Assisted Living: Needs, Practices, and Policies in Residential Care for the Elderly

12. Economics and Financing

12 Economics and Financing Sally C. Stearns, Ph.D., and Leslie A. Morgan, Ph.D. Economic forces play a major role in the structure and viability of the residential care/assisted living (RC/AL) industry. Conceptually, the issues relevant to the economics and financing of RC/AL facilities may be divided into two levels, as indicated in table 12.1: industry domains and individual firm (facility) domains. Key industry domains include current and future demand, financing and investment resources, and the regulatory environment. Key firm (facility) domains include aspects of ownership, staffing, expenses, and revenues. These issues, both at the firm level and in aggregate at the industry level, will determine the effectiveness and growth of the RC/AL industry. We begin this chapter by reviewing background information related to the industry and firm domains. A descriptive exploration of the firm domains is then presented, using data from the Collaborative Studies of Long-Term Care (CS-LTC), a study of RC/AL in four states (Florida, Maryland, New Jersey, and North Carolina). We conclude with a discussion of the issues identified as most central to the growth of RC/AL facilities . The Industry Environment The industry domains shape the environment for RC/AL facilities. Four major demographic trends result in predictions of substantial increases in future demand for formal RC/AL services: the aging of the baby boomers, the increasing longevity of the elderly population, the greater participation by women in the labor force, and the increasing geographic dispersion of adult children from their parents. Policy plays a central role in demand , as well. There is an important distinction between public and private demand in the demand projections. Historically, much of the demand for RC/AL (also called board and care) came from individuals without sufficient health and resources (family or financial) to live independently. Many of these individuals relied on federal and state programs, primarily Supplemental Security Income (SSI) or State Supplemental Payments (SSP), for funds to pay for their care. Mor, Gutkin, and Sherwood (1985) reported that 43 percent of residents were SSI recipients, and Hawes, Wildfire, and Lux (1993) cited data indicating that approximately 50 percent of residents depend on some type of public payment (SSP, Medicaid, Medicaid 2176 Home and Community-Based Care Waivers, or other state or county funds). Yet the public programs had little control over the service providers or users because the industry, especially smaller facilities, was unregulated in many states. Capitman (1989) predicted that public payers would be reluctant to increase involvement through such programs as Medicaid unless those individuals who could be cared for most appropriately and efficiently could be identified. The fact that many users were low-income and reliant on public sources for income also meant that many RC/AL providers (particularly smaller operations) were at best marginally profitable (Mor, Gutkin & Sherwood, 1985; Chen 1989). Much of the motivation for provision of the services may have come from nonfinancial considerations or the family economy model (Morgan, Eckert & Lyon, 1995). 272 S. C. Stearns and L. A. Morgan Table 12.1. Key Economics and Financing Domains Industry Domains Firm (Facility) Domains Market demand and supply Ownership Demographics Type Public versus private demand Owner involvement Growth and competition Staffing Financing and investment Per resident by type Revenue sources Turnover Access to capital Expenses Regulatory environment Revenue Facility licensure Charges Medicaid waivers and payment Sources Quality Profit or loss Over the past decade, however, both public payers and people with substantial private resources have become increasingly interested in RC/AL. As a result of the evolution of the industry, more and different options are available, especially for private pay clients. States see RC/AL as a way to reduce the growth in nursing home utilization. In 1996, 22 state Medicaid programs provided reimbursement for assisted living (AL), with the number increasing to 39 by 2000; other states were planning for Medicaid reimbursement (Mollica, 2000). All four of the CS-LTC states provide some Medicaid reimbursement for RC/AL. Although the greatest demand for senior housing is still from people with lower incomes (NIC, 1997), many middle- or upper-income individuals or their children see RC/AL as a desirable way to support older adults during a period of increasing functional dependency. The result has been a burgeoning RC/AL industry. Construction of housing for seniors increased dramatically during the 1990s, and...