Assisted Living Industry Braces for Boomers, Regulation

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Assisted living centers are costing the elderly a pretty penny.

The average assisted living center resident is an 85-year-old female who pays close to $3,000 a month — though many needing greater care pay closer to $4,000 or $5,000. While the assisted living industry is currently strong, experts said a major shift in demographics and the looming threat of federal regulation could transform the industry over the next two decades.

The relatively new business, which is susceptible to variations in demand, is expecting a dramatic swing in demographics. While the elderly population is 33 million strong right now, that number will rise sharply to 80 million by 2050, as the baby boomers continue to age.

“The beginning of the baby boomers hitting long-term care is basically going to grossly overwhelm the system, just like the baby boomers overwhelmed the elementary and high schools,” said James Allen, a former professor at UNC at Chapel Hill and author of textbooks covering the industry.

Experts said to watch for how the industry reacts (or overreacts) to the population changes. While occupancy rates are relatively strong, experts said the baby boomer influx could lead developers to overbuild and stretch the industry thin.

The assisted living industry “is dominated by people who believe if you build it, they will come,” said Regina Herzlinger, a bestselling author and professor of business administration at Harvard Business School.

“If they build more capacity than there is demand for, the bottom will fall out of the industry. That’s happened before and it could happen again,” said Herzlinger.

Another impact from the shift in demographics is that baby boomers are looking for more out-of-the-assisted-living experience, such as chapels, spas, theaters, bars and fitness rooms.

“The biggest struggle is how do you accommodate this new population and still make money from an operational point of view?” said Nicolette Merino, vice president of operations at Lifestyles Senior Housing in Vancouver, Wash.

Assisted living centers are regulated by most states but to a varying degree. Even the definition of an assisted living center can be different from state to state.

“Regulation is inevitable. When that happens there will be more consolidation in the industry because your mom and pop assisted living providers will find it much harder to comply to the regulations,” said Herzlinger.

While most in the industry are confident federal regulation is on its way, it’s not clear when and in what form.

“We don’t want to be so federally regulated that it hinders creativity and innovation,” said Merino. “Everybody is really trying to find a niche in their communities. A lot of communities are overbuilt with assisted living so they are trying to find ways to stand out as far as quality and services.

The current economic conditions are good news/bad news for the assisted living industry.

The threat of a recession and turmoil in the financial markets has forced the Federal Reserve to lower interest rates to historically low levels. These lower rates make credit more available and thus building and investment cheaper for those in this industry and others.

However, the housing slump and falling home values has also lowered the wealth of some potential assisted living residents.

“A dip in home values is going to [hurt] the buying capacity of seniors,” said Allen

The biggest expense for assisted living facilities is staffing, which often accounts for close to 50% of their costs. Assisted living centers need to employ everyone from accountants and receptions to cooks, nurses and recreational staff. Staffing is complicated by a very high turnover rate, which averages around 80%.

“The staffs are being spread thinner and thinner until they hit the breaking point. It’s a balancing act between getting the families on board with an ever increasing cost, versus having enough staff on board to cover the care you have to provide,” said Benjamin Pearce, president of Potomac Homes, a facility catering to seniors with dementia.

“The higher the turnover, the poorer the [quality of] care,” said Pearce.

Among the other costs, the industry has been faced with sharply rising insurance rates.

“It’s been a dramatic increase in our costs,” said Pearce, who said insurance rates have jumped 12% to 13% a year.

Unlike in the nursing home business, the majority of revenue for assisted living facilities, about 80%, comes from private sources rather than publicly-funded Medicaid. Many facilities receive 100% of their revenue from private sources.

“We’re barely able to cover our costs [from the publicly-funded money]. At the end of the day we’ve got to have a buck left or we are in trouble,” said Howard Groff, president of Tealwood Care Centers in Minnesota and chairman of NCAL.

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