The looming payment challenge few are talking about

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John O'Connor
John O'Connor

The latest Genworth numbers came out this week, and here's the good news: residents are paying a bit more to live in assisted living communities.

The overall median cost rose by slightly more than 1% last year, to $47,208, Genworth surveyors found. As always, regional variances reflecting income levels were in play. Costs tended to be lower in southern states, higher in the Northeast and South Atlantic.

So if you are a senior living operator and your rents went up a bit last year, that's a good thing, right? As it turns out, the answer may not be so obvious.

As with those of most other businesses, senior living operating expenses tend to rise over time, if only to keep pace with inflation. Throw in additional budget items that can suddenly spike up — such as labor and food — and that 1% uptick seems downright miserly. And frankly, it is.

But what really should concern operators is this: At what point do rising rents become problematic for my intended customers? There may be no easy answer to that question. But some disturbing demographic trends need to be kept in mind.

One is this: Nearly half of the people in this nation who have made it to their 65th birthday live on less than $23,760 a year, if the Kaiser Family Foundation is to be believed. Another is this: About six in 10 of those people likely will make it to age 80, when their growing need for health and living assistance tends to make them ideal candidates for your community.

So what will it mean when so many of your potential prospects earn far less than you charge? As a practical matter, I would suggest that two outcomes are all but certain.

One is that an increasing number of operators will need to target residents on the high end of the income spectrum. If you happen to join this club, then you will need to spend a fortune on the services and accoutrements necessary to meet five-star expectations. And you'll increasingly be competing against others doing the same.

As for operators opting out of this fast lane? Well, there is a good chance that subsidized payments will be your future. To get a sense of what that is like, ask your friendly neighborhood nursing home operator what it's like trying to make ends meet on Medicaid funding.

Does this mean operators should not raise prices? Of course not. But it's pretty clear that assisted living is on a road to bifurcation. We're increasingly going to see some operators targeting the haves. And the balance fighting over the have-nots.

And for many in both camps, the fight to survive could get quite ugly.

John O'Connor is editorial director of McKnight's Senior Living. Email him atjohn.oconnor@mcknights.com.

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