Forethought, Periodic Reassessment, And A Good Executive Director
What should senior living providers be doing today to rein in costs in order to navigate the current fiscal crunch? That question rubs Ralph Bellande, founder, president, and CEO of Renaissance Senior Communities in Prospect, Kentucky, the wrong way. Bellande becomes very concerned when senior living providers allow the economic environment to dictate what they should be doing to be fiscally responsible.

“Any provider worth its salt should constantly be investigating efficient ways to do business, regardless of what is happening with the economy,” he said. “It’s naïve to be running around now, when times are tough, looking for ways to cut costs. That should be part of the ordinary course of business.”

Right now, though, the tight marketplace is forcing everyone to look for efficiencies in their cost structures, while trying to maintain service quality and produce results. “You can be fiscally responsible and do a quality job of service,” Bellande stressed. “They’re not exclusive. But I’ve been in this business now for 40 years, and I’m sad to say that some of my counterparts very foolishly try to cut costs without paying attention to what they’re doing from a customer standpoint. And when they’re drowning, they’re more likely to make desperate decisions.”

So fiscal responsibility is not simply about cutting costs. It’s about balancing economic efficiency with quality of service and the needs of the residents. It must be a long-term approach that is regularly reviewed and reassessed. “Failure to evaluate what you have done and what you can do differently to improve results is almost amoral from a business standpoint,” Bellande said.

Reality check for United Church Homes
Sometimes, an organization has to look to drastic measures. The economic fallout that began in September 2008 led to some pretty dark days for United Church Homes, Inc. (UCH) in Marion, Ohio, which owns and operates 56 communities in 10 states. The organization not only had to undergo cost reductions but has also undertaken a divestiture process. “It has been one heck of a reality check but one that was inescapable, inasmuch as we absolutely and unequivocally needed to attend to the circumstances in which we found ourselves,” said John Stoner, CFO. UCH is currently seeking to divest two underperforming properties.

Throughout the country, Medicaid programs are struggling due to state budget constraints and will face even more severe times in two years, when stimulus monies from the federal government are likely to disappear; senior facilities, whether for-profit or not-for-profit, are all in the same boat. Multi-site providers such as UCH are having to evaluate whether one or several of their sites are particularly underperforming in terms of their business liability (i.e., profitability), according to Stoner. And if the facility requires a lot of capital or is inefficiently structured or just doesn’t appear viable in terms of operating costs—and barring the ability to make the necessary changes from an operating standpoint—divestiture must be considered and, in fact, may be the best alternative.

Stoner, who spent much of his career in the hospital industry, believes there is definitely a market for these types of troubled properties even in this economy. “When managed care took hold and amassed enough economic power to be able to dictate terms to providers, hospitals responded with all kinds of tactics,” he said. “They cut costs, negotiated contracts with managed-care organizations, formed loose networks and tried a variety of other things. In the end, what worked was consolidation of the providers, which allowed them to gain sufficient market clout and the power to combat and deal directly with the managed-care organizations. That may be the way to go for senior living service providers, whether for-profit or not-for-profit; in fact, this strategy is already in various stages of maturation throughout the country. That’s why I believe there is a market for divestitures.”

Operational review process
People do budgets and some do strategic planning, but most are not necessarily accustomed to doing regular forecasts, according to Stoner. He suggests that every organization should prepare a quarterly financial update projected out one or two years. “Anything beyond that is a waste of time and effort,” he said, “but a prognosis of what things might look like in the relatively near future can help management recognize and prepare for any adjustments that might be necessary. Unfortunately, many people simply react to a situation that could have been foreseen had they given it a little forethought.”

Who should be involved in the review process? Top management should certainly review the organization’s financials. Then, Stoner recommends a discussion of the results with the principal site administrators (or department heads at a single site), as well as a board committee. “It’s important to engage the board in any discussion,” he said. “There needs to be an understanding and appreciation, at both the board level and the operational level, of what is foreseen, along with any difference of opinion about what is foreseen.”

While no one can accurately predict the future, periodic reviews provide a good framework for anticipating how the organization will be operating down the road and whether any actions should be taken to stay on course. “Too many people look backwards at what happened instead of looking forward,” said Stoner. “And organizations absolutely need people to look forward. But they can’t just forge ahead blindly. They need to review progress and, depending on what they learn, modify their plans and the execution of those plans.”

Staffing issues
The single largest expense when operating a senior community—perhaps two-thirds of any organization’s cost structure—is payroll. Not-for-profits typically have staffing levels above those of for-profits, and it’s often very hard for a not-for-profit that is steeped in culture and the type of service rendering that it has historically provided to make modifications that emulate for-profit organizations. But government programs are increasingly stipulating the fees paid for services. And in that environment, providers with an average staff of four FTEs per patient (vs. 2.3 at a for-profit) and who don’t have a preponderance of private-pay business must ask themselves if they can continue to provide quality services effectively at the price that third-party payers are willing to pay. If so, don’t change. If not, any who ignore the warnings may cease to exist.

Three major areas to investigate when seeking staffing efficiencies are the staff-to-resident ratio, the scope of the work that employees do and the benefits they’re paid, according to Bellande. “Without a doubt, the single biggest challenge facing any senior care operation is finding quality staff—people who are committed to the vision and mission of the community, who have a calling, who have heart, who are responsible and accountable, and who are interested in being key members of the staff,” he said.

“Many providers underestimate the energy involved in finding quality employees,” he continued. “Quite frankly, a lot of providers historically have been tied to the notion of one size fits all. They’ve established their basis for staff costs on hours and rates rather than on the quality of the employee’s work. Yet one efficient worker might do the work of two or three inefficient workers. Therefore, you’re better off hiring one person at $8 per hour than hiring two at $6 an hour, if the one person can do the work of two.”

Some providers are moving to the universal worker alternative, where an employee can do any of several jobs (e.g., laundry, housekeeping, dietary server) rather than assigning each job to a separate employee. And in terms of employee benefits, particularly health insurance, employees are having to contribute much more of the cost—if they get benefits at all. “Benefits are a bear,” said Bellande. “Anyone who says they aren’t is lying to you.”

Assessing the cost structure
Whether an organization’s operations are centralized or decentralized matters when evaluating costs and cost structures. A decentralized approach would be to have a relatively small corporate office that pushes into the field a lot of what might be considered duplicative services. A centralized organization, on the other hand, is one that has a concentration of people in a corporate office and limited support staff—mostly direct care provider staff—out at the individual sites.

“This is an essential element or aspect of an organization’s makeup that needs to be critically evaluated,” suggested Stoner. “What is the most efficient and effective way to provide the support services to operate the facilities? Should it be more centralized or more decentralized? And how do we get the best benefit organizationally from each structure? Those are questions that must be addressed.”

Another area that should be assessed is whether to contract for services or to employ people to provide those services. And the determination could be different for each organization and for each site within an organization. “There aren’t a lot of physical therapists living in Appalachia, for example, so a facility located there may need to contract for those services,” Stoner suggested. On the other hand, that facility might be able to grow its own produce. In any event, the more an organization contracts out services, the more consequential those contracts become when evaluating the cost structure.

Then there are the nickel-and-dime items that can add up to significant dollar amounts over the course of a year, according to Bellande. “When you reduce your food costs by two or three cents per meal and you’re serving thousands of meals a year, the savings add up rather quickly,” he said. For example: overcooking meat will reduce the water content—and therefore the amount of cooked meat—by up to 45%; cutting the meat by hand will end up costing 15% more than using a meat slicer; and cooking from scratch rather than buying prepared food can result in food cost savings of more than 20%.

“Make sure you follow menus and that you really measure your portions,” Bellande added. “And use the right size plates, because your food costs will be affected depending on whether you serve your meals on a 9-, 10-, or 12-inch plate.”

Purchasing is another area where providers have looked to save costs. Many have joined group purchasing programs. Others are buying some items locally. “It’s another layer of hassle for someone to go shopping,” Bellande admitted. “It’s easier for providers to punch an order into a computer and have it delivered by one of the large institutional vendors. But by buying locally, you can save a lot on housekeeping supplies and even milk, which can cost three times less at a local Walmart or Costco.”

Basically, though, fiscal responsibility really depends on the skill of the business leader of the organization. “It all comes down to your executive director,” said Bellande. “If you want fiscal responsibility, you have to hire someone who has that type of attitude and, of course, the appropriate wisdom.”