The Business Side of PACE, Part 2

The Business Side of PACE, Part 2
How the actual experience of two PACE organizations is contributing to the development of new programs


Part 1 (see Nursing Homes/Long-Term Care Management, April 2003, p. 36) of this pair of articles on Programs of All-inclusive Care for the Elderly (PACE) describes the financial planning tools available for creating a PACE organization, including the PACE Financial Proforma model and the Baseline Scenario developed by the National PACE Association (NPA). In order to develop the assumptions for this model, in-depth case studies of successful PACE programs in Denver, Colorado, and Chattanooga, Tennessee were undertaken. The operating experiences of these PACE programs offer a current perspective into (1) a well-established program that is expanding and (2) a relatively new site that is starting up. Both programs operate in different marketplaces with varying state policies, and thus use different marketing and business strategies to achieve success. These variations offer readers a broad view of the issues involved in creating a PACE program.
“Over the years,” says Shawn Bloom, NPA president and CEO, “there developed many ‘rules of thumb’ about PACE that we really wanted to test. With the PACE Financial Proforma and other tools, we developed both a way of highlighting all the assumptions that need to be thought about and historical data to base these assumptions on.”

The case studies show that PACE programs can be both clinically and financially successful in providing comprehensive primary, acute, and long-term care to the frail elderly. As more organizations develop PACE programs, it is hoped that PACE will become a significant part of the community-based long-term care delivery system.

As of this year, 28 fully capitated PACE programs are serving frail elderly in their communities. While all PACE programs must comply with Medicare and Medicaid regulations, each develops marketing, financial, and business strategies that are unique to its marketplace. This article discusses 10 key lessons learned from two successful PACE programs, using findings from the Baseline Scenario in the PACE Financial Proforma model when appropriate.

1. A PACE inter-disciplinary team can serve more people than the typical 120-bed nursing home. It has been a longstanding rule of thumb that a PACE team can handle a total enrollment of 120 participants. Recent operating experience at Total Longterm Care (TLC) in Denver has demonstrated that a PACE team may be able to handle a total enrolled capacity of up to 200 participants, when congregate supportive housing or assisted living is used. This higher capacity spreads the fixed costs, such as those for certain administrative, management, and clinical staff, over a larger enrollment base. Other variable costs, such as direct care costs for staff aides, will increase in proportion to enrollment.

The PACE Baseline Scenario assumes that a PACE team can handle up to 180 participants. As shown in the Table, which summarizes financial performance data from the baseline scenario, enrollment growth in general and increasing team capacity from 160 to 180 lead to reduced administrative costs and stable profitability.

2. Enrollment growth is the key to success. The motto at TLC is “Census Is King.” The key statistic used to monitor census growth is net enrollment (i.e., new enrollments minus disenrollments and deaths), which drives growth and success. Both TLC and Alexian Brothers Community Services (ABCS) in Chattanooga were able to achieve net-enrollment growth rates of six to eight participants per month. TLC achieved this success while expanding as a mature site. ABCS achieved this success in the start-up phase. There are operating PACE sites, however, that have not achieved this level of sustained enrollment growth. The base-line scenario uses a net-enrollment growth rate of five per month in year one and increases to seven per month in year five. When undertaking a feasibility study, careful consideration of the vast array of local market factors-such as demographics, the state policy environment, competition, and referral sources-is important.

3. PACE programs can include assisted living. Although PACE programs are not required to offer assisted living or other types of supportive housing as a covered benefit, an increasing number of PACE programs are finding this to be a cost-effective alternative to nursing home placement. Although some PACE programs do own their assisted living units (particularly for dementia patients), contracting with assisted living providers is also a successful strategy. TLC is in a market oversaturated with assisted living units. TLC contracts with assisted living providers directly at a rate comparable to the state’s Medicaid rate for assisted living, but then supplements the on-site care provided to participants. TLC has found that assisted living residents use the adult day health center less frequently, on average, resulting in cost savings. Given this win-win situation, assisted living providers have become a major referral source for TLC. Although the baseline scenario uses assisted living as an alternative to nursing home placement, each potential PACE provider can estimate the trade-off involved in developing its own financial scenarios.

4. Marketing strategies should be tailored to the environment. Ultimately, the thing that markets a PACE program and allows it to grow is the quality of the program. However, without sufficient referrals of individuals who will meet the eligibility criteria, a PACE program cannot succeed. At ABCS, traditional marketing sources include self-referrals, referrals from current PACE participants, and referrals by community providers, such as home care agencies. By comparison, in more mature markets such as TLC’s market in Denver, referrals are strongest from the state’s Single Entry Point system, which is required to assess all individuals who will receive nursing home care and assisted living residents who might need additional services. Clearly, marketing programs must be tailored to individual marketplaces to generate a sufficient number of eligible referrals.

5. Supporting the family caregiver is a key clinical and financial strategy. New organizations considering a PACE program understandably are concerned about the impact of nursing home placement, given the capitation payments they would receive. The difference with PACE, however, is the ability providers have to support family caregivers. According to Viston Taylor, CEO of ABCS, “Supporting family caregivers is critical. Whenever we lose a family caregiver, our costs are likely to double, because the participant is more likely to be placed in a supportive housing environment or a nursing home.” ABCS has a tool to measure caregiver strain among family members. ABCS also educates families about ways to better handle the associated stress of caregiving. To reduce identified caregiver stress, ABCS employs several strategies: providing respite care and counseling for family members, increasing home care hours, and increasing attendance at the day center.

6. Avoiding unnecessary permanent nursing home placements is essential. The goal of the PACE program is to enable an enrollee to live in the community. However, when nursing home care is required, the PACE program is financially responsible. Therefore, a PACE program must successfully assist enrollees to live in the community and help participants avoid permanent nursing home placement, if possible. Over time, however, as the enrollees age in place, nursing home placement tends to increase. The baseline scenario increases nursing home utilization from 5 to 9% of capitation days over the five years of the model. As shown in the Table, this utilization reflects an increase from 2.4 to 9.8% of expenses over that five-year period.

7. Inpatient utilization can be successfully managed by the interdisciplinary team within the PACE model. PACE programs also achieve clinical and financial success by reducing utilization of acute care services, as compared to fee-for-service utilization, immediately upon start-up of the program. The PACE model works remarkably well in managing inpatient utilization. Indeed, only a handful of PACE programs-and neither of the two case study sites-purchase the reinsurance policy for PACE programs that is currently available to cover the cost of acute care.

The baseline scenario reduces acute care utilization from 3,500 days per 1,000 participants in year one to 2,200 days per 1,000 in year five. As shown in the Table, by year five in our baseline scenario, hospital expenses represent 7.2% of total expenses while nursing home expenses represent 9.8%.

8. PACE programs should plan for growth. PACE program sponsors are looking forward to a time when PACE will become a major player in the movement toward community-based long-term care delivery. Indeed, some states, such as Colorado and Texas, have passed legislation to encourage PACE development across the state. TLC, which operates four PACE sites in the Denver metropolitan area and has an enrollment of more than 600, has developed an aggressive growth plan. TLC is now building one “super site” that will house two interdisciplinary teams serving an enrollment of 360 in one physical location, along with administrative space. Through experience, TLC has determined that its break-even point is between 90 to 105 participants per team and each team can handle between 180 to 200 participants. To facilitate the smoothest possible opening of each new center, TLC conducts the opening by moving half of its participants and staff to the new center. Each staff then has the critical mass and the professional experience to grow to full capacity. The PACE Financial Proforma model allows the user to develop several teams and sites as needed, based upon the assumptions made about growth.

9. PACE programs achieve financial success. Since PACE sites, until only recently, have operated as demonstration programs, there is limited information on their financial performance. In developing the Financial Proforma model, a baseline scenario was developed that uses assumptions from the two case studies described in this article. The baseline scenario shows that a new PACE program can achieve net income at 18 months and break even at 38 months (including the recovery of start-up costs), can achieve a margin percentage* of 22% in year five, and can get a return on net revenue** of 20 in year five.

10. PACE programs can be successful either as part of a health system or as a freestanding program. When Congress allowed PACE programs to become permanent providers under Medicare and Medicaid, nonprofit organizations were offered an extraordinary leadership opportunity to provide community-based long-term care. At present, only nonprofit organizations can sponsor PACE programs, although for-profit organizations can participate in a new demonstration program that the Centers for Medicare and Medicaid Services is organizing. PACE programs can be complementary to a hospital system and use the existing components of the continuum, including nursing home care, hospital care, and home care, within a coordinated care model. While ABCS is sponsored by a hospital system, it does not operate a hospital in Chattanooga. PACE programs such as TLC can also be successful as freestanding PACE programs that can contract with hospitals, nursing homes, and assisted living programs in the community.

These are just a few of the lessons learned from the development of the new PACE Financial Planning Tools. “While there will never be a recipe for creating a new PACE program,” says NPA President and CEO Bloom, “these tools will help healthcare providers learn the lessons available from some current PACE programs. Ultimately, organizations have to decide how PACE might fit into the future of both their community and their organization in order to make a decision about becoming a PACE program sponsor.” NH

Table. Summary of Operating Performance From the Baseline Scenario, Proforma Model.
Year 1Year 3Year 5
Member Months3301,9923,942
Team Capacity160180180
Distribution of Expenses
General and administrative expenses
Adult day healthcare
Primary care
Routine specialists
In-Home care



Percentage of Total Expense
Nursing home
Supportive housing



Financial Ratios
Margin percentage
Return on net revenue




Jade Gong, MBA, BSN, is a senior advisor to the Health Dimensions Group, a PACE technical assistance center and is based in Arlington, Virginia. Phone (703) 243-4202 or e-mail Robert Greenwood is vice-president of public affairs for the National PACE Association, Alexandria, Virginia. Phone (703) 535-1522 or e-mail To comment on this article, please send e-mail to
For background information on PACE and additional resources for developing a PACE program, including the PACE Financial Planning Tools, go to The complete case studies, business planning checklist, and other information on PACE are also available. The PACE Financial Proforma model is available to NPA members and the Baseline Scenario can be obtained through NPA as a benefit of Exploring PACE.
*Margin percentage is defined as operating income divided by total revenue. Operating income is referred to as earnings before depreciation, interest, taxes (if for-profit), and amortization.
**Net revenue is defined as net income divided by total revenue. This ratio shows the profit on each dollar of revenue.

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