Tapping into the Middle Market Requires Mix of New and Old Ideas

If the senior living industry wants to tap into the sizable middle market consumer demographic over the next decade, it’s going to take some truly unique operating models and financing structures — including some that haven’t been thought of yet.

Possible solutions include developing communities with shared rooms and fewer high-end amenities, embracing efficiencies to cut down on labor costs and leveraging new technology. The answer might also lie in developing more affordable senior living brands, a la the hospitality industry, or partnerships with Medicare Advantage insurers to help drive down the cost of care for residents.

And that’s just the tip of the iceberg.

While there will be significant challenges related to rethinking the traditional senior living model — especially with regard to development and construction costs, equity and staffing — the emerging consensus among industry stakeholders is that now is the time to tease out new ideas.

‘Huge untapped market’

The number of middle-income seniors will almost double to 14.4 million by 2029, and 54% of them will not have the financial resources for private-pay senior living if today’s rates hold, according to research conducted by a team from the National Investment Center for Seniors Housing & Care (NIC), NORC at the University of Chicago, Harvard Medical School and the University of Maryland School of Medicine.

Of that 14.4 million, 8% will have cognitive impairments, 60% will have mobility limitations and 20% will have high needs, which are defined as people living with three or more chronic conditions and one or more limitations in activities of daily living (ADLs), according to the NIC study.

At the same time, the age and income demographic is less likely to be married than today’s older adults, less likely to have pensions and will have fewer children, on average. All of these factors could affect how much these older Americans can afford and whether they’ll have family caregivers as they age.

If senior housing and care providers can find a way to reduce resident rates and out-of-pocket medical expenses by $15,000 a year, another 5.9 million older adults — or 12.5 million total — would be able to afford their services in 2029.

As big as the upside is, the risk of doing nothing is also vast. And if the senior living industry doesn’t try to solve the problem soon, regulators and policymakers likely will, warned NIC Founder and Strategic Advisor Bob Kramer during a NIC investor summit in New York City Tuesday.

“If this industry is only seen as caring about wealthy elders, there will be hell to pay,” Kramer said. “The reality is, this is a huge untapped market. It’s also going to be a huge social need … that is going to put an enormous and unsustainable pressure on our safety nets.”

For years, senior living providers have differentiated themselves from their competitors not with quality of care, but with pricey luxury amenities. This has only added to the cost of senior living, and it’s a mindset the industry will need to shed if it wants to get serious about tapping into the middle market, Kramer said.

“Both [to] your investor and your customer, you’re saying, I provide assisted living, but look at all these added bells and whistles,” Kramer told Senior Housing News in an interview after Tuesday’s event. “One theme today was the importance of starting with a price point that the middle market customer can afford and then figuring out in all of the different areas, how can you design to that price point?”

Middle market models

Already, there are some senior living providers — such as Seattle-based Leisure Care and Benchmark Senior Living, which is headquartered in Waltham, Massachusetts — that are actively testing possible operating and financing concepts for reaching the middle market.

While the efforts from Leisure Care and Benchmark are still in their early stages, they may offer a window into how the industry at large can begin to tackle this problem in the coming years.

Currently, Benchmark has one community open and two more under construction that are aimed at reaching middle market residents. Annual rates for residents of these communities were targeted at around $50,000, with monthly rates starting at about $3,300.

“We’ve seen rents and costs continually increase and knew that there was an unserved middle that we wanted to see if we could tap into,” said Tom Grape, Benchmark’s founder and CEO, at Tuesday’s event. “We tried our first community as an experiment, to just sort of dip our toe into the water … and we’ve been very pleased with the success.”

To achieve lower costs, Benchmark first designed and built a smaller community than one of its more traditional offerings. The company also chose wood-frame construction to help keep construction costs low.

On the operations side, the provider was able to reduce its total staff by about 15% versus one of its traditional communities, through small efforts like not having a dining manager and reducing its activities staff.

Benchmark also marketed the property in a way that wasn’t focused on affordability.

“The way we marketed this was not as a lower-cost option, but as a high sociability option,” Grape said during the panel Tuesday. “Because of the more compact building size, the common areas have a great culture … and it’s really worked with slightly scaled back staffing.”

Despite the early success of Benchmark’s model, Grape said there’s more experimentation needed to really standardize what works and what doesn’t. On the whole, he believes it will take a new perspective on the traditional senior living model plus some brand-new ideas to develop a true middle-market product.

“My guess is there will be some parts of this that could be answered by tweaking the existing model, and I think other folks will approach it and have some success with entirely new models,” Grape told Senior Housing News. “Somebody’s going to figure it out, and I like to think we’re adaptive and nimble and as likely to figure it out as anybody else, if not better.”

For Leisure Care, efficiency is the name of the game, according to Judy Marczewski, the company’s CFO. To date, the company has opened three independent living communities geared toward the middle market, with its latest one in Raleigh, North Carolina, and a handful more in the works.

“We are really focused on efficiency, on very thoughtful design that has enabled us to reduce our staffing levels,” Marczewski said. “It’s in the kitchen design, it’s in the way the food is delivered, it’s in the menu design.”

These efficiencies allow the community to operate at significantly less cost versus the more traditional way, she added. The first of Leisure Care’s middle-market projects clocked in at around $26 million, or $200,000 per unit, in 2014.

With shared units, Benchmark’s first middle-market community was also able to achieve a similar cost per beds.

Technology could also factor into affordability by creating new efficiencies in staffing, said Gaurie Rodman, director of development services with Direct Supply Aptura, which provides senior living interior design and construction management expertise. She envisioned a day when a smart chandelier might provide Wi-Fi and therapeutic light while also tracking residents as they go about their day.

“There’s a lot of innovation going on that I think our industry has to be embracing,” Rodman said. “How we fund and how that gets capitalized is going to be the next conversation.”