Assisted Living Update

As 2010 comes in and looking back on 2009, the Assisted Living market has been on a bit of a roller-coaster.  Without question, the downturn in the economy caused some provider pain most notably among some of the larger, heavily leveraged companies (e.g. Sunrise and Sunwest).  Occupancy rates were soft in many parts of the country, particularly those regions with very to moderately distressed housing markets.  As residential housing sales have modestly improved, the occupancy rates have gradually moved higher.  This is not to say that the housing sales improvement alone has contributed to this trend as providers have also been busy creating incentives to attract additional residents. Providers that have fared the best have been those that are more modern or more updated, less leveraged, already stabilized, in market areas that are not significantly over-built, are priced moderately, and have a solid array of specialized care services to serve a differentiated resident population.  The opposite end of this spectrum is where providers have struggled with one addition; newer projects, especially those that are not geared toward Medicaid waiver residents but more so toward the upper-middle end of the price range, have struggled to achieve occupancy projections.

Looking ahead into and for the balance of 2010, I don’t see significant changes in the current trend coming out of 2009.   I believe the economy will still negatively impact the housing market through at least mid-year and while sales of existing homes have picked-up somewhat, there is not question that the present demand has been bolstered by federal stimulus/tax credits.  Once these dollars evaporate in April, and with a continued slow to no growth job market, demand within the housing market may all but flatten-out or recede.  Important to note as well about the housing market is that while sales have moved up, prices continue to fall suggesting that the supply of properties still exceeds the real demand by quite a margin.  In fact, a significant percentage of homes sold in the last quarter of 2009 were foreclosures or distressed sales of one type or another.

Another issue which plagued the industry in 2009 was the lack of reasonable cost, available credit.  Again, in the mid to latter part of 2009 credit availability softened a bit and the availability of funds via the HUD Lean program helped.  Going into 2010, credit remains however, tight and terms still rather stringent compared to four to five years ago.  Similarly, banks remain tentative about additional commercial loans as their commercial portfolios have taken the biggest beating over the past year to eighteen months.  Regardless of the source of the loan collateral (non senior housing), commercial loan portfolio losses equal tight credit and lending decisions for all industries.  Additionally, if these factors are not enough, the Obama adminstration is pushing a new “bank” tax policy that if passed, could significantly chill the credit markets even more.   If Washington maintains a negative stance toward the banking industry, all health care lending and senior housing lending will more than likely suffer and any softening that occurred in late 2009 will reverse.  Unfortunately, this means that an already tepid transaction climate will cool equally as rapid and prices per unit will need to fall further for any deals to close.  In short, tight to no credit means that the realizable asset and business wealth in the industry at least point-in-time, regresses.

Turning to the overall market today and the macro view, what’ s been evident over the last three years is that the Assisted Living market has reached a bit of a maturity stage.  This doesn’t mean that growth cannot and will not continue to occur.  It does mean however, that the building for building sake boom has ended, operators now predominate the development process rather than real estate developers, and certain markets in certain areas have become truly over-developed.  Clearly, the demand curve is far more elastic than originally thought, made plainly evident by the economic downturn.  The market also has become more niche’ or specialty driven, moving toward a more integrated and appropriate care model versus a housing model with ala carte services.  All that said, the growth in the industry will still primarily come from consumer choices; opting for more residential accommodations to receive basic care services versus an institutional setting such as a nursing home.  According to a series of surveys conducted by Genworth Financial, the average annual cost of assisted living care in 2009 was $34,000 compared to $74,000 for a semi-private room in an SNF.

An element of the industry that is changing and perhaps, will shape the industry along a different path in the coming years is the expansion of government as a payer source.  A push within the states and at the federal level to reduce the cost of institutional care has created a new market within the traditionally dominant private-pay, ALF arena called roundly, Home and Community Based Services (HCBS).  Within the broad HCBS arena, Medicaid waiver programs have had the biggest impact on the ALF industry as a source of once, financially ineligible residents.  With both the states and feds embracing more uniformly, the concept of using Medicaid dollars to pay for assistive care as opposed to using a larger pool of funds for institutional care (typically SNF care), Medicaid or Medicaid waiver programs have gradually inched upward as a legitimate consumer of ALF capacity.  As this expansion of HCBS and Medicaid waiver programs continues, the industry should not be surprised by a movement at the Federal end to begin to federalize a regulatory framework for ALFs.  The fact remains that once government pays for something, it tends to want to regulate it or perhaps more appropriately stated, it will regulate it.  As the Feds typically use a very broad brush when it comes to regulations, the industry’s players, regardless of their participation in Medicaid waiver programs, will feel the effect of government regulations.  As a friend of mine says, “it is what it is”.

Up until the time that the Feds become more directly involved (and I believe they will in due time), the industry will remain non-centrally regulated.  This means that for all intents and purposes, no single licensure or regulatory category is yet in effect and the same will continue to vary widely state to state.   As an approximation based on data available, there were 38,000 ALFs (by the broadest definitions) in 2007 consisting of 975,000 units.  It is a certainty that the industry has grown somewhat since then.  In comparison, the SNF industry has approximately 16,000 facilities and 1.6 million beds.  Unlike the ALF industry, the SNF industry has actually been shrinking, somewhat due to the diversion of Medicaid dollars to waiver programs and HCBS programs, eliminating certain residents from the SNF mix as well as other reimbursement and economic pressures across the industry to become more efficient.  It is highly likely that the two opposite trends will continue over the next ten years with SNF capacity continuing to slowly decline and ALF capacity continuing to increase, albeit at a much slower pace than in the previous decade.

Looking across the ALF industry today, a summary of its key demographic facts is presented below.

  • The dispersion or penetration of ALFs varies widely across the nation.  The national average number of facilities per 1,000 elderly was 22.9.  The states with the greatest number per 1,000 elderly are Minnesota (104),  Virgina (46) and Oregon (43). Hawaii (2), Connecticut (4) and West Virgina (7) had the fewest number of facilities per 1,000 elderly.
  • Where the largest penetration of ALFs exists, the demographics in terms of education, median income, and median home values are more favorable than in other areas.  There also tends to be a correlation between ALF location and the presence (lack thereof) of minorities.  Rural areas tend to have very few to no ALF penetration and the same is true with inner city environments, heavily populated with or by minorities.  Not coincidentally, these areas also have lower levels of education attainment, lower levels of median income and lower median home values.  Predominantly, ALFs are found in suburban or outer-suburban markets and their census is heavily skewed toward middle to upper-middle class caucasian residents.
  • Not too surprising, in areas where there is a greater penetration of ALFs there is also a greater presence of SNFs with stronger Medicare and private pay occupancy levels.  In short, there are fewer ALFs congregated close to SNFs with high Medicaid censuses.
  • The states that spend the most on Medicaid waiver programs and HCBS programs have higher penetrations of ALFs compared to states with lower spending levels.  There is also a correlation between the percentage of the population with long-term care insurance plans and the penetration levels of ALFs – more ALFs, higher percentage of individuals with long-term care insurance.

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