Challenges and trends in senior living and care
Soft occupancy rates
While national senior housing occupancy rates remain soft, particularly in localized areas, there was a modest improvement to 88.0% in the fourth quarter of 2018 compared to the seven-year low of 87.9% in the third quarter of 2018.7 It's important to note that not all markets have seen the same occupancy softening, and some markets have maintained very robust occupancy rates pointing to the idiosyncratic characteristics of each project. Interestingly, while net absorption of inventory in the fourth quarter of 2018 of 5,149 units was the highest ever reported by NIC, the contributing factor to the softness is the larger number of units being brought online that have not been leased, with poorer performing properties additionally pulling down the average occupancy rate.7
Preparing for the silver tsunami comes with a host of challenges, and one of the greatest is hiring and retention of a well-trained workforce to provide quality care. In today’s low unemployment environment, the cost of quality labor continues to rise along with new state minimum wage standards. And while many providers have a passion to serve seniors, a quality wage for the provision of quality care is critical.
With expectations that 1 million to 2.5 million additional caregivers will be needed between now and the end of the next decade to counter this lack of supply, many providers are offering key employee retention plans with attractive benefits packages including health insurance, paid time off, transportation, 401(k) plans and more.8
Affordability and the path to Medicare
As baby boomers age, there will be an increasing need for low cost senior housing and more subsidies needed for health care costs for those who have not adequately saved for retirement. While many developer projects focus on private pay or market rate projects, some are developing projects to serve the affordable segment of the aging population.
Medicare continues to be a major provider of health care for seniors. In 2017, there were 58.5 million people receiving health care coverage through Medicare, with spending reaching $672.1 billion in 2016, approximately 20% of total national health care spending.9 While Medicare typically covers nursing home stays, there is no requirement that Medicare must pay for assisted living. As a result, the level and type of support varies widely for Medicare-assisted care from state to state. States have started contracting with health plans to operate as Medicaid-managed care organizations, replacing the traditional state-operated, fee-for-service Medicaid system. Managed care helps fill the gaps in Medicare coverage.
Medicare Advantage, which offers private, Medicare-approved insurance, has experienced headwinds resulting in seniors receiving lower daily reimbursement rates, shorter lengths of stay for care and more referrals to home care instead of inpatient rehabilitation facilities. There is some relief expected in 2019 with Medicare’s introduction of the Patient Driven Payment Model taking effect October 1st that should provide an improved reimbursement model for care and potentially reduce project operating margins.10
While the skilled nursing industry is highly regulated at the federal and state levels, regulation of assisted living and memory care facilities differs by state and is not uniform. Examples include building design standards, licensures and staffing requirements. This makes underwriting for investors a challenge which is only mitigated by experience and knowledge of regulatory idiosyncrasies.
CONs – another layer of regulation
In addition to a state licensure, a certificate of need, or CON, is an endorsement that numerous states require before approving the construction of a new health care facility. From an underwriting perspective, CONs can create investment opportunities because they can create barriers to entry.