The Bottom Line: Watermark Focused on ‘Bending the Cost Curve’ for Operating Expenses

Misty Hansen was not expecting a job offer when she met with Watermark Retirement Chairman David Freshwater and CEO David Barnes about four years ago. But, in the middle of their meeting, David Barnes said he had a bright idea: Hansen should come on board as the company’s CFO.

After an early career stint with Arthur Andersen, Hansen had spent nearly 14 years with the University of Arizona Health Network, rising to the CFO role. But she left that large academic health system after it combined with Banner Health, and the job with Watermark appealed to her as a new challenge at a company with a strong culture.

She joined Watermark in April 2016 as the Tucson, Arizona-based company was rapidly gaining scale, and she focused first on elevating its financial systems and processes. But she also is a strategic thinker with an insider knowledge of how hospital systems work — including the opportunities and impediments when it comes to aligning senior living with the broader health care ecosystem.

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And like senior living executives across the industry, Hansen at the moment is focused on the challenges posed by oversupply and historically tight labor markets. She is seeking ways to “bend the cost curve” through new approaches controlling major expenses related to labor, real estate taxes and insurance, she said during a recent interview for the Senior Housing News Bottom Line series.

A self-described “Pollyanna” when it comes to the ability to improve labor expenses, Hansen is testing new technologies and processes to improve retention. And she’s deployed teams of analysts to help Watermark communities harness financial data to drive operational improvements.

Hansen is also helping lead Watermark through the rollout of its Elan Collection of high-end communities with a new pricing model and an innovative focus on wellness.

The following interview has been edited for length and clarity.

How did you get into senior living?

My background is in the public accounting area. I went to the hospital system in Tucson, which is now called the University of Arizona Medical Center. I started there as their controller and gradually went up through the ranks, becoming their CFO for the last five years or so of my time there. It’s a big academic medical center … We had two hospitals, about 700 physicians, 400 residents and seven health plans. It was a big enterprise. Then, we merged that hospital system with a big regional provider, Banner Health, that’s in the Southwest. When we merged with them, the roles that I was offered were not commensurate with where I was, so then I left the organization.

We joke that there are fewer CFOs in academic medicine than there are NBA players. So, my skill set is actually more sought-after than theirs. And it’s a really cool thing. There’s a lot of altruism and a lot of great work that happens in those [academic medical] centers. But when it was time to leave, I was interviewing with other academic medical centers and looking at the challenges they face, and it felt a bit repetitive. I decided to try to give myself a different challenge.

I was asked by David Freshwater’s cousin to meet with David and David [Barnes] and talk with them about how to have hospitals engage more with senior housing — a conversation about, how do you get in the room with the hospital CFO? There’s a lot you hear about, how are we going to align health care and senior housing. So, we just had a brainstorming session about ways that hospitals can get together with senior housing, and by the end of the meeting, I had a job offer from David. Basically, halfway through the meeting, he takes a coaster off the table and [puts it above his head like a lightbulb] and says, “I have an idea!” At the time, Watermark didn’t have a CFO, so they brought me in.

That sounds very Watermark.

No departure from the classic David and David there.

Did you take the job right away?

I was so excited in the meeting to have my juices flowing, talking about how health care and senior housing can align. It was a cool vibe. And culturally, they really do walk their talk. In that meeting, I was thinking, I’m having more fun in this half hour than I’ve had in the last six months.

When you started, were you focused on the strategy around aligning health care and senior housing?

When I got there, I did have a lot of strategic ideas, but the first thing I had to focus on was gaps in the accounting. Nuts-and-bolts. Watermark was really small, and right before I got there, they grew very quickly … the infrastructure wasn’t really ready for it.

We had a couple partners, Colony NorthStar for one, who needed us to be Sarbanes-Oxley compliant. A lot of [senior living] shops are not that overly sophisticated, so when you start getting into Sarbanes-Oxley, everyone’s kind of mind-blown. The [Watermark] team had put something in place before I got there, but there was some nuance that needed to happen. So, I came from a much larger shop, so I was able to question everything, re-process. I probably spent the first two years revamping how we did things, because … we didn’t want to have to add staff every time we added three new communities or a new [capital] partner.

But where we did focus strategically was in Tucson, specifically. We have a skilled nursing there, called Hacienda at the River. I was able to work with our director of innovation about partnerships with the University of Arizona and Banner Health. A lot of those were facilitated through my relationships and David Freshwater’s.

You mentioned that becoming SOX compliant is mind-blowing for many senior living providers, why?

Most [for-profit] senior living is privately held, and it’s people who have been successful being able to be nimble, make decisions quickly and not be bogged down with bureaucracy, red tape. SOX feels a lot like bureaucracy. There’s a lot of compliance. You have to put in processes that don’t feel like they’re value-add in that nimble, entrepreneurial spirit. You don’t have a strong desire to do those things. So, that’s where the big rub is. I have to be the gal that comes in and says, “Hey, everybody really does need to do this, this and this.” And it looks like that adds very little value to anyone’s day. I know. But an auditor somewhere is going to ask me to see this. So, without getting into the weeds, I think it’s a conflict between what accountants want to see and how business can be most efficient.

Do you think senior housing has a substantial opportunity to align with hospital systems?

I think the door should be wide open. We should be looking at any possibility. I think that folks in senior living need to realize that hospitals are going to be very protective of their business model. So, they’re really more focused on, how can I get more people into my hospital? It’s very few and far between that are going to be excited about finding ways to get out of the hospital more quickly, unless that’s an ownership play. At least, that’s my personal experience.

If we want to get in front of a hospital and talk about what we want to do, we have to fully bake the plan. We have to really understand what it is we’re bringing to the table, what we need the hospital to do, and then how we’re going to execute that. Because hospitals have such a different set of challenges that they’re facing … we’re not a large enough solution for them. We have to bring solutions to them and get them to pilot, and that’s what we tried to do in Tucson … not to sound doom and gloom, but it’s just not going to be as simple as pulling together a group of like-minded people and hammering out the perfect plan.

I think people who are doing plays where they’re partnering — vertical integration with a hospital system, even if it’s a joint venture, that’s how you’re going to get folks engaged.

And people will talk about shared savings programs, and they’re more effective in theory than in practice.

Do you think the ability of senior living to reduce re-hospitalizations — so the hospital can avoid Medicare penalties — has moved the needle?

From a skilled nursing perspective, yes I do. But it’s a different conversation for assisted living and memory care. There’s clearly a connection between readmissions and great care in assisted living, I just think it’s harder to explain that to an acute-care hospital leadership team and get them to fully buy in.

Some senior living providers are launching their own Medicare Advantage plans, and view that as a way to get financial upside from lowering overall health care costs.

We talked with a group that was getting together, and they invited us to be a part of their Medicare Advantage plan, which was exciting. But we felt we were going to take a step back and see how that plays out before we jump in.

Because of the complexities involved, it was going to take a lot of bandwidth?

Yes. And wanting to truly understand just how well they work, what the outcomes look like. But, it’s exciting stuff. We’re very supportive of the people who are working on this.

Watermark has a lot going on right now, what are you focused on day to day?

We have four Elan collection [communities] coming on this year that we’ve been working on and developing and programming for about three years now. And now we get to see how that all is going to play out. We had hoped they would be a little more staggered, but they’re all kind of coming at the same time. So, there’s a lot of buzz about that and a lot of excitement and a lot of our internal resources are circling around that to make sure that they execute well from day one.

For myself and my team, you hear there’s challenges in senior living across the board. It’s a tight market right now. So, we’ve been trying to focus more on how can the internal team help with operational performance. We’re building up an analyst team that is going to bring, hopefully, more business document and operational analysis to the communities to help us figure out where the opportunities are.

I’ve assigned [each analyst team] to a group of communities, and their job is to look at all the information and tell me what people are missing. The people who are in the communities can sometimes have such a strong draw to the social side of our business. We do need them to have that, but being able to analyze their financial statements to say, it looks like my staffing has gone over … whatever it is that they need to see, I want to be able to help them see it. The answers are always in the numbers.

I think we have to figure something out — I’m going to use a hospital term — to bend the cost curve. Rate increases are a little soft right now because of excess supply. So, there’s pressure on expenses, and it’s at the same time as minimum wage increases. One of the things we did this year was going self-insured on health insurance, which is pretty basic, but you need scale before you can start to do something like that. We did that to try to avoid large increases in health insurance. But, there’s just such a high salary expense base. The majority of our expenses are real estate taxes and salary and insurance. So, we’re trying to hit on those three things to see what we can find. I’m also trying to go all-in on some tax credit opportunities. We’ve been developing, and there are credits that exist in the development universe, so I’m dabbling to see if there are any of those where we have opportunity. It’s a little early, I’m not spouting numbers yet, but I think it has the potential to be pretty exciting.

Not low-income tax credits, I assume?

No. There are some special ZIP codes, sort of like development zones, but there are some different nuances where if you build a building in this city and you meet these four criteria, then you can apply for a tax credit for the next 10 years. Things that you would never know if you don’t live in that city. We’ve found a good advisor who is helping us identify those.

In terms of bending the cost curve, it seems like reducing labor expenses would be very difficult, given that you need to have well-staffed buildings, and wages are going up.

I’m a little bit of a Pollyanna.

I think you can cut costs in staffing by hiring the right people up front, training them really well, and not having them leave.

With turnover, I always, for 15 years, believed that you can make a real impact on expenses.

In the last year, we’ve put in a new recruitment tool. It’s not rocket science, but it’s something we didn’t have before, that helps us reach out to more people instead of just using Indeed or [similar sites]. People are getting more candidates. And now they have to take a survey to understand their cultural alignment with Watermark before they can get through the interview process.

It’s all designed to get better people. One ED said, you know, I didn’t buy it, and I interviewed all four people that applied regardless of what their score was, and lo and behold, the one with the top score was by far the best and the one with the bottom score didn’t even show up for the interview. It’s only one story, but it’s what I believe is true.

And then, just trying to be thoughtful about benefits once people are hired. We’ve started with some online tools of engagement, where folks are able to acknowledge people online when someone does something well. And all our communities have a television in the break room, so if anybody has received a high-five from someone in their community, it shows on the TV — things like that, to get people excited about acknowledging one another.

We’ve got a couple new benefit plans that we’re looking at. We’re looking at sick child care. You can either have the employee pay totally or subsidize [the cost] for them, but if [an employee’s] child is sick, or their day care provider can’t take care of their kiddo, within two hours they’ll have child care. So, they can get to work, and you can avoid the backfill cost, you can avoid the fallout, and people know that we just care about them as people.

And we’re starting daily pay, where folks can get paid every day after the end of their shift.

It’s about trying to give [workers] things that will improve their lives, that connects them with Watermark.

Who provides the sick child care? Are there agencies?

There are national agencies and there are local agencies — the nationals usually subcontract with locals. We’re piloting in Tucson because we have four communities there right now. It may or may not work, but when I listened to people talk about the problem, the solutions are sometimes pretty generic, so we’re trying to get specific things. Let’s try this. Let’s monitor it and see if it works.

Watermark has a number of capital partners, including the investment from Keppel, and you’ve been growing rapidly. Safe to say you feel confident about the availability of capital and the deal pipeline?

We don’t have any concerns about access to capital and, yes, Keppel’s coming in. We’re highly aligned with our current capital partners. And we have a really strong pipeline of deals that come our way.

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