NIC's MAP project: checking in one year later; With four quarters of data now reported, trends have started to develop.

The National Investment Center for the Seniors Housing & Care Industries (NIC) Market Area Profiles (MAP[TM]) project was launched just over a year ago to establish a database of business trends in the top 30 metropolitan statistical areas (MSAs) for the major seniors housing and care property types, including independent living, assisted living, dementia care, skilled nursing, and CCRCs. While numbers have been reported quarterly since the first quarter of 2004, only now after a full four quarters (or one year) of data gathering can some definitive trends be observed. Some of these trends are common sense; some are rather surprising; all of them bear watching in the future.

"One trend we are definitely seeing is in occupancy--particularly in assisted living, in which we've seen occupancies that have struggled over the past several years with median occupancies nationwide being in the mid-80% range, and in the third quarter of 2004 still at around 87%," says NIC President Robert Kramer. "On the other hand, occupancies in the 30 largest MSAs are consistently running 400 to 500 basis points higher than we see for the rest of the country. In other words, there is a reason why many investors and operators have focused in on these areas. We are seeing very strong occupancy rates in these MSAs across all product types, but especially in assisted and independent living."

"We also are seeing and confirming over these past four quarters that what we call the 'top-tier' nursing properties are able to charge more without hurting occupancy," adds NIC Research Director Anthony J. Mullen. "In other words, when you look at the median of that upper tier--around the 87.5 percentile--they are able to charge substantially more than the average properties without hurting their occupancy rates. From that standpoint, it is an important insight for companies that are trying to stake out a high private-pay position. If you execute, it appears from the numbers that you can do so and not impact your occupancy negatively. Now, I emphasize the word 'execute.' The market is healthy enough in the top 30 MSAs that you can stake out that position and achieve it if you execute well. The market is deep enough for skilled nursing, assisted living, and independent living. This insight does not necessarily hold true outside the top 30 MSAs, however. We just don't have enough evidence there from our other work to claim that. In my opinion, it would be generally true, except in those areas where there would be more pressure because there were far too many properties opened at the same time."

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The numbers bear out Mullen's observations: Nursing properties in the upper tier on price for private-pay rates (the top 12.5% of properties) charge 48% more than the median-priced nursing home and have a slightly higher occupancy rate than the median-priced nursing home. This 48% difference represents increased revenue of $2,470 per month per private-pay bed ($7,638 versus $5,168).

That 48% gap may sound huge, but take it with a grain of salt, cautions Mullen: "It certainly raises an eyebrow, but in this context, it perhaps wasn't as surprising. The reality is that those who are paying private-pay rates in nursing homes today represent a very small percentage of the overall population--down around 14 or 15%. So the people who are placed in that position--usually either residents who have very complex medical conditions or are bedridden and can't feed themselves--have families who figure that it is very unlikely that the resident is going to have that long to live, and therefore are willing to spend whatever it takes to get the best care at the best property. In that context, I think the numbers make sense. If you can deliver on care, people will pay for it."

Another significant trend is shown in how payer mix influences freestanding nursing homes' occupancy and private-pay rates. Freestanding homes with a high Medicaid census (85%+) and those with a high Medicare census (30%+) had an occupancy rate approximately 200 to 300 basis points fewer than freestanding nursing homes with a more balanced payer mix (approximately 68% Medicaid, 13% Medicare, and 19% private pay/other).

"I don't think what we uncovered is shocking; it is basically grounded in common sense," explains Mullen. "We are seeing that nursing homes that either are forced into or try to become predominantly Medicaidoriented facilities have shown a somewhat lower occupancy rate--250 to 300 basis points lower. It basically is showing that not only in terms of occupancy, but what you can actually get for your private-pay rates, if you are orienting more toward a Medicaid population, you are taking more risk. This doesn't mean that there aren't successful homes that have a high Medicaid rate--there clearly are. It just means that you are going to have a stiffer headwind on the private-pay prices you can command and on occupancy rates. What's intriguing is that this also tends to hold true with Medicare in one good way and one not-so-good way. Those that are targeting a higher Medicare mix, maybe 30% of the residents, are suffering a little bit on occupancy, but the positive news is that they are getting a higher rate on their private-pay beds, about $41 a day above a Medicaid-oriented home and about $6 a day above the typical payer-mix home. It may be common sense, but I don't think anyone has actually been able to prove this before."

Clearly the trend toward nursing home private-pay has been down dramatically during the past 25 years and continues to be down in terms of the percentage of total nursing home beds, although the decline has clearly slowed. "We don't know where the bottom is, but we certainly are closer to the bottom than we were 25 years ago when the private-pay nursing home market first started to erode," Mullen explains.

"A lot of that came with the growth of assisted living and the demise of the intermediate care nursing facility," adds Kramer. "Many people before who might have gone into a nursing home and would have hit that private-pay market are now in an assisted living community instead. This change in the market has really accelerated that drop in the private-pay nursing market because assisted living costs less, but it is primarily a private-pay market, just as skilled nursing is now primarily a government-funded market."

"In terms of a trend seen in our numbers, clearly the private-pay nursing numbers are not going back up," says Mullen. "When you look at what has happened over the past few years, there is some compelling evidence that it is still in decline. Is the private-pay percentage going to fall down to 5% in nursing? My opinion would be no, but it certainly could slip to 10 or 11% in the next few years. Because of the severe Medicaid budget deficits in most states, there is a loosening, if you will, of the regulations to allow heavier-care residents into assisted living facilities. Some states are actually providing incentives to close down their nursing beds and switch over to assisted living. So I feel that this broader trend will continue, but at a decelerated rate."

Kramer agrees, but also cautions that observers not jump to conclusions either: "It would be a mistake to assume that eventually private pay is going to disappear from the skilled nursing facility. The reality is that as people live longer, very frail people with complex chronic conditions are not going to be suitable or, by regulation, able to be in an assisted living community."

At press time, data from the fourth quarter of 2004 had just arrived and had yet to be fully investigated, but Kramer and Mullen still had observations they could make based on their initial impressions, and even some beyond that time frame. "There is the ongoing issue of the median age of the nursing home properties in the 30 MSAs, which is 27 years old. Obviously these aging properties pose a major challenge for the operators in terms of the ongoing viability and competitiveness in the market," says Kramer. "The data here are pretty compelling. In contrast, the median age for assisted living properties is only 12 years, and for dementia care it is 7 years. I think that is a significant issue that will continue to be a real challenge."

Another trend that bears watching is the fact that the private-pay resident and the Medicare resident are key to the viability of the property. "The size of the differential between the median market rate for assisted living, which runs approximately $2,700 per month, versus the rate for private-pay nursing, which is approximately $5,200 per month, is larger than I expected," observes Kramer. "The fact of the differential is not a surprise, but the size is."

Looking for some positive news? Occupancies are still strong across all property types. "There has been concern particularly with assisted living properties about oversupply and weak demand," says Kramer. "But within the top 30 MSAs, demand has certainly caught up with the supply."

With significant trends such as these seen after only a year of collecting data, NIC's MAP project should continue to provide key insights for years to come.

For more information on NIC's MAP Project, visit www.NIC.org. To send your comments to the author and editors, e-mail [e-mail]. To order reprints in quantities of 100 or more, phone [phone].

BY TODD HUTLOCK, ASSISTANT EDITOR