By Ingrid Bagby, Melissa Dimitri, Paul Melville and Christopher Updike
As an owner, operator, or stakeholder in a continuing care retirement community (CCRC), the last words you likely want to hear are “restructuring” or “bankruptcy.” But, given the economic pressures CCRCs can face, one doesn’t have to look very far to encounter examples of both.
Having advised numerous senior living facilities in our roles with the law firm of Cadwalader, Wickersham & Taft LLP and audit, tax and advisory firm Grant Thornton LLP, we have observed CCRCs in a variety of circumstances — from exceedingly healthy organizations operating business as usual to those requiring protection under chapter 11 of the U.S. Bankruptcy Code.
Based on our collective experience, below are 11 areas of critical introspection regarding the most common missteps, or missed opportunities for CCRCs.
1. Financial Covenants
Common CCRC covenant violations include failure to meet debt-service coverage ratios as a result of entrance fee turnover and failure to meet occupancy requirements. In order to anticipate and prevent a covenant violation, an organization must perform a thorough review of all financing document covenants to identify those that may become problematic and ensure all financial covenants are included in financial projections.
Consider the impact that covenant relaxations, holidays or other types of relief could make on your organization and develop an affirmative proposal to your lenders with respect to those provisions. Finally, proactively communicate with your lender, even if it’s not good news. If you wait until a breach has occurred, your lender may be less receptive to your point of view.
2. Third-Party Contracts
Growth and maturation of an organization can lead to vendor sprawl as bidding and contract negotiations get relaxed, perhaps due to department heads working with their preferred vendors without an appreciation for larger strategic sourcing objectives.
Consider consolidating vendors to increase buying power and gain pricing leverage (i.e., group purchasing programs, better payment terms based on volume). And perform regular insource versus outsource analyses because circumstances and pricing can change quickly, resulting in missed savings opportunities.
3. Loan Availability
Financing needs can change based on projected growth or occupancy, seasonality trends, competitive pressures or a changing liquidity position. Provide lenders with current financial statements, key performance indicators, and a comparison with your forecast to build a strong, working relationship.
In addition, develop and utilize financial forecasting tools that allow you to project out different scenarios. You should be realistic in projecting capital expenditure outlays. Organizations often use capital spending as a lever in managing liquidity (i.e., deferring capital improvement projects when cash is tight). In today’s ultra-competitive senior living market, maintaining an up-to-date facility with pleasing aesthetics is critical. Deferring capital spending may create bigger problems for your organization in the long run, so make sure the liquidity afforded by your loan facility allows for needed repairs, maintenance, and improvements.
4. D&O Insurance
The adequacy of D&O insurance policies often is not reviewed until coverage is needed, which may be too late. In times of financial distress, stakeholders may take aggressive action such as threatening or pursuing litigation against directors and officers in an effort to hold someone accountable for an institution’s financial condition. Any company in this situation must understand existing insurance coverage so that management is not distracted and can instead focus on the business challenges ahead.
5. Regulator Relationships
Your regulator(s) are the lynchpin to CCRC viability and credibility. While you may have minimal contact with regulators during good times, your relationship with them will be critical if you are facing challenges. CCRCs should always keep communication lines open with regulators.
You may provide your regulator with periodic updates about your progress in tackling financial challenges. Alternatively, some regulators may prefer to be presented with a fully vetted proposal. Regardless, these are good opportunities to utilize advisors familiar with interacting with regulators during challenging times and who can work with you to have the best opportunity of maintaining your regulator’s support and cooperation.
6. Communications Plan
Perhaps the most important constituency of CCRCs is residents. A comprehensive communications plan for residents, in addition to lenders and regulators, is critical.
Restructurings can move quickly and involve complex transactions. If such restructurings are effectuated through bankruptcy proceedings, many notices with legal jargon may need to be sent to residents. Having an established, robust communication plan already in place with appropriate and timely disclosure can avoid unnecessary confusion and concern. CCRCs should develop an effective strategy to deliver information to residents and engage with residents’ leadership to foster trust and transparency. Residents can be your best advocates, whereas, poor communication can foil even the best planned restructuring.
7. Resident Demographics
Make sure your financial projections reflect changing resident demographics as your facility matures. Upon opening a CCRC and with the influx of entrance fee funds, management can be lulled into a false sense of security. Too many organizations rely on their entrance fee funds to subsidize operating losses, which can have long-ranging consequences.
As a facility matures, revenues and corresponding expenses will evolve. A younger facility will have fewer life care residents in the skilled nursing facility. Not only do skilled nursing beds represent increased expenses over lower levels of care, but beds occupied by residents in skilled nursing cannot be utilized for private nursing home use – which typically pay a premium. An organization must understand its changing resident mix and make plans to replace declining revenues before they occur.
8. Revenue Cycle
Effective management of a CCRC’s revenue cycle is critical because every aspect — from resident intake to accounts receivable — impacts the rest of the cycle.
Typical challenges with revenue cycle management include: disparate IT systems that do not “talk” to one another resulting in poor visibility; insufficient key staff training; and improper or untimely billing, recordkeeping and claim reconciliation. Insurance denials represent up to 90% of missed revenue opportunities. Successful CCRCs evaluate front-end revenue cycle processes, including insurance verification, point-of-service collections, and revamped charge capture and entry processes to reduce denial rates, missed filing deadlines, and costly re-bills and write-offs.
9. Labor Costs
The changing state and federal legislative actions surrounding the Affordable Care Act continue to impact employee compensation packages for health care employers. However, it is very possible to lower compensation and benefits costs without materially impacting total rewards to employees or quality of care to residents.
This involves carefully observing the mix of benefits offered and benchmarking against local and regional metrics. Similarly, successful CCRCs are aware of the cost differential between use of regular, overtime, and agency labor and very carefully manage this mix to achieve cost savings. The use of nursing resource teams and flexible staffing models may alleviate an organization’s reliance on agencies to meet minimum staffing requirements.
Another complication, however, is the upward pressure on the minimum wage in many states and jurisdictions. CCRCs will need to spend more on staff development, training and mentoring in order to increase retention and lower turnover costs to offset the impact of rising wages.
10. IT Platform
When your IT systems are working, they are barely noticeable; but when something goes wrong, the results are disastrous. Financially robust organizations can experience financial hardship or even bankruptcy from an IT failure or an electronic medical records implementation gone wrong.
Before making substantial changes to any IT system, CCRCs should retain experts to test the system and ensure a seamless rollout. Also, a fully functioning IT infrastructure provides real-time key performance indicators and executive-level dashboard reporting needed to effectively manage the organization. Tracking and reporting of quality metrics is becoming an absolute necessity as payment models shift away from fee-for-service to capitated rates, pay-for-performance and value-based purchasing among accountable care organizations.
Finally, the growing risk to organizations regarding data breaches and cybersecurity cannot be ignored. Your IT infrastructure must be well equipped to defend against outside threats that may jeopardize resident confidentiality and introduce liability to your organization.
11. Marketing Incentives
Amid stagnant occupancy rates, a marketing incentive program might be very appealing to a struggling CCRC. Although marketing incentives can be a powerful tool (particularly in a newer organization’s quest to achieve stabilized occupancy), you must understand how discounts, deferral programs, payment holidays and other marketing incentives impact your cash flow (and your covenants), present and future.
The actuarial impact of lowering entrance fees versus monthly payments may be far-reaching, particularly for those residents on life care contracts who may need higher levels of care in the future. Despite the U.S. Department of Health approving incentive programs under the federal anti-kickback statute, a CCRC must be knowledgeable about the legal implications of any incentive program. It is of paramount importance, however, to actively market the CCRC and employ a talented staff capable of drawing residents into the facility. CCRCs with both exceptional facilities and level of care may suffer because they were unable to attract potential decision-makers (often children of prospective residents).
In today’s rapidly changing health care environment, senior living organizations best positioned for long-term success are those most self-aware and adaptable. If you’re concerned about any of the above areas, we urge you to contact your advisors and have an honest conversation about ways to improve. And don’t be afraid to interview other professionals, as they can provide valuable information on potential strategies. A candid self-appraisal now will help avoid painful missteps in the future, and may open the door to multiple opportunities for your facility to thrive for a long time to come.
Clockwise from top left:
Ingrid Bagby, Partner at Cadwalader, Wickersham & Taft LLP
Christopher Updike, Special Counselor at Cadwalader, Wickersham & Taft LLP
Paul Melville, Principal in the Corporate Advisory Services group at Grant Thornton LLP
Melissa Dimitri, Director at Grant Thornton LLP
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