In my consulting career, I’ve done a fair amount of feasibility work (market, economic, etc.). Similarly, I’ve done a fair amount of similar analyses, primarily related to M&A activity and/or where financing is involved (debt covenant reviews, etc.). Heck, I’ve even done some bankruptcy related work! I’m also queried fairly often about feasibility, demand, market studies, etc. such that I’m surprised (often enough) that a gap still exists between “proper” analysis and simplified “demographic” analysis. Suffice to say, feasibility work is not a “one size” fits all relationship.
I’ve titled this post “CCRC feasibility” principally because the unique nature of a true CCRC project provides a framework to discuss a multitude of related industry segments simultaneously (e.g., seniors housing, health care, assisted living, etc.). Starting with the CCRC concept, a set of basic assumptions about the feasibility process is required.
- Demographics aren’t the arbiter of success or failure – feasibility or lack thereof.
- Demand isn’t solely correlated to like unit occupancy, demographics (now or projected), or for that matter, how many units are projected to be built (following the Jones’ as a qualifier).
- Capital accessibility isn’t relevant nor should it be.
- National trends for the most part, are immaterial. Local, regional and state are, however.
- Projects pre-supposed are projects with inherent risk attached. This isn’t an “if you build it, they will come” type exercise. The results shouldn’t be thought of as a justification for a “specific” project already planned.
The last point typically generates a “heresy” cry from folks and certain industry segments. Regardless, I am adamant here in so much that true feasibility analyses determines “what makes sense” rather or as opposed to, justifying that which is planned (or the implication that the client is paying for a study to justify his/her project). Remember, I am a fan of the fabled quote from Mark Twain attributed to Benjamin Disraeli (the former Prime Minister of Great Britain): “There are three types of lies….lies, damn lies and statistics”. As an economist, I have deep appreciation for this as all too often, I see analyses that smack of this latter type of lie.
(Note: The source of the actual “lies, damn lies” quote is still a mystery…thought initially to be said by Lord Courtney in 1895 but since, proven invalid.)
Carrying this feasibility discussion just a bit further, the approach that I recommend (and use) incorporates the following key assumptions about seniors housing (CCRCs) and to a lesser extent, specialized care facilities (Assisted Living, SNFs, etc.).
- The demand for seniors housing, true housing, is very price elastic. Given the elasticity, all demand work must be sensitized by price. The more specialized or unique the project might or may be, the more sensitive the demand elasticity becomes (greater or lesser).
- Local economic conditions matter – tremendously. This is particularly true for CCRCs and higher-end seniors housing projects, especially real estate conditions.
- Regional and state trends matter particularly the migration patterns, policy issues, job issues, etc. Doubt me? Let’s have a discussion about the great State of Illinois (for disclosure, I have a home and office in Illinois).
- Location(s) matter. I incorporate location/central place theory elements in all of my feasibility work and analyses.
- Demographics are important but not in the normative sense. Yes, age and income qualified numbers are important but education and real estate ownership, location and years residency in the market area(s) can be as impactful.
- Competition is important but in all forms. Given the demand elasticity of seniors housing, the higher the price, the greater the wealth status required of the potential consumer, the greater the options available to that same consumer.
- Ratios matter. The demographics are important but the ratio within the demographic correlated to the project, within various locations, etc. is “money”. (Sales folks love this stuff). How many seniors does it take to fill a CCRC?
Because no one project is equal to another, feasibility work and like analysis is both (an) art and a science. I liken the process to cooking. Recipes are key but taste and flair and creativity are important as well. Honestly, knowing the industry well from an overall perspective is ideal – like being a chef trained by the masters! When I see flawed analysis, it typically comes from a source that follows a recipe; a recipe for market analysis, etc. Knowing the industry, having operated organizations or facilities, being trained in quantitative analysis, etc. separates good or great from average. Remember Twain/Disraeli.
So to the title of this post; the correct or proper methodology for feasibility studies and similar analysis (sans some detail for brevity and not in any particular order)….
New Facility/New Location
- Location Analysis – in economic parlance, the application of elements of Central Place Theory. This includes a review of the site in relationship to key ranked variables such as market/demographics, accessibility, staff/employment access, proximity to other healthcare, other services, etc.
- Pricing – what is/are the core pricing assumption(s)….I’ve written on strategic pricing models on this site. If I am doing the pricing work, I apply the concepts in the Strategic Pricing presentations and worksheets found on the Reports and Other Documents page on this site.
- Demographics – I’ll use my pricing data and my location analysis to frame my demographic analysis. Aside from age and income, I’ll look at migration patterns, education, career history, etc. plus I’ll review the information on a geocoded basis to refine market relationships between customers and other competitors.
- Demand Analysis – From the demographic data and tested against the pricing, I’ll build a demand analysis and a penetration analysis that provides a range of likely target customers, within the market areas, give the pricing information, for a particular product. Historic migration and market area occupancy of like accommodations is used to sensitize the demand analysis.
- Economic Analysis – This is a review of current market conditions and trends that can impact the project’s feasibility, positively or negatively. Real estate, income, employment, business investment, economic outlooks, policy implications such as tax policy, etc. are all key elements reviewed.
- Competitive Analysis – What is going on within the area/regional competition of like or quasi-comparable projects is important as a buffer or moreover, a stability (or lack thereof) check. I like to look at all potential or as many as practical, comparable living accommodations – not just seniors housing (condos, apartments, etc.).
I will complete a major portion of the above with less time spent on location analysis and pricing work (though pricing is still key for accurate demand). I have watched organizations cannibalize their own market share and occupancy levels with expansion projects so accurate gauging of current and pent-up demand is critical along with conditional trends (economic, competitive analysis, etc.).
M&A, Financing, Etc. Projects
Again, all of the above work is relevant but depending on the circumstances, I will incorporate benchmark data from industry sub-sets. For example, for SNFs I look at compliance information, CMS star ratings, staffing numbers, payer mix/quality mix and of course, federal and state reimbursement and policy trends. When I review covenant defaults and provide reports, I narrow the analysis based on the core nature of the default but most often, the issues of late are occupancy, pricing, and revenue models versus fixed and variable cost levels. Pricing work is often key along with a review of marketing strategies.
Is there more to this topic area? Of course and this post isn’t meant to be exhaustive nor a text-book supplement. It is however, a ready framework that can provide guidance to those looking at conducting or contracting for, a feasibility, financing or market analysis. My advice: Getting it done right the first time saves money, prevents future problems, and assists with positive outcomes for any project or purpose.
Over the years I have written about the changing landscape in post-acute care, principally due to the health policy ground swell resultant from the ACA (other reasons too but the ACA concretized them all, more or less). Boiled down, the fundamental driver of change is “pay for performance”; the notion that payment will migrate toward value based concepts, away from fee-for-service. The ACA and ACOs, bundled payments, readmission penalties, etc. concretized this oft discussed concept into policy (good, bad, flawed in some regards, and other). However, before the ACA, the notion that healthcare was just too darned expensive wasn’t new fangled. The healthcare industry prior was moving toward pay-for-performance, incentive based models; privately and publicly. Some reference posts on these concepts can be found on this site at http://wp.me/ptUlY-hq and http://wp.me/ptUlY-dw .
From an article this morning on the Modern Healthcare website, “Hospital Select Preferred SNFs to Improve Post Acute Outcomes”, the beginning of the new era for the post-acute industry has arrived. Because of readmission penalties, bundled payments, ACOs and value-based purchasing/pay-for-performance, hospital systems have begun identifying and thus, partnering with only select SNFs. Article link is here: http://www.modernhealthcare.com/article/20150509/MAGAZINE/305099987?utm_source=modernhealthcare&utm_medium=email&utm_content=externalURL&utm_campaign=am
What is interesting to note isn’t what is in the story but what is behind the movement and thus, the implications for SNFs. First, given all that we have seen (and for readers, read about) regarding SNFs and Medicare fraud, the Modern Healthcare story is the antithetical strategy of current environment survival. Hospitals are seeking to partner with SNFs that are efficient, lower cost, higher quality. Essentially the mantra is: There is no survival for those that can’t shorten length of stay and improve quality. Nothing about this trend relies on maximizing RUGs, providing unnecessary care, or delivering sub-standard care (the DOJ suits against HCR/Manor Care, RehabCare and Extendicare representative examples).
Second, the trend is all about quality and competence. The SNFs that are referenced invested in quality and core competence some time ago. They planned, made the staff investments to deliver the care (RNs, Therapists, etc.) and implemented strong programs of QI/QA (ala QAPI). They didn’t rely purely on maximizing rehab but on building overall case-mix and thus with it, case-mix competency. They excel at advanced care planning, care coordination, and med reconciliation. They also have strong committed leadership, boards, and competent facility based management (I know because I have consulted with many and still do). Moreover, they seek to add new programs and innovations to be better, more efficient and high quality providers and understand the relationships between care outcomes and patient satisfaction.
As the title of this post references, this is a period of “new beginning”. This means that for many SNFs in many markets, there is still time to reform and get into this new era. Below are my six stepping-stones to get into this new era and quickly; to become a valued and wanted partner in the ACO, bundled payment, pay-for-performance world.
- QAPI: If you don’t have a program, build one now. This site has lots of reference material. This is a backbone, fundamental requirement for membership in this new era.
- Align Your Internal Resources: What does your staffing levels look like? How many contracted services do you provide? Where are your contractors at with regard to these concepts (quality, improved care outcomes, commitment to education and development)? Do you have sufficient staff resources to increase your acuity? If not, what investments do you need?
- How Integrated is Your IT Infrastructure?: Are you capable of connecting with your partners? Can you share data seamlessly? Are your physicians capable of accessing patient information remotely? Can you provide patient/families with access? Are your contract services connected (lab, radiology, etc.)?
- What are Your Key Competencies?: Do you reconcile medications on admission? Do you begin advanced careplanning discussions prior to and concurrent with admission? Do you have specific staff expertise in wounds, neuro, behavior management, respiratory, pain, etc? What are your current quality indicators for falls, infections, wounds, hospitalizations? What do your partners want and need and do you provide it?
- Who are Your Partners?: The SNF environment isn’t the last stop for transitional patients. Home care, hospice, outpatient services are all part of the continuum and the equation. SNFs need to have their distinct partners in the same vain and alignment as hospitals with the SNF. Vet your partners and get understandings made. Share information, build infrastructure, develop common understanding, meetings, etc. Get on the same page. Being able to rapidly discharge when ready is all about having key partner relationships.
- Become Service Centered: Giving good care is one element. Being good at caring is of equal importance. Outcomes are great but satisfaction in health care is rarely about just good care. Frankly, most patients don’t understand what the outcomes are all about rather, how do they feel and how were they “cared for” during their stay. Service centered is about answering call lights timely, having staff with a smile and an element of concern, a presence by management on the floor, and a level of engagement that says we “care about you”. Measure satisfaction, solicit input and hold focus groups. Pay attention to the details!
As always, questions are welcome. Feel free to drop me a note in the comment section or via e-mail. My e-mail contact is available on the Author’s page. Remember, if you wish a personal reply, please provide a working e-mail address.
With the hospice market (in most areas) fairly well saturated and the core (source) demand from traditional referral sources “flat”, growing census is a challenge for agencies. Some agencies have experienced referral growth but alas, length of stay has shortened. Others have experienced erosion as, while improper, the “skilled to death phenomenon” erodes days and referrals. Recall, the “skilled to death” concept is the SNF referral/discharge where the patient meets the 3-day prior inpatient criteria and “may” require a skilled service by Medicare SNF definition (nursing or therapy) even though the same is imprudent or not truly related to the patient’s condition. I have written about this issue before: It is fraudulent by all indications and merely a ploy to avoid out-of-pocket costs (applicable under hospice) for institutional care (at least for the first 20 days, if such meet the “skilled’ definition under the Medicare SNF benefit). The question oft asked of me is where can growth or additional days be found? My answer is at the “institutional” end (sort of). The reaction I soon get is “too much risk” or “been there, done that, got probed” or “those places won’t deal with hospice”. The last comment is why I say “sort of”.
To start; Hospice is a perfect complement for an SNF, and Assisted Living Facility, a Memory Care facility or a Seniors Housing complex (including CCRCs). As I have written before, I encourage all of these groups to partner with a (yes one) agency or perhaps two (no more). By the way, and I have beat this issue to death with numerous people, it is perfectly legal and appropriate for an SNF or any other of the aforementioned provider types to partner with just one Hospice (you will find ample reference on this site and explanations as to why in the comments section, other posts, etc.). For an SNF, hospice is clear survey risk-reduction and efficiency enhancement for any patient/resident that is simply trending toward end-of-life, naturally. The SNF COP (Medicare federal requirements) loathe patient/resident decline and thus, as patients/residents naturally trend toward death, the ante to prove all things interventionist to stave-off decline or at the least, justify that decline occurs despite best efforts to prevent, falls to the SNF. As ridiculous as this is, it is the SNF reality. Hospice and palliation, done right, resolve this issue and release (though not totally) the SNF, and the patient/resident, from the illogical burden (the patient/resident no longer bothered with weights, lab tests, etc.). The benefit in the Assisted Living/Memory Care environment, while less regulated, is the ability of hospice to elongate a stay where perhaps, the resident has exceeded the regulatory care parameter (boundaries) set by the State. In short, most states will allow residents to remain in the Assisted Living environment, even when the care required exceeds the regulatory boundary, if the purpose is to facilitate natural death in the environment rather than relocate the resident.
The risk for hospice today lies within the focus the CMS/Department of Health OIG and Department of Justice have placed on the industry, for agencies with large caseloads in institutional care settings. The reason for such scrutiny is the large (rather) amount of inappropriate enrollment and care provision exhibited by certain agencies (predominantly national agencies such as Vitas) in SNF and Assisted Living environments. Bluntly: These environments are the locus for a great deal of fraudulent activity in the industry. For those interested, the January OIG report on hospice activity in Assisted Living environments is available here: http://oig.hhs.gov/oei/reports/oei-02-14-00070.pdf Understanding the level of scrutiny the Federal government is placing on hospices with a large institutional caseload is key to building a proper risk management model/approach. To be sure, the agencies that play heavily in the SNF and Assisted Living environments will be audited more frequently. When audit frequency increases, the risk for claim errata and mistakes increases (mathematically logical). Knowing and understanding this risk is imperative to building a proper “institutional” care program. The risk of improper enrollment/certification and insufficient care isn’t worth a comment as no agency should ever breach these risk areas as doing so is clear fraud.
(There is one additional somewhat looming risk and that is a possible payment reduction in the future as CMS continues to look at revamping and modernizing the Hospice benefit. A concept within the discussions is a per diem reduction for any patient residing in an institutional care setting like an SNF or Assisted Living. As I have no solid information, nor does anyone else, as to what (and when) CMS will do regarding a change in the Hospice benefit, I won’t integrate any additional comments regarding payment changes into this post).
Taking the risk into account as discussed prior, how would or should an agency integrate additional institutional patients into its caseload and build a risk management model. The assumption is that a greater focus on an additional caseload will trigger scrutiny from the Medicare intermediary or perhaps, a CMS contracted auditor. Below I have outlined the approaches and recommendations I provide to hospice agencies.
- Limit the settings and in advance, perform due diligence on the provider setting and the provider. Partner with providers that have high quality, solid compliance histories (CMS 5 star, good survey history, well-regarded, etc.). Lots of data sources for an agency to use exist to determine the quality of any setting, formal and anecdotal.
- Understand the compliance/code requirements of the institutional setting. Hospices know their own requirements but all too frequent, don’t know the SNF requirements or Assisted Living requirements. Become knowledgeable or acquire talent that is. This will make discussions and planning and ongoing internal auditing much more effective and efficient.
- Build a strong interface agreement with each institutional setting. I have resources here if anyone needs. The key point is define in writing, everything to the best of each parties ability – who does what, who is accountable for what, etc. Focus on key risk areas such as documentation.
- Know the setting documentation and integrate the setting documentation into the hospice documentation/record. For example, in an SNF make sure the hospice has copies of the MDS, care plans, pain and other assessments, ADL information/records. Fundamentally, both parties should be seeing, recording and saying the same things.
- Structure your IDG/IDT process to incorporate a review of the institutional care setting’s documentation. Make certain institutional care staff are part of the process. I like to see the same representative group.
- Train key personnel – Hospice, the SNF, the Assisted Living, etc. on what each party is looking for in terms of care delivery, documentation, etc. Implement an ongoing program of inservice education. I like to see, on the part of the hospice, the same individuals tasked to a site – limit rotation of staff.
- Develop institutional care pathways and algorithms for common disease states found in SNFs, Assisted Living. Many hospices use Local Coverage Determination criteria – I am not a huge fan unless the same are tweaked or updated recently. CMS has clamped down on failure to thrive, generalized neuro, end-stage dementia as appropriate diagnosis/reasons for certification. This is not to say that the same are irrelevant reasons for certification merely, more elaboration is required. Look beneath the surface to find what is going on. Institutional setting patients, particularly SNF patients, generally have a good medical record with tons of data. Likewise, AMDA is a great pathway source. Local universities with medical schools can help with identifying criteria for end-stage Parkinson’s, post stroke (CVA, hemorrhagic, etc.), heart failure, end stage diabetes with/without renal failure, etc. Build your algorithm to assure key definitional points/milestones and share it with the institutional care setting.
- Utilize an external source to perform quarterly audits of your institutional caseload. Have this individual/organization sit through an IDG/IDT and then review records, particularly focused on certifications/re-certifications and charting – both Hospice and the institutional site. I like to have a focus on continuity of charting/documentation and clear role congruence between the parties (their staffs particularly).
As regular readers know, I speak at a number of conferences annually. Additionally, I work with financiers and investors in the space literally daily. In all my journeys and conversations, I am still faced with some major myth “debunking” about the nature of the seniors housing and healthcare demand, current. The major myth: Baby-boomers are either here, impactful, or here soon enough that additional supply and different supply is necessary. Nothing is further from reality.
The economist in me (and the economist that I am) wants desperately to provide a full-blown lecture here but I’ll refrain and provide a Cliff’s Note version. Demand is a function of supply and to a lesser extent, vice-versa. The two are interdependent. Demand (commercial) requires a supply of consumers, able and willing to pay a price for a given product. Seniors housing and healthcare, especially housing, has a very elastic demand curve. This means that price is a major influencer in demand. The amount of demand for higher-end, above market seniors housing, is less than the amount of demand for moderate and lower-priced seniors housing (at its core).
Demand is also influenced psychologically hence the “willing” component. Seniors housing requires the consumer to make a psychological decision about moving or consuming, a niche’ product. This fact is supported by the demographic reality that less than 12% of all seniors live in a specific “seniors housing” environment. While a greater number reside within a NORC setting (naturally occurring retirement community) such as a condo complex or apartment complex, the reality is that fully 80% of all seniors at anytime, do not reside in seniors housing nor are they “looking”. The core dilemma with seniors housing is that seniors universally, prefer to live in their “residence” in their community. Some, but a rather small number, choose or are motivated to move annually by choice or by need – the latter being the greater motivator (death, family move, health issue, change in neighborhood, etc.).
Consumers, in this case seniors, exist along the full spectrum of age and ability (economic) to pay. Given the elasticity of demand for seniors housing (the higher the price, the fewer number of able consumers) coupled with a plethora of living options for seniors (home, condo, apartment, etc.), measuring the actual demand for seniors housing is a bit more complicated than most want to believe. The complexity lies demographically and economically.
First, the demographics today are not spectacular. While it is true that we have more older adults reaching ages 80 plus than at any time in history, the number of people in this cohort as derived by birth is falling. An individual today aged 80 was born in 1935 – the depression/war years. During this period (depression/war years), birth rates declined precipitously. See chart below.
It isn’t until the post 1945 years and subsequently, into the mid 1950s that birth rates accelerated into what we commonly know as the Baby Boom. Simple math thus tells us that the real expanse of supply of seniors, age appropriate for seniors housing (around age 80) won’t occur for another 15 years minimally. Today, we are actually seeing a reduction in overall “age relevant” supplies of seniors for seniors housing.
Back to the point about seniors housing demand being highly elastic. Fewer consumers (potentially) also means that all consumers by economic status and desire are fewer in number. The point here is that the supply of seniors for higher-end housing is not just smaller in number but smaller in “desire” or motivation. Folks that have the means to spend thousands per month and invest an entry fee of $250,000 to $1,000,000 also have the means to explore multiple different options. In other words, the range of substitute products (alternatives) for this group is plenty and growing. They clearly can afford to remain at home longer, acquire supportive services, or migrate to lifestyle communities or other planned communities that include multiple options and services geared towards “aging in place” (see Del Webb and The Villages as examples).
Today, there is a reason many communities and projects continue to struggle with occupancy. The average nationally remains stuck around 90% and Assisted Living hasn’t broached this level yet – even though projects continue to come forward at a steady clip. A contributing factor? The demographics are not as fluid and as strong now as industry folks want to portray. The industry is in the core openings of the 20th century baby bust. Additionally, not only is this next group demographically smaller, it is economically less well off, by virtue of time of birth, than the cohort preceding and the one following. This is in effect, the double demographic dilemma for seniors housing.
The moral of this present story: Supply of units for the most part, in most regions, is good to surplus. Reinvention in place is what I advise and for growth; acquire – don’t develop. Adding additional inventory is not only expensive it is difficult to support, except in certain markets where certain really good conditions apply, demographically and economically with proper demand analysis. This present condition will last for about the next 10 years and to a certain degree, maybe longer as the age at which seniors seek “seniors housing” elongates – moving into the 80s. Developers need to understand this condition and seek proper demand analysis and economic planning before believing the demographics of “If you Build it, They Will Come!”
One of the top questions I’m asked by clients, readers, students, and interested parties everywhere is how can my organization excel in a competitive environment. In other words, how can I build my organization’s value proposition such that the organization becomes the provider of choice in the market? My answer is always thematically the same: Be different in a way that is perceptible and tangible to the market and to the trends in the industry. Think Apple. Apple is constantly rolling forward new technology to feed the trends and its customer base iterations (the changes that occur among its customers as each Apple release begets more desired upgrade on behalf of the users).
Before I give out five rock solid strategies that any SNF can pursue, I need to frame what not to do first or specifically, what won’t work. First, building the organization’s Medicare star number by manipulating the input data on staffing, quality indicators, etc. Waste of time, perilous on a number of levels and ultimately, a no -win unless compliance surveys correlate to the 4 or 5 star level. Second, baiting, paying, cajoling and/or bribing referral sources (discharge planners and physicians). This is fraud and while it may work in the short-run, in the long-run it won’t plus its illegal (for those saying this doesn’t happen, guess again – I see it all the time). Third, marketing and advertising without the requisite pedigree to back it up. All the words and images don’t and won’t work if the product isn’t there and the experience on behalf of residents isn’t good.
On to the strategies. These work for a number of reasons but most importantly, because they are cutting-edge, fit the health policy landscape, and are patient/family centric. Additionally, none of these is expensive, though each requires some investment -just not mega-bucks. Once operative, each is a difference marker and likely, not repeated within a given market area.
- Excel at Food: Institutional food service whether outsourced or produced on-site is the bane of residents and families from a service and quality perspective. Further, it is unnecessarily clinical. The trend is complete de-institutionalization; top to bottom. First, ditch all diets – one general diet is fine and preferred. It is the facility’s job to manage resident weight, health, etc. and special diets just aren’t required. Second, quit modifying food products and fluids chemically or mechanically. Use food to create substitute products with recipes and to modify products for thickness, texture or consistency. Find a culinary school or good chef near your facility for pointers here. Have great food and diets that any resident, under any condition will rave over and the facility will rise immediately to the top of the market, at least in this category.
- Excel at Care Coordination and Advanced Care Planning: Advanced Care Planning is all about helping residents and families make good choices with regard to care and treatment decisions. Healthcare people and especially institutional care sites stink at this. Being great means knowing how to have the right conversation at the right time and having resources available to help people make good decisions. Think of how many dollars can be saved in everything from unnecessary meds, to unnecessary tests, to reduce hospitalizations, ER visits, etc. with proper communication around risks and benefits and individual choices. Likewise, great pre-admission planning and discharge planning wrapped around Advanced Care Planning will lead to fewer hospital re-admissions, more complete care on discharge, faster care on admission (fewer delays in care), and enhanced staff productivity (particularly nursing) as less time is spent on phone calls, communicating non-critical labs, etc. Excel at this and watch hospital referrers, physicians and satisfied residents/families laud your facility.
- Excel at Behavior Management: This is all about reducing unnecessary drugs plus improving the care of behavioral challenged residents. The latter includes the ability to “step-up” your rehab and restorative nursing programming, even for the dementia afflicted. This is all about training and employing the techniques that are available from organizations such as CPI and TCI (Crisis Prevention Institute and Therapeutic Crisis Intervention). Residents become medicated most often for staff convenience and conformity with the institutional environment. Train all care levels and support levels in how and why behavior occurs, make simple changes, and meet as a Behavior Team regularly and watch overall resident behavior decrease, staff confidence rise, crisis and panic reduce and residents and families become happier. Likewise, facilities which become really good at crisis and behavior management become a resource for the community – a center of excellence.
- Get Connected: For a minimal investment, get your facility on the web and if it already is, build its own ap! Develop a patient/family access point with all kinds of information and resources about everything common to resident questions, family concerns, etc. Use Skype as an activity and as an options for families to watch an activity, to talk to the doctor and/or to participate in a therapy session with their loved one. Connect with a local tech school or university for cheap talent maybe, talent which is free as part of an internship.
- Bring it In-House: This strategy requires the most investment dollars but again, not a ton if done right. The more internal capacity/competency that is available on-site, the fewer care transitions the facility will experience. Fewer care transitions = lower risk. Fewer care transitions reduces and/or eliminates, delays in care. The list here is lengthy but any of the limited following are inexpensive (relatively) and simple: I&Rs, mobile x-ray with digital results, on-site swallow studies via FEES, IV starts including PIC lines, fluoroscopy, Doppler studies, EKGs, in-house therapy (non-contracted). Each of these can be a simple, huge improvement and none require a six figure investment or even half of a six figure investment.
Accomplish any of the above, a few of the above or all of the above and communicate and market the same within the facility’s market area and start becoming the provider of choice.
Earlier this spring (a couple, three moths ago), I spoke at a marketing/P.R. conference and when my session was over, I sat and visited with a number of the attendees. My presentation was about value propositions and marketing; how to align your organization’s core economic value components within a marketplace, within a customer segment. Within the short additional time I spent with these attendees, I learned that a number of their organizations (CCRCs) were still struggling post the recent economic recession/slow-down. In fact, a number of them expressed that in their areas/region, recovery hadn’t yet begun.
Since that event and over the course of the past three months or so, I took notes on various client engagements, discussions and research reports on how the CCRC industry is fairing these days. Before I break down my conclusions/observations, some general prefacing comments about the industry are required. First, the CCRC industry is truly different by location and thus, it is expected that some areas/regions, etc. are faring better than others. Second, established projects have fared differently than newer projects; not always better but different. Third, the capital structure of a CCRC (how much debt and how the debt is structured in terms of rate, etc.) is a major component of how well or not well, certain projects are doing.
Below are my observations/conclusions of how the CCRC industry is doing mid-way through the third quarter of 2014. As stated, most of my observations are first-hand (client engagements)* followed by research and conversations with those that work in and around the industry. *(My firm and in many cases me specifically, does capital development/corporate development work within the industry including consultant’s reports when covenant defaults occur, strategic planning, turn-around consultation, M&A work, research for banks and investment banks, and economic, market, and financial feasibility studies. My comments do not reflect any specific client or series of clients or any engagement former or current).
- Late 2013/early 2014, Fitch issued their outlook on the CCRC industry as “stable”. Their conclusion was that improving occupancy rates, stable expenses due to the non-inflationary economy and access to low (historically) cost capital was favorable and thus, their rating. In general, I concur that where real estate rebounded (used inventory down, prices stable and climbing) and general economic conditions improved (unemployment falling, commercial activity rising, etc.), demand for units returned to near pre-recession levels and occupancy increased. However, as I mentioned at the beginning of this post, there remains pockets of weakness, some fairly profound, across the country. The regional/local outlook as opposed to the 20,000 foot national trend is more relevant to the success/struggle of any one project. For example, our clients in “rust belt, heavy manufacturing” areas in Ohio, Wisconsin, Illinois, West Virginia and New York would mount a stiff argument that the outlook is far from “stable”.
- Pricing has remained relatively flat and in many areas, occupancy gains have occurred as a result of discounting and promotions. I don’t see this changing any time soon as while demand is good in some areas, demand is tempered by recent events and still, a large amount of economic uncertainty. The wealth profile of the current demographic has shifted, especially on the income component.
- Approximately half of the projects that were in the development queue in 2008 evaporated or re-scaled. Only recently has the industry returned to a somewhat robust, new development outlook. Access to continued low-cost capital is a key element of fuel for this emerging (again) trend and even though rates ticked-up in November/December 2013, they have since stabilized. Rate however, is just one component. Demand for debt on the part of investors is still at low ebb. Suppressed yields have moved investors out of fixed rate, tax exempt debt en-masse. Deals still are competitive but nowhere close to pre-recession levels. Banks are only now starting to revisit commercial lending to the sector and again, not with the same fervor as pre-2008. The overall number of outlets has declined and the debt to equity levels are still conservative (70/30). Valuations remain a bit low as comps are still weighted by one-off deals, distress deals and work-outs and bankruptcies. Book remains the valuation arbiter and as such, cap levels remain in a narrow range. Overall, the capital outlook is fair but caution and uncertainty remain prevalent and thus, valuations are flat and good deals get done but marginal deals still struggle.
- Rising occupancy and improving economic conditions have slowed defaults and tempered bankruptcies but not eliminated them. Again, certain projects in improving economies have rebounded though others in regions/markets of slow to no-recovery languish. Though average occupancy has once again moved into the low ninetieth percentile across the industry, I still see projects below this level on a regular basis and some, profoundly below. In virtually all instances when I encounter low occupancy, two elements are present. First, the market area is struggling economically – real estate, jobs, infrastructure, etc. Second, the project itself is really viable or relevant. More on this latter point toward the end.
- Projects that have done well, rebounded, stayed vibrant exhibit the following key elements, aside from being in a market area that isn’t still declining or not recovering. First, they were not overly leveraged. Second, they had/have investments and cash reserves. Third, they didn’t defer maintenance to any great extent. Fourth, they stayed relatively lean on the expense side. Fifth, they have diversified revenue streams/bases. Sixth, their pricing was market balanced and actuarially sound. Finally, their management was forward-thinking and had plans in place to address the changing environment. They have a good senses of the economic and market conditions impacting their organization and they plan and address these conditions fluidly.
- Projects that haven’t fared well exhibit the opposite characteristics from above and/or, they simply exist in market areas that haven’t rebounded. The most common element of struggling projects that I see is ineffective senior management and governance. They simply never moved beyond a paradigm that was shifting, shifted and won’t ever return. They aren’t relevant and haven’t learned or developed the current competencies required to compete in a different economic and market environment. For many, the writing is on the wall and for some, revival is possible but a complete turn-around is required.
What I have concluded over the last few months is that industry success is a function today of five components;
- Being in a market area that is economically stable and modestly improving. Real estate fluidity and price stability is important but equally important is the general economic outlook, government infrastructure and commercial economy. Projects that aren’t in this type of environment won’t, no matter what they do, improve beyond a point of mere survival (thriving just isn’t possible).
- Marketing and pricing today require a completely different set of competencies and strategies to achieve success. Pricing must be strategic and financially validated and demonstrative of a clear value proposition. No longer can a project succeed on guessing, market comparables and eyeballing what “management thinks” the budget will support. Marketing is different as well. This is no longer a real estate driven sale and the economic axiom of elastic demand applies. CCRCs have a very elastic demand curve and such, pricing and marketing must unite in the creation and communication of the economic value proposition. More leads than ever are required to generate sales and build and hold, market share. Traditional print and media ads won’t get it done.
- A highly diverse revenue stream/platform (multiple service lines) such that liquidity and debt service covenants can comfortably be made within normative occupancy levels (90th percentile or lower is best). If this is the case, the CCRC also tends to be more market competitive and capable of self-referral and internal market development. In other words, it has multiple channels for referral development.
- Strong, capable management/leadership that isn’t necessarily, tied to the industry conventional wisdom. They are adept at planning, forecasting, and keeping operations structured on high-quality, efficient service delivery. They know the market, know their place in it, know the economic outlooks and demand elements and adjust their products accordingly.
- A relevant physical plant environment for the market. A project doesn’t have to be new and/or the most glitzy. It does have to fit the market however and be current – minimal to no deferred maintenance. Economic value proposition are about proper product value, inclusive of warranty, for the customer to evaluate the tangible and intangible relevance. The physical real estate elements are a major component of the proposition and properly positioned within the overall project, priced and communicated correctly, the prospects for sales and success are high.
Using characterizations, 2013 was a year of gradual ascent for the industry but not necessarily, uniformly so. After a series of years preceding classified as industry malaise, occupancy began to trend forward and absorption rates stabilize. Industry wide, overall occupancy is hovering around 90% for CCRCs though again, this number is broadly misleading. Non-profit CCRCs, the bulk of the industry, fell-off slower and less dramatic and thus today, have risen back in generalized occupancy above 90%. For-profits, fewer in number and newer in market, remain below 90% in overall occupancy (88%). Interesting to note is that the bulk of non-profit CCRCs are entrance fee communities whereas the for profit variety trend toward rental models.
The question for 2014 is will a growth trend emerge? My answer is “no” but the tide will remain somewhat positive. What needs expansion is the following;
- CCRCs and Seniors Housing is very local and regional. Effectively, market dynamics at the local and regional level will play more directly than national trends. As each economic region and market have recovered differently and are pacing recovery differently, so are the prospects for Seniors Housing.
- The real estate market, while better, remains vulnerable nationally and moreover, regionally. Some regions and municipal areas have rebounded nicely and days on market have returned to historic lows (averages) and prices, increased to pre-recession levels. Conversely, other regions remain stuck or have only marginally rebounded (the Detroit area, portions of Chicago are current examples). For true CCRC prosperity to return, the residential real estate market must continue to strengthen.
- The overall economy is still mired close to neutral. Job gains are somewhat phantom and Labor Department unemployment numbers a misleading gauge. The job gains made are not career oriented jobs with moderate to high wages and solid benefit packages. The gains are part-time, lower wage, service sector and seasonal/temporary work. The overall participation rate remains at 40 year lows (fewer numbers) and the long-term unemployment number, grudgingly high. Inflation remains low and accommodative monetary policy has suppressed fixed income yields at record lows. Essentially, this means price inflation remains checked, even for seniors housing. With seniors feeling the pinch of income suppression (low social security increases, low fixed income returns, etc.), the income component of the rent equation remains compressed.
- Available product in many markets is still fairly high. While new projects are coming on, the rate is still slow and recent upticks in financing costs have changed the capital components on project cost. Recall that in April of 2013, unrated and rated tax exempt debt was at record lows and volume in terms of issuance on the uptick. Essentially, demand was equal to and often greater, than supply. Nine months later, the cost in terms of interest is 25 to 50% higher across all rated and unrated categories with new project/new campus debt cost today hovering around 8.5%. Though capital markets remain relatively fluid for projects, the costs today have moved high enough to re-shape new product entries in terms of timing and scope. Similarly, the fluidity that does exist is subject to short-term volatility as Fed policy (the degree of tapering), global shifts in monetary fortunes via emerging market currency valuation changes (a far lengthier discussion is warranted for this but not now), and the fixed income bias to “short” duration (fearful of upward rate volatility) shifts liquidity and funding dynamics.
Given the above, my outlook is good but not great. I see continued occupancy improvements but incrementally. I also see continued regional struggles as some locations are just not in recovery mode. I see enough volatility economically to keep things moving cautiously forward. Similarly, the same volatility can rear a period of distraction and even retrenchment, though I think such a period is brief. Projects will emerge cautiously and then again, given funding dynamics, will evaporate and re-scale. I think the wholesale raft of tax exempt debt refinancings will cool substantially as the cost of a refunding without enough interest savings has narrowed or tipped, especially for less than A rated credit. I think price compression will continue as rates will remain suppressed by fixed income fortunes and low inflation. Revenue improvements will continue to come from rising occupancy and improved operational efficiencies though the latter is probably, mostly wrung out.
Non-profits will continue to out perform for-profits in most markets if for no other reason than their time in-market. For consumers, these sponsors and projects have been around long enough to garner trust and build reputational stability. This isn’t to say that for profits can’t succeed and many will but as a generalized industry trend, the non profits are ahead of the curve. This gap however, will narrow if and when, the industry fully rebounds. A challenge for non-profits is that while they lead in reputational time in-market, they do so often with older physical plants.
Where vulnerability for organizations remains is at the capital structure level. I still see a tough year with a continued high volume of technical covenant defaults (usually liquidity covenants). Rate compression and the inability to pass along too much rate inflation (if any at all) coupled with occupancy challenges was the driver in 2013 and will continue to 2014. We saw some salvation with low rate refinancings but that window has closed for the majority. The key solution for most is recovering occupancy and for some, this will remain difficult given regional economic challenges. What I do know however, is creativity in solutions and positioning is key and will continue to be so for at least 2014.
A key element for all providers that seems missed to me in numerous discussions is the true demographic picture and thus demand equation within the market. For lack of a better term (or terms), I call this the Baby Boom Fallacy. Too many developers and providers have reached the conclusion that the market is rich with and growing exponentially because of Baby Boomers. In reality, nothing is further from the truth today, and for the next number of years. The true baby boom period is 1947 to 1963. This means that the oldest Boomers are just above 65 (67 to 68). Using the real age math for seniors housing and CCRCs in terms of average age of initial occupancy (non-hybrid projects like Del Webb communities aise) at 80, the impact of the Boomers is still a decade away. Their impact today is as adult children and influencers of the current resident prospects; not prospects themselves.
The current resident demographic demand is the baby bust generation or war babies. The World War II era babies are part of time where birth rates declined due to depression recovery and the war. The target range lies within the group born between 1930 and 1943 – pre Baby Boom. This period in time is more bust than boom in terms of numbers. The shift in numbers evident within this group (today) over prior periods is evolutionary due to survival, not due to birth rate. There are more of these 75 plus folks than ever before solely due to increased life expectancy; nothing more. Targeting this group, their cultural norms and their experiences (social, economic, etc.) is where marketing and planning should be – not focused on Boomers. The Boomers, contrary to rhetoric, aren’t here yet as the consumer.
My presentation from this morning’s LeadingAge Annual Meeting session, “Data Driven Marketing Strategies” is available for free download on this site. Go to the page titled “Reports and Other Documents” to access the Power Point.
Among the improvement laggards in the current slow economic recovery was the real estate sector of the economy. Despite record low borrowing rates, home sales seemed stuck in neutral even as positive GDP growth resumed, modest gains in employment occurred, and consumer confidence improved.
Starting late summer 2012 and accelerating in to 2013, the real estate economy has strengthened and improved nicely. Historically, a healthy real estate economy correlates to strong seniors housing starts, sales and occupancy. With many major markets over-supplied as of late in terms of seniors housing units (demand perspective), an improving real estate economy, if trends hold true, imparts hope for the seniors housing sector – or does it?
Seniors housing, as I have written before, has a very price elastic demand curve. Essentially, this means that potential buyers and the universe thereof, is directly influenced by the cost of the housing option. Even when costs remain stable, the demand equation changes dramatically if the buyer for the units experiences change (real or perceived) in his/her economic capacity. Negative changes such as falling real estate prices, constrained ability to liquidate real estate, or reduction in the number of potential buyers for the real estate contribute directly to a senior’s ability and willingness to purchase a seniors housing option. The most dramatic impacts occur within projects that are above-market priced or higher-end as the elasticity of demand for the most expensive options is greatest. In effect, the higher the price the more the consumer of the product or service, will shift to lower cost alternatives, if his/her ability or capacity to purchase has changed (again, real or perceived).
What is most interesting about the real estate economy compared to other economic sectors is that national trends don’t play-out directly, in regional or local markets. Take for example, markets or regions where oil and natural gas production has exploded. Even during the slowest, most depressed times for the real estate economy nationally, the real estate sector in these regions and locales was booming. Housing of any form in areas such as Casper, Wyoming and Williston, North Dakota was (and remains) scarce, pricy, and by timing (supply and demand), development scarce. Conversely, some markets fared far worse than national trends in terms of foreclosures, time on the market and price deflation (Las Vegas and Chicago, IL are examples). Given the regional drivers that impact the real estate economy, recovery will vary dramatically.
Correlating a recovering real estate economy to an improving seniors housing sales and occupancy cycle is simplistic from a global perspective but at the site-specific end, a bit more daunting. What we know generally is that a more fluid, stable real estate market generally improves the occupancy, unit absorption and sales results for seniors housing. We also know that in general, by occupancy and ultimately, price inflation, it improves the operating results of seniors housing projects. What we don’t yet know is whether this recovery is a harbinger of longer-term real estate stability and does the improvement tide wash over all markets at some point and in what time frame.
Arguably, this recovery is perhaps different, certainly less uniform and due to other over-arching economic issues, more complex than any post recession period prior. In certain markets, those that were the least impacted by too much existing supply, rapid increases in unemployment and a large number of foreclosures (REO or REJ properties), recovery is impactful for seniors housing projects, especially if the unit supply is normative or about par with pre-recession demand. In other markets where prices fell dramatically, foreclosures were heavy and unemployment greater than national average, recovery will be slow. Even the latest positive economic news regarding the real estate economy is a tad misleading. Yes, most markets are improving. Yes inventory is down, days on the market is improving, listing prices are recovering, etc. (a few markets such as Columbus, OH, Philadelphia, PA and Spokane, WA continue to see price deflation) but the improvements are from a very, low point. In short, the improvements are signs of “recovery” not a validation of stability – yet.
While the road ahead appears somewhat smoother, the opportunity for pot-holes exists and thus, the relationship between real estate fortune and seniors housing is still rocky. My considerations worth noting are as follows.
- Employment and wage growth (personal income) is still stubbornly slow. Under-employment at record highs.
- In some markets, employment and under-employment will never return to post-recession levels. Certain jobs and companies are gone from the landscape for good.
- Interest rates today are less of a function of improving sales even though low rates improve affordability and thus, general increases in eligible buyers. Changes to federal lending laws and mortgage requirements have tightened credit requirements for borrowers. These changes, regardless of how low rates remain or go, preclude a large universe of individuals from securing favorable term mortgages. In short, the supply of buyers has shrunk and permanently so.
- Given how low rates have been and for how long, rate rise to a certain degree is forthcoming. Rising rates inversely impacts the supply of buyers (negatively).
- Price increases for individual homes won’t broach pre-recession levels (actual or inflation adjusted) for years in many markets. In certain markets such as the Metro Chicago region, price increases in terms of realized sales, are years out to achieve pre-recession par.
- The overall economy is still vulnerable and the consumer, still leery of what can lie ahead. Confidence is better but not great. Consumer confidence is critical to a buyer’s willingness to leverage long-term, arguably as critical as financial capability to buy.
- Seniors housing costs are at their low-ebb as expressed by monthly rental and in some communities, entry fees. While costs continue to rise, albeit not dramatically, the pressure to begin to inflate fees is present for many projects. Fee inflation during a recovery period or stabilization period is anathema to improving unit sales and developing new prospects. With the elasticity of the product, rising rates in a market that still isn’t healed can “chill” prospective buyers.
Is the trend improving for seniors housing? Yes but not universally and the real estate economy in many regions remains disconnected. Additionally, I think the direct correlation between a strong real estate economy and the prospect for seniors housing sales has changed. Yes it remains a major factor but property sales cycles will remain slower than prior periods, prices lower than prior periods, and buyers for individual homes, in lower numbers than in prior periods. The take-away is this: The improving real estate economy is good news, not necessarily great news or for that matter, a sign of salvation for projects looking to ramp-up sales with urgency. The trend is improving but full improvement, is still down the road and for certain, the road is different in direction than before.
I have uploaded the Power Point portion of the presentation I did at the recent Leading Age Annual Meeting and Conference in Denver per reader and attendee request. You can find it and download it on the Reports and Other Documents page on this site. The presentation is titled, “Value Propositions and Marketing”. The content essentially covers the application and development of economic value propositions and their resulting use in developing marketing and pricing strategy.