When it comes to the cost of food at a long-term care facility, it’s easy to feel stuck between a rock and a hard place. As the largest recurring expense outside of payroll for most facilities, it’s a place you’d love to find some savings. But you know that food can make or break the morale and reputation of your facility.
In today's digital age, online reviews are commonly the first line of evaluation for everything – including long-term care facilities. A positive review can elevate the standing of a facility, while negative reviews can tank the reputation. Delicious and nutritious food will make an impact on current residents and their families, staff, visitors, and prospective residents alike.
If you’ve been working with the same food company for a few years, you might feel like you’ve locked in a good deal, but you’re probably doing your organization a disservice. Costs can creep up over time (and the recent unprecedented levels of inflation haven’t helped), and it’s worth your time to review this expense and explore alternatives. In this post, we address the variables that impact your outsourced food service contracts. We’ll tackle “self-op” food service in a future article.
Types of Outsourced Food Service
Many smaller to mid-sized senior care organizations outsource their food service operations to specialized food service companies. There are two main types of contracts: cost-plus and per diem.
Cost-Plus Contracts
The cost-plus contract is a straightforward agreement between the long-term care facility and the food service company. Under this contract, the food service company spends whatever is necessary to run the food service operation (the “cost”), plus a management fee (the “plus”).
With this type of contract, the long-term care facility is responsible for controlling costs, and there is less incentive for the food service company to reduce costs. With a cost-plus contract, a detailed budget may be agreed to based on the target meal costs; however, there is not much preventing the food service company from going over budget. If you do have this type of contract, the food service company should be providing a P&L (Profit & Loss) statement with the invoice. It is important to review the P&L periodically with the food service company to determine where efficiencies or improvements may be made, especially if certain areas are continually over budget.
Per Diem Contracts
On the other hand, a per diem contract is more complex. This type of contract normally includes a fixed rate per resident based on a predetermined base census, and a variable rate per resident, which either adds or subtracts from the fixed rate based on the actual census.
With this type of contract, the food service company has more responsibility for controlling costs, and there is more incentive for them to control and reduce costs. If your census changes significantly up or down, you would need to work with your food service company to update the base census and possibly adjust the fixed and variable rates. We recommend adding this as a term to your contract (if it is not already included), because if the facility census drops significantly over a period of time, the costs may not drop proportionally enough. On the other hand, if the census increases significantly over a period of time, the food service company may not have the resources needed to maintain the desired quality of the food service operation.
Pro tip: when your census is off by 10% or more 3 months in a row (whether up or down), you should renegotiate. We help initiate re-negotiations like this for our clients.
We typically recommend a per diem agreement for our clients. Cost-plus may seem like a good option because it is convenient to set up and no calculations are required. But most clients aren’t optimizing this expense because the bill typically does not lower, even if the census does. Ultimately, cost-plus is usually more costly in the long-run. Nearly 100% of the time, we find that per diem is the best option for our clients.
Additional Charges on Food Service Contracts
Regardless of the type of contract, there are often numerous additional expenses associated with food service operations that are addressed separately from the base charges. These charges may include:
- guest or employee meals
- holiday meals
- catering events
- smallwares
- floor stocks
- nourishments and supplements
In per diem contracts, these would be listed as separate charges. In cost-plus contracts, they may be listed out separately in the P&L statement.
In both types of contracts, there are typically purchasing responsibilities spelled out for both the client and the food service company. Reviewing the terms of these added charges is one way that you can save money.
Negotiating Purchasing and Housekeeping Responsibilities
The long-term care facility and the food service company have distinct purchasing responsibilities under both types of contracts.
For example, the long-term care facility is usually responsible for:
- telephone/internet
- pest control
- utilities
- service contracts
- licenses/permits, including any related to the service of alcohol
On the other hand, the food service company is usually responsible for:
- food
- training materials
- menus
- dues/subscriptions
- expenses related to food service employees (i.e. uniforms)
Besides purchasing responsibilities, there are also maintenance and cleaning responsibilities to consider, i.e. daily and deep cleaning, light replacement, and window washing. These responsibilities should be spelled out in the contract ensuring there are no costly surprises later on.
It's important to negotiate the responsibilities of both parties when developing an RFP to ensure that all terms are included and priced correctly by the food service companies.
Pro tip: it’s best practice to ensure that whoever has the most control of a certain expense area should be the responsible party.
Requests For Proposals (RFPs)
Another advantage of the per diem contract is that it makes it much easier to compare proposals from different food service companies when it comes time to put food service out to bid. This is especially true when comparing the financial impact of each proposal.
Because the per diem contract tends to spell everything out, it is less likely that surprises will surface at a later time after implementation of a new agreement. Though it may take more time and effort to facilitate an RFP process for a per diem agreement, the effort should be well worth it in terms of getting the best quality for the best price.
Pro tip: When putting the food service out to bid, the per diem contract makes it easier to compare bids and have more confidence that actual costs after implementation will be in line with what is being proposed.
Annual Price Increases
One last item to consider is the annual price increase. There is normally a clause in the agreement which allows for the food service company to raise prices, typically on an annual basis. This isn’t as significant for cost-plus agreements, as additional costs (other than the management fee) are naturally absorbed. We recommend basing increases on the rate of inflation rather than a fixed percentage.
From the facility perspective, this may not seem as savvy based on the recent higher inflation numbers our economy has experienced. However, by basing the increases on inflation, it is less likely that the food service company will try to renegotiate based on their increased costs since you’ve accounted for inflation. Also, if inflation is higher in a certain year, the food service company should be able to raise prices commensurately, as not doing so could put burdensome cost pressures on them and they may resort to reducing quality to compensate. On the other hand, if there is little to no inflation, or even deflation, in a certain year, having a fixed percentage cost increase will increase facility costs unnecessarily.
It is also important to use the correct CPI (Consumer Price Index). There are many variables to consider which are outside of the scope of this article. Have additional questions? Our team at HMS would be happy to help determine the correct CPI for your particular facility.
Pro Tip: Annual price increases should be based on the 12 months percent change in CPI rather than a fixed percentage.
Conclusion
Not only is food a huge recurring expense, but it can make or break the morale and reputation of a long-term care facility. By carefully considering the terms and conditions of each type of contract, you can effectively manage food service costs while providing excellent service to your residents.
But we know that managing this process can be time-intensive and challenging. That's why at Healthcare Margin Specialists (HMS), we help our clients navigate the complexities of food service contracts to negotiate the best possible terms.
With seasoned experts on our team, we know the ins and outs of the various food service contracts that senior care organizations use, so we can help our clients make informed decisions about their food service operations.
Ready to know more?
We’d love to talk to you more about your food service operation. Schedule a call with founder and CEO Chris Carroll to discuss how we can help you save.
