Any builder knows constructing a house requires more than just erecting four walls and a roof. Although those components are crucial, a house also needs a good foundation along with electrical and plumbing work.
In a similar vein, skilled nursing operator budgets are more than just money in and money out. Like building a house, a skilled nursing facility’s financial viability depends on many factors, all culminating in a term that Plante Moran Partner Patrick McCormick calls “financial architecture.”
“We started using this term, financial architecture, to get away from the black and white of what numbers can represent,” McCormick says.
Here is a look at the five financial architecture building blocks identified by Plante Moran, the 11th-largest audit, accounting, tax, investment banking and wealth management firm in the United States:
- Revenue Cycle
- Expense Management
- Staff Retention
- Patient Experience
- Building Management
BUILDING BLOCK #1: Revenue Cycle
For many SNF operators, revenue streams depend not only on occupancy, but also reimbursements and margins. Balancing reimbursements from various payment sources and managing reimbursement timelines is a critical component of managing SNF revenue cycles.
The pandemic occurred shortly after the Medicare changes involving the Patient Driven Payment Model (PDPM). While there was significant training and energy leading up to this change, the focus during the initial stages of the pandemic quickly moved away from optimizing reimbursement. Providers saw an average 5% increase in overall FY2020 Medicare reimbursement rates, prompting Centers for Medicare & Medicaid Services (CMS) to study the unanticipated increase.
Despite that revenue bump, turnover and agency usage resulted in missed opportunities in coding for the care provided under PDPM. A refocus on training, documentation and systems can yield additional reimbursement.
“Managed care contracts is another area that should be evaluated for profitability,” McCormick says, with some Plante Moran clients experiencing very low managed care rates. Considering the cost to deliver care when including the COVID-related protective equipment, overtime paid for documentation requirements and agency staffing costs to handle increased staffing, increased census can sometimes lower profitability.
“Operators should understand which contracts are being offered in their area and explore getting qualified for them,” McCormick says. “Stepping away from contracts that aren’t profitable may be part of the strategy to regain profitability of the facility.”
BUILDING BLOCK #2: Expense Management
Because the lion’s share of the operating budget comes from labor, agencies must evaluate all aspects of staffing.
As SNF occupancy dipped significantly across the U.S. in 2021, revenue has fallen too. In the second quarter of 2021, average industry occupancy rates remained near historic lows at 74.9%, according to the NIC MAP Data Service, which is provided by the National Investment Center for Seniors Housing & Care (NIC).
While SNFs must adhere to strict staffing requirements, and while many providers manage to daily-hours-per-patient-day, providers should re-examine their fixed staffing costs to withstand dips in occupancy. In those cases, they should identify which staffing functions are critical and which can be pared down. These aren’t easy decisions, but with the sustained lower occupancy levels, agencies must evaluate all areas to know what is affordable.
“We are finding many providers with significant overtime and non-productive time issues,” McCormick says. “Some providers aren’t tracking this by department or shift to determine the causes. There is general ‘clock creep’ that can happen when these areas aren’t monitored. It is usually in the shift change related to documentation or care transitions. We have seen some providers institute shifts that overlap others to provide some consistency or the ability to work through documentation not in a peak shift change.”
BUILDING BLOCK #3: Staff Retention
Staffing retention, turnover and staff measures — building blocks 3 and 4 — are related yet separate.
In the case of staffing churn, it’s no secret that turnover is a significant cost driver for SNFs. According to senior living workforce software provider OnShift, staffing agency fees currently cost SNF operators up to twice the hourly rate for full-time employees.
Keeping that in mind, providers can reduce turnover in a few main ways. One is through peer mentorship. Another is through staffing creativity, creating float pools that can increase flexibility for nurses.
“Our multi-facility providers are creating internal float pools, almost [like] internal agencies, where they’re hiring people to work in one of a number of buildings,” OnShift CEO Mark Woodka told Skilled Nursing News in June. “Instead of working in a building, I might have five buildings in Cleveland. I hire people to work in a float pool, and I’ll tell them the week before what building they’re going to work in.”
BUILDING BLOCK #4: Patient Experience
Improving efficiencies flows into patient experience, which covers each patient’s day-to-day interactions with staff. This is a financial building block because it drives star ratings and, therefore, occupancy and revenue.
BUILDING BLOCK #5: Building Management
The last building block of financial architecture is building management, which can mean anything from how physical spaces are used to how much the facility spends on modernizing the building.
McCormick suggests operators identify the different areas in their communities and determine how often they are used, with the goal of maximizing space and efficiency.
“Common spaces can become underutilized, and it adds to the cost structure of a building,” McCormick says. “If I can shrink the square footage of a building or utilize it more appropriately, it really ends up reducing utility costs, it reduces insurance costs, it reduces maintenance costs.”
Providers should also prepare to set aside money for general maintenance because, as McCormick states, “There is no excuse for unpainted walls or scruffy carpets in the eyes of consumers.”
Consumer demands for private rooms has been a trend for a number of years. However, with infection control and pandemic-fueled preferences, the tolerance for semi-private rooms may never go back to the pre-pandemic levels. Repositioning a facility to maintain predominantly private rooms and adjusting the overall cost structure to accommodate this lower permanent census level is key.
“The ultimate success to this financial architecture process is putting some control on the controllables,” McCormick says. “Planning the solid foundation by working through these building blocks of success brings into focus the key factors. It also creates flexibility to account for those items which are outside of your ability to influence but maintain the overall financial health of your organization.”
This article is sponsored by Plante Moran. To learn more about why these building blocks are important for financial architecture, contact Plante Moran at plantemoran.com.
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