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Know Your Market, Know Your Value Proposition

Last October I wrote a post regarding the development of an Economic Value Analysis and how the same is important for marketing seniors housing and skilled nursing.  A couple of weeks ago, I wrote a post regarding feasibility tests key to project success and targeted feasibility.  Later this year, in October at Leading Age’s annual conference in Denver, I’ll again cover the concepts in a direct, interactive fashion.  Until such time however, I continue to receive dozens upon dozens of inquiries as to how to construct an Economic Value Analysis and a corresponding value proposition.  Last October’s post is instructive and can be found at http://wp.me/ptUlY-7G.  In addition, and in concert with the post prior to this one on financial feasibility methodologies, I’ve provided below some additional “help points”.

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

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

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

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

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

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

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

Financial Tests Before Additions, Renovations or New Construction

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

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

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

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

A Rare Post

As much as I have focused on keeping this site free from any of my personal agenda, I have encountered a circumstance that bears a one-time exception to my rule.  Please bear with me as this will be brief.

I have a colleague and true friend who was recently downsized from a deteriorating health system due to their financial and operational mismanagement.  This gentleman was in charge of Marketing and P.R. for this organization.  In spite of his best efforts and gifts, he was hamstrung by the financial condition and continued deterioration of the organization, literally unable to do his job due to the reputation and care problems, staff turnover, poor community reputation and consistent resource shortage.  He became a victim of circumstances beyond his control.

As I said earlier, I rarely attest for anyone and never in writing of this sort.  This is a first.  The reason?  This gentleman is gifted, a true professional and a consummate, stand-up guy.  He became a victim of circumstances because he was too principled to walk when he should have, even in spite of my counsel.  He finishes what he starts, even if not given the tools or support to do so.

This all said, here’s the inside information.  His name is Steve (I’ll withhold further unless requested).  He has thirty years of health care marketing and P.R. executive experience within hospital systems (one being the largest in the state) and in the post-acute environment (seniors housing, assisted living, SNFs, hospice, etc.).  He comes from a journalism background originally; television principally.  He knows media, public and community relations and can market and sell health care.  He is a gifted writer and has worked all angles of health care P.R. and Marketing from spokesperson to damage control to mergers and acquisitions and new product launches.  He’s even overseen philanthropy and fund development.  Aside from me, his references are impeccable and he’s well-known in the health care community in his market areas.  I have recruited him in past positions and would without reservation, hire him again.

To the point, he’s networking and available, including possible relocation.  I know of few other health care marketing people with his breadth of experience and track record of success.  To my readers, all of whom I appreciate, and my professional colleagues whom I equally appreciate, your leads or insights on Steve’s behalf would be deeply appreciated.  If you have any ideas or interests you would like to share and/or learn more about Steve (resume, etc.) or talk directly with him, drop me an e-mail and I will make it happen.  My e-mail is Hislop3@msn.com.

Thanks for indulging my deviation in content and again to all, thanks for reading!

November 2, 2011 Posted by | Assisted Living, Home Health, Hospice, Senior Housing, Skilled Nursing | , , , , , , , , | 2 Comments

Economic Value Analysis, Value Propositions and Marketing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Presentation on Strategic Pricing for Senior Housing

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

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

Due Diligence and Acquisitions: A Review of Common Pitfalls

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

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

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

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

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

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

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

Senior Living/Housing M&A and Fitch

The title of this post likely appears a tad bifurcated but as you read through it, the title should make a bit more sense.  In the past two weeks, I’ve had numerous conversations with potential buyer’s looking at or for (to acquire), senior housing projects  (AL, IL, some CCRC and a few SNFs).   Invariably, the conversations center around the current prevailing notion that “now” is a good time to buy.  The most salient reasons I hear to support this belief are “values” are plentiful and capital is coming back to the industry.  Alas, I guess it is my job to be the bearer of “bad news” or, not really bad news but “truth”.  This is where the Fitch part of the title comes into play.

Fitch, the ratings agency, released its industry outlook for Senior Housing in mid-March and as suspected by most, the outlook remains negative.  This said, it should be noted that Fitch does somewhat confirm the belief that capital is returning, albeit slowly to the sector, and that the industry as a whole has “shown suprising resiliency”. Still, as detailed within the report, 2010 contains (likely) more negative or static news for the industry than positive or encouraging news.  Principal to Fitch’s outlook is its prognostication on ratings of debt issues (new and existing) and in this case, Fitch is predicting that the majority of rating decisions will be affirmations of existing ratings and when changes to ratings occur, Fitch is predicting more downgrades than upgrades.  For Fitch, the ratings outlook plus the overall sector economic outlook and trend is the basis for their sector outlook.

Overall, the report presents a great deal of carry-over of issues from 2009, namely the taint in the industry left over from the Erickson collapse.  Per Fitch, little has changed across the industry dynamic that caused Erickson to melt-down.  In specifics, their conclusions are;

  • Current economic recovery laxity and a slow and very limited recovery in the real estate sector will continue to hurt the industry.
  • Letter of Credit repricing risk in the next 12-24 months is high as current Letter’s of Credit renewal, banks that previously extended credit either may pull away entirely or provide renewals at significantly higher prices.  Today, the going rate trend for renewals is running at 50 to 200% higher for investment grade debt (BBB or better).  
  • Weaker liquidity levels for the industry will continue throughout 2010.  Since 2008, liquidity levels have dropped in the key measures of days cash on hand (down by nearly 75 days), the cushion ratio (down by nearly a full point) and cash to debt (down by 10%).  The concern as expressed by Fitch is for continued slow economic recovery or the potential of an additional market downturn, shocking liquidity again.
  • Cost of capital continues to run higher than periods prior to the economic downturn.  This is particularly true for non-rated debt and floating-rate debt and less so across a broader horizon for fixed rate debt.  In reality, fixed-rate debt today is priced attractively, considering the cost of variable-rate debt and LOC (Letter of Credit) fees.
  • The real estate recovery is barely, if at all visible, and for Fitch, this trend foretells occupancy fortunes for the sector.  The biggest impact on occupancy remains for new projects or projects with recent sizeable expansions.  Occupancy in general is down by 3 to 5% and for established providers, the trend has remained stable to marginally improving.

So the Fitch tie-in in the title?  What is known by Fitch is known by lenders and the capital markets and thus is known by investors.  In reality, a willing buyer and a willing seller today is only 50% of the deal; the other half is capital – unless the buyer is in an all-cash position.  I’ll elaborate a tad more at the end.

As I indicated earlier, my job is to be the bearer of the truth when I talk with buyers or interested acquirers.  The truth regarding the M&A scene today for senior housing is that the real value plays are projects that are small or distressed and those are virtually impossible to finance (notice I said “virtually”).  When and where financing can be obtained, if needed, for these distressed or smaller projects, the terms are stiff (rates, covenants, term, overall costs).  Where buyers are assuming more discounts should be available, sellers are not cooperating.  In short, there is a pretty solid gap between a seller’s valuation and a buyer’s valuation of the same project or group of projects.  Sometimes, this gap can be overcome but most often, for solid projects with decent cash flow, it cannot.  Sellers today have precious little incentive to reach down to buyers, especially if their project (single or portfolio) is stabilized, cash-flowing, and has a solid balance sheet (average or better than industry average capital and liquidity ratios).

Another complication for buyers is the lack of decent comparable transaction data over the past two years, especially in certain areas or regions.  Comparables drive valuations/appraisals and of course, valuations/appraisals drive lending terms and limits.  I have seen a pretty decent disconnect between deal terms and valuation results over the past two years and in a large part, due to a lack of decent, reasonable and recent comps.  Lenders, skittish as they are about the sector, are highly wary of comps from deals completed three or four years ago when the market was frankly, a tad over-heated and the economy, over-bloated.  Summary: Throw out the comps that may have made sense on a representative basis three to four years ago and try to find representative comps that are from a period of market stagnation and recession – the alchemy for a valuation disconnect.

For buyers, the reality is that the market is still seller-driven and I don’t see a dramatic change occurring throughout 2010.  Perhaps the most investment-ripe play is in the SNF sector as volumes are slightly up, bed prices are slightly up (albeit fractionally compared to a double-digit decline from 2008). In 2009, AL prices per unit continued to decline (30% aggregate since 2008).  Note: The price suppression is a reflection again on the weakness of the housing market plus the deals completed comprised primarily of weaker projects.  What the SNF sector offers today is “known” external variables and a disconnect from the real estate market.  With health care reform complete, the SNF sector is essentially “stable” for investment.  What this means is that revenues are easier to forecast and operating ratios quicker to analyze.  The prospects in other words, of a transaction are more tangible and easier to quantify.  This said, I still don’t see a ramp-up of activity, more perhaps a gradual increase with modestly rising or stable per bed prices and effectively, stable cap rates.

The AL and IL sectors will still remain a bit problematic for buyers unwilling to put a fair amount of cash into a deal or unwilling to use enough cash to create a financeable transaction for a distressed project.  Value buyers are going to continue to find that sound projects are few and far between on a true value play and the stickiest issues regarding valuations and financing will remain.

The conclusions I draw and the counsel I provide today is rooted in basic economics (my history).

  1. Buyers and sellers exist across the entire price/value continuum.  At times, the proportion of one versus the other (sellers vs. buyers) creates different strength/weakness propositions hence when a market becomes a buyer’s or a seller’s market.  Most often, historically, the market is neutral.  There is not enough volume today to characterize the market as predominantly strong for either side (buy or sell) but the dynamics are such that sellers with good projects have an upper-hand for the time being.
  2. The near term trend also favors sellers, especially as buyers begin to gain access to reasonable cost capital.  Initial cycles where capital becomes cheaper or easier to access favor sellers as buyers typically will use the new-found access to buy at price points recently considered by them as too high. 
  3. The intermediate term will favor buyers as the market seeks to return to “neutral”.  Sellers, seeing deals done at increasing prices and with increasing volumes, will shift their positions from hold to sell, trying to reap a piece of the action.  Too many sellers will enter the market and buyer’s will be favored.
  4. The credit markets will continue to gradually loosen but again, cautions regarding valuations need heed.  Buyers with solid credit, cash to add equity and sound balance sheets will find fixed rate deals more and more attractive.  New bond deals will also find fixed rate deals almost as attractive if not as attractive as floating rates with LOC enhancement, given the rising prices of LOCs. 
  5. As a rule, properties that are stabilized are likely at or just beyond their low census point.  I think occupancies will or have stabilized and start to trend back-up, although the slow to non-recovering real estate market will keep progress gradual.  Some markets will fare better than others.  I also see these same properties in a better overall position financially in 2010 than last year or the year before.  Providers have done a decent job getting “lean”, save perhaps their debt load.  The good news is that rates are not under pressure to rise so even potential increased LOC costs (as applicable) won’t alter too many balance sheets among the stabilized provider group.

May 5, 2010 Posted by | Assisted Living, Senior Housing, Skilled Nursing | , , , , , , , , , | 4 Comments

Property Tax Update for Wisconsin Senior Housing

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

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

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

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

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

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

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

Sharpen the Sales and Marketing Efforts in 2010

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

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

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

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

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

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

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

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

Better Productivity, Better Retention: Labor Strategy for 2010

For the vast majority of providers, productivity and retention are ongoing labor hassles.  Salaries and benefits are typically, the single largest expense item for health care providers and when analyzed by all of the components, a surprising percentage is allocated for labor related expenses that can and should be, reduced.  Expenses such as Worker’s Compensation, recruitment, turnover, lost productivity due to turnover, pool staff, etc. are resources spent with minimal to no return.

For nearly twenty-five years, I ran a very large multi-site, multi-corporation health system with nearly 1,000 employees.  A number of years back (ten or so), the organization decided to focus on our labor costs and our manpower strategy.  Our turnover was about the industry norm, we had some pool use, our recruiting costs were higher than they should have been, our Worker’s Comp premium was trending up and our overall comp and benefits package, while attractive, wasn’t strategically aligned with who we were trying to recruit – principally experienced, stable employees.  Altogether too often, we hired someone in a panic mode to fill a spot only to find out we hired the wrong people, termed them or they termed themselves,  and then went back to the drawing board.  In the interim, to fill the vacancies resulting from the revolving door, we used pool or temporary staff; premium dollars for no commitment, no real productivity.

By the time I retired in early 2009 and for the seven to eight years preceding, the organization had turned to become the employer of choice in the market area.  Our turnover was less than 10% of our total staff, the majority occurring in non-clinical staff.  Average staff tenure had exceeded ten years and our recruitment budget was less than $100K per year.  Our Worker’s Compensation “modifier” (the factor that correlates work related accident/injury loss experience to premium) was the lowest in the industry – so low that we annually received high five and six figure rebates on our premiums.  We never posted ads for management or administrative positions, never had any employment actions (legal) taken against us save unemployment claims which we universally won on appeal, and had totally eliminated pool or agency use.  Our productivity was extremely high and our Medicare, Commercial and Private Pay payer mix for our reimbursed businesses (SNF, Hospice, Outpatient Rehab, etc.) was fully 75% of our patient days and billed encounters.  We also ran multiple sites, completed multiple acquisitions, and had over a dozen complex service lines (vent, wound, inpatient hospice,, etc.) that required us to recruit and maintain, highly skilled clinical staff.

The point of this post for me, is not to brag but to share some common sense, workable strategies that will, if employed (pardon the pun) properly, increase productivity, increase retention, and reduce non-essential labor related expense.  I have actually used each tactic or strategy below and each has worked (in conjunction with the others) and produced real, tangible results that every provider organization can benefit from.

  • Change hourly and salaried compensation to a very flat scale that compensates each employee for the requirements of the core job – nothing more.  There is no real correlation between longer-term employees being paid more and their relative worth to the organization.  I know this sounds incongruous in light of a retention strategy but trust me, longer-term employees well compensated and performing will be just fine and as we all know, pay doesn’t keep or attract any key staff members.
  • In light of above, increases in hourly and salaried wages should be tied to “market” only or to skill levels.  Career ladders are fine provided they actually correlate to necessary skills, demonstrated competency and “jobs” that actually exist or need to be filled. 
  • Re-work job descriptions for all non-management and non-supervisory positions such that the core of the job description is divided into two thematic areas – job required competencies and behavioral standards.  Job required competencies are the core, functional requirements (demonstrable) that must be completed by the person doing the job, routinely (daily, weekly, monthly, etc.).  Behavioral standards are the requirements established by the profession and/or the organization and are essentially universal to every position or every position within a particular job category.  Examples of behavioral standards are attendance requirements, dress codes, CEU requirements, etc.  Behavioral standards are not things like, “treats co-workers with respect” – this should be an organizational given and the purview of management.  Eliminate from each job description, any non-demonstrable, non-verifiable requirement.
  • Change job or annual performance evaluations to nothing more than a competency based review, based on the job description.  Competency testing should be annual or as frequent as needed when job descriptions change or competencies are altered/added.  Eliminate “compensation” from the discussion as compensation or wages should be determined entirely based on the market, the organization’s budget and its manpower plan (a component of which should include a provision of how the organization determines what level of compensation it will offer in light of the market).  Include in the review, an optional discussion for employee development but such a discussion should only occur based on the desire or choice of the employee.
  • Re-work hiring and orientation practices (non-management, non-supervisory) such that new hires are essentially automatic if the candidate meets the essential requirements of the job.  Orientation thus becomes a very didactic, competency-based process during which, the new hire is fully tested and indoctrinated in his/her job and the organization’s standards for employees.  Require absolute attendance and use tests and/or other forms of demonstration to assure that the new employee has successfully grasped the knowledge and/or demonstrated the core competency of the position.  Be prepared to “terminate” employees that don’t meet the requirements or standards at a high level.  Past experience suggests that employees that “don’t get it” within the first ninety days or less will likely be problem employees throughout their career and certainly, take  far more organizational resources to supervise and manage than what their performance will be worth.  Lastly, don’t let any new hire “start” their full position until he/she has successfully completed every facet of their orientation.  The organization should view this phase as the most critical step toward long-term retention and success of a new hire.
  • With respect to benefits, I am a big fan of unbundling every possible, non-mandated benefit and creating a cafeteria or flexible benefit program that allows each eligible employee to “purchase” the benefits that fit their circumstance or lifestyle.  I am also a big fan of providing lots of choices or voluntary plans such as additional life insurance, extra disability income protection, hospital indemnity, etc.  We even allowed employees to buy additional days off.
  • Create an “employee activities” committee and provide the committee with a budget.  Encourage employees to create almost weekly activity programs and events, mostly simple.  I prefer breaking these activities into four categories: Fun, Education, Wellness, Community Involvement.  Examples of things that we did were food drives, walking programs, wellness fairs, sports themed lunches, ice cream float days, cookouts, etc.  The only requirement for these events is that they must be “open” to every employee on every shift.
  • Share as much information as possible with employees about operations including budgets, strategic plans, census, staffing, quality data, etc.  I also believe that getting employees (hourly especially) involved in quality and customer service/customer satisfaction activities is essential.  The more knowledgeable and involved employees are, the more committed to the organization they typically become.

Assuming the points above are implemented or are in the process of implementation, the next group or set of strategies is undoubtedly the hardest to implement as each involves organizational change and management acumen or competency.  Arguably, without these changes or strategies in-place, the results attained will be weaker and produce much less return for the organization.

  • Rewarding performance must become a group and an individual function, tied to true performance.  The organization should be willing to provide significant bonuses or other tangible rewards to individuals who demonstrate exceptional performance or to groups that demonstrate exceptional performance.  The organization must be exceptionally clear about how it determines performance (must be measurable) and what performance is (outcomes).  Examples of performance are census goals, payer mix, survey results/outcomes, budget/financial performance, clinical indicators and quality measurements and of course, customer satisfaction.  I am a fan of using “scorecards” on key performance outcomes and then posting these measurements for staff to review.  The organization should become willing to “gain share”‘; passing along a percentage of actual gained revenue or saved expense to employees. For example, we shared the dividend we received from our Worker’s Comp experience with employees. Employees knew that the safer we maintained the workplace, the gain we received as result of our safe practices benefitted them.
  • In light of the point above, rewards must be timely and personal.  We used cash, vacations, time off with pay, deferred compensation into retirement plans, etc. for larger rewards.  For small incentives, we used gift certificates, movie passes, flowers, pizza parties, etc.  The whole point here is that performance must be rewarded rapidly and tangibly and the behavior that is part and parcel to good outcomes needs immediate recognition. 
  • Management at every level is key and the organization must commit to developing professional management staff and developing core managerial competencies.   I like the following approach.
    • Require managers to complete an organization sponsored or conducted training program on key managerial competency.  Completion and demonstrated competency is required to maintain the management position.
    • Never promote someone into a management position simply based on tenure or job skill.  Make sure that each manager has managerial competence.
    • Tie managerial compensation to the achievement of organizational objectives, direct objectives of the job and employee/direct report outcomes.  Managers must know that their compensation and future is directly tied to how well their reports and staff perform.  Measure constantly, employee turnover, customer satisfaction, quality and financial outcomes.
    • Give managers the authority and a budget for rewards for their staff.  Measure how frequently the manager is using these tools to reward outcomes and behavior.
    • Make it difficult for managers to take job actions against employees without the involvement of a “higher authority” (senior management, human resources).  Organizational policy should reinforce that employees only get fired or suspended for not performing their job as detailed in their job description (competency) or for behavioral standard infractions (attendance, dress code, etc.).  Managers should understand and embrace the concept that their role is to coach, to plan, to develop and to implement organizational strategies and policies.
    • Create opportunities for managers to interact, to solve problems jointly, to develop new ideas and programs, and to be a part of the overall organization – not just their individual department or function.
  • At the organization level, set a clear standard and practice for very quick termination of employees, regardless of tenure, that do not meet expectations.  Consciously limit written and oral discipline tendencies so that managers know that their responsibility is to lead and to work on performance issues, not simply spend hour after hour disciplining poor performing employees that will likely never be terminated.  If the organization has clearly outlined performance and behavioral standards for each job, employees that don’t meet the standards should be quickly eliminated from the organization.  Documentation thus becomes very simple; a function of matching employee behavior or work product to the job description and the competency testing material that should be a part of each employee’s record.
  • Consciously reinforce to all levels of management that interaction with every level of employee is a necessity and that visibility and knowledge of the core business and the customer is critical.  To do this, the organization must commit to limiting non-essential meetings as well as to an ongoing review process of management that incorporates key performance outcomes that cannot be attained unless management is fully engaged with staff, with customers, and with the process and outcomes of the jobs they (management) lead and direct.

Putting these concepts into action is not an easy or quick process, taking at least a couple of years from start to finish.  Maintenance is also somewhat difficult as the organization must be disciplined to not let creep in, the natural tendencies of humans to want to short cut the steps or to not repeat the maintenance steps (training, orientation, performance monitoring, etc.) frequently – a must.  Without question, the first two or so years will be years with some additional turnover and necessary management turnover as managers will be the most resistant to their new levels of accountability and their new focus of “keeping” employees productive rather than “micro managing” conduct, etc.  What I do know is that when the steps above are flushed out on an organization specific level and implemented, the results in terms of productivity and retention are amazing – well worth the investment and the effort.

January 4, 2010 Posted by | Assisted Living, Hospice, Senior Housing, Skilled Nursing | , , , , , , , , , | Leave a comment