What Is the Gold Standard of Nursing Home Performance?

In a competitive marketplace with changing reimbursement models and in which consumer choice is more discerning, the ability to identify environmental trends, understand internal capabilities, and execute strategy is critical. The process of benchmarking and, by definition, trend monitoring is one means of linking financial and operational performance to strategy. For many, just understanding how their organization compares on financial and performance indicators is helpful, but for others the need to understand the differences in the way work is performed is critical. Benchmarking allows management to identify through performance indicators, such as days in accounts receivable, the key areas in which their organization has opportunities for improving work processes and focusing the organization’s resources. Benchmarking is also an excellent management tool for framing and communicating the need for change.

For the past 21 years, the LarsonAllen Health Care Group has published the Cost Comparison Report for our senior living clients. Based on encouragement from many of our clients, we further developed the report by exploring the implications of the data and the lessons that can be learned from successful facilities, labeled Gold Standard Performers. The information provided in the report includes ratio and cost analyses that have been computed using information primarily from the audited financial statements of LarsonAllen assurance clients. Additionally, some of the information collected is from clients for whom we provide other accounting and consulting services. All the data gathered have been analyzed by LarsonAllen Health Care Group staff. The entire Licensed Nursing Facility Gold Standard Performance Summary can be viewed at www.larsonallen.com/healthcare.

The Gold Standard Performers are a select list of freestanding nursing facilities identified from the LarsonAllen Health Care Group’s client database. The initial list of Gold Standard Performers included the facilities with a debt-to-equity ratio of at least 1.0, along with improved net operating margins during 2000, 2001, and 2002. The list of Gold Standard Performers then was narrowed further based on the facilities’ performance on ten key indicators and their most recent state survey results, as reported on the Centers for Medicare & Medicaid Services’ Nursing Home Compare Web site. The facilities selected for closer review represented urban and rural, for-profit and not-for-profit, city-owned, religiously sponsored, and privately held facilities, as well as large and small facilities throughout the country.

We interviewed the CEO, COO, or CFO in each of the Gold Standard Performance facilities in an effort to identify the characteristics and practices that enabled these organizations to perform successfully in a challenging operational environment. The following is a summary of our interviews, the innovative management practices highlighted, and the key findings from analyzing the operating and financial data.

By the Numbers
The benchmarking of the key financial indicators for 2000 through 2003 and interviews conducted resulted in three key observations about Gold Standard Performers:

• Gold Standard Performers focus management resources on the execution of the basics, such as cash management, expense control, and revenue growth, by monitoring key operating indicators daily and weekly.
• Gold Standard Performers capitalize on serving Medicare patients to demonstrate their clinical capabilities and improve the organization’s financial performance. These facilities have managed costs, lengths of stay, and clinical requirements to create a margin that is substantially better than the average.
• Strong occupancy numbers depend on satisfied residents and referral sources that are impressed with the quality of care at the facility. Gold Standard Performers are listening attentively to their residents and caregivers to create programs, services, and an environment that are welcoming, engaging, and designed to meet the unique needs of the older adults and their families.

For many financial indicators, such as total staff hours per resident day, nursing skill mix percentage, and total Medicare Part A days percentage, the Gold Standard Performers were similar to all other facilities. The key financial indicators that demonstrate the differences between the Gold Standard Performers and all other facilities in the database include: the net operating margin ratio, the operating expenses per resident day, the Medicare net margin per Medicare resident day, and the net operating revenue growth. These comparative financial trends and an explanation of each are presented below.

Net operating margin ratio. This measure of a facility’s ability to control costs relative to total revenue highlights the keen ability of the Gold Standard Performers to manage their costs. While their operating margins declined in 2003, they consistently outperformed other facilities in the database (figure 1).

Operating expenses per resident day. The operating expenses per resident day for Gold Standard Performers are growing faster than for other facilities in the database but continue to be about 4.5% less than the average (figure 2).

Medicare net margin per Medicare resident day. The ability to manage costs per resident day in all categories resulted in significantly better financial performance. Total Medicare net margin for the Gold Standard Performers exceeded the average for other skilled nursing facilities in the study by $33.11 per Medicare resident day for 2003, despite revenues being only slightly higher (figure 3).

Net operating revenue growth. The growth in revenue for the Gold Standard Performers has been greater than for other facilities in the database (figure 4). This reflects the focus on clinical program development, building and maintaining key referral source relationships, and managing revenue growth.

Strategies
Gold Standard Performers articulated a number of innovative strategies that were geared to increase customer satisfaction, create growth, and improve operational performance. A sampling of some of their strategies is outlined below:

• A well-defined strategic plan linking departmental and organizational goals is broadly communicated.
• Performance data are widely shared and promote accountability.
• Formalized processes exist for frequent monitoring and evaluating operational, clinical, and financial performance.
• Change is approached in a way that generates energy in the organization.
• Niche clinical programs, including designated subacute units, neurorehab programs, and short-stay admission units, increase referrals and customer satisfaction.
• Strong, focused relationships with referral hospitals and physician offices are maintained.
• Managers serve and visit with residents during mealtimes to get to know the residents and their preferences.
• Volunteers are assigned to new residents for the first six months to assist with their transition to the facility.

Successful skilled nursing facilities have distinguished their organizations from other providers by developing programs around the care of increasingly frail long-term care residents while responding to the demands of the short-stay consumer who needs rehabilitation services. The Gold Standard Performers have proven that even in difficult operating environments it is possible to be successful and thrive.