The Need to Increase Senior Living Fees as Inflation Cuts into the Fixed Incomes of Residents and Prospects

Battling Inflation and Pandemic

Forty-year high inflation rates have impacted every aspect of communities offering independent living, assisted living, memory care, and/or skilled nursing on both the non-profit and for-profit sides. During the pandemic, many workers left their communities, requiring managers to use expensive agency staffing to fill key positions from dining room workers to registered nurses, and hire recruiters to try and fill permanent positions or leave positions unfilled. To compete with the bigger wage and benefit packages offered by retail and hospitality employers, providers have had to match or exceed them while struggling with higher prices for food, supplies, insurance, utilities, and services that are outsourced.

To comply with new regulatory requirements and meet the expectations of residents and prospects, expenditures for new or upgraded technology and trained staff have also been necessary. According to the result of a recent survey from the National Investment Center for Seniors Housing & Care, inflation has replaced staffing as a top concern for providers. The Bureau of Labor Statistics last reported that its key inflation gauge, the consumer price index, rose 8.3% year-over-year in August. The Federal Reserve’s key inflation gauge, the August personal consumption expenditures price index excluding food and energy increased 4.9% from last year.

Scrimping and Finagling

To corral escalating costs, prioritize spending, and reduce expenses, managers have held exhaustive brainstorming sessions with senior staff as well as outside consultants, slashed spending wherever possible, and delayed all but the most critical capital and repair projects. They have negotiated with vendors, outsourced services, juggled schedules, and re-designed benefit packages to include such things as workforce housing. Many have peppered every local and digital source repeatedly for referrals, launched new at-home and hospice programs, created new training programs with local colleges, and applied for every local, state, federal and philanthropic grant they could find.

After months and months of scrimping and finagling, many have found that their efforts have not been enough. Only one other option has remained: raising rates for residents.

Raising Rates Enough

Every community is different, but for those managers still unsure about what to do or how high to go, we encourage you to consider the following:

• Providers are operating in unprecedented economic conditions, battling a barrage of negative national press as well as a pandemic going into its third year, still not back to pre-pandemic occupancy but facing a more intense regulatory environment with reporting requirements such as technology upgrades and specialized staff, all designed to protect and benefit residents and patients;
• Boards and managers are committed to the best and highest health and safety protocols to benefit residents as well as staff and this requires the payment of going rates for all the necessary technology, supplies, training and labor;
• Inflation is hitting some parts of the country, some urban, rural and suburban areas harder than others as a result of the pandemic, supply shortages, wage increases offered by employers in competing industries including retail and hospitality, and demographic changes. The reality is that labor is in extremely short supply and price inflation for non-discretionary items and services has been rising all year and continues to rise. Smaller communities have less leverage in negotiating purchases and services. As always, rates need to be high enough to cover projected costs for the contracted service and meet debt service;
• Trends in real estate sales, prices, mortgage rates and demand point to a slowdown, which may have a significant impact on the pool of prospective residents seeking to enter each community to fill vacant units and provide the revenue needed to meet operating expenses and provide timely refunds. Some cushion is needed to absorb changes in housing trends and the economy in general that are beyond management’s control;
• However, many residents and prospects facing higher than expected entrance, rental and monthly fees should have some cushion based upon the nationwide annual home price growth which peaked at 20.6% in April 2022, and the long bull run in the U.S. stock and bond markets;
• More good news is that residents are expected to see a Social Security COLA increase of 8.7%, which would be the biggest raise in more than 40 years and that will help;
• Since the community was financed with debt and equity, there are hard covenants that must be met with respect to debt service, cash balances, occupancy, and sales. Operators have no intention to default, create headlines and bring in new pressures and demands forcontrol fro m outside parties;
• Some residents faced with increases may seek to terminate their contracts and move in with family or to a different community, so creating and maintaining wait lists and interested party lists is critical;
• The goal of management should be to maintain a steady, predictable annual increase for residents and avoid ever having to announce any exceptional increases again;
• FY22 and FY23 increases have necessarily been the highest on record, but there will be a time, hopefully in the very near future, when conditions turn, prices fall, fees can be lowered and any surcharges discontinued.

Expectations and Pressures

Almost every current and prospective resident understands that their contracts assume annual increases. For renters, they have the option of moving out if the increase is unacceptably high. For those with entrance fee contracts (lifetime leases), it is not so easy. For investors who financed the facilities with equity or debt, the assumption is that there will be regular, annual increases of about 3% in monthly fees and 2% to 4% in entrance fees.

Major institutional investors in this sector know that senior living facilities are able to raise fees; care providers must do so to compensate for low Medicaid, Medicare and Managed Medicare reimbursement rates. Managers can also reconfigure units or eliminate skilled nursing beds to offset some of the cost inflation and investors may pressure managers and boards to do so.

These investors also understand that communities going into the pandemic with lower occupancy, and those who continue to experience a sluggish recovery as a result of new competition, too rapid expansion, or significant demographic change, may not have the luxury of increasing fees by much, if at all.

Increases in 2022

During the first year of the pandemic, not all providers were able to raise rates, given the lockdowns and loss of so many services and staff. That may have slightly skewed the 2021 Genworth Cost of Care Survey which reported that the compound 5-year annual growth rate is 4.4% for community and assisted living, and 3.25% for nursing care. In 2022, most every independent living, assisted living and memory care facility operator pushed their resident fees higher. As of June 30, the average rent across senior living rose by 4.7% year-over-year according to Marcus & Millichap, with increases well exceeding 5% in 20 different major U.S. markets. However, the average rent growth still remains below that of inflation (Chart 1) while labor costs soar (Chart 2).