Today's CCRC dilemma.

Balancing the cost and quality of care

DURING THE PAST FIVE YEARS, CONTINUING CARE RETIREMENT Communities (CCRCs) have performed quietly and effectively in the shadow of the assisted living sector. But a variety of challenges have also surfaced for existing CCRCs.

Some of the new players who have entered the independent living and CCRC market have been through the marketing and operational minefields of the 1990s. They are approaching new CCRC development and operations with much more caution and a sharper focus on operational details. Many are focusing on four very important strategies. They include: (1) results-oriented sales and marketing initiatives, (2) innovative market-driven pricing techniques, (3) sharpened operations and staffing, and (4) a passion to deliver acceptable financial operating ratios.

Existing CCRC sponsors and owners or operators are under increasing pressure to remain competitive. Since many CCRCs offer both assisted living and nursing, the care component of operations has become especially critical. Many are finding that their operational indices and financial ratios are way off the mark when compared with published industry benchmarks. It is not uncommon to find operating expenses per resident day considerably at odds with acceptable industry benchmarks.

Bringing staffing ratios and operational costs back into line is a very difficult and traumatic experience for many existing CCRCs. Many of their problems stem from the fact that they have not implemented any zero-based budgeting initiatives for years. This year's budget was merely built on last year's actuals while adding apparently justifiable inflationary increases.

Department heads certainly have a responsibility to protect the integrity of their department, treating their employees fairly and delivering consistent quality of care to the residents. But sponsors, owners, and operators also have a responsibility to remain competitive and deliver the highest value and quality of care at the lowest cost for their residents. Striking this delicate balance appears to fly in the face of logic on the part of many existing operators. They rationalize that any significant reduction in cost would cause them to become a "greedy, uncaring operator" with deteriorating quality of care and declining inspection scores. While certainly desired outcomes, seriously inefficient operations are frequently masked because of the legitimate concern for quality of care.

It's true that there have been horror stories regarding unacceptable quality-of-care standards because of unrealistic cost-cutting by some health care anti CCRC operators. However, other serious problems that have not received significant publicity and disclosure are the inefficient operation and the unnecessary high costs that are being experienced by many CCRC operations and passed on to the senior. In the past, these high cost pass-throughs have worked in the marketplace because the intensity of competition was much lower than it will be in the future.

There is a middle ground of optimum operations, which CCRCs must achieve as 21st-century organizations (see figure). CCRCs must walk a thin line and strike a delicate balance between unrealistic, inappropriate cost-cutting at one end and inefficient operations and inflated costs at the other. Don't let broad mission objectives and your legitimate concern for delivering high quality of care prevent you from addressing serious operations problems.

Operating profit margins (net operating income divided by revenues) should be monitored constantly for each CCRC living and care option. A margin of 43 percent to 48 percent for independent living, 30 percent to 37 percent for assisted living, and approximately 15 percent for nursing are typical industry benchmarks. These margins will vary based on your unique product mix, pricing (entry fee vs. market rate rental), and possibly prepaid life care benefits. But don't let these complexities deter you from seeking out the best operational strategy for your CCRC while sustaining quality of life, quality of care, and overall commitment to your residents.

Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based seniors housing and health care consulting firm, and author of Assisted Living 2000.

               Quality of care vs. reasonable cost envelope
                        Increasing operating costs
      Unacceptable           Zone of acceptable performance
        low cost                  for 21st-century CCRC
          zone            Area of reasonable expected outcomes
Unrealistic cost cutting  Staffing ratios are
 * Potential for moderate  * Reasonable and appropriate
   to serious quality of  Quality of care is
   care problems           * Consistent/not threatened
 * Not consistent with     * Above average of industry press
   mission, heritage      Resident quality of life can
   or commitment to       be sustained
   residents              Financial results & pricing are
Unjust financial           * Equitable
rewards                    * Reasonably affordable
 * Excess profits          * Consistent with industry benchmarks
                           * Long-run viability is strong
      Unacceptable                Unnecessary
        low cost                   high cost
          zone                        zone
Unrealistic cost cutting  Long term cost creep
 * Potential for moderate  * Leading to excessive costs
   to serious quality of  Inflated operating
   care problems          budgets
 * Not consistent with     * Making future growth/
   mission, heritage         improvements difficult
   or commitment to       Financial viability
   residents              long-run is threatened
Unjust financial           * Residents will eventually
rewards                      feel the impact
 * Excess profits
Source: Moore Diversified Services