In the midst of what some nursing home operators are calling the “Amazon Effect” on consumers, providers are facing an important choice when it comes to future builds: design for the expanding middle market or cater to the high-end, private-pay segment.

Consumer expectations guided in part by a higher level of instant gratification in the Digital Age are in part guiding providers’ plans. With nursing home beds projected to decline and demand set to surge in the coming decades, many argue that affordable, scalable middle-market models offer long-term sustainability. Others point to the financial resilience and appeal of high-end facilities, aspects that safeguard these facilities in uncertain times.

Panelists at the LeadingAge IL conference in Chicago on Tuesday said that the high-end model’s long-term viability may be limited, however, by changing consumer wealth and expectations, but can be tempered by reducing building costs.

“There’s real room here too for … low cost constructed homes,” said Ronald Schaefer, chief operating officer of EverTrue, formerly known as Lutheran Senior Services, which is an operator of life plan communities, which include skilled nursing. 

If a “magic formula” to decrease costs to under $100 per square foot can be achieved on a larger scale, he said, then it will be possible to have high-end living for a middle market consumer. 

“We haven’t really seen [low cost homes] at scale yet, but if we can crack a nut like that and be able to buy these en masse, whether they’re sort of Lego blocks put together with different components that can be assembled on site or flat packs like Ikea does … we might actually be able to accomplish a true middle market product without saturating the margins,” he said.

Nursing Home Administrator Thomas Annarella of ValleyHi Nursing & Rehabilitation, an operator of a county-supported nursing home that caters to the middle market consumer, agreed.

“In this day and age, you’ve got to offer a little bit more. You’ve got to have a middle-market type price point with high-end market amenities, and give people options,” Annarella said. “That’s what everybody is looking for … the Amazon Effect. The baby boomers learned one thing during COVID: Anything that you need and everything that you need can be delivered to your door with the click of a mouse, and that includes health care, that includes services and amenities.”

Marrying both high-end and middle-market is the way to go, Annarella said, but the success will lie in whether the building costs can be reduced.

“I really think that’s where the big wins will be in the future, because most of the boomers are spending their money anyway, so you’re gonna have to be able to provide that housing.”

Case for a middle market living model

The middle market is certainly growing. It represents a demographic that’s projected to double by 2029, according to Sam Heibel, director advocacy and engagement at LeadingAge Iowa.

This group of aging adults is increasingly in need of care but has fewer financial resources, making them ideal candidates for moderately priced housing and services, she said. And, building for this segment presents a more sustainable business model in the long term.

In addition, one major benefit of targeting the middle market is the potential to transition residents from private pay to public assistance like Medicaid, ensuring long-term retention, Annarella said.

Within life plan communities in particular, this middle market model is helpful in getting the more acute patients into skilled nursing facilities (SNFs), stabilizing them and then transitioning them over to Medicaid or other government subsidized housing, allowing the resident to be kept long term, Annarella said. In contrast, high-end living will deplete a facilities’ income faster, making it less viable for long-term care.

To be sure, middle-market models have economic constraints as well.

“The margins on that are so thin that scale has to be so great in order to even be able to be sustainable,” Schaefer said.

And operational discipline is crucial, he added.

“Watching your costs and service austerity is really a must for a middle-market product to be successful,” Schaefer said.

Case for high-end living

Despite the strong case for middle-market strategy, the high-end segment has its place.

Mark Dubovick, CEO of Selfhelp Home, said high-end communities yield more profits.

“High-end living definitely has high profitability. You can use these funds to invest into your community” said Dubovick.

And, higher-end communities are able to withstand crises better, such as the COVID-19 pandemic, which resulted in massive closures of nursing homes.

“We are usually able to weather the storm. We all know what the pandemic did. And those higher end living communities usually have a higher amount of reserves and have a little buffer,” Dubovick said.

Moreover, there’s also a consumer segment that still expects a premium experience.

“You really have to have the higher end product in the middle-market community, because people have that tough expectation to have that, and they’re paying good money for it,” Dubovick said. 

That said, baby boomers’ spending habits might deplete their financial resources by the time they reach high-end facilities.

And when that happens, “That move will be to a middle market or a low-market facility that takes Medicaid,” Annarella said.

‘Devasting to communities’

And while there is room for both high-end and middle-market models, the panelists said that the success of high-end models hinged on a deep understanding of the local population, and middle-market builds can be less disruptive if they fail. 

“Obviously there’s room for a very diverse range of offerings in the aging services sector,” said Heibel.

Problems arise when providers go overboard with equipping high-end facilities, particularly because these facilities might take longer to build and are harder to finance.

“We’ve seen it in Iowa, organizations that want to expand and build something with every single thing it has to offer. And by the time as it gets built and the doors open, a population that existed before is gone,” Heibel said. “So I think step number one is a real understanding of who is in your market, who wants those amenities because when that closes down, it’s much more economically devastating for a community than something that is middle market.”