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Senior and Post-Acute Healthcare News and Topics

What’s Trending: A Hot Friday Perspective

Seems every day this month has been hot and dry – could use a break from the heat  and definitely, some prolonged rain.  Within the past couple of weeks, I’ve traveled “rural” a bit and as a result, I have a different perspective on what farmers and ranchers in the middle-section of the country are struggling with.  Brutal is the best word I can think of.

As this week concludes, Medicaid remains on my radar for a variety of reasons, some attributable to where I have been, discussions with providers in middle-America states, etc., and some attributable to policy news I’m tracking.  With that note, here’s my trend list and of course, a couple of brief fall-out issues for the week and early next week.

Medicaid: If you are a policy junkie and economist like me, this issue is truly fascinating, full of complexity, politics, nuances and implications for providers and governments alike.  On Monday, the CBO is supposed to release an updated scoring of the PPACA post the Supreme Court decision.  What I will look closest at is their analysis of the forecasted costs of Medicaid expansion.  The CBO is in a bit of a “between a rock and a hard place” scenario as it must score the law as it “is”, weaving the Court’s decision into the equation.  What is unknown is how states will proceed with expansion.  I suspect the CBO scoring to be a tad favorable for expansion prospects as the mechanisms with the PPACA for state to state funding support during implementation cover substantially, all of the costs.  As the CBO is constricted by its charter and charge in matters such as this, what won’t be touched on is the existing funding problems that states have within their Medicaid programs and the depth of go forward deficits that are not covered by additional federal funding spun from the PPACA.  Read on.

Earlier this week, and tied directly to this global issue of Medicaid expansion, CBO estimates, etc., a report was released from the State Budget Crisis Task Force, co-chaired by former Federal Reserve Chair Paul Volcker and businessman and former New York Lt. Governor, Richard Ravitch.  Other notables on this task force are economist Alice Rivlin and former Secretary of State George Schultz.  (A PDF copy of the report is available to my readers by dropping me an e-mail at ).  Within this deep report is a section on Medicaid, current issues and likely impact due to expansion under the PPACA.  The Task Force’s analysis points directly to comments I have made in other articles on Medicaid: The program is so structurally flawed in terms of funding and government regulatory constraints that expansion will only “pile on” to existing problems and deficits.

Summarized, Medicaid spending is growing faster than current state revenues.  Today, Medicaid for most states is their largest outlay, surpassing education spending.  The prolonged recessionary period has shrunk and constrained state revenues while simultaneously increasing Medicaid eligibility and enrollment; a burgeoning gap between revenue inflow and outlay.  Under the ARRA (Stimulus), states received enhanced federal support but with a policy catch; the enhanced funding could only go to expand programs under Medicaid.  At the end of 2011, the enhanced funding disappeared while state fortunes in terms of revenue and expanded enrollment remained virtually the same, creating enormous structural deficits, larger than pre-recession years.  The enhanced funding provided under the ARRA served as a band-aid only, allowing states to have sufficient current funds to avoid raising taxes or restructuring their Medicaid programs.  Restructuring however, is not an easy option as states are presently finding as doing so requires federal approval, often slow to come and limiting in creativity or significance.  Similarly, any revisions to Medicaid that occurred within a state’s plan before or after passage of the PPACA are tied to a Maintenance of Effort provision under the law.  In short, this constriction forbids states from reducing benefits or program eligibility and thereby, spending.

The report’s conclusion is that regardless of the PPACA impact, Medicaid will remain a significant crisis issues for virtually all states.  The simplest reason is that the PPACA additional funding serves one purpose; expanded eligibility.  All other existing structural problems for the states such as bureaucratic plan and program requirements, lack of flexibility, increasing long-term care utilization (not addressed by the PPACA), slow economic recovery (no new revenues), and existing debt levels within state budgets aren’t changed at all by the PPACA and Medicaid expansion.  Similarly, states have a current and real (justifiable) fear that the Federal government will not be able to sustain the projected funding levels provided with expansion. Federal deficit reduction actions will require cuts to entitlements and grants to states for federal program support. Among the largest current state grant expenditures is Medicaid.  With looming deficit reductions at the federal level necessary, no real revenue change forecasted for states via increased tax revenues, Medicaid eligibility growth not subsiding, provider balk at payment reductions (reducing outlays), there is real justification that Medicaid is set for some level of substantive reform, arising out of a near financial melt-down.

Drugs, Drugs and More Drugs: A topic that won’t go away is anti-psychotic/psychoactive drug use in nursing homes.  Whether the news comes from the OIG at DHHS or via CMS, this issue has clearly got attention in Washington.  While I have yet to see surveyors take this issue to task at individual facilities (at least not at an in-depth level), the buzz I hear suggests that regulatory engagement will ramp-up and facilities need to be prepared.  The latest news is from CMS regarding incorporating anti-psychotic use numbers under Medicare Compare.  The message, and I have said this before (repeatedly), providers beware and get on this issue!

Changes to CCRC Entrance Fee Financial Reporting: For CCRCs that charge entrance fees (most do), a change is occurring regarding the reporting of entrance fees subject to refundability provisions.  The Financial Accounting Standards Board (FASB) has revised a former requirement that the refundable portion of an entrance fee tied to reoccupancy (the refund trigger) be amortized to income over the useful life of the physical plant housing the unit will change requiring the CCRC to book the full liability of the refund due if the refund provision within the contract does not specifically state that the proceeds from unit re-occupancy are the trigger for the refund.  In other words, any other limiting provisions that provide for a refund separate from strict reoccupancy, regardless fo the time period lapse, will necessitate the treatment of the entrance fee as a liability versus quasi-equity.  Application of this new treatment will require CCRCs affected to reverse their prior cumulative amortization and establish the refund liability provision on their balance sheet.  There may be some spill-over impact for affected CCRCs in terms of their FSO (Future Service Obligation) calculation as the deferred revenue component within the calculation goes away.  I don’t personally believe this issue to be material for the industry (the FSO issue) but I do anticipated that certain CCRCs will have to take additional time explaining the changes to their Boards and bankers as implementation will cause some point-in-time “funk” to their statements.

Here are this week’s Fall Out issues (stuff worth noting briefly but not important enough to continue to watch – for now).

  • Department of Agriculture reports are warning that persistent heat and drought are certain to lead to significant summer crop yield reductions.  As a result, current corn commodity prices are up 31% since June.  Beef, pork and poultry prices will rise accordingly as will corn-based Ethanol and thus, mixed blend gasoline to a certain extent (although oil prices continue to remain fairly flat and oil is the biggest driver of gas prices).  For providers, food costs will rise and in this environment, especially for SNFs and Hospitals, it’s just another nuisance when there is no foreseeable increase in revenue.
  • Soft census seems a national trend right now from hospitals to SNFs, home health and hospice.  My group is watching this issue closely and as of today, we can’t correlate this into a shift of some discernible reason or sets of reasons.  I know the nation isn’t healthier and perhaps the only driver in-play is continued economic malaise that is causing folks to avoid elective procedures, forestall health spending as much as possible, etc.  Still, we are seeing this even for Medicare utilization.  Perhaps more on this next week.
  • No real news on healthcare stocks post the Court decision on the PPACA.  We are watching this group closely to see if anything perks but so far, not much – a mixed bag.  There are some clear winners if the PPACA remains full intact post-November – insurers and MCOs are an obvious winner.  Providers are less clear but in time, certain hospital groups and well positioned post-acute providers could do well, especially if they are aligned with ACOs, etc.
  • The weather deserves a note here just because; its lousy, nasty, hot, dry, etc.  Don’t know anything more to say other than nationally, providers and my healthcare contacts and colleagues universal are experiencing extreme weather hang-over.  For some, the excessive heat and drought is causing building problems and higher than anticipated utility costs and for others, just a general crankiness among staff, physicians, etc.  Pray for rain and a shift in the jet stream!

July 20, 2012 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , | 2 Comments

CCRC Marketing Reality Check-Up

Periodically, the source for a post on this site is the accumulation of thematically condensed questions that I receive regularly and with frequency; what I now call the “buzz”.  While the “buzz” for me is fairly constant across the post-acute/seniors housing industry, the pitch does vary, sometimes daily but most often, weekly.  I guess it just depends on what is trending and where people’s focus lands.  If the buzz is steady enough and the sound-bites within the buzz repetitive, it spurs me to sit and write, perhaps defensively, to quiet the noise from Twitter and e-mails, and re-focus.  This post is one of those defensive or perhaps, reactive posts.

Lately (last three to four weeks), I’ve been getting a steadily increasing series of questions regarding CCRC marketing, value (economic) propositions and to a lesser extent, repositioning.  The sources of course anonymous, range from established communities to relatively new communities, seeking sales and occupancy improvements.  In some form or fashion, I’ve likely addressed most of these issues in pieces via various posts and articles spanning the last two years but alas, I have been remiss in circling back with a condensed and consolidated version.  Hopefully, this post will help.

Post recession and into a grinding period of almost unrecognizable economic improvement sprinkled with volatility, CCRCs need to come to grips with four key themes when it comes to marketing.

  1. Reality has shifted permanently for the industry.  This is not necessarily bad but it does mean that every aspect of the sales and marketing cycle once engrained, understood, and successful in terms of selling units has changed.  Consider the following;
    • Within the last four years, most seniors saw their incomes via investment returns, social security, pensions, etc., flatten and/or trend down.  Some saw immediate and permanent reductions (permanent for their remaining lifetime).
    • While investment portfolios principally consisting of equity securities have rebounded, the recoupment of loss only occurred for those that remained fundamentally steadfast and did not turn what were “unrealized” losses into realized losses via reactionary selling during the market fall-off and bottom.
    • Depending on the individual market, real estate prices fell precipitously or at least modestly and the liquidity of the real estate via a thriving residential market stagnated and declined.  Some markets have recovered elements of liquidity and re-sale value (price) but not to the levels prior to the downturn.
    • Seniors housing demand has always been elastic but as a result of the three points preceding, it is even more elastic today.  Why?  Simply, economic fortunes of the consumer shifted downward and thus their real and perceived purchasing capability moved accordingly down while the prices for seniors housing remained stable to modestly higher.  We’ve seen a similar effect in new construction vs. existing housing.  New construction per square foot costs have stayed relatively flat or slightly higher over the period while existing construction on per square foot basis fell.  When the correlation between the two is tighter or even inverted slightly, the demand shifts accordingly.  For seniors housing, this added price elasticity, created by a wider gap between the declined consumer’s economic purchasing capability (again, real or perceived) and flat to slightly higher seniors housing prices, creates a different value proposition and purchasing dynamic.  For most CCRCs and other seniors housing providers, the best strategy to combat some of this impact in the near term is to hold prices or drop prices; a scenario for many that may be difficult.
  2. The customer demography has shifted.  While this shift has been subtly occurring over the past decade, the recession period sped the movement.  Retirement is now more deferred and the economic need or desire to remain in the community for a longer period of time more developed.  The customer today is de facto older and more driven by need, predominantly health related.
  3. In light of number 2 above, even with the constant growth of age bands suitable for seniors housing and CCRCs, a percentage of the market evaporated.  This percentage is folk whose economic fortunes changed so profoundly negative or were marginally positive enough to afford a seniors housing product but now no longer so as a result of wealth loss.  This segment or percentage was at the normative market age, economically qualified at the time, but four or so years later, outside the age and health profile and/or economically incapable of affording the product.  The bad news is, the replacement numbers generated from a cohort behind them are insufficient to make-up for their loss.  The market has marginally shrunk, although unit numbers have not and in some markets, have increased during this period.
  4. Given points 1-3 above, the sales cycle is now longer requiring new approaches, more touches, and revised pricing strategies and product features that realign the value proposition.

Circling back to where this post started, the compendium of current questions I am attempting to defer and answer lie in number 4 above.  Specifically; “OK, I get 1-3 but how do I then develop the strategies, etc. dictated by this new sales cycle”.  My summarized answer is below.

  • First, redefine your customer.  I like an analytics approach.  Who are they?  What do they need? What is their economic profile?  What are they shopping for (and it’s not the real estate)?  What is their background at all (or as many) levels that you can ascertain (education, occupation, interests, locations, current living arrangements, health profile)?  The more you know, the better.
  • What is your community’s economic value proposition?  I’ve written on this before and it needs to be clear.  Price it and benchmark it across the broadest market segments possible (compared to living in their current home, rental, condo, etc.).  How does your product compare to competitors at all levels (features, services, care levels, etc.) on a price basis, quality basis, access basis, etc.?  Again, the more detailed this information is, the better.
  • Generating leads once the above is complete becomes easer.  The strategies that work the poorest on a cost per lead basis are newspaper and print media advertising, other media advertising, facility generated brochures, billboards,  and events.  Events can be helpful in getting people into the community to remove a barrier but in and of themselves, they do very little to turn attendance into prospects without other steps taking place.  Strategies and tactics that work best in terms of numbers and on a cost basis are referrals (current residents, families, community members, from other providers, etc.), e-mail contacts and direct mail, website and social media marketing, and co-branding with other organizations where your target market is plentiful and frequent.  In this latter strategy, I recommend being present and visible via human presence as well as building joint lists and joint value-added connections (education, support, referral development, resource sharing, sponsorships, etc.).  A word of caution here: Make absolutely certain that in co-branding and co-marketing strategies that the other organization is as credible and solid as your organization – the relationship must be value-added not value-dilutive.
  • Incorporate new math into your thinking.  The new math is all about how many touches and presentations are required to make a sale.  For most CCRCs and market rate or above market rate projects, 20 or so touches to qualify and close a prospect is the new norm.  In short, if you are working on a list of 100, expect five to ten sales (if the list is qualified) from that 100.
  • Marketing needs to focus on building “volume” thus, methods and analytics need to be at the forefront of strategy.  To keep costs manageable and to build fluidity, I recommend strategies that utilize in revolving fashion, the following four elements.  First, e-mail blasts and e-mail news letters that go out to target segments on specific interest levels.  Second, simple events that are educational, again focused on target market interests.  Third, internet and social media campaigns.  For internet, I like to make certain that the web pages are clean, focused and have ample opportunities for people to request more information.  Fourth, direct mail campaigns.
  • All campaigns and elements need to focus on a clear, direct distinction between your product and other options.  In other words, the goal is to find as many ways as possible to reinforce what the value proposition is and how the same is directly correlated to the interests of your target markets.  For CCRCs, the simplest concept is “continuum of care”.  The vast majority of CCRC consumers are motivated by health and supportive care access.

The “new” CCRC marketing reality is all about analytics and alignment; narrowing the gap between what your customer wants and how your community is best suited to address the key issues.  Touches have to go up to meet sales objectives and contacts need to be weeded through quickly.  Building a qualified and fluid prospect list today is all about using multiple methods with fluidity.  Finally, I can’t emphasize enough how critical and how granular the marketing analysis needs to be to push forward a successful strategy.  Without a full analysis of market targets, customers, prices, product, etc., gaps remain that allow prospects to filter through, resulting in less than effective marketing activity.

April 19, 2012 Posted by | Senior Housing | , , , , , , , | 8 Comments

Know Your Market, Know Your Value Proposition

Last October I wrote a post regarding the development of an Economic Value Analysis and how the same is important for marketing seniors housing and skilled nursing.  A couple of weeks ago, I wrote a post regarding feasibility tests key to project success and targeted feasibility.  Later this year, in October at Leading Age’s annual conference in Denver, I’ll again cover the concepts in a direct, interactive fashion.  Until such time however, I continue to receive dozens upon dozens of inquiries as to how to construct an Economic Value Analysis and a corresponding value proposition.  Last October’s post is instructive and can be found at  In addition, and in concert with the post prior to this one on financial feasibility methodologies, I’ve provided below some additional “help points”.

Economic Value Analysis is a fairly simple process that centers on determining the ability or capability of a product or service to satisfy the core demands of a given market; the ability to quantify utility.  Utility in this context, simply stated, is satisfaction at a given price.  For seniors housing, the struggle always is “how” to demonstrate value to potential consumers in a way that is logical and meaningful.  This is acutely problematic in a market that is competitive as the “noise” emanating from all the competitors regarding price and services is constant and at times, deafening.  At its core, Economic Value Analysis creates a more tangible constant.

Given that seniors housing has a very elastic demand curve (a great many substitute products provide equal or proximally equal core utility), the devil is creating a comparison basis and this basis is not “stated price or features”.  A place to start is completing a simple analysis that equates a seniors housing unit per square foot cost (cost = fixed costs, variable costs, and margin) to the comparable alternatives in the market.  In this case, comparable alternatives equal rental housing, other competitors, community dwellings (housing units, condominiums, etc).  Ignore your current pricing structure as unless the same is equalized on a square foot basis, this analysis won’t provide a true picture.

Taking the example to the next level, once the cost per square foot is known, determine the relevent market comparables.  This does take some homework but it is fairly easy to complete.  Via simple survey, one can generally gather enough information from realtors, friends, etc. to determine a community housing cost per square foot (utilities, taxes, rent costs, depreciation/maintenance, etc.).  Gaining information from competitors is even easier as typically, they publish the information or a simple “blind shopping” trip gathers all the necessary information.

Once the information is gathered, populate a simple spreadsheet with the data.  If the core cost per square foot for the seniors housing option is higher, and it typically is, the analysis must delve deeper.  Usually, elements that drive costs for seniors housing come in the form of rate or price inclusions such as meals, cable television, maid/cleaning services, etc.  Two approaches to deal with this issue are possible.  First, back these costs out of the seniors housing number and re-analyze the comparables.  Second, and my recommended method, gather data on these services and develop a square foot comparable.  Between competitors, the key is to keep the data as apples to apples as possible so one must be clear that the costs include exactly (or as close as possible) the same features/amenities, etc.

Once all the information is known and “spread” and sorted, the picture should become clear.  I like to look closest and hardest at the comparison between living at a seniors housing complex versus living in a market rate situation whether that is home, condominium or rental.  The age-old belief among seniors is that a seniors housing community is too expensive.  The analysis should detail where the true costs lie.  Expect some price sensitivity issues where the seniors housing is a tad more expensive but the difference should be clearly and easily explained (24 hour services, access to care, transportation, etc.).  The more than can be quantified in the form of dollars, the tighter the analysis becomes and the easier it is to explain where the salient benefits lies.  If the gap between the seniors housing cost and the alternatives is too high, the issue may lie in the structural elements of the equation such as inordinately high fixed costs or variable costs.  Becoming competitive may require changing, if possible, the financial drivers of the seniors housing project equation.

Concluding, the square foot model works exceptionally well in this analysis as it provides flexibility to model and to change any number of variables.  It also is “non-unit” specific so its data and results aren’t skewed by less-than relevant unit pricing schemes.  The difficulty simply lies in taking the time to build the model and to accurately gather solid data from the “universe” of housing alternatives.  Assuming costs mirror most of the market, the value proposition thus becomes a powerful tool that can and should be used in market positioning.

April 3, 2012 Posted by | Assisted Living, Senior Housing | , , , , , , , , | 1 Comment

Financial Tests Before Additions, Renovations or New Construction

A frequent, recurring question that I field, especially for CCRCs and seniors housing providers is “what” financial feasibility tests are most important before a project is started or for that matter, financed.  Given that capital is still relatively tight, project feasibility and key financial tests are today, critically important to assure the best financing terms available plus, project viability.  Below, I’ve broken out the initial “best” feasibility tools/tests to work through once a scope and general cost is known.

  • Revenue Efficiency: This is very simple: How much of the proposed project square footage produces revenue?  The more square feet tied to revenue generating functions, the more revenue efficient the project is.  For seniors housing, the factor or test is very important.  Too often, I see proposed projects that allocate way too much space to commons and other areas that aren’t related to revenue production.  While groups will argue that these spaces are necessary to attract prospective renters/residents, the reality is that smaller, more efficient is better from an operating standpoint and frankly, even from a marketing standpoint.  Too much space can give the project a “vacant” feel while driving up costs related to heating/air conditioning, maintenance, furnishings, etc.  Ratios of revenue producing square feet to  common or non-revenue producing square feet of 70/30 or less, tend to work best from a feasibility standpoint.  I’ll tie this point tighter in subsequent segments.
  • Prospective Rate Test by Square Foot: While rate charged is a function for many providers of market or other perceived and financially tied projections, a first basic test should involve a simple equalization model based on project square feet.  In fact, this test is an easily built model that can be used for many rate setting exercises and revenue pro formas.  First, total the revenue producing square feet in the project.  Next, determine the project’s projected or known, fixed costs, variable costs and desired margin.  Finally, decide at what level, stabilized occupancy will occur (e.g, 85%, 90%, etc.).  Hint: Amounts or levels greater than 95% are not realistic.  Once the aforementioned data is determined, divide the total of fixed, variable and margin (annualized) by the total revenue producing square feet, divided by 12 for a monthly factor or 365 for a daily factor.  Finally, multiply this result by the stabilized occupancy percentage.  The result is the gross revenue per square foot required by the project to cover the fixed and variable costs plus generate the desired margin.  To equate this number to prospective rates, multiply it by the unit square footage for each unit type in the project.  Next, analyze the results compared to market.  Are the rates calculated attainable?  If the rates are ultimately not, can the revenue be picked-up elsewhere via a shift among unit types?  Are the costs too high?  Back to the first point, is too much of the project square footage not tied to revenue production?
  • Occupancy Tests: Knowing what the projected gross revenue is on a square foot basis provides a basis for conducting some simple occupancy tests via adjusting fill-rates, overall occupancy rates, payer mix, etc.  Using the same formula above but varying the occupancy, it become easy to see the relationships between square foot expenses, particularly those that are fixed and the revenue levels required to cover these expenses.  I like to analyze the ratios between each or, how much occupancy do I need to cover fixed expenses (percentage) and where can I massage variable expenses based on occupancy levels or payer mix.  Typically, once a simple spreadsheet with square foot costs and revenues is built, it is fairly easy to do assumptive modeling and analyses.
  • Payback Testing: An important analysis or test too often ignored or, assumed to be tied to a debt service amortization schedule, is payback testing.  Payback should be factored to occur on or before the point in the project’s useful life, when major improvements need to occur.  The point here is that the project ideally is paid-for before major improvements occur, commonly known as the period of re-building.  At this point, one shouldn’t look at a scenario of re-building when the original debt or expenditure (if equity is the source) isn’t already recovered or substantially defeased.  If this doesn’t occur, the capital improvement process is akin to building the project twice (or major portions thereof).  In simple theory, new buildings or new construction provides a window of time where capital infusion for improvements is minimal if almost non-existent.  This period is where incremental cash (assuming proper pricing at sustainable occupancy levels) can accumulate, allocated for payback (either via faster current debt repayment or investment for future repayment when the arbitrage is positive).  My preferred methodology for this analysis is to develop a cash flow analysis where revenue is netted against cash expenses, including debt service.  I set my targeted payoff period as that time in the future where projected improvements via major system, structural, etc. upgrades will occur – typically by years 12 to 14.  I also will net my annual cash flow by anticipated or projected capital improvement expenditures that use “cash”.  For inflation assumptions, or investment assumptions, I try to use actual or historic data and I err on the side of conservatism.  Two methods can be used in this approach.  One that negates principal repayment in “real-time” and one that incorporates incremental principal repayment.  If debt is involved and on an amortization schedule with principal repayment incorporated, its easiest to assume a declining balance for the payback analysis.  If the source of funds is equity or a combination of  debt and equity, I assume equity repayment at a current cost of capital rate and while I may not create an amortization schedule with imputed principal payments (equity repayment), I will assume a “balloon” effect by imputing a cost of capital return assumption on the equity.

Ideally, this type of analysis is done sufficiently ahead of project finalization.  If such is the case, the project can be adjusted to conform to a proper payback period, be optimally efficient, and have a rate/revenue structure that fits within the target market.

March 16, 2012 Posted by | Assisted Living, Senior Housing, Skilled Nursing | , , , , , , , , | Leave a comment

Presentation on Strategic Pricing for Senior Housing

I’ve posted a Power Point presentation one of my partners and I did at a trade show/conference last week.  The title is  “Strategic Pricing Strategies for Senior Housing” and it is available for viewing or download on the Reports and Other Documents page of the site (menu listing on the right).

October 12, 2010 Posted by | Senior Housing | , , , , , , , | Leave a comment

Strategies for Accomplishing New Development or Major Capital Projects

One of the focal areas of my consulting practice/work is assisting health care organizations in accessing sources of funding (securing financing basically) for major projects and/or new development.  Given the state of the economy, most specifically the capital markets over the past eighteen months, getting funding for capital projects and/or development has been challenging, though not impossible.  Terms are definitely not as good (rates, covenant restrictions, and length or term of the obligation) and lending sources are far more credit adverse than two years ago.  Health care, although the defaults have been low, is an eclectic industry for most traditional lenders and their lack of specialization or knowledge makes them deal “shy”.  Even lenders with health care technical experience are more cautious and requiring far more information and deal due-diligence than say, two years or so ago.

Approaching a major capital project (expansion, remodeling, equipment replacement, etc.) or a new development (addition or new facility) is a daunting task and if any of the cost involves securing financing, below are some strategies or tips for project analysis and due diligence that I have found are virtual necessities to secure financing.  Obviously, this information does not supplant the credit worthiness of the organization doing the borrowing or in other words, bad financial ratios equals bad terms or today, no credit.

  • Completion of an Internal Rate of Return analysis at “current” market cost’s of capital.  The analysis needs to include sensitivity adjustments/tests as well.  If the project is such that the expenditure will not add revenue (major equipment or even some remodeling projects), the Internal Rate of Return analysis uses assumptions of savings and depreciation expense as the source of “revenues”.  In other words, you begin the first phase by using a life-cycle cost analysis as the means to produce the “net inflow” assumptions (savings, etc.) for the IRR. 
    • Much of health care, especially the reimbursed and clinical segments is very much a fixed-revenue prospect.  I see providers get caught all the time trying to justify remodeling and even down-sizing projects as “revenue improvements” and it doesn’t fly.  It is possible to produce or to generate new or improved “cash inflows” from these types of projects but creating assumptions for this improvement and the resulting new inflows requires careful thought and impartial analysis.  Suffice to say that if the project involves remodeling or down-sizing, getting to the point of improved net inflows as a result of the project means something had to change on the expense side (especially again, if the bulk of the revenue related to the project is fixed reimbursement), efficiencies have to be clear and demonstrable, and/or the use of the remodeled or down-sized space is for a new product or service line that will generate incrementally higher revenues or reimbursements per patient day.
    • On new developments or expansion projects, the largest mistake I see made is around the assumptions of occupancy and revenue generation.  The assumptions used need careful analysis and should be weighed against comparable provider/market experiences whenever possible.  This is critical in the sensitivity testing portion of the IRR – stressing and testing the new revenue assumptions.  Some very important revenue assumptions cues are;
      • Reimbursement rates and the corresponding revenue assumptions need to fit the current legislative and policy trends.  For example, health care reform just passed and Medicare is looking at $500 plus billion in cuts.  Medicaid is another issue and state budgets and forecasts of rate cuts or rate stability are an issue.  Don’t use assumptions that don’t follow the present health policy issues.
      • Dramatic changes in payer mix and product line mix are unlikely to occur as rapidly as I see providers try to project.  If for example, your payer mix has been predominantly Medicare, some Medicaid and some private insurance (65/25/10),  it may change dramatically for a new development in a new market location but not for an addition to an existing location.  In reality, just by “building it”, they won’t “naturally come”.  Marketing strategy is the key to this change but in the analysis, the assumptions of any major revenue changes as a result of a project need to be smoothed.
  • Capital Budgeting techniques and analysis need to be performed for major equipment replacement or infrastructure improvements.  Alternatives to the project need to be reviewed and financial analysis of the costs and operating impacts of each alternative need to be completed.  Again, interest rate/cost of capital assumptions, even a cost of cash assumption (investments of internal cash v. cost of debt), need to be integrated into the analysis.  Lenders want to see that the provider has thoroughly evaluated analytically, the alternatives for each proposed capital project.
  • Benchmark your project against like projects and your numbers against industry ratios.  There are a number of sources for industry ratios by health care segment from Fitch, to trade associations, Ziegler, BB&T, etc.  I typically will add comments and a brief discussion of salient differences when the ratios and results are positive or negative to industry standards.  I also like to incorporate a pre and post project re-cap.
  • Discussion and information on Market and Industry Trends is important for lenders to understand how the project fits into the overall market, into your organization’s position within the market and where the organization views the project in light of current industry trends.  Remember, the policy landscape is quite volatile and lenders are aware of the volatility.  Explanations of a thorough understanding of this volatility and how the project and organization plan fits in light of this trend is imperative in order for lenders to have a grasp of  the organization’s project management and financial and strategic management capacity. 
    • Market discussions should focus on where the organization ranks competitively within a market area, where the organization’s target market is, how that market is changing, and how the project responds to the market needs, its market position, and to the changing demands within the market location.  I also like to incorporate sales advantages, competitive advantages, quality information (as pertinent), customer satisfaction information, and any commentary on competitors.
    • Industry trend discussions focus on what is happening in the industry and how the project relates to these trends and why.  If the project is for example, an infrastructure improvement (roofs, mechanical systems, etc.), it is entirely appropriate to discuss the average age of physical plants in the industry, deferred maintenance and or average capital spending trends, etc.  If the project is an addition, the discussion should focus around meeting customer needs, new products and services that will be delivered and how completing the project either keeps the organization up-to-date with industry advances or propels it ahead of the pack. Other industry information that is important to discuss is;
      • Major health policy trends such as reimbursement rates, new regulations or requirements (e.g., mandates for sprinkler systems in SNFs), and as applicable, changing patient/customer needs.  It is important to relate these trends to the project and as much as possible, across the anticipated horizon that covers the length of the credit.  For example, if reimbursement changes may positively or negatively impact the organization’s cash flow, a frank discussion of this impact is necessary along with how the organization is planning to address the impact.  The impact, of course, plus the organization’s assumptions of impact on the project and the organization should be incorporated in the financial analysis.
      • Industry information regarding payer mix trends, length of stay, service utilization, labor costs, etc. may or may not relate to the project but whenever it does, I like to point it out and moreover, discuss briefly the relevance and the distinctions.
  • For New Developments market and demand studies are critical.  I like to see demand studies that test demand at given prices, not just global demand.  Global demand assumes price doesn’t matter or location and service-depth is less relevant and in reality, it may be the difference between success or lack of success.  Although a bit esoteric, I am even in-favor of incorporating a bit of “central place” or “location” theory in my market and demand analyses.  This type of analysis looks at key project characteristics or specifications and analyzes how strongly they are met or reinforced by the development location.  For example, if proximity to a certain referral source is a key project specification, I’d analyze this in relationship to market size and perhaps, existing referral patterns. I’d then look at the cost of development and location (site) in relationship to the requirement that the location is proximal to a referral source.  In some cases, the cost of development may be to such a degree greater that an alternative location actually becomes preferrable from a financial feasibility stand-point.  Finally, market analysis needs to define the primary markets, the competitors within the markets, the socio-economic condition of the market location (population growth, income/wealth, age,education, etc.) and the market trend.  I will also address factors that may positively or negatively affect the project’s completion and revenue assumptions (occupancy/lease-up, etc.).

 As daunting as the above may sound, it is nearly a pre-requisite to access capital for large capital projects and/or new developments at acceptable terms (again, assuming the general financial profile of the organization is solid).  While each project is different necessitating more analysis in one area and less in another and each organization is different, I’ve found that lenders today prefer more on-point discussions, even if they seem trivial, than less.  Building a solid case, financially and strategically, for the project is critical in order to achieve success in the capital markets and frankly, in order for the project to achieve the organizational objectives.

March 24, 2010 Posted by | Assisted Living, Hospice, Senior Housing, Skilled Nursing, Uncategorized | , , , , , , , , , , | Leave a comment

The Housing Market and CCRC Prospects: What Each Means to the Other

It has been a world-wind few days (make that a week) analyzing all that is or was, health care reform.  In some respects, I’m glad that the meat of health care reform is done for now though admittedly, I’m disappointed at the outcome.  Suffice to say, I will catch-up on the ramifications of the legislation and the reconciliation package for providers over the course of the next few days. For now however, I need to re-focus on the subject matter pile that is building within my e-mails and my files.

An issue that has drawn a great deal of attention lately is the future and current prospects for CCRCs (Continuing Care Retirement Communities).  As I wrote in earlier posts, the CCRC industry was perhaps, the hardest hit by the recent and continuing economic downturn, although not necessarily as bad as some would think.  Two highly visible restructurings/bankruptcies involving Erickson and Sunwest placed caution in the minds of the rating agencies and as a result, the analysts at Fitch for example, issued a “negative outlook” for the industry.  At the crux of Fitch’s outlook is the dismal residential real estate market performance, the lackluster economy and slow-recovering investment markets (the latter less of an issue today).  Correctly, Fitch points out that declines in its CCRC rated borrowers’ financial condition in terms of liquidity and profitability are contributing factors to their negative outlook but they seem to view these conditions as symptoms of the economy rather than tell-tale signs of an exhausted industry.

As I take a close look at the industry and at the comments from Fitch, et. al., it is easy to see how a dim or less than optimistic view can occur.   Specifically, here’s what I mean and moreover, why I think there is room for a tad more optimism until one focuses acutely on the real estate market itself.

  • The CCRCs that are struggling and those that have gone through highly publicized restructurings, etc. are truly isolated and reflective principally of highly leveraged, aggressively expanded organizations with many unstabilized projects and projects under development.  Unstabilized projects and new, in-development projects have unquestionably suffered the most although, some have done fine when they are located in areas or markets that remained more stable during the economic downturn (parts of Texas for example).
  • Occupancy dipped a tad as a general condition in 2009 but again, for stabilized operators, not as bad.  In fact, the majority of the declines averaged 3.5% to 5% and some operators in good locations, saw virtually no declines, even in projects with 95% to 100% occupancy levels. 
  • Occupancy dips, such that they were or are combined with price suppression (down economies require providers to hold the line on price increases) and sagging investment values are the cause for the lower liquidity and profitability levels that Fitch reports.  The latter two don’t have me terribly concerned as most stabilized and solid operators can handle the modest, temporary price suppression and the once sagging investments should be on much better footing by now as a result of recent improvements in the investment markets.

The residential real estate market is proving to be the biggest lag on CCRC industry performance and unfortunately, I don’t see a lot of cause for optimism that recovery in real estate is near.  As much as I am a proponent of creative, strategic marketing for CCRCs as a means of boosting and maintaining occupancy, if a prospective senior can’t sell his/her home or worse, can only do so at a severe discount to value, demand for units and occupancy won’t realistically improve.  Entry fee CCRCs will face this predicament in far greater numbers than rental only CCRCs, though rental-based projects will still see some of the same issues.  As CCRCs predominantly attract transitioning seniors, those moving from one residential, owner occupied setting to another complimentary setting (CCRC), real estate sales are a significant part of the transition.  In short, a lackluster or illiquid residential housing market effectively suppresses the current demand for CCRCs on the part of seniors.

Unfortunately, what I am seeing now in the immediate and near-term outlook for the residential real estate market, particularly for existing home sale prospects, is not encouraging.  In January, existing home sales declined by 7.2% over January.  This in and of itself is not hard to understand as the November to early December period was a high month for closings due to the expected end of government tax-credits for new home and replacement home buyers.  Congress extend the credits through May but the extension occurred a bit too late to match the demand fall-off.  The news or trend that is disconcerting in “what” volume is making up the sales and at “what” prices.

More than a third of all current sales are distressed or foreclosed properties and as a result, median sale prices in most markets continue to fall.  For a CCRC, the typical prospect is not likely to live in a distressed or foreclosed property and, since the homestead is a significant portion of the prospect’s estate, not as willing to drop the home selling price to match the declining market values.  In other words, depressed values and selling prices combined with a great amount of “bargain” inventory means that the senior citizen prospect for the CCRC isn’t likely to sell his or her home in the near future (not enough traffic across all of the inventory options and a seller unwilling or not needing to lower his/her price to match the market price points).

For the balance of the year, especially across the prime sales months of April through September, I expect to see the following occur.

  • A gradual increase in sales volume starting now and stabilizing through May – the end of the tax credit extension.  April and May should be the heaviest volume months in the first half of the year.
  • Average sales prices will continue to decline in the West, South and Midwest regions.  Prices seemed to have stabilized and are actually rising every so slightly in the Northeast and in the Northwest.  The majority of the suppression on average sale price will continue to come from foreclosures.
  • Foreclosures will stay at their current pace for at least the next two quarters, perhaps even to year end.  As a result, average prices will remain suppressed as foreclosure sales and distressed sales pull the selling prices down and require sellers to drop asking prices to points or levels proximal to the values of like properties being sold; a dismal trend for seniors wishing to sell a home to move into a CCRC.
  • Individual markets and regions will out-perform the nation as a whole but these markets will remain few in number and despite performing better than the national averages, their performance still isn’t great.  Examples include Charlotte, NC,  Boston, MA, Denver CO, and San Diego and San Francisco, CA.  Larger market areas that are performing better can be found in Virginia (D.C. areas), Austin and Dallas Texas areas and the Golden Triangle areas in North Carolina.  CCRCs in these areas will find a bit more “rosier” outlooks for converting side-lined prospects to residents in 2010.
  • The wild-card for faster more more steady improvement in the residential real estate market is jobs.  Improving employment will help to stabilize the real estate market, reduce foreclosures, allow prices to trend back-up slowly and spur more home-buying.  As I see only gradual and slow job recovery prospects for the balance of 2010, the spill-over to residential real estate won’t logically occur until months after.  Job growth needs to filter to job stability for major investment (consumption) activity to heat back up (there is always a lag).

March 23, 2010 Posted by | Senior Housing | , , , , , | 2 Comments

Property Tax Update for Wisconsin Senior Housing

The 2009-2011 Wisconsin budget (Act 28) incorporates a specific change to how the state defines property tax exemption for non-profit senior housing projects.  Up to this point, the existing statutory law was vague and providers were left to contend with a precedent set by an even more vague Supreme Court decision (Columbus Park) and patchwork legislation authored to counteract or more appropriately, counter-balance the Columbus Park decision.  Below is a brief summary of the recent history of non-profit senior housing and property tax issues.

  • Prior to Columbus Park: Wisconsin Statutes 70.11 created a category of exemption for benevolent homes for aged.  The exemption category as poorly defined as it was, fundamentally allowed 501(c)3 providers to argue that their federal exemption and the use of the property for “benevolent” purposes met the definition, provided that the exemption was sought for 10 acres or less.  Limited challenges were made by Assessors to this definition or to the broad interpretation used by non-profit senior housing providers.  Perhaps the statutory challenges most noted up and until Columbus Park occurred in the City of Milwaukee. 
    • In the City of Milwaukee v. The Milwaukee Protestant Home, the City argued that a planned expansion of the Protestant Home funded entirely by new, non-refundable endowments from residents who would still be required to pay monthly rental fees and required to financially qualify, was not justifiably exempt. The basis of the City’s argument was that the new facility was too luxurious, catered only to the wealthy, pre-screened residents to limit the needy, did not provide medical care on-site, and used a health screening to eliminate residency to anyone in need of care.  The Court decided in favor of Milwaukee Protestant Home stating, among other things less relevant to the core exemption issue, that Benevolent does not mean “charity” and as such, a Home can be benevolent and charge fees.  Effectively, the Court said that benevolence can and does in this case mean, allowing people of moderate means to live out their final years, even if the same is not considered charitable.  The Court also said that a new, free-standing housing project must be viewed along-side or as an integral part of the entire sponsoring organization, not in a “vacuum”.
    • In the City of Milwaukee v. Friendship Village of Milwaukee, the city argued that a planned expansion called Freedom Village, built with “refundable” resident endowments and where residents would continue to pay a monthly rental charge, was not justifiably tax-exempt.  As in the case of Milwaukee Protestant Home, Freedom residents were pre-screened as to ability to pay, one resident in a couple needed to be 55 or older, and each resident had to able to live independently (a medical screen).  Residents were provided with a $50 per day credit if skilled care was later required and, as part of their contracts, could opt to convert at a later date, to residency at Friendship Village thereby waiving their refund from Freedom in exchange for residency and care provided at Friendship.  As in the Protestant Home case, the City offered all of the same arguments (too exclusive, no on-site medical care, excluded the needy, etc.) and the facility did not permit residents to live-out the remainder of their years as was the case with the Protestant Home.  The Court reaffirmed the Protestant Home decision stating that benevolent did not mean free and that the Freedom contract provision allowing residents to convert to occupancy at Friendship Village with no additional charge when care was needed, provided the means for residents to “live out their years”.
  • Columbus Park and After: With the Columbus Park decision, the courts began to slowly redefine the interpretation of Wisconsin Statute Chapter 70 as well as to abandon the basis used to uphold the exemptions found in the Protestant Home and Friendship Village cases.
    • In the Columbus Park Housing Association v. City of Kenosha, the Wisconsin Supreme Court ruled that non-profit associations renting housing units to low-income elderly were not exempt from property tax as specified in Chapter 70 (WI State Statutes) unless the tenants themselves could or would be exempt from taxes had they owned the units.  Essentially, the Court said that the only way a non-profit that was renting units to low-income seniors could be exempt was if the seniors themselves were exempt non-profits.  This decision became widely known as creating or establishing the “rent use clause”.  In effect, the Court decided that the only permitted use for rent proceeds derived from low-income projects was property maintenance and debt retirement.  Prior to this point, it was widely accepted and essentially reaffirmed by the Protestant Home and Friendship Village cases that a benevolent association could use rent proceeds for any purpose that furthered or was in concert with, the reason or justification for federal tax exemption and the mission of the benevolent association (e.g., subsidizing other programs within the association).  In 2004, Governor Doyle signed Wisconsin Act 195 which was created to reverse the Columbus Park decision.  This Act prohibited local assessors from collecting property taxes from non-profit providers of low-income housing.  The Act however, did not address with clarity, the “rent-use” dilemma.
    • In Attic Angel Prairie Point v. City of Madison,  a Dane County judge ruled that senior housing was not necessarily a benevolent activity unto itself.  The entrance fees at the time ranged from $230K to $450K and were structured on a life-lease arrangement.  Under this arrangement, residents received 90% of the fee as a refund when they left or vacated their unit.  The contract also provided for a “priority” admission to other Attic Angel care facilities but no guarantee of admission.  While Attic Angel argued the fundamentals found in the Protestant Home and Friendship Village cases (benevolent association status, life lease arrangements, etc.), the Court found that the only use or purpose for Prairie Point was to provide housing to middle and upper income individuals, absent any health care guarantees or provision on-site and in a manner highly similar to other taxable housing developments. Because the case was decided within a Circuit Court, no value of precedent could be used in other cases, a basic ruling on the exemption issue had occurred sufficient enough to garner attention within the non-profit community and across state-wide municipalities, namely with assessors.

With the passage of Wisconsin Act 28 (the Budget bill), new provisions are now in-place beginning January 0f 2010 that establish the basis for property tax exemption for benevolent homes for the aged.  The law clarifies the exemption test and creates presumed categories of exemption for CBRFs, SNFs, Hospice (those that operate places of residence) and RCACs as defined under Chapter 50 of the Statutes.  The Act also expanded the number of acres that could be exempt from property tax from 10 to 30.

With respect to residential units or senior housing units, the Act provides that a benevolent association may exempt those units with fair market values less than or equal to, 130% of the average equalized value of residential units in the county where the project is located.  The Act also provides specific exemptions for low-income senior housing provided by non-profit, benevolent associations and removes the requirement that the rent be used specifically for debt repayment or property maintenance.  This same provision regarding “rent use” applies to other categories of senior housing as well.

Where I expect the issues to arise with respect to the new provisions in Act 28 are around the determination of fair-market value and the potential carve-out of certain units in a project having values in excess of 130% of the equalized value while others do not.  In effect, some units may be determined as taxable while others qualify for tax-exemption.  How an allocation of property tax to the taxable portions is determined will no doubt raise a series of court challenges.  Similarly, as the units themselves are typically within a larger complex, often with extensive and at times, quite opulent common space, determining fair market value of the unit will be an interesting exercise.  Truth be told, fair market value for the unit is not by assessment definition, the price charged for the unit.  Fair market value would require a determination of value based on an assessment and/or appraisal methodology and I anticipate wide interpretations coming forth across the various county assessors throughout the State. 

In summary, while Wisconsin Act 28 goes quite a ways in clarifying the issue of property tax exemption for benevolent homes for the aging and senior housing projects, the “waters” remain somewhat murky.  It will be interesting to watch how the process unfolds and where the lines are drawn (likely via the courts) on the open issues of fair-market values and how taxes end up allocated on units within a project that don’t meet the 130% equalized value threshold.

February 20, 2010 Posted by | Policy and Politics - Wisconsin, Senior Housing | , , , , , , | Leave a comment

CCRC Update

Within the past ten or so days, I took some time to review the financial and operating benchmarks for CCRCs.  The past eighteen months have likely been the toughest operational and financial period ever for CCRCs.  By the end of 2009, a small rebound in the economy via an increase in existing home sales, a solid financial markets recovery, and a bit of moderation in the capital markets improved the industry outlook heading into 2010.  Specifically, the lagging trends in occupancy stabilized and improved ever-so gently and key operating and capital ratios started to stabilize.  The result is that while key medians and benchmarks slid year-over-year (between 08 and 09), 2010 could be rebound year for the industry.  Below, I have included a chart of the 2009 CCRC medians as produced by each major rating agency (chart courtesy of BB & T Capital Markets, a division of Scott & Stringfellow, Inc.).

Where continued issues of concern remain are principally in newer, non-stabilized developments, CCRCs located in extremely depressed real-estate markets and CCRCs that are subject to having to refinance favorable debt packages within  today’s lending environment (expiring Letters of Credit, etc.).  Concerns that were present in early 2009 regarding entry fee CCRCs seem to have moderated as the improved real-estate market has made it possible for prospective residents to either move via selling their homes or be in a positive position to sell their homes in the near future.  Again, individual market dynamics play a major factor in how the upcoming months shake-out for new entry-fee CCRC sales.

An area of continued concern for CCRCs is the capital markets and the ability of owners/operators to access new debt at favorable terms.  Failures, albeit few in the industry, have made lenders cautious and today, rates and terms reflect the caution as well as the year-over-year decline in the industry benchmarks.  Fitch as well as other rating agencies has not yet fully warmed to the prospects of recovery for the industry as a whole and as such, continue to produce negative to bland outlooks for the industry.  Essentially, the story here is twofold: First, the upcoming year will remain a fairly down year for development as capital for new projects will not be plentiful and not at favorable terms, and; second, refinancing existing debt for solid operators with stabilized projects will be possible and increasingly so as the year progresses, though not yet at terms and rates that are better than the periods prior to 2008.

Looking at 2009 and ahead into 2010, a few key items for CCRC owners/operators to review are as follows.

  1. Sales always lag marketing efforts and as a result, CCRCs that have stuck to their marketing plans and stayed engaged with prospective residents will reap the rebound “rewards”.  Any CCRC that has pulled too far back on continued marketing needs to get busy now to improve their 2010 prospects.
  2. Entry fee CCRCs need to be continuously vigilant regarding their pricing and the economic conditions of their market place.  Entry fee CCRCs have the most elastic demand curve and price positioning is key to staying forefront in the senior’s demand cycle for retirement housing options.
  3. When and if the GAO produces its report on CCRCs, the principal focus will be on disclosure and customer knowledge.  In effect, the key “take-away” here is this process is all about consumer protection.  Aside from making sure the finances are solid, CCRC owners/operators need to beef up their consumer disclosures, their education efforts and clean-up their contracts and marketing materials.
  4. The four key benchmarks, aside from occupancy, that a CCRC needs to focus on for 2010 are: Net Operating Margin, Excess Margin, Days Cash on Hand, and Debt per Unit or Bed.  If a CCRC is considering accessing the capital markets or borrowing from any lending source, moving these indicators up or down as appropriate to rank better than the median will improve the terms and rate available to your project.
  5. Soft and recovering markets call for strategic pricing evaluation and strategy.  It is important to continue to increase revenues but doing so simply through rate increases may not be the best approach.  Rate increases are one component of an overall pricing strategy.  If a CCRC has not done a complete review of its competitive posture, its pricing structure and especially, its value proposition correlated to price, it should consider doing so immediately.

February 2, 2010 Posted by | Senior Housing | , , , , , | Leave a comment

Non-Profit Health Care Outlook for 2010

Moody’s Investor Service released their annual sector outlook today for not-for-profit health care organizations, stating that they (Moody’s) continue to maintain a “negative” outlook on the industry.  Important to note in this report is that the focus is principally on hospitals and since the report is produced by Moody’s, its primary perspective is on credit and investment.  That said, even with the predominant focus being on hospitals, there is quite a bit of take-away information for non-profit health care providers in general, including those in the post-acute sectors.

The emphasis Moody’s places on their negative or dim outlook is economic related primarily and public policy weighted secondarily.  They point to the continued weak economy as the cause for slack patient volumes and concerns regarding provider debt levels, particularly those providers that may be facing an expiring Letter of Credit (LOC) situation over the next twelve to eighteen months.  With regard to public policy issues, Moody’s points to budget insufficiency issues in Medicare and Medicaid foreshadowing tighter or declining reimbursements and uncertainty of the outcome of health reform although, as they indicate, the legislation today, is effectively in limbo.

According to Moody’s, the weaknesses inherent for non-profits are their reliance on governmental sources for payment more so than proprietary operators and their need to be cautious of their tax-exempt status in terms of a political culture requiring more and more justification of expenditures made on behalf of the uninsured or under-insured population.  I would also add that other forces such as unions are today, targeting non-profits more so than ever and the result is higher labor costs and higher legal defense costs (to abate organizing campaigns).  Similarly, the plaintiff’s bar is far more active today and for non-profits, their fair-haired status once given due to religious affiliations primarily, is all but gone.  It is not uncommon any longer for attorneys to seek damages against large or for that matter, even small to medium-sized non-profit providers. 

The report cites the following reasons as the primary factors contributing to Moody’s negative outlook.

  • Sluggish patient volumes due to high levels of unemployment combined with the loss of health insurance.
  • Pressure on revenue streams, particularly Medicare and Medicaid combined with intensified recovery activity (RACs and Probes).
  • Greater difficulty in cutting costs due to the cost-cutting measures already undertaken in 2009 and late 2008.  There is little room remaining for significant expense reductions. 
  • Increasing bad-debt exposure.
  • Debt structure and liquidity risks driven by high bank exposure, potentially expiring LOCs and less than a full recovery of investment losses.
  • Greater or increasing capital needs after a year or more of deferred capital spending.
  • Expiration of the federal stimulus program at year-end 2010.

In addition to the above negatives, Moody’s cites three positive factors.

  • For some providers, strong management capability that allows the provider to respond quickly to negative operating changes and positive improvements as they occur.
  • Partial recovery of investment losses adding back some liquidity.
  • Likely increase in merger and acquisition activity which Moody’s believes is good for the market.

As I reviewed the report, my conclusions are as follows.  These conclusions I believe, are universal for all non-profit health care providers.

  • The pace of economic recovery will push forward or hold back, the recovery of non-profit health care provider’s fortunes.  A quickening pace including job growth will help providers recover quicker although a lag in terms of patient volume increases will clearly be present.  A slow, mixed recovery with equally elongated new job creation will hurt providers and potentially, lead to insolvencies and failures.  The key to remaining solvent in the event of a slow recovery is debt structure, depth of product/service mix and generally low non-wage related labor costs (turnover, legal issues, compliance problems, supplemental staffing costs, etc.).
  • Access to capital at reasonable terms will remain an issue for the sector throughout the bulk of 2010.  While I see some softening, the present stance the Feds are taking on taxing the banking industry could very quickly, chill any warmth that has softened the credit markets. Within the next twelve to eighteen months, a very large ($19 billion) amount of Letters of Credit will come due.  Providers with struggling balance sheets or under-performing newer projects may struggle to meet new conditions and terms to enhance their credit.  Without question, debt costs and the related costs associated with debt issuance will continue to be higher than any period over the last five plus years.  The significant question remaining about access to capital is what role the Feds will play and will they continue to bolster lending activities via HUD to help stabilize some of the credit/lending markets.
  • Of particular concern to me and in concert with the point immediately above is the growth in deferred capital investing that is occurring, particularly in the SNF industry.  This industry is already dominated by aging physical plants and as providers have been forced to defer capital investment due to the economy and due to the reimbursement climate, the industry continues to shed asset wealth via depreciation and become more functionally obsolete.  With growing regulatory pressure for SNFs in terms of environmental standards and new mandates on fire suppression systems, access to reasonable cost capital will be imperative for this industry to modernize and recapture at least a portion of its physical plant asset wealth.
  • With health reform on the Washington back-burner for the moment, I believe providers will tend to breath a collective sigh of relief – prematurely.  While I believe that a reform conflagration is not imminent, the fiscal woes of Medicare and Medicaid trudge on and as a result, the reimbursement outlook from my perspective, remains rather bleak.  There will be continued financial pressure at the federal and state levels to reduce or reign in the trajectory of entitlement spending and as a result, I believe providers need to be vigilant about the prospects of flat to declining reimbursement rates.  Of particular concern to providers should be Medicaid which today, is heavily bolstered by federal stimulus dollars set to evaporate in December.  With state budgets remaining in the “tank” due to the slow recovering economy, states are going to be looking for Medicaid savings with a vengeance unless the feds continue additional matching provisions or add new dollars.
  • In the merger and acquisition area I’m less of a believer that this market will heat-up than Moody’s is.  I think that the time is certainly ripe for some increase in activity but I believe that the credit markets will have more to say about the volume than the desire of providers to acquire or be acquired.  I do believe however that this is an opportune time for non-profits to look at merger and affiliation arrangements as opportunities are plentiful, the benefits of consolidating balance-sheets are obvious, synergies can be maximized across and within markets, and the costs of mergers/affiliations are far less and can be completed with minimal to no need for new debt.

Any readers that would like a PDF copy of the Moody’s report can go to the Author page and send me an e-mail request.  In your request, please provide me with your full name and a working e-mail address that I can use to forward the document.

January 28, 2010 Posted by | Assisted Living, Hospice, Policy and Politics - Federal, Senior Housing, Skilled Nursing | , , , , , , , , , , , , | Leave a comment