"One trend we are definitely seeing is in occupancy- particularly in assisted living, in which we've seen occupancies that have struggled over the past several years with median occupancies nationwide being in the mid-80% range, and in the third quarter of 2004 still at around 87%," says NIC President Robert Kramer. "On the other hand, occupancies in the 30 largest MSAs are consistently running 400 to 500 basis points higher than we see for the rest of the country. In other words, there is a reason why many investors and operators have focused in on these areas. We are seeing very strong occupancy rates in these MSAs across all product types, but especially in assisted and independent living."
"We also are seeing and confirming over these past four quarters that what we call the 'top-tier' nursing properties are able to charge more without hurting occupancy," adds NIC Research Director Anthony J. Mullen. "In other words, when you look at the median of that upper tier-around the 87.5 percentile-they are able to charge substantially more than the average properties without hurting their occupancy rates. From that standpoint, it is an important insight for companies that are trying to stake out a high private-pay position. If you execute, it appears from the numbers that you can do so and not impact your occupancy negatively. Now, I emphasize the word 'execute.' The market is healthy enough in the top 30 MSAs that you can stake out that position and achieve it if you execute well. The market is deep enough for skilled nursing, assisted living, and independent living. This insight does not necessarily hold true outside the top 30 MSAs, however. We just don't have enough evidence there from our other work to claim that. In my opinion, it would be generally true, except in those areas where there would be more pressure because there were far too many properties opened at the same time."
The numbers bear out Mullen's observations: Nursing properties in the upper tier on price for private-pay rates (the top 12.5% of properties) charge 48% more than the median-priced nursing home and have a slightly higher occupancy rate than the median-priced nursing home. This 48% difference represents increased revenue of $2,470 per month per private-pay bed ($7,638 versus $5,168).
That 48% gap may sound huge, but take it with a grain of salt, cautions Mullen: "It certainly raises an eyebrow, but in this context, it perhaps wasn't as surprising. The reality is that those who are paying private-pay rates in nursing homes today represent a very small percentage of the overall population-down around 14 or 15%. So the people who are placed in that position-usually either residents who have very complex medical conditions or are bedridden and can't feed themselves-have families who figure that it is very unlikely that the resident is going to have that long to live, and therefore are willing to spend whatever it takes to get the best care at the best property. In that context, I think the numbers make sense. If you can deliver on care, people will pay for it."
Another significant trend is shown in how payer mix influences freestanding nursing homes' occupancy and private-pay rates. Freestanding homes with a high Medicaid census (85%+) and those with a high Medicare census (30%+) had an occupancy rate approximately 200 to 300 basis points fewer than freestanding nursing homes with a more balanced payer mix (approximately 68% Medicaid, 13% Medicare, and 19% private pay/other). "I don't think what we uncovered is shocking; it is basically grounded in common sense," explains Mullen. "We are seeing that nursing homes that either are forced into or try to become predominantly Medicaid-oriented facilities have shown a somewhat lower occupancy rate-250 to 300 basis points lower. It basically is showing that not only in terms of occupancy, but what you can actually get for your private-pay rates, if you are orienting more toward a Medicaid population, you are taking more risk. This doesn't mean that there aren't successful homes that have a high Medicaid rate-there clearly are. It just means that you are going to have a stiffer headwind on the private-pay prices you can command and on occupancy rates. What's intriguing is that this also tends to hold true with Medicare in one good way and one not-so-good way. Those that are targeting a higher Medicare mix, maybe 30% of the residents, are suffering a little bit on occupancy, but the positive news is that they are getting a higher rate on their private-pay beds, about $41 a day above a Medicaid-oriented home and about $6 a day above the typical payer-mix home. It may be common sense, but I don't think anyone has actually been able to prove this before."