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November 2007 issue
The Case For Long-Term Care Financing--
AAHSA (and others) Continue The Debate And Suggest Changes
More than half of U.S. residents needing long-term care either pay for it
themselves or depend on help from family members. Private long-term care
insurance remains prohibitively expensive. Meanwhile, the elderly population
is about to explode. AAHSA and others have actually come up with some good
ideas to solve the problem.
...
Expanding Through Home Healthcare--
Masonic Health Systems of Massachusetts: Right Place, Right Time
Masonic Health Systems of Massachusetts is in the enviable position of being
both cash rich and land rich. Concerted strategic planning resulted in a
mission update, a corporate reorganization, and the acceptance of the
concept of debt (a novel idea for this group) before moving forward with
expansion plans.
...
Q&A With Stephen Infranco
The director of public finance in
the not-for-profit health care group of Standard & Poor’s talks about market
stability and factors that affect credit ratings.
...
Recent Not-For-Profit Sales &
Recent Refinancings
We detail some deals that closed in
the last few weeks.
....
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Read more about
Senior Living
Business.
Articles Archive
Steve's BLOG on Senior Care
Companies Mentioned in this issue:
November 2007
A
AAHSA p1
Anna Dupree Apartments p3
B
Bethany Lutheran Village p3
Beulah Land Christian Home p3
Blue Cross/Blue Shield p4
C
Canterbury Court p3
E
Episcopal Retirement Homes p3
Extendicare Health Services p3
F
Franklin United Methodist Community p3
G
Graceworks Lutheran Services p3
Grand Lodge of Masons of Massachusetts p1
H
Harrington Home Care & Hospice p7
L
Lancaster Pollard p3
Leadership Council of Aging Organizations p5
Lutheran Community p3
M
Managed Home Care p7
Mariners Home Care p6
Masonic Health System of Massachusetts p6
Masonic Health System of Massachusetts (MHS) p6
P
Professional Home Care of Western Massachusetts p6
R
Retirement Living Services p6
S
Sovereign Bank p7
St. John’s Communities p3
Standard & Poor’s p2
Summerfield Plaza Apartments p3
Sunrise Care Center p3
Systems Unlimited p3
T
Telford Healthcare Center p3
V
Village on the Isle p3
W
Westchester Villages p3
Z
Ziegler p3
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Expanding Through Home Healthcare--
Masonic Health Systems of Massachusetts: Right Place, Right Time
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When the Grand Lodge of Masons of Massachusetts hired David Turner
in 1999, it owned and operated a rather unspectacular “old folks home” in
the central Massachusetts community of Charlton. The facility had 100
skilled nursing beds and 69 licensed, intermediate care beds.
The masons were also sitting on a lot of money — a $120 million endowment,
plus $500,000 to $1 million in annual gifts and contributions — and almost
470 acres of land.
Nevertheless, the Charlton facility was operating with a budgeted $3.5
million to $4 million annual deficit. While the endowment was earmarked to
care for the residents, the home’s board recognized that spending $4
million a year on 169 people was not good economics. Also, the physical
plant was aging, new CCRCs were emerging, and the board had begun to talk
about considering some type of expansion.
The Grand Lodge of Masons of Massachusetts has about 35,000 members, plus
their wives and widows. In 1999, the nursing home had a two-year waiting
list, the average age of the fraternity was 67-68 years, and members who
needed help but couldn’t get into the home were pressuring the board. So
the board members said, “Let’s do something about it.” That’s when they
hired Turner to initiate strategic planning.
Survey says...
In a 1983-84 survey of fraternity members, only 15% of respondents
indicated that they would consider Charlton a desirable location to
retire. As part of his strategic planning initiative, Turner brought in
Retirement Living Services to help put together a new survey to assess
the current viability of a CCRC product in Charlton. “We also surveyed the
fraternity on the bigger question,” he says, “as to whether senior care
was, indeed, part of the mission of the Grand Lodge of Masons of
Massachusetts.”
About 50,000 surveys were mailed to Massachusetts masons and their widows.
Of the 11.5% who responded, more than 98% indicated that providing senior
care is, indeed, part of the fraternity’s mission. In addition, 85%
thought Charlton was a desirable location for retirement — exactly the
opposite of the survey results 15 years prior. “That gave us the mandate
to go forward,” says Turner. If the fraternity had said ‘no’ to either
question, the organization probably would have sold everything and gotten
out of the senior health care business altogether.
Updating the mission, the board, the organization
Turner and the board then reviewed the organization’s internal structure
to figure out how to provide the necessary flexibility for future growth
and expansion. “We had to adjust our mission to reflect changes in our
industry and the opinions from our survey,” he explains. “Simultaneously,
we had to adjust our corporate design to coincide with the goals of that
mission and our strategic plan. We engaged legal counsel to help create a
new structure that would allow us to expand beyond a single facility and
reach beyond the fraternity.”
Nowadays, very few not-for-profit organizations, whether religious or
fraternal, serve only their own constituency — including the masons, whose
hospitals treat kids other than the children of masons. “We are a
charitable organization and need to take care of anyone who needs us,”
says Turner. “Getting the board to understand and fully accept that,
though, was a big part of the strategic planning effort.”
Reviewing and refocusing the functions of the board was also critical to
the organization’s future growth. For the first time, non-masons were
allowed on the board and term limits were adopted. Most importantly, board
members accepted their role as planners and stayed out of operations. “But
we had to emphasize that continually,” says Turner. Lastly, the board
understood the need to stick to the strategic plan.
Ultimately, a strategic plan was developed that focused on expansion, with
a corresponding 10+-year financial projection that provided metrics for
these assumptions:
• A major expansion into senior care,
• Replacement of the skilled nursing and intermediate
care facilities,
• Adding independent living, and
• Aggressively enbracing home health care.
And in 2001, the Masonic Health System of Massachusetts (MHS) was
born, with David Turner as its president and CEO of four separate
divisions: Corporate, Overlook Masonic Health Center (the original
Charlton facility), The Overlook Lifecare Community (independent living on
the Charlton campus), and Overlook VNA & Hospice Services (home health
care delivered throughout Massachusetts).
Expanding into home care...accidentally on purpose
With the new survey results clearly showing demand, the board was
comfortable laying plans to turn the Charlton campus into a Type A
lifecare community. “We first submitted a determination of need to rebuild
the nursing home and rest home, a $44 million project, while we
simultaneously embarked on the presale process for the $72 million,
219-unit independent living project,” Turner explains. “But we recognized
the need to get into home health care. Because no matter how we rebuilt
the home or added independent living to the campus, that would only
involve a few hundred people. With 35,000 masons in the fraternity, plus
their wives and widows, we realized that we had to get into home health
care.”
Out of the blue, an opportunity arose in May 2000 to pull Mariners Home
Care out of bankruptcy. “We negotiated through the court to pull three
provider numbers out of bankruptcy without any successor liability,” says
Turner. “We took the staff and patients, as well. We paid a small amount –
a couple of hundred thousand dollars in associated legal fees — so it was
a pretty good deal.” Mariners Home Care had operations in central
Masssachusetts, the Cape, and the New Bedford area, so that acquisition
provided significant extra coverage.
In January 2002, MHS acquired Professional Home Care of Western
Massachusetts, a small, private home health care company operating out
of Springfield, in a straight buyout. “That got us into the western part
of the commonwealth,” says Turner. The following April, MHS acquired
Managed Home Care, which had been a major competitor in New Bedford,
by taking it out of Chapter 7 bankruptcy. “We basically got that for
free,” he notes, “and it nearly doubled the area we cover.”
Most recently, in July 2005, MHS took over Harrington Home Care &
Hospice. “We now cover about 50-60% of Massachusetts,” says Turner.
The financing
Despite its enviable position in terms of cash on hand and annual
revenues, it made sense for MHS to borrow — a concept not even considered
in years past. The board had always preferred a pay-as-you-go basis. MHS
first borrowed $5 to $6 million in seed capital from its own endowment to
start its expansion into home health care. Then, the first outside
financing was a $44M tax-exempt bond issue for rebuilding the original
facility and building the independent living project. The financing also
included a $37 million construction loan from Sovereign Bank, $10
million of intermediate debt, about $15 million in long-term financing,
and $7.5 million in subordinated debt that MHS put in itself.
The funding for the acquisitions also came from the endowment, which
loaned the money to its sister entity. “The endowment is still earmarked
for the home,” says Turner, “but lending the seed capital for the
expansion is just an investment opportunity that is not much different
from investing the funds elsewhere. Our new corporate structure allows us
to do that, and we executed loan documents between the two entities.” The
endowment and the home have separate boards.
The endowment remains at about the same level today as in 1999 — $120
million — and earned about 15-16% in income last year. On the $44 million
bonds, 3.8% is the highest interest rate that MHS has paid. And on the
independent living financing, the highest interest rate is about 5.7%.
“Having the endowment allows us to take a long-term approach and accept a
longer payback,” says Turner. “And if there’s a downturn in the markets,
we can pay off a portion of the debt. So when we talk about expansion and
growth and acquisitions, we’re not thinking about improving this year’s
bottom line. We started in 1911 and want to be here in another 100 years.”
Home health care — not a magic pill
“The big lesson that I learned from this experience,” Turner says, “is
that getting into the certified home health care business is a huge
undertaking. It requires planning, infrastructure, and management, as well
as the appropriate corporate structure. In that sense, it’s no different
from building a CCRC from scratch.”
Home health care may not have tangibles such as buildings but, for MHS, it
involves taking care of 1,700 patients.“You need a lot of infrastructure —
billing, clinical, information technology,” Turner says. “You need offices
— we’re renting seven or eight sites — and a lot of people. Instead of
delivering services in a very controlled environment, we’re sending
caregivers into the patient’s home where we can’t easily monitor what
they’re doing. So we have huge transportation expenses and very
significant worker’s comp and liability issues.”
So it’s not a magic pill. Getting into home health care is a major
expansion, with the payoff several years out. It requires a commitment to
growth. “A provider needs 1,100 to 1,300 patients to get to breakeven in
certified home health care.” says Turner. That’s a lot of people.
“My recommendation to a small provider looking to generate additional
revenue in this arena would be to partner with a big VNA or run just the
private duty portion of it — although it’s just a matter of time before
states start regulating that, too.” MHS does, in fact, have a partnership
through which it provides home health care services that an outside CCRC
brands with its own name.
Next steps
So MHS still has its 470 acres of land, its $120 million endowment, and a
continuing revenue stream of $500,000 to $1 million a year in gifts and
contributions. It has a rebuilt nursing home, a new independent living
community, and a profitable home health care presence throughout most of
Massachusetts. It has a significantly expanded mission statement and a
reorganized corporate structure. And it has a financial plan in place for
the next ten years or so.
“We plan to divide our home health care into three divisions: private duty
home health care, certified home health care, and a hospice program,”
Turner says. Right now, the majority of the home health care revenue comes
from the certified side of the business. Hospice services are only run
from the Charlton location, but Turner wants to expand that to other
locations, as well.
“We’re also looking at a few other things,” he adds. “I’m looking at
developing facilities on the north and south shores and perhaps in the
metro-west and western parts of Massachusetts, whether through acquisition
or full development from green field up. On the home health care side,
we’re also looking to grow through either acquisitions or market growth. I
would like MHS to have much broader coverage across the commonwealth.”
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