Affordability: what it means for aging people and some ways to achieve it.(assisted living expenses)

Assisted living is an attractive model for many who suffer the frailties of aging. Why? Because services and their costs are limited to those that are actually needed. Yet few communities exist to provide assisted living to elders who are not affluent. Is affordability possible without substantial continuing subsidies? This author says yes--with care and planning.

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Frequently, well-intentioned people make statements about affordability that are the equivalent of political sound bites from inside the Washington Beltway. They're meant to sound great, and they do. But most of them fail to pass the reality test. And that's because we conveniently avoid answering these six defining questions:

1. What is a reasonable financial definition of "affordable"?

2. What pricing actually covers assisted living operating expenses and debt service costs?

3. What can millions of seniors with modest incomes really afford to pay?

4. What is the financial impact on the resident's budget; or, what additional financial help (subsidies) must be provided by either not-for-profit sponsors or for-profit owner/operators?

5. Is cost-shifting fair? Is it desirable? In many instances, assisted living includes less affluent seniors by shifting a portion of their actual costs, utilizing the ability of better-off retirees to cover the cost of subsidized units.

6. Can elders depend on Medicaid waivers and other state and local initiatives to remain universal, multi-year, predictable entitlements, or are they just limited experimental programs?

After all the well-intended rhetoric, the bottom-line question is, "what's the required monthly service fee--and how many seniors can afford to pay it?" This article will address four key issues to better understand the possible answers:

* defining affordability;

* what Sponsors and Owner-Operators Need;

* what Seniors Can Afford to Pay; and

* pathways to Identifying (or Achieving) Affordable Assisted Living and Defining Affordability

Delivery of legitimately affordable assisted living must factor in three economic classes of seniors. These are referred to as the "entitlement" group, the "gap income" group, and the "market rate (private pay)" group.

The "Entitlement Group"--Income Under $12,000

Seniors with reported incomes under $12,000 per year typically qualify for various government entitlement programs, such as the HUD 202 and Section 8 senior housing, which offer low monthly rent initiatives. But keep in mind that the original concept of the HUD 202 or Section 8 programs assumed that seniors would live independently (preparing their own meals, etc.).

It was initially presumed that seniors would not need assistance with typical activities of daily living. But many of these programs started twenty-five years ago. Thanks to improved health care, among other advances, the number of low-income seniors who have aged in place and need assisted living has skyrocketed beyond the initial projections of a quarter-century ago. Sadly, but predictably, no consistently-funded entitlement programs pays for these additional services.

The "Gap Income Group"--Income Between $12,000 and $25,000

The greatest unmet need in senior housing today is the obvious lack of affordable services and living options aimed at serving seniors with incomes that are moderate, but not low enough to qualify for subsidies or government entitlements. Nor can they afford to fully private pay for assisted living.

Labeled the "Gap Income Group," this sector of the senior market has annual incomes between $12,000 and $25,000. In 2003, these seniors will represent about twenty-eight percent of all households over the age of seventy-five in the United States.

The "Market Rate (Private Pay) Group"--Income Over $25,000

Many seniors with incomes in excess of $25,000, qualify for "market rate" assisted living. That means they can afford to pay prevailing rates beginning at the lower end of today's assisted living private pay pricing spectrum.

The Gap Group Economic Squeeze

Figure 1 illustrates how the Gap Group is caught in an economic squeeze between the other two economic classes of seniors--the very low-income group who qualify for significant entitlements, and the income-qualified market rate group who can afford to "private pay" for a wide variety of senior living options. Trapped between these two economic classes, the Gap Group is significantly underserved and represents very large numbers. Figure 2 depicts this economic conundrum. (Note these are 2003 demographic projections.)

[FIGURE 1 OMITTED]

Nationally, approximately thirty percent of the aged seventy-five and over households report annual incomes of $12,000 or less. The "market rate" group reporting incomes of $25,000 or more represents about forty-two percent. That leaves twenty-eight percent, or approximately 3.1 million, aged seventy-five and over households that are largely underserved.

Affordability Gap

As Figure 3 dramatically demonstrates, the Gap Group's affordability limits fall far short of adequately covering today's required independent or assisted living monthly service fees. These monthly fees typically range from $1,000 to $2,000 for independent living, and approximately $1,900 to $3,600 for various levels of assisted living.

Without considerable spend-down or help from children, a senior's qualifying annual income would likely have to exceed $25,000--and that's in after-tax dollars!

The Entitlement Group will be dependent upon just that--public--or private-sector entitlements. The Gap Group represents a national potential of over 3,800 projects, assuming an average senior housing project size of eighty units and a modest ten percent total market share for senior housing. Figure 2 depicts Gap Group gross potential within a community's primary market area in typical major metropolitan areas; while Figure 3 shows typical potential for an individual project's primary market area.

When the impacts of aging-in-place intensify and reach crisis levels, the Gap Income Group will finally be widely recognized as a huge economic and social challenge. Breaking down the existing economic barriers with creative solutions that stand the test of time and financial viability will be difficult to achieve. But if this lofty goal is accomplished, the result will perhaps be the biggest breakthrough in effectively serving seniors in the 21st century.

Affordability Parameters--What Sponsors And Operators Need

A realistic definition of "affordable" is elusive. In determining how much a senior can spend for assisted living, we must first make two important qualifying income adjustments. Available demographics on seniors provide pre-tax income, but seniors must pay for assisted living in after-tax dollars. Ideally, they should not spend more than eighty percent of their after-tax disposable income for monthly service fees.

The Price Sensitivity of Assisted Living

Assisted living pricing sensitivity is driven by the need to cover both capital costs and operating expenses. The sensitivity of these costs cuts both ways. At the low end of the pricing spectrum, it is difficult to significantly reduce capital costs enough to create true affordability. That's because a $1,000 per unit decrease in capital costs--using borrowed money at a nine percent interest rate--provides cost savings for the resident of only $100 per year, or $8.40 per month. At the high end of the pricing spectrum, both …