|Trends Driving Assisted
Assisted Living - How Does It Work
Opportunities for Hospitality
Competitive and Market Conclusions
As the baby boom becomes an elder boom in coming decades, profound change will occur across North America and Europe as the elderly become a dominant part of the population. In the United States, 80 million babyboomers began to turn 50 in the last year and many are already looking to early retirement. Almost half of Europe's population could be over 60 by the year 2050 as population growth slows.1 Those approaching retirement age today are at the vanguard of this much heralded demographic change, and with it, radical change in society's structure and business opportunity. Among those sectors expected to accelerate in demand is the assisted living marketplace.
Assisted living represents a middle ground for the elderly. Housing accompanied by some assistance allows seniors to remain independent as long as possible. Services are tailored to the individual as they need them. Meanwhile, Wall Street has eagerly embraced offerings made by leaders in the industry, recognizing the significant growth prospects for assisted living. This $16.5 billion market is projected to exceed $20 billion in revenues by the year 2000 in the United States alone.2
Assisted living represents a prime opportunity for hospitality companies willing to use the core competencies of hospitality to develop and operate communities for seniors. While most of the major hospitality entities have merged, consolidated or entered new market segments in last few years. only one hospitality company is currently a major player in the assisted living industry, Marriott International, which expanded into assisted living in 1989, now occupies the number two position on the chart for the top 25 U.S. Senior housing Owners and is ranked third in the top 25 U.S. Senior Housing Managers. In June of 1996, Marriott completed its merger with Forum Group, in the process acquiring an additional 42 assisted living facilities. As of October 1997, Marriott operated 82 assisted living communities, and the company plans to triple that number in the next five years.3
Does Marriott's path in assisted living make sense for other hospitality companies? Clearly there are "cross-over" resources and skills between the hospitality and assisted living industries. Food and beverage and other processes in hospitality can be translated into assisted living operations. Indeed, hospitality companies with brands that represent service and quality have two of the most import ant ingredients when consumers make buying decisions in this industry. There are also challenges for a hospitality company expanding in this industry, however, given its mission of providing care services to the elderly. Nevertheless, the prospects may be attractive to hospitality companies with significant resources, given that assisted living is likely to be the fastest-growing segment in the long-term care industry.
Trends Driving Assisted Living
Three primary demographic trends will shape growth of the assisted living industry in the next few decades. Advances in nutrition and medical science have resulted in an increased life expectancy, and consequently growing numbers of elderly people. Many seniors are living longer, more active lives.
Second, as an increasing number of women enter the workforce, their ability to serve as the primary caregiver to aging parents has been greatly reduced, thus changing the role of the family in providing elderly care. Third, a greater number of elderly are now living in isolation in many countries. In the United States, for example, the average family moves once every five years. Many families are widely scattered, leaving elderly parents alone. Family structures have radically changed in recent decades. The end result is an elderly population that has been left without the traditional sources of assistance needed to perform their daily activities. Families must increasingly rely on alternative solutions to fulfill their previous roles as caregivers.
Proactive companies in the assisted living industry have stepped in to provide these services to a market that is forecast to grow at a record pace. The number of people aged 65 and over in the United States is currently 34 million, accounting for 13 percent of the total population. That number is projected to grow to 69 million, or 20 percent of the total population, by the year 2030.4 The number of elderly will only increase with the aging of the baby boom generation, those individuals born between 1946 and 1964. As this generation ages and retires, an increasing number of people over the age of 75 will require some level of care or assistance during the final years of their lives. The number of people aged 85 and over is currently 3.7 million and is projected to increase to 8.5 million by the year 2030. Demand will be driven by increases in how long people live. The average life expectancy for women aged 65 is projected to increase from 84.2 years in 1995 to 87.4 years in the year 2050.5
The demographic shift in the European Union (EU) may be even more extreme than in North America, where the demographic structure of society is more greatly influenced by immigration and slightly higher birth rates. The population aged 60 or over in the European Union had climbed by 50 percent in recent years, reaching 68.6 million by 1992. Estimates place the number of older people in the European Union at 80 to 100 million by the year 2020, of which 27 to 29 million are estimated to be over 80 years old. The average life expectancy in Europe is estimated at 78 years for men and 82.5 years for women. This is reported slightly lower in the United Kingdom at 77.6 years for men and 81.7 years for women.6
Also of urgent concern is the financial strength of the aging in the European Union, with poverty remaining a source of worry for many older people in EU countries. A 1993 Eurostate survey revealed that 48 percent of older people in the then 12 EU countries had financial difficulties.7 Health and social services or older people vary widely across Europe. Generally, however, the trend is toward de-emphasizing institutionalization and promoting private care or assistance.
Although needs and resources vary greatly among the elderly in North America and Europe, assisted living will almost certainly sustain significant growth in the near future for a variety of reasons:
Inspired by the Dutch and Scandinavian systems, assisted living programs originally offered housing and sheltered services for the frail elderly. Today, the industry provides long-term care in a homelike environment at less expensive rates than nursing homes. Elderly residents gain an ability to live a more autonomous lifestyle, while enjoying the comfort and security of on-site services, including health programs and other types of support. As residents age, their level of need increases, and the community becomes responsible for providing more complex levels of care. This is commonly referred to as "aging in place." Residents are able to customize their level of care based upon their needs.
A Merrill Lynch industry report indicates that the average assisted living community comprises 58 separate private living units.8 A typical resident is a widowed or single female, 84 years of age, who needs assistance with three activities of daily living. Some 30 to 40 percent of residents suffer from Alzheimer's or some other form of dementia.
Due to the focus on lower acuity care, assisted living communities can offer the elderly the level of care that is individually required at prices that are typically two-thirds of what a nursing home would charge. Most assisted living communities in the United States offer a tiered pricing schedule in which residents pay a basic rate for room and board, and are then charged additional fees depending on the level of service they select. This economic structure is beneficial for both the provider and the customer. The customer is able to obtain an individualized level of service at prices substantially less than at other higher acuity centers, like nursing homes. The provider is able to continuously serve customers as their needs change.
Assisted living companies in the United States are currently able to offer affordable services to their residents with monthly costs for assisted living (housing, meals and additional services) ranging from $1,500 - $3,000,9 with certain markets ranging as high as $6,000 - $7,000. Private payers represent 96 percent of the industry's total revenue. Costs to residents could increase substantially, however, depending on the extent of future regulation. While U.S. nursing homes and other healthcare providers are heavily regulated on a federal level currently, the American assisted living industry is free of many of the costly compliance burdens of federal regulation. Regulation of the assisted living industry, however, looms on the horizon as the expansion of this industry has stimulated greater scrutiny of assisted living providers.
Opportunities for Hospitality
The assisted living industry is highly fragmented, with a growing trend toward consolidation. The supply of communities has been unable to keep pace with demand and consolidations have begun to accelerate. The top 50 operators in the industry housed an estimated 20 percent of the residents in 1996 until their needs required that they move to nursing homes or other higher acuity programs.10 Providers look to gain critical mass and strengthen their presence in particular geographic regions. This environment will create opportunities for strong operators and developers with loyal employees, an established marketing process, and access to capital.
The Competitive Landscape
Competition among companies in the assisted living industry exists on three levels - national, regional and local. To effectively compete on a national level, a company may need to have a strong brand name, access to sufficient capital and an ability to effectively execute appropriate development decisions. On a regional level, a company will need to take advantage of regional demographics, maximize efficient use of resources and establish brand equity. On a local level, competition varies widely. Factors influencing the local markets include geographic location, knowledge of the elderly population trends currently and going forward, and regulatory issues. Also critical are supply-and-demand forces shaping the local market in its current phase and what is expected for the future.
Marketeting to Customers
To effectively position companies within key markets, it is essential to understand the distinction between the prospective resident of the assisted living community and the customer who may be an adult child caring for an aging parent. In the assisted living industry, there are unique challenges to target and market to the consumer (the potential resident of the assisted living facility). The customer, however, may be the adult child who is the primary caregiver. Most residents - or their family caregivers - choose an assisted living community within a certain radius of their family. This highlights the importance of careful target marketing to identify not only the demographics of the resident, but also of the family.
Access to Capital
As competition continues to increase, access to capital will be a major factor in success. Currently, the ability to obtain capital in the public and private markets in the United States is at an unprecedented level as investors recognize the opportunities and returns of the assisting living market. Within The last 24 months, there have been 16 public equity offerings, six convertible offerings and multiple REIT financings by assisted living companies in the United States. In a capital-constrained environment, those companies with access to capital through relationships with strategic partners will have a competitive advantage. Again, strong hospitality entities would be able to supplement local assisted living operators.
Competitive and Market Conclusions
The fundamentals driving the assisted living industry - including the aging of populations in advanced economies and the drive to better manage health care costs - will continue to provide exceptional demand for assisted living services. Given the industry's fundamentals, a company with access to capital, strategic focus and commitment to operational excellence should be well positioned to be a leader in the market. As competition in this evolving market increases, consolidation will provide companies with an opportunity to expand both within their own niche of service and into other levels of the care continuum. This is particularly the case in the United States, for example, where there is currently no dominant provider of assisted living services.
Although hospitality companies may have the brand equity and the operational expertise of running a housing community, it is essential for them to provide the other health - and support - related services to elderly residents. Residents of assisted living communities require more services than a hotel guest. That is the core difference between hospitality and assisted living. Competitors for elderly residents offer communities and services at all points of the senior care continuum, from skilled nursing communities and acute care hospitals, to companies providing home-based health care. Hospitality companies considering the assisted living market may want to consider partnerships with current operators. The hospitality companies can offer critical mass, brand reputation and general operational expertise, while the care-giving expertise would be provided by the assisted living company.
The prospects for providers of assisted living housing look extremely
promising. The number of potential customers is rapidly rising, and they
can be expected to have lengthy stays at assisted living communities. At
the same time, there is currently a limited supply of assisted living communities.
This all translates into opportunities for proactive companies. The hospitality
industry may be one of the beneficiaries.
|Andrea S. Wade is a Senior Consultant iri Arthur Andersen's Business Consulting Practice in Los Angeles. Deborah S. Anthony, Tax Partner, hospitality Services, contributed to the article. She is based in Arthur Andersen 's London office.|
1 Aging a bigger worry than population size. UK...News,
Electronic Telegraph, June 19, 1997
2 Merrill Lynch, The Assisted Living Industry: An Introduction to the Sector, April 1997, p.5
3 More on Marriott/Sodexho Merger, AMREX, October 8, 1997
4 Source: US Census Bureau
5 Source: US Census Bureau
6 Older People in the European Union, Oaps.html at www.leevalley.co.uk. p.1
7 ibid., p.1
8 Merrill Lynch, The Assisted Living Industry: An Introduction to the Sector, April 1997, p.7
9 Jefferies & Company, Inc. The Assisted Living Industry: The Missing Link, August 1997, p.20
10 ibid., p.37