Paul Willging Says…

Budgeting is more than just numbers

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.

Now let’s move on to costs and their control. Numerous strategies have been used to keep community costs in check. Some of these controls, unfortunately, need to be built in at the development stage of the project. Since debt service accounts for up to 30% of your total monthly service fee, a substantial reduction in capital costs can translate into an appreciable reduction in monthly fees. This might be difficult to do, however, if you’ve been up and running for a number of years because most of your capital costs have already been incurred and your debt can’t be refinanced.

A smaller community might offer more ambience than a larger one, but it also means that you have fewer units across which to amortize your costs (at least your variable costs). Cross-training your staff (i.e., creating the universal worker) can help you avoid direct cost growth. Cross-training has been known to create problems, however, particularly in creating stability and a sense of “career” for your staff.

Remember, too, that “penny-wise and pound-foolish” is an axiom that works just as well in seniors housing and care as it does in other sectors of the economy. Cheaper, less durable equipment today will most certainly add to your operating expenses down the pike.

Don’t assume subsidies will be available for your facility, even if it is nonproprietary. The local community (faith-based or otherwise) can’t always be counted on to bail you out when things get tough. Build enough flexibility into your income statement to accommodate what-if scenarios. Also, anticipate the inevitable “cost creep” that accompanies aging in place. Make sure your pricing structure can accommodate it.

Consultant Jim Moore, in his book Assisted Living Strategies for Changing Markets, has referred to ADL or cost creep as the “million-dollar mistake.” He refers to the fact that assisted living has traditionally marketed itself as an alternative to nursing facilities, as less institutional and less medical, where mom’s needs can be cared for in a social environment that facilitates aging in place. While successful as a marketing tool, aging in place has become problematic in terms of its effects on assisted living facility operations. By definition, with increasing age comes increasing frailty. And with increasing frailty (given the inexorability of geriatric change) comes the need for higher levels of service designed to accommodate higher levels of ADL dependency. A community’s pricing structure needs to reflect the fact that today’s resident’s health status will not remain static. Flat-rate systems are the least capable of adapting to this reality (absent frequent changes to the base price). + la carte and point/time systems can easily accommodate aging in place, but it won’t be long before the resident starts feeling that the cost of ancillary services is exceeding the cost of the residence itself.

Tiered pricing, if appropriately structured, can accommodate ADL creep best-but still warn families that mom is not likely to stay in her initial tier indefinitely.

This awareness is crucial because absent an ability of your pricing structure to change in direct ratio to the increasing acuity of your residents, an additional 30 minutes per resident day could result in unrecovered costs of more than $100,000 per year-even if only 25 residents were involved. (That figure is based on a fully loaded hourly wage of more than $22-including profit and overhead allocation-and does reflect current industry practice.) At a capitalization rate of 10.5%, that translates into a loss in a typical community’s value of $1,000,000. Ouch!

Of all your operating expenses, labor will require the greatest amount of attention, accounting for 65 to 70% of those expenses. Of course, your labor investment will spell the difference between a quality and a mediocre product and, ultimately, the success of your community. The importance of staffing demands that at budget time, staffing levels be “zero-based” every year. It is equally important that budgeting for staff directly reflects your residents’ acuity. Simply adding or subtracting staff based on last year’s totals without correlating to real need can be, at best, a short-term solution and, more likely, a recipe for disaster.

Certain economies of scale are also worth exploring, especially if your community is part of a multifacility corporation. Indeed, when looking to the possibility of controlling costs in seniors housing and care, many operators sense intuitively that tremendous efficiencies result from the scope and scale of the operation. Closer analysis shows, however, that this is not necessarily the case. While there are some system-wide activities for which unit costs can decrease if spread over a larger number of residents (e.g., corporate-level activities such as management information technology), most costs directly reflect resident care. Thus, if it takes 30 minutes to bathe a resident, those minutes become no fewer just because you have a large number of residents. Size might make a difference in other areas (e.g., increasing market share, integrating service delivery capacity), but it is no panacea when it comes to operating efficiencies.

While multifacility organizations or integrated systems might not deliver all that has been promised as far as economies of scale are concerned, they are a large part of seniors housing and care and do possess common elements-and some advantages. The successfully integrated corporation or network will have successfully balanced the authority and responsibilities of the home office with the need to continually recognize the specific needs of local markets. The successful home office will be responsible for creating the corporate vision and culture and for providing support services, but will allow the individual communities to respond effectively to unique community needs.

Coordination of clinical care will be facilitated by avoiding gaps in or duplication of services. Combining the resources of several communities will make it easier to support the costs of such care.

Another advantage: Large group purchasers of healthcare services have shown a desire to contract with single-provider organizations, and the scale of the organization will better allow it to develop the information systems that can best support its efforts to display appropriate clinical, financial, and operational data to achieve this.

According to quality guru W. Edwards Deming, reducing the variability of output is at the heart of quality. One of his “14 points” is to look at the total cost of production rather than focusing on individual price tags. Thus, if customer needs are to be met in the long run, suppliers need to be consistent and reliable-and that is more likely to occur when they have a long-term relationship based on something other than just price. When we change suppliers every year in the constant search for the lowest price, what costs are we incurring? What about the cost of briefing potential suppliers, of teaching them about our standards and expectations? These costs are not reflected in the price tag but, rest assured, they do affect the total cost of production.

For an organization to deliver quality and control costs, it is critical that its suppliers will have bought into the corporate culture and that the organization’s mission is understood and adhered to. This has become even more important, given the increasing propensity of regulatory and legal authorities to hold the corporation responsible for the actions of independent suppliers. Physician services, for example, are deemed by the federal government to fall within the scope of responsibility of the nursing facility, even though the physician exercises his or her own personal and professional judgment. Better then to make sure the physician is “part of the team,” especially since you ultimately bear responsibility as the team’s manager.

So, the budgetary equation, like all parts of the seniors housing exercise, requires attention to multiple details. Quality remains job one. But quality comes at a price. And that price, too, requires your unflagging attention.