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Senior Living Industry Faces Myriad Challenges

It is interesting that most of the press coverage in senior living cites an increase in volume from baby boomers aging into the space. Typically, these articles note that 10,000 people will turn 65 every day for years to come. While some believe that the heaviest baby boomer influx might still be a few years down the road, one would think this tail wind would create significant opportunities for investment and profitability.

That simply does not appear to be the case. The headwinds facing the industry are significant and, at this time, appear to be winning. As a general overview, the key issues affecting this industry include:

  • Labor

  • Regulatory oversight

  • Reduction in the number of Medicare patients

  • Reduction in average reimbursement

As a result of these issues, companies in the space are running into trouble. If engaged in one of these projects, there are a number of items to consider:

Staffing. A number of states have raised the minimum wage, which, of course, has impacted organizations’ cost structures. As one consultant to healthcare facilities observed, “We are now competing with Walmart and other retailers for staff and can lose an employee over 15 cents an hour.” Most operators likely were aware of the issue and have integrated changes to address the problem, but they may not have anticipated the full range of consequences stemming from these changes.

In response to the challenges of hiring quality employees, many operators have come to rely on temporary agencies to provide staff. While this is often a good solution, it really should be only temporary. Agencies typically cost more and the staff is likely to be more fluid. This is a good area for cost savings opportunities, as a strong hiring program can result in retaining quality employees while reducing labor costs.

Another key staffing opportunity lies in hiring a strong administrator and leadership team. Staffs at these facilities are diverse, typically possessing a range of educational and socioeconomic backgrounds. The leadership team must bring this team together, with a focus on quality care for the residents. One consultant to such facilities said leadership must instill the attitude in the staff that “this is the residents’ living space, and we all just work here.” This is an important perspective because employees too often view patients or residents as “in the way” of doing their jobs.

Referrals and Admissions. It’s likely obvious that most people looking for a senior living facility for themselves or a loved one will spend quite a bit of time researching options. Reputation in the local community as a quality senior living facility is critical for attracting new residents.

A key source of information for those researching senior living facilities is the Medicare Five-Star Quality Rating System, a simple, objective measure designed to help people compare facilities. The rating system reflects an overall rating, and separate ratings for health inspections, quality measures, overall staffing, and registered nurse staffing. If a facility’s rating is downgraded, it can be difficult to move back up to a higher rating. A focus on reporting requirements and successful surveys can go a long way toward maintaining and improving a facility’s star rating over time. One misstep in reporting can result in a downgrade that can take months or even years to reverse.

It is also important to cultivate local referring organizations. Senior living facilities rely heavily on the communities they serve. They must maintain strong relationships with the appropriate professionals at local hospitals, other senior care organizations, and the broader community. It can be extremely difficult to turn around a bad reputation with these referral sources.

Billing and Collections. As with any healthcare organization, billing and collections in a timely manner are critical. Once an organization gets behind in these areas, given day-to-day requirements, it can be very difficult to get billing and collections back on an appropriate schedule.

Clearly, billing can only include charges that are properly justified. However, some organizations leave money on the table through faulty billing practices. Because profitability for these companies can be tight, it is important to ensure that the facility is billing for what is properly due. In fact, some states recognize and understand the need for proper revenue management and are often willing to assist in this area.

Regulatory Oversight. Rightfully so, the industry requires a significant amount of oversight. Families want to ensure that their loved ones are being properly cared for, and they expect state and federal government agencies to oversee the care provided in these facilities. While the regulatory requirements can be burdensome, all operators work under the same structure.

Conducting mock audits can be a great way to ensure that proper systems are in place and that findings from surveys by regulators are slightly less painful. It is often difficult to get through a survey without acquiring some kind of “tag” for a perceived deficiency. However, responding to these findings with a prompt plan of correction and immediate implementation of those plans goes a long way toward demonstrating to regulators that an operator takes these situations seriously. It is critical to stay current on changes in regulatory requirements, as they are often updated (or more likely added to) annually.

Declining Average Reimbursement. The Patient Protection and Affordable Care Act (ACA) has impacted skilled nursing facilities (SNFs) directly through additional regulatory oversight. However, the ACA has also impacted SNFs indirectly. Many hospitals are now part of accountable care organizations (ACOs), which forces them to recognize downstream costs. This has prompted a search for less costly alternatives to nursing homes, resulting in a decrease in the number of Medicare-covered patients and less time spent by such patients at the facilities. Because Medicare historically was one of the better payers, the drop in the number of patients and the number of days they spend in facilities has also decreased average reimbursement amounts.

The change forces SNFs to rely more heavily on Medicaid patients, for whom reimbursement rates are much lower, often below real cost. For example, the director of operations for a family-owned senior living and rehabilitation company noted that MassHealth, Massachusetts’ Medicaid program, reimbursed SNFs an average of $38 per patient per day less than what it costs the provider to care for patients. That likely contributed to the closures of 20 such facilities in the state over the past year.

Challenging Lender Situations. Last but not least, operators must keep in mind that these are difficult situations for lenders as well. While most lenders prefer to avoid liquidation, they are especially concerned about loans to senior living companies because liquidation would require relocating residents, subjecting the lenders to potential press coverage accusing them of “putting Grandma out on the street.”


The senior living industry faces a challenging environment characterized by staffing issues, declining reimbursement, and more-stringent regulatory oversight. While the tail winds of a growing elderly population suggest opportunity, the industry must resolve its profitability problem. Additional volume will not solve the problem. Turnaround professionals should expect to see more of these issues arise at troubled facilities.

Paul Valentine

Paul S. Valentine

KCP Advisory Group LLC

Paul S. Valentine is a senior managing director with KCP Advisory Group. He focuses on performance improvement and corporate renewal, providing clients with strategic and marketing advice, while also emphasizing financial structure and operational efficiencies. His experience includes roles in healthcare services, medical devices, retail products, and manufacturing, including roles as CEO, COO and CFO. Valentine holds a bachelor’s degree in accounting and an MBA in finance and entrepreneurship, both from Babson College.

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