How to Make an Adult Day Care Profitable

The graying of America suggests that operating an adult day care center -- ADC -- can be a profitable business opportunity. A 2013 report by the Centers for Disease Control and Prevention predicts 72 million seniors, aged 65 and older, will make up 20 percent of the U.S. population in 2030, twice the size from 2013.

A 2002 national survey funded by the Robert Wood Johnson Foundation reported 3,400 adult day care centers in operation nationally. This left 56 percent of the 3,141 counties in the U.S. underserved, indicating a significant need for more ADCs. The report concluded that the nation needed 5,400 new centers in 2002. The update eight years later from 2010 national RWJF survey reported an increase to 4,600 centers. These figures suggest the growth in ADCs continues to lag behind the elderly population growth rate.

Despite the evident need for adult day care services, operating a profitable adult day care center requires careful planning and having a clear understanding of all potential revenue sources.

There are two ADC business models based on services offered:

• Social models provide seniors basic care and supervision within a social setting, an array of activities and nutritious meals and snacks. Many social model ADCs offer additional services such as support groups for caregivers, periodic health screenings, bath services and transportation.

• Medical models provide all or many of the services offered by social model programs. Additionally, they provide services to clients with physical or mental disabilities, including an LPN on duty at all times who is supervised by a registered nurse trained in geriatric and dementia care. Physician services are available. Medical models often offer physical, occupational and speech therapies.

The two ADC business models have different revenue implications. More than half of all ADC revenue comes from public funding, with only a quarter being private-pay, according to the 2010 RWJF study. Medicaid, the Department of Veterans Affairs and state and local funding are the three largest ADC public sources of revenue, with Medicaid being the single largest revenue source.

Medicaid does not pay for adult day care directly, however. Rather, Medicaid pays ADCs for specified personal care services, physical therapy and nursing services from the list of Medicaid Covered Services that are prescribed by a physician. As such, despite being more costly to operate, you improve the chances of running a profitable ADC using the medical model, which allows you to tap into public-pay revenue streams with an array of Medicaid-approved services.

Social models, tending to be more dependent upon private-pay revenue, require different profitability-enhancing strategies. These strategies usually focus on targeting upper-income clientele who want and can afford a higher per diem, or will pay for a menu of diversified a la carte services. Such services might include gourmet meals and snacks, beauty and nail salon services, music and dance therapy, yoga and tai chi instructions, and creative writing and fine arts lectures.

The 2010 RWJF report found that 56 percent of ADCs operate as 501(c)(3) nonprofit entities, while 16 percent are connected to government agencies. This is significant, because the report also revealed that 8 percent of ADC revenue comes from grants. Internal Revenue Service rules severely restrict private foundations and public sector grant-making entities from awarding grants to for-profit business entities. As such, the most feasible way to tap into grant revenue is by operating as a 501(c)(3) nonprofit. This can make the difference between operating profit and operating loss.

Numerous public and private-sector grant-making entities provide ADC grants. You can find many public-sector grant-making entities at the Catalog of Federal Domestic Assistance and the USA.gov for Nonprofits websites.

The Foundation Center and The Grantsmanship Center are two prominent fee-based websites that provide directories of private foundation grant-making entities.

If you don't include fundraising to offset your ADC operating expenses, you're missing out on a huge profitability opportunity. Although the 2010 RWJF report says that only 5 percent of ADC revenue comes from fundraising and donations, that 5 percent can make the difference between operating profit and operating loss. Some ADCs have high-profile fundraising events that cover a big chunk of their operating expenses for the entire year.

Whether you're running, or interested in starting, an ADC, reinventing the wheel is not required. You can significantly increase the chances of operating a profitable ADC by following the guidelines, standards and best operating practices established by the National Adult Day Services Association, the industry's leading trade association.