Senior Living Business: Benchmarking - Now More Important Than Ever
Measure Key Metrics To Operate Smarter And More Efficiently
Senior living providers are realizing that they must be more agile in their decision-making and must react more quickly to financial and/or operational changes—especially now—because you can’t improve what you don’t measure. “Benchmarking helps an organization measure performance in order to implement its strategic plan,” according to Jeff Boland, a partner at ParenteBeard, LLC in Harrisburg, Pennsylvania. “And the more frequently a provider looks at the benchmarks, the easier it is to react.” Boland’s firm collaborates with Ziegler Capital Markets and CARF-CCAC on Financial Ratios and Trend Analysis of CARF-Accredited Communities, a benchmarking reference used extensively across the country.
Organizations have been doing financial benchmarking for a long time, because bond covenants such as debt service coverage and days cash on hand are based on financial ratios. “Creditors are obviously concerned with liquidity ratios, cash reserves, and an organization’s ability to repay its debt, but many senior living organizations haven’t incorporated benchmarking for non-financial measures,” according to Amy Hayman, Managing Director of Cain Brothers in Chicago, Illinois.
The current economy, however, has brought non-financial, or operational, benchmarking to the forefront, especially for not-for-profit organizations that have experienced a sharp decrease in their investment earnings and endowment funds. As the market has changed over the last 18 months, organizations that relied on high occupancy rates and investment earnings, but neglected to update their plant and programs, are now struggling to play catch up with no money. Had they been leading those organizations with an integrated strategic plan and regular operational benchmarking, it’s likely they would be better prepared to meet the challenges they’re facing today.
For example, an organization recognizing the current concern about government reimbursements and with high exposure to Medicaid might set a goal of reducing that exposure. Through a benchmarking process, data would be collected, measured, and analyzed. Based on that analysis, an action plan would be developed to meet the goal—including measurements to determine whether the plan is working or not and, in either case, next steps to take. “That’s the value of benchmarking,” said Hayman.
“Right now, there’s a lot of scrutiny on operations,” Boland added. “Everyone is looking to work smarter and more efficiently. Though the financial and banking industries focus on financial ratios, they’re also looking at indicators such as operating performance, net operating margins, and return by level of care. But you can’t concentrate on every ratio,” he cautioned. “Everyone should be looking at occupancy across all levels of care and the payer mix within those levels, but then target specific operational ratios that need some attention.” It is also important for an organization to benchmark day-to-day operational goals set by department heads (e.g., improve resident satisfaction, employee satisfaction, the dining experiences) to help management and the board assess effectiveness and allocate resources for those programs.
Operational benchmarks, though, change according to the situation, so the key metrics are more fluid than those for financial benchmarks. “The operational benchmarking process needs to be nimble,” explained Hayman. “The items you target for measuring this year may be completely different from those you targeted last year. So you identify areas you need to improve, go through a benchmarking process, analyze the results, and implement an action plan to effect change. Then you start the process again. The items you previously measured change because you’ve taken action, and the challenges change from one year to the next, as well. It’s a continuing, evolving process.”
Determining key metrics
American Baptist Homes of the West (ABHOW) is a multi-site senior housing provider based in Pleasanton, California. One of ABHOW’s overall strategic goals is “consistent, incremental improvement.” To meet that goal in what is certainly a capital-intensive industry, requiring continued borrowing and debt costs to keep communities up to date, ABHOW employs cash operating margins (COM)—defined as cash operating revenues less cash operating expenses and including interest expense but exclusive of investment income—as a primary benchmarking metric for budget development.
“We strive for a 1% positive COM,” said Pam Claassen, Senior Vice President, Finance, and CFO. “That was a strategic metric set quite a few years ago that we use for all our CCRCs. We use it as one of our primary measures to ensure operating revenues will cover operating expenses. If our investments do well, then we can build liquidity from investment earnings; but if investments tank, we’re not relying on those earnings to pay our operating expenses. It’s a cushion that has served us very well.”
COM is also used as a component in assessing new development opportunities. “At the end of the day, we don’t want to rely on turnover entrance fees to meet our liquidity needs,” she explained. “We look at entrance fees to fund capital needs, not operating needs.” The overarching goal of continuing to improve and being able to get the capital to reinvest and still be able to pay debt service sets an overall operating performance objective that then drives the budgeting process, according to Claassen.
Two other financial ratios that ABHOW monitors closely are days cash on hand for liquidity and debt service coverage, which are the ratios most important to capital providers—LOC banks and institutional investors. “The combination of those three metrics are key from the 30,000-foot level of financial management,” she said.
With a fair concentration of nursing beds, one of ABHOW’s key measures on the operational side is nursing hours per patient day, taking into account the acuity of the resident. “Post-acute Medicare-A stays involve a lot of therapy and associated services and require more nursing hours per patient,” said Claassen, “so we have a baseline measure for custodial vs. post-acute care and then do a blended measure.”
Another goal in ABHOW’s strategic plan is to serve an ever-increasing number of seniors within available resources. “We want to achieve that goal prudently,” said Claassen, “and we want satisfied residents and employees. So we benchmark key goals pertaining to those areas based on the percentile that we want to achieve. If certain measures fall below the target, we have a focused plan to address that area in order to achieve a better rating the next time we benchmark.”
ABHOW has a host of key baseline measures for operations, such as staffing ratios in assisted living (e.g., the number of residents covered per shift), dining operations (e.g., meals per man hour), and housekeeping (e.g., the number or apartments cleaned per staff member per day). “We also look at bad debts and fairly carefully track worker compensation claims,” Claassen added. “We actually have a weighted method of allocating worker compensation expense based on performance, so well-performing communities get a lesser allocation of that expense than poorer performing communities.”
The current economic environment has not caused ABHOW to change any of its key metrics, but benchmarking tools are being used more aggressively from the standpoint of “what ifs.” What if we have another event like last year? Would we fail bond covenants? Would debt service covenants be jeopardized? “Asking those questions drove us to make modifications in our incentive compensation plan,” said Claassen. “If another extraordinary event such as last fall’s market crash were to happen, we wanted a trigger to allow us to say ‘Sorry, we can’t pay it.’”
Sharing and reporting data
In this era of transparency, benchmarking information is generally shared willingly with internal department heads and senior management, as well as with boards, to ensure that everyone is comfortable with the organization’s financial and operational performance. Many organizations use an online dashboard, where management can view comparative measurements on occupancy levels, the payer mix, staff turnover, and other key issues. How frequently certain items are benchmarked depends on the activity or program being measured. When benchmarking a wellness program, for example, muscle growth or mobility may be measured every 30 days, whereas employee turnover may be monitored only on a quarterly basis.
ABHOW prepares separate reports with different levels of sophistication and detail for its various stakeholders. A weekly report, which is basically an Excel spreadsheet delivered to everyone in operations, tracks data on items such as nursing hours per patient day and census by level of care and payer type. “A lot of statistics are captured daily and reported weekly,” said Claassen, “while some of the higher level measures are reported monthly. Then a comprehensive package, with trending graphs to make the financial information easy to understand, is put together quarterly for the board and for public disclosure. Some organizations prefer not to share information publicly, but we think it’s healthy to do so and that it gives comfort to our residents. They know we’re not hiding anything.”
Sourcing operational benchmarks
In the senior living industry, the availability of specific operational benchmarks is limited or, at best, difficult to find. So far, no book for operational ratios similar to what CARF-CCAC publishes for financial ratios is available. As a result, providers try to benchmark themselves against other organizations that are similar in size, character, services, staffing, geography, etc. and that are willing to share data. Or they look to industry associations such as the American Seniors Housing Association that poll data.
Claassen finds the AAHSA/Ziegler 100 listing helpful for identifying organizations that are comparable in size and complexity to ABHOW. “We might contact the CFO and do some informal benchmarking on, say, the size of the finance department just to get a perspective,” she said. If providers can’t find a like source but can identify areas within their operation that need improvement, they should benchmark against themselves and, for multi-site organizations their various components. C.A.R.V.E.R. methodology is one way ABHOW and others use to prioritize specific goals and objectives.
“Benchmarking your own results is always beneficial,” emphasized Boland, who views the process as an integral factor in continuous performance improvement. “But the data from a single benchmarking exercise shouldn’t be viewed in isolation. It’s the trending, along with an analysis of any differences or anomalies that come up in the process, that will help providers determine where to focus their efforts and then make good decisions.”