Everybody's Business
Hospitals and nursing homes are getting into assisted living
By Jim Moore, Moore Diversified Services Inc.
The following was reprinted with permission from the book Assisted Living 2000,
published by Westridge Publishing.
 Nursing homes
are being battered on two economic fronts: Hospitals are creating swing wings and getting
into skilled nursing, rehabilitation and subacute care on one front, while many
assisted-living operators are crossing the line offering quasi-nursing services on the
other. Some industry analysts feel that assisted living could eventually replace hundreds
of thousands of the 1.7 million nursing beds in operation today. There will be an impact
on nursing-bed growth in the future, but the actual impact is currently difficult to
quantify.
Nursing-bed supply/inventory has seen only modest growth over the past five years as
managed-care impacts and the introduction of assisted living has changed the basic demand
structure for new nursing beds. An indication of relative nursing-bed supply is a ratio
indicating the number of beds per 1,000 seniors over age 85. This ratio has declined from
650 beds per 1,000 seniors over the age of 85 in 1980 to approximately 400 beds in 1998.
The changing ratio is the result of increasing numbers of seniors over 85 while the
nursing-bed supply has remained essentially flat.
Who would have thought that a hospital's success would be measured by the vacancy of
their acute-care beds? That is exactly what is happening to some hospitals that sponsor
and become payers of Medicare Risk HMOs for people over 65 and are under pressure to lower
the healthcare costs (within the Medicare benefit structure) for seniors joining their
HMOs.
Hospitals and nursing homes are fighting back. Both industries are placing assisted
living right in the middle of their radar screens. Many hospitals and nursing-home
operators are seeking ways to enhance revenues by offering new services, achieving higher
operational efficiencies and responding to evolving managed-care initiatives. At the same
time, they are being pressured to reduce costs by both the consumer private-pay
marketplace and third-party payers. In their search for a solution to this dilemma, some
sponsors are finding assisted living a tempting, but perplexing, opportunity. Both
nursing-home operators and hospital chief executive officers are asking the complex
question, "Is the assisted-living concept competitive or compatible with our future
business strategies?" A number of traditional healthcare sponsors see the
opportunities, but very few truly understand the challenges.
Positioning for Success and Synergy
 The hospital
and nursing-home industries can position themselves to benefit from assisted-living
operations, synergy and market opportunities. But to do so successfully, many management
philosophies, operating policies and organizational cultures must change dramatically.
For healthcare providers, assisted living can be a sound and synergistic
diversification strategy by allowing their facilities to expand or complete the continuum
of care they offer while enhancing revenues by serving a broader sector of the market. In
addition, they can realize significant operational economies of scale, primarily in the
areas of staffing, food service, housekeeping, laundry, maintenance, operations and
health-service delivery.
Assisted living also appeals to traditional healthcare providers because their
traditional subcontracting, outsourcing and patient-referral initiatives are gradually
being replaced by revenue-enhancing, internal, service-delivery strategies. But before
they can diversify into assisted living, healthcare providers must adopt appropriate
management philosophies and operating policies, and create new organizational cultures.
Impacts of Reimbursement Systems
As Medicare and Medicaid Risk HMOs, Medicaid waivers and other managed-care initiatives
play a larger part in financing long-term care, a third-party payer system for assisted
living may eventually evolve. These providers and payers will be taking on increasing
financial risks for the total healthcare of seniors, which means they will seek the common
objective of integrated health-service delivery at the lowest possible cost. For Medicare
and Medicaid policy makers as well, assisted living could prove to be the cost-effective
missing link between existing entitlements involving institutionalism (acute, subacute,
skilled nursing) at one end of the continuum and some inefficiencies of delivering home
healthcare at the other end. A word of caution: Don't count on significant third-party
payers for assisted living in the short run. The existing Medicare and Medicaid budgets
are being strained and cutbacks, not new entitlements, are the current topics of
discussion with policy makers.
Nursing-Home Initiatives
For nursing-home operators, reimbursement and third-party-payer programs are becoming
more complex. High census rates no longer automatically lead to a strong financial
position, and the threat of increased regulation has made long-range planning a difficult
task. Approximately 70 percent of the total nursing-home patient days are Medicaid
reimbursed; private-pay nursing patients are becoming a relatively rare resource. In
addition, nursing homes in many markets are struggling to sustain a strong presence as a
myriad of competing healthcare options emerges. Many facilities have room to grow, thanks
to underutilized resources and excess land, and some wonder whether simply adding new
skilled-nursing beds is the best business strategy to pursue.
For nursing homes considering expansion, there are several innovative implementation
strategies. One such strategy would be to add an assisted-living wing or floor to an
operating nursing home, thereby benefiting from the existing service core area or
"back-of-the-house" functional area. This would be a medical model of assisted
living. Another strategy is to develop a new, non-institutional, freestanding,
assisted-living building on the same site/campus (the residential/social model). Sometimes
this new building is actually oriented away from the main entrance of the existing nursing
home. This individualized sense of entrance can create a strong, favorable,
non-institutional first impression.
Hospital Initiatives
Meanwhile, hospitals are realizing that expanding the spectrum of health-related
services to seniors is a natural and sometimes necessary step. Not only are more than 50
percent of hospital patient days related to seniors, but average lengths of stay are
declining and competition for outpatient services is intensifying. This makes assisted
living an attractive revenue-enhancement option for progressive hospitals planning for the
future, especially those in suburban markets. In the past three years, approximately half
of our assisted-living feasibility studies and strategic-planning engagements have
directly or indirectly involved hospitals.
Expanding into assisted living is a relatively new initiative for hospitals, and one
that usually remains a closely guarded secret during the exploratory phase. Typically,
hospitals consider three options. The first option would be to convert existing space,
which is generally best suited for the more institutional personal care, or medical model,
of assisted living. Secondly, they can construct a new facility on the existing campus,
creating a more residential/social model that can benefit from the hospital's economies of
scale. And third, they may develop a facility off-campus at a "satellite
location." The latter is a popular option for joint ventures between a hospital and a
developer or operating partner. It also allows a core-area/inner-city hospital to have a
high-quality satellite presence in other suburban areas for both marketing visibility and
service delivery.
| Assisted-Living Opportunities and Challenges for
Hospitals and Nursing Homes |
| Opportunities |
Challenges |
| 1. Synergy of operations |
1. Changing culture |
| 2. Economies of scale |
2. Mind-set of staff |
| 3. Revenue enhancement |
3. Serving different markets |
| 4. Favorable response to managed care |
4. Different cost structure |
| 5. Expanding the continuum |
5. Creating a residential vs. institutional market model |
Economies of Scale and Synergy
Both hospitals and nursing homes can realize significant economies of scale as they
consider entry into the senior-housing market. There are five major areas of potential
economies of scale that could lead to synergistic growth opportunities, which include:
- Staff and management resources. Some of the human resources that are already in
place for a hospital or nursing home can lead to synergistic economies of scale when
considering adding independent-living and/or assisted-living arrangements on or near their
campus. Contrasted with the new assisted-living community that is entirely
"stand-alone," there are the benefits of inherent economies of scale if assisted
living is integrated (but separated) within a comprehensive campus.
- Food and beverage operations. Hospitals and nursing homes already have extensive
commercial kitchens and mass-purchasing power. While the food-service menus and needs are
different in senior housing and assisted living, there are some potentially significant
dietary economies of scale that can be realized.
- Delivery of healthcare services. This is an obvious extension of something that
most healthcare providers do quite well. Staff depth and the ability to rotate healthcare
personnel can alleviate burnout and employee turnover.
- Housekeeping, laundry and maintenance operations. In many instances, these
existing operations have additional capacity and underutilized resources. Cost-effective
expansion can be implemented with relative ease.
Diversification Pitfalls
All of this diversification sounds easy, but it should be emphasized that
implementation of these growth strategies involves significant challenges. There are a
number of pitfalls regarding healthcare providers entering the senior-living market
sector.
One of the pitfalls involves the inability of providers to adjust their philosophy of
service delivery. Healthcare providers sometimes have difficulty recognizing that offering
independent and assisted living is really a new and different business for them. The
differences center on several important areas critical to the overall success of a
healthcare-provider's strategy: market positioning, marketing approach, physical and
aesthetic design, interior finish-out, furnishings and day-to-day operations.
Of paramount importance is the clear recognition that providers must move away from a
heavily institutionalized, medical-service model to one of satisfying more benefit-driven,
but still complex, senior-consumer needs and motivations.
Despite these challenges, the spin-off benefits for providers can be significant. For
example, a hospital that develops a strong image by responding effectively to the senior
market is more likely to enhance their capture of senior acute-care admissions.
Like it or not, assisted living will be a major player in the overall healthcare arena.
Many hospital and nursing-home operators still resist entering the fray. But, in response
to marketplace forces and the changing policies of third-party payers, astute providers
are reviewing their five-year strategic plans to see where assisted living might fit in.
Think of it this way, if you are either a hospital or nursing-home provider currently
giving away courtesy referrals to assisted living, should you rethink the process?
Jim Moore has more than 35 years of industry experience. For the past 28 years, the
company he founded, Moore Diversified Services Inc., has served thousands of national and
international clients with market-feasibility studies, financial pro-forma analysis,
strategic planning and investment-advisory services. Mr. Moore has conducted more than
1,500 senior-housing and healthcare-consulting engagements in more than 550 markets. He
has authored many columns, technical papers, articles and books, including Assisted Living
2000: Practical Strategies for the Next Millennium and Assisted Living: Pure and Simple
Development and Operating Strategies. He may be reached at (817) 731-4266; e-mail
mdsres@aol.com.
| Assisted Living 2000  Written by Jim Moore and published by
Westridge Publishing, Assisted Living 2000 unveils trends and successful strategies
for the senior-housing market, and offers suggestions on how to prepare for the future of
the industry. The book is based in part on Moore's monthly column, "Assisted
Living/Senior Housing," which appears in Contemporary Long term Care magazine.
With more than 35 years experience in the industry, Moore's insight for his books and
articles comes from spending his time in the trenches of senior housing, giving him a
"real-world" look at the industry. To order the book, call (817) 731-4266.
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