How Frazee Care Center, Frazee MN, Became Viable In 18 Months
January 2, 2009
Frazee Care Center in Frazee, Minnesota, was a small, stand-alone, not-for-profit facility — 102 skilled care beds and 19 assisted living units — with $6 million in debt, $1 million in unpaid bills, and a net loss exceeding $200,000 when it filed Chapter 7 bankruptcy in August 2004.
Today, Frazee is a viable facility with a new sponsor and a positive cash flow. Health Dimensions Group (HDG), which purchased Frazee at auction in 2004, was able to turn around the facility in about 18 months’ time.
“Turnaround is our business,” said Dave Briscoe, Principal of HDG, a for-profit organization that works primarily with banks and hospital-based organizations. “We literally purchased Frazee in a bidding contest on the courthouse steps,” he said, “and closed the transaction within 60 days. We’ve done about 15 turnarounds in the last 10 years, but the bankruptcy was the unique part of the Frazee turnaround. When we took on this project, we owned the facility.”
An organization doesn’t have to be on the brink of similar dire financial circumstances to benefit from the lessons learned from this turnaround, so we asked Briscoe to shed light on some of the problems that led up to the Frazee bankruptcy and the subsequent strategies that HDG put into place to get the facility not only on an even keel but, as it turned out, in a position to be sold to a new not-for-profit sponsor and undergo substantial renovations.
Critical turnaround components
Briscoe outlined several critical components that, based on HDG’s extensive experience, apply to any financial turnaround situation:
Transition management. The on-site administrator is a key member of the turnaround team—with support from nursing, financial, marketing, clinical and regulatory compliance consultants—and the spokesperson of the turnaround effort at the facility level. If residents, families, employees, vendors, regulators and lenders believe that a “blue suit from the corporate office” is yanking the administrator’s chain, the situation may turn adversarial and eventually unmanageable.
Action items. A very focused list of action items—bullet points that will fit on one page—must be accomplished in the first 90 to 180 days of the financial turnaround period. The list might include items such as getting staffing in line, renegotiating contracts with vendors, implementing a marketing plan, increasing Medicare revenue per patient day, increasing Medicare referrals and so forth.
Communication. Always err on the side of overcommunication. As soon as possible, meet face to face with residents, families, employees, key vendors and lenders to let them know the game plan, what will happen in the short term, what has been figured out and what has yet to be figured out. Be open and honest; otherwise, they may bail on you—or at least cause a lot of grief.
Employee relations. Virtually all turnarounds have staff impact—either staffing levels or staff compensation. As soon as you sense that you’re going to have to make changes that affect employees, be straight up with them and explain what has to be done.
Compliance. Ensure continued compliance with regulations and be ready, at any given moment, to have the health department walk through the door and do a survey. Fixing a regulatory problem in the middle of a financial turnaround could take your eye off the ball for 30 days or six months, depending on the issue, and slow down the turnaround effort.
Specifically regarding Frazee…
Frazee Care Center was established in 1971 as a 76-bed intensive-care facility; 26 beds were added in 1978, and 19 units of assisted living were added in 1993. The facility, located in a rural area, was and continues to be the second-largest employer in town (after the local school district).
As Frazee’s organizational culture eroded, the financial management infrastructure ceased to exist, and the regulatory climate became volatile, the facility’s occupancy levels declined and insurmountable debt created a crisis situation. Frazee declared Chapter 7 bankruptcy in August 2004. The court appointed a trustee to handle all business and bankruptcy issues pending sale of the facility at auction, and the state granted a 90-day license for Frazee to continue operations until October 31, 2004.
Prior to closing the sale on November 1, 2004, HDG examined the facility’s operations—revenue and expenses, labor hours, room rates and market competition—and determined an initial turnaround plan. The primary cause of Frazee’s bankruptcy was “simply gross overspending,” according to Briscoe. For example, Frazee—while not a large facility—operated five vans with full-time drivers to transport patients and deliver meals to seniors in the community without associated revenue or reimbursement of any kind. “Just eliminating the transportation program saved more than $100,000,” said Briscoe, “and we uncovered a number of similar examples of significant overspending.”
In its initial examination, HDG also found inequities in staff compensation. Significant pay differentials existed between nursing assistants, for example, who had the same experience and the same responsibilities and were hired on the same day.
“We got a sense of what needed to happen with staffing and with spending,” said Briscoe. “Our assessment continued and our turnaround plan evolved in the 30-60 days after closing. Implementation of the plan began after about 90 days.”
Implementing the turnaround
The turnaround strategies implemented by HDG included both revenue and expense adjustments. For example:
Revenue adjustments. HDG examined Frazee’s revenue streams and put an aggressive plan in place. Discussions about “right-sizing” the facility were undertaken with the state of Minnesota, where downsizing can positively affect reimbursement rates. Downsizing by 14 beds maximized revenue. Private pay rates, which had been priced below market rates, were increased by $18 per day. And Medicare documentation training was conducted to ensure that the facility received the appropriate per-patient-day rates.
In addition, the lack of a dedicated and focused marketing and census-development plan significantly hindered Frazee’s ability to hit necessary revenue targets. No one had been calling on hospitals, meeting with physicians, or going to home-care agencies to market the facility and seek referrals. A marketing plan aimed at increasing occupancy was developed and implemented, with dedicated staff, resulting in occupancy rebounding favorably.
HDG also learned that key staff in the facility had ventilator care expertise and experience. A new marketing strategy, aimed at caring for ventilator-dependent individuals, was created. Negotiated rates for ventilator-dependent residents are 3.5 times the average Medicaid rate for the facility. Now, on any given day, Frazee will have three or four vent patients paying $500-$700 per day. Referrals come from all over northwest Minnesota and as far away as Minneapolis (a three- or four-hour drive) and North Dakota, because not every nursing home is equipped for vent patients.
Expense adjustments. HDG revised Frazee’s financial operating structure to be more in line with industry standards. Basically, every department was overstaffed. HDG brought staffing in line with norms by analyzing the overall wage and benefit package against the market to ensure a competitive but financially realistic offering. Changes were made to reduce overall expenses while also keeping the facility market-competitive.
And 18 months later…
About 18 months after HDG implemented the turnaround plan, Frazee became profitable. Occupancy in the assisted living units climbed above 95%; on the skilled nursing side, occupancy rose above 93%. Frazee developed a reputation for providing high-quality care for ventilator-dependent patients. And financial results for the facility overall improved from a net loss exceeding $200,000 in 2004 to a positive net income up to $300,000 per year. Frazee Care Center now has 84 licensed skilled nursing beds, 19 assisted living units, and an additional 15 assisted living units in the nearby town of Vergas, Minnesota.
In August 2007, HDG transferred ownership of Frazee Care Center to Legacy Senior Services of Minneapolis, an independent not-for-profit group with five senior care facilities for which HDG provides management services. HDG continues to provide management services for Frazee, so operations have not changed with the new ownership.
Included in the overall financing that Legacy Senior Services arranged for the purchase of Frazee Care Center was $900,000 to finance a capital expenditure project that included renovation of patient rooms, nurse’s stations, and other patient care areas in the Frazee facility.
“The reason Legacy could include that additional financing was because Frazee had cash flow to support the debt,” said Briscoe. “The return to profitability put Frazee in a position not only to be sold but also to renovate the building and provide a better environment for both residents and staff. And that was important to us.”