With the passing of the healthcare reform legislation in March 2010, the foundation was laid for change in the healthcare system. This includes a sector of multifamily housing—senior housing.
The Community Living Assistance Services and Support Act is a part of that overarching healthcare reform focusing on government-sponsored, long-term care insurance, which will significantly revalue skilled nursing facilities, according to a 2010 study by Encino, Calif.-based Marcus & Millichap’s National Senior Housing Group. The healthcare reform’s decrease in Medicaid payouts will lower the value of the skilled nursing business overall.
“The most important conclusion … is that the government is elevating demand for seniors housing properties, while failing to provide an adequate vehicle to pay for it,” says Gary Lucas, senior vice president and managing director of NSGH at Marcus & Millichap.
There are four main types of senior multifamily housing—Independent Living, Assisted Living, Skilled Nursing, and Continuing Care Retirement Communities. Of these, the skilled nursing segment will be the hardest hit by the reform, Lucas says. This is primarily due to the high cost associated with the care, as well as the reduction of the Medicaid reimbursements. Skilled nursing facilities depend heavily on government aid, with nearly 80 percent of their revenue coming from Medicare and Medicaid.
“Sweeping cuts to reimbursement schedules will erode bottom lines when the cost of care shows little sign of retreating,” Lucas adds.
Those looking to invest in skilled nursing facilities will also be impacted by the C.L.A.S.S. Act. According to the study, the business operations at a particular facility are the most important factor in determining value and skilled nursing prices never advanced with those of other commercial real estate.
“Buyers seeking skilled nursing properties are looking at the Census mark-up and margin, which is why cap rates in the segment are so high,” Lucas explains.
Yet, at the same time, the demand for senior housing is increasing, as the average life span is getting longer and families do not have the time for long-term care, causing occupancy and revenue rates to rise.
The additional stress on Medicaid funds will prove too much, says Lucas, offering a grim prediction for the future of skilled nursing housing. “When the Baby Boomers reach utilization age for skilled nursing beds in the 2030s, an explosion in demand will likely be met with short supply and could potentially bankrupt both Medicare and Medicaid.”
Of course, as the bill will not be implemented until 2014, the ramifications are still speculations on the part of those in the multifamily industry.