Tough economic environment? Yes. But not all is lost for CCRCs in 2009

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The credit crisis, competition, increased costs: Tough times for long-term care
The credit crisis, competition, increased costs: Tough times for long-term care
Three hundred fifty billion dollars. That's the amount the healthcare industry spends each year just to submit and process claims. And, that's during good or bad times. Add to this cumbersome workflows, inefficient processes and a changing landscape marked by increasing out-of-pocket costs for patients and rising operating costs for providers.

In and of itself, this wouldn't bode well for the industry at large.  For long-term care companies, continuing care retirement communities (CCRCs) included, prospects are particularly troubling. It begins with the prospect of poor "credit worthiness" in the eyes of lenders, and continues through a litany of potential obstacles that include increasing competition from investor-owned chains, growing financial pressures from the government as a result of continued reimbursement cuts, aging treatment facilities, the growing cost and complexity of technology and IT infrastructure, the need to constantly improve quality and patient safety, continuing shortages in the labor supply, nearly 47 million Americans who remain dependent on the health system and yet are uninsured, and the reality of a rapidly growing aging population.
 
Too late to save the ship?

Turnaround consulting firms are often brought in when it's too late—long after the horse has left the barn. Distressed businesses often wait until the cash has dried up and lenders have lost all patience for non-compliance of loan payments, and so are left with the limited option of immediate liquidation of all assets.  Lenders, meanwhile, are faced with too many bad eggs in the portfolio, with no relief on the front lines.

Over the next few years, many experts in the senior living care industry expect a period of prolonged difficulty, characterized by increased revenue uncertainty and many cost pressures, reduced access to capital, and a continued erosion of public and political support. Coupled with the other challenges mentioned earlier, there is growing concern for the health of our industry and our long-term ability to meet the health care needs of our communities, especially those of our most vulnerable citizens: the poor and under-served.

Unsuccessful attempts to deal with the credit crisis, cash shortfall


A leading bank lender for senior living and long care term companies recently reviewed its healthcare portfolio and found out that one of its client organizations, a chain of 10 CCRCs, had entered into a new venture to purchase two freestanding 250-bed nursing homes located in northern Pennsylvania and the New York state border. After two years of funding, the provider found itself in violation of loan convents as a result of a cash short fall for buying a distressed operation and myriad problems that included a misunderstanding of the state reimbursement system, cash pressures to meet payroll, high recruiting costs, contract labor expenses and a declining census and payer mix. Additionally, the two buildings were in dire need of some extreme "tender loving care." Even worse, the lender had no updated information on the property and required help in getting a viability assessment completed by a management consultant company. The provider mistakenly believed that it could ignore monthly cash short signs and simply finance operations-which turned out not to be the case because of tightening credit standards. No leading institutions would lend any money to refinance both facilities and refinance their way out of the problem. The operation had no chance to work its way out of the mess, and was forced to liquidate.

This is not a unique case. On Jan. 8, 2009, 44 nursing home facilities went into receivership looking for new owners and were forced to wind down operations and liquidate all assets.

Performing value-added solutions


The healthcare industry is an enormously large sector and not all management consultant healthcare firms have the working knowledge specific to the senior living care arena. This is a very important factor to consider for companies seeking assistance and third-party verification.

An effective management consultant advisory firm will have the experience and expertise to resolve these types of issues and will do so quickly. Such a firm will have the ability and resources to help both parties make organizational assessments quickly, efficiently and cost effectively. Since this is their business, they already have a network of resources in place to make this a smooth process. An example is that many times these situations— once the evaluation is completed—end up as corporate finance transactions. An advisory firm steeped in the senior care market may have a client or have sufficient knowledge of the landscape to know where they can find a company to take over a troubled organization with a management team already in place and access to capital available.
 
Any advisory firm being considered must have the agility to quickly assess an organization's current and prospective state of performance and capacity for organizational change in order to develop a turnaround plan (the who? what? how? stage). This entails:

* Reviewing their pricing plan packages related to apartment admissions.

* Gaining a general understanding of the business operations, with the intent to explore and confirm the operations of the business activities and recommend improvements where warranted. This would include a review of business operations and operating expenses, financial statements, contact labor expense, overtime, staffing patterns, recruitment plans and an evaluation of leadership.

* Determining the need for a financial turnaround  that would involve the parties to be involved in the process, knowing the early warning signs of pending financial difficulty, and experiencing the analytical/diagnostic stage (i.e., balance sheet vs. operational restructuring; organization change and leadership issues; and strategy and game plan development).

* Identifying core assumptions, including a need for prospective financial information, game plan execution and stakeholder participation in the turnaround plan development. This would involve residents/patients, the community, local and state officials, bondholders, lenders, etc.

* Monitoring the execution of the plan and reporting the results, which includes the interest and role of lenders and investors, the credit market prognosis, and the quality-of-care issues in a turnaround/bankruptcy environment.

* Reviewing the processes for developing and executing marketing programs for generating referrals and assessing organizational structure and management reporting.

After the evaluation is completed, the lender will have the necessary information that it needs to develop a game plan moving forward with the company. This may involve a number of options such as an exit strategy, with additional funding used to turn the operations around with outside management oversight while preparing for a sale. The right consultant firm will have the insight to spearhead this process with its primary goal to make it a "win" situation for both parties. More and more lenders are making this choice instead of reorganizing, and, as a result, both parties win.

Since this is not always the case, increased chapter 11 filings will be a common occurrence in such high-cost provider states as New York, New Jersey, California, Texas and Hawaii, which are among the highest in healthcare delivery cost. 

The environmental situation today is certainly not for the meek of heart. Yet, all is not lost. Knowing the adverse conditions is part of finding solutions. Despite the turmoil, savvy and experienced healthcare leaders will not only survive but thrive in 2009 and management consultant firms will play a vital role. 


Michael Sandnes is managing director of healthcare practice at Executive Sounding Board Associates. Based in Baltimore, he can be reached at msandnes@esba.com.

Guest Columns

Guest columns are written by long-term care industry experts, ranging from academics and thought leaders to administrators and CEOs.

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