Is the Household Model of Senior Care Financially Worth It?

An increasingly popular means of reducing the institutional nature of senior-care facilities, the household model is “a living arrangement where all activities of daily living occur within a small-scaled environment, reminiscent of a large family home” [citation]. Typically, a senior-living campus will have multiple households containing 10 to 20 units each. In 2010, we examined the financial viability of building and operating facilities using a household model. This article revisits this model to share learnings with providers.

Paradigm Shift

Received wisdom among many senior-living providers is that the traditional design with centralized planning and care management, a large commercial kitchen and common therapy space is outdated and will soon be unmarketable. Furthermore, there is a notion that all new projects should shun semi-private rooms, recognizing that the current market demands privacy and is willing to pay for it.

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Certainly, the core principals behind the household concept are compelling. No facility wants to appear institutional, but the evidence that the household schema is both marketable and profitable is mixed. The important question for a provider who is even considering a household project is, “are we committed to changing our culture throughout the organization?”

If an organization’s leaders do not fully embrace a willingness to give up a considerable amount of control—and even more importantly hire and/or train a workforce to assume more flexibility and responsibility—then a household project is probably not appropriate.

The core concepts of household models are in many ways analogous to modern manufacturing techniques. That is, the 20th-century factory operated with top-down management, large inventories, centralized order-planning that tried to predict demand and a specialized workforce. However, with the advent of production philosophies, such as the Toyota Production System, factories began to evolve in the 1990s to a more consumer-focused mindset. Rather than dictate what and how much to produce through a “push” system, manufacturers relied on customers to demand products and services through a “pull” system. The success of companies that embraced these “lean” techniques began to filter throughout process and service-oriented business concerns.

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For most of its history, the health-care industry operated with the same top-down and centralized planning structure as the 20th-century factory, but many providers recognized the limitations of this approach. While a commercial kitchen and a consolidated nursing station create certain efficiencies, the physical plant necessary to facilitate such a layout can be very impersonal. It is more difficult for the care staff to establish meaningful connections or be attuned to the concerns of residents in the traditional setting. Consumer-directed service and care is the mantra today.

Project-Cost Analysis

While consumers may demand more input and more personalized care in a private space, their resources and willingness to pay for it are limited. The cost of design and construction using a household model is almost assuredly higher than a traditional building. The major differences in amount of common space and ratio of private to semi-private rooms mean the total square footage is inherently higher and additional equipment (e.g., more—albeit less expensive—kitchen equipment) can further increase the cost of development for the project. The chart below demonstrates the average cost per bed for 20 proposed projects—both household and traditional [citation].

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Although the sample size is small, the average cost for household projects appears higher. Interestingly, the numbers for traditional nursing beds have changed little in recent years, but there has been a significant increase in the cost (about 10% since the 2010 article) for household projects in our database. 

Efficiency from the Bottom Up

With the higher cost to build, providers must expect to achieve higher revenues, while keeping expenses consistent with levels at a more traditional model. It stands to reason that a new facility—traditional or household—will attract an improved payor mix. However, the potential private-pay rent for a facility is largely dictated by the market and the potential Medicare census, in the case of skilled nursing, is limited by a number of factors. The available data on the change in payor mix and revenue per bed or unit at senior-care facilities that have undergone a transition from traditional to household is limited. Empirical observation suggests the expected demand bump is limited by exogenous factors as is the case with other new construction or replacement projects. That is, many assisted-living providers have struggled with occupancy because potential residents could not sell their homes, while skilled-nursing providers are subject to the vagaries of reimbursement rates.

The long-term success—indeed the crux of the argument in favor of the household model—depends on a radical change in culture. As described in our previous analysis and a detailed article presented in Seniors Housing & Care Journal [in 2011, Vol. 19, Number 1], it is possible to operate as efficiently in the household model. However, as many manufacturers learned when trying to adopt the Toyota Production System, changing the plant is easy but changing the mindset is much harder.

To operate effectively, the household model needs a flexible and educated workforce that is both empowered and enabled to make decisions. In order for the front line workers to feel empowered, they must have support and proper guidance from management. As providers that we interviewed for this article attest, high turnover is expected with the change in operating philosophy. Many health-careworkers are uncomfortable performing housekeeping or dietary tasks and some managers refuse to adopt the new role of teacher and coach.

On the other hand, providers that have successfully implemented a household model noted counterintuitive benefits, in addition to the purported marketing advantages:

  • Lower Food Costs-There is less spoilage when food is prepared as desired and as needed [citation].
  • Lower Supplies Costs-Many providers find that supplies are hoarded throughout a facility, regardless of the physical plant layout. The household model allows for a more formal distribution of supplies.
  • State Survey Results-A major concern with the new models relates to interaction with regulatory bodies having requirements set forth decades ago. Some providers actually noted better survey results after implementation, in addition to better clinical outcomes [citation].

Discipline throughout the Process

The majority of household projects are associated with nonprofit providers, so mission is an obvious consideration. The quality-of-life benefits of resident-directed care and the core design concepts have an intuitive appeal. However, one must be wary of scope creep throughout the design, planning and construction phases of this type of project. The cost for incremental changes mushrooms when deployed over multiple units in several buildings. A lack of discipline in the design or equipment budget can lead to capital costs that are much higher than the local competition; a mistake, which is compounded by unreasonable expectations for marketability of a household design. The reality of a poor housing market and weaker reimbursement environment exist for all providers. Embarking on a project at the upper end of the cost spectrum leaves little pricing flexibility and can greatly hinder the financial viability of a new project.

While the temptation to fully embrace the household design may be irresistible, a phased approach is likely to be more financially feasible. The current economic environment confounds empirical financial analysis of household projects introduced in recent years. The theoretical model is viable as long as truly realistic financial planning and forecasting—including capital cost and operations—is integrated throughout the process.

This article was written by Ritchie Dickey, a vice president with Lancaster Pollard, and reprinted with permission from The Capital Issue at www.lancasterpollard.com.

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