Shared occupancy.

If you try this path to affordability, proceed with caution

ASSISTED LIVING SPONSORS AND OPERATORS HAVE GENERALLY done a good job of serving seniors with after-tax incomes of $35,000 or more. But few have managed to deliver truly affordable assisted living (without spend-down) for those with incomes below $35,000. One way to do so may be to offer shared rooms.

Only about 25 percent of today's 80-plus seniors can afford to pay for assisted living at its current average monthly rate of $2,500 without spending down their savings or receiving help from their children or from sponsor subsidies. A great many of the other 75 percent--about 4.5 million people--have no savings or affluent children to fall back on, and simply can't afford that monthly rate.

Medicaid waivers and other government subsidy programs could help subsidize assisted living for moderate- and low-income residents, but the near-term expansion of such programs appears unlikely. What's more, many industry professionals do not favor third-party payor programs because they fear that regulations are sure to follow--and that rates may be too low to pay for both good care and profits.

The other solution is to lower monthly rates. For every $200 per month reduction in monthly service fees, over 250,000 additional seniors nationally would qualify for private-pay assisted living. Let's assume that approximately 30 percent of those, or 80,000, would need assisted living services. If 10 percent of those people would opt for assisted living, that $200 reduction would result in a demand for 8,000 more units, or 100 80-unit communities.

But lowering rates isn't easy. About 70 percent of a typical assisted living community's base monthly service fee is needed just to cover operating expenses (approximately $45 per resident-day on average), while the remaining 30 percent is used to cover real estate costs; debt service, and/or investor return. (These numbers are typical, but they will vary by geographic region, your cost structure, and your community's unique characteristics.)

So what's the solution? One answer may be the model nursing homes call "semi-private occupancy," in which the facility offers shared living arrangements for unrelated individuals. Since that phrase is an oxymoron, I suggest we call this "shared occupancy" instead.

While shared occupancy in assisted living is certainly not the ideal, nursing homes have demonstrated that private-pay, semi-private occupancy can become an accepted service delivery system. In assisted living, this strategy will probably be a necessary part of the changes needed to accommodate a large, underserved sector of the market. It may also help troubled properties respond to a market correction.

A 1998 survey conducted by the National Center for Assisted Living (NCAL) indicates that approximately 78 percent of assisted living communities offer some shared living. Very few offer shared occupancy units only; instead, most offer a mix of private and shared occupancy.

The traditional situation involves married couples where one of the spouses (most frequently the husband) needs to be close to reasonably consistent and structured assistance with the activities of daily living. The other spouse is typically healthy, but can no longer consistently provide the necessary support.

The non-traditional situation is the one with huge market potential. This typically involves two unrelated individuals who live together. Sometimes this is because of a prior shared living experience, a desire for companionship, or a paying resident's desire for a live-in caregiver, but economic considerations are usually the driving factor.

In evaluating the economics of shared occupancy, beware the marginal analysis trap. This involves considering only the incremental (new) increase in expenses-- the added direct cost of a second occupant--without allowing for the allocation of all necessary fixed costs (overhead) and profit objectives across each resident.

Shared occupancy can reduce a typical base monthly service fee from $2,500 to approximately $1,650 per resident. The savings result from residents sharing the cost of debt service and return on equity (about $590 each), property-related expenses ($4 per resident-day, or $120 each), and other operating expenses ($75 each), and from a modest decrease in operating margin ($65), if the operator is willing to give up a small amount of operating profit. These numbers are based on a community with total costs of $110,000 per unit with 75 percent debt, 9 percent interest, and a 25-year term; and 25 percent equity with a 14 percent cash return. A simple rule of thumb is to estimate that your shared-occupancy monthly service fee is likely to be about 60 to 70 percent of your private-occupancy fee.

At least three unit designs can be adapted to shared occupancy, depending on how low you want monthly costs to go. The first is a typical assisted living studio unit of about 350 square feet, whose layout is very similar to that of a semi-private nursing room. Second is a modified one-bedroom space with a living area of about 400 to 450 square feet modified so that each resident has an individual sleeping area with a modest shared sitting area. The third is a two-bedroom unit with two equivalent sleeping areas and a larger shared living area, totalling about 600 square feet.

Regardless of the model type, you must offer reasonable privacy, dignity, and affordability--and equal turf. That means, wherever possible, both residents should have equal amounts of privacy and dignity. Roommates must be reasonably compatible, and another good match must be made if one of the seniors dies, moves out, or is transferred to nursing. Sharing a bathroom can be particularly challenging, but it's certainly easier to accommodate if the two individuals get along.

Proper market positioning is also integral to executing this strategy effectively. Consumers make practical economic trade-off decisions almost daily, and savvy marketers have found ways to make those choices more palatable. Airlines, for instance, have renamed their "second-class economy" tickets "coach" or "main cabin." Ocean liners have dropped the Titanic's "steerage" class for friendlier terms such as "Promenade Deck."

We can design or modify living units to provide shared occupancy. We can run the numbers to establish affordable and profitable pricing. But the real challenge is consistently achieving compatibility between two unrelated individuals who are set in their ways and sometimes forgetful. Nursing homes have faced this problem for years, and few have found a foolproof solution.

In shared occupancy assisted living and in other strategic approaches to affordability, we must build upon established approaches while pushing the creative envelope.

A contributing writer to Contemporary Long Term Care, 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.

                           Expanding the Market
                                        Additional    Additional 80-unit
                  Monthly Qualifying     75-plus       assisted living
                  service   income   income-qualified    communities
Type of unit        fee   needed [1]      people          needed [2]
Private studio    $2,500   $45,000          --                --
Shared studio     $1,500   $26,450    1,400 million         1,750
Shared unit,      $1,650   $29,100    1,305 million         1,630
separate bedrooms
(1.)Pre-tax income, allowing for 20% to be set aside for discretionary
spending, with no help from adult children.
(2.)Assuming that 30% of the income-qualified people qualify for assisted
living, and 10% of those who qualify opt for it.
Source: Moore Diversified Services, Inc. and Claritas