A number of years ago, post-acute/senior living analysts, etc. started warning of a coming paradigm shift for skilled nursing and home health. I started writing and advising about this shift well over a decade ago. The signs were obvious.
- Rapid expenditure growth as a percentage of Medicare/Medicaid outlays.
- MedPac warnings to Congress of rising profit margins in these industry segments.
- Increasing reports from the OIG and other agencies substantiating billing abuse and likely, widespread fraud.
- Rapid agency and outlet growth.
- Rising per unit prices and cap rates.
- For SNFs REIT deals and rental rates that were clearly, unsustainable given the market conditions and policy trends.
- Overall reimbursement dynamics including passage of the Affordable Care Act that foretold stable to shrinking Medicare reimbursement.
- Increasing Medicare Advantage penetration.
- Increasing Medicaid funding problems at the state level and increasing conversions of state programs to Managed Medicaid platforms.
The handwriting was on the wall and even without a clear crystal ball, I began warning those that would listen (from clients to students to industry watchers) that the post-acute provider segments of SNF and Home Health would face stiff headwinds and the unprepared and unimaginative, suffer losses and operating struggles unlike any in recent times. As much as I loathe the “I told you so” speeches or references, the proof today is in the news constantly. One need (only) reference Genesis, HCR/ManorCare, Skyline, Signature, Kindred, Amedysis, Gentiva, etc. (I could go on) now versus ten years ago (or less) for validation. The paradigm of ratchet-up fee for service Medicare encounters, particularly therapy related, increase outlet span, more is better, bigger is better, don’t worry about quality metrics, and find ways to minimize top line operating costs, etc. ended with a resounding THUD (you (and I) knew it would).
To the question posed as the title: Is Seniors Housing/Living starting a similar paradigm shift? Because such shifts start gradual and pick up momentum as the “trend” winds strengthen, its easy to claim “no” or to ignore the bits and pieces that are the harbingers; a nod to a point-in-time. Lately, I have had an increasing number of conversations with learned folks and those heavily invested in the “housing” elements (independent and assisted) of senior living. To a one, they all remained bullish for principally ONE reason – demographics. Each points forward to a rising or swelling tide of senior citizens; byproduct of the great Baby Boom. With confidence, I hear an argument for a demand proposition that current and even near term supply, won’t meet. This is in spite of the current reality that supply is greater than demand and occupancy is declining consistently, not increasing. The Brookdale argument is thus: Give it time, the residents are coming and occupancy will improve. I am skeptical.
The economist in me is uncertain that other factors aren’t more in-play than accounted for or buffered by the “demographics” justification. For example, the notion that this Baby Boomer customer is the same customer that has been consuming and driving the current seniors housing paradigm is I’ll argue, a false premise. Their sheer numbers alone won’t guarantee supply consumption. Students of economics and history will find lessons aplenty such as the death of steam locomotion, coal power generation (though not fully dead), wired television, cassette format video and audio, etc. The customer bases for these products or industries never shrunk and in fact, they grew in number and purchasing power. Other dynamics shifted the demand curve ever so slightly for alternatives initially, then rapidly as the same came to the market and price points shifted. The fallacy is that demographics by number alone mean a sustainable market.
Seniors housing has a very elastic demand curve. The crux of price elasticity is that the greater or higher the price, the smaller the number of buyers. For the demographics of the coming wave of future seniors to be a demand boon for seniors housing, they (the seniors) must have purchasing power to consume the supply of product at the price levels current and future. This group must also have limited or no more than present, alternatives to the product (a fixed base residence). As their power to consume is measured by wealth, wealthier folks demand more alternatives and have more options. For example, a woman with a million dollar net worth and a $200,000 annual income can arguably buy 90% of the new automobile models (personal use) produced in a given year. She may buy a Rolls Royce or a Honda Fit. A woman with a ten thousand dollar net worth and a $20,000 annual income probably can’t buy any of the new automobile models and will need to use public transportation or acquire a very, very used car. As is the economic constant, shifts in wealth and substitution products across the price spectrum will influence supply or products and the prices thereof. Today, there is a bit of a supply inequity in seniors housing and as such, occupancy has trended down.
The supply inequity is seen via the homogeneity of the product, especially product that has come on the market within the last decade. Where occupancy is consistently high, the product is market or less than market, priced. Value-based products with or without services are more occupied than their above market competitors today. Fewer in number, their supply is consumed plus and in constant demand. I know today of no market or below market (subsidized or rent controlled) seniors housing that is good condition, in a good location (not crime ridden, etc.) that isn’t full or close to full – constantly.
To be clear, I am not anti or even really too bearish (yet) about seniors housing, assisted or independent. I was never totally bearish about the SNF and Home Health sector, just the paradigm that was operative. I believe that strategically aligned, market-sensitive product and providers will always do well. Unfortunately however, I also believe that too many seniors housing units and operators are “me too” driven, emphasizing a “same-same” approach. I find it hard to believe that the look-alike, feel alike, same amenities, different location or even similar location can be justified by “coming” demographics when similar providers, at similar price-points are at five-year occupancy lows. All too often, I am reminded of conversations I had with SNF operators telling me their justification for acquisition and the price per bed paid was: “We are different. We’re going to drive Medicare census to 40 plus percent, raise acuity and RUG levels, utilize technology to be superefficient, etc.” And when I would say “how” and show me where “you” had done this before and maintained high-quality, etc. and negotiated far better rates with the growing Medicare Advantage market, I got the typical ‘ignore’ response. Suffice to say, I was never proven wrong.
Because I will be asked, here’s what I am seeing that suggests the beginning of a paradigm shift for seniors housing – biggest for Assisted Living but still palpable and impactful for Independent Living.
- While the demographics are good, the economics of the demographics are not as good. Baby Boomers will simply not have the same economic wealth and thus purchasing power of their parents and grandparents. While some will have done well, the decades of their work and maturation cycle did not see the same kind of wealth and economic expansion that occurred for their parents. One simple measure very much tied to seniors housing is worth review – residential real estate. Most Boomers will have had multiple homes and have consumed large portions of their equity to “buy-up” or to adjust lifestyle. Their parents did not (home equity loans didn’t exist). Most Boomers also will have started with a more expensive home basis than their parents and thus, will not see the value appreciation. For example, I know many seniors that bought their home for $40K and sold it for $400K – appreciation of ten-fold. For a $100,000 Boomer investment to reap the same, the appreciation would need to be $1,000,000. This is just price. If I factored in life-cycle cost, the net is far worse (higher interest rates, taxes, etc. over the ownership period).
- Seniors housing is not getting cheaper. In many regards, driven by market forces to be more opulent, bigger, better, more amenities, etc., it is getting more price inefficient (cost per square foot needed to sustain). As the price rises, the product demand becomes more elastic and the number of consumers economically capable of consuming, fewer.
- Alternative products are increasing and ala carte service providers, expanding. Where staying “at-home” was not much of an option a decade or so ago, it is becoming easier with technology and service availability that suppports, aging in-place.
- Planned development communities that are geared toward active, younger seniors are consuming a market segment between 65 and 80. These communities have club houses, maintenance services, etc., and are typified by private homes, developed to accommodate early level disabilities (no stairs, grab bars in bathrooms, etc.).
- Because of the point prior, the migration age to seniors housing is increasing accompanied by additional disability. The more frail and disabled this cohort becomes, the more difficult it is for the provider to keep costs low as operations must support the true needs of the resident. This is a real problem for Assisted Living as occupancy today is often predicated on catering to a much more frail and debilitated client, many who as little as five years prior, would have resided in a nursing facility.
- Lastly, the market trends and information are illustrative of the harbingers of a paradigm shift.
- Weakening cap rates and per unit values
- Over-built markets with product, still coming into a market already below 90% occupied and trending lower.
- Brookdale (enough said)
- Chinese investors pulling back from the sector – more cautious investing
- Period over period occupancy declines in the industry – Assisted now at just over 85%!
- Per NIC 22 of the top 31 markets saw occupancy decline, quarter over quarter
- Rising cost of capital and fewer starts (finally). This may actually be a good thing as the sector needs some leveling forces.
- Rising labor costs. Again, this may be a good thing.
- Federal and state-to-state pressure for Assisted Living regulatory actions. Again, this may be a good thing as too many ALFs are over their-skis in terms of capability to take care of their resident populations.
- For providers reliant on Medicaid-waiver clients to bolster occupancy, we are seeing rate “reductions” consistently in these programs and know of more to come (no increases yet).
In an upcoming article, I’ll offer some thought on what is working and why and where the market will be for seniors housing and why over the next decade or two.