Multifaceted Benchmarking Financial Performance

Profit margins for senior living providers who serve Medicaid and low income individuals are razor thin. Without a solid financial plan, an effective budget, and timely response to operational and industry changes, a senior living facility will struggle to survive.

The first step in the financial planning process is to determine the strategic and financial goals for your facility. When determining your financial goals, it is important to keep in mind short- and long-term strategic objectives as well as more immediate concerns such as debt covenants, which often include minimum levels for the debt service coverage ratio and days cash on hand.

Industry benchmark information, available from various sources including state senior living associations or industry-specialized CPA firms, can also help your facility determine targets for the budget process and identify opportunities to improve financial performance. The budget process should include enough detail to allow you to understand variations from budget as the year progresses. The budget should include the following detail:

• Average daily census by payor
• Reimbursement rates by payor
• Staff hours by department
• Average wage rates by department
• Narrative that describes key budget considerations for nonwage-related expenses

To determine the budgeted average daily census by payor, your facility should benchmark average daily census by payor against other providers in your market area. This will help determine whether there is an opportunity to capture more of the market, and it will also help you understand area trends for overall utilization levels. Benchmarking data should also be used to evaluate reimbursement rates by payor to determine whether there is opportunity for enhancing reimbursement levels through improved coding or acuity management and also to determine a potential increase in private pay rates.

If you want the department heads to “buy into” the budget, you need to involve them in the budget development process. The best way to accomplish this is to have each department head develop and submit a budget for their department. Once all the budgets have been submitted, they should be compiled into a single organization-wide budget.

Once the organization-wide budget has been compiled, you should schedule a meeting with the department heads to review the budget and gain consensus for the budget. Department heads should be asked to come to the meeting ready to discuss their department’s budget, be prepared to explain expense increases beyond inflation, and have a list of possible cost reductions identified.

At the budget meeting, the administrator should provide an overview of the short- and long-range strategic and financial goals for the facility and should present the first draft of the organization-wide budget. If the first draft of the organization-wide budget does not meet the goals that were established, additional dialogue with the team will be needed. This additional dialogue will include: 

• Opportunities for enhancing volumes and revenue levels.
• Explanations for expense increases greater than inflation.
• Benchmarking data related to average hourly wage rates, hours per day by position, and payor mix. This information can affirm department head proposed budget levels or confirm that changes to the budget are appropriate.
• Brainstorming of areas where expenses could be reduced.

We recommend management work to gain consensus on changes in the budget that will help achieve the established goals. Once this consensus is achieved, the budget can be finalized and presented to your Board of Directors or owner for approval.

The budget meeting with your Board or owner should include:

• An overview of the key assumptions related to:
  • Average daily census by payor.
  • Reimbursement rates by payor.
  • Staff hours by department.
  • Average wage rates by department.
  • Narrative that describes key budget considerations for non-wage-related expenses.
• Discussion of challenges that management is concerned about that could impact financial performance. For example, “we currently are having a difficult time recruiting CNAs and if this trend continues, we may need to look at increasing the CNA starting wage or offering a sign-on bonus or both.”
• Benchmark information to demonstrate how the facility compares with similar facilities. The peer group for benchmark purposes may vary depending on the individual item being evaluated. For example, if you are discussing staffing levels, you may want to benchmark against facilities of similar size. However, if you are discussing average wage rates, you may want to benchmark against facilities in your area.

Once the budget is approved and a new fiscal year begins, your facility needs to manage against the budget and needs to keep department heads accountable for their own budget. The first key financial indicator that should be reviewed daily is the average daily census in total and by payor.

This financial indicator is the driver for many other operating decisions including staffing and expense management and understanding of census levels to help administration and department heads determine whether staffing and spending need to be adjusted in light of variations in census levels.

Since wages account for the majority of expenses, it is critical to also manage staff hours per resident day. As part of the management process, total payroll dollars should be reported to the administrator on a daily or weekly basis as one of the financial indicators. This will help the administrator know whether payroll costs are tracking ahead of plan, at plan, or behind plan. If management waits until the financial statements come out to determine whether wages are on track, there is no opportunity to adjust staffing levels to bring expenses back in line with budget.

We recommend specific staffing levels by position be developed based on various census levels and targeted hours per patient day. This will ensure the scheduler and department heads know at what point hours need to be reduced. This model is easy to do on paper but often difficult for department heads to implement. It is important to communicate the staffing plan to staff as part of the budget education process. If staff are educated and know what to expect, it can make it easier to reduce hours when the time arises. Many facilities will identify staff who may be willing to reduce hours or go home early prior to needing to make those adjustments.

To manage non-wage expenses, we recommend facilities use “spend-down worksheets” such as the following:

To effectively use the spend-down worksheets, department heads are allowed to order supplies for their department as long as the expenses do not exceed the weekly budget amount. Purchases that exceed the budgeted amount must be approved by the administrator prior to being ordered. Using this expense monitoring tool should eliminate surprises when the monthly financial statements are completed.

At the end of the month, the financial statements should be prepared on both a total and on a per resident day basis. This format gives the true financial picture because it takes into account fluctuations in census. In addition, the administrator should meet with any department head whose expenses were over budget to get an explanation and agree upon a plan of correction. If the financial performance is not meeting expectations, a careful evaluation of the actual performance compared to the budget should be performed and short-term and longterm corrective action needs to be implemented.

This is also a good time to review actual performance against benchmarking data to identify opportunities for improving census levels and payor mix and for decreasing staffing and other expense levels. If the administrator takes the time to complete these steps, they will be ready to discuss your Facility’s financial performance in an intelligent manner with the Board and owner and will also be much more capable of leading your facility to a successful future. With a solid financial plan, an effective budget, and timely response to operational and industry changes — as discussed in this article — your senior living organization’s ability to thrive financially and operationally are significantly enhanced.