10 unexpected trends in assisted living.

BASED ON AN INTERVIEW WITH JIM MOORE, MOORE DIVERSIFIED SERVICES, INC.

Assisted living is the fastest-growing sector in senior care these days, and for good reason: For those who can afford it, assisted living provides the older person with maximum possible independence, often in very handsome surroundings. Even so, investors and operators in this field have encountered some surprises in recent years, and there may be more to come. If they don't pay attention to some increasingly evident trends, they will pay a price.

I would propose my personal "top ten:"

1. High acuity levels and resident turnover

Just as nursing homes have seen their acuity levels increase markedly in recent years, so have assisted living facilities seen the arrival of much more need-driven people than many operators anticipated. Rather than simple shelter and assistance along the lines of medication reminders, people entering these facilities are bringing with them some fairly high acuity levels. And, with this, projects are routinely seeing turnover rates of 40% or more a year. This has, in fact, shocked more than a few in the field.

It was common to speak, a few years ago, of an age 65-plus market, but in fact the average age of assisted living residents is 83 and, even in independent living facilities, 78. The fact is, people are drawn to assisted living only by some fairly serious need-driven considerations.

Many operators have responded by providing services incontinence care, dementia care - that weren't available a few years ago. In fact, some organizations are becoming concerned about drifting into "gray areas" concerning medical licensure. They are (or should be) keeping close watch on their states' licensure requirements, which vary considerably from state to state. The licensure issue is one reason nursing homes themselves, rather than fight assisted living, are starting to join in; an estimated 60% of them are at least considering this alternative.

2. Threat of Regulation

There is concern that the nursing home OBRA experience not be repeated with assisted living. The question arises, though, that if Medicaid becomes a major player in this field, what sort of strings will be attached? How much regulation will be Federal, how much state, and what will the regulation be like? For now, the most practical approach to the issue is to make sure that the facility is built in accordance with anticipated basic regulatory requirements - e.g., fire doors, corridor widths, sprinkler systems - that, if not required now, may well be required in the near future. In short, make sure that the "bricks and mortar," at least, are prepared for government oversight.

3. Cost Creep

It's one of those slow, insidious things that operators often pick up on only after it's been happening a while: a little more overtime, an occasional staffer added here or there, steadily increasing bills for healthcare supplies. Suddenly it's time to "do something about this" - most often, by a price increase. But the residents who are already in the facility don't want to hear about it. This leads to point 4:

4. Complex Pricing Systems 

Suddenly the facility's nice, simple, easy-to-understand service fee has evolved into a multilevel price structure. You start by increasing fees $200 to 300 a month for increasingly intense levels of assistance with activities of daily living. Or perhaps you charge $8 to 12 for every 15-minute increment of additional care. New residents, at least, will know about this fee structure at the start and, presumably, will accept it. From an administrative standpoint, though, this requires more sophisticated record-keeping and cost-accounting systems - but that investment comes with the increasing complexity of this business.

5. Market Saturation 

Some metropolitan areas are approaching market saturation. Many major companies feel that they must have a presence- and not just a single presence, but a multiple one - in certain metropolitan areas (Atlanta and Boston, for example). This concentration has not yet reached the "market disaster" point, but in assessing whether saturation is approaching, there are some important "vital signs" to watch for. Are occupancy levels in various neighboring facilities starting to sag? Why? Are they in temporary partial shutdown because of a major remodeling project? Or is the sag starting to look more chronic? And what about fill-up rates? Today's projects fill up, on average, at a rate of five to seven units a month, net, after turnover. Anything slower than that over a reasonable period of time is cause for concern. One thing is certain: You won't be able to ignore point 6:

6. You Can't Rely on Demographics to Solve it

For a while, it was the 1990s' version of "if you build it, they will come": Even if we're not filling up now, an operator might say, surely with the aging boom we'll have no problems by the year 2000. This summons up memories of the 1980s, when inflation was supposed to cover up many a real estate mistake. Unfortunately, demographics will not cover up assisted living project development mistakes that are made today.

The reason is that in almost every demographic area, the growth of age- and income-qualified demographic groups for assisted living is increasing just enough to refill already existing units, at today's 40%+ turnover rates. There is not a big margin for error. In fact, the real "aging boom" will start in the second decade of the 21st century, when the first Baby Boomers start turning age 65.

7. Market Overlap Is Already Occurring in Some Areas

When combined with some evidence of market saturation, this is the ultimate set of problems for assisted living developers. Interestingly, in some market areas that, unfortunately, I am not at liberty to identify, there is market overlap occurring within the same company's operations. Marketing manager A is competing with marketing manager B to fill units, and they are confronting consumers who are smart enough to make deals by playing one against the other. The headquarters office, of course, just wants to see units filled and may not be aware that the company is competing with itself to do that.

With firms that compete with one another, the situation more resembles having two service stations on opposite corners of the street. Suddenly they both notice that their business is turning markedly downward. It's not so much that there isn't enough market size to support the competing assisted living facilities, it's that they're both going through their critical start-up periods at the same time. There's an old saying that timing is everything - but it is not always good timing.

8. Boom - Followed by Bust?

Recently my firm calculated that if all the projects in a particular market announced by major companies at the time came on line during the next 18 months, the assisted living inventory would increase by 23%. That is a huge increase, especially given current turnover rates. We're finding that the combination of companies going public and the rising availability of capital are producing consequences we're going to be noticing over the next two or three years. Is there a "boom/bust" potential here? The marketplace will provide answers fairly soon.

9. Managed Care Is No Savior

There used to be the argument - and it still exists in some quarters - that since assisted living provides a less costly alternative to nursing home care, it will be very attractive to managed care organizations as they take hold in long-term care. Today I am less certain that this is true.

Acuity levels in nursing homes have increased to such an extent that relatively few residents today fit the ideal profile for assisted living. Two years ago one might have argued that 15 to 20% of nursing home residents could be appropriately relocated to assisted living (assuming, of course, that they could private-pay). Now, though, I think that we have two separate populations in these settings, with very little overlap - i.e., a nursing home population whom government largely supports but can ill-afford to pay for, and an assisted living population who, if they become Medicare- and/or Medicaid-qualified, are also too large a population sector to support. I would love to see assisted living become a major player in the entitlements market, but how can this work given the current numbers and trends?

I don't see Medicare HMOs going beyond covering basic Medicare benefits anytime soon. Meanwhile, private long-term care insurance, which might be expected to use managed care to keep premiums under control, is still only a very small player in the market and is growing perhaps a little less rapidly than some might have anticipated five or six years ago.

For these reasons, we counsel all our clients that assisted living must be viewed as a private-pay business. If there is ever an entitlements breakthrough, that will be a big plus for the industry - but don't count on it.

10. Extraordinary Efforts Will Be Required to Survive and Prosper with Assisted Living

This statement sums up all we've discussed. There is a lot of product out there, and an increasingly sophisticated consumer who is able to differentiate among projects. That is the overall challenge confronting the field.

I would add one more point: There is a lot of talk about "affordable" assisted living. This is a spin-off, I believe, from the concept of affordable housing. Clearly, such Federal programs as Section 8 and 202 have been good programs for the economically disadvantaged needing basic housing. But assisted living is an altogether different arena.

If we look at the basic costs involved in providing basic assisted living services (shelter, food, reasonable help with ADLs), they come to about $40 per resident day (if you're fortunate). Multiply this by 30.4 days, and the basic outlay is between $1,200 and $1,300 a month.

There is simply no escaping this. Even if someone were to give the developer the land and the building, which seems unlikely, these are the basic costs that must be recovered for the operator to break even. Tax credit programs help, but they are not the total solution to the affordability challenge.

I wish there were a way to resolve this, because there are certainly large numbers of people in our society who need and deserve these services. But, as a practical matter, assisted living is and probably will remain private-pay. From society's standpoint, that is our challenge- and dilemma - for the future.

Jim Moore is president of Moore Diversified Services, Inc., a senior housing and healthcare consulting firm based in Fort Worth, TX. For further information: [phone]; fax [phone]; email [e-mail] and web page www M-D-S.com