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Price Isn’t Right: Operators Get Creative as Labor, Food Blow Up Budgets

The Covid-19 pandemic has burdened senior living operating budgets, and operators say two items on their balance sheets pose the biggest threat to financial stability: labor and food

On the labor side, expenses have risen as operators have leaned on overtime and agency workers to maintain service levels amid staffing shortages. At the same time, the food costs have increased steadily in recent months, with no relief expected in the foreseeable future.

In response to these pressures, many senior living companies have adapted their budgets to mitigate high expenses where they can. For example, many operators are joining new general purchasing agreements to combat the cost of food and goods in addition to taking measures to boost employment and cut down on agency staffing.

Chief financial officers at Life Enriching Communities, United Methodist Communities and 12 Oaks Senior Living all said they were feeling the most expense pressures from staffing and labor costs, closely followed by the rising costs of food and dining services. And while all are focused on tamping down on expenses in the months ahead, there is only so much the industry can do, given the bigger economic picture.

“I think there are general macroeconomic pressures that are not only associated with our industry, but as a nation, we are facing these supply chain issues, along with rising staffing costs and energy costs,” 12 Oaks President and CFO Greg Puklicz told Senior Housing News. “Across the board, everyone is facing the same problems.”

Rising costs

It’s no secret that rising expenses are part of doing business in senior living in 2022, or that operators of all kinds are feeling the pressure on their operational budgets.

While occupancy is improving, rising operating expenses could limit the degree to which margins will grow in the next six months. A recent National Investment Center (NIC) survey showed that, while 5% of respondents anticipated a margin decrease in 2022, the majority (55%) said they only expect to see margins tick up between 1% and 5%.

Adding to the pressure is the fact that expenses are somewhat unpredictable in 2022, an issue that is complicated by supply chain backups, the Russian invasion of Ukraine and other mounting global challenges — not to mention the pandemic itself.

Faced with instability in their budgets, some operators are remaining financially flexible. For instance, leaders at Life Enriching Communities, which operates three communities in the Cincinnati area, are having to revisit cost estimates every month, according to CFO James Bowersox.

“In some cases, like with appliances, we are having to pay whatever it costs when it arrives,” he told SHN. “That’s new and uncomfortable.”

On average, assisted living resident rates increased approximately 4.6% in 2021, according to insurer Genworth Financial (NYSE: GNW). And many senior living operators met the trend of rising expenses by increasing rates in 2022, some by as much as 10%.

Rising expenses have led to operators being faced with “hard questions” regarding the best course forward, according to The Springs Living CEO Fee Stubblefield.

On the one hand, operators faced with a higher cost of doing business will likely need to raise rates at least somewhat in the years ahead to maintain margin. On the other hand, senior living communities must stay competitive with one another with regard to what they charge residents.

McMinville, Oregon-based The Springs Living has dealt with these pressures by balancing the need to tamp down on rising expenses while becoming more “sophisticated” with pricing for residents. But in the long run, Stubblefield believes that margins are going through an “adjustment period,” and that operators like The Springs Living will be able to chart a course through these troubled waters.

“There is going to be some compression in the margins … but they will recover and they will rebound as we have time to work all that through the system,” he said.

Oregon-based The Springs Living operates 20 communities in Oregon, Montana and Washington.

For communities and operators catering to middle-market and lower-income residents, Stubblefield believes operators will have to make choices “about what services people really need and what they really want or are willing to pay for.”

“If you don’t watch that, you’re going to have some significant market margin compression,” Stubblefield said.

That’s not to say every line item on the senior living budget is getting more expensive in 2022. Although insurance premiums have been a notable pain point throughout the pandemic, some operators have been able to control them thanks to high credit ratings and lack of claims being made.

Bowersox said insurance costs were finally “normalizing” for the company, while insurance costs dropped 10% for 12 Oaks, Puklicz confirmed.

“We attribute that to not having a lot of claims and being on top of compliance and risk management,” Puklicz said.

Looking ahead for the rest of 2022, Puklicz said he felt the year would continue to be one of “rebuilding” as operators look to stabilize operating costs wherever possible.

‘Get creative’ on labor

It’s a widely held goal across the industry in 2022 to reduce staffing expenses by eliminating the use of agency staffing. To achieve that, some operators have gotten creative with labor practices.

For example, Frontier Management — which was previously spending millions annually on agency staffing — was able to substantially reduce its use of third-party workers with the help of a new staffing model, among other measures.

“We are hyper-focused on hitting our budgets, moving the needle on occupancy and stabilizing staffing,” CEO Greg Roderick told Senior Housing News earlier this month.

New Jersey-based United Methodist Communities recently launched a program where workers can travel to communities struggling with staffing shortages, according to CFO Robert Peterson. The operator manages five assisted living, memory care and independent living communities in New Jersey.

Workers from the company’s urban properties can travel to communities located in more rural markets and work for eight to 12 weeks at a time. As part of the program, UMC covers housing costs and pays a premium to the traveling employees.

“It seems to be working initially and we are getting interest in the program,” Peterson said. “We’re really trying to get creative.”

The operator has gotten creative in other ways, including creating a nurses’ aid program to create career paths for certified nursing assistants (CNAs). The program subsidizes the cost of nursing school for employees, and in return, the workers commit to staying with the company for a period of time.

“We will pay those costs up front because a lot of folks can’t afford to go to nursing school,” Peterson said. “That’s going to hopefully help develop more of a pipeline for both nurses aides and nurses over the long term.”

At the end of the day, 12 Oaks’ Puklicz said the “number-one way” senior living providers can cut down on labor costs in the short-term is to reduce or outright stop the use of agency staffing. Dallas, Texas-based 12 Oaks operates 12 senior living communities in the southern U.S.

“We want to make sure we are properly staffed with our full-time employees and not relying on agency which can be very expensive,” Puklicz added. “To a large degree we’ve been successful in doing that.”

Focusing on finding efficiencies and maintaining procedures that help 12 Oaks stay on budget to mitigate encroaching expense pressures, he added.

“We’re making sure that we are conducting spend downs from our department heads and our (executive directors),” Puklicz said. “We’re conducting monthly budget reviews looking at variances both favorable and unfavorable to understand where the cost pressures are coming from day-to-day, week-to-week and month-to-month.”

Pain on the menu

Compared with staffing, there are fewer easy ways to reduce costs in senior living culinary departments. While operators can eliminate agency staffing or find new and creative ways to schedule workers, they are at the mercy of macroeconomic trends driving up the cost of food or causing supply chains to break down.

Even so, senior living operators are leveraging scale to get a better deal on goods and services by joining group purchasing organizations (GPOs). One example of this trend lies with Frontier, which joined a GPO called Pure Solutions to source food, supplies and services such as pest control, landscaping and training.

Higher food costs are a“primary pain point” outside of staffing and health care-related costs in 2022, , according to Jared Schei, CEO of national group purchasing organization Value First. The GPO is owned by LeadingAge and 25 state affiliates.

The cost of packaging has also risen, and those costs have been “passed down the supply chain,” he said. Many food production facilities are also still making up lost ground after a big slowdown in 2020, and can’t meet the demand of consumers.

“That’s putting a lot of pressure on the market,” Schei said.

In some cases, food costs are even outpacing revenue gains realized through census growth, he added.

Based on commodity market forecasts, Schei said dining services equipment and disposable, single-use items will remain at high prices this year. In terms of food costs, Schei said “nearly every category” was more expensive compared to previous years— and with no relief in sight.

“Meat, beef and poultry, within the food category, are the most painful,” Schei said. “Labor inflation and supply chain logistical issues are central to what’s going on and causing the increases.”

Peterson said in the last year UMC saw a 9% overall increase in food expenditures.

“We have an out-sourced food service vendor and they help us stay on top of that,” Peterson said. “They’re thinking that food costs will slow down soon. That’s what we are hoping for.”

At 12 Oaks, Puklicz said menu planning in accordance with price changes helps better account for higher food costs down the road.

“We’re making sure we are being efficient in planning our menus and planning our menus around products that are available and are not perhaps as cost sensitive recently,” he added.

The post Price Isn’t Right: Operators Get Creative as Labor, Food Blow Up Budgets appeared first on Senior Housing News.

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