It can be both strategically and financially favorable for a health care provider to expand into assisted living. But as those providers with long memories of the many senior housing failures of the 1980s can attest, a decision to sink millions of dollars into an assisted living project requires careful scrutiny, using realistic financial projections from a valid and reliable market feasibility study.

MARKET FEASIBILITY GOALS

The purpose of a market feasibility study is to ensure that potential residents actually exist and can be captured for the project. While nursing facility or hospital conversions and retrofit projects may be financially successful with a small number of units, current wisdom is that a free-standing assisted living facility must have between 60 and 80 units to be viable.¹

The end product of an assisted living market feasibility study should provide adequate information for credible financial projections. The study report should specify:

* number and types of units for the project (i.e., studios, one- or two-bedrooms)

* unit size and common space
requirements

* unit specific- and common- area amenities (e.g., balconies, kitchen equipment, special lighting, game room, pool, fitness center)

* pricing by unit type, including basic rent and services

* special products and services (e.g., dementia program, respite care)

* private pay/Medicaid occupancy ratios, if relevant

* recommended services (e.g., transportation, religious services, physician clinics)

* estimated absorption rate (e.g., number of units that will be filled per month).

Hospitals and nursing facilities that are considering assisted living as an adjunct to existing services likely will attract a more medically frail and dependent group of seniors, simply because of the association with the health care setting. While the median age of assisted living residents may be similar to the national norm of 84 years, the number of dependencies in activities of daily living will be more than the national average of 3.1.¹

For existing health care providers seeking to expand, the market feasibility study should focus on the demand for a medical model of assisted living.

FIVE-STEP PROCESS

A market feasibility study involves five steps:

1. Define your market. First, you must know where your residents are coming from. Approximately 70 percent of residents will originate from your primary market area, and 30 percent from your secondary market area. A rule of thumb is that your primary market area is within a 15-mile radius of the proposed assisted living facility, but this number can vary based on several factors.

For example, in Bismarck, N.D., the primary market area is much larger because many potential residents live on farms and relocate to the city for retirement. Conversely, in Pittsburgh, Pa., tight cultural neighborhoods make the primary market area radius considerably smaller than 15 miles.

The origin of patients or residents for the existing health care facility also should help determine the geography of primary and secondary market areas.

2. Estimate the number of potential residents in your market area. In this step, you are honing in on the real number of assisted living facility users, for both the current time and for at least the next five years. Data required to develop your estimate of potential residents for your project
include:

* individuals aged 75 or over (recall that the median age for assisted living residents is 84)

* single-person households (more than 97 percent of assisted living residents are single)

* people with more than three ADL dependencies (the average ADL dependencies are 3.1, and more dependencies should be expected in a medical model assisted living facility)

* people with annual incomes that are 20 percent greater than the anticipated monthly rates in the project.

This data can usually be found in state and county planning offices and state universities.

The most challenging estimate is the number of potential residents with annual income levels adequate to meet the proposed project's monthly payments. Available reports differ as to the income thresholds for assisted living. In fact, one survey report by Price Waterhouse Coopers² showed the national average annual income for assisted living residents was $30,831. Another report suggested most assisted living residents report annual income at $25,000 or less from savings, interest, dividends and social security; and that the residents are paying an annual average fee at 100 percent of their income.³ This latter report suggested that residents are spending down assets and relying on family assistance for assisted living fees. If you are uncertain about the range of monthly fees for your project, then use $25,000 as a minimum annual income for residents to qualify for a moderately priced assisted living facility.

3. Assess the competition. Next, create an inventory of existing and planned assisted living facilities and other senior housing projects that may be competitive options.

Assisted living facilities provide residents with a safe and secure environment, offering housing, meals and support services. However, there may be other independent apartments and retirement communities offering similar services in the area. A competitive assessment, then, should include all potential options. Identify planned projects through inquiries to state and local planning agencies. Obtain occupancy, turnover rates, fill rates, amenities, fees and market positioning through calls and visits to all possible competitors and substitutes.

4. Conduct informant interviews. You can obtain significant information about a community's elderly culture, anticipated needs, competitive issues and other trends from other health care providers and from community agencies.

Conduct your interviews, via telephone or face-to-face, with these key informants:

* hospital discharge planners

* physicians

* nursing facilities and retirement communities

* home health agencies

* day care programs

* planning and zoning agency personnel

* area agencies on aging

* senior health service providers.

Be sure to consider informants' comments in your final estimate of potential residents for your project.

5. Identify income-qualified pool of potential residents. To obtain the real pool of income-qualified individuals, modify the initial number of age-, dependency- and income-qualified households by subtracting the existing and planned assisted living units with comparable or higher monthly rates.

FINAL PROJECTIONS

Interestingly, only a small percentage of people in this income-qualified pool would actually enter an assisted living facility. A general rule is to estimate between 5 and 15 percent of this pool as your potential assisted living residents. The final number should reflect findings from the entire market feasibility study, as outlined above.

The market feasibility methodology for assisted living is not an exact science. Those who have operated assisted living facilities--from opening to full occupancy--know that a great deal of professional judgement and experience is necessary to ensure that the hospital or nursing facility owner can be confident in the assumptions used for financial projections.

A thorough and well researched market feasibility study, however, can keep second guessing throughout the project to a minimum, and allows the hospital administrator, nursing home owner, sponsor or investors to sleep at night.

References

1. Moore J. Assisted Living 2000, Practical Strategies for the Next Millennium. Fort Worth, Texas: Westridge Publishing: July 1998.

2. Price Waterhouse Coopers. The Assisted Living Industry, An Overview-1998. Fairfax, Va.: Assisted Living Federation of America, 1998.

3. News Currents. Assisted Living Residents Less Wealthy Than Assumed. Provider, 1998;12:11-12.

Dr. Kathleen M. Griffin is national director of post-acute and senior services for Health Dimensions Consulting Group, Scottsdale, Ariz. She is also an
ADVANCE editorial advisor.