The funeral home industry is losing sales.

This was just one insight into the “longevity economy” that attendees of the NIC Fall 2019 Conference were treated to during an enlightening keynote session by Dr. Joseph F. Coughlin, founder and director of MIT’s AgeLab.

Coughlin is a recognized thought leader specializing in the impact of demographics—particularly related to retirement, aging, and real estate.

“Longevity is changing how all of us live,” he said, as he asked the audience to focus on more than just the numbers behind changing demographics. Coughlin described the concept of disruptive demographics and how it will change the future of seniors housing. “The future of your business is not just more old folks. These folks are very different.”

Higher Expectations

The numbers and research are compelling, however.

• Ages 60+ make up the third largest economy in the world, next in line to the GDPs of the U.S. and China.
• In the U.S., those aged 50+ are responsible for 70% of the consumer spend.
• Sixty-four percent of those 65 and over believe their IQ is higher than average.

The next generation of seniors is more educated and more confident than prior generations, Coughlin noted. He believes this leads to higher expectations and ultimately to different desires for their seniors housing. The next generation will expect different and newer products than what worked for their parents.

8,000 Days

Coughlin told the audience to think about how they, as an industry, own a third of adult life, “Old age is longer than we think,” he said. He compared the span of retirement years—roughly ages 65-85, totaling about 8,000 days—to that of ages 0-21, and 21-midlife and noted the lack of defined stages or milestones in retirement. He presented his thoughts on four retirement “stories” encountered during this stage of life.

• Managing ambiguity.  This is the point at which adults are deciding what comes next, whether it be full retirement, consulting, starting a business, etc. Coughlin noted that women over 50 are the second largest group starting new businesses.

• Managing big decisions.  Older adults at one point will face larger decisions such as whether to downsize into a smaller home, relocate, retire completely, etc.

• Managing complexity.  Complexities grow as older adults may begin to face medical problems, financial issues, and more.  

• Managing living solo.  Adjustments are needed as most older adults, particularly women, will end up living alone at some point.

Creating Communities

In general, Coughlin sees the current generation of adults entering retirement years eschewing participation in formal groups, such as joining a church or the rotary, and instead gravitating to lifestyles and ultimately housing based on smaller affinity groups, targeted to commonalities. He sees seniors moving to small towns and college towns for the informal communities and amenities available there.

“College communities form a virtual assisted living, if you will,” he said, noting the availability of entertainment, dining options, and even care at medical schools.

He pointed out that the “service-on-demand” apps and in-home technology popular with the millennial generation are life-changing for seniors too. Already, smart devices can be used to monitor medications, eating habits, and other health concerns. Services that started as conveniences are enabling seniors to stay safer in their homes for longer.

Users vs. Buyers

The baby boomer generation is not the audience for seniors housing yet, but they tend to be the decision makers for their parents’ selections. And buying decisions in general are made primarily by women. “The future is indeed female,” said Coughlin as he cited statistics showing that women are three times more likely to perform online research when making purchasing decisions. Women are now the primary decision makers for automobile purchases, consumer electronics, and health care products.

Looking to the Future

As providers look to the future, Coughlin recommends organizations work to become trusted members of the community so there’s a natural relationship. He sees an evolving notion of seniors housing in which care, community, and brick and mortar overlap with platforms, partnerships, and pipelines built on trusted relationships.

“The future of service and senior services is not a place,” said Coughlin, “it’s any place that person may live.”

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No matter where they live, most seniors prefer to age in place. But as they do, they also typically need more services. These can include assistance with the activities of daily living as well as health services.

But what’s the best way to deliver those ancillary services in a seniors housing or skilled nursing setting?

Effective home care and home health strategies were discussed recently at a well-attended session at the 2019 NIC Fall Conference in Chicago. A panel of experts took a deep dive into the pros and cons of outsourcing the services or taking them in-house.

“Seniors housing and care operators need a strategy,” said panel moderator Joel Nelson, president and CEO at Life Care Services (LCS).

The panelists agreed that an effective strategy can help boost resident satisfaction and also extend length of stay. Residents who can get the help they need where they live are less likely to move. They’re more satisfied, and so are their families.

The difference between home care and home health was defined. Home care consists of help with activities of daily living (ADLs). Home health is typically a Medicare-certified and reimbursed service, such as physical therapy or nursing care.

Several macro trends are impacting the home care and home health markets. The Centers for Medicare and Medicaid Services (CMS) is moving toward value-based care, seeking the best health outcomes in the lowest cost settings. More healthcare is being delivered at home. Also, CMS is allowing some payors to offer home care services. “That creates opportunity,” said Cheri Greenfield, senior vice president, Home Care Operations, Humana.

A 2018 study by Humana showed that the next generation of seniors will have less social support because of smaller and fragmented families, and more elders will live with chronic conditions. “We need to invest in the right services,” said Greenfield.

New Rules Disrupt Home Health

A big change takes effect January 1, 2020, that will impact the home health landscape. The new system—Patient Driven Groupings Model (PDGM)—changes reimbursements from per visit payments to ones based on value.

“The change will push mom-and-pop home health agencies out of the business,” predicted panelist Paul Kusserow, president and CEO, Amedisys, a large home care and home health services provider. He estimated that of the 12,500 home health agencies in the country about a third will have trouble surviving the change in the payments system.

Kusserow views the situation as an opportunity to purchase home health agencies and grow Amedisys. He noted that seniors housing operators might also consider jumping into the home health business, though a partnership with an established company might make more sense because of the complexity of the business.

Panelist Todd Kaestner agreed. “Home health is a technical and complex business,” said Kaestner, executive vice president, corporate development, Brookdale Senior Living. The company offers home healthcare in about 70% of its 800-plus communities. Home care services are available in 100 locations.

LCS launched a home health business in 1985 but several years ago decided to outsource the work instead. “We didn’t have enough scale,” said Nelson, adding that the availability of labor was an issue along with the need to heavily invest in new technology.

Start-ups are difficult, noted Kusserow. Amedisys launches 12-15 home health care agencies a year. The cost is about $500,000, and sometimes double that amount for agencies that require special licensing, such as for hospice services or in a state where a certificate-of-need must be purchased.

Nelson asked the panelists whether home health and home care services compete with seniors housing or represent a route to referrals and higher occupancies.

Humana’s Greenfield views the relationship as a partnership. “We can come together to identify the right services at the right time,” she said.

Kaestner at Brookdale doesn’t see home health as a competitor because of its episodic nature. Home health providers offer treatment for a specific condition over a short period of time. But he added home care services can help increase the length of stay of residents. “It can be a win-win,” he said.

Telemedicine will change the home health market, said Kusserow. “It’s a tremendous opportunity.” Sensors will monitor the elder’s activity and health, signaling when assistance is needed. Amedisys invested last year in Medalogix, a Nashville-based predictive analytics company. It provides data to customize care plans to reduce hospitalizations and keep seniors in the most appropriate care setting—information sought by managed care plans.

Whether a senior living provider decides to launch its own home care and home health business or partner with another provider, the panelists agreed that a strong local management team is necessary for success. “All healthcare is local,” said Kaestner. “This is a people intensive business.”

Debt and equity capital is readily available for the right borrowers, according to panelists at the 2019 NIC Fall Conference. 

Private equity interest in the sector has not slowed as players compete for the best properties and development opportunities. Debt funds are assuming a bigger role as a capital source while traditional debt providers aim to stay disciplined amid wariness about the broader economic outlook and overbuilding in certain markets.

“It’s an interesting time,” said Sarah Anderson, managing director, Newmark Knight Frank. “The industry is in a good spot.”

Back-to-back educational sessions at the conference, held last month in Chicago, addressed the capital markets. The first panel discussion explored capitalization options. The second session compared new and traditional debt and equity capital sources.

The broader economic outlook provided context for the discussions. Panelists noted that unemployment is very low, 3.5% in September, its lowest point since December 1969, which has pressured wages and staffing in the sector. The Federal Reserve has cut interest rates two times so far this year, and may cut rates again, a plus for borrowers but also a worrisome sign that economic growth is slowing. 

“This is the longest economic expansion we’ve had,” noted panelist Grant Saunders, senior vice president/senior banker, KeyBank Real Estate Capital. He didn’t think any one factor might tip the economy into recession, adding that the correlation between seniors housing performance and the broader economy is somewhat muted in both bad and good times.

Private equity continues to play a big role in the sector. “We don’t see any slowing,” noted Anderson. She added that a lot of opportunistic capital is sitting on the sidelines, waiting to buy up troubled properties in overbuilt markets.

The agencies—Fannie Mae, Freddie Mac, and HUD—are actively lending and offering competitive rates, said panelists.

Debt funds have emerged as an alternative funding source, noted panelist Dan Reilly, managing director, White Oak Healthcare Finance, a debt fund. He’s bullish on skilled nursing properties, especially those owned by local operators that have good relationships with hospitals and other referral sources. “It’s a huge opportunity,” he said. “Great operators with great track records will win in the skilled nursing sector.”

Reilly said his fund has earmarked money to invest in new construction, though other lenders are wary of ground-up development at this point in the economic cycle.

“We like to understand new construction projects,” said Anderson. Developers prefer partners with sufficient liquidity to provide a completion guarantee and an operator with a good track record. Panelists noted that an operator should also be invested in the deal so its interests are aligned with those of the lenders and investors.

Panelists in the first session analyzed three case studies, providing insights into how they viewed each deal.

In the second session, panelist John Mark Ramsey, CEO, Sentio Investments, noted a disconnect between investor expectations and property performance. The operating environment is somewhat tricky while, in his opinion, investors still haven’t lowered return projections.

Ramsey likes repositionings and new development, in certain situations. “Other firms are moving in that direction,” he said.

The mezzanine debt market remains robust, according to Tim Podboy, head of originations, Heitman. Some banks dictate the use of preferred equity as an alternative, however.

Will credit standards tighten?  

“I think we will see some tightening,” said panelist Steve Anderson, managing director, Ally Bank Healthcare Capital.  He predicts that slower lease-ups will also slow lending.

Panelist Ramsey agreed. He thinks banks will tighten their lending standards because of a combination of an oversupply in some markets, labor shortages and rising expenses. In response, banks will focus on the quality of the operator and sponsor, he added.

Ally’s Anderson urged lenders to be patient. “Buildings will fill eventually,” he said.

Panelists in the second session also discussed the NIC study “The Forgotten Middle,” which explores the future housing needs of middle-income seniors. The speakers addressed how capital sources might work together to produce more housing for this growing cohort of elders.

Public-private partnerships were discussed as a financing option. Private capital sources will probably not accept the lower returns expected from middle-market housing. But other types of capital might, noted Ramsey, singling out so-called impact funds or those that invest with a social goal in mind.

Panelists agreed that middle-market communities may require a variety of capital funding sources. The hard part will be how to pay for the care component.

“There has to be a solution around how to provide care,” said Brock Andrus, managing director, structured finance, Bridge Investment Group. Emerging technologies that improve the efficiency of care delivery will play a role, he said. Partnerships with nonprofit organizations to operate the properties are another alternative, he added.

“We have to figure out a way to care for people in the most appropriate setting,” said Ramsey.

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Supply follows demand. Or that’s how the thinking goes.

So it makes sense that aging baby boomers—76 million Americans—represent a huge opportunity for the seniors housing industry. After all, they’ll need an age-appropriate place to live.

But demand for seniors housing is much more nuanced than raw demographics. Consumer preferences, local market dynamics and other factors play a big role in how much, and what kind of seniors housing will be needed in the years to come.

A panel of experts at the 2019 NIC Fall Conference took a deep dive into the factors that impact demand trends and development cycles. They agreed that baby boomers will create more demand for seniors housing in the years ahead, though a large amount of new supply may not be needed for another decade. Panelists also weighed in on demand drivers such as local market differences, the importance of branding, and the aging stock of existing properties.

“The long-awaited crush of baby boomers is already here,” noted panel moderator Susan Barlow, co-founder and managing partner at Blue Moon Capital Partners, an investment fund based in Boston. “They’re helping their parents select seniors housing and their opinion counts.”

NIC Senior Principal Lana Peck provided an overview of demand trends. Here are a few key points:

• The overall occupancy rate for seniors housing (assisted living and independent living) in the second quarter of 2019 in the top 31 primary markets was 87.8 percent, the lowest since 2011. Independent living was five points higher (90.2%) than assisted living (85.1%).
• Second quarter occupancy in local markets varies widely from the highest, San Jose (95.7%), to the lowest, Houston (81.1%). Rent growth also varies, but hovers around 3%.
• Absorption of new inventory is ramping up while new construction, especially of assisted living, appears to be slowing.

(NIC third quarter 2019 data show similar trends.)

What’s Ahead?

Peck previewed new research on demand trends which was detailed in NIC’s October Insider newsletter.

Looking at age 80-plus households, factoring in a penetration rate of 18%, the study projects that an additional 881,000 units of seniors housing inventory will be needed between 2019 and 2030. But, Peck noted, the demand hits at different times. Fewer units will be needed in the near future than were produced in 2018. The most units will be needed between 2030 and 2040 (105,000 units annually).

Panelist Gleb Nechayve provided insights on market selection. He is senior vice president, head of research and chief economist, Berkshire Residential Investments, Boston. He argued that it’s not if market selection matters, but how it matters.

Unlike other commercial real estate asset classes, seniors housing lacks some fundamental research on market selection and property performance. “Understanding differences in risk-adjusted returns across markets is critical to market selection,” said Nechayve.

Based on NCREIF and NIC MAP data, Nechayve made some observations:

• Markets with high occupancy tend to have higher rent growth.
• Higher demand usually accompanies higher supply growth.
• Markets with supply constraints tend to have higher occupancies.
• A concentration of wealthy seniors and adult children, also with a high level of education, contributes to positive property performance.

Blue Moon’s Barlow addressed consumer trends that influence demand today and going forward. She noted that baby boomers, especially adult daughters, are already impacting their parents’ housing decisions. Healthcare integration is important, especially for families who live far apart. Creating a sense of community is a way to differentiate a property.

As an example, she cited a Blue Moon financed project in Denver. The new property will sit at the center of the city’s Jewish community, providing housing options for elders in the area.  “The developer is building something that is an asset to the whole community,” said Barlow.

Where would the panelists buy land for a new senior living development?

In the near term, panelist Nechayve said the best spots are those similar to the ones already succeeding, places with a well-educated population with high incomes. “That’s where to concentrate,” he said. But he cautioned that future demand will likely come from elsewhere.

Peck noted, “We could see something very different in 10 years.” While demand will increase, much of it will likely come from middle-income seniors. NIC recently released the results of a study, “The Forgotten Middle.” It details the growing need of this group for moderately-priced housing options.

Another demand factor to watch is building obsolescence. Seventy percent of the seniors housing stock is 20 years old or older, said Nechayve. “There’s tremendous opportunity for new development to replace those properties in major markets.”

Peck noted that the “sweet spot” for building occupancy is in the 10-17 year age range. That’s when operators have mastered efficiencies and have learned how to maintain resident satisfaction. “The communities are institutions in their neighborhoods,” she said.

Barlow remarked that Blue Moon capitalized three older assets last year and they’re among the best performing properties in the portfolio. “It’s what goes on inside the four walls that counts,” said Barlow. “The properties are known in the community as the best place to live.”

Amid huge structural changes in the healthcare system, population health management is quickly emerging as a way for skilled nursing and assisted living providers to improve the healthcare outcomes of residents and reduce costs.

“Population health management is an exciting trend,” said Mark Parkinson, president and CEO at the American Health Care Association and National Center for Assisted Living (AHCA/NCAL), Washington, D.C., a group that represents long term and post-acute care providers. “Every major provider is developing a strategy around it.”

In order to help providers develop effective strategies, AHCA/NCAL will hold a population health management summit December 9-10 in Washington, D.C. Designed for long term and post-acute care leaders, the Summit will provide a gathering to discuss different population health management models, network with peers, and gain a deeper understanding of the role of the Centers for Medicare & Medicaid Services (CMS).

Population health management is being driven by two major trends that have impacted the assisted living and skilled nursing sector in both negative and positive ways, noted Parkinson. The first trend is the recognition that healthcare outcomes are more important than procedures. Providers should be paid based on value and outcomes rather than the volume of procedures that are performed—a plus for the healthcare system and the patient.

The other trend is the growth of Medicare managed care, or Medicare Advantage insurance plans. About 34% of Medicare eligible adults are now in Medicare Advantage plans, a number expected to continue to grow. This has had a negative impact on skilled nursing providers because payments under Medicare Advantage are less than those under the fee-for-service system. According to the NIC Skilled Nursing Data Initiative, revenue per patient day under Medicare Advantage has fallen from $510 in January 2012 to $432 in June 2019.

Population health management has emerged as a solution, noted Parkinson. Skilled nursing and assisted living providers can become managed care companies and apply to be a Medicare Advantage institutional needs plan, or I-SNP. This is a plan which includes residents who reside, or are expected to reside, in a long term care facility for at least 90 days, or require a nursing facility level of care but reside in assisted living or in their own homes.

But becoming an insurance company is a daunting task, admitted Parkinson. In part, it means taking on the full financial risk of residents’ Part A, Part B, and Part D Medicare benefits and creating a healthcare provider network.

I-SNPs Expand

Sensing an opportunity, a growing number of providers are introducing their own I-SNPs or figuring out ways to partner with other providers. In 2019, there are 62 provider-led special needs plans across the country, a number that Parkinson figures will double in the next five years.

Last January, AHCA/NCAL launched the Population Health Management Council to represent members that own Medicare Advantage plans, mostly I-SNPs. All 24 AHCA/NCAL member-owned plans are represented on the Council which advocates at CMS, develops strategies and shares best practices.

Parkinson attributes the growth of I-SNPs to the fact that the plans create a funding stream for innovation to keep residents healthy. Under the I-SNP arrangement, skilled nursing providers are paid a per member, per month payment (PMPM) to take care of the medical needs of a resident.

Eighty-five percent of the payment must be used for health care services. Fifteen percent is reserved for administrative expenses such as payment of claims, enrollment, sales, marketing, and profit. If the plan keeps members healthy through additional wellness services and/or reducing avoidable hospital admissions it can keep the savings it creates after all administrative and medical expenses are paid.

One example of the innovation that comes with owning a health plan is the application of an enhanced primary care team. Nurse practitioners are employed to see plan members and ensure they are receiving the right care, at the right time, in the right setting.

Typically a Medicare beneficiary has to spend three midnights as an inpatient in the hospital to access their Medicare benefit and begin receiving skilled nursing services. Providers that own a plan can choose to waive the three-day prerequisite.

This allows a nurse practitioner to “turn on” the Medicare benefit when a change in condition that requires skilled care is noted without the member/resident ever leaving the facility. In this scenario, an avoidable inpatient stay and corresponding expense is averted and the member/resident receives the treatment they need without the trauma of being transported to the emergency department and being admitted to the hospital.

“It’s a win-win,” said Parkinson. “Residents are healthier and providers take control.”

Early results are encouraging. A recent study showed that I-SNP members had 38% fewer hospitalizations than other Medicare beneficiaries, 51% lower emergency department use, and 45% fewer readmissions. Also, the rate of skilled nursing facility usage was 112% higher.

“The clinical outcomes are astonishing,” said Parkinson.

There are different ways to approach the provider-led I-SNP opportunity, he noted. Big providers have started their own insurance plans, while smaller providers are partnering with each other and with administrative firms that help set up the plans.

Parkinson hopes the upcoming Summit will offer something for everyone, those just getting started and those with an existing plan looking to succeed. “We will cover the spectrum of options,” he said.

The Summit will feature speakers from CMS to provide its perspective, and providers that have created plans to discuss the pitfalls and pluses. “It’s an opportunity to learn and hear about the latest best practices,” said Parkinson.

The Population Health Management Summit for Long Term and Post-Acute Care Leaders will be held December 9-10, 2019, at the InterContinental, Washington, D.C., The Wharf. For details and to register visit PHM.ahcancal.org.