Longevity Healthcare Systems began in 1972 through a husband and wife’s aspiration to find care for their elderly parents. When searching for an institution, Kathryn and Richard were extremely unenthusiastic about being placed on a waiting list to care for their parents.
Instead they decided to care for them themselves along with later admitting more and more elderly folks to care for. Eventually the couple leased a 40-bed hospital and transformed it into a long-term health care facility.
During the period of approximately the next 15 years, they added new nursing services, expanded by acquiring nursing homes in nearby areas, and also built new health care facilities. At the end of 1988 LHS directed 12 nursing homes, cared for more then 700 beds, and employed more then 1,200 people. With examining the case the authors present us with numerous possibilities or opportunities that Longevity is presented with to expand their operations or increase their profitability. The health care industry is extremely uncertain and LHS must be sure that the decision they make is the most positive for their future.
I intend to present you with my analysis of most the likely, profitable suggestions to sustain growth for Longevity. These are not the only possibilities but just the choice selection I come up with from the information presented to us in the case. ANALYSIS I would like to begin my analysis listing Longevity’s three overall marketing objectives; expand the percentage of private payers, increase profits from institutional pharmacies, and promote a higher occupancy rate among homes.
I chose these goals as my selection criteria when developing my primary opportunities; Acquire a nursing home for subacute purposes either locally or regionally, promote integration by establishing a Pharmacy in Toledo, and/or expand operations to accommodate patients with Alzheimer’s disease. The acquisition of a nursing home either in South Bend or Toledo with a subacute emphasis. The case presented us with the two possible expansion locations of South Bend, IN and Toledo, OH. The primary purpose of this acquisition would be to increase Longevity’s capacity for subacute patients.
The reasoning for this would be as a result of the decrease in hospital stay and the abnormally large profit margin of 25 percent for subacute care. The average daily revenue from a subacute stay is approximately $250-$750. The first possibility for expansion is in the city of South Bend. They are presented with the opportunity of purchasing a facility with 450 beds for five million dollars ($11,111 a bed). The case also presented us with the average cost per patient per bed in a nursing home as being approximately $4,415 per month.
By combining these two figures I assume that before interest and tax the average payback period per bed would be close to 2. 5 years and then they assume a profitable position. Along with this information according to exhibit 10 in the case, South Bend has the largest percentage of retirees for their community and they have the highest average age of the heads of households. I also compared the number of nursing beds in South Bend to the total adult population and I found that they have accommodations for 10. 8 percent of the pop’n while of 40% of their population is over 45 years old and 20 percent of their pop’n is retired.
The next opportunity for subacute expansion was presented to the Hamilton’s in Toledo. There is an unprofitable 80-bed facility operating at 60 percent capacity with the chance of converting part of this into a subacute care unit, in which the occupancy would probably rise close to 95 percent (if not full). The conversion would cost close to $25,000 a bed but raise revenues for those units from $147/day to ~$250-750/day. At average revenue of $500 a day for subacute units this comes to approx. $30,000 a month. This is substantially lower then the $1000/day average cost of subacute care at a hospital.
(Granted there are other factors that are involved with these costs, such as length of stay and type of disability, but I produced numbers for approx. possible outcomes. ) These numbers seem to say there is room for exponential growth in profits in this market. Ms. received notification that the Toledo homes were experiencing 81 percent occupancy and 25 percent private pay. This says a couple things to me, first is that they are increasing their occupancy rate however, they are too heavily relying on Medicare and Medicaid as primary payment.
When relying on government reimbursement it’s not always bad, they know they will get paid, however, with the increasing chances of healthcare reform it could be too risky to depend too heavily on gov’t assistance. Further integrate Longevity by establishing a Pharmacy in Toledo. This move would continue amalgamate their existing Healthcare operations and it would provide an additional incremental source of earnings from their stagnant Toledo market. In Toledo they currently only have an 81 percent occupancy rate along with 75 percent of their patients receiving government assistance.
They have recognized an available institutional pharmacy in Toledo that would approx. cost $1,050,000 which serves 15 homes and 700 beds. Ms. is confident that the acquisition of this pharmacy would be able continue to provide products to all 280 LHS beds currently in Toledo along with 60 percent of their current operations totaling (. 6 x 700=420) plus 280, 700 beds. With possible annual revenues of $1450 per bed and 700 beds, this would equate to annual revenue of approx. $1,015,000. The payback period would be estimated at one year before substantial profitability.
However, when trying to rely more heavily or private payers, Toledo has by far the largest reliance on Medicaid and Medicare and they currently have the lowest occupancy rate (even though they believe this would raise it). The reliance on Medicaid could be extremely unattractive depending on the impact of health care reform. It seems as if this acquisition could result in a large amount of revenue however, this comes with an extreme amount of variability and risk. Expansion of operations into Alzheimer care.
The demand for Alzheimer care was being examined because of the decrease in research and therapy, and a huge increase in the population that endure this terrible disease. Currently there are 4 million patients that carry this disease at a growth rate that could hit 50 percent from 1994 to 2000. Longevity is considering an Alzheimer’s wing in two of their Grand Rapid’s nursing homes that would serve 30 patients each and would be self-contained for the patients. Each of the 60 rooms could result in the revenues of $3,400 per patient monthly and 15 percent lower then average costs for the patient.
LHS has available cost estimates from $2000-3000 per bed to convert the rooms to accommodate the new treatment. The obvious benefit to the conversion is that Alzheimer’s units typically carry at least a 95 percent occupancy rate along with the fact that they are almost always private pay. Also staying in Grand Rapids would be beneficial because they have the largest pop’n of the three cities and the patients do not have to be necessarily old, Alzheimer’s can occur at any age so the larger the pop’n the better.
The difficulty of this decision is how to position their marketing strategy. Primarily Alzheimer treatment centers usually have relationships with churches, Alzheimer Associations, support groups, etc. This could be a problem because LHS does not have good relationships with these groups, so they would be forced to revamp their marketing positions to better direct them toward new relationships and how to get positive referrals.