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In the ever-changing health care environment, the accuracy and effectiveness of financial forecasts face increased scrutiny and questioning from health care entity boards and management teams. 


As a result, BKD has developed a 3-part series to address the most common mistakes in financial forecasts prepared by health care entities.


In this third and final article, we address issues organizations have in aligning forecasts with their overall strategic mission and communicating the forecast to the necessary individuals. 


Part I addressed mistakes related to the effect of complacency on the forecasting process, while Part II examined mistakes related to maintaining consistency among forecast assumptions.


Some organizations think of annual budgets or forecasts as a routine, check-the-box procedure that must be performed each year but never fully utilized. In addition, some management teams get stuck in the details and overlook implementing the forecast as part of the organization’s overall plan. 


Making any of the mistakes outlined below decreases the accuracy of any forecast and may lead to difficult-to-explain budget-to-actual variances next year:


Disconnect from Strategic Plan


Successful organizations often employ a long-term strategic plan, especially when planning for major additions or renovations, changes in services offered, etc. In preparing a forecast, consider all aspects of the strategic plan. 


Failing to incorporate the strategic plan creates confusion as to which plan has higher priority. For example, if one of your organization’s primary goals is to increase orthopedic services to serve the community’s aging population, management should estimate the potential impact of such changes to allow for future comparative analysis.


Not Involving the Right People


While forecast preparation often falls to the finance department, financial results often are driven by individuals in other areas of the organization. 


Make sure those charged with the execution of the plan have input into the forecast and buy into the assumptions used. For instance, board members should be involved in significant decisions, e.g., issuance of new debt or major capital expenditures, while medical staff should be involved in patient volume forecasts. 


In addition, each department should provide input to a certain extent to allow for buy-in and increased motivation to achieve the forecasted results.


Not Holding Individuals Accountable


Once the right individuals are involved in the forecast, they should be held accountable for future results. Depending on the organizational structure, make sure at least one person is responsible for each major assumption included in the forecast. 


For example, department heads often are responsible for monitoring department expenses, while members of the executive team may be held accountable for larger strategic changes.


This gives members of the management team a specific focus rather than everyone trying to manage everything at once.


Not Communicating Results


Although most organizations prepare some variety of budget or forecast, many do not fully use it throughout the year. If those expected to follow the budget aren’t aware of monthly or year-to-date results on a timely basis, they cannot alter future decisions to better align with the forecast. 


To avoid this, prepare regular reporting packages, typically on a monthly basis, showing budget variances. To make it even more useful, include additional narrative explaining the main reasons for any variances. 


For instance, an increase in salary expenses can be explained by increased overtime that month, which was caused by increased patient activity and higher revenues.


It is imperative to consider how the forecast fits into the organization’s overall strategy and management structure for it to be used successfully.


Making sure the appropriate individuals are involved both on the front end, with the determination of the forecast assumptions, and on the back end, when the assumptions are actually implemented, improves the accuracy and achievability of the forecast. 


Lastly, making sure to communicate actual results compared to the forecast on a timely basis will enable management to course-correct throughout the year and make any necessary adjustments.


This article was originally written for BKD, and is used here with permission.

In an ever-changing health
care environment, the accuracy and effectiveness of financial forecasts have
faced increased scrutiny and inquiry from health care entity boards and
management teams. 

As a result, BKD
has developed a 3-part series to address the most common mistakes we see in
financial forecasts prepared by health care entities. 

In Part II,
we examine common mistakes related to maintaining consistency among forecast
assumptions. Part I addressed mistakes related to the effect of complacency on
the forecasting process, while Part III will cover aligning the forecast with
the entity’s overall strategic mission.

For many health care
entities, the budgeting and forecasting process is completed over several
months as the management team gathers input from department heads and other
parties. Throughout this arduous process, it is easy to get lost in the details
and forget the big picture. 

Furthermore, department heads may provide input
without knowledge of all other assumptions, leading to a final forecast that
includes assumptions inconsistent with one another. 

Specifically, consider the
following common forecast oversights:

Lack of a Market
Assessment  

In addition to simply analyzing historical volume trends for the
entity, management should complete an overall market assessment of the service
area. Knowing the service area’s demographic trends can help management
determine volume forecasts. 

For instance, many rural hospitals face decreasing
populations and declining inpatient use rates. To keep patient volumes steady in
this scenario, the entity would need to increase its market share. 

However, the
opposite also is true, as an increasing population may help an entity sustain
increasing volume levels without increasing market share. 

Disconnecting Revenues and Expenses  

Once the market assessment and
volume/revenue forecast are completed, management should ensure the expenses
necessary to support any changes in revenues are included in the forecast.
Staffing costs typically are the largest cost incurred by a health care entity,
and these costs should be evaluated in comparison to expected revenue changes. 

Management can evaluate trends in ratios compared to industry benchmark amounts,
including salaries and wages as a percentage of net patient service revenue and
full-time equivalent employees per adjusted occupied bed. 

In addition, analyzing
the fixed and variable portions of expenses becomes essential as volume changes
are implemented into a forecast.

Ignoring Debt Covenants   

Management should ensure required debt covenant calculations, such as debt
service coverage or days cash on hand, are incorporated into the forecast. 

In
addition to knowing the minimum levels required, management also should
incorporate a higher “target” level for any debt covenants to allow for a safety
cushion. If the forecasted results approximate the required covenant level, an
unexpected event -- even if relatively small -- could send management reeling for a
response.

Ignoring Cash Flow Budgets  

Often, management
teams fall into a trap of preparing a forecast to address the statement of
operations, but ignoring the statement of cash flows.  

Although preparing a
full statement of cash flows is more cumbersome, “cash is king,” and it should
never be ignored when preparing a forecast. Balance sheet items could have a
large effect on cash flows, such as debt service requirements (including
required reserve funds), capital expenditures, pension requirements and working
capital changes, among others. 

In addition, for capital projects that include
additional debt, it is imperative to evaluate the useful life of the asset
driving Medicare reimbursement compared to the term of the related debt, as the
entity may end up in a situation in which it will be making debt payments in the
future with no associated Medicare reimbursement.

In
summary, management should consider how its forecast compares to the trend in
recent historical years. Management should be able to qualitatively and
quantitatively summarize the key factors causing any major fluctuations and
should consider implementing a “1-time items” summary to disclose to users of
the forecast how significant nonrecurring transactions affect year-to-year
trends.

While avoiding the mistakes discussed above can help
improve the forecasting process, these represent only a sliver of potential
oversights management teams make in the forecasting process. Refer to Part I,
discussing the effect of complacency on the forecasting process, and look for
Part III, discussing the alignment of the forecast with then entity’s overall
strategic mission.

The full version of this article appears on BKD. This version is used here with permission. 

On March 26, Rep. Marsha Blackburn (R-TN) introduced the Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act of 2015 (H.R. 1673), a bill to redirect profits by Government Sponsored Entities (GSEs) Fannie Mae and Freddie Mac from the U.S. treasury to a reserve fund to cover any losses incurred by the GSEs in the event of another housing downturn. 

The bill has been referred to the U.S. House of Representatives Financial Services Committee. 

As of the end of 2014, Fannie and Freddie had paid a total of $227 billion into the Treasury, almost $40 billion more than they were provided under the “bailout.”  

LeadingAge will track this legislation in conjunction with coalition partners to ensure the current funding streams for the National Housing Trust Fund (NHTF) from GSE profits is protected. 

To date, the NHTF is the only source of affordable housing development for very low-income households. 

On April 16, The U.S. House of Representatives Financial Services Subcommittee on Housing and Insurance held a hearing on “The Future of Housing in America: Increasing Private Sector Participation in Affordable Housing.”

Subcommittee Chair Blaine Luetkemeyer (R-MO) wanted to explore how private investment could address the growing affordable housing problem. 

Shiela Crowley, executive director of the National Low Income Housing Coalition (NLIHC), told the committee that “it is possible to end homelessness and the shortage of affordable rental housing in our country without costing the federal government 1 additional dollar.” 

Witnesses James Evans, director of Quadel Consulting Services, and Brad Fennel, senior vice president of WC Smith, a property management and development company, made it clear that they did not believe the private sector would invest in affordable housing without federal resources.

Ranking Member Emanuel Cleaver (D-MO) cited the increased number of low-income renters that joined the rental market since the economic downturn. Rep. Maxine Waters (D-CA), ranking member of the full Financial Services Committee, who has made increasing affordable housing and ending homelessness a priority, expressed interest in consolidating Community Development Block Grant (CDBG) program and the HOME Investments Partnership program funds into housing serving extremely low-income households.

Financing for Licensed Healthcare Facilities under the HUD 232 Program is accessible as ever. 

The once dreaded queue -- the line of submitted applications for mortgage insurance pending review from HUD -- has been all but eliminated with only a handful of transactions waiting for assignment. 

This means that based volume in November 2014, an application submitted to HUD for review would be assigned to a HUD underwriter in approximately less than a month. 

With interest rates near historical lows, now is a great time to obtain HUD mortgage insurance, according to a report from Ziegler.

Sims Mortgage Funding, Inc. (SMF) closed in September a $1,800,000 HUD-insured Section 223(f) loan for the AuSable Valley Apartments, a Section 202 elderly project located in Fairview, MI.  

AuSable is owned and managed by Wellspring Lutheran Services, a not-for-profit organization that operates approximately 19 communities in Michigan serving over 2,600 residents.  

Wellspring provides affordable housing, home care, hospice and grief support, independent and assisted living, memory care, short-term rehabilitation, and skilled nursing care.

AuSable was constructed in 1981 and consists of 60 one-bedroom apartments in a single-story structure containing approximately 47,500 square feet.  

It is part of a 90-acre senior housing campus that includes attached condominiums, independent living residences, and skilled nursing care.  

The sponsor had three basic goals in pursuing the recapitalization:  

 

  1. Ensuring that affordable housing units would continue to be available on a long-term basis.

  2. Financing a series of moderate improvements to the property that would improve accessibility, enhance resident comfort and increase occupancy.

  3. Generating a developer fee that would provide additional organizational resources that could be applied system-wide.

 

These goals were met through the Section 223(f) loan, which was underwritten at 90% of the property's fair market value and features a 35 year, fully amortizing term.  

Wellspring now will be able to meet one of their core corporate goals of providing affordable housing to low and moderate income elderly for years to come.   

One of the old adages of political advocacy is the importance of strength in numbers. That’s why LeadingAge and the Retirement Housing Foundation (RHF) are working together to make sure Congress stands up for affordable housing.  

RHF, one of the nation’s largest non-profit providers of housing and services for older Americans with 175 communities nationwide, has long supported the preservation, funding, and expansion of affordable senior housing.  

RHF leaders and staff often engage with their elected officials and invite them to events at their communities, such as the opening of the new Las Alturas community in Los Angeles later this month. 

A Housing Advocacy Team Effort

Recently, RHF has also been amplifying LeadingAge’s legislative calls to action by asking their 2,800 staff across the country to contact Congress in support of our shared policy priorities including increased federal appropriations for housing and strengthening the low-income housing tax credit.  

As a result, hundreds of RHF employees have helped LeadingAge deliver more than 5,000 emails and letters to members of Congress in the last 3 months in support of affordable senior housing! 

This important effort has been spearheaded on the RHF side by Chris Ragon, RHF’s director of communications. She notes, “We have received a positive response from RHF staff about how easy the whole process is to contact members of Congress through LeadingAge.” 

LeadingAge is grateful for such a successful partnership. 

“LeadingAge members are truly our best lobbyists," said Niles Godes, LeadingAge’s senior vice president of housing and capital. "The voice of members like the Retirement Housing Foundation is critical to helping us expand the world of possibilities for aging, and to advocating for older Americans in need of affordable housing."

Future Housing Advocacy Efforts

Going forward, LeadingAge and RHF will look into expanding this partnership to include RHF’s more than 19,000 community residents in LeadingAge’s advocacy email campaigns. 

“We have some rabid residents when it comes to advocating for affordable housing and services for seniors,” says Ragon, “And, they want to participate in those email efforts, too.” 

Strength in numbers, indeed!

For more information on how your organization can partner with LeadingAge to support aging services, please send an email to Tommy Goodwin, LeadingAge’s director of member advocacy, at tgoodwin@leadingage.org.

On June 5, the U.S. Senate Appropriations Committee approved a fiscal 2015 appropriations bill combining funding for the U.S. Department of Housing and Urban Development (HUD) with a few other federal agencies. 

The bill provides the same level of funding for Section 202 and Section 8 that the U.S. House of Representatives included in its version of the bill:

  • $420 million for Section 202 housing, a $36.5 million increase over fiscal 2014
  • The Section 202 funding includes $350 million to fully fund all annual project-based rental assistance contract renewals and amendments.
  • $70 million is provided for service coordinators.

No new money was provided for the new housing with supportive services demonstration program. However, the Senate Appropriations Committee included language in its report on the bill allowing HUD to use remaining 2014 funds, residual receipts, collections and unobligated balances to keep the demonstration program moving forward. 

This language was more favorable to the demonstration program than the language of the U.S. House of Representatives' version of the spending bill.

Larry Minnix sent the following message to every senator in support of the language in the Senate Appropriations Committee's report:

On
behalf of LeadingAge’s 6000 not-for-profit aging services providers and the 4.5
million persons we serve, I am writing to urge you to support the Section 202
demonstration project as reported out in the Senate THUD bill and to reject the
restrictive language in the House bill.

The
senior homeless population will increase by 33 percent by 2020 and more than
double by 2050 according to the National Alliance to End Homelessness. Our
members with Section 202 and 236 properties have tens of thousands of people on
their waiting lists who desperately need affordable, supportive housing. The
Section 202 rental assistance demonstration authorized in FY14 is a critical
step towards meeting our growing demographic needs by creating a
"demonstration program to test housing with services models for the
elderly that demonstrate the potential to delay or avoid the need for nursing
home care." LeadingAge has worked closely with HUD and non-profit
developers on this demonstration.

While
the House's FY15 THUD bill seeks to severely restrict the demonstration, the
Senate bill expressly urges maximum flexibility to test a new, workable model
of supportive housing in a close partnership with the states. I am writing to
urge you to maintain this flexibility in the final Senate bill and throughout the
conference process with the House bill.

It
is essential that Congress support HUD’s efforts implementing the Section 202
demonstration, which can provide a path toward serving the housing and health
care needs of low-income seniors in ways that improve health outcomes, lower
costs, and support the preferences of the aging population. Our members have
significant anecdotal evidence that stable, quality housing, when coupled with
appropriate services, can delay or obviate the need for more expensive assisted
living or licensed nursing care. This demonstration will test models for
expanding capacity to meet our growing demands in the most cost-effective way.

A study just released byASPE supports the underlying need for this demonstration. LeadingAge’s
research institute participated in this study which found that older adults
enrolled in both Medicare and Medicaid and receiving HUD-assistance in 12
jurisdictions: 

  • Have more chronic
    conditions than their peers in the community who do not receive HUD assistance.
     
  • Utilize more
    health care, including hospitals and emergency department services, than their
    peers in the community who do not receive HUD assistance.  
  • Have higher
    health care costs than the average older person—and even higher costs than
    community-dwelling elders not receiving HUD assistance who are also eligible
    for both Medicare and Medicaid. 
  • The data from this study
    suggests just how much potential housing providers have to help low-income
    residents manage their health and improve their functional status—all while
    saving health care dollars. 

Thank you for your
leadership and support in serving America's low-income seniors.

Sincerely, 

William L. Minnix, Jr.

President and CEO, LeadingAge

 

Rep. Pat Tiberi (R-OH) and Rep. Richard Neal (D-MA) introduced H.R. 1142, legislation that would make the 9% tax credit rate permanent for new construction projects.   


The fixed 9% rate was first implemented by the Housing and Economic Recovery Act of 2008 and was extended in December of last year as part of the Tax Increase Prevention Act of 2014.  


However, the December 2014 extension applied only to projects with credit allocations prior to January 1, 2015 that had not already elected to fix the rate.  


The proposed legislation would fix the 9% rate for all projects placed in service after December 31, 2014. The legislation proposed also included a provision that would establish a 4% floor on the tax credit rate for acquisition costs (but not for projects financed with tax-exempt bonds). 


On May 4, Sen. Pat Roberts (R-KS) and Sen. Maria Cantwell (D-WA) introduced a companion bill, S. 1193, in the U.S. Senate.  


Past Efforts at Reform 


In July 2013, the full U.S. Senate was urged by LeadingAge members to advise the Senate Finance Committee about which tax credits and deductions currently in the tax code should be retained as the Congress undertakes a major rewrite of the tax code; specifically, the need to preserve the 9% and 4% tax credit program. 


The Low Income Housing Tax Credit is one of those credits which could be eliminated without support from senators.  


Committee Chairman Sen. Max Baucus (D-MT) and Sen. Orrin Hatch (R-UT), ranking member, have outlined a "blank-slate" approach to tax reform that would: 


  • Eliminate all tax credits and other tax expenditures from the tax code

  • Add back only items supported by enough senators 

  • Help grow the economy.

  • Make the tax code fairer.

  • Effectively promote other important policy objectives. 

Why Save the Low Income Housing Tax Credit?


Created by Congress in the last major overhaul of the tax code in 1986, the Low Income Housing Tax Credit is a public-private partnership that uses tax credits to encourage the development of and investment in multifamily affordable housing. 


Many states that administer the tax credit program provide selection points for senior supportive housing. 


Widely viewed as one of the most effective federal housing programs, it currently finances all affordable housing development. It is also used in conjunction with the Section 202 housing program in both preservation and development. 


To date, the Low Income Housing Tax Credit has financed the development and rehabilitation of more than 2.6 million affordable rental homes across the country.


For even more information, the ACTION Campaign has prepared advocacy materials about the Low Income Housing Tax Credit.

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