Focus on fundamentals.

Don't wait until next year to put this strategy into use

THESE ARE TOUGH TIMES IN OUR INDUSTRY. BUT THERE IS ONE strategy that will stand the test of time--we must focus on fundamentals. Certain long-run fundamentals always seem to apply whether it is stock market annual returns or stabilized price-earnings ratios. And fundamental trends also apply when tracking human mortality and morbidity.

The supply side of the assisted living market has been in a white-knuckle roller coaster ride ranging from product proliferation in the late 1990s to terminated development pipelines in the past two years. Meanwhile, morbidity rates and acuity levels of our senior population have remained very predictable, leading to moderate growth in market demand for various senior-living options. It's true that the senior consumers and their families have not jumped on the assisted living bandwagon consistent with our optimistic plans and projections. But in large part that's because our marketing and consumer education process has been less effective than anticipated. (See "Back to school: Your growth lies in educating the public about LTC options," September 2000 CLTC page 28.) The good news is that the market is deeper than current empirical evidence indicates. There are two important issues that must be displayed prominently on your assisted living community's radar screen:

* The opportunity cost of a vacant assisted living unit will typically be about $24,000 per year (see "Opportunity cost of vacant units," right). That's because above 50 percent occupancy, only about 25 percent of your operating costs are truly variable (raw food, housekeeping, some direct care, etc.) For just five vacant units, that opportunity cost escalates to almost $119,000.

* Reaching stabilized occupancy is a recognized challenge, yet it may not solve your sagging operating profit margins. When some communities approach 95 percent occupancy, they still experience unacceptable operating profit margins.

It's time to focus on fundamentals. Increasing occupancy could involve multiple strategies. Here are some to consider: (1) Develop understandable and meaningful market positioning platforms, (2) transition from a passive marketing program to one that is proactive and results-oriented, (3) identify and respond to serious senior consumer and adult child misconceptions, (4) address missed opportunities in directly marketing to adult children, (5) develop 25-30 qualified leads in order to consummate each sale, (6) obtain a sophisticated lead-tracking system, (7) hire the right personnel who respond favorably to progressive-performance incentives, and (8) focus on the here and now--don't wait for the market to find you. These initiatives will require cash investments, but the returns can be enormous.

Achieving satisfactory operating profit margins has become a financial imperative for both for-profit operators and not-for-profit sponsors. Almost a decade ago, the assisted living industry targeted its operating profit margin objective as being an EBITDA of 40 percent. EBITDA is a fancy financial term for earnings before interest, taxes, depreciation, and amortization. Simply stated, it is your net operating income after paying all of your normal operating expenses. The sobering reality is that many assisted living communities are experiencing profit margins of only 30-35 percent. Achieving higher profit margins is being seriously impacted by operating cost creep resulting from two factors: inefficient use of direct-care staff and spending more time than anticipated delivering ADL assistance to high-acuity residents. Operators are caught up in the conflict of relaxing admission and discharge requirements to reduce turnover and improve occupancy while also experiencing increasing acuity leading to higher dir ect-care costs and eroding operating profit margins.

Keeping direct-care costs under control involves striking a delicate balance between love and compassion for your residents and focused staff time efficiency. A suggested set of baseline objectives: The direct-care CNA should be 80 percent efficient, average direct-care time per resident per 24-hour day should be about 45 minutes, your cost-accounting system must be able to measure both staff efficiency and individual resident-care needs, and additional care costs must be quantified and passed on to the consumer in an equitable manner.

Remember, it's conceivable to fight your way to an acceptable stabilized occupancy and still experience minimal or negative cash flow! During these difficult times, and with the onset of the holiday season, there is the temptation to procrastinate--to do nothing. But what we really need to do is accelerate our 2002 New Year's resolutions by putting appropriate strategies in motion in the last 60 days of 2001. In our industry, executing certain fundamentals will ultimately lead to survival, growth, and profitability.

Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based national senior housing and health care consulting firm. He is author of Assisted Living 2000 and, most recently, Assisted Living Strategies for Changing Markets.

Opportunity costs per assisted living unit

Even vacant units incur operating expenses



Unavoidable/ixed expenses                  $1,255
at 75% of $55 per resident day

Debt service payment [*]                     $725

Opportunity cost for vacant unit     $1,980/month
                                  or $23,760/year


(*)Payment on 75% debt of $120,000/unit at 9% interest over 30 years.

Figures based on a monthly service fee fee of $2,640

SOURCE: MOORE DIVERSIFIED SERVICES INC.