Affordable assisted living.

Chasing the elusive moving target

THIS IS THE TIME OF YEAR TO REFLECT ON THE PAST AND focus on the future. A top-of-mind issue has to be the huge challenge of breaking the Assisted Living affordability barrier. Herewith we've identified 9 pathways to affordability that--individually and collectively--can make a difference in the new year.

No one of the nine pathways is going to be the total answer. It's more likely to be "a little of this, a little of that." Using that philosophy, let's look at some details for five of the nine pathways.

1. Reducing total project costs. Capital costs are being reduced through donations of land, value engineering construction costs, fund-raising, and creative financing. Let's assume you can create an ideal affordable community with a very modest total all-in capital cost of only $85,000 per unit, clearly beating the typical benchmark of $120,000-plus in many markets. The $85,000 figure assumes the total turnkey project cost is divided by the number of units. This project will require a monthly debt service per unit of approximately $460, assuming a very low 5 percent interest rate on a 30-year mortgage.

So very low interest loans and even tax credit incentive programs certainly help, but capital costs typically represent only about 30 percent of your monthly service fee component, while covering operating expenses takes up the remaining 70 percent.

2. Reduce operating costs. Dealing with adequate operating costs is a business fact of life--for both for-profits and not-for-profits. Owners and operators have found it extremely difficult to offer basic, service-enriched assisted living for a cost per resident-day under $45, or $1,365 per month. But if you could reduce your existing expenses by $2 per resident-day (about 4 percent), you might be able to reduce the monthly service fees for 20 residents by approximately $200 a month. (This example assumes 74 occupied units, saving $60 a month per unit, or $4,440 a month with the savings allocated to 20 moderate income seniors, or $220 a month.)

The sobering reality is that serving the Gap Income Group senior (with an income of $12,000 to $25,000 a year) frequently is limited by the inability to cover just ongoing operating expenses effectively--even when land and brick-and-mortar costs are reduced significantly, or even donated. This group has tremendous needs and represents almost 30 percent of the age 75+ seniors market.

3. Shared occupancy of unrelated individuals. While normally a dangerous marketplace assumption for high-quality market-rate Assisted Living, it's time for innovative approaches to shared occupancy as we try to balance acceptable trade-offs and affordability. A very moderately priced, market-rate Assisted Living unit charging a base fee of $2,000 to $2,200 per month for single-occupancy can typically offer that same unit for $1,550 to $1,650 per resident per month for shared occupancy of unrelated individuals. That's because the capital costs of the unit and certain shelter components of operating expenses are shared. An analysis indicates that, without compromises in standards of care, operating expenses can be reduced from about $50 to $37 per resident-day. But remember, this is a very tricky business strategy.

4. Blending the rent roll. The blended rate approach typically involves decreasing the rates on 20 percent to 30 percent of your units, while modestly increasing the rates of the remaining 70 percent to 80 percent.

The downside to this scenario is the sobering reality that market rate residents are partially subsidizing lower income seniors. Let's say your market rate is approximately $2,500 a month and you'd like to offer a $1,000-a-month subsidy to 25 percent of your residents. In this typical rate-shifting model the "full pay" residents are paying a premium of over $300. This concept also requires the establishment of a pragmatic means-testing screening process to determine which residents are legitimately entitled to the below-market-rate benefit.

5. Using endowments for reducing the monthly service fee. Use of endowments to buy down the market rates is a concept whose time may have come, especially for not-for-profits. But to reduce the monthly service fee for a low-income senior by just $750 per month, a permanent endowment fund of approximately $129,000 earning an average 7 percent annual after-tax return is required. To reduce the rate by $750 per month for 20 units would require a tax-free, interest-earning endowment of $2.6 million.

Medicaid waivers and other entitlements have serious current limitations but future potential. There is also the additional potential for financial support from children, spend-down of assets, and the benefits of an Assisted Living medical tax deduction. (See "Assisted living: When are fees deductible?," November 2000 CLTC, page 28.) Affordable Assisted Living clearly is the challenge--and the opportunity--for the near future.

Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based senior housing and health care consulting firm, and author of Assisted Living 2000.

The 9 pathways to affordable assisted living

1. Reducing capital costs and debt service

2. Reducing operating expenses

3. Providing shared occupancy

4. Rate-shifting

5. Operating subsidies and endowments

6. Medicaid waivers and other entitlements

7. Financial support from children

8. Spend-down of assets

9. Medical tax deduction