Predictions '99

From the Desk of Ruth Gulyas

Creating communities to serve low-income seniors proposes a significant challenge for the assisted-living industry, which has primarily focused on those with the means to pay for their own housing and care needs. Today, average fees for assisted living range from $2,000 to $4,000 per month, requiring a minimum annual retirement income of $30,000 to $60,000. This is an amount well out of reach of most seniors.

There is no one formula for developing affordable assisted living. However, developers are beginning to creatively utilize both public and private resources to create facilities consistent with the unique needs of the communities they serve.

Some visionary developers are challenging architects to design communities that can be constructed less expensively, but maintain a high quality of living. "Value engineering" emphasizes the importance of keeping the desired operational program in mind throughout the design process. Building decisions can be made that make the project affordable, but do not compromise the goals of the community by taking into account such factors as the desired scope and frequency of services, residents' need to access other programs and planned staffing patterns.

In addition to value engineering, another way to reduce a project's debt burden is through the utilization of tax-exempt bonds, low-income housing tax credits, grants and other financing vehicles. For example, Edward Doerman of Phoebe Ministries recently used several sources of development funds to build affordable assisted living in Reading, Pa. Doerman successfully combined a traditional mortgage with funds from the HOME Program, bonds, Community Development Block Grant, the city of Reading Rental Rehabilitation Program, a developer's note, proceeds from the sale of state Neighborhood Assistance Program Tax Credits, low-income-housing tax credits and historic tax credits.

In the future, expect to see more interest from state financing agencies utilizing several funding sources to build assisted living. Today, policies prohibit residents of communities built with tax credits from also being charged for services in their monthly rent.

Jim Brown, president of Victory Housing Inc., in Rockville, Md., has successfully developed many low-income assisted-living facilities. A key for one development was obtaining property donated by the Catholic Archdiocese of Washington. In the future, more communities may be amenable to donating public lands to non-profit organizations for developing needed affordable assisted-living projects.

Brown also has built communities with mixed-income populations in mind. In this way, the development costs can be spread to more affluent residents who often desire extra amenities. According to Brown, if at least half of the units in an assisted-living project are subsidized and the remainder are market rate, resident fees can be kept low.

Another strategy for developing affordable assisted living is finding ways to deliver needed care and services. While people's chronic-care needs cannot be customized according to their ability to pay, the key here is to find alternative ways to deliver needed services as efficiently as possible. For example, Barbara Finkleman, executive director of Jewish Federation Housing in Cherry Hill, N.J., has utilized the state's Medicaid waiver program and a partnership arrangement with a local hospital to co-locate a senior health center to provide medical assistance to the residents. The health center will be able to provide some of the services normally thought of as in-home care--such as bathing and help with medications--more efficiently in a congregate setting.

In the future, expect to see more Medicaid dollars being utilized to provide assisted living. Both federal and state governments continue to seek ways to stretch their budgets to serve older Americans.

Over the next decade, new opportunities to utilize other government-funding sources that provide services to older Americans should become available. Pressure will increase to lower the boundaries between Medicare, Medicaid, Social Security, HUD and Older American Act programs in order to provide creative new solutions.

For example, Bill Harris of Culpepper Garden in Arlington, Va., an organization with several federally subsidized apartment buildings for low-income residents, began construction of a 73-unit, assisted-living facility for low-income residents. The new facility is being funded through a combination of funds from HUD's Section 202 Program, a grant from the county and a developer's note to be paid back by future fundraising campaigns.

Consumers themselves will be a great ally in making government programs more responsive to their needs. They want access to the services and care they need in the least-restrictive environment possible.

In developing affordable assisted-living facilities of the future, not-for-profit organizations adept at marshaling diverse resources in order to meet pressing community needs may have greater flexibility in developing workable models of affordable assisted living.

Ruth Gulyas is the director of assisted-living policy of the American Association of Homes and Services for the Aging (AAHSA). AAHSA represents not-for-profit organizations dedicated to providing quality healthcare, housing and services to the nation's elderly. For more information, AAHSA may be reached at 901 E Street NW, Suite 500, Washington, DC 20004-2011; (202) 508-9475; fax (202) 783-2255; www.aahsa.org.

From the Desk of Susan B. Brecht

The assisted-living industry has experienced enormous growth and apparent market acceptance, and has emerged as a leading force in the long-term-care and senior-housing environments. During the coming year, I believe that several trends will dominate. With the relative turmoil of the capital markets during the third quarter of 1998, it appears that financing for new developments may tighten in the face of continued economic uncertainty. This does not mean that deals won't get done, but they may be harder to do in 1999. Public companies will continue their search for appropriate acquisitions, particularly among organizations with multiple sites under control and/or multiple existing communities. Slowing down the recent development pace may, inadvertently, be a positive outcome as many major markets may be nearing temporary saturation. During the past few years, most markets have only had to try and fill one or possibly two new assisted-living communities and, frequently, these were developed by major national organizations with substantial financial resources, and skilled and experienced marketing personnel. Being an early entrant in the market, while challenging in some respects, provided the opportunity to reap the benefits of pent-up demand for high-quality, state-of-the-art assisted-living communities.

During the next few years we will learn a great deal about just how much product a market can absorb as areas with numerous new assisted-living communities face absorption challenges. The issue of what constitutes saturation in assisted living is an issue that the industry is struggling with, and 1999 and 2000 will provide substantial insights into this question.

Concerns regarding appropriate standards for market feasibility and demand analysis will begin to be addressed in the coming year. The Assisted Living Federation of America (ALFA) will be releasing the results of its Market Feasibility Task Force in 1999, providing guidelines for best practices in this complex arena, which will be welcomed by lenders and practitioners as well.

Attention will also continue to shift to finding solutions to the development of more affordable assisted-living communities, thereby addressing a large segment of the market that currently has to (and appears to be choosing to) spend-down in order to afford the majority of the products that are available today. Through the ongoing research efforts of organizations, such as the National Investment Center and ALFA, we will learn more about the consumers of assisted living and how much they really are willing to spend to reside in an assisted-living community.

Greater attention will be given to development of assisted living in urban markets through conversion of existing buildings and, where possible, new construction. Urban assisted-living communities will need to span the range from upscale to affordable. Hopefully, attention will continue to be paid to adding assisted-living services to existing, subsidized, senior-housing communities where residents have aged in place. New Jersey has set a good, albeit modest, example by designating some of its Medicaid waiver slots for use in subsidized-housing communities.

Overall, I believe that it will be a year of consolidation and strengthening of the position of existing providers, of learning more about our "adolescent" industry, of ongoing creativity designed to reach a greater number of consumers, and of positive influence on the lives of seniors and their families.

Susan B. Brecht is president of Brecht Associates Inc., a Philadelphia-based consulting firm that specializes in market feasibility and planning for assisted living and other types of senior housing and community-based services. Ms. Brecht may be reached at (215) 592-0254; fax (215) 627-5362; e-mail susanb@brechtassociates.com.

From the Desk of Alan Segan

Financing for senior housing is experiencing the same volatility and uncertainty that other real-estate asset types are facing today. We are all waiting for stability to return to the capital markets, which will again open up financing channels to the mortgage conduit and commercial-mortgage-backed securities (CMBS) market. Some direct lenders are active, but the overall field of lenders has dramatically narrowed in the past few months.

Alternatives to the capital markets do exist for financing senior housing in today's environment. Developments that qualify can go the tax-exempt-bond route, and others might choose the HUD/FHA alternative. However, it is important to recognize that senior housing is not simply a multifamily-housing development with an older-population census. The business component of senior housing must be carefully analyzed in any underwriting or financing.

In terms of the development landscape, we are seeing some overbuilding at the high end of the spectrum in assisted living, but the affordable and middle-market segments are still underserved. Careful analysis also needs to be done in terms of the level of care necessary in a given senior's development. For example, can a home-healthcare component combined with an assisted-living facility be a better living alternative than a skilled-nursing facility?

As populations age, it is becoming increasingly difficult for residents who would like to remain in their community to find housing accommodations that one would consider "middle market." The high-end, luxury market often addressed by the national companies does not satisfy all those long-time community residents of modest means. From a property-use standpoint, affordable assisted living should be highly desirable to a community since the residents' demands for traditional community services--such as schools, transportation, parking, recreation and shopping facilities--is greatly diminished.

Although some markets are experiencing overbuilding, we believe there is considerable room in other markets for new congregate-care facilities, perhaps even with a home-health component. The skilled-nursing sector, with its maze of approvals and regulations, tends to present the least risk from a lender's perspective.

However, if lenders intend to participate in the senior-housing market, they must have expertise in both the business and real-estate components of financing. Without such expertise, they cannot adequately assess the risk nor determine the long-term market viability of any property financing.

The market for senior housing will continue to expand at all levels, from independent and assisted living to congregate care and skilled nursing. The demographics of our population point to that growth and, certainly, the interest shown by developers, owners and operators at the recent National Investment Conference indicate that exponential growth will take place in the coming years.

Alan J. Segan is the director of marketing for all of Parallel Capital's lending and investment programs. Mr. Segan has more than 20 years experience in banking, real estate and economic development. Parallel is a national, commercial real-estate lender based in New York.

From the Desk of William Pettit

For those of us concerned with senior living, 1998 was a great year filled with vibrant examples of how getting older can truly mean getting better. George Bush leapt out of an airplane, John Glenn returned to space and Gloria Stuart proved you can go back to work in your 80s and be the best of the best--even in a town like Hollywood that seems to worship youth over the wisdom of experience.

Along with these glowing examples of active seniors, assisted-living corporations have also been basking in the spotlight. As we move into 1999, I believe the past year will mark the beginning of what we will look back on as the "reality" stage. Our industry has enjoyed the glamour of being one of the fastest-growing industries in America. We've enjoyed the rapt attention of Wall Street investors. The U.S. Census Bureau projects that nine million people will need some form of long-term care by the year 2000. Those estimates increase to 24 million people needing long-term care by the year 2060.

But like all fast-growing industries, we now are starting to feel the effects of rapid expansion. Looking ahead, I believe that 1999 will include some of the growing pains of our recent success, and they will be manifested in three particular areas--financing, marketing and consolidation.

To start with, it will be a year in which our financial partners will turn a more conservative eye toward our businesses. The surge in capital for our industry has greatly diminished. That's represented by both the REITs being significantly reduced and a falling off of public offerings for the retirement communities, as they are no longer Wall Street's favorite way to roll the dice. Banks will be in an even stronger pick-and-choose mode in selecting which credits to extend.

Small weaknesses in balance sheets, which only recently may have been dismissed as nits not worth picking, will loom larger as stumbling blocks to financing deals. Although aging baby boomers will fuel market expansion in the long-term, lenders in the near term will carefully scrutinize earnings projections in light of existing capacity.

Closely related will be the key role that our marketing skills will play, both in realizing healthy earnings and persuading lenders to select us as their investment vehicles. In 1999, many of us will place even more emphasis on marketing efforts, especially market research. In an age when products of nearly every kind are increasingly being tailored to appeal to more sharply defined demographic slices, there is no reason to believe our industry can continue to grow and prosper with a one-size-fits-all approach.

Moreover, we can't assume we intuitively know what our customers want. The recent research from the Assisted Living Federation of America is a good first step, but we must continue the job; indeed, the job of knowing the wants and needs of our diverse customer base can never be finished. We must continue to analyze and reassess our marketing efforts to ensure we are targeting the correct message to reach the appropriate audience in the most efficient manner possible. The diversity of our audience dictates the need for tailored messages for each segment. As our marketplace becomes more saturated, we will need to compete more aggressively for the same customers as our competition. The more we understand our customers and competitors and tailor our marketing efforts, the more likely we will be to succeed. Marketing is as important to our future success as knowing how to manage cash flow.

Finally, industry consolidation and the impact of scale economics on competition also will grow in importance in 1999. As companies merge, smaller operators with only one or two facilities will find it more difficult to compete. New entrants with deep pockets bring with them increased capability to fund the sophisticated marketing campaigns necessary to attract new customers as well as the leverage to reduce per capita operating costs.

Our industry has moved through the initial stages of rapid growth and is poised in 1999 to move to the next level. To help it do so, we need to keep our companies abreast of the changing financial trends in the marketplace. We need to stay focused on the needs of our customers and communicate regularly and efficiently with them. Finally, as the trend of consolidation accelerates in our industry, we need to be able to respond in ways that are appropriate for our individual companies. If we can do these things, and do them successfully, we can move further down the path of providing seniors an ideal place that they can call home.

Bill Pettit is the president of the R.D. Merrill Company and Merrill Gardens. Merrill Gardens currently operates 23 assisted-living communities in Washington, California, Texas, Indiana and Florida. The company will open 10 new facilities in Arizona, Florida and California during 1999.

From the Desk of Matthew J. Murer

Assisted living has changed significantly over the past five years. From a "hot new concept" to an infant industry to a major player in senior housing, assisted living has evolved and matured, raising new questions for regulators, consumers and developers. Now that the idea of consumer-directed senior housing with care services has become a reality, people are asking how we can improve it, and what it means for senior housing and healthcare in the 21^st century. The answers to these questions will dictate the course of assisted-living development in the future.

How Can We Improve It?

While assisted living has been developed in every state, many states have not created effective regulatory frameworks to foster its growth or ensure that it is meeting the needs of citizens. In some of these states, old licensure categories have been applied to assisted living with mixed results. Some providers have had to reduce the scope of their services to fit within the licensure category. Others had to subcontract for the provision of key services or set up complex arrangements to ensure that assisted-living services can be provided within the regulatory limitations. Finally, other operators have functioned completely outside the licensure category, which raises additional issues for providers and consumers.

States can bring uniformity to assisted living in their state by adopting regulations that are tailored to the industry. Consumer demand is already causing many states to re-examine their existing statutes and regulations to see if they require revisions. The states, consumers and providers all benefit from more focused regulations. Providers are more likely to embrace the regulatory scheme if it addresses the manner in which they provide their services and if it is consistent with market development. This, in turn, results in more providers being involved in the regulatory scheme. Greater participation increases a state's oversight of assisted living. Consumers benefit because assisted living becomes more uniform in presentation and services. This results in less consumer confusion and frustration.

Finally, providers benefit by having greater certainty that their facilities are sanctioned by the government. This certainty is an effective marketing tool as well, and improves providers' abilities to finance their projects.

How can providers help states draft clear, effective regulations? By being participants in the process. No group is more familiar with the strengths and weaknesses of assisted living and the types of residents who should be admitted than providers. Regulators should seize every opportunity to educate regulators about how assisted living works and the real day-to-day issues that providers face. Providers have a responsibility to explain to regulators how quality should be monitored, how residents can be protected through regulations and how existing regulations can be improved.

Arizona and Texas both recently had great success in drafting new regulations with significant provider input. Active participation by providers is one of the most important things they can do to improve assisted living for everyone. Providers also need to realize that this is a unique opportunity. States that are currently reviewing how assisted living should be regulated are not likely to do so again in the near future. If providers feel that existing regulations are inappropriate or insufficient, now is the time to raise these concerns.

What Does Assisted Living Mean for Senior Housing and Healthcare?

Assisted living is causing people to re-evaluate more than states' regulatory framework; people are looking at the whole spectrum of healthcare in a new light of consumer choice. Assisted living has been one of many important factors in this shift to marketing healthcare by bringing the concept of senior housing and healthcare together without losing the essential residential character of the home or quality of services. This transition and mix of traditional home life and healthcare delivery has been part of an ongoing process over the past 10 years. Overall, healthcare has changed from a utility service to a service that consumers and payers spend a great deal of time evaluating and choosing based on a variety of concerns. This transformation has been subtle, but healthcare has finally become a true industry in a variety of ways. Providers who wish to help people live better lives, soothe their pain, heal their injuries and disease, and raise their spirits through activities and social interaction are now finding that they must compete in a marketplace to deliver these services.

One of the biggest driving forces in this change in healthcare was the emergence of managed care. Providers quickly learned that only by providing services at a low cost and with a better or more comprehensive package of ancillary services would they be able to participate in the delivery system.

Assisted living can take credit as being another significant factor in that change. More so than most other senior-housing providers in the United States, assisted living has worked hard to identify consumer needs and to provide a full complement of housing and services that ensures seniors will be able to stay within their homes and receive quality care. This focus on consumer preference has had a ripple effect in the healthcare industry. Providers and insurers have learned that consumer demand is a potent driving force for deciding how healthcare is delivered. These factors have all lead to one of the biggest challenges facing regulators in the coming millennium.

As healthcare becomes more and more industry-driven and competitive, regulators should endeavor to draft regulations that allow innovation and ensure a high level of care. Difficult issues, such as limits on admission and retention and the staff who may be delegated the responsibility for medication administration, will need to be addressed and reviewed by many state agencies in the coming years. The traditional healthcare system has changed so significantly as to be almost unrecognizable. Hospitals have seen their roles change from being everything to everyone to an acute-care specialty center focusing on only those with the most serious conditions. While home healthcare has had a significant impact, recent changes in Medicare funding leave the viability of many home-health agencies in question. Finding a way to foster this change and innovation will ensure that consumers' needs are met in the best possible way.

Final Questions

Finally, state regulators will have to answer some significant questions before they can develop truly effective regulations. First, will assisted living be a component of the continuum of care? Second, will it replace nursing homes, overlap some of their services, or be separate and distinct? Third, is assisted living meant to be a cost-containment strategy for addressing Medicaid nursing costs?

Different answers to these questions mean very different regulations for assisted living. By deciding that assisted living should only be a low-level component on the continuum of care, regulators needlessly limit the consumer's choice to the environment in which they wish to receive maintenance care and some nursing services. While such a decision may protect existing skilled-providers' markets, it in no way guarantees their continued viability. Prohibiting a consumer from going to an assisted-living facility because they may require intermittent nursing, does not necessarily mean they will seek admission at a skilled facility. In fact, the more likely outcome is that they will seek out services from home-health agencies or may even go without receiving the proper services.

If regulators decide that assisted living will act as a cost-containment mechanism for addressing Medicaid spending on skilled care, they must understand that such a policy will inevitably result in the development of two-tiered, assisted-living care. Because assisted living is so consumer driven, there will always be a place for high-end residences. The government cannot expect--nor should it--that same complement of services to be available based on small per-diem reimbursements at Medicaid residences. This is not to say that assisted living cannot be provided based on a state per diem or that the care would not be of high quality, but simply that the state cannot expect a Medicaid assisted-living facility to be identical to a private-pay facility.

In predicting what the future brings for assisted living, there are several different areas in which I expect there to be significant changes. First, the next five years should see a significant development in the middle-income market of assisted living. This as-of-yet undeveloped area will become increasingly attractive to providers and developers as the high-end market reaches its saturation point. I also expect to see continued development in the integration of assisted-living facilities with other levels of care--including independent living in houses, bungalows, townhouses and apartment buildings--and higher levels of care--including sub-acute centers and skilled-nursing facilities. I also expect that assisted-living providers will strengthen their relationships while continuing to educate insurers and other healthcare providers to the benefit of the assisted-living experience for residents.

I expect the legislators and regulators in the various states to continue to draft new legislation and regulations, and to tweak existing regulations in the hope of making assisted-living regulation more flexible and provider friendly. Focusing on these two aspects ensures that providers will continue to innovate and offer new cost-effective ways of providing services to residents in an environment that they desire. Such a regulatory approach does not preclude a mechanism for ensuring high-quality care. States that have not recently reviewed their existing regulations should review them with a special eye towards seeing if staffing requirements are flexible or contain arbitrary minimums, which do not necessarily translate into better care. States should also consider whether assisted-living regulations provide maximum access for consumers.

In these coming changes, assisted-living providers must realize that they have a responsibility. Providers have a unique opportunity and a responsibility to educate regulators, consumers and legislators about what assisted living is, who it serves and how it can best continue to serve them. All too often, regulations and legislation are drafted without the benefit of the experience of those actually engaged in the industry. I have found that legislators and regulators welcome providers to the table as they are often aware of issues and concerns that may not be readily apparent. Providers should take the time to get to know their state regulators and work with them to ensure that existing regulations are enforced fairly and comprehensively, and address those regulations that are hindering the development of assisted living and the continuum of care.

A healthcare attorney with the firm Holleb & Coff in Chicago, Matthew J. Murer has been practicing in the area of assisted living, senior housing and long-term care for several years and advises clients on a variety of issues, including fraud and abuse, regulatory compliance, certification and licensure, certificate-of-need issues, reimbursement issues, civil suits and general business planning. Mr. Murer has been extensively involved in helping assisted-living developers navigate through the regulatory process in a variety of states.

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