New Demand Dynamics Could Alter Industry’s Assisted Living Vs. Independent Living Balance

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During last week’s Q2 2023 earnings call, Brookdale Senior Living (NYSE: BKD) CEO Cindy Baier characterized the company’s focus on higher-acuity settings as a competitive differentiator.

“Our diverse portfolio of communities, with a higher mix of assisted living and memory care, sets us apart from the industry, which is skewed towards lower-acuity products,” she said.

Independent living occupancy recovery has been “sequentially a little bit softer” than the rest of the Brookdale portfolio, she noted, and she emphasized the huge incipient demand for more health care-driven senior living as more older adults are living with chronic conditions such as Alzheimer’s disease.

The differing dynamics of IL versus AL and memory care was a theme not only in Brookdale’s call, but over the last two weeks of industry news. The topic was a major discussion point during Ventas’ (NYSE: VTR) earnings call, with the REIT’s results affected by the underperformance of 38 Holiday by Atria IL communities, while Atria and Sunrise drove strong assisted living results.

At National Health Investors (NYSE: NHI), senior housing operating portfolio (SHOP) IL growth was “muted,” while SHOP IL “disappointed” despite an overall “clean” earnings report from Sabra (Nasdaq: SBRA), Stifel analysts wrote in an investor note.

On their earnings call, leaders with Welltower (NYSE: WELL) detailed the launch of the REIT’s first independent living operating platform, enabled by the IRS private letter ruling from late 2021. This marks yet another way that IL is starting to become more differentiated from assisted living and memory care, as REITs are not able to self-operate higher-acuity senior living.

And NIC last week introduced the absorption-to-inventory velocity (AIV) ratio, as an indicator of how effectively new senior housing units are absorbed by the market. Since Q2 2021, the AIV ratio for assisted living has reached an all-time high, “far exceeding any level recorded” by NIC since 2005. The AIV ratios for IL — while also strong — have not exceeded the previous high-water mark, achieved prior to 2015.

In this week’s exclusive, members-only SHN+ Update, I analyze this recent news and offer key takeaways, including:

• Strong demand for higher-acuity senior living could lead the industry to a tipping point in total IL vs Al units
• Memory care could be emerging from years of distress to become a major growth engine for the sector — but innovation is needed
• The typical IL model, though still performing strongly, is at risk of becoming “irrelevant”

Inside current demand dynamics

To be clear, the independent living segment of the senior living sector is performing well.

The Q2 2023 for IL communities was 85.4%, which was higher than the 82% for assisted living, according to NIC MAP Vision data. And over the four-quarter period ending in Q2 2023, the AIV ratio for majority independent living communities sat at 22:10 for primary markets and 26:10 for secondary markets.

“This indicates that for every 10 new units introduced in each of the NIC MAP market aggregates, 22 and 26 units were positively absorbed, respectively,” NIC Principal Omar Zahraoui wrote.

Furthermore, executives with publicly traded owners and operators described generally positive momentum for independent living. Ventas’ issues with the 38 Atria by Holiday communities largely came down to “execution” in those locations, rather than any macro concerns with independent living, according to Chief Investment Officer and EVP of Senior Housing Justin Hutchens.

“All of our independent living communities in the U.S. that are not Holiday by Atria are doing great; they have double-digit NOI growth,” he said.

And Baier described being bullish on the prospects for Brookdale’s entire portfolio, including the IL segment.

Yet, industry leaders also recognize the particularly strong demand for assisted living and memory care, and how that is driving the pace of recovery for those types of communities. For instance, NOI increased 32% year-over-year for Ventas’ U.S. assisted living portfolio. And while “all regions and product types” contributed to the 24.2% NOI growth in Welltower’s senior housing operating portfolio, “assisted living continues to outperform independent living, driving exceptionally strong results in the U.S. and U.K.,” said CEO Shankh Mitra.

Even before the pandemic, Brookdale’s strategy centered around higher-acuity senior living; this appears a wise decision, given current trends. Baier portrayed the current strong demand for assisted living and memory care as indicative of what the future holds, saying:

“By 2030, the CDC expects 8.5 million Americans will be living with Alzheimer’s disease. As seniors need more care, there are fewer adult children to support them. The caregiver ratio is projected to fall by an astounding 35% in the decades spanning from 2020 to 2030. This decline, building upon already noticeable decreases prior to 2020, deepens the need for valued, high-quality care and personalized services.”

The NIC data supports the notion that demand for assisted living and memory care is especially robust. The AIV ratio for majority assisted living has hit an all-time high, at 38:10 for the primary markets and 66:10 for the secondary markets.

NIC’s Zahraoui agrees that the stronger demand for AL relative to IL is driven by the needs of a growing population of older adults, and he believes that the “rising trend in high-acuity demand” that NIC has observed in recent years is “likely to persist,” he told me via email.

There are several reasons why IL demand might be somewhat muted at the moment, including the impact of higher interest rates on the housing market. Because of this, I have assumed that the current demand dynamics for IL and AL are temporary. Yet while IL is more sensitive to economic conditions than AL, Zahraoui thinks acuity-driven demand could be strong and sustained enough to alter the balance of the sector’s overall unit mix, telling me:

“Majority independent living properties house more residents compared to assisted living. Yet, if the high-acuity trend persists, we might see a shift with more residents in assisted living than independent living in the coming years.”

Major opportunities in memory care

In light of the high-acuity trend, I’m particularly interested in the future of memory care. Brookdale is seeing “strong growth” in memory care, which Baier expects will continue, given the statistics she shared regarding Alzheimer’s prevalence — and, of course, other senior living executives are well aware of those stats.

Several other large operators are putting memory care front-and-center in their growth plans for the coming years, including Pegasus Senior Living. Already, the company has been driving occupancy in part through AL-to-memory care conversions, and CEO Chris Hollister anticipates that the current slowdown in new supply will supercharge growth.

“By 2026 or 2027, virtually every memory care unit in the country will be full,” he said at SHN’s recent BRAIN conference. “Nobody is putting spades in the ground and they can’t build under $400,000 a unit.”

However, memory care also has been a beleaguered segment of senior living for years, stretching back to oversupply issues in the pre-pandemic time period, followed by the devastating effects of Covid-19 on these communities. With operators in survival mode, I believe innovation has been slow in memory care.

This will have to change in the years to come, as stronger occupancy will be a boon but not a cure-all for the challenges facing providers. As Anthem Memory Care CEO Isaac Scott put it at BRAIN, demand will solve the census problems, and “we just have to fix all the other things.”

I’m confident that strong operators will implement impressive advancements in clinical care and resident engagement, rooted in the latest research. Panelists at BRAIN spoke in some detail about the great work they’re doing in these areas already. But they spoke in more general and hypothetical terms about how memory care will play a larger role in value-based payment models.

I believe memory care represents a huge potential area of focus for Medicare Advantage and other managed care frameworks, as payers can gain significant cost savings through more proactive and integrated care for older adults who have dementia. Consider these stats from the Alzheimer’s Association:

• Per capita Medicare spending in 2019 averaged $25,200 for people with dementia, versus $7,700 for people without dementia
• Health care spending for older adults with dementia reached an estimated $305 billion in 2020

Already, some health systems have started to make inroads in more integrated memory care models, such as the Care Ecosystem pioneered at UCSF’s Memory and Aging Center. Other health systems, including Louisiana-based Ochsner, have replicated the model, which involves the creation of an individualized care plan for people who receive a dementia diagnoses, and navigators who work with these individuals and their families, connecting them with clinical and non-clinical resources aligned with the care plan.

Ochsner’s preliminary cost analysis showed average per-member-per-month spending increased 12% for Care Ecosystem participants after 12 months, versus a 43% increase for non-participants, according to a June 2022 Health Affairs article on the program. In that article, Ochsner’s chief population health officer said he would like to expand the program to serve more beneficiaries in Ochsner’s MA and ACO programs.

As senior living providers create more memory care units and fill them up in the years ahead, payers and “payviders” will take note of how many beneficiaries in their plans are residing in these settings. Many providers already have been executing on strategies that they hope will drive savings to the overall health system and enable them to gain appropriate financial upside, with Brookdale’s HealthPlus model being one example.

I believe programs such as HealthPlus must increasingly include specialized approaches to meet the intensive needs of memory care residents in order to optimize costs and outcomes for this population. And providers also should be familiar with the emerging models of integrated dementia care that systems such as Ochsner already are developing. Senior living operators should at least be part of the discussions that are occurring about the options for enrollees in programs like the Care Ecosystem — and I’m sure senior living providers can play an even larger role in such models, especially given the cost advantages of congregate living that Baier highlighted in Brookdale’s latest earnings call:

“When a senior needs care, senior living is incredibly attractive from a cost perspective. Assisted living/memory care averages a mere 25% of the cost of a home health aide.”

I’m excited to see the growth and evolution of memory care over the next several years, which all of us at Aging Media Network are anticipating. In fact, we’re expanding our memory care coverage and will launch a dedicated memory care newsletter this fall. To receive the latest memory care news and analysis, you can sign up for the forthcoming Memory Care Business newsletter here.

Future of independent living

At the start of 2020, SHN published our annual “Top Trends in Senior Living” article — in which I predicted independent living would start to look obsolete in the year ahead.

A lot has changed in the last three years, but I still believe that the typical independent living model needs to evolve, and I think the data is starting to tell this story, as well.

In terms of lower-acuity senior living, the active adult sector has been red-hot, with last year’s watershed NIC report identifying 33,000 units already online — and COO Chuck Harry noted that “these numbers will grow dramatically in the near term.” And on the higher-acuity side, I’ve already noted the AIV ratio for assisted living is at an all-time high.

Sitting between these two parts of the continuum, independent living’s recovery is strong but not as compelling — and this coincides with observations that IL has fundamentally changed in recent years. Hansa Medical Group provides primary care and other services in senior living communities, and CEO Chirag Patel has been outspoken about the changes in IL over the last 10 years, with “comorbid conditions, multiple medications, falls, emergency department visits and hospitalizations” all more commonplace.

A recent ProMatura report also has helped characterize how IL has changed. The report “confirmed what many have known for years” about increased frailty in IL, Priya Living Head of Marketing Dan Hutson wrote this week on LinkedIn. And in characteristic fashion, he was blunt about the implications, writing:

If your business model is “taking care of” older adults, congrats. You’ll have plenty of prospective customers in the years ahead. Whether they want what you’re selling is a different story, of course.

If, on the other hand, you want to be in the business of supporting older adults in living engaged, purposeful, stimulating, authentic lives, you’ve got your work cut out for you. A narrow focus on appealing amenities will not make you successful. People are looking for an experience that makes this stage of life meaningful and fulfilling. We all love a full kitchen and laundry with washer/dryer, but we’re not building our lives around them.

Finding true innovation in this industry is a challenge. We have to work harder at finding new ways to serve. Otherwise, we run the risk of becoming irrelevant.

I’m hopeful about providers rising to the challenge of innovating in independent living. Priya is one example, with its model focused on serving an affinity group and a general willingness to be entrepreneurial — including through its foray into the Indian market.

Welltower’s management platform with Cogir is another innovation, and I’m curious whether the Canadian model of independent living — which has been successful for Cogir and rivals such as Le Groupe Maurice — could be adapted for U.S. markets in the coming years.

Other experiments are underway as well, including Maxwell Group’s bid to create “hybrid” communities that combine elements of active adult and independent living, and Serenbe’s ambitious project to expand on its multigenerational, wellness-focused model.

Yet, I’m also sure that Hutson is correct that some providers will struggle to innovate or will be too complacent, and some of today’s independent living communities will indeed become “irrelevant.” These communities will shrink or close, accelerating the shift that Zahraoui described, with AL eclipsing IL in the industry’s total unit count. Today, Brookdale’s Baier can say that the sector is skewed toward lower-acuity products; it might only be a matter of time before that is no longer true.