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Paul Willging Says...

February 1, 2004
by root
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Long-Term Care Needs to Change Its Focus

Long-Term Care Needs to Change Its Focus
Is today's lack of marketplace resonance for facility-based long-term care simply a reflection of the customer's preference to stay in his or her own home? If so, is the solution simply to fine-tune the "product" to accommodate these preferences? Or is there a more deep-seated dilemma facing the industry?

Depends on whom you talk to, I guess. Some seem to think that the malaise facing both nursing facilities and assisted living is cyclical in nature, that-like real estate-the field has its inevitable highs and lows, requiring simple perseverance to survive and prosper. I noted, for example, in another long-term care publication a panel of senior housing investment experts expressing their conviction that the sector "has hit bottom after four years of financial stress and is poised for a strong rebound"; one panelist noted that "the industry has come full cycle from 10 years ago and is in the best position in five years for renewed financial strength and solid investment returns."

I think I'd feel better about such predictions if they weren't coming from the same public equity market experts whose industry prognostications have consistently been a day late and a dollar short. Wasn't it Wall Street, after all, that a few short years ago propelled assisted living valuations to heights not seen until the dot-com era of irrational exuberance? And then turned ferociously on that same industry when "saturation" became the new buzzword? No, I certainly wouldn't want to stake my future on the public equity market's ability to predict anything about the industry's future.

Others would suggest that what we are witnessing is little more than a need to revamp our product lines to account for changing customer likes and dislikes. Nursing homes need to become more "homelike," it is said. Assisted living, for its part, needs to offer even more amenities designed to appeal to evolving customer tastes. Along with all this, maybe we should change the "culture" of our facilities.

I wouldn't dispute the validity of any of these statements; they're all important. Culture change, for example, is indeed critical if facility-based long-term care is to survive, at least over the short run. But culture and product change, while necessary to our survival, are both more of an attempt to deal with yesterday's failings than with tomorrow's challenges.

To deal with tomorrow, it's necessary to understand the very genesis of facility-based long-term care and, based on that understanding, to determine what the industry needs to do in a fundamental fashion to avoid repeating its past.

I have argued in previous columns that the birth of both nursing homes and assisted living had little to do with customer preferences and more with the exigencies of financing (public as well as private). Quite frankly, the purchase of both products was driven less by customer desire than by a perceived lack of alternatives and/or the dollars with which to pay for them.

It's basically true that nursing homes, as we know them today, are a direct result of the public financing vehicle known as Medicaid. American consumers didn't ask for the product. Long-term care as we know it today became available in 1966 as a benefit under Title XIX of the Social Security Act. Coupled with an arcane provision called "spend-down," Medicaid proved to be the only way that America's seniors could afford the high cost of facility-based long-term care. As the only financially viable alternative for most Americans, the fast-growing nursing home industry was populated with residents who often could have been accommodated elsewhere-if elsewhere existed.

Back in the early days of the Medicaid program, Sen. Frank Moss (D-Utah), founding chair of the Senate Special Committee on Aging, suggested that as many as 42% of nursing home residents were there only because of the absence of alternatives. A quarter-century later, assisted living became one of those alternatives. Its success, as such, was both unparalleled and financially disastrous for the industry it overtook. It happened because seniors were suddenly able to afford an alternative.

Once thought of as one of the most financially needy of America's population cohorts, seniors have found their disposable income rising steadily over the years. Propelled by Social Security and augmented by the growth of pensions, the median yearly family income for households headed by a senior is now approximately $35,000. Coupled with an increasing propensity for adult children to support their senior parents' long-term care choices, nursing homes are no longer the only affordable game in town. As a result, nursing homes' private-pay residents now account for less than one-quarter of the average facility's residents.

Which brings us back to the customer preference questions I began this essay with. Are we seeing increasing acceptance on the part of seniors (and their families) of assisted living as their product of choice? Or is it more likely that assisted living is seen simply as the lesser of two evils when compared to nursing homes? Is assisted living's current occupancy problem-a hangover of the high-flying 1990s-cyclical, or is it intrinsic to the business? If the latter-if people are no longer satisfied with the lesser of two evils-might our aforementioned panel of experts have to rethink its optimism about the future?