What is the Difference between Profit and Nonprofit Organizations?

Nonprofit vs Profit Senior Housing Communities — Does it really matter in 2020? And if so how?

“What is the difference between profit and nonprofit organizations and does it matter?” This a frequently asked question when considering Senior Housing Communities. Some people think for-profits will take money out of the community to pay shareholders, to the detriment of residents. Or that non-profits will be kinder because of a charitable mission, to the benefit of residents. Or that non-profits will be less expensive because they don’t have to make a profit.

It’s not that simple.

Updated 10/30/2020

Nonprofits can and do go bankrupt when they can’t pay their bills

This topic came up last year when we sat in on a sales presentation by a nonprofit LifeCare Community. The sales pitch proudly proclaimed the community’s nonprofit status. This was shortly after discussing the community’s recent bankruptcy reorganization brought on by excessive construction debt. In other words, they didn’t sell or lease up fast enough.  The occupancy rate was under 80%. several years after initial construction. A normal, financially “safe” occupancy rate is over 90%. The presenter claimed only the creditors suffered from the reorganization. . . not the residents. As a nonprofit retirement community, they didn’t have to pay shareholders. The speaker’s clear implication was that nonprofit residents automatically got more and were unaffected by the bankruptcy?

We didn’t believe it. Partly because we were aware of some bad outcomes for residents or resident families from the community’s bankruptcy. There were service disruptions during the bankruptcy. Staff turnover was high. Quality ratings sank. There were excessively long delays in receiving refunds. Maintenance was deferred. And more. Residents did suffer.

If one inference was wrong, was the other? Do nonprofit residents really get more because there are no shareholders to pay?

We decided to explore this topic in more detail.

This question matters because the for-profit share of the senior housing market is increasing. And some of our favorite senior housing communities are either owned or managed by for-profit companies.

What does profit vs nonprofit status say about the community?

Do we really believe nonprofit retirement communities better protect residents? No.

We don’t. We think it is far more important to focus on what you get for your money at any particular senior housing community. Read the contracts. Compare prices. And here the contracts and prices are more similar than not. We are unconvinced that a nonprofit senior housing community has clear financial benefits for the resident. At least not by virtue of being nonprofit. Are some nonprofits better than average? Yes. But there are also some for-profits significantly better than the norm.

The mere label, “nonprofit” is not a magic talisman protecting the consumer from caveat emptor (buyer beware).

We see no significant difference in the real estate, programming features, or contractual commitments of nonprofit vs for-profit communities. It isn’t obvious that non-profit residents are getting more because shareholders are getting nothing (there are no share or stockholders in a nonprofit). The two types of entities compete in the same market. For-profits wouldn’t be winning the competitive battle for market share by delivering less to residents.

If anyone is getting less, it is the government from non-profits due to tax exemptions for charities.

Which begs the question, “Where is all the money going if not to the differential benefit of residents?” That’s the next section.

Our answer is not self-obvious. We may be in the minority with this conclusion. It is a complex topic. Let’s peel back the onion.

Profit Motives

What are the profit motives for each?    Wait, nonprofits can have profit motives?  Yes.

At the most basic level, nonprofits still have to produce positive cash flow. They need revenue to match or exceed expenses. Just like a for-profit community. Stephen Covey’s rule of thumb applies, “No margin? No mission.” If you don’t generate more revenue than expenses? Someone else will be pursuing your mission or charitable purpose.

And it turns out that just because the real estate owner is a nonprofit, doesn’t mean there aren’t plenty of opportunities for individuals or other businesses to profit from a nonprofit. This isn’t cynicism. It’s a reality.

The iceberg below the nonprofit surface includes lots of for-profit motives

difference between profit and nonprofit organizations

For-profit motives are the iceberg below the surface in nonprofit senior housing communities with a complex web of management and development contracts or commission compensated employees.

A nonprofit community typically has complex relationships with profit-seeking people and entities. For-profit motives are there, just hidden below the surface. The label, “nonprofit” simply doesn’t tell the whole story.

These contracts show up as expenses on the nonprofit senior housing community’s statement of financial activities (equivalent to a for-profit’s income statement) and statement of financial position (the equivalent of a for-profit’s balance statement).

So, the label “nonprofit” can also be misleading if you think that no one is making a profit off a nonprofit.

Highly Compensated Staff

Salespeople and administrators are well-paid, and often by an organization that manages but doesn’t own the community’s real estate. The devil truly is in the details. Both for-profits and nonprofits must pay the going rate for talent. Complex organizations, of both stripes, tend to have well-compensated executives, professionals, and sales staff.

Contracts with For-Profits “Off-Balance Sheet”

Off-balance sheet deals with for-profit entities obscure the details of who’s benefiting. For-profit shareholder dividends are not the only way to extract cash from a senior housing community to the detriment of residents. Developer fees and management fees accomplish the same extraction. Do not blindly accept that nonprofit means no conflicting motives or conflicts of interest.

Because of the complex web of contracts around nonprofits, we’re not convinced that nonprofit means more resources go to the direct benefit of residents. We’re reluctant to buy into any great advantage for nonprofit senior housing communities because while many communities are nonprofit, there is typically a complex web of management agreements and developer contracts with for-profit entities.

Follow the Money: The Difference between Profit and Nonprofit Organizations 

Do nonprofit community residents benefit from nonprofit tax exemption?

So far the score is at best even with no clear benefits for residents from a senior housing community’s nonprofit status.

Remember, nonprofit is not a financial objective, it is a tax status. All nonprofit recognition does is relieve the entity from the obligation to pay corporate income tax and often local property tax. The exemption is in recognition of a charitable mission. Governments get less money. Do residents get more benefits? More protection? Better quality? Lower prices?

A cash flow positive nonprofit enjoys clear savings by avoiding income tax payments that a similarly situated for-profit senior housing community would pay. Many municipalities similarly exempt or protect nonprofits from property taxes. But not all.

Linkage and Leakage

But there’s no necessary linkage that requires tax savings end up in lower prices, savings, more benefits, or greater reserves to secure promises to residents. They could just as easily flow out of the nonprofit to management or developers who look more like the financially interested shareholders of big, bad for-profits than the residents who are supposed to be the beneficial mission of a nonprofit.

Looking at the label nonprofit isn’t enough. Regardless of the senior housing community’s tax status, we have to examine the details of an individual community’s financial statements. There’s simply no shortcut to Deep Throat’s famous prescription, “Follow the money.” Financial security isn’t in the label, it’s in the financial performance and management practices of the senior housing community, regardless of for-profit or nonprofit tax status.

Nonprofits may; however, offer nonfinancial or intangible benefits.

Religious Affiliation and Mission: The Difference between Profit and Nonprofit Organizations

We concluded the devil was in the details when it comes to financial benefits from a senior housing community’s tax status, for-profit vs nonprofit. There’s no financial protection for residents in a label. That doesn’t mean nonprofit is necessarily meaningless.

But what happens as a resident when I outlive my money? Won’t a for-profit dump me on street? Or won’t a charitable nonprofit be kinder, gentler, and be more likely to let me stay? Again, in reality almost no difference.

The resident contracts are typically very similar. Almost all senior housing contracts, regardless of profit or nonprofit status, allow a community to evict someone unable to pay ongoing monthly fees. If it’s a straight lease or rental agreement, you gotta pay the rent. Rental communities are part of the do-it-yourself (DIY) retirement puzzle. It’s up to you to manage the risk of running out of money.

For buy-in communities, it’s a little fuzzier.

Buy-In Communities Buy Some Built-in Protections

Many senior living or housing communities feature contracts that require a “buy-in”. These have some built-in protections, regardless of the tax status of the community. Buy-in contracts are more common in Life Plan Communities (LPCs) also called Continuing Care Retirement Communities (CCRCs) or a variety of trade names like LifeCare. (The Department of Acronyms is working overtime in this industry.) Evictions are a rare event for buy-in communities, by either profits or nonprofits. These are the communities selling the worry-free promise of security, regardless of your future needs. The security of a buy-in contract can be promised by either a for-profit or a nonprofit community.

The Protections

  • First, both financially underwrite or qualify resident admission based upon the prospective resident’s ability to pay. They’re both good at running the actuarial numbers. Regulators and financers often require them to run the numbers to reduce the risk of failure.
  • Second, buy-in contracts often feature a “return of capital” feature. If you can’t make the monthly payment, they take it out of the return of capital, from your initial buy-in, promised to your heirs. Buy-ins often exceed $500,000. Given the time value of money, this is a lot of collateral or security. (Note that most return of capital contracts only return some portion of the original buy-in and not any earnings on the buy-in (contributed capital or equity) in the interim. E.g., 90% return of capital but not interest on the money.)
  • Third, most senior communities maximize income from available public programs like Medicare, Medicaid, and VA benefits (among others). If you spend down assets? If you run out of money? Medicaid is the backstop. Both for you and the community.
  • Fourth, if you’re selling security, it’s tough to get new residents if you’re throwing existing residents out on the street. It looks bad. Regardless of the community’s tax status.

Medicaid Backstop

Evictions are rare for buy-in communities, and normally due to a hard to manage health challenge or behavioral issue as much as financial capacity. Behavior changes and psychiatric challenges are a real problem, often associated with progressive dementia. In these cases, it’s a transfer to a facility better able to provide necessary care, at Medicaid’s expense. And it is often justified as protecting remaining residents or staff from the risk of physical harm. The transfer may not be to as nice of a building, but a broke and difficult resident is not dumped out on the street.

Nonfinancial or Intangible Benefits of Nonprofits

There are also nonfinancial benefits that can matter very much to individual residents.

It may matter to you for instance whether there is a religious affiliation. A dedicated Catholic may prefer a religiously inspired nonprofit that offers engagement with the Church for spiritual support. Several of the strong nonprofit networks have religious foundations. Religious lines include Quaker, Catholic, Presbyterian, Bethany (Congregationalist), Baptist, Methodist, Jewish, Masons, and more. And there are other nonprofits with a service mission that are not faith-inspired or religiously affiliated.

Several of our favorite communities are owned or managed by mission-driven organizations like the Quaker-affiliated Kendal organization and Chicago’s The Admiral at the LakeThe Admiral at the Lake — The New Wave. But we also see great for-profit communities like Balfour Senior Livings’ The Balfour at Riverfront Park in Denver.

A religiously-inspired or mission-inspired benefit does not necessarily go to financial strength unless the parent church or organization is willing to stand financially behind the individual communities. Larger, multi-community systems tend to have more financially secure individual communities than single-site organizations. This is true for both nonprofits and for-profits. Experience normally pays. But not always.

Parents Don’t Always Bail-out a Troubled Child

In most circumstances, individual senior housing communities are organized as separate legal entities in which the managing parent or affiliate is not required to invest more in a failing community. The owner of the real estate is not always the same business entity as the operator. The parent may do so voluntarily to avoid the marketing black-eye of a failure, but we’ve also seen well-known systems practice window-dressing by selling off their losers. They can continue to say, we’ve never had a bankruptcy, not because they’ve never had a troubled community, but because it didn’t fail on their watch. They dumped it before the bad news hit the headlines.

A financially strong parent is no guarantee that the local affiliate will be bailed-out. The experience of management may reduce the risk of failure. And parent companies can and do sometimes bail out troubled children. But they also sometimes bail and sellout or dump a miss into bankruptcy.

For-profit vs Nonprofit Conclusion — Financial Results not the Label

Nonprofit status does not mean more money benefitting residents

In this multi-part discussion, we’ve explored whether nonprofit senior housing communities such as CCRCs yield any clear financial benefit for residents over for-profit competitors. Our conclusion? No.

Because this is a common point of market differentiation and because it’s a common question by prospective residents, we intend to continue to explore the actual performance differences between nonprofits and for-profits and see if we can document any clear advantage in financial security or value for the residents, in one or the other.

The answer is in the individual financial performance of a community and not in the label. Well-managed communities with high occupancy rates and strong reserves are a better guarantee than nonprofit status. Read the financial statements. Don’t count too heavily on the label or the parent organization. Don’t assume nonprofits are pure or without profit motives below the waterline.

2020 Update — A look at the Data, are Nonprofits Measurably Better?

Nonprofit Quality Comes with a Price

Consumers often believe that nonprofit senior living facilities are better than for-profits. Is it true? Not for every nonprofit. But yes, there’s evidence to support nonprofits on average deliver higher quality. But it’s like the fairytale maxim. All magic comes with a price. According to the evidence? Generally, higher quality comes at a higher price. The senior living fairytale corollary? All quality comes with a price. (quality comes with a price suggested keyword.)

Do Nonprofit Senior Living Facilities Make Money?

Do “Nonprofit” senior living facilities make money? Yes, they try to. But not all succeed. Typical industry operating margins were in the 28%-38% range for assisted living. (Pre-pandemic.) And 35%-40+% for independent living. This is before subtracting facility financing expenses and taxes. More on this below. Operating Margins of Senior Living Facilities – Senior Living Investment Brokerage January 7, 2019

So a lot of people can make a living off that operating margin or profit. Besides the people paid for operations. That’s true regardless of whether the facility is nonprofit.

You can’t take the profit motive out of the people even if the organization is nonprofit.

And nonprofits often contract with for-profit businesses. For-profit businesses provide a wide range of services, up to and including management. Non-profit ownership doesn’t mean the absence of financial self-interest. For instance? Senior housing sales and marketing are full of commissions and self-interest.

The non-profit label does not erase all incentives to earn more money. Aging With Freedom — For-Profit vs Nonprofit? Does it really matter if a CCRC is For-Profit vs Nonprofit?

Do Nonprofits Make More or Less Money Than For-Profit Competitors?

Do nonprofits make more money or less money than for-profit competitors? It depends.

For comparison? The biggest for-profit publicly-traded senior living company is Brookdale Senior Living. It’s net? About 2%, but sometimes less than 0. Brookdale Senior Living Profit Margin 2006-2020.

But net margins in the single digits are common. So, the loss of 1-2% can make the difference between cash flowing. And not. Average Net margins in real estate operations generally are in the 3-4% range. NYU Stern School of Business Margins by Industry Sector (US).

We were unable to find a clear answer to this question. Non-profit facilities are smaller on average. Suggesting fewer assets and less financial depth. How Does Non-Profit and For-Profit Assisted Living Differ? There’s some indication that nonprofits fail at a higher rate. That would suggest they make less money. But the inability to raise equity to match debt for a turnaround may be the core “why.” And not differences in size, operating performance, or management. Any insight you have, please share in the comments.

Non-profit is a Tax Status Not an Operating Goal

Nonprofit is a tax status. It is not a financial goal. Even charitable organizations have to pay attention to being self-sustaining, net income positive. Remember, Stephen Covey’s rule applies, “No margin, no mission.” If an organization can’t generate bottom-line net revenue? It fails and someone else is serving those customers or pursuing that mission.

Income, Expenses, and Regulations Don’t Vary by Tax Status

Income, expenses (other than income taxes), and regulations do not vary by tax status. With a couple of exceptions.

Generally, for revenue? Base rates are the same for both for-profit and nonprofit senior living facilities. Non-Profit vs. For-Profit Senior Living Organizations: What You Need to Know – Presbyterian Senior Living 2016.   Base rates are not all the revenue. More on that below. But, a peek under the curtain? Ala carte means, “Bring a bigger cart of money.”

Local labor markets drive wage rates. Everyone within a local market is subject to the same state and federal regulations. Those regulations include minimum staffing ratios at least for nursing homes or skilled nursing care.

There’s no clear reason why construction costs or maintenance costs would vary by tax status.

One place tax status does matter? Financing costs of construction. Nonprofits use tax-free financing tools that reduce the interest charges on long-term debt. But conversely, nonprofits lack access to outside equity investors.

Resident Satisfaction — the Real Measure of Performance

Both nonprofits and for-profits care about resident satisfaction. Happy residents stay and pay. And happy residents attract new residents. Resident-satisfaction is an indirect quality metric for the pursuit of a nonprofit’s mission. And for the probability of profitability for a for-profit.

Does Mission Matter? Yes, but. . .

Presbyterian Senior Living is a nonprofit owner/operator of senior living. They make the argument that quality should be better when mission-driven. Other nonprofits make the same argument. And it’s a common consumer belief. It’s a self-interested argument. And not always borne out in practice by all nonprofit operators. But the satisfaction scores give you, the consumer, a route to test actual performance. For a specific location. Regardless of tax status.  Some of our favorite senior living owners/operators are nonprofit. These include Wesley Life, Presbyterian Senior Living, and Kendal.

Mission, often faith-inspired, is an important community-building and social connection tool. The best nonprofits use mission not just to save money on taxes. But also to motivate staff and residents to build a sense of purpose. Remember, High Purpose is one of Aging With Freedom’s three factors for a happy retirement life. Mission matters.

But, we also have for-profits among our best-practices favorites. Corporate culture can foster sense of purpose for staff and residents. Regardless of tax status. Or culture can ignore purpose.

Non-Profit Quality Is Better. . . at a Price

The best study of for-profit vs. non-profit performance is a little dated now. The data set from the 1990s is more than twenty-years-old. It’s also limited to nursing homes, only one segment of the senior living industry. We’ll assume the conclusions extend to other types of senior living. But it’s a comprehensive study measuring more than 20,000 facilities. Big studies are generally more conclusive than small studies. The study supports non-profits provide higher quality care. It’s an academic-style slog through the data but with some interesting conclusions. The Commercialization of Nursing Home Care: Does For-Profit Efficiency Mean Lower Quality or do Corporations Provide the Best of Both Worlds?

Our bare-bones summary:

  1. Non-profits provide higher quality care. Exactly as consumers believe. (Remember this is an average. That doesn’t mean all nonprofits are better than all for-profits. The average caveat extends to the other conclusions as well.)
  2. Non-profits provide more staff per resident. Regulations dictate minimum staffing ratios for nursing homes. But non-profits exceed the minimums. And provide more staff than their for-profit nursing home peers.
  3. The Market is trending to more for-profit facilities. (True as well in senior living generally in the interim. The current market split is approximately 80% for-profit and 20% nonprofit. That is non-profit owners are about 20% of the broad senior living market.)
  4. Chain ownership is increasingly common. That includes growing non-profit chains, both as facility owners and operators. (About 40% of senior living facilities are chain-owned. Even more are chain-managed.)
  5. Non-profits charge more (and provide more services). Base rates may be similar but the add-ons add-up. And non-profits on average charged more in total. And thus, non-profits target higher-income consumers and the higher-end of the market. This may not be so self-obvious to consumers. Non-profit doesn’t mean less expensive. The higher quality comes at a price. And a price that is not always within the range of all consumers.
  6. Non-profits have a harder time raising money for expansion or growth. For-profits grow faster. Partly because they can both borrow and raise equity from private investors. Nonprofits can’t directly access outside equity. (This explains many of the nonprofit contractual relationships with for-profits.)

The study proves out an old maxim. You get what you pay for. Assuming you can pay. And that’s an issue too.

Falling Margins vs. Ability-to-Pay

The senior living industry widely reports falling profit margins. Oddly enough? This especially threatens middle-class Americans’ future. More so than the wealthy who can afford to pay. They are the high-end of the market. But the middle-class is also more at financial risk than the poor. The poor have the backstop of Medicaid and other safety-net programs.  Middle-income workers have fewer savings. And no third-party payer for senior living and services. Neither Social Security nor Medicare pays for long-term care or senior living.

Medicaid and safety net programs for the poor cover the lower end of the income scale. Everyone wants the wealthy’s money. But serving the needs of the middle-class is harder. 

Quality comes at a cost. The so-called middle-market is where the differences in organizational structure are most obvious. The Forgotten Middle: Many Middle-Income Seniors Will Have Insufficient Resources For Housing And Health Care. This article asks, “Will anybody serve middle-income seniors of the future? Nonprofit or for-profit?”

What Happens if I Run Out of Money?

Outliving your money is a risk of aging. Especially for that middle-class consumer. A key question for consumers to ask? “What happens if I run out of money? Will you kick me out?”

This may be a place where a nonprofit’s charitable mission comes to the fore. Are nonprofits charitable to the benefit of impecunious existing residents? Often yes. Especially in “buy-in” facilities. But we also know for-profit CCRCs that offer some protection for residents who run out of money. But recognize that this is at the end of life after receiving years of revenue equal to all your savings. And generally, it’s not guaranteed. It’s discretionary.

For renters? You’re SOL. Subject to eviction regardless of the facility’s tax status.

And the dirty little secret of senior living? Facilities can force you out even if you’ve got the money. Too difficult? Excessive care needs? Offend staff or other residents? They can tell you to leave. The common explanation, “We can’t meet your needs.” 10 things retirement communities won’t tell you – Marketplace 2014.

Pay attention to the fine print. Depending on the kindness of strangers is a dangerous strategy. Rich strangers are more generous. Therefore. . .

Net Margin is a Good Thing

You want your nonprofit to make a net margin. A failed facility is a bad thing for consumers. They can’t give what they don’t have. So, a positive net margin is a good thing. It means less likelihood of failure. And more mission or money to drive resident satisfaction.

It may be less obvious, but you also want a for-profit provider to make money. Again, failure is good for no one.

Good management is a factor in making money. Regardless of tax status.

How Do I Know or Find the Numbers?

With public companies, the numbers are readily available. But not broken down to the individual facility level.

It’s not so easy to get reliable or accurate numbers on privately-owned companies or facilities. Regardless of tax status (for-profit or non-profit). Some states require public filings. But not all. And it’s more commonly available for facilities selling units. Not much disclosure on rental facilities. The rush to build more rental senior housing probably says the margins are higher in rental units.

Consumer Action Advice

If you’re a prospective buyer of a senior living unit you can request to see the financial statements. You want to know what you’re buying into.

Renters? No such transparency. But renters can walk away if the facility fails. Resident owners are stuck with the results of management failure.

The financial statements answer the likelihood the facility can deliver on its promises. Remember you want a facility with a positive net margin and more assets than liabilities. In other articles, we talk about how occupancy rates matter. Ninety percent (90%) occupancy is about the minimum safe level. More occupants, filling more of the facility, equal more revenue to cover the expenses.

Accounting Knowledge or Help Necessary

Unfortunately, a little accounting knowledge is necessary to read financial statements. It may be easier to share the financial statements with your accountant or tax advisor. (Or share with us at Aging With Freedom®.)

Financial statements separate expenses into two or more broad categories.

  • Operating Expenses – many of these vary by the volume of business. More customers, more expenses. So-called variable-expenses. But it also includes the administrative expenses of running a facility.
  • Facility Expenses – generally these are the “fixed” expenses of financing the physical structure.

This separation allows a fair direct comparison of operating performance between facilities. Regardless of their financing or ownership structure.

There is some specialized language depending upon the tax status. For instance, the equivalent of the “net profit” line item in a non-profit financial statement is labeled “net assets”. This is the amount available to reinvest in a non-profit’s mission. For-profits have the added option of investing net profits or distributing all or some to shareholders.

The major structural differences between non-profit and for-profit are in the facility expenses. Or how the buildings and equipment are financed.

It Depends, On a Lot of Factors

Other factors also influence expenses and margins. Older facilities may have more operating expenses. But lower facility or financing expenses. Because more is fully paid for and or depreciated and worn out. And newer facilities may have higher revenue. And the higher expenses of new construction. Again, it depends. On a lot of factors.

For-profits pay income taxes. But it’s a percentage of the profit. After adding up all revenue and subtracting all expenses. Nonprofits avoid this cost.

Nonprofits don’t pay income taxes. But they still want dollars left after paying all the bills.

Here’s a tricky step. Finance-types look at several levels. They measure various expenses as a percentage of total income or revenue.

  • Operating Margin = Operating Expenses / Total Revenue
  • Net Margin = Total Expenses / Total Revenue

Why is this tricky? It’s not always clear if someone is referring to Operating Margin or Net Margin. Sometimes you only know from the context. Or by asking.

What to Look for in Financial Statements or Metrics?

  • Above-average margins. You want a facility with operating margins at or above the industry average.
  • Margin Trends. Stable to rising margins. Falling margins are a warning of future problems and or rate increases. Higher operating margins and net margins are better.
  • High Occupancy Rate. A waiting list is a good sign. 90% occupancy is about the minimum required for long-term success. 95% is better. Higher occupancy is better.
  • Occupancy Trends. Falling occupancy is another warning of future financial problems. Expect rate increases for the remaining residents. Or worse. Steady to rising occupancy is better.
  • Quality Measures. Medicaid measures nursing home performance. There is no comprehensive, direct quality measurement for other types of senior living. So, you need to use some indirect measurements like satisfaction and staff-turnover. Aging With Freedom – Medicare Star Ratings.
  • Resident Satisfaction. Happy, socially-engaged residents attract more of the same. Interestingly, Staff-satisfaction is an indirect measure of resident-satisfaction. So staff tenure or low staff turnover is a good predictor of resident satisfaction. High staff turnover is a warning sign.
  • Positive Balance Sheet. Assets plus owners’ equity should exceed liabilities. If they don’t? The facility is bankrupt. And like other measures, trends matter. Net worth should be growing over time. A downward trend for net worth is another warning sign of future trouble. Higher net worth is better.
  • Strong Cash Flow. But cash flow also matters. A facility can also go broke by not being able to pay bills as they become due. Finance-types look at the debt-service coverage ratio (DSCR). Where DSCR = Net Operating Income / Total Debt Service. (Total Debt Service is the same as Interest + Principal Payments.)

Less than one (<1) is bad. There’s not enough money after operations to also pay the debt or facility financing charges. A debt-service coverage ratio of one (1) is flirting with disaster or on the edge. Any wrong step means a facility can’t pay the debt. And you or your heirs may also be creditors of a facility. You want some room for error or the unexpected. Like COVID. A debt-service coverage ratio equal to or greater than two (>2) is good. Higher is better.

This list is not exhaustive but gives some sense of key questions. And the answers are the same regardless of tax status.

All Magic Comes With a Price

Are nonprofits better than for-profits? It depends on what you mean by better. Better quality, yes. But also a higher cost. In general, you get what you pay for. All magic comes with a price.

On average? Non-profits deliver higher quality service in senior living. But that higher quality generally costs more to deliver. And residents pay for quality.  The lack of profits for shareholders doesn’t necessarily translate to consumers paying less for the nonprofit services.

And averages conceal as much as they reveal. The average doesn’t tell you what’s true for a particular facility, nonprofit or for-profit. The interesting data is in the range and tails of the distribution curve. Or how much difference is there between bad and great? And who are the best performers? Or worst?

According to the data? Nonprofit senior living at about 20% of the market is more focused on the upper-income end of the market. People willing and able to pay for quality. And they do pay more. Nonprofits’ higher quality comes with a price. There are some high-performing for-profit peers. But again, quality comes at a cost.

The biggest problem? There are few good direct measurements of quality accessible to consumers. The senior living industry is not transparent on quality measures. The truth is most often in the ommissions. So residents must judge quality indirectly. High resident satisfaction and low staff turnover are good signals of quality. As is facility maintenance. Deferred maintenance is a warning sign.

But, if you assume non-profit means lower cost? Not much evidence of that. They are not giving away services. Staff and creditors still expect to be paid.

The non-profit label may signal a higher probability of quality. But often because you’re paying more for the added services and features that define quality. All quality comes with a price.

More Questions?

Aging With Freedom® would like to know if chains do better than independents or stand-alone facilities. Or if there are any significant qualitative or cost differences between chains of equivalent size?

We’d like more comprehensive and transparent data on all forms of senior living, not just nursing homes. That data could then confirm the inference from the nursing homes data to other forms of senior living. Does the same story play out in assisted living, independent living, and CCRCs or life plan communities? It makes sense that it would given the growth of chains and the importance of access to capital.

Have changes in labor markets and staff shortages changed the answers? Do nonprofits still provide higher staffing ratios and higher quality on average? What was true isn’t necessarily always true. We’re hungry for current data. But the industry is not known for transparency.

Do senior living nonprofits fail at a higher rate than for-profit competitors?

Or do failures play-out differently by tax status? For instance, are the acquirers different?

By category of senior living? Assisted living, independent living, CCRC, etc.

Or how does the age of a facility affect the risk of failure, quality, or price to the consumer?

We think it’s important to see trouble coming as a consumer and avoid it if possible. But we also want to reward quality and value with our patronage.

Share your questions and experience

What do you want to know? Or what do you see from data or experience? Share in the comments and we’ll see if we can dig-up the answers. Or learn from your insights.

We welcome your thoughts on the questions. Does this square with your experience? Are there questions we should explore that we didn’t discuss? Let us know. Love a discussion on an important topic.


8/29/2019 Worth: How Non-Profits Can Use Business as a Force for Good


Add yours

  1. I share your opinion for the most part, I think that some factors are worth having a more sophisticated
    look to comprehend what is happening.

    • Exactly, Adelia Zito. It takes a more sophisticated analysis. The label “nonprofit” doesn’t guarantee beneficence or good results. Even within the “nonprofit” tax-status world there are plenty of “for-profit” motives. And similarly, “for-profit” doesn’t automatically equate to greediness or bad results. Plenty of high-performing for-profit senior services providers that deliver outstanding service and results. Like most of life it’s a bell curve and you have to look at the specific facts and get beyond the labels. Great comment. Thanks for the read and for sharing your thoughts.

  2. I think a nonprofit organization is more than profitable then profitable organization, my i right or wrong

    • It’s certainly true of some nonprofits. But the opposite is also true for some. Nonprofit should be a tax status, not an objective. But some nonprofits take the title literally and don’t pay attention to margins. Often managing the organization to breakeven or giving it away till there’s nothing left to give. Stephen Covey’s rule is, “No margin, no mission.” If you’re not making enough to stay in business? Someone else ends up serving your customers and pursuing your mission.

  3. Hello there! Thank you for clearing all this up for us!
    Glad I stopped by your informative blog.

    • With your law background, you can appreciate the need to look behind the labels to the actual functions and performance. There can be an amazing number of “for-profit” functions and motives behind the “nonprofit” label.

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