23E Innovative Strategies for Survival in Today’s Economic Climate

1. 23E Innovative Strategies for Survival in Today’s Economic Climate Susanne Matthiesen, Managing Director, CARF-CCAC Jeff Boland, Partner, ParenteBeard LLC Mary Muñoz, Managing Director, Ziegler Brian T. Williamson, Director, Standard & Poor’s

2. Session Objectives • Explore the significance of data collected from years of on-site peer directed accreditation surveys and understand how the accreditation process can provide organizations with a framework and become a catalyst for quality care delivery. • Learn about providers who demonstrated “stand-out” conformance in strategic planning, governance, business practices, finance and program process. • Discover how the most frequently cited standards provide opportunities for performance improvement.

3. Overview of Issues in Field & Trends in Standards Sue Matthiesen

4. Observed Field Issues • There is a marked increase all types of organizations offering home and community services • Consumers seeking alternatives to LTC, AL, CCRC • Occupancy rates declining at a time when population is aging • Percent of residents with dementia increased by more than 6% since 2001 • Aligning business practices, seeking efficiencies • Culture change continues • Need to measure performance – healthcare reform/ ACOs

5. Governance Themes • Governance policies and practices in place for various board activities • Selection and composition of board • Orientation • Education and development • Board structure and performance • Annual self assessment of entire board • Periodic self-assessment of individuals • Annual written signed ethical code of conduct • Governance policies and practices to address executive leadership development and evaluation including annual review of written succession plan • Board annually reviews its governance policies

6. Ongoing strategic planning includes expectations of stakeholders Written strategic plan Reflects current and projected financials Information is shared with stakeholders Is reviewed and updated Organization addresses ongoing margin/profitability including expense management Strategic Integrated Planning & Finance Themes

7. Information Measurement & Management Themes • Data collection system for service delivery improvement…. • Collects data about persons served at appropriate times • Measures for indicators in each of the following areas….. • Effectiveness • Efficiency • Access • Satisfaction/input • Each indicator: • To whom is it applied? • How is the data collected? • Goal? • Extenuating/influencing factors to be considered in analysis

8. Performance Improvement Themes • Annual performance analysis for service delivery • Analyze indicators for service delivery • Effectiveness • Efficiency • Access • Satisfaction/input • Results in a plan • Performance information is shared

9. Operational Performance Improvement Jeff Boland

10. What We’re Seeing in the Field • Providers focusing on operational areas to improve financial performance • Census/Occupancy • Marketing • Vendor contracts • Staffing realignments/salary freezes or reductions • Capital expenditure freezes or reductions • Reduce or eliminate continuing education, travel, supplies, minor equipment, and outside consultant budgeted expenses • Detailed cost analyses of all departments • Revenue alternatives

11. Net Operating Margin Ratio (NOM) • Net Operating Margin Ratio focuses on a provider’s core operations – resident revenue and resident expense • NOM is an indicator of the margin generated by cash operating revenues after payment of cash operating expense

12. Net Operating Margin Ratio (NOM) • Continued improvement for Single-Site (SS) and Multi-Site (MS) providers – highest medians for both • As in the past, the operating performance of MS providers is generally weaker than the SS providers, but the gap narrowed significantly in 2009.

13. How Drive Operating Margins? • Operational Performance Improvement • Focus on revenue and expenses by utilizing operational indicators • Measure performance against expected outcomes by utilizing benchmarks

14. Operational Performance Improvement • Process Assessment to achieve performance improvement RESULTS • Process, not an event • Evaluate all areas of the business • Vision and mission • Governance • Products and services • Processes • Policies and procedures • Personnel

15. Operational Performance Improvement • Goals • Identify revenue enhancement opportunities • Identify cost containment measures • Current organizational and management structure evaluation • Evaluation of current management reporting structures • Assessment of performance measurement systems • Sustainability of strategies

16. Operational Performance Improvement • Process • Review organizational and management structure • Assess organization alignment with vision and mission statements • Review job descriptions of staff and management • Perform documents and records analysis • Assess functions, processes, and practices of services provided • Perform benchmarking

17. Revenue Enhancement Opportunity Considerations • Resident assessment process management • Clinical documentation • Demonstrate services delivered • Intentional to impact reimbursement • Therapy service delivery • Charge capture processes • Contract negotiation • Entrance fees and monthly fee pricing

18. Cost Containment Opportunity Considerations • Staffing in Independent Living and Assisted Living • Nurse department staffing in nursing facility • Other department staffing in nursing facility • Service contracts • Raw food costs • Fringe benefits • Health insurance • Benevolent care

19. Cost Containment Opportunity Considerations • Other areas to consider • Organizational structure • Financial reporting • Information technology • Resident relations

20. Sample Opportunities • Census (Occupancy) Maximized – Lost Revenue Calculation • Independent Living, Assisted Living, Nursing • Analyze Break Even with Payer Mix • Daily Management Reports • Mix and Margin Revenue Contributions • Resident Assessment Process Management and Clinical Documentation • Medicare Resource Utilization Groups (RUGs)

21. Sample Opportunities • Rehabilitation Therapy Utilization • Medicare Utilization • Pricing Structures • IL, AL, and SNF • Fund Raising / Development • Department Staffing in IL and AL • Nurse Department Staffing

22. Sample Financial Results • Not-For-Profit, Single-Site CCRC, Western US, focused on IL, AL, SNF • $1,870,000 • Not-For-Profit, Single-Site CCRC, Mid-West US, focused on IL, AL, SNF • $1,000,000 • Not-For-Profit, Multi-Site CCRC, Western US, focused on IL, AL, SNF • $900,000 • Not-For-Profit, Multi-Site CCRC, Western US, focused on SNF • $1,500,000

23. Implementation • Prioritize the recommendations to be implemented • Determine the time and resource allocation requirements • Form action teams • Caution: do not involve the same staff simultaneously in several action teams • Hold staff accountable • Be diligent and be deliberate • Create a sense of urgency without creating anxiety

24. Implementation • Develop a communication plan • Develop measurement tools • Celebrate successful results

25. Lessons Learned • Be prepared to make tough decisions • Assemble the right team; be willing to change players • No “Sacred Cows” • Continuous process • Communicate purpose and process • Difference between success and failure • Communicate often • Lessen anxiety

26. Lessons Learned • Communicate to Board, to staff, to Residents, • Do not look at the assessment as the “end” • It can be a new beginning • Efficient systems are as important as the financial impact

27. A Few Things To Remember • The “Sacred Cows” of the past need to move out to the pasture • Providing adequate operating margin is just as important for a non-profit as a for-profit • This is hard work and often misinterpreted • No Margin No Mission & No Mission No Margin

28. Holding Onto the Vision Mary Muñoz

29. Staying Ahead of the Curve:Growth and Repositioning 85+ Year Olds 75 – 84 Year Olds We are here! We are here!

30. Growth: New Communities Growth through new campus development Capitalize on non-profit competitive advantage Site selection process more favorable in current economic climate Spreading market risk across multiple geographic sites is typically seen as a strategy for enhancing an organization’s financial strength Partnering with experienced, recognized professionals is key for minimizing risk and maximizing likelihood that project will ultimately succeed Though capital costs are up, construction costs are down

31. Growth: Acquisition/Affiliation Weaker operators are putting up their hands Acquisition/affiliation filters and criteria help you be prepared, including desired geography, model(s) of service delivery, age of campus, capital if any that can be put at risk, etc. Strategic divestitures by hospitals, as an example, may create opportunity

32. PACE More than 70 sites since 1970 Growing interest in PACE by senior living providers Growth: Outside the Walls Home & Community-Based Services 19% of the AZ 100 expanded their HCBS during 2009 Nationally, data show rapid increase Source: AARP Across the States

33. Neighborhood Villages Nearly 50 villages are operating across the country Senior living sponsorship  of villages is now emerging  Life Care at Home Positioned well due to housing market & economic constraints Growth: Outside the Walls (cont.)

34. Repositioning Aging Campusesis a MUST Repositioning is picking up intensity across all areas of the campus: dining, common areas, private rooms, courtyards, etc. Repositioning leads to (and grows out of) culture change Repositioning is critical for surviving and thriving …if your campus hasn’t implemented major capital improvements in the last 7 years, you’re an aging campus AGE OF PHYSICAL PLANT RATIO Source: Financial Ratios & Trend Analysis of CARF-CCAC Accredited Organizations, 2010.

35. Market-Driven Physical Assets Ultimately, suitability of residences, amenities is about market acceptance and market positioning Evaluate your community with fresh eyes, to ensure it is competitive with new and emerging senior living product Are you investing enough annually? Do your longer-range plans incorporate sufficient capital to keep your product fresh? Maximize the return on your existing real estate Are there other uses for existing land? Are there opportunities for growth or new services on contiguous land?

36. Market-Driven Physical Assets:Independent Living Cash flow margin is highest, whether rental or entrance fee Feeds remainder of continuum Under-penetrated markets remain Consider how your organization is viewed in the market in order to maximize marketing impact and grow occupancy Is a name change appropriate? Are there branding opportunities?

37. Market-Driven Physical Assets:Independent Living IL: Walnut Village, Anaheim, CA 1964 and now

38. Market-Driven Physical Assets:Assisted Living/Skilled Nursing Pro-active providers succeed in remaining independent by maintaining strong knowledge of their markets and commitment to evolution of their organizations SNF: St. John’s Lutheran Home, Billings, Montana

39. Forging AheadRisks: Known and Unknown Third party reimbursement Medicaid, Medicare, health care reform! Competition Housing market uncertainty Economic uncertainty Investment strategies, importance of cash Tax-exempt status under siege The unknown?

40. Summary Observations Brian Williamson

41. 2010 Rating Actions by Year *Through December 31, 2010

42. Outlook Changes by Year *Through December 31, 2010

44. 2010 Ratings Distribution *Through December 31, 2010

45. 2010 Rating Outlook Distribution *Excludes CreditWatch *Through December 31, 2010

46. Standard & Poor’s Views on Current Trends • Pressure remains on unrestricted liquidity, although the investment markets have rebounded • Continued reliance on non-operating income highlights risk during periods of economic stress • Capital intensive business model remains despite reduction in capital expenditures or delaying of projects

47. Standard & Poor’s Views on Current Trends • Continued response to cash flow pressures & market conditions: • Providers are revising contract offerings to add more flexibility; marketing becomes key initiative • Providers are entering into new service lines (ie Home Health, Adult Day Care) • Providers in the hardest hit housing markets are providing assistance with home sales; closing costs, discounted entrance fees, etc • Greater focus on expense containment • Renegotiating terms with banks providing LOC/SBPA support

48. S&P’s Views & Sector Outlook • Near Term: Stable • Improved operations in early 2010 that flattened out • Marketing efforts that are starting to payoff in some areas of the country • Strong and stable management teams • Strong market position for most rated communities Page 15

49. S&P’s Views & Sector Outlook • Longer-Term: Stable • Cost issues persist (Can’t hold salaries flat forever) • Housing “recovery” could take some time • Deferred capital needs/growth plans may create near term financial stress • Access to capital has become more of an issue, and if you have access, at what cost?

50. Thanks and Questions