Keeping the mission in focus: is your "charitable content" still benefiting the resident? (Seniors Housing).THE STATED MISSION OF MOST SENIOR-LIVING AND HEALTH CARE not-for-profits contains four fundamental elements: enhanced quality of life, a loving and caring living environment, an ecumenical theme, and charitable content. Unfortunately, the charitable-content objective is frequently misdirected, and this issue now threatens the financial viability of many sponsors. A large portion of most fund-raising and endowment resources is being used to compensate for higher-than-necessary operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. . Very few subsidy dollars are actually being deployed where they're needed most--reducing the market rates for low-to-moderate income seniors. In fact, the market rates for most not-for-pro fits are essentially equivalent to those of their for-profit competitors. We've lost sight of the true definition of a charitable senior-living mission. The problem is intensified because a typical not-for-profit's sources and uses of finite financial resources are significantly challenged. (See "Big changes over the past 18 months," above.) Some organizations are actually dipping into the principal of their shrinking endowment fund Noun 1. endowment fund - the capital that provides income for an institution endowment patrimony - a church endowment chantry - an endowment for the singing of Masses in order to cover current operating expenses. It's true that many for-profit and not-for-profit operators are having to significantly subsidize sub·si·dize tr.v. sub·si·dized, sub·si·diz·ing, sub·si·diz·es 1. To assist or support with a subsidy. 2. To secure the assistance of by granting a subsidy. their Medicaid nursing beds to the tune of $25 to $60 per patient-day due to inadequate reimbursement Reimbursement Payment made to someone for out-of-pocket expenses has incurred. . A 90-bed nursing home with 60 percent Medicaid patients (54 beds) could experience an annual deficit totaling $500,000 to $1.2 million. Many sponsors are considering a reduction in total bed count. But don't let that problem mask one that involves overall operations. From a business perspective, not-for-profit does not mean "not making any profits." It really means that for-profits and not-for-profits use their positive cash flow in different ways. So let's explore the issue of operating profit Operating profit (or loss) Revenue from a firm's regular activities less costs and expenses and before income deductions. operating profit See operating income. margins--defined as operating revenues operating revenue Revenue from any regular source. Revenue from sales is adjusted for discounts and returns when calculating operating revenue. Compare other revenue. (without any subsidies) minus operating expenses (excluding depreciation, interest, amortization, and taxes). A surprising number of not-for-profits are operating with deficit operating margins Operating Margin A ratio used to measure a company's pricing strategy and operating efficiency. Calculated by: and negative cash flow. Some say that's okay because they're performing a mission. It's not uncommon for a sponsor to use donations or endowment proceeds to inject $300,000, $600,000, or even $1 million annually to cover operating expense Operating Expense The essential things that a company must purchase in order to maintain business. Notes: For example, the payment of employees wages are an operating expense. Also known as OPEX. deficits. Conversely, a typical for-profit would likely have the following operating profit margins Operating profit margin The ratio of operating profit to net sales. : nursing at 8 percent to 15 percent, assisted living as·sist·ed living n. A living arrangement in which people with special needs, especially older people with disabilities, reside in a facility that provides help with everyday tasks such as bathing, dressing, and taking medication. at 28 percent to 32 percent, and independent living at 43 percent to 48 percent. Some would say these margins do not apply because not-for-profits are more caring and deliver higher quality of life and standards of care Standards of care are medical or psychological treatment guidelines, and can be general or specific. They specify appropriate treatment protocols based on scientific evidence, and collaboration between medical and/or psychological professionals involved in the treatment of a given . But there are many well-conceived for-profits that provide the same outcomes with a much more efficient operation. With value-engineered expenses and an objective operations analysis, a not-for-profit can enjoy positive operating profit margins and significant cash flow. A not-for-profit can also make better use of its favorable tax-exempt interest-rate spread of approximately 3 percent versus conventional for-profit financing. A new independent living community might have a total all-in cost All-In Cost Shorthand for "all-included" costs, which are expressed as the interest paid or received for total costs of a financial transaction. Notes: All-in costs include the spread, commission, interest payments, and any other fees resulting from the transaction. of $22.5 million or $150,000 per unit. The 3 percent interest-rate spread saves approximately $675,000 a year, or $375 per unit per month--savings that could conceivably lower the competitive market rates on their independent living units. If the not-for-profit chose to dedicate only 30 percent of the units for low- to moderate-income seniors, that $675,000 per year would be spread over 45 units with an average subsidy of up to $1,250 per month. In these examples, the proceeds from fund-raising or the sponsor's endowment funds Endowment funds Investment funds established for the support of institutions such as colleges, private schools, museums, hospitals, and foundations. The investment income may be used for the operation of the institution and for capital expenditures. have not yet been tapped, assuming the not-for-profit also enjoys positive operating profit margins and cash flow. Not-for-profits can reset the charitable content of their mission to be less expense-driven and more resident-focused. Practical strategies can be deployed in five basic areas: (1) optimum use of endowment resources, (2) sharpened operations analysis and expense reduction, (3) proactive sales and marketing, (4) expanding the continuum, and (5) existing physical-plant enhancements. The cost of identifying, structuring, and implementing these strategies usually represents only a fraction of the annual savings realized. A modest one-time investment can reap significant rewards over the next 5 to 10 years.
Big changes over the past 18 months
Not-for-profit's financial sources and uses face significant challenges
Sources Uses
* Endowment fund market values: -20% * Ineffcient operations
* Short-term interest rate * Negative cash flow increasing
returns: -50%
* Fund-raising becoming more difficult * Escalating liability insurance
premiums
* Third-party payor reimbursement: * Increasing staffing costs
Not covering expenses
* Acuity/cost creep escalating
Source: Moore Diversified Services, Inc.
Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based national senior housing and health care consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a . He is author of Assisted Living 2000 and, most recently, Assisted Living Strategies for Changing Markets. |
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