Expanding the market.

Spend-down for assisted living seems to be a growing trend

IN THE NOT-SO-DISTANT FUTURE, THE FOLLOWING SCENARIO WILL be played out hundreds of times weekly across the U.S. In fact, it's already started to happen: "Bob, this is Sue. Sorry to be calling you so late, but we have an important family decision to make. You remember when you came home at Christmas, you said Mom seems to be getting quite frail. Well, her condition has gotten worse and I've been searching for options.

"Let me just cut to the chase. The best choice for Mom appears to be a place called The Gardens at Westridge. It's assisted living--it provides a nice residential setting, but with a strong medical foundation. But here's the rub. The Gardens costs $2,500 per month. Mom can afford only about $1,500 a month, unless she sells the house and uses the money to help pay.

"I'm working on a spend-down model on my laptop, but Mom seems really concerned about leaving most of her money to us and the kids. I told her that she really needed to do what was best for her and not worry about us. Do you agree? If so, here's what I'm proposing..."

Sue's spend-down spreadsheet shows that the $100,000 home sale proceeds will last about eight years, spending down at $1,000 per month while earning 5 percent interest on the residual balance in any one year. (That's allowing for a 4 percent annual increase in the community's monthly service fees.) According to the actuarial tables, this should work: Mrs. Barker is 83 years old and has a statistical life expectancy of seven years.

Of course, Mrs. Barker could live well into her 90s or beyond. But she has another important safety net. Only about a third of her pre-tax monthly income--approximately $800--comes from Social Security. The remaining $18,400 comes from savings on her portfolio of approximately $360,000, on which she earns a pre-tax savings rate of 5 percent. So if Mrs. Barker spent down her home equity, she could start a similar spend-down process at the end of the eighth year. Assuming The Gardens at Westridge's monthly service fee continues to escalate at 4 percent a year, Mrs. Barker's nest egg would last another 12 years.

Then there's a third option: financial help from her adult children. This might come into play if, after Mrs. Barker had lived in the community for some time, she encountered financial difficulty.

How much of this kind of spend-down is going on? It's hard to say. Empirical and anecdotal evidence of spend-down or financial help from children is extremely difficult to obtain. It seems that many owner/operators are playing a don't ask, don't tell game: Rather than ask about income and asset qualifications, they inform seniors and their families what it costs to live there and let them decide whether they can afford it.

A recent survey by the National Investment Center for the Seniors Housing & Care Industries indicates that many seniors may be spending all their available after-tax income on monthly service fees, and are also spending significant amounts of their savings. This may be true, but beware of basing your market size estimates for a new facility on the assumption that residents will dip into savings to pay their initial monthly fees. Instead, consider spend-down as a safety margin to cover future cost creep as residents age in place.

Spend-down is already occurring in other senior housing settings. It is universally accepted in nursing homes, where the government can be counted on to step in with Medicaid coverage if a resident becomes impoverished. And it is effectively being used in some CCRCs, although the practice goes by another name. Communities that charge entry fees often only partially refund them, keeping a certain percentage of the principal every month until reaching a floor (usually 50 to 80 percent). If the entry fee is $100,000 and the non-refundability rate is 2 percent, residents are essentially spending down $2,000 of their assets every month until reaching the floor. And some CCRCs allow residents to spend down the remains of their entry fees to make up the difference if rising monthly fees exceed their incomes.

So how can you determine who really qualifies for your services?

First, don't forget that census information or other demographic data usually gives pre-tax incomes, while seniors must pay their bills with after-tax income. Most of the people who qualify for assisted living today are in about the 20 percent tax bracket.

Furthermore, seniors who don't want to spend down should pay only about 80 percent of their after-tax income for assisted living, leaving the rest for other ancillary and discretionary purchases. This modest discretionary income pool can be used for lifestyle expenditures in the early stages of a senior's residence in assisted living. Later, as his or her lifestyle becomes limited, the funds can be shifted to paying for advanced levels of tiered pricing as additional ADLs are provided.

Applying those formulas, someone who wanted to pay $2,500 per month, or $30,000 per year, in assisted living service fees and still have 20 percent for discretionary purchases without spending down assets would need $37,500 in annual income. That comes to about $45,000 in pre-tax income.

But look how the market expands if the resident and her family are willing to apply a prudent spend-down strategy. For someone with Mrs. Barker's fixed assets, the income needed to afford a $2,500 monthly service fee drops to about $28,000 a year before taxes. Nationally, about 4.2 million households headed by someone 75 or older have incomes of at least $28,000, while only approximately 2.3 million report $45,000 or more.

If someone in every one of those additional 1.9 million households qualified for assisted living, they would represent about 24,000 80-unit communities. Obviously, not all have the qualifying home equity, or would opt for assisted living if they did. But even if just 10 percent qualified and were interested, they would represent an additional 2,400 or so 80-unit communities--more than 190,000 units.

Is spend-down a significant factor in assisted living today? Probably not. But it probably will become a much more significant factor over the next few years.

Operators will begin to encourage spend-down as they realize that, used prudently, it can significantly expand the market. More seniors and their adult children will agree to spend their assets as they become convinced that it will open up options that allow them to live out their lives with more independence and dignity. And cost creep leading to tiered pricing will require seniors to pay higher fees as assisted living residences--and their residents--age in place.

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

The shape of the future?

If spending down to pay for assisted living became widely accepted, a whole new market would open up for a typical community with a $2,500 monthly service fee.

                                     Additional
                                      75-plus   Additional
Monthly                   Qualifying  income-   80-unit AL
payment from    Monthly     income   qualified  communities
current income spend-down needed [*] households needed [**]
$2,500               $0    $45,000           0         0
$2,000             $500    $37,500     600,000       750
$1,750             $750    $32,800   1,100,000     1,375
$1,500           $1,000    $28,000   1,900,000     2,375
(*.)Pre-tax qualifying income, allowing 20 percent to be set aside for
discretionary spending
(**.)Assuming that 10 percent have sufficient assets for spend-down