NEWPaul Willging Says…

Don’t Let Demographics Fool You

But I would emphasize the word “potential.” Gross numbers don’t really tell us much. Only by looking behind the numbers can we get a sense of the implications of aging for the seniors housing and care industries. Failure to do so is what has left many in our industry holding the bag. For example, just looking at the growth of the elderly in this country (normally described as those 65 years of age and older) isn’t very instructive. Indeed, it can be very misleading.

Just ask Wall Street. The investment community, in its historic analysis of long-term care, was absolutely fixated on the “aging of America.” It certainly displayed an abundance of “irrational exuberance” when contemplating the power of demography, particularly the demographics of aging. To know that seniors are America’s fastest-growing population cohort is not enough. More important is to know what this increasingly critical market wishes to, and can, buy. Here is where the industry has needed help.

For example, our focus on just one aspect of demographics in the 1970s and 1980s lulled nursing homes into a false sense of security. By focusing exclusively on exponential growth as the most telling characteristic of the aging market, we failed to isolate more critical aspects of the seniors marketplace. We forgot, for one thing, that the demand for nursing home care was driven by the availability of financing-specifically, by Medicaid-not by customer preference. We fooled ourselves into thinking that the growth of the nursing home industry was a function exclusively of the growth in the number of potential customers, that their age in itself was sufficient to qualify them as happy customers for our product-the nature of our product notwithstanding.

Not that the numbers themselves aren’t compelling. Average life expectancy has increased dramatically over the past century, from 50 years in 1900 to 75+ today. In 1900, 75% of the population died before age 65; in 1995, 70% died after 65. The number of individuals who are 85 or older will increase from 2.3 million in 1995 to 16 million in 2050.

But it was the failure to understand what lies behind such numbers that led to the downfall of many a long-term care entrepreneur. From 1980 through 1990, for example, the demand for (and construction of) skilled nursing beds increased by approximately 2% per year (certificate of need notwith-standing). Extrapolating these numbers and assuming, erroneously, that seniors’ need for facility-based long-term care services would grow accordingly, many saw the growth of nursing homes continuing into the far distant future.

The result? Flawed business plans. Why? Because the predictions themselves were flawed, in that they didn’t take into account other factors: the increasing affluence of seniors and a corresponding increase in their ability to make their own choices regarding care; the availability of assisted living and other alternatives to skilled nursing care; and an overall improvement in seniors’ health and commensurate decline in disability.

In other words, in focusing on the numbers of seniors, we overlooked the implications of their increasing health, wealth and income, and education. And those implications proved to be every bit as significant as the numbers.

Let’s look at some of those other factors. Average annual household income, for example, rose from $18,000 (in real, not inflated dollars) in 1970 to more than $30,000, 25 years later. And how about assets? Those numbers, too, are instructive: from a net worth (again, in real dollars) of less than $80,000 in the 1970s to more than $130,000 in the 1990s. More than 70% of seniors own their own homes free and clear. And an increasing number of them are willing to divest that asset as part of a decision to enter not a nursing home, but a retirement community.

How about education? Education levels attained by seniors have shown equally dramatic increases over the past few decades. Between 1960 and 1997, the average level of schooling for seniors increased from 8.3 to 13.4 years. Between 1970 and 1997, the percent of elderly with a high school diploma increased from 28 to 66%. The number of those who had attended college increased to 24% (from 5% in 1940).

Educated seniors are not just healthier seniors. Education also affects their buying behavior, particularly when they consider the kind of facility they would contemplate living in. Educated seniors tend to be more knowledgeable and have higher expectations of a facility. They are, for example, more likely to “do their homework” and come to the facility ready to ask more meaningful questions regarding the product. They will expect a broader range of services, such as continuing education classes, transportation to cultural events, and Internet access. Even the basic living unit will be subject to increasing scrutiny (e.g., just ask any operator about the continued desirability of shared occupancy facilities).

What about those decreasing levels of disability? The proportion of Americans with a chronic disability decreased from 24% in 1982 to 21% in 1994. Seniors are healthier today than they were in the heyday of nursing homes, a corollary, at least in part, of higher levels of educational attainment.

In observing this failure of the nursing home industry to adequately dissect population numbers, assisted living shouldn’t be too smug. Many assisted living operators made two basic mistakes: For one, they, like nursing homes, lumped the elderly into one basic category and, in so doing, failed to see crucial distinctions within the seniors populations. But their more compelling mistake lay in their failure (like that of their nursing home counterparts) to understand the drivers of their industry’s growth. While nursing homes never really understood that their product was a function not of customer preference, but of financing-Medicaid payments making the product affordable, if not desirable-assisted living similarly failed to understand that its product’s success was not because of its innate desirability, but rather to a general aversion to nursing homes. Consumers don’t choose assisted living, their children do-and not for the reasons that motivate their parents.

Let’s look at the first mistake, assisted living’s failure to distinguish the demographic forest from the trees. By looking simply at all people over age 65 as a homogeneous group, assisted living failed to see the “pig in the python.” A term common in demographic jargon, the “pig in the python” is a way of characterizing the movement through time of the large subset of the American population born following World War II-the much-talked-about baby boomers. Assuming that they had been swallowed whole by our apocryphal python in 1945, and did not emerge as a viable customer until around age 81, they would not, given the average age of admission to an assisted living community, be beating on its doors until the year 2030 (at the earliest). True, given the pent up demand for this new product line (including the desire for an alternative to nursing homes), the market was reasonably large in the 1990s and could generate considerable new demand. But that demand was nowhere near as large as those who were looking at an undifferentiated seniors population might (and, in fact, did) assume.

Let’s face it: The real growth in seniors housing and care, at least in the foreseeable future, will be (and has been of late) in the independent, “active adult,” and congregate environments-the baby boom’s initial wave of seniors housing customers.

Long-term care’s marketing approach must recognize these factors if it is to succeed. While educated seniors are likely to be “more desirable” residents because of their better health and financial circumstances, attracting them requires a specialized, targeted approach. Not being a nursing home will not suffice. Factors affecting a senior’s quality of life-ambience, security, social contacts, mental stimulation-comprise the desired service for today’s seniors. The ability to satisfy those desires, and not to just catch the numbers, will spell the difference between success and failure in today’s long-term care. NH