Rising costs in all areas of running a nursing home — not just labor — are squeezing profit margins, compelling providers to adjust operations, make investments and pursue innovations in a quest for greater efficiencies.
While skilled nursing facility operators try to get a grip on labor shortages, workforce costs surged by as much as 30% in 2022, according to some providers who spoke with Skilled Nursing News. But creeping food, beverage, equipment and supply prices, as well as insurance costs, are putting a strain on their budgets. They report costs in these areas increasing between roughly 5% and 15%, and more in some cases.
Carespring Health Care Management, which operates 17 SNFs located in a 90-mile corridor between Ohio and Kentucky, has worked with its suppliers to keep costs down despite inflationary pressures and higher fuel prices, CEO Chris Chirumbolo told SNN.
And Carespring is not alone. SNF providers such as Majestic Care and Health Dimensions Group (HDG) have both been forced to take extra steps to counter rising costs, leaders at these organizations told SNN.
Stephanie Schmidt, Director of Financial Planning & Analysis at HDG, said costs have increased for nursing home staples and supplies, and even insurance. HDG operates SNFs as well as senior living communities, and has a consulting arm.
“With a lot of our budgets (at SNFs), we’re just trying to … break even or to cashflow it, not have a large margin or anything, but just to be able to pay for some cutbacks,” Schmidt said.
While budgets are currently under strain, leaders with these organizations do hold out hope for some relief in 2023, and report success in various cost control efforts. Still, the road ahead will continue to be hard.
In a recent report on the health care sector’s outlook, management consulting firm McKinsey & Company said it expects profit margins for skilled nursing facilities to shrink in the next four years, while other areas of health care might see small gains.
“We expect to see continued cost optimization measures to tackle rising costs, such as increased labor productivity efforts and the application of technological innovation,” McKinsey authors wrote.
Providers pursue cost control
HDG has budgeted for a 4.5% increase in supply costs and 10% increase in food costs for 2023, Schmidt said. That’s a cautious approach, given that food vendors have estimated 5% to 7% cost increases for the first half of the year.
HDG has made some menu changes to offset costs in addition to finding some efficiencies through using a new automated purchasing software. That technology helps community leaders maintain greater visibility into their budgets, driving more cost-conscious decision making, Schmidt said. She also cited better inventory control as helping to keep supply costs in check.
Meanwhile at Carespring, CEO Chirumbolo said that the process of belt tightening has been much more dynamic and rigorous now than in the past.
“We’re no different from the general American public” in feeling the pinch of higher costs, Chirumbolo said.
Carespring’s food prices, for instance, have risen by 10% to 12% in the last two years, he said. But, Chirumbolo adds, “We’ve worked together to try to mitigate, to stay below the normal inflationary numbers.”
As part of this effort, Carespring hired a materials management team member in October 2021.
“We’ve always probably needed one, but this (situation) forced our hand,” Chirumbolo said.
Since the appointment, Carespring has gleaned savings by adjusting the use of supplies and staples with the ebbs and flows of the census. Now, “we can really drill down on a building by building, patient-per-day usage,” without compromising patient needs, Chirumbolo said.
Carespring also changed its approach to buying versus renting equipment, he noted.
Another large source of efficiency at Carespring is drawn from the fact its facilities are located relatively close to each other, allowing the company to reduce transportation and fuel costs.
“We have met with each vendor to find individual opportunities to save money while not compromising on the quality and experience our staff and residents expect. Our size and locale provide our vendors efficiencies as well,” Chirumbolo said.
For Carespring, labor costs remain the biggest challenge. On a per patient day basis, labor costs have risen between 20% to 35% depending on the facility and the position, according to Chirumbolo, while the census at its SNFs lags 5% to 7% when compared to pre-pandemic levels.
This sentiment is echoed by Bernie McGuinness, CEO at Majestic Care. Majestic Care operates 27 skilled nursing facilities and seven assisted living facilities throughout Indiana, Ohio and Michigan.
For Majestic Care, labor costs have gone up by 22% year-over-year, McGuinness said. And costs for the non-labor areas have also increased for supplies, freight on deliveries, food and construction.
“Our 30% (of overhead) hasn’t gone down to be able to offset labor costs. It’s only gone up as well,” he said.
However, Majestic Care has been able to see fruits from investment in technology to streamline workflows and reduce time away from the patient bed. Moreover, McGuiness said that his organization has been able to find efficiencies in labor and staffing costs by creating an internal agency to compete against third-party contract labor.
Majestic Care has also been able to allow staff to multi-task by offering “special pay programs and review of job descriptions for combined work.”
Insurance cost considerations
Another area of concern for SNFs has always been insurance costs, which since the pandemic have seen a steady rise. Insurance remains a cost concern, in particular with regard to property and cybersecurity coverage. However, there may be some relief in other areas.
Other than property and cybersecurity insurance, costs will likely remain largely stable across various lines of insurance coverage such as general professional liability, private company, D&O public company, D&O workers comp and auto, according to Scott Lieber, managing director at Marsh, an insurance brokerage and risk management firm.
In 2022, Lieber said SNFs saw increases for cybersecurity insurance jump generally in the range of 40% to 50%, with costs for some facilities going up by 100%.
“We see the most market potential rate increases coming from property and cyber for 2023. It doesn’t mean that increases can’t come to individual insurance on other policy lines, but we see the most volatility based on the market impact for property and cyber,” Lieber said.
He anticipates a “very stable” marketplace for GL/PL and “fairly stable” worker’s comp market for 2023, with increased costs now largely baked in. That perspective is confirmed by HDG’s Schmidt, who said that insurance costs are holding “pretty flat” after big increases in 2022.
However, both Carespring and Majestic said their insurance costs are rising. Indeed, costs will vary depending on a variety of factors, including geography, Lieber emphasized.
The amount of increase in rates for property insurance depends on the locations of a nursing home’s portfolio, he explained. And so, nursing homes in Florida and a lot of the Gulf Coast states will likely see insurance rates going up due to extreme weather events.
Cybersecurity isn’t a large part of the overall insurance budget of SNFs, but is also expected to see “some significant increases.” And coverage has gone from being ancillary to a “must-have” for skilled nursing operators.
Cybersecurity insurance is linked to cyber attacks in the industry, Lieber said.
“We’re seeing a number of clients having cyber attacks … some aren’t big dollar amounts and then some are very large dollar amounts,” he said. “And so there’s just a lot of volatility in the attacks that are occurring and the frequency.”
Even if certain areas of insurance coverage are remaining stable overall, prospects for insurance costs for the skilled nursing sector will vary by market with certain state jurisdictions being deemed “tougher” markets due to a high level of litigation and financial settlements as well as stricter implementation of regulations, as well as weather-related risk.
“There are skilled nursing operators that may see better or worse results based on their individual portfolio,” Lieber said.
For Carespring, with skilled nursing facilities in Kentucky, Chirumbolo said that his organization’s property insurance went up 10% to 15%. Meanwhile, GL/PL insurance also went up functionally about another 10% to 15%. Kentucky’s litigation environment is a driving factor.
“We practice in Kentucky. Five of our buildings are Kentucky nursing homes….Our costs for our GL/PL is five to six times more than in Ohio facilities,” Chirumbolo said.
Lieber has some advice to reduce some of these costs arising out of insurance coverage. For example, to prevent an increase to property insurance, he said, “It’s very important to have a strong submission (to underwriters)….The insurers should know their buildings.”
Given the staffing crisis facing the industry, Lieber says that insurance companies are more tuned into the nitty gritty of the steps SNF operators might be taking to alleviate their staffing inconsistencies, including use of agency workers and training processes.
Moreover, insurance providers are also watching how nursing homes are implementing technological tools to mitigate staffing challenges and other issues, said Lieber.
Overall, his message related to insurance costs applies to the mindset that operators must generally apply as they face expense pressures: “I think innovation is a must.”
