This article is sponsored by Plante Moran. In this Voices interview, Senior Housing News sits down with Patrick McCormick, partner at Plante Moran, to talk about how operators are overcoming inefficiencies to improve cash flow and profitability in today’s operating environment. He explains the importance of playing the long game and lays out some key steps operators can follow to mitigate the compounded effects of census decline, staffing shortages and funding challenges to prepare for the year ahead.
Senior Housing News: What career experiences do you most draw from in your role today?
Patrick McCormick: Early in my career, I had a great mentor who was a regional owner of numerous facilities — both skilled nursing and assisted living. He took me under his wing and allowed me to accompany him on every executive team meeting, including operational and financial budget reviews. Doing that for multiple years got me ingrained in the industry, and 30 years later I am still using the skills I learned back then.
Those early experiences developed my ability to take a provider lens to a professional service environment, and my primary focus today is on due diligence services and developing turnaround plans. We are helping providers through this distress from an operational and financial perspective, and with those turnaround plans in particular, my team and I describe it with the phrase, “financial architecture.”
Our process is about digging deeper into these buildings and figuring out what makes them tick operationally. When these buildings were built, there was a particular kind of profile for them. Even if they were built five years ago, pre-pandemic, the outlook has changed. Being creative and developing that financial architecture, much as you would in a more traditional architecture realm, is a puzzle-making process.
It’s about asking, “What staffing levels should I be looking at? What resident mix should I be looking at? What acuity levels? What should we be expanding into and what wasn’t envisioned for the building 5 years ago or 10 years ago? Do we look at waiver programs? Do we look at different managed care plans? Do we have short-term respite as part of our mix that wasn’t anticipated when it was designed?”
Given the current senior housing operating environment, are you seeing any trends with sustained financial losses and/or covenant loan violations? Does this differ from what was normal in recent years?
Yes. When the pandemic started, we anticipated some of these patterns and they came true. We knew the overall census would decline over time, but the stimulus programs were more robust than we had originally thought. They really propped up providers, be it from PPP loans or provider relief monies, and they became a lifeline over the last couple of years.
Along that stimulus route, we’re also seeing opportunities with an underutilized IRS program that has employee retention tax credits, but with different qualifications than the PPP. This program is available to both for-profit and not-for-profit entities. Regardless, we’re finding that the underlying operations are still struggling for most providers. Census has gone down, wages have gone up and the stimulus money is running its course. Now we’re at a point of inflection because providers are operating on their own.
With respect to the financial losses and covenant loan violations, many providers are surprised that the banks have been looking through the stimulus monies all along and examining core operations as part of their evaluation process. Again, if a provider’s getting pressure or inquiries from a bank, the stimulus money may have masked them.
We’ve seen census issues and recessions, but today we have labor challenges on top of everything else. If it was just a census issue, most providers would have been able to adapt, however, the census decline combined with labor and wage pressures have put some additional focus on our industry. I think we need to really step back as an industry and look at living wage.
We’re a female-dominated industry. If you look at a single mother with childcare and day-to-day living expenses alone, most would have to work two jobs to sustain them. Our industry’s not paying enough, and aside from the regulatory change that needs to happen, we need to start raising the awareness of living wage in our industry to reposition it in the long-term.
For operators facing financial distress, what are some immediate steps they can take?
I tend to look at it in three areas: revenue cycle management, staffing and controlling costs. We think the revenue cycle process is broken for many providers. We’re seeing higher levels of outstanding accounts receivable balances, and the rigor around collection policies aren’t being followed. I think some of this is the make of our industry. We’ve got big hearts and a social service mindset, so we start to accommodate people and families at the cost of following policies and admissions agreements.
But it’s important to create the expectation that this is a business in the beginning. I think that big heart exposes some of the shortcomings from a business perspective. Unfortunately, people pass away or they move to different levels of care with more significant outstanding balances than a family has ever had. This has stretched out the collection aspect. Creating some rigor, going back to our original policies and setting those expectations upfront is the first step.
Staffing continues to be the hottest topic across the industry. How are you advising providers to deal with their staffing-related challenges?
Many providers increased staffing through COVID, and I believe it was the right thing to do. You want to make sure people are safe, but at some point in time, you have to go back and look at your pre-pandemic staffing schedules, then modify them as a result.
We’re finding that there’s some inefficiency in the way residents are being distributed throughout the buildings. We’ve got more vacant units in one area versus another, and it’s creating longer distances for staff. Reevaluating the staffing levels against those vacancies can help providers be more strategic about leasing as more people come in.
What trends are you currently seeing with respect to controlling costs in senior living? How does Plante Moran help providers navigate those trends?
I think providers have generally done a good job of controlling costs. A more universal issue that we’re finding is around level of care pricing. With the pandemic, I think people stayed in their homes longer with more family support. They’re coming into the facilities much more acute or sick than they would have in the past.
Many providers have a level of care pricing based on the care needs being provided. There’s usually a base rate and a bundle of services in different packages. We’re finding that many of those care packages were priced pre-pandemic, and they were focused on what other competitors were doing instead of priced on value alone.
Many times, providers are losing money on those higher acuity packages. It has to do with our new cost structure — typically, wage rates that have gone up. They’re not commensurate with the change. Stepping back and doing that cost analysis can be really eye-opening for providers. It’s a revenue enhancement, not a cost control. That’s new revenue. I think most families are understanding when you explain, “This is what it costs to deliver this service for the care of Mom.”
With occupancy levels slow to recover post-pandemic, given the inflationary environment, what are you advising providers do to maintain financial viability?
Unfortunately, we’ve gotten involved in some real distress situations. Providers sometimes don’t ask for help as quickly as they need to. For me, the first piece of advice is to be smart and don’t get yourself into a big hole. Make sure you’re paying the bills that don’t have leniency. Pay your payroll tax deposits, your workers comp premiums, and ultimately, communicate with suppliers about extending the payment terms.
Most providers are still struggling with, “How do I pay my staff more? How do I increase my staffing?” I think if you’re struggling from a profitability perspective, or from a cash flow perspective, but you’re still profitable, there are ways to reduce your income tax that many people haven’t taken advantage of. There are cost segregation studies, which is a process to accelerate depreciation reductions and reduce taxable income. That may be an option if you’re profitable and you’re still struggling from a cash flow perspective.
With regard to revenue enhancement, referral partners are focused on performance value-based billing and looking at ways to reduce hospital readmissions. I think assisted living has been an overlooked solution in that process. We’ve become a great alternative to home care because we’re a lower-cost alternative, and there’s some additional funding available through these physician groups or managed care companies.
We’re rallying families and residents to be ambassadors for the buildings. Every building has active families that showcase what’s happening. This is being accomplished through social media channels as well, especially for showcasing staff. But families are still struggling. I’ve been in this industry for 30 years, and when I have to navigate something on a personal level, I’m thankful I understand the industry, but it’s still not easy. Going through the lens of the adult child with an aging parent, our facilities and our providers really can be a bigger resource than what they are today.
In each community, make sure you’re putting out social media content about how to navigate the different service options. It’s not about your business, it’s about becoming a resource that people need. We’ve seen providers do gatherings around that topic. When people are ready to use your services, they’ll remember. You’ve now developed a relationship with somebody.
Finish this sentence: “The top strategy that care providers should employ in 2022, to best prepare for 2023, is…”
Spend time analyzing cost structure, look for revenue enhancement opportunities and control level-of-care pricing.
Editor’s note: This interview has been edited for length and clarity.
For more on staffing and expense optimization to revenue diversification strategies, explore Plante Moran’s 2022 State of the Industry Report.
The Voices Series is a sponsored content program featuring leading executives discussing trends, topics and more shaping their industry in a question-and-answer format. For more information on Voices, please contact sales@agingmedia.com.
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