False Spring in Long-Term Care Winter

Published January 1, 2007

Savvy public policymakers know that funding long-term care (LTC) will be a long, cold slog.

Even if they weather the perfect storm of impending Medicare and Social Security insolvencies, Medicaid–especially its LTC component–threatens to sink the ship of state when Boomers need expensive care.

Everyone knows the scary demographics and Medicaid’s frightening budget impact. No need to repeat that here.

So, given the foreboding future of an industry heavily dependent on government financing, why are long-term care providers and the capital markets that support them thriving again? After a turn-of-the-millennium slump that sent eight nursing home chains into bankruptcy, left the assisted living industry overbuilt and under-occupied, and nearly choked off capital for all sectors of seniors housing, long-term care providers and financiers are cheerful and optimistic again.

To find out what’s going on, I attended the annual conventions of two long-term care industry associations. What I learned should give policymakers, taxpayers, and investors an icy chill.

Booming Business

The National Investment Center (NIC) met in late September in Chicago for its sold-out 16th annual conference. NIC is a research organization that describes its mission as serving long-term care “lenders, investors, developers/operators, and others interested in meeting the housing and health care needs of America’s seniors” by “facilitating informed investment decision-making and providing excellence in networking, professional education, and research.”

Everybody who is anybody in the long-term care investment class was there.

What was the buzz at NIC?

“The seniors housing and care industry has never been hotter,” enthused an NIC flyer.

“This is one of the healthiest periods of time for all sectors of the seniors housing industry. Everyone is doing well, even skilled nursing facilities,” summarized David Schless, executive director of the American Seniors Housing Association.

NIC Board Chair Sarah Sumner Duggan said, “Seniors housing is producing very attractive returns. Investors in Emeritus Assisted Living enjoyed a 403 percent return in a year.”

Rising Numbers

A similar tone of optimism prevailed at the other industry meeting I attended, early in October at San Antonio’s cavernous conference center–the 57th annual convention and exposition of the American Health Care Association (AHCA), which represents skilled nursing facilities, and the National Center for Assisted Living.

“The state of our industry is healthy,” said AHCA President and CEO Bruce Yarwood, even as he contrasted today’s conditions with the deep funk his association and the industry it represents faced only a year ago.

Michael Hargrave, an expert on seniors housing metrics, backed up Yarwood’s optimism with hard numbers. Median nursing facility occupancy surged from 92.7 percent to 94.1 percent in the latest four calendar quarters, and revenue per occupied bed over the past four quarters jumped from $165 to $175.

Submerged Issue

Likewise, according to Hargrave, median occupancy of assisted living facilities rose from 94.0 percent in Q2 2005 to 95.8 percent in Q2 2006, delivering an increase in revenue per occupied unit from $2,931 to $3,100 within a year.

That’s fantastic news for nursing homes and assisted living facilities–their percentage occupancy rates were in the mid-80s only four years ago. Both sectors’ profitability and stock prices also have spiked up.

So, what can we conclude from this rosy scenario? Long-term care providers and financiers are making money hand over fist, so public policymakers should cut their Medicaid and Medicare reimbursements even further? Whoa, don’t jump to that conclusion. Here’s what I think is going on.

Coming Crisis

The bottom fell out of seniors housing a few years ago when the industry disappointed Wall Street by over-promising and under-delivering. The pipeline of new construction and capital to finance building and operation dried up. Now, to compensate, as one speaker said at the NIC conference: “There is too much capital chasing too few deals.”

Hence this could be a very risky time for investors in seniors housing. The industry is in danger of repeating the mistakes it made only a few years ago.

Why? Simple. Aging demographics (the oncoming Age Wave) suggest seniors housing is a lucrative field for the future. Investors get stars in their eyes thinking about the tremendous potential.

But it is as evident today as it was when the industry hit the skids six years ago that the financiers of long-term care–the people and institutions that provide the debt and equity capital to fund the industry–don’t see the big picture.

They continue to ignore the deteriorating condition of public financing through Medicaid and Medicare. They see privately financed sectors of the industry, such as independent living and assisted living, are thriving, and they rejoice. They see conditions improving in the publicly financed sector of the industry, especially skilled nursing, and feel hopeful.

But they fail to see the handwriting on the wall.

Lost Focus

The potential of private financing for seniors housing is severely limited by the low market penetration of private long-term care insurance and the virtual lack of a long-term care financing source from home equity conversion.

In addition, Medicare and Medicaid are in a long, slow process of decline as funding sources for long-term care. Yet, most of the NIC speakers and attendees seemed oblivious to these trends.

The AHCA/NCAL presenters were much more concerned. They warned Medicaid’s reimbursements to nursing homes are currently $4.5 billion short of breaking even; that Congress is under pressure to cut relatively generous Medicare reimbursements that now help make up for Medicaid’s shortfall; that popular policies to de-institutionalize Medicaid recipients and take care of them in home- and community-based settings will mean shorter stays of higher acuity residents who require more expensive care even as the floor under government reimbursements sags ominously.

Sure, times are good now. The economy is booming, welfare rolls are down, and tax receipts are up. On October 10 the Kaiser Family Foundation reported, “State revenues increased faster than Medicaid spending for the first time since 1998,” and, “While cost control remains a priority, state Medicaid officials appear to have moved away from a primary focus on cost containment to a range of priorities including expansions or restorations of eligibility and benefits, improving quality, and changing the delivery of long-term care services.”

Dire Prediction

It is only a matter of time, however, before another fiscal downturn occurs. With the economy in recession, Social Security, Medicare, and Medicaid languishing, public financing of long-term care declining, and private financing sources strained, the seniors housing industry will once again struggle to perform at levels of investment return sufficient to attract adequate capital.

The more careless public officials are with their spending and the less cautious investors are with their capital, the sooner the next crisis will come and the more devastating it will be.

My prediction is that the financiers of seniors housing and long-term care are slowly moving toward another day of reckoning that will plunge their business into another economic funk similar to the one from which it has just emerged.

Time will tell, but the warning signs of a false spring in the long-term care winter are already clearly evident.

Stephen Moses ([email protected]) is president of the Seattle-based Center for Long-Term Care Reform.

For more information …

“Medicaid Spending Growth Hits Near Record Low: State Revenues Rebound,” The Kaiser Commission on Medicaid and the Uninsured, October 10, 2006, http://www.kff.org/medicaid/kcmu101006nr.cfm