Rethinking Care Models for Middle-Income Seniors

by Jeff Shaw

Innovative solutions are needed to reach this underserved audience.

By Joe Mulligan

As is the case with many things in life, the choice of where seniors get their housing and services is driven heavily by their financial resources. For wealthier individuals, the senior care industry offers many attractive private-pay options, including congregate housing with a wide range of service and care levels and professional care ported into a home — whether that be their own home or that of a family member. 

For lower-income seniors, their limited available personal financial resources can be augmented by governmental sources. Shelter can be secured with family, Section 8 vouchers or via the HUD 202 Supportive Housing Program. Services and care can be secured from Medicaid programs. 

But what about seniors with financial resources in between? 

This cohort was at the center of discussion during the fifth annual InterFace Seniors Housing Midwest Conference held in Chicago this summer. Simply put, middle-income seniors are faced with a conundrum. They are typically too wealthy to qualify for the means-tested programs available to low-income seniors, yet not wealthy enough to afford the private-pay options for a sustainable period. 

Senior care operators and developers have long been attracted to the private-pay market due to the potential for lucrative development fees, operating profits and the ability to create Class A trophy facilities. Low-income or “affordable” housing developers and operators are often characteristically attracted to the industry due to market demand, passion, mission, tax advantages and more.

The middle market has long been the industry doughnut hole for developers and operators because it lacks both the mission sizzle of serving the poor and the economic potential of serving the wealthy. 

Speaking the same language

The notion of “middle income” in senior living development is generally a term of art that is evaluated on a market-by-market basis and not driven by precise income thresholds, which means individuals and companies define it differently. During one of the conference panel discussions, an executive said his company considers the middle-income market to earn 70 percent to 150 percent area median income (AMI). In contrast, income thresholds for affordable housing are generally dictated by the types of support programs utilized (such as LIHTC and Section 8 waivers), which limits housing eligibility generally to persons making 30 percent to 50 percent of AMI.

In a comprehensive study recently released by The National
Investment Center (NIC) called “The Forgotten Middle,” the age 75-plus middle-market is defined as individuals in the 41st to 80th percentile of individual income and annuitized assets. Based on data from the 2014 Health and Retirement Study sponsored by the National Institute on Aging and the Social Security Administration, the mean income for individuals age 75-plus is $44,326 excluding housing equity, and $57,187 with housing equity. 

Going off the NIC analysis, this middle-income cohort is projected to become the largest of the three by 2029 with 14.4 million seniors, which represents an increase of 83 percent from today. The growth drivers of this middle-income cohort include demographics (first baby boomers turn 83 in 2029), lower savings (fewer pensions and more 401ks that go underfunded), fewer married couples (62 percent currently versus 52 percent projected in 2029) and fewer family caregivers, as birthrates continue to decline and children are less likely to live nearby.

By 2029, 91 percent of these age 75-plus middle-income seniors are anticipated to need assistance with up to three activities of daily living, 67 percent will have three-plus chronic care conditions, 60 percent will have mobility limitations and 16 percent will have high cognitive impairment needs. In 2014 dollars, the projected average cost in 2029 for independent living rent and medical costs of taking care of these needs is approximately $45,000. For assisted living, the projected rent and medical costs is $60,000. 

Using this math, only 20 percent of middle-income seniors are projected to have the financial resources available to afford this $60,000 cost when excluding housing equity, and only 46 percent will be able to afford it even with housing equity.

Overcoming the wave

The NIC analysis assumes no erosion or decline in the projected financial resources for seniors, which may understate the magnitude of the looming problem. For example, the Board of Trustees of Social Security and Medicare recently announced that Social Security’s costs are expected to exceed its income in 2020 for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits. 

Absent policy changes, the trustees project that by 2035 they will only be able to pay Social Security recipients about 75 percent of their scheduled benefits. The potential consequences of such a gap are significant when analyzing income composition for seniors. A study by the Urban Institute reported that Social Security comprises approximately 50 percent of the income for seniors age 65-plus with income of $47,000. Further, with home ownership declining and seniors carrying more debt from student loans and bigger mortgages that have lower levels of true home equity, the projected net income with housing equity may be overstated.

While there are some sobering thoughts about the future challenges of care options for middle-income seniors, it’s conversely an exciting opportunity for change and innovation that is long overdue. For years, senior care market participants have talked about the holy grail of a middle-market product, yet there haven’t been many impactful, replicable models at any scale. This is both the essence of the problem and the beauty of the opportunity. 

The quest for developing prototypes and achieving scale is sexy and alluring, but the reality is that healthcare is local, and any prototypes must be viewed through a lens of local market knowledge and tailored to the preferences, demands and economic realities of local consumers. This message was repeated and reinforced several times throughout panel discussions at the conference. 

Panelists also emphasized the importance of being in tune with
forward-looking trends in designing new facilities. One such example was rightsizing the number of parking spots, which can cost over $30,000 per spot for underground parking. With the increased usage of ridesharing and evolving acceptance of driverless car technology, architects and developers are evaluating downsizing the number of parking spots and repurposing available space.

The whiteboarding has begun on rethinking care delivery for
middle-income seniors. New models will emerge that will be named and branded differently. Shelter, care and services desired by middle-income consumers will be delivered from within and outside the walls, efficiently, cost-effectively and likely with multiple layers of payer sources. 

It’s a matter of “when” and not “if” because the middle-income market potential has become too big to ignore anymore. 

This article is for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual person or entity. Cain Brothers, a division of KeyBanc Capital Markets, is a trade name of KeyBanc Capital Markets Inc. Member FINRA/SIPC. KeyBanc Capital Markets Inc. and KeyBank National Association are separate but affiliated companies. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives. Banking products and services are offered by KeyBank National Association. Credit products are subject to credit approval. ©2019 KeyCorp.

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