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Rethinking Profit Margins in Senior Housing

johngonzales's picture

I may not be an accountant or CFO, but when I open up an excel spreadsheet and I can crunch with the best.  As a seasoned operations-guy, I am intimately familiar with “profit margins.” 

For the sake of being clear, allow me this layman’s definition of the term:  The profit margin is an accounting measurement that reflects the financial health of a business, company or industry. Generally, it is defined as the percentage of total revenue remaining after paying for all operational expenses and debt service.  There are variants of this metric ranging from Net Cash, Net Income (close cousins) to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization), EBITDAR (add Rent), EBITDARM (Add Management Fees), EBITDARMA INITIATIVE (Add specific episodes of LOST), etc.

Look I made an “Easter egg!”

In short, the margin is the remaining percentage of your gross revenue after paying the piper, pied or not (if you want a chuckle just lookup the definition of that term).  In our industry, a community’s margin is a cursory, but decent indicator of a company’s fiscal health.  Like your temperature, it reflects the current condition but does not identify the deeper underlying issues, conditions, illnesses, etc. causing the fever.


Margins in Senior Living

In Senior Housing, conventional wisdom dictates that the more independent a community’s population (low acuity), the higher the profit margin, because of lower operating expenses; concurrently, the gross revenues are typically lower than in other higher care environments;  think, a bigger piece of a smaller pie.  An assisted living community will have higher gross revenues, due to higher rates being charged for care services, but lower margins because of the need to fund higher operating expenses; a slightly smaller piece of a larger pie.  Easy-peesy, lemon-squeezy, right?


Revisiting Our Thinking

As part of the for-profit senor housing industry, here’s where I think we slipped: Anyone who has been in this industry for any length of time will tell you that our resident population has dramatically increased in acuity level.  The clinical and care services we are providing today are strikingly similar to those once offered only in skilled care environments. 

As assisted living emerged in world of senior housing it held the promise of being a viable alternative to skilled care, it also held the promise of higher revenues and – without the encumbrance of onerous federal regulation - presented a very attractive investment vehicle. 

As our industry evolved from an “independent” or lower acuity base resident population into today’s quasi-medical environment, financial performance expectations justifiably increased - albeit disproportionately.

Here’s where I’m going to tick off some folks (again):  you see, the temptation of touting higher rates, which could be realized when accepting higher acuity residents (or by adding a memory care wing for instance), while downplaying any reduction in margin was too seductive for those who were charged with creating increasing value in their companies. 

In short, we sold the additional revenues without properly acknowledging and disclosing the additional costs that would – or should – be incurred. This obviously placed an enormous amount of pressure on management to operate extremely efficiently, cutting corners wherever and whenever possible.

Understanding that labor typically comprises 50% or more of operating expenses, tighter staffing, less training and low wages were inevitable outcomes. As we evolved and embraced our changing position in the spectrum of senior healthcare, we should have had conversations with ourselves and with our financial partners, exploring and explaining that while our gross revenues would definitely increase, as would returns – the percentage of that return would decrease due to the additional training, oversight and investment in physical plant and staffing that properly caring for this population would necessitate.

We cannot be an industry that continues to promise margins that come at the expense of “doing it right.”  There’s far too much at stake to sacrifice any degree of care and services in exchange for an additional 2-3% of margin.  

Maybe it’s time for that conversation, but I fear it may be too late.

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