Insight: CEO Turnover
During the pandemic and continuing somewhat through current, healthcare turnover has been on the rise. Nursing turnover (from direct care) and retirements exploded by mid-pandemic. Burnout was high as was job dissatisfaction. What became evident is the linkage between staff turnover and staffing difficulties along with COVID policy, and CEO turnover. While 2021 turnover was proximal to prior year norms, 2022 is showing an increase as the pandemic wanes but other headwinds increase.
According to Challenger, Gray & Christmas (executive outplacement firm), there were 62 hospital CEOs that called it quits in the first half of 2022 versus 42 in 2021. The impact is actually a bit more pronounced as the overall number of CEO positions has declined due to consolidations and closures. This same source indicates that the primary causes of turnover are COVID burnout, rising capital costs, capital access constraints, and staffing. Financial pressures due to these factors, evidenced by multi-billion-dollar losses at even the largest systems (Ascension $4.7 billion, CommonSpirit $3.7 billion) further contribute to turnover.
Senior Living/Post-Acute care is walking an almost parallel line in terms of turnover at the CEO level. Longer term, large provider executives are at retirement ages. The industry has not generated younger executive leadership in proportion to the positions that are turning. Talking with some of the larger recruiting firms specializing in Senior Living (e.g., Witt/Kiefer), even prominent positions at large non-profit organizations are struggling to source qualified candidates. The experience levels across the expanding system offerings (e.g., hospice, home health, post-acute services) aren’t universally held in various areas. Demand is high but quality candidate numbers are lower than say, 10 years ago. Further, market challenges in some areas such as high litigation, (low) available staff numbers, and changing demographics (think Chicago, Detroit, Portland) place boundaries on candidate opportunities. Simply put, many candidates have no desire to relocate to challenged locations.
Looking at key position availability by title, LinkedIn shows over 6,000 executive director/C-level openings in senior living. By comparison, LinkedIn shows hospital C-level openings at 738. The average tenure today for any healthcare CEO is a smidge over 5 years. Twenty years prior, the average tenure was between 10 and 15 years. Below are some interesting CEO turnover data points from Becker’s Hospital Review.
The average hospital CEO tenure is under 3.5 years.
• Fifty-six percent of CEO turnovers are involuntary.
• When a new CEO is hired, almost half of CFOs, COOs and CIOs are fired within nine months.
• Within two months of a new CEO appointment, 87 percent of CMOs are replaced.
• Ninety-four percent of new CEOs without healthcare sector experience believe extensive healthcare knowledge is not necessary to replace senior management positions.
• Eighty-nine percent of people involved in the hiring process believe a broad area of business expertise is beneficial in a hospital CEO position.
• Most new hospital CEO candidates come from a venture capital/private equity industry background (42 percent,) followed by finance and accounting (40 percent,) banking (32 percent) and marketing and sales (19 percent.)
An element not often factored into CEO turnover is the ripple effect. According to the American College of Healthcare Executives, the departure of the CEO is followed by departures of 77% of Chief Medical Officers and 52% of Chief Operating Officers. I have seen wholesale executive staff departures (CFO, COO, CPO/HR, etc.) in less than six months post the departure of a popular/effective CEO. In rural settings, the loss of a healthcare CEO can be even more painful as the executive role within the community in terms of service on various boards and civic organizations is lost with the vacation.
Addressing CEO turnover today is a function of understanding the key contributing factors. Below is a solid list that I have compiled over the past three or so decades of my work in the industry.
- Difficult relationships between the CEO and the Board
- The regulatory and reimbursement environment is becoming more challenging
- Profit motives out rank care strategies and growth
- Cultural misalignment
- Geography/location
- Challenges with helping board members understand their roles (often, board members are appointed/recruited from within, without proper training and onboarding)
- Capital access challenges
- Staffing challenges/building and maintaining a core team
- Compensation and benefits (an inability to maintain competitive compensation)
Given the above, and the fact that the majority of turnover is non-voluntary today, the industry volatility creates planning challenges. With average tenure at right around 5 years, constant and consistent succession planning for the healthcare organization is required. I’d argue, given the overall lack of qualified candidates that can be source externally, an internal leadership development process is preferable. What I have seen is that internal candidates tend to create less ripple turnover and have an advantage such that they know the culture and organizational capacity. The downside, however, is that internal candidates can have too many organizational biases and bred relationships such that creating change and new strategies that challenge the status quo (we’ve always done it this way), becomes difficult if not, improbable.
Senior Housing/Senior Living Debt Review
Senior housing in the form of CCRCs, Independent Living and Assisted Living (including memory care) is a large user of debt financing. While equity has become more prevalent via increasing private equity interests in senior living, operators, especially non-profits, continue to rely heavily on bank and bond financing. Private equity and venture capital investment trends tend to curve toward newer projects, acquisitions, healthcare offerings on the post-acute side (home health for example) and other ancillary businesses (SNFists/intensivist physician practices, pharmacy, therapy). Given the current economic conditions and banking environment, now is a good time to take a look at where the senior housing/senior living industry is from a financing perspective.
Perhaps the largest current concern focuses on existing debt that comes due in 2023 and 2024. The industry will see billions of bank and bond debt that matures or has variable rate features that will reprice across the next twelve to eighteen months. Two challenges thus exist. First, the cost of capital, expressed as interest rates, is higher now than it has been for the last fifteen years. While the rate environment (expressed as climbing or falling) seems to tack to a stable point, inflation has yet to fall to Fed target levels. As long as inflation remains high, the risk of the Fed continuing to raise rates remains. Effectively, expiring debt that requires refinancing will cost more going forward. Debt that is variable and repricing will cost more. Depending on the rate increase level, providers may face significant margin erosion and/or operational drag as debt service costs increase. A chart of the last twenty years is below. More analysis is also available here: <a href=’https://www.macrotrends.net/2015/fed-funds-rate-historical-chart’>Federal Funds Rate – 62 Year Historical Chart</a>
The second challenge is capital access. While rate is a concern, accessing capital is also a concern as lending conditions have tightened due to bank capital structural changes and generalized commercial credit concerns – real estate in particular. Valuation challenges also come into play such that operators/owners may find the overall value of their projects has changed, negatively so. Credit access is not only a function of real property collateral (value) but also, the strength of operations to meet debt service requirements. With occupancy challenges remaining, though improvement is occurring, and costs rising faster than revenues in many organizations (labor, energy, supply), credit profiles for providers (owners) have changed – negatively. In short, the spigot of available capital is less open now than it was, pre-pandemic.
The pandemic slowed the pace of property improvement and to a certain extent, the deferred maintenance “bill” for needed improvement is now coming due. Per NIC (National Investment Conference), across 31 markets that they track for senior housing data, two-thirds of the communities in these markets are old and in need of improvement – redevelopment or major upgrade. This of course, begets a need for capital and today, the capital availability is not as prevalent as five years ago and the cost of the capital, three to five times more expensive.
When improvement is required, capital access and cost are relevant but so is the cost of the improvement. The industry is seeing a bit of a perfect storm (currently) as capital is more expensive and construction costs are as well. In this scenario. project feasibility and payback conditions become stressed. Infrastructure improvements or community updates and refreshment may be required just to retain occupancy or to manage market share BUT the same may beget no new revenue or minimal revenue increase opportunities, not proportional to the investment. For many of these older communities, market location and property composition are such that significant increased revenue opportunity is unlikely. Given this prospect, the alternative to improvement via financing may be for some, merger or affiliation. See my post on this topic here: https://wp.me/ptUlY-tH
Bank debt/lending continues to be the primary source for capital but recent banking failures have tightened lending activity. We saw a bit of improvement via mini-perm lending at FYE 2022 but even there, overall loan volumes remained down compared to pre-pandemic levels. Balances did stay near all-time highs for housing but nursing care balances reduced. Construction lending remained soft and I suspect, it will continue this trend for the balance of 2023 and into 2024. Nursing care construction lending remained suppressed and senior housing construction lending sat at a quarter of 2016 levels. A good overview from NIC is here: NIC_Lender_Survey_Report_4Q_2022_FINAL
What I’ll be watching are default levels and loan volume (new levels). If we see a condition of softening rates later this year, volumes will lag but loans in-queue will tick-up. There is definitely some pent-up demand for capital and any condition or combination, of softer rates and lower construction costs due to a recession or slower overall commercial activity will ignite senior housing capital access demand. I’ll also pay close attention going forward, to default or pre-default conditions that motivate additional acquisition and affiliation deals. Softer valuation levels are good for buyers that have existing capital capacity or in some cases, equity raised capital, ready for investment. The key is patience and market conditions that produce deals that have inherent, accretive value prospects.
Senior Housing Marketing: Bumpy Road Ahead
On Wednesday, the Federal Reserve added another .25 point to its baseline interest rate – federal funds rate. The rationale is to continue to reduce inflation which, is running at decade highs. The trickle-down effect will begin with capital costs and capital access, impacting all kinds of industries but first and foremost, the real estate industry (commercial and residential). Borrowing costs and access to funds has changed dramatically since 2020. In mid-2020, mortgages were widely available below 3% fixed for 30 years. Residential real estate rode a significant wave in rising housing prices and rapid sales.
Today, the residential market has ground to a near halt. While home prices remain steady to a large extent, buyers have fled due to high mortgage costs and bank lending constriction. Recent bank failures have not helped banking confidence or improved lending access, personal or commercial. As a result of the Fed’s need to fight inflation and to reduce overall liquidity in the monetary system (lower money supply), the Fed quit buying mortgage-backed securities in March, therefore no longer directly supporting the mortgage market. Without the Fed keeping the liquidity of the mortgage market “up”, mortgage rates will remain higher for a longer period and banks will be pickier about lending as the buyers for mortgages are now private entities, more concerned about profit and the underlying credit.
So as not to confuse my readers, the title of this post is right-on and while a bit of economics starts this post, it is relevant to senior housing. Senior housing, especially independent, above-market products rental and entry-fee are very much occupancy impacted by the residential real estate market. I have written and spoken about this connection for years. The typical senior housing move is a transition from a private residence of some sort with the proceeds from the sale, used as a resource for the senior housing stay. With entry fee sales, the net proceeds from the home sale very much correlates to the resource for the entry fee. Market data has shown us for decades that there is a very strong relationship in the sales process between what a resident in a market area can liquidate his/her residence for and what the net proceeds will “purchase” in term of a CCRC unit. Well positioned CCRCs in a market have entry fees very closely tied to the average net sale value of homes in the primary market. Even today, few seniors will want to dip into estate values to pay for a senior housing unit. A good resource is a presentation I did a few years back: Value Propositions and Markteting 4 14
The primary factors that drive new sales and work on impacting occupancy positively, are as follows.
- Demographics in the target market – age, net worth, income level favorably matched against the product (price, demographic, location)
- Overall supply of units in the market current and anticipated. Senior housing demand is very elastic. Supply ranges of product will shift based on the price and the economic conditions within the market area.
- The condition of the residential real estate market in the primary market area. While national trends are one thing, the translation of those trends locally is the key. Not all local markets fare equally to the national trend. Interest rates aside, a growing market may attract more buyers still willing and financially capable of buying homes, even at a premium (see Florid for example).
- The condition of the property/senior living site. Is it in good condition and is its reputation positive.
The trends in occupancy and thus, marketing have shifted dramatically as a result of the pandemic. Occupancy in rental and entry-fee projects for the most part, remain below pre-pandemic levels. While CCRC occupancies are strongest and still growing (albeit slowly), at the present course of improvement, we are approximately 2.5 years away from pre-pandemic levels (91% vs. 87% today). This time period may elongate if interest rates remain high and real estate inventory (for sale), remains low.
During the pandemic, to maintain and attempt to increase occupancy via sales, I noticed a lot of communities resorting to incentives of one form or another. Fortunately for the CCRC/senior housing market, new inventory slowed and remains slow. Existing units today, have a greater opportunity to gain ground as new product is not coming on the market with the same fluidity as pre-2019. Capital access and costs have abated many new, planned projects either permanently or temporarily.
Incentives have long been a staple of generating unit pre-sales, holds, and interest/waiting lists. Conversion to occupancy often includes different incentives, directly tied typically, to rent abatement or stabilization (so many months free, no rent increase for so many months, etc.). Other softer incentives include moving fees (pay for the move), meal additions, decorator services, relocation coordination, etc.
The road however today, is bumpy and will be so for a while. Two difficult financial/economic conditions are at-play and both, hamper demand when the desire, is to sell above-market cost units. First, the real estate market in terms of liquidity, is exceptionally slow. New listings lag from pre-pandemic levels and new sales the same. A good data source that I use to watch these trends is here: https://www.redfin.com/news/data-center/
The second condition is overall estate values are down. Seniors with market investments in their retirement plans have seen minimally, on average, a 25% erosion in value. This constriction reduces their willingness and confidence to buy into, more expensive (real or perceived) housing. Further, familial support or influence tracks a similar downward confidence curve meaning, family become less supportive of a move that is further perceived, as negative to estate values. Remember, the U.S. mindset still has a strong connection to passed-through or down wealth transfer (e.g., kids receiving inheritance from mom and dad).
Strategies do exist for CCRCs and other senior housing projects to make inroads in occupancy gains, even in a tight market. Here are a few that I have used and can recommend as having some value.
- Use equity and/or internal financing mechanisms to assist in achieving liquidity for a senior’s home. Banks will typically step forward if the home has substantial equity and are often willing, if the CCRC is a partner, to provide the loan allowing a move to occur. The challenge then falls on maintaining the vacant property but that is less difficult than one would think with a bit of creativity.
- Defer the entry fee to a later date. Take the move off the table so to speak, allowing the senior to move while the house is still on the market, even if the timeframe is elongated. Another option is to pay the entry fee in installments.
- Work with a realtor that will package a transition service at a reduced commission allowing for home sale/pricing flexibility.
- Purchase the home, if feasible. I have seen organizations do this and then, when market conditions change, resale the home. This is complex and fraught with all kinds of detail issues, but it can be done.
Friday Feature: The Economic Realities
For the past two years, as the pandemic emergency waned, and the U.S. and the rest of the world moved back to a more normalized business and social condition, the fallouts of a mish-mashed pandemic policy (federal, states, local) became evident. School closures with virtual learning impacted kids and their education performance (falling performance on reading and math). Enormous governmental outlays and supports to the tune of trillions, revealed fraud (PPP), begat inflation, and assisted in dislocating millions of people from the workforce via subsidies (rent abatements, student loan payment abatement, enhanced unemployment, etc.). What we know is that short-term measures without a longer-term view of the resultant impacts, can lead to troubling economic times, and sometimes, the cure in terms of pain is worse than the original condition.
This morning, core inflation data was released, known as PCE (personal consumption expenditure). What we see is continued inflation above the Fed target of 2%. PCE measures personal consumption, removing volatile components such as food and energy. This report showed that inflation, minus food and energy, ticked-up in March and rested at 5% year-over-year. With energy such as gas on the rise, expect the CPI number with food and energy included, to continue to be at or above 6%. Here is this morning’s PCE release: https://www.bea.gov/news/2023/personal-income-and-outlays-february-2023
Earlier in the week, another key economic number was released – GDP or Gross Domestic Product. GDP data represents the growth rate of the economy as measured by the sum total of goods and services produced by economic activity. The first quarter number was 1.1%. This result is down from the prior quarter measure of 2.2%. GDP releases are initial and then adjusted, with adjustments typically moving the initial number down. With inflation running significantly above GDP 1.1% vs. 5% PCE and/or 6+% CPI, the economy is either in a state of or moving towards (quickly) a condition known as stagflation and perhaps, recession. Stagflation occurs when inflation runs considerably higher than GDP growth. Here is the GDP report: https://www.bea.gov/news/2023/gross-domestic-product-first-quarter-2023-advance-estimate
So, what does this data translate into for the near-term outlook for the economy? Answer: More of the same struggles and perhaps, some additional challenges. Interest rates will continue to rise as the Federal Reserve is likely to add another .25% rate hike to its core borrowing rate (fed funds rate), now at 4.75 to 5%. This will push the rate to 5 to 5.25%. A traditional economic principle starts to become evident: Fed rates at or above the rate of inflation drive inflation via demand reduction, down. If as suspected, the core inflation driver is 5% or thereabout, a fed funds rate at 5% to 5.25% should significantly slow the economy and move inflation down. The problem is the lag in seeing the impact and whether, the impact will in turn, push the economy into recession.
For senior housing and post-acute care, the current economic conditions are problematic (kindly stated). Real wages are not yet, keeping up with inflation meaning staffing costs will continue to have upward pressures. Borrowing costs are now crazy high and yet, reimbursement rates are not keeping up in growth, with the increasing cost of capital. For debt that is variable, providers are getting a rude and frequent awakening with increasing index rates pegged to the borrowing costs on the debt – rates therefore, rising. I’m watching growing debt defaults for senior housing as expenses have risen, borrowing costs the same in some cases, while revenues are flat or modestly higher but in no way, keeping up with the expense increases. The result is margin reduction and of course, reduced cash flow, translating into lower levels of income available for debt (below covenants).
Here’s a quick snapshot of economic data and conditions to watch over the next quarter.
- Bank capacity and willingness to lend. Credit is tightening and banks with deposit runs, are not capable of generating the same lending levels as before. This will hamper access to credit.
- As I have written about before, a non-existent (or very, very sluggish) home sale market due to high borrowing costs turns real estate primarily illiquid. This is not good news for seniors seeking or needing to sell a home to move into a senior housing project. With occupancy rates still below pre-pandemic levels, CCRCs and other senior housing providers will likely continue to struggle to move occupancy up due to the housing market challenges.
- Access to capital for capital improvements is a necessity for the senior housing sector. I expect a year of tough sledding in terms of capital access and thus, a creep-up in average age of plant with deferred maintenance being the driver (this year).
- Mergers and Acquisitions will also slow (already down) due to higher costs of capital and economic uncertainty. This may mean, with fewer buyers/acquirers, some projects/providers fall into closure/bankruptcy.
- If there is a bit of good news, it may come a bit later this year, in the labor market. The impact will not be on the clinical side but on the non-clinical side. Layoffs which are occurring, will accelerate if further demand reduction in the economy occurs. This will move people into situations where shifting industries for work occurs. In other words, fall-out in construction could beget maintenance staff (an example).
TGIF and Happy Weekend to all!
In-Depth: CCRCs First Quarter 2023
The smallest distinct segment of senior housing is Life Plan communities or CCRCs. Assisted Living, Independent Living and Skilled nursing, in each segment, dwarf the number of CCRCs yet, CCRC popularity remains and continues to grow, if ever so slowly.
CCRCs run a gamut between large and small, entry fee to rental, with/without SNFs yet always including some extended care services beyond the housing component. In recent years, I’ve watch CCRCs smartly, expand their service offerings to include home health and personal care, hospice in some cases, and other wellness and medical/care services. Typically, the larger the CCRC or sponsoring organization, the greater the service array (home health, personal care, etc.).
The industry remains dominated by non-profit owner/operators. For profit organizations account for about 25% of the industry, the balance is thus, non-profit. Size as measured by units/residency is largest among non-profits. Additionally, the non-profits dominate the entry-fee CCRC market.
For the last two plus years, COVID has had a profound impact on all senior housing organizations. The fallouts from the pandemic include a diminished workforce (fewer health care and support) workers, inflation, and rising interest rates have hurt all providers and driven all kinds of compensating behaviors such as reducing census due to staff shortages, escalatory pricing, service reductions, etc. CCRCs have not been immune to the pandemic fallouts but have weathered the pandemic and the fallouts better than their segment partners (e.g., Assisted Living and SNF). Similarly, we watched CCRCs experience fewer COVID health impacts (outbreaks, deaths, etc.) than Assisted Living or SNFs.
Through the first quarter of 2023, CCRCs have experienced a steady but slow increase in occupancy. At the start of the quarter, occupancy was still behind pre-pandemic levels at 87% (compared to 91% pre-pandemic). Non-profit CCRCs had stronger occupancy performance than their for-profit counterparts – 88% v. 84% respectively. We also see entry-fee communities outperforming rental communities, 89% to 84%.
In terms of rate and inventory, there has been a shift from pre-pandemic levels. Inventory (units for rent) shifted the least for non-profits and where reductions occurred, they did so in nursing care. For-profits had the biggest inventory shifts, across all living accommodations (independent, assisted and nursing). Rent increases are harder to factor but as occupancy has recovered, inflation and labor factors settle-in, we are seeing rather aggressive pricing shifts. Senior Living in general has seen rate increases in the range of 8 to 10%. Diving into living segments, we see memory care and smaller Independent Living units (one bedroom, studios) increasing the most – 9% to 10% – with studios running at 8% plus, the same as Assisted Living. CCRCs tend to have different pricing packages at the Independent Living level vs. at the care levels. Many incorporate various discounts for residents as they transition to the numbers of actual realized rent v. published or asking rent can be quite different (Sources: NIC, LivingPath.com)
As 2023 progresses, there are a number of headwinds for CCRCs still trying to recover from the pandemic and its related fallouts and impacts. Below is my watchlist for the remainder of the year. I’ll touch base on these items from time to time throughout the remainder of the year.
- Interest rate rises will impact cost and access to capital for CCRCs. These organizations tend to be capital intensive as their marketability is tied to heavily amenitized environments requiring constant updates, improvements, refreshment, etc.
- Rising rates have also severely impacted the residential real estate market. New CCRC occupants typically move post a primary home sale. The inability to effectively liquidate their real estate to pay an entry fee will harm occupancy increases. Most CCRCs have units for sale. Depending on the market location, this impact could be very, very profound for the balance of 2023 and perhaps, beyond. The good news is that homes for sale inventory is low so price reductions have not been (yet) dramatic.
- A marketing strategy often deployed by CCRCs is some form of rent suppression, rent reduction or abatement for a period of time to “sell” a unit. Revenues are already suppressed due to lower occupancy and, likely rent suppression in general during COVID. Revenue recovery will be a function of occupancy and the ability to increase rates to accommodate rising costs. This will be a tricky navigation for most operators/sponsors for 2023 and in my view, early 2024 as well.
- Labor will continue to be a major problem hampering occupancy, service expansion, and increasing cost. I don’t see any labor challenge abatement any time soon, beyond 2023.
- In established CCRCs we will continue to see an increase in resident age and debility and a similar trend on admission. This trend, especially on admission, is a lingering pandemic problem as folks avoided moving to CCRCs during the pandemic. As they do now, they are generally older and more disabled.
- Wealth reduction due to market losses will cause some seniors to remain, ill-advised, at home. Couple the liquidity issue (stagnant) on real estate sales (bad market) and estate shrinkage due to investment losses, an impact in qualified seniors for any CCRC but especially, entry fee CCRCs, has occurred. Recovery will not occur in 2023.
- The demand for CCRCs is very elastic such that, there are a number of substitute options available to a senior, such as staying at home with services. As real estate liquidity is a challenge now, the demand curve has shifted a bit similar to what we saw in 2008 to 2010. Expect this shift to remain in-place for at least all of 2023 and likely, until mid 2024.
Top 5 Tips for Recruiting in a Tough Labor Market
I’ve done a number of presentations on the staffing challenges facing providers and how, certain strategies work and others don’t in terms of recruitment and retention. Over my 30 plus years in the industry, I’ve had reasonable (ok, very good) success in building and retaining high-performing teams, including direct care staff. I’ve been fortunate to have many folks who have worked with me, follow me from assignment to assignment, some across the country. Leadership is no doubt key to recruiting successfully as people want to work with winning organizations. Likewise, really good recruiting strategies don’t use the same methodology as the past – namely advertise, incent (throw money at it), repeat. Steve Jobs said it best: “Innovation is the only way to win”.
Most healthcare providers can’t financially compete for staff, consistently. In reality though, staff only work for money when they see no long-term value in the employment proposition. I know travel nursing and agency nursing catch lots of news and sound sexy and high paying. I also know nurses (really, really well as the same are throughout my family) and, the lure of travel nursing is short, regardless of the money. Stability, home base, regularity, working with good colleagues and peers has more value to most nurses.
Before I offer my five “DOs” for recruiting, let me offer a few “DON’Ts” and a reminder. The reminder is recruiting is like marketing – it requires constant, incremental effort to achieve success. Superb marketing campaigns and brands build year-over-year. One misstep, however, can damage a brand significantly (see Bud Light). The “don’ts” mostly focus on money as in don’t think you can buy staff and don’t think, sign-on bonuses buy anything other than applications and temporary workers. Don’t focus on the economic alone but on the goal of recruiting. Like marketing, it’s about positioning the organization to attract workers. The sale or close comes via an H.R. specialist or someone exceedingly good in the organization of convincing people of the value of working for the organization.
My Top 5 tips for recruiting are….
- Focus on recruiting introductory, PRN workers first. Stop advertising for shifts, full-time, part-time, etc. Focus on people who are interested in flexible work and are willing to take a role and see how it goes. This is the “dip your toe in the water” insight. Be prepared to pay well but not necessarily crazy. You won’t be dealing with many if any benefits for this group other than some soft stuff (meals perhaps, incentive rewards like a gift card now and then, t-shirts) so hourly rates can be decent. Likewise, be prepared to pay weekly if not even more frequently.
- Have a killer, multi-media/onboarding/orientation program. Little investment here but not much. YouTube, Tik Tok (can’t believe I wrote that), a website, and other applications can be used to recruit (what it’s like to work for us) and to onboard and orient. The more new staff, even your PRN, feel comfortable walking in the door, the easier it will be to get them and keep them. Giving them a stack of policies and procedures, a big manual, a drone-on HR speaker or a computer-based checklist is a certain turnoff.
- Give the Bonus to the Staff. Turn your own staff into recruiters and pay them for it. Nurses know nurses, CNAs know CNAs, etc. Comp and incent them to bring referrals and comp them well. Sign-on bonuses really don’t work but referral bonuses do. Heck, do individual and team and create a bit of competition and fun.
- Create a Marketing Campaign and Have Accountability. Recruiting is marketing. Stop thinking otherwise. Sure, many think it’s an HR function but most who do, are wrong. It’s an organization function today requiring the best talent. For people to join your organization as employees, they need to know “why” – what are the tangibles and intangibles. Why should I work for you? This is not about pay and benefits but about the value and benefit internally, of a person working for XYZ organization. What’s the value proposition? What’s the real reason people work and stay for an organization (trust me, it’s not money). Build the case and sell that case.
- Get out of your own way. I watch organizations fail as their message is all wrong – tired, non-descript, sounding like everyone else. I watch organizations fail as their environment and their culture are all the same. Stop and align the incentives. Reward what matters and differentiate. Remember the Jobs quote in the first paragraph. Innovate. Stop looking externally at what everyone else is doing and stop going to the same conference sessions. Direct care staffing has certain red rules but not as many as providers think. In other words, stop the “can’t, regulations won’t let us” and start with WHAT can we do. Maybe even bend a rule or two if the same doesn’t jeopardize patient care or quality. Worklife for nurses and CNAs in terms of direct care has lots of negatives but many that I see are driven by provider foolishness – too much paperwork not necessary, too many meetings not necessary, and very few positive touches and rewards. If your culture and the work create fun, ownership, and staff love their work and their company, recruiting others to join the team just got that much easier.
Upcoming, I’ll touch on the opposite of recruiting – retention.
Merge/Affiliation in the Cards?
I pay close attention to economic trends and to the health care industry in general, as the same are applicable. One trend I’m watching quite closely is business consolidation and mergers/affiliations. In the general economy, a lot of consolidation is occurring post-pandemic. Restaurants are closing outlets (Red Lobster, Krispy Kreme, Burger King, etc.), retail outlets too like Bed Bath and Beyond and even, Wal Mart are closing stores in various locations. The drivers? Simplistically, supply chain issues (increased costs and inability to pass along the same via price) and labor costs plus worker shortage. There is another driver in some closures and that is environment as restaurants and retailers are leaving communities with high-crime and homelessness as they simply cannot generate a sustainable retail climate amidst theft (inventory loss), customer erosion (customers staying away from certain locations, etc.). Whole Foods leaving San Francisco is an example.
Health care and senior living/housing are not immune to these same pressures. Labor is a huge issue facing all providers today. Changing environment, particularly for urban providers is an issue. Supply chain issues and supply costs are additional motivators or drivers. And let’s not forget the impact of COVID (yet to totally abate in health care and senior living) and increasing regulatory costs. Below are some examples of consolidation and affiliation moves that I have seen recently.
- Diversified Healthcare Trust (REIT) merging with Office Properties Income Trust. This is really an access to capital play as Diversified is constrained from refinancing debt due to covenants. It has a pretty large capital need to improve its senior living facilities (primarily IL, AL and CCRC). Like most REITs with senior living holdings, the occupancy levels remain below targets/desired levels.
- Good Samaritan Lutheran/Sanford is offloading a large amount of skilled nursing facilities and other senior living centers across 15 states (primarily western states). Good Samaritan was the second largest chain provider of senior living.
- Sanford, which merged with Good Samaritan, is in the process of affiliating with Fairview Health. Fairview includes Ebenezer (senior living) which, is the largest non-profit manager of senior living projects in the country.
- Theda Care health system in Appleton, WI announces an affiliation plan with Froedtert/Medical College of Wisconsin health system. The two, primarily hospital and clinic-based organizations will offer services along with locations throughout the eastern corridor of WI, primarily Milwaukee metro area and the Fox Valley area (Appleton and Green Bay as the metro reference).
Looking at the press releases and then, reading other disclosure information and knowing players in each of these scenarios, a similar series of factors are driving the affiliation/merger/consolidation activity. Not surprising, these factors are not unique to health care/senior living. They are the same factors in many cases, driving decisions across all businesses/industries.
- Labor availability and cost. Affiliations and outlet reductions reduces labor cost and vulnerability to staff shortages.
- Stagnant volumes and revenue shortfalls. Senior living is not back to pre-pandemic occupancy levels and frankly, while the trend is improving, it could be a while before we see pre-pandemic occupancy levels.
- In the case of senior living, further movement toward home and community-based care options is eroding demand. This means, provider capacity is impacted. Closing outlets or selling them to more localized providers such as the case with Good Samaritan, make sense. Local providers have inherent market advantages that large, national or regional players simply don’t have.
- Supply chain improvements are possible with a larger platform though by experience, they are not as large and impactful as often forecasted. Single-source buying is good and can achieve discounts but often, the reliance on one source may challenge quality targets and innovation. I’ve seen this definitely occur with food and food service supplies.
- Overhead reduction is the biggest gain or biggest possible gain. Reducing management layers and consolidating overhead functions can cut millions of dollars of duplicative positions. In really good mergers/affiliations, bureaucracy is also reduced netting more efficiency and better care/service. This however, comes over time.
- Access to capital can improve as scale improves. In other words, larger organizations have more opportunities and outlets to raise capital when needed, especially if the scale achieved is margin positive.
- Increased market share and increased market opportunities can occur. For example, in the case of the Theda Care and Froedtert affiliation (if it closes), both systems get access to new markets via their affiliation and new customers without having to “build new” or “start new”. New building and starting new locations/outlets is expensive and time consuming. Leveraging the business footprint with a synergistic partnership is much faster and in theory, less expensive.
More mergers/affiliations to come? No doubt. While the economy is moving toward a recession and labor remains challenging, providers will have to look toward possible strategic opportunities that include adding services, becoming more efficient, building/improving capital access, and accommodating rising costs without concurrent increases in reimbursement or additional rate. Affiliations make sense for some providers, especially when selling is not a real or viable option (non-profits).
I’ll provide a merger/affiliation strategy document/post soon!
Senior Housing Update – Q1
The first quarter is now in the books (so to speak) and the trend for senior housing remains about the same, a little better but not back to pre-pandemic levels. With a softening real estate market principally due to low inventory levels and high interest rates (by comparison to the past ten years), we are likely to continue to see slow occupancy increases in Independent Living in most markets. Fortunately, for existing operators, the cost of new development coupled with high costs of capital has slowed inventory growth. Without a bunch of new product in many markets, absorption of existing inventory has a chance to impact occupancy, positively so.
Per NIC (National Investment Center), first quarter occupancy ticked-up for all product types (IL, AL, and SNF) with the industry as a whole seeing a modest increase to 83.2% – up 30 basis points. IL occupancy remains the strongest at 85.2% while AL and SNF, slightly improved, still remain at 81%. For SNFs, this may be less of a problem as staffing challenges remain and occupancy is less critical than the quality (payer) mix of the occupied beds. In other words, if I have a 100 bed SNF, and 80 beds are occupied but 60 out of the 80 are occupied by Medicare payers and insurance/private pay, I am less adversely impacted by a lower census revenue-wise than if 90 of my beds were occupied but 70 of the 90 residents were Medicaid payers. Similarly, with staff challenges (numbers), I may be better off having fewer beds occupied if the same can be efficiently and safely staffed. Here is the first quarter NIC report: 1Q23-NIC-MAP-Market-Fundamentals-PDF
Overall, occupancies lag the pre-pandemic levels by about 5 points. IL was running right around 90% at the start of 2020. As I mentioned earlier, new starts are down and thus, absorption is improving. Rent growth has been decent and necessary as costs continue to grow due to inflation. I am a bit concerned however, that rent growth is below generalize wage inflation and supplies inflation, particularly food. Utility increases are also higher than rent growth. With slightly depressed occupancy, margin compression is quite possible if not inevitable for 2023 for IL (primary) facilities. Rent increases would need to be above 6% to offset internal cost escalation for most providers.
Looking back to the 2008 t0 2010 recession period, the real estate dynamics in a lot of markets significantly impacted senior housing, especially above-market IL projects and Life Plan communities with entry fee pricing models. The primary source of the entry fee payment is the net proceeds from a senior’s sale of his/her principal residence. If resales become difficult or stagnant because of high borrowing rates, the liquidity (such that it is) of real estate sales adversely impacts the ability of the senior to “make the move”. For sure, the economics are different today than they were in 2008 to 2010 but, how the residential real estate market fairs over the next year or so will impact, additional occupancy gains for IL housing, especially above market projects and entry fee projects.
- Real estate demand is highly elastic such that price and cost moves, impact demand significantly. With higher interest rates, even with compressed residential real estate inventory (new and existing) in many markets, demand will soften as buyers are priced-out of the market.
- There is likely less inventory coming to market in the next twelve to twenty-four months. We’ve had historically low interest rates for a long period of time (until recent). A portion of inventory available for sale in any given market comes from people who sell their home in order to move-up to a different (usually larger) home. If the current owner has a 2 to 3% fixed mortgage and getting a new home requires financing at today’s rates (6 to 7%), the current owner is unlikely to move or, will only do so if he/she can extract enough value (equity) from the current residence to reduce the next home mortgage level to a comparable payment level (even with higher interest cost, the balanced financed is less). Simply put, there are lots of current homeowners that took advantage of historically low interest costs either via purchase or refinance and are unlikely, to move into another home if doing some comes with a mortgage cost twice or more, than their current mortgage. A de facto inventory suppression is occurring due to this rate/borrowing cost scenario.
- The good news is that there still is enough demand for any decent properties and enough buyers with capital and access to financing, that price suppression of residential housing is minimal, so far. I’ve noticed some suppression but in reality, prices are holding up quite well.
- Real estate is local, and no two markets will experience the same supply/demand dynamics. Some markets had little negative impact in 2008 to 2010 as housing values never escalated dramatically and employment stayed relatively steady. Other markets saw significant value erosion and defaults. Typically, the center part of the country (Midwest), modest-sized cities/metro areas (not top 10), fare better. High cost, coastal communities and large metro areas (New York, Los Angeles, Philadelphia, San Francisco, etc.) experienced high volatility and value erosion in 2008 to 2010. I don’t see, as of now, a repeat such as 2008-2010 but these same markets have other dynamics at-play (high crime, rising tax costs, etc.) that are negatively impacting their residential real estate markets.
Penny Wise, Margin Foolish
There is a common business axiom, one I have used/repeated many times over: “You can’t save yourself to a profit(able business)”. In health care and in senior living/senior housing, challenges abound and almost daily, new ones arrive. Staffing is incredibly challenging, supply costs are rising, inflationary pressures have increased utility costs, investment portfolios are beat-up (hopefully full of primarily, paper losses), reimbursement is nowhere near up to date with inflationary costs, litigation risk and cases have increased insurance rates, and CMS continues to add cost with additional regulations and oversight. Tons of organizations are mismatched revenue to expense right now with expense greater than revenue. Naturally, the correct thing to do is to cut expense, or is it?
For most provider organizations of all types, expense management is a difficult proposition. Most expenses tend to be more fixed in nature than not and most, involve personnel. The largest expense for health care organizations and senior living is typically (aside from debt and depreciation), staff and related personnel costs. Yes, it is possible to be efficient with staffing costs but generally, not at a ratio that can generate big changes in margin if occupancy and payer mix are below expectation. In other words, cutting too much produces an undesired consequence of bad care outcomes and staff dissatisfaction (short-staffing). Cutting other things is possible and I’d argue that reducing layers of management is a great place to start. I once worked with an organization that had supervisors that existed on second and third shift to, as one exec. told me, “To make sure staff did their jobs and not sleep on the job”. Oh, boy…
This morning while reading and having coffee with my wife, she shared an article from McKnight’s (e-news) that was really quite good and germane to this post. The link is here: https://www.mcknightsseniorliving.com/home/news/top-trends-in-senior-living-include-organizational-readiness-operational-strategies/ Many good takeaways in this piece but particularly, the focus on having to grow and diversify the typical senior living business. I think the article’s focus on strategy makes the most sense for communities/CCRCs/Life Plan organizations. Good tips herein…
- Focus on revenue driving opportunities and expense monitoring.
- Don’t fall short of revenue increases because the organization does not understand its pricing potential.
- Develop partnerships and niche growth opportunities.
- Stop looking at the organization as an island and start focusing on generating more revenue by additional services.
- Identify niche markets – capitalize on existing resources to provide services to the greater community.
Across many years in the senior living and health care industry, I’ve seen many organizations make the same mistake over and over again. As times get tough, they reach for the saw and seek to cut to make a profit. Assuming they were perhaps fat to begin with, some trimming was needed but the focus on expense reduction is simply not the answer. The fact is, return on investment is the answer and therein lies the flaw in cutting. Maintaining a balance between the inputs (expenses and investments) and the revenue produced is what successful business requires. In other words, if the revenue productivity is not there for the dollars being expended, perhaps the issue is not to spend less but to spend better. Additionally, sometimes the issue is that the overhead is not productive or simply put, the scale is large enough to support more business. In senior living, this often the case.
I have been in many, many communities that have phenomenal infrastructure, poorly used. In other words, lots of fallow real estate/common areas and office spaces that don’t generate revenue or are minimally used. Opportunity abounds in terms of how much more productivity and revenue, can be generated from the overhead. Similarly, I have watched organizations ooze lost opportunity, failing to capture revenue from services residents/patients are getting from other vendors. Home health, personal care, hospice and expanded food and environmental service packages are the easiest to identify. There are more.
Pricing is also a missed opportunity. I lost track of how many senior living communities I have worked with, including in default and bankruptcy work, that had no idea how their pricing matched the community at-large or how the model made economic sense for the business. The common method has been to simply escalate a prior year’s level by some percentage and then maybe, look at the rates for the surrounding competitors (assuming the comparison is accurate). I’d argue the case to worry less about the competition and more about valuing the services the organization provides within a proper pricing/business model. A number of years ago, I did a presentation on pricing for senior living communities. The presentation can be found in the Presentations page on this site: Intersection of Pricing and Marketing v.2 The referenced worksheets are here: Entry Fee Pricing Worksheet Pricing Worksheet
The simple fact remains is that there is no real strategy in business that involves cutting or reducing expenses to create a sustainable margin. Business is about playing a “long game” – looking and anticipating forward. Short-term thinking nets a reaction that typically, produces only short-term results, if that, negating the longer-term problem: the business must constantly evolve, grow, and seek to return maximum value (economic) on its investment (people, equipment, plant, property, etc.). Without continued investment in marketing, equipment, new businesses and product lines, strategic partnerships, and infrastructure (IT, software, etc.), the organization becomes non-competitive, incapable of attracting the desired customer at the desired revenue level. Similarly, staff desperately needed these days, choose to work elsewhere as the business is no longer investing in them (more than wages).
I read a lot, an occupational hazard. In so doing, I come across all kinds of interesting articles and reference documents. My curse is not the amount I read but the amount I save (tons of documents, links, etc.). I pulled one link that I thought fit this subject matter quite well. Here it is and it is generic but awfully, on-point: https://foundr.com/articles/building-a-business/finance/business-not-making-enough-money
To my Jewish friends and colleagues, I wish you all a blessed Passover.
The Real Impacts of Poor Quality, Inadequate Compliance and Weak Risk Management
A number of interesting information drops occurred this past week or so reminding me that from time to time, the obvious isn’t always so obvious. The seniors housing and skilled care industry today is going through a rocky patch. A solid half of the SNF industry is severely hurting or struggling mightily due to Med Advantage, softer demand, pervasive reliance on Medicaid for census, labor shortages, rising wage pressure, tight Medicare reimbursement, new regulations, etc. (I could elaborate for a stand-alone article). While not as pervasive in its struggles as the SNF industry, Assisted Living is facing challenges due to softer census, too much capacity, rising resident acuity, labor costs and shortages and gradually increasing regulatory scrutiny. The relative strength in the overall seniors housing and post-acute sector is home health and independent housing. Notice, I did say relative as home health demand is good but regulatory over-burden is still present along with tight reimbursement. Home health is also experiencing labor challenges, the same as SNFs and ALFs. The relative strength that is found in independent housing tends to be more on the market and sub-market rent side. Many, many high-end providers are still struggling with census challenges and soft demand in certain markets.
As I have written and counseled many times to investors and clients alike, there is something to learn from the national trends but health care and seniors housing is still, a local reality. What this means is that in spite of some rocky water for the industry, there are providers that do well and are bullish about their fortune in their respective industry segments. Not to seem too convoluted, the national trends matter but as I like to think, in the context of what they truly mean. In this regard, what they truly mean is how the trends impact providers on a macro basis as well as on a micro, behavioral basis.
As I started, this past week or so included some interesting information drops. The first and not too surprising, is another alarm from a major, publicly traded provider organization that it was on the narrow ledge to failure. Five Star Senior Living provided notice that given its financial condition now and as forecasted, it would not be able to meet its continuing obligations in the form of debt or timely payment of operating expenses. When I say half the SNF industry is in battle to survive, I’m not kidding.
In unrelated drops, CNA (the major national commercial insurance provider) released its 2018 Claims Report for Long-Term Care/Senior Living. The claims in this case are liability related. Following CNA’s release, Willis Towers Perrin (major insurance brokerage and consultancy firm) provided their outlook for liability insurance noting that Long-Term Care and Seniors Housing should expect liability premium increases of 5% to 30%. Anecdotally and unrelated, we are seeing steep property/casualty increases in the industry as well due to extreme weather losses over the last twelve to eighteen months.
While not absolute but substantial in nature, there is a direct correlation between providers that are struggling and the quality of care and service they provide to their patients. The core competencies required to provide superb care are tied directly to compliance and risk management. I have never seen an organization that delivers excellent care have poor compliance trends (billing, survey, other) and weak risk management leading to high levels of worker’s comp cases, lawsuits, liability insurance claims, etc. Lately, there is the same correlation developing between quality and financial results. As more quality payer source referrals and higher reimbursement with incentive payments connect to patient care outcomes, a gap is evident between the providers that are thriving and those that are dying. That gap is the quality divide.
There is a spiral effect that is visible today in the SNF industry. This effect has been visible for some time in hospitals. It occurs as follows.
- Care delivery is inconsistent and in most cases, not great. Service is the same.
- Complaints and survey results demonstrate the same and are reflected in star ratings.
- Consumers and referral sources catch wind that care is not good.
- Staff turnover accelerates, including key personnel that take with them, a disparaging message regarding care.
- Quality mix erodes slightly. Medicaid census increases as the “next best” alternative to an empty bed.
- Financial results start eroding and losses occur or come into view. Cash margins are getting tighter.
- Expenses become an issue and cuts are necessary. The cuts are incongruous to improving care.
- With limited resources, quality suffers even more. No money is available for capital and equipment upgrades. Staff morale suffers and staffing levels are lower. Productivity wanes as morale is poor and patient care follows.
- Survey results are very poor and fines now happen. The fines are expensive, removing more resources away from patient care.
- Costs are growing rapidly related to higher insurance premiums, poor worker’s comp experience, unemployment costs, turnover, and legal costs to defend the facility. These costs are removing resources away from patient care.
- Finally, because the resources are too depleted to make the necessary changes to rebuild quality, staff levels, etc. and no lender is available to front any more capital, the enterprise collapses. The names are becoming familiar….Signature, ManorCare, Five Star, Genesis, Kindred are all SNF providers whose future is extinction or “almost”.
Arguably it takes money to have and deliver quality. Equally as arguable today is that without quality, money won’t be made sufficient enough to stave-off failure due to…poor quality. When quality isn’t the primary objective, compliance and risk management work as dead weights that the organization must carry; and the weight increases over time. Why this isn’t obvious yet in the post-acute and seniors housing industry is beyond me. An analogy that I have used time and time again is the restaurant analogy. Successful restaurants are laser-focused on their products – food and service. They know that poor marks in either category or an outbreak of food borne illness can be death to their livelihood. In a crowded market of diners, price or value ties to quality and experience across a myriad of options. What is common among the restaurants that succeed is their quality meets and exceeds, the customer’s realization of value (getting equal to or more satisfaction for the price paid). When this occurs, money flows in increments sufficient to reward investors, pay employees, invest in equipment, and to reinvest in the products and services that customers buy. Simple.
Seniors housing and post-acute care aren’t too different or disparate from the restaurant analogy. The market is crowded with options…too many actually. Yes, the customer relationships are a bit different but the mechanics and economic levers and realities identical. Providers that give great care, equal to or higher than the price points/reimbursement levels are GAINING customers via referrals. The customers they are gaining are coming with good payment sources. Money in the form of cash flow is strong enough to invest in plant, property, equipment and staff. Doing so reinforces quality and service and allows the referral cycle to optimize. As the market continues to shrink in terms of number of providers due to failure, the few that are exceptional continue to see their future and fortune improve. Again, simple.
What we know is the following and the message should be clear today for those who still can control how they approach and manage their quality and customer experience.
- Poor quality costs money disproportionately more than the dollars required to deliver “high quality”. The costs are erosive and ongoing.
- Higher insurance premiums
- Poor compliance results with fines (the federal fines today are steep and immediate for SNFs)
- Higher capital costs (yes lenders are now looking at quality measures as a measure of credit risk)
- Increased litigation risks which when realized, contribute to higher insurance premiums.
- All of the reimbursement incentives today and going forward are only available to providers that can deliver high quality, efficient patient outcomes. Value-based purchasing rewards good care (limited rehospitalizations) and punishes poor care. The impact is just being seen today and in the years forward, the impact is greater – both ways (reward and punishment). The same is true under the new and forthcoming, case-mix payment models. The high quality, adept providers will be able to provide the care rewarded highest, under these new payment models (PDPM, PDGM). Those that don’t have the clinical infrastructure will languish.
- Referrals today are more and more, skewed toward quality providers. With hospitals and narrow networks looking for select post-acute providers that won’t increase their risks in value-based purchasing or bundles/ACOs, poor providers in terms of quality are increasingly seeing diminished referrals.
- The Plaintiff’s Bar is watching the SNF and seniors housing industry carefully and with optimism. The CNA report I referenced includes these snippets.
- 22.6% of closed claims relate to pressure injuries (an almost entirely avoidable negative outcome).
- Death from or related to pressure injuries is the highest average claim by cost.
- 14 out of the 15 highest cost claims occurred in for-profit facilities.
- Assisted Living claims cost more on average than SNF claims.
- Falls continue to represent the lion share of liability claims – 40+%. The vast majority tie to SNF care.
- The frequency of claims is increasing.
- Independent Living is not immune. The report contains claim data on fall and pressure injury cases from Independent Living.
While no organization is immune from a law suit, the reality remains that organizations with exemplary quality history, high satisfaction levels, and processes that focus uniquely on the elements of great care and service (staffing levels, staff competency, good management, proper equipment, IT infrastructure, etc.) provide less of a target, if any. No matter where, negative outcomes still occur but in “quality” organizations, they are an exception. Because care is primary and service right behind, there is far less of a motivation for patients and families to litigate as by reason, the organization wasn’t negligent. Again, the connections are rather ‘simple’.
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