Affordable Evolution

The economic climate shines new light on alternate-pay assisted living models, but state-level policy largely holds the reins on growth

Visit Any BMA Management supportive Living community in Illinois, And you probably won’t notice much difference Between it and any neighboring market-rate competitor. Some BMA community dining rooms may feature candelabras instead of chandeliers. Perhaps some of the apartments or shared spaces feature more paint than wallpaper and not as much wood trim.

Move beyond the first glance and onto monthly rates and you still won’t see big differences. Monthly fees for a supportive living apartment and services at one of BMA’s 29 communities in southern Illinois is about $2,500, and in the suburbs of Chicago, in the low $3,000s. Most residents, however, (60 percent) pay these fees through a combination of Medicaid, food stamps, and the checks they receive from Social Security. The Bradley, Illinois-based company ranked No. 24 in assisted living residents on the 2009 Largest Providers list (see Assisted Living Executive, March/April issue) and, despite a down economy, has opened six new properties this year and plans to expand into Indiana in 2010.

“I don’t want anyone to think that affordable means cheap,” says rod Burkett, BMA’s president. “We have shown that we can be profitable but still hold to our mission of serving seniors of all in- come levels and build a quality community. The proof is that 40 percent of our residents pay privately, and they could go elsewhere if they wished.”

The affordable sector is a huge untapped market for senior living, but inadequate Medicaid reimbursement rates, complex bureaucratic hoops, and the need for creative financing have long discouraged most assisted living providers from investing in the sector. Still, those few who have succeeded in finding a workable business model for afford- able communities have shown that not only can the category be profitable but also that it has more stability in times of economic distress.

Some providers and advocates believe that with states seeking ways to find cost-savings in strapped Medicaid budgets, the political climate has never been better for companies interested in this sector to advocate for the changes needed to make it profitable.

Market watch

Everyone evokes the baby boomers as proof of the market potential for senior living overall. But Burkett says that the economic shakeout of the past year has also underlined the affordable sector as a market providers should take seriously.

“Look at what’s happened to pensions and retirement plans,” he says. “How many people in their 60s and 70s have half or less than half of their nest egg for later in life? The demand for affordable assisted living is only going to be greater in the next 10 years.”

Current economic woes have forced down rates at many communities, says roger Bernier, president and CEO of Fanville, New Jersey-based chelsea senior Living, which operates 13 communities in New Jersey and New York. “Prices have come down in many markets by as much as 15-20 percent, although they have come up a little bit in the past few months,” he adds.

So while market-rate and affordable rents may sometimes be in the same ballpark, the term “affordable” assisted living generally targets Medicaid-eligible seniors, says Wayne Smallwood, executive director of the Affordable Assisted Living Coalition. Currently, many of those seniors benefit from home and community-based services (HCBS) waiver programs, enacted by many states in the 1990s and early 2000s. A smaller number cover some assisted living expenses through their state Medicaid plans, in lieu of or in addition to the HCBS waiver. Only about 115,000 people in residential care settings nationwide— which includes assisted living but not adult foster/family care—relied on Medicaid in 2007, according to HHS. HCBS waivers accounted for just $25.6 billion, or 8.6 percent, of Medicaid spending on long-term care in 2006. Only one quarter of that amount went to senior care, with the rest devoted to people of any age with mental retardation or developmental disabilities.

Over the past few years, states have made few changes to their waiver pro- grams, but Medicaid rates have fluctuated and in some cases even declined, says Robert Jenkins, vice president of NCB Capital Impact, an organization that manages Coming Home, a national grant program that facilitated the construction of 42 affordable assisted living communities through state partnerships.

“The fact that Medicaid rates have gone down in some states and haven’t gone up in some states for a while makes it difficult to attract operators and investors to affordable assisted living,” Jenkins says.

Policy Perspective

Despite the challenges that come with the affordable model, Jenkins encourages providers interested in this sector to approach state legislators and Medicaid officials to advocate for changes in waiver and other state programs to make affordable assisted living more financially viable. Citing powerful examples of state success stories is a good place to start.

In Illinois, 115 buildings have qualified for supportive living licensure since the program was founded in 1997, and these have an average Medicaid census of 60 percent, Smallwood explains. The state Medicaid waiver program pays a per-resident rate that ranges from $59.13 per day in southern Illinois to $75 per day in Chicago, compared to $110 per day for a nursing home stay. In fiscal year 2007, that meant a savings to the state of $93 million.

“In Illinois, we had providers lined up at the door to get into the program,” says Smallwood, who was one of the proSpeedy qualification for Medicaid is another benefit, says Aaron d’costa, vice president of marketing and business development for Des Plaines, Illinois-based pathway senior Living, which operates 10 supportive living communities in the state. “If you’re not already qualified for Medicaid, it typically takes seven days if all the sources get back to us, including the bank, which has to verify assets. Less than 10 percent of cases extend beyond a month,” D’Costa says.gram’s key architects. “We were the only state where that happened.”

Of course, not everything runs smoothly all the time. Recently, Medicaid payments were running six months late, but Illinois has improved its reimbursement practices and recently Pathway has been receiving funds within 60 days, D’Costa says. BMA budgets for a six- to nine-month Medicaid receivable reserve account to allow for any payment delays, Burkett says. “It some- times makes cash planning a little more challenging, but it’s manageable when you build it in up front,” he adds.

Arkansas also has taken steps to en- courage affordable assisted living development. For example, the state has a cost-of-living adjustment built into its waiver reimbursement rate, Jenkins says. “This is very significant because it gives lenders and operators confidence that reimbursement rates won’t get worse,” he adds. “If you have a 20- or 30-year commitment on a building and the market is based at least in part on Medicaid, you need to know the Medic- aid program will remain viable.”

Allowable Allocations

Even through the waiver program in Illinois, Medicaid reimbursement cannot cover all of a resident’s expenses. Fed- eral law forbids the use of Medicaid dol- lars for room and board. So both Path- way and BMA have relied on tax-credit financing and HUD financing to bring down the cost of construction, which helps keep monthly room rates at a more affordable level.

“Tax-credit financing has enabled us to build a market-rate looking building that normally would cost $40 million for 100 units for just $25 million based on the credits we receive,” D’Costa ex- plains. “As a result of that savings and not having to pay down debt, we can of- fer a lower monthly rate to everyone in the building, so private-pay rates also are more affordable in comparison to what someone might pay in a market-rate building.”

For example, for a Medicaid-eligible resident living in a Chicago community, Pathway would receive $75 per day, about $2,300 a month, from Illinois Medicaid; an additional $110 per month from state food stamps; and, thanks to tax-credit financing, the rest—approximately $600—would come from a resident’s Social Security earnings to equal a total monthly rate of about $3,000. The income threshold to qualify for the latter program, which allows seniors to keep $90 a month for incidental expenses, is as high as $31,680 per year. Pathway helps seniors with the paperwork to qualify for all of the programs, as well as assistance with accessing other pro- grams that pay for medications.

Tax-credit financing even has allowed Pathway this year to complete Victory Center of South Chicago, one of the country’s first assisted living communities to qualify for LEED certification, a national standard in energy efficiency and environmental responsibility.

However, tax-credit financing is much harder to find in a down economy when companies already have lost so much and don’t need to create new liabilities, Burkett says. Despite being confident that demand for affordable assisted living hasn’t dipped—and may even be on the rise due to a decline in seniors’ assets—the downturn in the capital market has meant that BMA will likely only open two new communities in Illinois and two in Indiana next year. Burkett says that in 2010 the company wanted to build at least four or five new communities in Illinois. “We have pieced together the down payment, but it’s the debt financing that’s slowed down. HUD financing now is the only real player,” he adds.

Burkett thinks tax-credit financing will come back, but the question is when.

On the other hand, the economic downturn uncovered an opportunity for Chelsea Senior Living; the company got a bargain on an assisted living community with 100 apartments and capacity for 120 residents. The community, whose residents are half private-pay and half Medicaid-supported, had fallen into bankruptcy and foreclosure. The community is now called The Chelsea at Tom’s River, and the company hopes to eventually fill it with a 40-60 split of Medicaid and private-pay residents, Bernier says. “It’s an interesting property in that it’s very large and all rooms could be semi-private under New Jersey rules, which allows us flexibility,” he adds. “It didn’t have an Alzheimer’s unit, but since there’s a high demand for more affordable Alzheimer’s products, we’re [converting] some rooms.”

Still, the project would not have been attractive if New Jersey did not have one of the nation’s highest Medicaid reimbursement rates at $94 per day. And be- cause that amount is more than 50 per- cent less than state nursing home day rates, and labor costs in New Jersey are high due to strict regulatory guidelines, Bernier says it could be even higher.

“If the state paid $125 per day, we could take care of more people and it would still be attractive for the state,” he adds. One plus is that New Jersey does allow for families to subsidize the difference between a shared and private room, he notes. Chelsea also has a policy of never discharging a resident because he/she runs out of money—whether or not the resident qualifies for Medicaid.

However, outside of foreclosures and distressed properties, Bernier says the acquisition market is still limited because sellers haven’t reduced their prices to reflect current economic realities.

Developers in the affordable sec- tor also could benefit from a HUD announcement in September allocating $20 million to help convert multifamily apartment complexes into assisted living communities for low-income senior citizens. The grants will be awarded on a competitive basis and must meet all local codes and regulations for assisted living.

Anya Martin is a contributing writer to Assisted Living Executive. Reach her at amartin [at] alfa [dot] org.