The battle for market share.

Don't count on the age wave to lift all boats

WE'VE ALL SEEN THE NUMBERS: IN THE EARLY YEARS OF the new millennium, the number of elderly people will rise dramatically, creating a bigger market for long term care providers. But in the turf battle between assisted living and nursing homes, who will benefit most?

In estimating demand, the industry has focused primarily on the ratio between beds and people 85 and over, but the real market is the 80-plus population. More than a third of the people in nursing homes are between 75 and 84--slightly more than the number who are 85 and older. And average ages in assisted living appear to be quite similar.

Today's nursing homes are serving residents with greater medical needs than ever before. In recent years, the industry has consolidated from a dual-level service delivery system (intermediate and skilled) to primarily skilled care. The average resident is 82 to 83 years old and quite frail, physically and/or mentally.

Nursing home occupancy rates have dropped significantly in most parts of the country. SNFs currently provide care for approximately 1.6 million people, about 90 percent of them seniors. Over the past few years, that figure has remained relatively constant. Meanwhile, thanks to the addition of new beds and a rise in the annual turnover rate, average occupancy rates have dropped to 88 percent.

Medicare still funds about eight percent of all nursing bed days, notwithstanding the challenges of PPS. Many of these are short-term subacute care stays. Medicaid remains the main payor in nursing homes, reimbursing for about two-thirds of all resident days. Despite laws against shifting assets in order to qualify for Medicaid, the practice continues, creating sustained demand for Medicaid-reimbursed nursing beds.

At the same time, assisted living has grown steadily. Although exact numbers are hard to come by, most observers estimate that the industry has the capacity to serve about a million residents.

The average occupancy rate for stabilized assisted living facilities is about 90 percent. The average resident appears to be only a year or two younger than the average nursing home resident, but she needs less help with ADLs and takes fewer medications.

Many of the lower-acuity people who would once have gone into a nursing home now choose assisted living, which is generally less institutional than skilled nursing and therefore more appealing to residents and guilty family members. But they can't stay there forever. With turnover rates of 35 percent a year or higher, assisted living facilities have become a significant feeder market for nursing homes. Studies show that approximately 40 to 45 percent of the people who leave assisted living go into nursing homes.

Assisted living is still almost entirely private-pay. This puts it out of the reach of the poor (with a few exceptions in states with Medicaid waivers), but many moderate-income seniors have proven willing to spend down other financial assets in order to afford it.

What's likely to change between now and 2005? The following scenarios seem likely:

* Nursing homes. Acuity levels will rise even higher as Medicaid reimbursement decreases for lower-acuity patients. More skilled nursing care will be offered by hospitals.

* Assisted living. Medicaid waivers, which currently pay the bills of less than 2 percent of the people in assisted living, may become a more common source of funding. Congress may offer tax incentives to encourage those who can afford to pay for their own or their parents' long term care--and those who have a choice will probably choose assisted living over skilled nursing if it can meet their needs. New or expanded sources of private payment, such as expanded incentives for long term care insurance coverage and new approaches to modified life care arrangements by CCRCs, may also make it easier for people to pay for assisted living.

Spend-down could become as prevalent in assisted living as it is in nursing homes today, since assisted living allows consumers to spend down at a slower pace while living in a more desirable setting.

Assisted living will probably expand to serve higher acuity levels, encroaching further on what used to be nursing home territory. And increased awareness and consumer education will cause more income-qualified seniors to opt for assisted living when that care level can satisfy their needs.

* The 80-plus population. By the end of this year, the 80-plus population is expected to total 8.9 million, an increase of 1.1 million since 1995. In the six years between now and 2005, the U.S. Census Bureau expects this population to grow by approximately 1.5 million, totalling 10.4 million.

Of that 10.4 million, only about a third (3.45 million) will have annual incomes of $30,000 or more. These will probably be able to pay for assisted living--and are likely to opt for it if they need long term care. Another 27 percent (2.8 million) will bring in between $15,000 and $30,000 a year. This "gap group" could probably pay for assisted living by spending down other financial assets. Judging by current trends, it's likely that as many as 10 to 15 percent of these 6.25 million income-qualified or gap group seniors--a total of 625,000 to 940,000 people--will opt for assisted living at some point, but there's no telling how many will in any given year.

The remaining two-fifths (4.15 million) of those year 2005 seniors will have incomes of less than $15,000, making them eligible for Medicaid. Therefore, the approximately 5 or 6 percent (208,000) who will need long term care that year will be candidates for nursing homes, unless assisted living waivers become far more common.

So what kind of new beds will we need? With net occupancy rates on the decline, demand would have to increase dramatically before more nursing beds would be needed. There is growing evidence that annual turnover rates in most nursing homes range from 65 to 100 percent. This means nursing facilities must admit 720,000 to 960,000 new residents a year just to keep occupancy rates stable. Bringing nursing homes up from their current 88 percent occupancy to an optimal level of 95 percent would mean filling an additional 128,000 additional beds this year--and then keeping them full. All things considered, it appears that nursing home net fillup rates will be flat to declining over the next five years.

The picture looks brighter for assisted living. Resident turnover appears to average between 35 and 40 percent a year, representing 350,000 to 400,000 people at the industry's current size.

Some of those slots will be filled by some of the 625,000 to 940,000 people mentioned above. But the true bonanza for assisted living lies in attracting a greater percentage of the 80-plus seniors in medium- to large-scale markets, cracking the tough affordability nut, and developing a financially feasible product for small-scale markets. Meeting those pent-up demands could create a need for hundreds of thousands of new beds in the next five years.

Nursing home operators face a steep uphill battle to maintain market share. The struggle should be easier for assisted living managers, but its outcome relies mainly on how deeply they penetrate into the existing market.

One thing is true for both types of long term care providers: Relying too heavily on the growth of the 80-plus population in the next five years to justify new beds or units would be a mistake.

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.

                               WHO'S THERE?
Only about a third of all nursing home residents are 85 or older. One in
nine are under 65.

Under 65 11%
65-74    16%
75-84    38%
85-plus  36%


Source: American Health Association, Facts and Trends: The Nursing Facility
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