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Paul Willging Says...

October 1, 2005
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Budgeting Is More Than Just Numbers

Budgeting is more than just numbers In anyone's last analysis, the seniors housing and care community needs to make money. Whether an organization is considered profit (for the proprietary community) or margin (for the nonproprietary), winning the end game requires that revenues exceed expenses. Consequently, the key element against which success will be measured is your community's budget. Its adequacy-and accuracy-will spell the difference between success and failure.

Admittedly, the quality of the product is what ultimately distinguishes your community. But quality comes at a price. Your budget and the ability it gives you to meet your goals will reflect how well you have created value-i.e., the combination of quality and price.

So, let's start with price. Pricing is, after all, where the rubber meets the road. In the nursing facility, the "good news" is that the government, for all intents and purposes, sets your prices for you; it relieves you of the agonies of all those price-setting decisions. The bad news is that since those prices will only inadequately cover your expenses, the burden is on management to control costs.

For assisted living, on the other hand, it is the beneficiary of services to whom your prices must be oriented. Some tips on this: To save headaches down the road, make your prices comprehensible and equitable. Don't rely on a multitude of discounts to fill your building-they will only come back to haunt you. Also, while affordability is important, bundling your services will result in the perception of a more valuable product, one worth the higher price.

Remember that the flat monthly rate varies only by unit type (e.g., studio, alcove, one-bedroom, etc.). With this system, therefore, you'd best be looking for low-acuity residents (and keeping them that way) who can subsidize those who have "aged in place." The a la carte pricing approach charges, of course, for each additional service. While this can accommodate aging in place, its downside is the difficulty of applying a "one-size-fits-all" service to each and every resident. One resident, for example, will likely need more time bathing than will another. The points/minutes (incremental) system of pricing alleviates this problem by charging for increments of activity, as needed. However, both this system and the a la carte option run the risk of creating a dissatisfied customer who feels she is being nickeled-and-dimed to death.

For assisted living, the system deemed to be the most equitable and understandable is tiered pricing. Essentially, it categorizes residents by likely levels of services consumed. While from many perspectives this is the best system, it does place a burden on the facility to accurately assess its residents. It is critical in tiered pricing to limit the number of categories to keep the system comprehensible but have enough tiers to account for significant gradations in care. Detailed assessments of the actual assistance required by each resident need to be an integral part of the admissions process and should be completed prior to determining into which tier a resident will be placed for pricing purposes. Residents should be reassessed periodically during their stays, particularly upon a noticeable change in health status.

All of this depends, of course, on determining the costs entailed in actually delivering the care required by each resident-both the skill levels as well as the amount of time needed. Some will be costs incurred by all your residents (i.e., "baseline costs"). These would include payment of underlying debt, although this should vary as a function of unit type. Other costs will be resident-
specific and will need to be calculated based on individual assessment of each resident. Each service required by a resident beyond baseline costs will need an assigned weight. Finally, group the scoring that results from this into three to five definitive categories and assign a price to each.

Having established your prices, you can use certain benchmarks to determine their feasibility in your local marketplace. As indicated above, nursing home operators will have their prices essentially set for them by public funding authorities. Assisted living operators, however, must use the nursing home prices in the community as at least one indicator of the reasonableness of their own prices, especially since assisted living has often presented itself as the less costly, more desirable alternative for people not requiring nursing home admission. A benchmark used by many is that assisted living rates should be at approximately 70 to 80% of the nursing home price.

It is also thought that seniors can generally afford to spend 75 to 85% of their disposable after-tax income for assisted living fees. The demographics for your community (which should have been a part of your preconstruction feasibility research) will let you know whether you and your customers meet this test.

Comparative price/value indices, while crude and largely intuitive, can also be used as benchmarks. This may be no more sophisticated than comparing the price per square foot of unit living space with that of your competitors.