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Managing Costs

In recent years, privately run nursing homes have proved to be a major growth area in the Irish economy.This is not surprising when one considers that of the 436,000 people in Ireland aged over 65, it is estimated that approximately 5% require long stay care.The indications according to the National Council on Ageing and Older People are that the percentage of people over 65 will continue to rise, with a growth of 14.8% being achieved on current estimates by 2021.

However, the most dramatic changes in the current nursing home environment have resulted from the unprecedented growth in the supply and quality of homes throughout Ireland. This expansion has been fuelled in part by the availability of attractive tax breaks and capital allowances.

Until recently the vast majority of homes have traditionally been small operations. However the current trend is towards larger purpose-built nursing homes. In a market where revenue growth is limited and with inflationary pressures on costs, this poses a number of challenges for established nursing home operators.

Our experiences of the nursing home sector have shown that the key to ensuring that a nursing home remains viable is the requirement for detailed and relevant financial information to assist the management team in making well-informed decisions. This is of particular relevance with regard to determining what price to charge existing and prospective residents and in terms of managing the home's operating cost base.

You as a nursing home operator have the power to control the amount of information available to you. The big challenge is to identify what information is important to you as an operator and to ensure that you get this information in a timely and accurate manner. The information requirements will vary between nursing homes, but there are some Key Performance Indicators (KPIs) which in our opinion are of particular relevance and should be collected regularly.

So, what Financial Information is Important to Nursing Home Operators in Managing their Costs?

Revenue and Occupancy levels

As stated above, the arrival of many large players to Ireland has resulted in the development of large purpose-built homes, many of which have access to international management experience and, in many instances, benefit from being part of a wider group offering. This increase in supply heightens competition in what is already an increasingly competitive market and has implications on occupancy levels and achievable weekly rates.

In 2005,the average occupancy rate nationally was 86. 1%, with the average weekly rate in the region of €640. However, noticeable variances on both indicators exist throughout Ireland. How your home performs relative to the above two critical KPIs can quickly provide an indication to the success or otherwise of your nursing home.

Staffing Costs

Staffing costs typically account for 57% of Nursing Home turnover and represent the single highest expense of the business. The worrying reality for many nursing homes is that staff costs have been increasing steadily in recent years.

In analysing the largest proportion of a home's cost, it is important to firstly break down staff costs into care-staff and non-care staff. Non-care staff includes catering, cleaning and laundry staff, therapists, maintenance, management, administration and reception staff.

Once the range of staffing costs accruing in a nursing home have been identified, the next step is to determine the current ratio of staff hours being utilised per specific category of resident and to benchmark these results with other nursing homes and minimum regulatory recommendations. However, when benchmarking staff costs, or any costs for that matter, it is important to compare with homes of similar size, resident mix and location due to the variance caused by these three factors. For example, the average hourly rates of pay amongst respondents throughout the country for nurses and care assistants was €15.67 and €9.25 in 2005, yet considerable variance exists on a county by county basis.

Non-Staffing Current Costs

After the cost of staffing, the largest single area of expenditure is likely to be food and daily provisions for the residents.Typically this category includes costs such as utilities, provisions, registration fees, grounds maintenance, laundry and patient medication. Food costs as a percentage of turnover range between 7.2% to 5.1% depending on the size of the nursing home, with larger homes enjoying some economies of scale benefits. In addressing non staffing costs the most effective method of analysis is to calculate costs on a "per resident basis".

Capital Costs

Nursing homes, particularly newer properties, involve a major investment and achieving an acceptable return on capital costs is becoming increasingly challenging. Capital costs, including the investor's and operator's return, account for the balance of care home fees. There are varying views as to what represents a reasonable return on capital with a figure in the region of 16% generally accepted as a good return.

Diversifying your product

In the current competitive environment, it is essential for nursing home operators to evaluate their cost base by identifying the key performance indicators and comparing these against historical data and best practice in the market. It is also as important for operators not to neglect trends in the market and changing consumer demands.

As specialist advisors to the Irish nursing home sector, BDO Simpson Xavier has worked with clients to assist them not only in terms of their financial and operational matters, but also with regard to helping them identify a number of current trends in the market, primarily along service offerings. In particular, we have noticed that a number of operators have begun to develop 'Retirement Villages' which provide a continuum of care from full nursing care to independent living for the elderly. Under this particular model, a resident's care needs are catered for irrespective of whether they are fully independent or require high levels of nursing care.The development of such villages on the same sites as existing nursing homes not only enhances and diversifies the existing offering but allows nursing homes to spread a number of their fixed costs across the entire service and achieve economies on non-staffing current costs.

Conclusion

The last decade has been a period of unprecedented growth for the Irish nursing home sector, with both the supply of and quality of homes throughout Ireland increasing dramatically. Current trends point to a period of change in the sector. This will be heavily influenced by the arrival of larger purpose-built operators entering the market who operate to strict financial bottom lines but who also bring a new offering to the market in terms of 'retirement villages' which serve to enhance the offering already existing in nursing homes.

From our years of experience, we have established that in identifying and managing one's costs efficiently, there is no need to presume that the quality of care is directly related to cost levels. Similarly, it is important to note that higher costs do not automatically indicate better care.

The key for nursing home operators moving forward is to recognise that an efficient analysis of one's costs supported by a continual smooth flow of information can provide the home with a competitive advantage in what is an increasingly competitive market and in the present climate of increasing professionalism.

BDO Simpson Xavier is one of Ireland's leading advisors to growing entrepreneurial businesses. The firm has, through its consulting department, developed extensive experience in the nursing home sector, providing both operational and strategic review services. In recent times, the firm has expanded its product offering to the sector and can now provide detailed advice and assistance with regard to new funding and business models.

Should you require further information on BDO Simpson Xavier, or on how we may be able to assist you and your business, please contact Tim O'Connor by email: toconnor@bdosx.ie or telephone 01 4700373.