The nation's largest chain of not-for-profit nursing homes says the old cliche "no margin, no mission" best describes its approach to the business of good works.
If that's true, the Good Samaritan Society is ready for one heck of a mission.
In an industry dominated by proprietary companies, the society stands out as a not-for-profit with more financial savvy than many of its for-profit competitors.
"We've found that you need to be as nimble as you can in the finance area no matter what your mission," said Charles Balcer, interim president and chief executive officer of the Sioux Falls, S.D.-based society.
The society has recorded profit margins averaging 4.7% over the past decade. Its total current debt is $309.7 million, and its estimated net worth is $404.3 million.
Even as business pressures increased, it managed to sock away $29 million on revenues of $629 million for a 5% profit margin in 1996. By comparison, Fort Smith, Ark.-based Beverly Enterprises, the nation's largest for-profit nursing home operator, posted a 2% profit margin in 1996.
Yet despite its healthy balance sheet, the society is facing some troubled times. It's searching for a replacement for its CEO of the past eight years, Mark Jerstad, a grandson of the society's founder. Jerstad died in March of cancer. What's more, its operating margin dropped to 1.8% in 1995 and 1996 from an average of 3.2% in 1992 through 1994 as staffing expenses rose and Medicaid payments were cut back.
Like most nursing home operators, the society is particularly vulnerable to reductions in Medicare and Medicaid reimbursement, which represent more than two-thirds of all payments to long-term-care companies.
State Medicaid programs accounted for 46.8% of the society's revenues in 1996. Some 33.5% of its revenue dollars came from private-pay sources; 8.7% from Medicare payments; 4.6% from ancillary services; 2.1% from interest income; 0.5% from unrestricted contributions; and 3.8% from other sources.
For now, analysts say the society's size, wide geographic spread and service diversity are helping it weather cutbacks in state and federal reimbursement programs.
Standard & Poor's recently gave a stable credit outlook and A- rating to the society's planned issuance of $37 million in taxable debt. Fellow credit-rating agency Moody's Investors Service backed that judgment with another strong investment grade rating, A3.
"An A3 rating is pretty average among all healthcare providers, but for a long-term-care company, that's pretty good," said Bruce Gordon, a vice president with Moody's.
The society was founded Sept. 29, 1922, in Arthur, N.D., by August Hoeger, a Lutheran minister. The society since has grown from one six-room home for the disabled to a national company operating 238 facilities in 26 states. Of these, 214 provide skilled-nursing care, 24 offer assisted-living apartments and 74 offer independent-living apartments. The bulk of the society's facilities are located in rural areas in Iowa, Kansas, Minnesota, Nebraska, North Dakota and South Dakota.
The society has affiliation agreements with both the Evangelical Lutheran Church in America and the Lutheran Church-Missouri Synod to offer social ministry programs, but it operates as an independent private company. Neither church participates in the governance of the society.
According to the 1997 MODERN HEALTHCARE Multi-unit Providers Survey, the society is the nation's eighth-largest nursing home chain based on its total number of U.S. beds. It's almost 10 times the size of its nearest not-for-profit competitor, the Board of Social Ministry in St. Paul, Minn. (See story, p. 48). It was even ranked ahead of for-profit leaders Atlanta-based GranCare and New London, Conn.-based Mariner Health. It also was listed as the nation's largest operator of continuing-care retirement communities.
For the most part, the society has avoided large, high-profile acquisitions and built its holdings by acquiring stand-alone nursing homes or adding complementary services to existing operations.
Its largest acquisition to date was the 1992 purchase of Good Neighbor, a St. Paul-based chain of 27 facilities, for a reported $66.3 million.
"Every decision we make we ask, `How does this fit into our mission of taking care of the frail elderly?' " Balcer said. "We are a unique, mission-oriented society. We don't want to go into areas that are already being served and where the community doesn't want us."
The society's nonaggressive acquisition approach has helped it maintain a rather low profile. Its employees are not unionized, so it has avoided the orchestrated worker uprisings that have plagued other industry leaders, such as Beverly, for years.
The society's reputation for patient care has varied from facility to facility, as is the case with most large long-term-care chains.
For example, in Nebraska, where the society operates 24 nursing homes, 12 had no deficiencies on their last annual survey by state healthcare inspectors, according to the Nebraska Health and Human Services System. Eleven facilities are back in compliance after being cited with deficiencies, and the remaining facility is awaiting a second visit by the state. Complaints were investigated at nine facilities, but none was substantiated.
"If they had had any health or safety violations, then we would have taken action against them and that's not their history," said Joann Erickson, a supervisor of the state's healthcare facilities surveying team.
Fred Gladden, chief of the health resources section of the North Dakota Health Department, said the society traditionally has been viewed as a national company whose 13 facilities in the state have strong ties to the communities they serve. But, he says, that perception soon may change.
"They are making the transition from a mom-and-pop operator to a very sophisticated big business," Gladden said. "I think they are recognizing their position. They are emphasizing more direction from the corporate office and the standardization of admission and patient-care policies."
The society adopted a formal strategic planning process in 1991, and it has continued to make use of some creative financing to carry out its mission.
In the late 1970s, it began using inexpensive financing from the U.S. Department of Housing and Urban Development to provide subsidized housing. The society now operates 22 HUD-backed projects for low-income residents and is developing three more. The projects always have produced losses. They carried net losses of $800,000 for both 1995 and 1996, and similar results are expected this year, Balcer said. He said the society does not expect to ever break even or make money on them.
In 1995 the society found itself unable to turn to the tax-exempt debt market because of a $150 million cap on outstanding debt for nonhospital projects. (The cap recently was repealed in response to industry complaints.) Seeking a low-cost alternative, the society issued $27 million in medium-term taxable notes, adopting a financing instrument first used by the automobile industry in the 1970s.
Other unusual steps include the creation of two major investment funds for its facilities' surpluses. The 6-year-old Helping Hands Fund has about $200 million and has recorded an average annual return of 8% over its first five years. A money market fund, called Short Asset Management, was added in 1995 and now has about $40 million.
"We're always looking for the right mechanism to get the job done at the lowest cost so we can use the money for other projects," Balcer said.
Balcer, former chairman of the society's board and retired president of Augustana College in Sioux Falls, became interim president and CEO in May. A permanent successor to Jerstad is expected to be named in February.
The society's previous leaders have been pastors and members of the founding family, but these aren't requirements for the position. "The search committee is looking for someone who believes in and will carry out the mission of the society," Balcer said. Another grandson of the founder is now director of spiritual ministries at the society.
Faced with increasing pressure to control costs, the new leader likely will have to make some tough calls. Balcer said the not-for-profit is questioning how big it wants to get. In some cases, the benefits of expansion no longer appear to outweigh the costs of additional staffing, he said.
Although the society has embarked on some new construction, including an $11 million research and information center at its headquarters, it is budgeting conservatively for the next year in light of reimbursement changes, Balcer said.