Erosion in margins a worrying trend

We act for a significant number of clients in the healthcare sector and in particular nursing home operators. There is no doubt that there has been significant reduction in the margins of certain operators over the last number of years. As part of our annual audit/accounting process, or when preparing for NTPF negotiations, we complete a financial analysis for our clients. This analysis would review the performance of the nursing home, often since the commencement of the Fair Deal Scheme in 2009. It has become very apparent when analysing this financial information that there has been significant erosion of operators’ margins over the last number of years. Often the extent of this fall in margin comes as a shock to the operator who has not been critically reviewing this information on a regular basis.

Increasing costs

Increasing wage costs are the primary driver of this drop in margin. Initially the shortage of nurses, and thereafter the shortage of care staff, led to increases in costs. But now that the economy is on a much stronger footing and the recession is over, there is significant pressure on nursing home operators to give pay rises.

Operators are also experiencing increasing rates, with revaluations leading to increases in rates in almost all cases. Insurance costs have been increasing, doctors are looking for fees to visit nursing homes, and aging nursing homes require increased spending on repairs and maintenance. All costs are increasing, and this is putting pressure on margins, which in turn puts pressure on operator’s ability to make profits and service debt.

Income

The ability of nursing home operators to increase their income is often limited. With a significant portion of nursing home beds procured by the state through Fair Deal, and with negotiations often taking place only every couple of years, the ability of operators in increase their fees comes only periodically. Ancillary charges are required to cover services not covered under Fair Deal. However due to media attention in recently times these charges are often difficult to increase. Also many nursing home operators are operating at close to full capacity, and therefore the income is limited to the bed capacity of the nursing home.

Impact

Reducing margins impact businesses in a number of ways, some of which are outlined below:

1. Reduced profitability which leads to difficulty in achieving banking covenants and servicing debt.
2. Inability to retain staff in the face of stiff competition from other operators, state run facilities and other employers in alternative industries offering higher wages.
3. Difficulty in maintaining their facilities in what is a very capital intensive industry with operators constantly upgrading their facilities.
4. Reduction in value of the business when often the only reliable way of valuing a nursing home business is on a multiple of earnings.
5. Difficulty in meeting HIQA demands which often require significant increase in capital expenditure.
6. Reluctance of new operators to enter the market with high build costs and low margins as noted above. This is very concerning considering the aging demographic that’s projected to increase considerably over the coming years.

Conclusion

The erosion in margin in a significant number of nursing home operations is very concerning for the reasons set out above. It is critical that operators monitor their financial performance on a regular basis. It is surprising the numbers of businesses we come across that don’t regularly review their financial information and are shocked at the extent of the erosion in their margin over a period of time. Only through constant review can remedial steps be taken to deal with some of these issues in a timely fashion. Some tips on how to deal with this reduction in margin will be covered in my next article in BDO Knows Healthcare.