  1. Have exceptionally clear job descriptions.
  2. Have a very simple, easily understood discipline system.
  3. Terminate employees only “for cause”.
  4. Make “reward” a liberal and frequent part of your practices.
  5. Have an extensive and paid-for orientation program.
  6. Require continuing education for all employees and pay for it.
  7. Require management to be extremely visible as often as possible.
  8. Create minimal separation between management and employees (lunch rooms, events, education, etc.)
  9. Share all information about the company, including financial data, with employees.
  10. Reward performance heavily and personally wherever possible.
  11. Be quick to discipline and terminate “for cause” – don’t allow issues to fester.
  12. Allow employees to participate in and be responsible for, QI and QA activities.
  • Effective Management: Managers must be good coaches, good inquisitors, good planners and extremely adept at confrontation.  Management that is weak in any area leaves open large areas for risks to occur.  Management must be continuously developed and provided with the challenge and the authority to constantly improve the processes and to identify and resolve, areas of inefficiency or operating problems.  Management must be similarly, rewarded for producing results and achieving high levels of safety and customer/employee satisfaction.  I personally believe that managers need to be evaluated on their ability to plan, to problem solve and to minimize turnover risk and to increase employee and customer satisfaction.  I also believe that managers need to be evaluated on how well they interact with and support the efforts of other managers; how well they cross-manage and cross-plan within the normal organizational boundaries.
  • Strategic Plan: Organizations with a high aptitude for strategic planning and a current strategic plan are far more in-tune with the external environment and the risks that are present internally and externally to the organization.  Strategic plans should be living documents, constantly reviewed and updated.  A key element in preparing and evaluating this plan is the SWOT (Strengths, Weakness, Opportunities, and Threats) exercise.  This SWOT exercise is invaluable on an ongoing basis as a means of updating and evaluating the strategic plan as well as in identifying risk.
  • Allocate Resources: Mitigating risk does not have to be expensive but it does require investments to be made.  For example, all of the above steps taken but no investments made in keeping equipment modern and in good repair leaves a major area of risk exposed.  Companies need to become accustomed to allocating resources based on a “reduction or abatement of risk” as a measurement of return.  Organizations should  understand that the prevention of risk equates to a reduction or elimination of resources that would be spent in the event of a major event (fines, legal fees, loss of reputation, etc.).  In nearly all cases, the resources used in recovering from a preventable event are far greater in cost to an organization than the cost of resources used in prevention.

 Getting risks under control and keeping them under control can be a major step forward in terms of organizational prosperity (improved profitability) and organizational prominence.  Good risk prevention leads to good compliance results, excellent reputation, employee retention, employee productivity and organizational effectiveness.  As risk “un-checked” permeates an organization’s effectiveness and ability to manage proactively, reducing and/or eliminating it only makes good business sense.

October 20, 2009 Posted by | Assisted Living, Hospice, Skilled Nursing | , , , , , , , , , | Leave a comment

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