10 TEACHING NOTE Mueller-O'Keefe Memorial Home and Retirement Village Strategic Planning in a Continuing Care Retirement Community William E. Aaronson TEACHING APPLICATIONS This case is intended for use in a strategic planning and marketing course or in a case studies course. It may be used in either a graduate health or long-term care administration-specific course. The case assumes some knowledge of long-term care organization. Specifically, the reader should be familiar with the concepts of continuing care retirement community, nursing home, personal care, and adult day care. Knowledge of such organizations as Area Agency on Aging and health systems agency is also assumed. Academically, students should have had coursework in organizational behavior, management of health services organizations, and health care financial management. If students are not prepared in these areas, a more basic analytical framework will need to be used. The case may be used in an organization and management of health services course to introduce the concept of strategic planning. It cannot, however, be fully analyzed at that level. It can also be utilized in a health care financial management course in studying financial statement analysis and working capital management. CASE SUMMARY Mueller-O'Keefe Memorial Home and Retirement Village existed in a relatively benign environment. Started as an old folks home at the turn of the century, it has This teaching note is taken from the long-term care management case study collection found in Cases in Long-Term Care Management: Building the Continuum, by Donna Lind Infeld and John Kress, published in 1989 by AUPHA/Health Administration Press. Used with permission. 59 60 Strategic Management managed to evolve and grow, largely through incremental decision making in response to immediate environmental needs. Nursing care needs became more important in the 1950s, and there was an increasing need for care of religious group members that was not being met. When a benefactor offered a sizable endowment, the home expanded to allow for the addition of nursing care and the admission of people who were not members of the Evangelical Free Church. In the 1960s, retirees found the home a nice place to build retirement cottages where they could be assured of future care in the nursing home. The retirement village continued to grow without planning or forethought. Roads and sewage lines were added in a patchwork pattern. The only attempt at developmental or proactive planning in the 1970s was a dismal failure. Thus, it is understandable that the board was reluctant to adopt a strategic planning posture. \"Seat of the pants\" decision making had served the home well throughout its history; however, the home suddenly found itself in an organizational life cycle period of decline. The board recognized both the organizational decline and the board's own inability to adjust. Principally, the decline was caused by an increase in unit costs resulting from aging buildings and demands for new programs that were not projected. The board recognized its shortcomings and decided to hire a consulting firm to develop a long-range strategic plan. Several board members were not sold on the idea and were unwilling or unable to move in any strategic direction. There were major problems with the lack of knowledge, experience, and judgment in matters of health care finance, planning, and development. Areas of expertise in patient care and operations had served them well in the past. The consultant, Steve Cantwell, ran into major obstacles. Although he believed that he was sensitive to the fit between strategic alternatives and internal capabilities, he was also driven to deliver a product. He was dealing with an organization that was used to incremental decision making and would have difficulty effecting major change. Consequently, options were limited to improvement of current services and minor adjustments in the service line. The strategic assessment Cantwell presented was comprehensive and more sophisticated than the committee could digest. Early in the process, the board asked that complex statistics be avoided in the report. If the committee and the administrator had difficulty dealing with strategic assessment, they would likely have even more difficulty implementing a strategic plan. The case closes at the point of strategic choice. Regardless of the actual choice, Cantwell is frustrated. He is uncertain whether the home will actually follow his recommendations. He is certain that if no action is taken, the home will face serious consequences in the near future. TEACHING OBJECTIVES The case is intended to develop an understanding by students of the way in which strategic planning proceeds. The specific objectives are to: 1. Understand the relationship between the expertise of governing boards and executive management and strategic planning posture. 2. Be aware of factors that contribute to incremental rather than developmental planning. 3. Examine the elements of strategic planning: mission, external and internal analysis, and choice. Mueller-O'Keefe Memorial Home 4. 61 Understand when outside help is required to assist with strategic planning and the difficulties in utilizing consultants. BACKGROUND For-profit corporations dominate the nursing home industry; the continuing care industry is dominated by not-for-profit, charitable organizations. Whereas nursing homes have proliferated throughout the country, the continuing care industry has been concentrated in a few areas, notably Florida, Pennsylvania, and Ohio. The concept is just now catching on nationally. The continuing care retirement community (CCRC) is a congregate housing and care setting for older adults that provides a range of services to its residents. The typical CCRC has cottages and apartments for independent retirement living and a nursing home for those who are no longer able to care for themselves and require that level of care. Originally, the life care concept implied that a person would turn over all personal assets to the community in return for guaranteed care for the duration of that individual's life. It was soon recognized that with increasing life expectancies, this contractual form placed the organization in a risky financial situation. As a result, the concept of continuing care has become the predominant form. This type of contract usually requires an entrance fee and a monthly maintenance fee. Entrance fees may be amortized over a determined period of time, and future care is paid for based on fund balances. Increasingly, communities are requiring the purchase of supplemental medical and long-term care insurance to ensure that care will be paid for in the future and personal assets will not be depleted. Residents are assured priority for care but not guaranteed care within the nursing center. The fastest growing trend among CCRCs is the development of personal care or assisted living units as a less costly and more acceptable intermediate step between independent living and nursing care. Frequently, as a result of deficits in activities of daily living (ADLs), older persons require assistance and supervision, but do not require the highly medicalized environment of a nursing home. These units tend to foster independence and may actually prevent nursing home utilization in retirement communities. Overuse of nursing care places the community at a higher level of financial risk. PROBLEMS AND ISSUES PRESENTED This case illustrates several deficiencies in the strategic planning process. The situation depicted is not all that uncommon, particularly among not-for-profit, religiously affiliated CCRCs and nursing homes. Management Planning Questions 1. What is the mission of the home? 2. Why might the board have been unable to articulate the home's mission? What other problems exist with this board? 3. What were the reasons for seeking outside help with strategic planning? 4. What internal factors inhibited the consultant from doing his job? 5. Why was \"seat of the pants\" planning so highly regarded? 62 Strategic Management 6. Identify the strategic planning elements in the consultant's approach. How does this contrast with the approach that the board might have taken without the help of the consultant? 7. Why did the consultant not recommend diversification or joint venturing strategies? 8. Discuss some potential consequences to this organization if strategic planning is not fully embraced. 9. What could Cantwell have done differently? 10. Additional information? Additional analysis? Additional data? Additional recommendations? Financial Management Questions 1. Were Polk's assumptions about working capital management valid? What type of approach would be preferable? 2. Based on a financial statement analysis, what is the financial status of the MuellerO'Keefe home? What recommendations should be made to the board? 3. What is the difference in the obligation of managers in life care and CCRCs? CASE ANALYSIS There are three levels of analysis to this case. The first deals with the organizational climate and its effects on strategic planning. The interface with the consultant should be reviewed at this level. The second level examines the strategic planning process. A third level focuses on the differences in approach between the consultant and the home. The consultant is approaching this problem from a rational organizational perspective and is disappointed when the organization does not act rationally. The analysis should be developed as follows: 1. Discuss the rational approach to strategic planning that should have been used. The class should proceed through formulation of objectives, environmental and internal analyses, development of alternative strategies, and end with strategic choice. 2. Analyze the factors that have inhibited this organization from utilizing such a process: 3. Faith in \"seat of the pants\" decision making Lack of sophistication of board and administration in this process Examine the utilization of consultants as an organizational growth strategy. To assist in this analysis, the study questions found under \"Problems and Issues Presented\" should be utilized as a guideline for discussion. It is recommended that the instructor take the students through the suggested exercise of developing a strategic plan based on the case and then analyzing the reasons that this rational approach is not always used. The discussion should emphasize the reasons why a rational approach to planning will be increasingly required by this organization. Mueller-O'Keefe Memorial Home 63 A major problem that should be immediately identified is that the home does not have a mission statement because the board has been unable or unwilling to agree on such a statement. It is evident from the administrator's comments, however, that there is an implied mission from which he has defined what the home is, why it exists, and who its constituents are. The administrator's statements are also problematic in that the special needs of the retirement village residents fall outside of the home's mission. Organizational objectives also have not been clearly defined. Yet, there are some clearly defined policies that reflect a well-recognized mission. The policy to not discriminate based on payer source, for example, reflects directly on the defined purpose and constituents of the home. As of 6 months later, the home is proceeding with plans to modernize and expand the facility. Instructor's Manual for Cases in Health Services Management, fifth edition, by Rakich, Longest, and Darr. Copyright 2010, Rakich, Longest, and Darr. Running head: MUELLER-O'KEEFE 1 Mueller-O'Keefe Case Study Jody A. Woodward University of Maryland University College MUELLER-O'KEEFE 2 Executive summary Steve Cantwell was hired to direct a long-range planning project for the long-range planning committee at the Mueller-O'Keefe Continuous Care Retirement Community. This committee was made up of members of the board of directors of the facility. There are problems to address in order to direct this project. The biggest problem is that while the facility seems financially sound, it is an accountant's nightmare. The second problem is the lack of a care bridge between independent living and nursing home total care. Recommendations are for hiring a CFO who is a certified public accountant experienced with long-term care, and increasing the monthly fee modestly along with renovating the personal care level to make it more amenable to the residents (Rakich, Longest, & Darr, 2010). MUELLER-O'KEEFE 3 Mueller-O'Keefe Case Study The case study of the Mueller-O'Keefe Continuous Care Retirement Community in Rakich, Longest, & Dar r (2010) requires the consideration of many facets. The challenges presented may not only impede the completion of the project, but can also derail any decisive action on the recommendations. Essential elements Mueller-O'Keefe is a non-profit church-affiliated Continuous Care Retirement Community (CCRC), faced with the need for some long-range planning. The long-range planning committee has hired long term care consultant Steve Cantwell to create a plan for the future to include new services and capital development. The long-range planning committee is a sub-committee of the board of directors. The chairman of the board, Mr. Polk, has distant experience as retail business owner; he is not a member of the long-range planning committee, but is opinionated about the project in various ways. The chairman of the long-range planning committee is Mr. O'Donnell. The CCRC administrator is Tom Clark, a long time friend of Mr. Polk and fellow member of the Evangelical Free Church. None of the board members are knowledgeable about long term care in general outside of Mueller-O'Keefe. The board members hired Mr. Cantwell as a consultant for long-range planning, yet Mr. O'Donnell said the board members were not solidly behind planning activities based upon a past bad experience with planning a project, preferring to \"fly by the seat of their pants\". The CCRC has been in place for over 100 years and has an excellent reputation for providing high-quality basic care. It has a fund balance of $5.6 million and no debt. Many generations of families have been residents and the CCRC has been the beneficiary of some wills from satisfied residents. The rates for the private residents are kept relatively even with Medicaid rates, and the monthly maintenance fees MUELLER-O'KEEFE 4 are by far the lowest rates in the area. This is based on the philosophy of the Evangelical Free Church, the church with which the CCRC is affiliated (Rakich, Longest, & Darr, 2010). Problems, issues and their magnitude There are numerous problems that are impeding any progress with the long-range planning project. First, the chairman of the board also is controlling financial decisions, is not using appropriate accounting measures. There is no record of the entrance fees in the statement, so that amount is unknown. Due to this practice, the facility's financial risk for resident care cannot be adequately calculated. It is not mentioned in the scenario whether or not any unused portion of these funds are refundable upon the individual resident's early death, only that they are depreciated over 12 years. Funds are all combined despite some funds having restrictions. There are fictitious entries for accounts payable. The payroll doesn't appear to be adequate for the nursing staff, let alone any other employees. Therefore, the accuracy of the financial statements is in question and the exact magnitude can only be imagined with unknown financial risk, false entries, lack of accounting for all deposited funds, and the combining of restricted and unrestricted funds. This will create much difficulty when the facility needs to grow or even maintain what it has. He also has the finance staff report directly to him instead of reporting to the administrator Tom Clark, as their structure requires. This places too much power in his hands as the chairman of the board. Second, there is not much available for the residents in the way of transitional care so the staff is being over-taxed by those residents in independent living who are declining and need more services. This is costing the facility more money than is available for this kind of care, and the aging of the independent living population will only increase the drain on the funds. The resident care and resident expenses are depleting the facility's reserves, and the amount has increased each year over the past three years. This secondary problem fuels the MUELLER-O'KEEFE 5 first problem as well, contributing to the overall magnitude of the facility's financial issues. Third, there is a mindset that organized planning is not how they do things due to a bad outcome with planning in the past, and they therefore prefer to \"fly by the seat of their pants.\" This mindset prevents forward thinking which is necessary for planning and growing. This is crisis management, not long-range planning, and could end up costing the facility more in the long run. Simply put, failing to plan is planning to fail. Fourth, the buildings will eventually need to be replaced due to poor construction and age, and additional room will also be needed for future growth. This requires long-range planning. If the committed can't agree to start moving forward with strategic planning, the CCRC will continue in crisis management. Fifth, the facility has expertise in treating those with dementia that is not yet being capitalized upon and there are fears that growth in this area would change the reputation of the facility despite the need. This is an untapped source of revenue for Mueller-O'Keefe. Sixth, there is no written mission statement for the facility. It is mentioned that everyone knows what the mission is, but it is not recorded anywhere that an outsider or visitor can see. Just saying that everyone knows the mission is inadequate. Each person may presume that everyone else thinks the mission is the same as they think it is. It is also mentioned that at one time, Mr. Polk tried to get a mission statement together, but could not reach consensus. This is proof that it is not safe to assume that everyone knows what the mission is. Mission statements are valuable as the starting point for all goals and strategic plans. This would go a long way in helping to unite the management and move forward, but sadly it has not yet occurred. Two most important problems and causation The most important problem at Mueller-O'Keefe is the handling of the finances. It is said that there is financial advisor and a bookkeeper who are supposed to report to the facility MUELLER-O'KEEFE 6 administrator on paper. Instead, Mr. Polk has them report directly to him. This is not appropriate for the facility's corporate structure; they are to report to the administrator. This gives him the power over the money as well as the power over the board. In addition, using \"creative accounting\" such as using a fictitious accounts payable entry in order to avoid a fine by Medicaid is risky. Mr. Polk bases his philosophy regarding financial management of a non-profit longterm care facility on an old for-profit retail business from the 1930s. While he may have been adept at turning a profit in furniture sales in the past and actually did turn around some of the finances of the CCRC facility, his experience was only in the for-profit arena. Seeing businesses go under in the 1930s due to a high debt burden has made him see debt as something to be avoided at all costs, and this philosophy is not held by the members of the long-range planning committee. He also admits not knowing how to use available funds or setting priorities. This is not the best picture of a treasurer or chairman. Another part of this issue is that Mr. Polk is very strong in voicing his viewpoint. As the chairman of the board, he should be listening as much as or more than talking. None of the members of the board have knowledge or experience with retirement communities outside of Mueller-O'Keefe. They don't understand that accurate accounting and strategic planning are crucial to the facility's survival. They also seem complacent about Mr. Polk's making decisions on a committee of which he is not a member. No one seems to be speaking up. The second major problem is there is not much available for residents between independent living and total care in the nursing home. While there are 40 \"personal care\" rooms, the residents say only a couple of them are nice. This is creating more than one problem for the CCRC. The residents in independent living are waiting until they need total care before transitioning to a different part of the facility. As they are declining, they are requiring more and MUELLER-O'KEEFE 7 more services to be provided by the nursing staff which is over- stretching the staff. It is also costing the facility more money to provide those services while the residents in independent living are not contributing to those costs. Another cause of this issue is that Tom Clark, the administrator, is placing personal feelings above the needs of the CCRC. Tom's personal feeling of not wanting to have the residents use their own funds as long as possible to prolong the time until they will need Medicaid are costing the facility in labor and services. The final cause of this is that since the board mindset is to fly by the seat of their pants or crisis management in decision making, they are not addressing the potential financial problems that will arise with the nursing home beds being full and the independent residents not wanting to move to the personal care rooms as they decline in health and instead, increase their demands on the nursing staff without contributing financially to their own care. Recommended courses of action and potential consequences The first course of action is to hire a certified public accountant (CPA) with experience in long-term care facilities to become the Corporate Financial Officer (CFO) of Mueller-O'Keefe. Financial planners, bookkeepers, and treasurers who are not CPAs are not fully educated in the day to day financial management of a CCRC and should not be CFO. A CPA will be aware of all rules and laws surrounding a CCRC and will adhere to the generally accepted accounting principles. This will help the board and upper management know exactly what money they really have to work with. The CPA can also help prevent difficulties with Medicaid and make suggestions regarding the financial decisions that make the most sense from a financial perspective. He/she could also help educate Mr. Polk about the benefits of having some debt, as well as provide recommendations for additional sources of funding for projects. O'Brian (2008) explains that the role of the CFO in health care is expanding to include innovation. This is just MUELLER-O'KEEFE 8 what the CCRC needs. If they do hire the CFO, they will have accurate financial reporting and will be compliant with the financial rules and laws. They will have an expert on hand to deal with the tough financial questions and to help them find sources of funding for growth, as well as to advise them on the best way to protect and grow their funds other than investing in the stock market, which can be volatile at times. Should they not hire a CFO, thinking that Mr. Polk is good enough as acting the role of CFO, the CCRC is destined to continue in the current financial practices which could cause problems of a catastrophic nature. By participating in Medicaid, they are subject to audits by the state. The auditor will want to see what the continuous accounts payable amount consist of, and there would be nothing to show. The auditor will want to see where the entrance fees are, and there would be nothing to show. The CCRC could lose their certification, which would close the nursing home except for those paying out of pocket. They could be prosecuted for fraud and severely fined. This would all be public record and potentially hit the media. The catastrophic fallout would affect every resident of the facility, independent or not. The next course of action involves bridging the gap between independent living and total care. Because the independent living residents are not going to personal care, they are becoming a significant drain on both financial and staff resources. The recommendation would be to use some of the available funds to renovate the existing personal care rooms to make them more attractive to the independent living residents currently requiring extra services. A new building or addition would be even better, as this would avoid having to do it again when the current building deteriorates further. They would need to involve some of those residents in the process to find out what they are looking for in personal care. This will come at a financial cost to the residents, but will allow them better assistance than just hoping that a neighbor has time to help MUELLER-O'KEEFE 9 them or that there is enough staff at the moment to treat them. In addition, the CCRC needs to make a modest increase in the monthly fee to help cover some of the costs (but still be less than the other nearby facilities to maintain the competitive edge they seek). Raising the fee without renovating personal care would not be effective in bridging the gap and the personal care rooms would still be empty. If the CCRC accepts this recommendation, they will increase revenue and ward off financial difficulties. In addition, they will be able to keep the staff happy that they are not being overworked as more independent residents will move to personal care. There will be a greater flow that would allow for new residents to move into independent living as the prior resident moves to personal care. The gap will be bridged. If Mueller-O'Keefe does nothing to bridge this gap, including keeping the monthly fees where they are, the funds will be quickly depleted and the staff will be continuously over-worked. Josefsson (2012) shows that when nursing staff is feeling pressured; there is a higher rate of sick absences. Martin (2015) points out that when there are staffing shortages, care quality is affected overall. This could negatively impact the CCRC's outstanding record of providing excellent care. The financial impact would be a continuing downward spiral as the residents wait until they need total care in the nursing home and require more and more services without paying extra for them. .Anticipated challenges to implementation There will be challenges implementing these changes. Hiring a CPA to take over the function that Mr. Polk has been doing all of these years will certainly be met with resistance as he may see this as a personal attack on his abilities as treasurer. In addition, his shortcomings will become visible to all, and no one likes to have their shortcomings discussed. Another challenge is that no one on the board is knowledgeable about CCRCs in general, so they are unaware of the importance of this change from a legal perspective as well as a financial MUELLER-O'KEEFE 10 perspective. Also, there is still the problem of Mr. Polk being the most vocal and everyone else being passive. It was stated in the scenario that Mr. Polk was democratic; for this action to be implemented, everyone will first need to understand how urgent and important this is to do, and will need to speak up. This is critical because he is the chairman of the board and would need to approve the hiring of an executive. There may be some concern about paying for the CFO as well. Last but certainly not least, unless the CPA is an Evangelical Free Church member, he could be seen as an outsider telling them how to run THEIR church's home. Only one member of the board is not a member of the church. This is where a mission statement would be very important, as any new employee would have to accept the corporate mission. For the second action implementation, the first push back will be from Tom Clark who does not want the residents to deplete their savings and have to go to Medicaid any sooner. While this is a noble and generous thought, this is not going to keep the CCRC in business. The director of nursing and the director of social services both state that residents are moving into the CCRC older and sicker, this means they are requiring more services sooner. This will speed up the downward spiral of the financial picture. The second push back will most likely be from the residents themselves. Shippee (2009) finds that residents often don't want to move to another level because it puts their decline and future demise in front of their faces. They are reminded when seeing others at these higher levels of care that they are failing too. They feel disempowered by this. This is why the residents need to be involved in the process. The third challenge is that this action involves long-range planning. It has been made clear that the mindset is to not plan. This is will definitely be the hardest hurdle to overcome. MUELLER-O'KEEFE 11 Performance monitoring In order to make sure these recommendations are working, monitoring must take place. With the first action, it will be evident that the recommendation has been followed when a CFO, a CPA with long-term care experience, is hired. To make sure the CFO is doing what he/she is supposed to do, an independent audit should be requested after the CFO has been there for about one year to 18 months. He/she would have had time to get their arms around everything and have it on the correct path. There should be no fictitious entries, restricted funds would be separated and indicated as such, the salaries and other entries would be accurate, and the financial reports would include the entrance fees and their depreciation. There would be knowledge of the financial risk of each resident. The chairman of the board would no longer be involved in the day to day finances of the CCRC and the CFO would be reporting to the administrator as required by the corporate plan. The CFO would have made sure that the trusts were moved to low risk funds, not the stock market. Performance monitoring in the second action is more challenging. The project manager will need to make sure that there is movement of the residents from independent living into personal care. There should be a decrease in the number of health related calls to the staff from the independent residents. The care costs for residents may actually increase due to the number of residents utilizing the personal care level, but the revenues should increase greatly to more than cover these costs and halt the drain on the financial status of the CCRC. The quality of care should remain excellent as the staff is not being called upon as frequently to provide care outside of their normal working schedule. The increased use of the personal care level may actually help to allow the two beds in the nursing home to remain open for residents to use when needed. MUELLER-O'KEEFE 12 Future considerations for Mueller-O'Keefe CCRC It was stated that Mueller-O'Keefe has a staff with expertise in providing care for those with dementia and the board has an interest in expanding in this area. The administrator Mr. Clark does not want the CCRC to be considered a mental health facility. He is not aware that many elderly people, regardless of whether or not they have cognitive issues, experience mental health issues as they deal with the changes in their function levels. Therefore, the CCRC is already dealing with mental health issues. He does need to pay attention to what the board is saying, as not only are the baby boomers aging, the number of people with dementia who will need care is increasing. The number of people with dementia will multiply by two every 20 years (McGill, 2016). Therefore, the long-range plan should include creating or building a part of the facility dedicated to caring for those with dementia. This would also increase the revenue of the CCRC and set them apart from the other facilities in the area. Conclusion While there are many problems and issues with Mueller-O'Keefe and the board of directors and the long-range planning committee, two important actions of hiring a CFO who is an accountant with long-term care experience, and bridging the gap in the continuum of care will go a long way in preserving the excellent reputation of the CCRC, while helping them prepare for growth. There will be challenges in implementing these actions, but they can be overcome with education of the board about CCRCs, laws and regulations, and the need for a continuum of care. Encouragement to step out of their mindset box will also help them move forward. Growth of the CCRC will definitely be needed as more baby boomers age and seek a retirement community to call their home. The board and management need to make sure it is still there when the baby boomers are ready. MUELLER-O'KEEFE 13 References Josefsson, K. (2012). Registered nurses' health in community elderly care in Sweden. International Nursing Review, 59(3), 409-415. doi:10.1111/j.1466-7657.2012.00984.x Martin, C. J. (2015). The effects of nurse staffing on quality of care. MEDSURG Nursing, 24(2), 4-6. McGill, N. (2016). Experts: Number of people with dementia worldwide expected to rise. American Journal of Public Health, 106(1), 9. O'Brien, M. (2008). Leading innovation in a risk-averse healthcare environment. Hfm (Healthcare Financial Management), 62(8), 112. Rakich, J., Longest, B., & Darr, K. (2010). Cases in health services management (5th Ed.) Baltimore, MD: Health Professions Press, Inc. Shippee, T. (2009). 'But I am not moving': Residents' perspectives on transitions within a continuing care retirement community. Gerontologist, 49(3), 418-427. doi: geront/gnp030