What are they doing about cost reduction now:
Enhancing performance within existing senior living communities represents a huge financial opportunity frequently overlooked by many owner/operators. The strategy is called “exploiting organic growth potential.” In 2015 and beyond, strategic focus must be placed on two major areas: 1) revenue/occupancy enhancement; 2) expense reduction.
In terms of occupancy enhancement, operators should recognize that at 80 to 85 percent occupancy, most of their fixed costs are already covered. Do you really have to buy more raw food or hire an additional employee when filling several additional units?
Therefore, units that are occupied above 85 percent typically enjoy a substantial incremental operating profit margin for each additional unit occupied of approximately 70 percent for independent living and 50 to 60 percent for assisted living.
For example, a property with vacant independent living units having an average monthly service fee of $3,000 will likely generate additional cash flow of $2,100 per unit per month, or $25,200 per year ($3,000 x 0.70 x 12).
For 10 additional occupied independent living units and using a conservative 50 percent operating profit margin, that could generate an additional $180,000 in cash flow that goes right to the bottom line as net operating income and cash flow. This would increase the capitalized value of the community by approximately $2.2 million using an 8 per-cent cap rate ($180,000 ÷ 0.08).
Modest expense reduction also produces a very favorable impact. A senior living community with
80 to 120 independent living units at 90 percent occupancy results in 26,280 to 39,420 annual occupied resident days. That figure is derived by multiplying the occupied units (residents) x 365 days.
A modest $2 per resident-day expense reduction (typically 1.5 to 2 percent of total expenses) produces additional bottom-line cash flow of $52,560 to $78,840 per year, depending upon the size of the community. The increased value using an 8 percent cap rate is $650,000 to $985,000.
Keep in mind that these two strategies represent a significant financial enhancement of an existing asset without having to design, construct, finance or operate another new physical plant. But these enhancements have to focus on more than just monetary value.
The ultimate expected outcomes for a community is increased value in four important areas: 1) resident satisfaction; 2) clinical care excellence; 3) increased cash flow; 4) enhanced value of the asset. The first two elements of value are relatively easy to comprehend. Increases in financial value have been addressed in Point No.3.
- Studies have shown that the delivery of home or community-based long-term care services is a cost-effective alternative to nursing homes. Care in the home or community—not nursing home care—is what most Americans would prefer.
- In 2004, the average daily rate for a private room in a skilled nursing facility was $192 for a private room or $70,080 annually, and $169 or $61,685 annually for a semi-private room. The hourly rate for a home health aide was $18.12.
- In 2000, annual cost estimates were $13,000 for adult day care and $25,300 for assisted living.
- Over two-thirds of the current health care dollar goes to treating chronic illness; for older persons the proportion rises to almost 95%.
- The aging of the population, especially those 85+—the most in need of long-term care—is expected to result in a tripling of long-term care expenditures, projected to climb from $115 billion in 1997 to $346 billion (adjusted for inflation) annually in 2040.
- One in four people age 45 and over are not at all prepared financially if they suddenly required long-term care for an indefinite period of time.
LT~CRS we are the experts in Healthcare Cost Reduction. We have serviced many healthcare facilities and long-term healthcare groups in saving tens of thousands on telecom, utility, and all vendors in cost reduction programs.
At LT~CRS we understand how to best help Clients save money, while ensuring you stay highly effective and efficient with your services. We strive daily to help you become more financially sound, putting more money back in your wallet. The average savings we find our clients is between 25 – 37%.
We have saved companies tens of thousands on their telecom and utility expenses with our proven cost reduction process. The results from the LT~CRS Process allow our Clients to reinvest the “savings” into growth initiatives or apply these “found profits” to their bottom line.
Contact LT~CRS today for a FREE CONSULTATION to discover how to get control of your unmanaged spend and reduce expenditure on business services.
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