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Financial Trends in Behavioral Health Housing

There is no shortage of need for the services provided by AAFCPAs’ Behavioral Health clients who provide residential, clinical, and day services. Commercial businesses facing such opportunities would simply invest in supply to meet demand; however, the health and human services sector faces a myriad of challenges to grow, including capital financing and talent shortfalls.

Funding and costs to build are not in-line.

Federal and state governments provide opportunities for providers to expand and build new group homes, but the cost to design/bid/build is generally much more significant than the available public funding/financing. Agencies need to come up with the difference, and most do not have the cash on hand to make the co-investment. In most cases, a bank valuation and the amount it is willing to lend related to the development of a project is significantly less than the true cost to design, build, and rent out these custom homes. Often the gap can range between $400,000 and $500,000. This shortfall has caused many clients to elect to establish long term leasing arrangements with third-party investors/builders in lieu of building and owning said properties.

If you can finance a new home, can you staff it?

As the demand for direct care workers continues to surge, health & human service agencies find themselves competing for talent with peer agencies, private companies, hospitals, and universities. This challenge becomes even more difficult as the caregiving workforce is increasingly destabilized by a continued decline in real wages.

Within the publicly funded market, reimbursement rates constrict the ability of agencies to pay higher wages because these rates are typically set without regard for the actual, current costs of labor. In an attempt to address this issue, the Legislature enacted Chapter 257 of the Acts of 2008, establishing that pricing for social-service programs would be set by the Secretary of the Executive Office of Health and Human Services (EOHHS). EOHHS was charged with the responsibility for establishing rates of payment for social service programs which are reasonable and adequate to meet the costs.

Those of us familiar with Chapter 257 know the shortcomings related to the implementation of this legislation, including missed deadlines and failures to conduct biennial rate reviews. Unfortunately, contract rates have again stagnated and fallen behind labor force demands, new minimum wage trends, and the rising cost of providing health insurance.

What we advise:

Although certain rates are up for review in two of the next three years, AAFCPAs does not expect a specific near-term fix to reimbursement rate setting. We advise clients to continue to search for ways to diversify revenue streams, consolidate/realign homes to reach full census, habitually evaluate program health, and consider ways to collaborate with other peer agencies to share costs such as IT, HR and billing services.

Diversify Revenue Streams

As funding challenges persist, we expect a continued emphasis and increased investment in fundraising. Fundraising is the one source of income that has the potential to multiply the amount of money available for the causes that we care about so deeply.

In addition, some of AAFCPAs clients have generated new revenue streams by consolidating and sub-letting administrative space and leasing land/roof space for solar & cellular installations.

Evaluate Your Census

Many clients are strategically evaluating their residential census and consolidating/realigning homes to shift beds and employees without significant additional capital costs.  In some cases, AAFCPAs’ clients have expanded and diversified services at the request of DDS to include acquired brain injury (ABI) and Turning 22 community residences when consolidation leads to available inventory. The state has prioritized these services in the fiscal budget which will pave the way for referrals as beds become available.

Assess Program Health

The health & human services sector is a highly dynamic environment, and AAFCPAs advises our clients to periodically evaluate program health as well as the current internal and external environment as part of their ongoing strategic planning process. We provide clients with independent and objective strategic analysis of the current business environment as well as individual program health, with an eye toward expanding your capacity while maintaining long-term financial sustainability. In some cases, providers may benefit financially from discontinuing or outsourcing services that are administered at a significant cost to the organization with minimal impact on addressing the specific health and human services issues.

Consider Mergers/Combinations

Mergers are becoming a commonality to achieve economies of scale and improve the bottom line. We have advised many clients through strategic mergers/combinations, which allows both organizations to continue to serve constituents, all under one management, finance, and fundraising team. AAFCPAs advises clients to explore conversations with complimentary organizations to determine how you may achieve economies of scale and increase profitability. We facilitate these conversations and collaborations as appropriate and at the requests of our health & human services clients.

AAFCPAs specializes in serving the health & human services sector and understands the business challenges our clients face. We make it a point to know each client – their finances, their challenges, and their vision for the future. We help our clients grow, pivot, or reinvent by providing insight and access to our network gained through over 45+ years serving the nonprofit community to aid in the pursuit of long-term financial and programmatic sustainability.

If you have any questions, please contact Jeffrey Cicolini, CPA, CGMA at 774.512.4026, jcicolini@nullaafcpa.com.