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Healthcare Briefing
June 2010
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In continuing our commitment to developing strategic alliances with operational experts in sectors we believe face significant challenges, we are delighted to be working with Healthcare Management solutions. Care homes seem to be coming an increasingly frequent topic of conversation – here, Tony Stein sets out why this may be and, more importantly, what to look out for and how we can help.
His experience includes working on a number of care home assignments.
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It used to be the case that if you ran care homes, you could be guaranteed bad press from the media who took a rather cynical view that all were in the industry happily to make money by exploiting the vulnerable in society. Certain journalists loved to provoke outrage in order to sell papers.
Since the credit crunch, life has been slightly easier with the banking sector receiving some media attention.
We could debate all day whether the care home sector was, is, or will be a good place to invest but with the fall in property (and business) values, banks are often faced with having debt, mezzanine funding and even a speculative, equity position.
Before I depress you all too much, we need to re-visit where we really are.
- You are experiencing a degree of exposure in the long-term care sector
- You have borrowers with problems (nothing new here)
However.. .
- We have an ageing population
- Unless compulsory euthanasia becomes a firm government policy (not a vote-winner), we have to find a way of caring for our elderly
- We have a diminishing working/tax-paying population therefore it is highly unlikely that people will begin caring for their elderly relatives at home
- Care homes are the most cost-effective and efficient way of delivering long-term care to those in need
One way or another, the country needs care homes. This makes it a pretty good long-term proposition.
Care home management, however, is not easy. If there is one thing that I hope you take from this article, it’s that you can’t run a care home group just because you’ve shown yourself a brilliant entrepreneur/CEO/CFO or had a successful ice cream business.
Some tough requirements
The pressures faced by operators are manifold and complex. Delivering safe, high quality care services is difficult and operators are reliant upon a willing, trained, caring, workforce usually paid barely more than the National Minimum Wage. Staff work in an environment which is physically demanding and often with a challenging client group whose needs are varied and complicated. Those they are delivering care to are often unhappy to be in a home, resentful of having lost their independence and willing to demonstrate this to those around them – the very workers there to deliver their care.
Constant training, assessment, appraisal, monitoring and management are required to ensure that their frustrations and fatigue don’t result in incidences of client abuse.
The business is highly regulated -quite possibly the most highly regulated there is. The service must meet the requirements of the CQC, the Environmental Health Office (EHO), the contracting authorities (Local Authority or LA) and the Primary Care Trusts (PCT) among others, as well as conforming to the usual raft of legislation governing employment and Health and Safety (Fire Regs, HACCP, PAT, LOLER etc).
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Unless the service is blessed with a high proportion of private fee paying clients, the services are delivered in an environment where the LA dictates the price that is paid, and the various regulators determine the way that service is run and, to a large extent, the resources that are used to deliver it. These two are often at odds i.e. low fees but increasing service standards demanded. All indications are that in the April 2010 fee review, most LAs are advising a 0% increase and some Primary Care Trusts up to 5% decrease in fees.
When problems arise
In the first instance, let’s look at those clients that aren’t performing well.
The kinds of problems that you’re going to come across in homes run by businesses in financial difficulty are:
- A basic lack of any information -financial or operational
- Conflict with Regulators for ignoring recommendations and requirements or because of current non-compliance
- Possible poor reputation, low occupancy, maybe even a stop on admissions
- A demoralised and de-motivated workforce
- Poor quality manager or even a manager vacancy
- Arrears of wages
- Inadequately trained workforce
- High agency usage
- A lack of appropriate equipment
- Assets in a poor or dangerous condition (building and fixtures & fittings)
- Large numbers of leased assets
- Illegal overseas workers
- Problems with obtaining basic supplies from creditors/suppliers
- Unresolved complaints, incidents covered by POVA (Protection of Vulnerable Adults)
- Issues with tissue viability (pressure ulcers etc), hydration, continence management, malnutrition, accidents, allegations of abuse
- Inadequate incomplete or erroneous care files
- Missing clients monies and valuables
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“For care homes to Succeed, you need more than a low LTV or a well structured deal. You need to know what they’re doing.”
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Many of these problems have been evident on several of the assignments we have worked on with Baker Tilly in recent months.
So, what can you do?
Act quickly
If you think there’s a problem, there probably is. Don’t trust to luck or hope that everything will be OK. When a borrower is in trouble, you’re the very last person they’ll want to share that with. Borrowers hide the reality for many reasons. Denial. Shame, that they can’t cope. Because it will prohibit them doing that one more deal which will salvage the business.
Don’t hesitate to get a third party report to confirm what you’re being told. The added value to the client will be pointers on how to improve the business or be more efficient and therefore be more profitable- everyone wins. If a problem can be identified early, more expensive consequences can often be avoided.
Consider an independent view of the care home
This way you’ll know whether there are any specific issues that he borrower hasn’t considered or hasn’t the expertise to deal with. As well as a thorough audit of the service, you can get a detailed schedule of all the issues that the borrower should deal with and the timescale that applies. This will enable you to follow up, monitor progress and gain confidence that the borrower has the right skills and controls.
Get an independent report on the management team
Have they the relevant experience, the right mix of skills and the resources to make the business a success or have they just got a desire to invest in long-term care and a good story to tell?
Check out the systems
Will they be able to control the basics- staffing, agency, billing, suppliers and client personal monies. Do their systems produce timely and accurate information and flag up KPis to enable management to focus their resources most efficiently? Will you, as lenders, have regular access to the management information? If you do, will you be comfortable that it properly reflects the business performance?
For care homes to succeed, you need more than a low LTV or a well structured deal. You need to know what they’re doing.
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Focus on value
Often, it’s the cost of recovery action that gets the focus. In reality, only by getting to grips with issues such as admissions bans, poor reputation, regulatory breaches or staffing levels, can the business be turned around and improved. Values are based on profitability. To improve the final values you have to know how to run homes well.
Understand your risks
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“If you ask around, there could only be one thing worse than a banker and that would be a banker running a care home!”
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it’s not simply your balance sheet that’s at risk here. The reputation of the bank is also on the line. If you have to take enforcement action, you need to know that you’re not going to be on the front pages of the tabloids for putting vulnerable people at risk through your insensitive actions. Trust me, sympathy is in very short supply these days.
Your friendly professional recoveries team will be able to provide you with a lot of financial information. They will be able to advise you of your options and to a certain extent, the likely financial outcomes but what about the service, the underlying business? Does the management team have the requisite experience and expertise to manage the business properly? Is there a risk of some catastrophic failure resulting in the closure of the business by the CQC I Care Commission or the withdrawal of clients by the Local Authority. What expenditure over and above the daily working capital requirements needs to be made to ensure safety and compliance?
The value of your security I needn’t remind you, lies in the ability of the home to generate a healthy EBITDAR – always difficult without any clients!
For this latter assessment, you need to involve people with experience of running homes. You need people with a detailed knowledge of the regulatory requirements, with experience of dealing with regulators and contractors, and with a fundamental understanding of the needs of the clients.
Restructuring
Stabilising and restructuring the business in or out of a formal process.
Options Analysis
Recommendations as to options and evaluation of potential outcomes.
Final word…
A care home is a massive responsibility. it’s not a lock it and leave it business. Over the years the directors and staff of Healthcare Management Solutions have been responsible for literally tens of thousands of elderly people in hundreds of homes across the UK. it’s what we do, in fact, it’s all we do.
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Tony Stein is Managing Director of the business turnaround consultancy, Healthcare Management Solutions.
Healthcare Management Solutions complement the broad range of Restructuring and Recovery services offered by Baker Tilly.
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How Baker Tilly and Healthcare Management Solutions can help
We have expertise gained over many years and in operating 350 care homes in the following areas: Finance and Financial Administration:
- Budgeting and forecasts
- Cash-flow management
- Liaising with banking partners
- Monthly reporting of P&L with accurate management accounts
- Development and management of Capital Expenditure budgets
- Debt management
- Improving profitability
Operations:
- Staffing and staff management
- Recruitment and retention of competent staff
- Staff modeling
- Managing and reducing supplier cost
- Reducing overheads
- Managing utility costs down
- Risk assessment
- Policies and procedures
- Training and development
- Management of discipline
- Management of vulnerable adults issues
- Under-performing homes recovery
- Improvements in performance and profitability
- Quality Assurance and improvements in standards
- Close partnership working with CQC, Scottish Care Commission and Social Services departments
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