Reg's Blog

Senior and Post-Acute Healthcare News and Topics

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 http://wp.me/ptUlY-7G.  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

When and Why Projects Go Bad: Traps and Pitfalls to Avoid

Creeping slowly out of a period of recession where financing was nearly impossible to get, providers, operators and developers are starting to look favorably at new development and refreshment of existing properties and infrastructure.  Though capital is less than free flowing, money is entering back into the long-term care and seniors housing world fluidly enough that projects once parked in the “back of the lot” are edging closer to the front.  Having watched significant failures occur over the past three to four years and/or counseled organizations through some of the rough times, now is an appropriate time to pass along some “learnings” from the failures and struggles that I have seen.  Importantly, as the industry and the methods for financing have fundamentally and permanently changed, so have the markers for assuring project (new, redevelopment and remodeling) success.

As a primer or if you prefer place to start, there are three basic elements critical to project (new construction or renovation) success: Market demand, cash flow margins, and project cost.  Too many new projects failed to meet occupancy projections simply by misunderstanding market demand dynamics (market demand is not demography).  While not universal or sacred to only non-profits, misunderstanding regarding cash flow margins is a common failure item.  For example, I don’t know how many projects I’ve looked at, especially on the substantial remodeling side, that incorporated no expectation of new revenue or improved operating margins (either this element was missed or worse, not present/expected as a result of the project).  Finally, project cost should always be less a function of funds available but more a function of payback.  I’ve seen too many projects that suffer from “scope creep” simply because funds, either via debt or equity, were available.  Being able to afford something doesn’t necessarily make it “affordable”, especially when the long range economics of a project are critically analyzed.

Avoiding the common traps, pitfalls, etc. that lead to project failure or in some cases, poor performance, is a function of being clear and knowledgeable about the core feasibility requirements.  Being clear up front means not just “knowing or providing lip-service to” but actually investigating and working through each element.

  • Market Demand: The presence of age and income qualified individuals is not demand; it is supply.  The supply of potential customers only assures that potentially, a large enough universe of people exists that meet the broadest elements of “potential consumers”.  Recognition that only so many of this universe will be actual consumers of any long-term care or seniors housing product at a given time is critical to developing the initial framework for market demand.  For example, less than 10% of all seniors reside at a nursing home at any given time, whether for short or long-term care purposes.  If occupancy rates within the existing supply of facilities are average to low, building more units within such a market is a big step toward potential failure.  Simply adding units, even if they are different in size, amenities, etc., doesn’t change the core demand for the product.  Success of such a project in such a market is thus fundamentally hinged on “taking existing customers” from an established facility; a risky proposition at best.  Even in markets with good demographics (customer supply) and minimal to average supplies of like products doesn’t guarantee that demand is present.  This is particularly true for seniors housing where demand is very price elastic.  The same is true, though not as directly, for SNFs when demand is correlated to payer source (e.g., a private-pay only facility in a market with primarily a Medicaid demand).  Without factoring in price and overall costs plus location and unit features and benefits, demand cannot be truly gauged or determined.  The mere presence of a suitable supply of age and income qualified individuals doesn’t guarantee any occupancy of a new project, save that the new project at a given price, given location, with given features and benefits fits an unfulfilled need or want within the universe (supply) of qualified customers.  Summarily, no matter how much money someone has or how age appropriate someone is, if that person (or persons) does not possess or find a need for a given product at a given price with desired features and benefits, the mere presence of the product within the market will not promote consumption (or occupancy). 
  • Financial Feasibility: Interconnected with a fundamental understanding of demand is pricing.  Pricing, as I have written before, has two key components.  The first is the derivation of price based on the formula of Fixed Costs + Variable Costs + Margin = Price.  The second component is strategic, tied to market.  In any given market, the supply of like products and programs will dictate the amount of elasticity that exists across the pricing continuum.  No longer is “me too”or matching the market a viable strategy for pricing.  This said, true financial feasibility is mostly tied to the first pricing component.  Where projects tend to struggle is when three core elements are misinterpreted or, over (or in some cases under) estimated.  The first core element is fixed cost.  Feasibility which doesn’t properly capture the key fixed cost elements of debt, debt repayment and depreciation has the potential for quickly turning a project from possible to impractical.  Specifically, I recommend the following approach to structuring the fixed cost portion of the feasibility.
    • Debt assumptions, especially those involving floating rate scenarios, need to be conservative and reflective of the true interest rate risk across as lengthy a horizon as possible.  Fixed rate scenarios are ideal but terms for the fixed period are generally less than the amortization schedule for the debt.
    • Following the point above, debt repayment on a schedule that is more aggressive than the amortization schedule is a must.  New projects or substantial remodeling projects carry the mindset that depreciation is a non-event in the initial years; minimal cash outlays.  While this may be true, depreciation picks-up rather quickly in terms of cash needs by year 5 and becomes more acute by year 10.  By year 15, substantial repairs and upgrades to major elements are a common theme.  Carrying debt across a normative amortization cycle without more aggressive repayment means that by year 10, the project is being substantially replaced by the need for upgrades and repairs, all while the first phase is still being paid for at a premium cost (interest on the original debt).  I have seen all too often, providers struggle with competing cash needs; debt service vs. capital maintenance.  Once maintenance becomes deferred, the ability to compete successfully is hampered.  Cardinal rule here: Work the feasibility numbers in terms of pricing to include a debt repayment plan no longer than fifteen years, regardless of the amortization terms, and incorporate a laddered assumption of cash needed (reserves) to replace equipment, upgrade units, etc. within the fixed costs assumptions (cash funding depreciation).
    • Margin is the devil in the details.  Too much fixed cost and/or too much variable cost eats at needed margins or stresses occupancy assumptions to unrealistic and/or unsustainable levels.  Ideally, a forty percent or higher “top line” margin is the target for Assisted Living and Independent Living (marginally higher for Independent).  When debt and depreciation (cash funded) is added below the line at stabilized occupancy, the project can create sustainable cash earnings/returns on equity.  Lower leverage (debt) levels and lower interest costs can aid in thinning top line margin levels but remember, equity contributions instead of debt still bear a cost in the form of opportunity cost.  Repayment of equity infusions need to be factored with an opportunity cost (interest factor).  Depending on current interest rate environments, the arbitrage on equity cash can be positive (debt cost is higher) or negative (debt cost is lower).  Not always does the provider get to pick the amount of equity participation required as lenders today are far pickier on leverage levels and loan to value relationships.
  • Project Costs:  Project costs should always be built around the assumption of revenue required to substantiate the project.  Renovations that do not incorporate opportunities for new revenue or enhanced revenue (new product/service lines, better payer mix, etc.) will almost exclusively be paid-back through depreciation funding and life cycle cost assumptions.  In short, no new money, the project scope needs to be tight.  Rarely have I ever seen the purported “efficiencies” used in renovation justifications materialize to the extent that the gains justified the project scope.  I also am always wary of renovations that incorporate enhanced or improved occupancy levels.  Again, rarely does the cost justify the outcome and almost always, the adage of “we are not marketable” is more a function of other organizational issues (bad reputation, pricing, average care, etc.) than it is a justification for an expensive renovation project.  In new projects/new development, building efficiency is the key to adequate payback.  Allocating too much space to common areas and non-revenue producing areas increases project costs in terms of building and furnishing (not to mention heating, air conditioning, maintenance, upkeep, etc.) and places more “dead space cost” burden into the pricing equation.  Objectively, a building that maximizes the majority of square footage for revenue production pays back investment far faster.  In an Assisted Living project or Independent Living project, I think a 65% revenue allocation vs. 35% common allocation is reasonable.  Higher allocations to common space strain pricing and definitely, require higher occupancy levels to create break-even and payback targets.  Similarly, more common space consumes more “furnishings”, often minimally used. Good focal space done right and space with a multi-purpose use is preferrable over space with singular use or no real defined use at all (i.e., lounge

April 5, 2011 Posted by | Assisted Living, Senior Housing, Skilled Nursing | , , , , , , , , | 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

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

Senior Living vs. Senior Lifestyle: Adjusting the Development Curve

Not too long ago, when  I was the CEO of a large provider organization, we began to investigate the “next” generation of senior housing products and communities.  We even went so far as to put in-play, one adaptation and had completed significant research on what we hoped would be, our next development foray.  In addition, we began the process of “re-developing” via a series of planning exercises, our existing “older” style housing products, best described as higher density, congregate style communities.  The reason? My personal belief, born out through research, that most traditional style, apartment or congregate style senior housing communities are virtually like the dinosaurs – two feet stuck in the tar pits and ready to become extinct in the seniors housing marketplace.  Of course, moderate to lower cost housing options will remain in the style genre but in reality, most of the current communities are not presently situated as moderate or low-cost housing options.

Like most sociological changes, the shift has been gradual.  When I first entered the “business”, it was not uncommon for seniors near or immediately post retirement to look at moving into the CCRC that we then owned.  The average age of the cohort was 72 and the average age of entry was just shy of 70.  Heck, we had people in their late sixties moving in – voluntarily!  The units were nice, modern and sized appropriately for the “then”demographic.  The community amenities were also nice and spacious, accessorized by a large dining room, craft rooms, game rooms, and specialty rooms (woodworking, weaving, ceramics, etc.).  We were an attractive and desirable option for this group and frankly, an upscale option in many respects from their existing homes.

Over the passage of time, roughly the last twenty or so years, much has changed.  The group that moved in at 70 is now 90 plus and likely deceased.  Their kids are the next target and boy has that group changed.  Unlike their parents, few if any of them (certainly those who can afford a CCRC or middle to upper class housing option) are coming from a home with only one “shared” bathroom.  Most have homes that average 2,000 square feet or larger and already have two cars, a den or recreation room, a jacuzzi, a large kitchen, walk-in closets, and belong to a health club or have a home gym.  Face it, some  of the smaller one-bedroom units I have been in in older senior housing communities aren’t much larger than the master bedroom, master bath suites that their kids are presently enjoying in their current homes.  This generation also has wholly different expectations about the “design” of the space as well.  After all, this next generation has ditched long ago, doing their own dishes, having vinyl on the bathroom floor, using a tub/shower combination with a shower curtain, and the galley kitchen.  Their space frankly, is far different from the space occupied by their parents.

Aside from the spacial considerations, other things have changed equally as dramatically over the past twenty-plus years.  The next generation is far more concerned with “lifestyle” issues.  This isn’t to say that the parents of this next generation weren’t concerned with their lifestyles but to say more succinctly, that the comparison is like a Chevy to a BMW; the latter far more accessorized and tailored than the former.  Being on the “junior” end of this next group, I can attest that my expectations about things other than space are radically different than those of my parents.  For example, I eat different foods and at different times and frankly, food and menu will be incredibly important to me.  I exercise routinely and have a very active lifestyle built around sports and hobbies.  I use the Internet throughout my house.  I am far more health conscious and I am far more socially active across a wider community base than my parents ever were – ranging from sports, to fine arts, to civic events.

To jump back where I began, these changes necessitated (in my former career) movement beyond the existing industry paradigm.  In other words, we needed to re-think and re-develop our products and communities for the next generation of seniors.  The question however, was “how”.  Fortunately, our own research and studying the building trends in the areas we operated gave us significant insights.  For new developments, we focused on the following.

  • Dwelling units that were more free-standing or in smaller groupings rather than “stacked” units in a apartment style buildings.  In all cases, where we could, the units would be one level, barrier free entries and grade level accessible.  Full basements would be minimized as they really were not necessary when the upper level or main level was planned right.
  • Pricing would be based on an “equity” basis allowing for “ownership”, complete unit customization and the owner to have market return.
  • All units would incorporate maintenance free exteriors or at least, exteriors that were minimal maintenance (e.g., brick, cement board, covered gutters, aluminum, forty-year roofs, etc.).  The initial cost would be a bit higher but the life-cycle payback/return would far outweigh the costs on the front-end. 
  • Interiors would incorporate universal design features such as three foot doors, minimal corridors, lever handles on all doors, barrier free showers with integrated seating options and bar options, walls that are pre-backed for grab bars and railings, no-seam floor transitions, non-slip flooring, specialty designed cabinets with readily adjustable heights, cabinet hardware with integrated pulls, and walk-in closets.  Laundry facilities would be on the main level and adjacent to the master bedroom.  In addition, wireless and RFID technology would be built into the structure.
  • The development would incorporate a community center and where applicable, commercial activity (shops, banks, etc.) on the perimeter.  Formal landscaping would be minimized but extensive buffer zones of natural landscape would be used to break up the views and create a more natural environment with walking/biking paths incorporated.  The Community Center could include as many “unique” features as the development could support such as an exercise/fitness center, a bar or pub, meeting space, concierge service, food service facilities/restaurant, etc. 

Re-developing existing projects proved tougher, mostly because units often were sized incorrectly.  In some cases, unit combinations are possible; the process of taking two smaller units or one larger and one smaller and joining them together.  I experienced this with some success but in all cases, the best you get is an enhanced version of the same existing box.  What can be done “best” is what needs to be done “first”, to steal an old adage.  Where space and the building and the infrastructure permits, the addition of any universal design concepts will pay dividends.  It should always be possible to upgrade decor and finishes and to add wireless, cable, dishwashers, microwaves, and other features required by the next generation of seniors.  To the extent possible, even smaller spaces can be made “better” by improving cabinet layouts, bathrooms and living areas by opening space and using contemporary design elements to re-imagine what had been before.

The common areas and the “program” tend to be far more critical in existing projects, primarily because the units themselves will always be somewhat flawed.  In order to modernize to a more lifestyle driven community, space will need to be re-allocated.  In addition, functions will need to be adjusted.  I was in a community in Connecticut where I saw some wonderful examples of exactly how this approach could and did work.  While the community was an apartment or congregate style, it was organized in neighborhoods and decorated to reflect these unique resident driven touches.  The community’s Manager was tasked with “facilitating” resident activity and thus, cocktail parties, dinners, events, lectures, wine tastings, smokers, card clubs, etc., were the norm.  You had the feeling that in the common areas, you were in a private club that catered to a very special community.  The reality is, to adapt an existing community takes careful planning along with community and resident input – current residents and ideally, future residents.  A common theme of priorities that I have discovered is below.

  • Programs are as important as spaces and should truly reflect the social mores and norms of the resident population.  For example, in Milwaukee the Friday night fish fry is a “norm”.
  • Programs and spaces need to be created to attract non-resident seniors into the community. 
  • Integrating formal and informal space is critical and heavy emphasis needs to be placed on adaptable, flexible, multi-use space.
  • Community personalization is key and it should be matched or as closely tied as possible to any branding activities already in-place as part of an overall marketing strategy.
  • Making the environment as unique and reflective of resident and community interests as possible is the key and where applicable, community buy-in is critical.  For example, I know of one community where a local bar/restaurant operates a small scale sports pub/bar that attracts not only regular resident patronage but has become a destination for area seniors.
  • Health, wellness, technology and culture will be critical to incorporate both in the form of space planning and in programming.  The community in Connecticut had a connection with Yale and their academic health programs – highly touted by the residents and a benefit for the broader community as well.

Realizing that costs are always an issue, I have done research in this area as well and as one can expect, the numbers can be anywhere from modest to daunting.  I can safely attest however, that any planning done well can minimize the initial an ongoing outlays and maximize the return on investment.  Most assuredly, the devil is in the planning and without sufficient expertise, thought and time spent, the results will not follow the capital investment.

June 17, 2009 Posted by | Senior Housing | , , , , | Leave a comment