Tame runaway cost creep: Eroding margins are a serious problem. (Assisted Living).

THE SOBERING EMPIRICAL RESULTS CONTINUE TO SHOW UP ON our radar screens. Assisted living resident acuity creep leading to cost creep is exceeding our ability to fully recognize and pass these costs on to seniors and their families. Achieving a 38 percent to 40 percent operating profit margin to support our original financial pro forma projections and representations made to our lenders is still an elusive, moving target. This profit margin is defined as revenues minus true operating expenses excluding subsidies, depreciation, interest, and taxes. Today's profit margins range from 35 percent down to 28 percent or even lower. But most operators will need the higher margins to provide the necessary cash to fund debt service and comply with a typical lender safety-margin requirement of having about $1.30 of cash available for every $1 of mortgage payment. (See "The effects of cost creep," right.)

Sponsors are caught in a four-way bind: (1) recognizing that cost creep exists, (2) measuring the cost impacts related to each resident, (3) tracking true CNA direct-care efficiency, and (4) recovering cost creep in today's very price-sensitive markets.

It's time to implement detailed time-and-motion studies involving the direct care of your assisted living residents -- just as the manufacturing industries have done for about 100 years. Your first reaction might be: "How could we possibly consider such cold-hearted strategies when we're supposed to be focused on our residents' quality of care and quality of life?" The sobering fact is that, to survive, we may need both initiatives.

Do the math

Let's start with some arithmetic of direct-care staffing that's relatively simple, recognizing that actual hour-by-hour performance on the front lines becomes quite complex. Regardless of this complexity, you must tighten operations by focusing on direct-care demand and staff supply. An 80-unit community at 93 percent occupancy involving 75 residents might have a benchmark objective of 45 minutes of hands-on direct care per resident-day per 24-hour day during a 7-day week. That's 23,625 minutes/week (75 residents x 45 minutes x 7 days). Granted, it's an oversimplification of the challenge, but it is a start.

On the supply side, a typical CNA has an availability of 8 hours per day, 5 days per week, at 60 minutes per hour plus an efficiency factor of 70 percent to 80 percent. This results in one full-time equivalent employee (FTE) being capable of providing 1,920 minutes per productive work week (8 hours x 60 minutes x 5 days x 0.80). Dividing the total care demand (23,625 minutes per week) by the supply (1,920 per week per FTE) yields a need of 12.3 FTEs. Remember, this is the arithmetic for direct care on a three-shift, 7-day week for an 80-unit community at 93 percent occupancy.

Assisted living has been touted as a less institutional, less costly alternative to skilled nursing for many seniors. But with assisted living acuity rising and annual turnover rates in excess of 50 percent, can we really maintain a substantial cost differential? Survey results vary, but it appears that direct care in nursing ranges from 120 to almost 240 minutes per resident-day. That means that an assisted living community with very high-acuity residents could actually be entering at least the lower end of the nursing cost spectrum.

But there will be at least short-run marketplace pricing pressures that may place a cap on assisted living fee increases. This means that there could be insufficient cash for debt service or for acceptable returns on invested equity. One thing is clear: For a CNA with an $8.50 per hour base rate loaded for fringe benefits, downtime, overhead allocation, and profit, that rate is really about $21 per hour. This means that for every 30 minutes per day of cost creep per resident, it is costing you $10.50 per day, $315 per month, or $3,780 per year for just one resident. It's time to at least investigate improving efficiency and tightening your cost-accounting systems.

Now more than ever, we must get very high marks for achieving optimum quality of life and quality of care. But we must also operate like a well-oiled machine, applying sound cost reduction initiatives by capturing the actual efficiency of each CNA and the total time spent delivering direct care to each resident.

The effects of cost creep

Uncompensated cost creep causes operating margins and debt service
coverage rations to erode rapidly

                       Operating profit margin (%)
                               (left axis)


45 minutes (baseline)             38.2%
60 minutes                        32.4%
75 minutes                        26.6%
90 minutes                        20.7%

                       Debt service coverage
                           ratio (DSCR)
                           (right axis)

45 minutes (baseline)          1.32
60 minutes                     1.12
75 minutes                     0.92
90 minutes                     0.72

Resident acuity creep and/or staff inefficiency result in average direct
care minutes per resident day/24 hour day

Source: Moore Diversified Services Inc.

Note: Table made from line graph

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.