Why Assisted Living Is a Not-For-Profit Imperative
By Jim Moore
For the past several years, the trials and tribulations of for-profit
assisted living operators have received considerable publicity. But the fact
remains that assisted living can be a viable, market-responsive service delivery
system. Successful assisted living must be properly conceived, purpose-built and
have strong programmatic content, while maintaining high standards of care.
The external consumer market is focused on three key competitive
characteristics: product, price and value. From an internal operations
perspective, assisted living allows very little margin for error. Despite these
challenges, there are at least 10 solid reasons why not-for-profits should
consider entering this market sector (see chart).
Consumers benefit from having more living options within a single campus
setting. The senior consumer generally prefers an expanded continuum with
multiple choices. In their search for the optimum product, price and value,
seniors want to be assured that their future health-related needs can be
satisfied. Most want to avoid moving off campus and delay the need for the more
expensive, institutional nursing home. And, unless covered by a sponsor’s life
care program, many seniors will likely deplete their assets at a slower pace.
Sponsors benefit by balancing their continuum of care with assisted living.
Many not-for-profit sponsors—especially those offering comprehensive life care
benefits—now have seriously imbalanced healthrelated resources. They either have
a shortage or an excess of nursing beds. The addition of assisted living (and
possibly campus retrofit) not only rebalances the product inventory, it also can
deliver significant financial benefits. For example, if a sponsor offers a
guaranteed life care program, the cost of providing healthcare benefits are
reduced for many residents who can be accommodated in a lower-cost assisted
living setting than skilled nursing.
Assisted living can also expand entry-fee cash collected. Here’s how it
works: A not-for-profit CCRC expands its campus with 50 assisted living units. Eventually that expansion could accommodate at least 30 additional life care
residents who paid an entry fee upon their initial move into independent living.
The refundable portion of their entry fee is typically only repaid when
residents permanently exit the campus. As their needs change, they move into
assisted living, thereby vacating their independent living unit that is then
resold. So, over about a two-to-five year period, a sponsor might collect an
additional 30 to 40 entry fees as a result of this expanded living unit
inventory and the resulting intra-campus movement.
In spite of these apparent benefits, many not-forprofit sponsors have learned
the hard way that making the decision to add assisted living to their campus is
just the start of a very long odyssey. That’s because they face the same
fundamental marketplace and financial issues as for-profits. Achieving an
efficient assisted living operation that adds positive financial synergy for
your campus rather than negative cash flow is a complex, continuing challenge.
Sponsors are caught in a bind between accomplishing their stated mission
objectives of providing excellent quality of care while also achieving positive
operating profit margins.
Let’s define a not-for-profit’s operating profit margin as cash income after
operating expenses but before interest expense, taxes, depreciation,
amortization, contributions, subsidies and endowment interest income. A
successful for-profit owner operating an 80-unit freestanding assisted living
community will likely experience an average operating profit margin between 28
and 32 percent. In the not-for-profit world, some rationalize that such profit
margins are not appropriate because mission objectives and high standards of
care set them apart from their for-profit peers. That is a commendable position,
but placing too much emphasis on that philosophy can mask a real opportunity to
strike an appropriate balance between achieving financial viability and mission
objectives.
There are five important questions to address in order to strike that
critical balance between mission objectives, quality of care and financially
responsible operations:
- If your operating profit margins are significantly
less than for-profit benchmarks, is it really because you’re providing
additional services and higher standards of care?
- Is it your policy to not charge for higher levels of
care?
- Is your direct care staff performing efficiently?
- Are less than efficient operations being masked by
your well-intended mission?
- If you are intentionally subsidizing your operation
with non-operating revenues, are those subsidies really providing more
affordable rates for moderate- income seniors or are you just covering higher
than necessary expenses?
If you’re considering adding assisted living to your CCRC campus, here is one
financial profile for adding 50 assisted living units. At 93 percent occupancy,
your 47 occupied units might be charging an average base fee of $2,800 per month
while incurring operating expenses of about $65 per resident-day. The base fee
should include approximately 45-60 minutes of direct care per resident day. This
should yield an annual operating profit before debt service of approximately
$500,000, which reflects an optimum operating profit margin of approximately 30
percent. Even if your operating profit margin is somewhat less than 30 percent,
your financial rewards could still be significant. Keep in mind that you should
have a tiered pricing strategy that compensates for the costs of direct care in
excess of what is included in your base fee. The total all-in cost of developing
your new assisted living might average approximately $120,000 per unit. If so,
you should realize a positive cash flow after debt service of
approximately $100,000 per year—this is assuming 100 percent financing at 5
percent for 30 years.
If you already have assisted living, it may be time to give yourself an
objective reality check—or maybe a wake-up call? The litmus test of the
viability of your operation is to compute your actual or pro forma operating
profit margin using the previously defined formula. There are a number of areas
where for-profits and not-for-profits are becoming less distinct— financially
viable, market-responsive assisted living is one classic example.
Jim Moore is president of Moore Diversified Services Inc., a Fort Worth, Texas-based senior housing and healthcare consulting firm. Moore has authored several books on assisted living and seniors housing, including his latest Assisted Living Strategies for Changing Markets. For more information, contact Moore at (817)731-4266, or visit
www.m-d-s.com.
10 REASONS WHY NOT-FOR-PROFITS SHOULD CONSIDER STATE-OF-THE-ART ASSISTED LIVING
- Complete the senior living continuum
- Respond to consumers’ preference of choice
- Provide alternative Assistance in Living (AIL) options
- Provide a less costly nursing home alternative
- Decrease the rate of some resident’s spend-down
- Expand, diversify and rebalance the services of the health center
- Reduce the cost of fulfilling life care benefit obligations
- Sustain acceptable private pay nursing bed ratios
- Increase entry-fee cash
- Enhance revenue and operating profit margins
Adding assisted living can respond to both consumer and sponsor-driven
objectives.
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