Going Forward, Senior Housing Industry Shaped by Consolidation, Medicare Cuts, and Rising Acuity

When looking back on 2011, senior housing industry professionals agree that the billions of dollars worth of real estate investment trust (REIT) activity played an integral role in shaping today’s market. But some say that going forward into 2012, healthcare reform will be a key influence in the industry, and others point out the changing roles of assisted living, independent living, and skilled nursing, as providers see acuity rise across the spectrum of care.

Here’s a rundown of notable developments and what they might mean heading into the new year:

Market Consolidation: The Year of the REIT

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Real estate investment trusts (REITs) continued their power play from the second half of 2010 well into 2011, with M&A activity reaching a fever pitch in the second quarter, featuring deals such as Ventas REIT’s $7.4 billion acquisition of Nationwide Health Properties and $3.1 billion acquisition of Atria Assisted Living’s real estate; HCP REIT’s $6.1 billion sale-leaseback of more than 300 HCR Manorcare properties; and Health Care REIT’s $2.4 billion sale-leaseback of Genesis Healthcare.

“The biggest surprise was how big of an M&A year 2011 turned out to be,” says Nick Gesue, senior vice president of operations and underwriting at Lancaster Pollard, a healthcare, senior housing, and affordable housing financier headquartered in Columbus, Ohio.

Apart from REITs, some investment brokers say there’s also been strong and steady demand for one, two, or three-property portfolios.

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“We’ve seen a very large appetite for these types of properties,” said Grant Kief, president of Senior Living Investment Brokerage, Inc., based in Glen Ellyn, Ill. “I see a continued stream of facilities coming for sale at aggressive pricing; it’s a very active market right now. I don’t see it slowing down.”

Rising Acuity and Expanding Services

Providers have seen rising acuity across the continuum of care, from independent living, to assisted living, to skilled nursing, and it’s forced them to expand their services to keep up with the trend.

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“With independent living, it’s morphed more into assisted living than ever before. It’s a pretty unusual and quickening trend,” says Aaron D’Costa, chief business development officer of Des Plaines, Ill.-based Pathway Senior Living.

A lot of this points back to troubled economic conditions, with seniors wanting to go into the least costly setting where they can then choose to get “unbundled” assisted living services through third parties such as home health care companies, D’Costa says.

The trend is further impacted by operators seeking to pad margins eroded by lower occupancy; operators are now more willing to provide services and retain residents longer than before in order to maintain occupancy rates.

With one provider referring to some skilled nursing facilities as functioning like “mini hospitals,” the rising acuity trend is clear across the spectrum of senior care, including assisted living.

“Assisted living has evolved from an environment that was more residential than medical,” says D’Costa. “It forces the conversation about having assisted living being in the continuum of the medical field, and this will continue into 2012.”

Changing Roles & Demographics in Senior Living Communities

Higher acuity levels are also shifting the demographics of those who move into different types of facilities.

With the average age for an independent living resident now in the mid-80s, and assisted living in the late 80s, the senior housing scene is changing. Younger seniors in their mid-70s to 80s who may have gone to an independent living community in the past are now choosing to either put off entering senior housing, or to instead go to “active adult” communities, says Margaret Wylde, president and CEO of ProMatura, a market research company based in Oxford, Miss. and London, UK.

Independent living, in particular, is undergoing a substantial transition as its residents begin to look more and more like those formerly found in assisted living.

Going forward into 2012, many companies will have an increased awareness of marketing and sales, says Wylde, and some communities will start transitioning toward a more natural, less programmed product offering, although it’s a long-term process.

“We are seeing active adult communities rattling the cage quite a bit,” she says. “A lot depends on the economy, but we’re seeing more of that product emerge.”

Medicare & Medicaid Funding’s Impact on the Industry

In 2011, the health care industry was rocked by adjustments to government entitlement programs, most noticeably the 11.1% reduction in Medicare reimbursement rates to skilled nursing facilities, which went into effect Oct. 1. The impact of these cuts and general reductions to state Medicaid funding will continue to play out.

“Medicaid and Medicare changes will have the biggest impact in 2011 going into 2012,” D’Costa told SHN.

With 63% of nursing home residents relying on Medicaid to pay for their care, according to data from the American Health Care Association (AHCA), most Medicaid directors are feeling the pinch as the federal debt crisis places a heavier emphasis on state budgets.

The Medicare cuts to reimbursement rates only directly impacted nursing homes, but it’s affecting acuity levels in assisted living and independent living as well, says D’Costa, as people may not be able to afford skilled nursing, and slots for Medicaid residents dwindle.

The cuts have also forced skilled nursing operators to trim down already slim margins and maintain investor confidence. And although Medicaid is exempt from the sequestration triggered by the “Supercomittee’s” failure to reach a deficit agreement, Medicare is not, and faces a further 2% cut.

Written by Alyssa Gerace

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