By Jack Cumming

A trusted business is usually a thriving business. Trust is central to business, and in no business more than that of housing and caring for old people. The appearance of a conflict of interest erodes trust. Do you agree with these two premises?

Give it some thought. How do these premises apply to the business in which you work or which you lead? If you are a resident, how does this apply to the business — not-for-profit or for-profit — that houses you? These are deep questions that should not be ignored, swept aside, or overlooked.

Why are esteemed journalists, like those at the New York Times and Washington Post, raising questions about whether senior housing can be trusted? Are they leading opinion, or merely mirroring popular opinion that is now so ingrained that it fosters tales of mishaps?

Are these articles and these perceptions the result of sloppy journalism and popular imaginings, or has the industry invited criticism to its own detriment? In short, has the industry been self-destructive?

The Danger

There is a danger that some well-intentioned executives may sometimes put what they perceive to be enterprise interests (money or risk) before the needs of customers. What can be done to minimize the risk that profit margin concerns may put elderly residents at risk? That has to come from the C-suite.

Think about it this way. If the C-suite buys into the business school maxim that the purpose of business is to maximize profit and enterprise value, then the residents and their families — in short, customers — are likely to be the losers. We see that kind of thinking in recent manipulative actions by second-generation executives at companies like Amazon and Microsoft. They seem to push sales over customer comfort. It’s annoying to get unwanted ads jammed in your face when you’re just trying to get something done.

The alternative, of course, is the common entrepreneur’s focus to put the customer first. Jeff Bezos, Amazon’s founder, famously had an empty chair in meetings to give presence to customers and to remind senior employees that it’s the customers who pay the bills. Bezos emphasized minimal margins in pursuit of customer value, and it paid off. Do you remember when Wall Street criticized Bezos for putting value before maximizing profit margins?

It’s easy to forget that customer value is the key to growth and, ironically, profit maximization. This is especially the case for a trust business like senior living. Still, it’s not uncommon for providers — both not-for-profit and for-profit — to push financial risk onto residents in a quest to increase corporate margins.

An Example

Picture this scenario, which is based on a true story. An elderly woman, weeks short of her 100th birthday, has a setback and lands in skilled nursing. In one CCRC, there’s no worry. Her care is included in her monthly fee. Her apartment waits for her return; the CCRC draws on its actuarial reserves to cover her SNF care. She has peace of mind.

In another, the response is different. She soon learns that, in addition to the rent for her apartment, the cost of her SNF stay will be $700 a day. She is shocked. She had no idea it was so costly. Of course, she could have known. Perhaps, she should have known. The schedule of rates is regularly shared with residents and their families. It’s not that she can’t afford it. Imagine how that makes her feel … at age 100.

There’s no evidence that decisions about the length of the SNF stay reflected anything other than clinical considerations for her health care welfare. Her contract spelled out the details of her care costs. Providers are only required to comply with laws and to conform with contractual requirements.

Of course, a provider might choose to be more liberal than the minimum requirements of contract or law, but there is no obligation for a provider to do so. Still, many residents move in expecting that their provider is committed to delivering peace of mind beyond mere minimum compliance standards. They move in trusting in the good intentions of the provider leadership.

Conflict of Interest

Many residents are affluent, and even wealthy, so staff may figure that residents can afford the cost and that they ought to pay the charges cheerfully. Still, there is that lingering conflict of interest. One can never be sure whether in such a case the provider is putting resident welfare first or giving priority to money and corporate aggrandizement. That need not be.

In the no-worry CCRC mentioned above, there is no conflict of interest. If the provider has a strong balance sheet, the residents and their families can rest easy. With a care-inclusive (Type A) contract, resident trust is congruent with provider interests. Competent providers employ actuarial analysis to reserve for future included care. Funded actuarial reserves shield residents from risk by providing offsetting revenue when care is provided without added cost to residents. There is no conflict of interest. The provider can be fully trusted.

In fact, with such an inclusive contract, the provider’s financial incentives align with keeping people healthy for as long as possible. The incentive, too, is to provide needed care in the lowest cost, least clinical setting possible. One wonders why so many providers are moving away from care-inclusive contracts. Why not at least offer such a contract as an option?

Some providers have told me that they are uncomfortable with the risk involved in a Type A contract. As an actuary, I always ask if they employ actuaries to advise them about that. There is a myth within the senior housing industry that actuarial services aren’t worth the cost, even as providers spend richly on accounting and similar advice. If trust is central to reputation and sales, and if actuaries can guide a provider to manage risk, thus sparing residents from doubt about provider intentions, then the cost of actuarial advice is one heck of a bargain.