By Jack Cumming

The trade press has been filled with optimism about the future of senior housing and senior services as the baby boomer demographic wave passes into advanced old age [Example]. The assumption is that today’s conditions will roll on endlessly like the good times in New Orleans.

Perpetual Prosperity, or Chaotic Restructuring?

We may be experiencing rapid political change, but prosperity continues; the stock market is at an all-time high, home prices have soared, and income taxes are being cut. Who wouldn’t want to hope that such a happy picture will be perpetual?

If we cut through the distraction of political personalities, our nation is embarking on a great economic experiment. We are cutting income taxes and substituting tariffs. Tariffs are already impacting the federal budget. Like sales taxes and value-added taxes, tariffs fall evenly on all consumers regardless of their wealth.

In contrast, income taxes are often “progressive,” taxing those with higher incomes more than those with lower incomes. Some see that as justice, while others consider it a penalty for success. Of course, compensation doesn’t always correlate with business success. Some highly compensated executives are leading enterprises that are shrinking.

The underlying political question is whether the coercive force of government should be used for income redistribution. The current administration appears to believe that the government should not redistribute income but that it should instead impede excessive consumption.

Competing Political Philosophies

Those who believe that economic expansion benefits all socioeconomic strata might prefer funding the government with consumption taxes like tariffs. Those who believe that wealth results from self-dealing, social insensitivity, and injustice might prefer steeply progressive income taxes.

Aside from one’s personal emotional leanings, that’s the nub of the economic experiment on which we now seem to be embarked. Imports into the United States have been reported at roughly $4 trillion per year recently. The federal government deficit has been fluctuating around $2 trillion a year. Thus, it would take across-the-board tariffs of 50% to close the gap. This back-of-the-envelope calculation suggests that reliance on deficit financing is more likely to impact our business environment than is the current fuss about tariffs.

Predictability Is Best

Nevertheless, business thrives best when the business context is predictable both legally and economically. Just now, things seem chaotic and anything but predictable. The news media naturally report on the chaos, since that’s more newsworthy, but business leadership calls for cool heads and deliberative judgment.

With that, we can close out this quick economic analysis and move specifically to senior living. Tariffs are just one unpredictable economic factor. Judgmentally, the other prospect looms larger. That is the potential that deficits might lead to a loss of faith in the dollar.

Such a loss of trust might cause hyperinflation, with the value of the dollar plummeting. It’s unlikely such a circumstance would be as dramatic as what struck Germany in 1923, but a repeat of the U.S. inflation of the 1970s and the consequent stagflation is a real possibility.

Senior Living and Economic Risk

It’s easier to adjust pricing and purchasing for a short-term business than it is for a long-term one. Senior living is long-term. Whether it’s contractual or merely a moral obligation, taking in people who are deteriorating due to age involves an implicit undertaking to care for them for the rest of their lives.

Nevertheless, if your focus is on the welfare of the business in light of economic uncertainty and chaotic utterances from those in high places, then you would logically convert long-term commitments into shorter ones. In many instances, that was how the senior living industry responded to the hyperinflation of the 1970s.

The move from Type A, care-inclusive contracts, to minimally Type B and even Type C pay-as-you-go contracts was a similar effort to turn a long-term undertaking into something short-term. Of course, the motive there was different since the industry resisted developing the needed expertise to manage the stochastic risk involved.

A big drawback to moving toward shorter-term commitments is that it moves risk from providers to residents. Residents are arguably less versed in how to manage that risk. Moreover, accepting care and longevity risks has long been one of the more attractive factors sustaining the industry.

Serving the Resident Consumer

The alternative is to anticipate the worst while hoping for the best. That can involve seeking to price at a level that allows the risk-accepting provider to build up risk and contingency reserves that can help bridge an economic downturn.

It also means accepting that senior living, especially the entrance fee CCRC sector, involves insurance elements. To be specific, these include the implicit lifelong reduced fees from an entrance fee investment, the availability of services when and as needed, and whatever pre-financed care services are included. That acceptance requires customer-responsive providers to master the nuances of reinsurance and other insurance capital and risk management tools.

Things to Consider

  1. If the operator is shifting more and more risk onto residents, then a socially responsible response would be to give those risk-bearing residents ownership commensurate with their investments. That can mean either creating a cooperative ownership program, which can provide attractive tax incentives, or giving residents voting membership in the not-for-profit CCRC entity. For reasons discussed elsewhere, cooperative organization is better for CCRCs than is a condominium structure.
  2. Eliminate entrance fees and move to a pure month-to-month rental structure by refunding previously paid entrance fees and setting rents retroactively to be commensurate with what a rental structure would have been. That can be more equitable, more flexible, and less onerous than today’s not-for-profit CCRCs. If the change is to a conventional multi-family housing structure, then care services can be separately contracted for, and bundles can be crafted with insurance expertise and risk management.
  3. The most extreme measure would be to conclude that the risks are too formidable for a business that involves at least a moral obligation to accept long-term, lifelong commitments. That could lead to a strategic decision to exit the market-priced segment of senior living and to concentrate solely on the charitable care, affordable living natural market for not-for-profit organizations. The hope would be that a successor buyer would have the means to shelter residents even through times of economic uncertainty.

Regulatory Exposure

In general, Generally Accepted Accounting Principles (GAAP) require not-for-profit Continuing Care Retirement Communities (CCRCs) to record real estate at its historical cost, including acquisition and improvement expenditures, and depreciate these assets over their estimated useful lives.

That GAAP directive ignores inflationary adjustments that might increase real estate values. Thus, that value is not on its face available to a CCRC that is seeking to demonstrate that its balance sheet is not impaired. For senior living, regulators now only have GAAP to guide them, unlike insurance, for which there is statutory accounting. Although artificial, this GAAP hazard can be real, may result in regulatory seizure, and may make the strategic option of selling the market-priced properties more compelling.

Tough Times for the C-Suite

The times ahead, like all times, are fraught with uncertainties that businesspeople have to face and manage. The chaotic talk around tariffs has brought a pall of unease over the economy, but businesspeople are expected to maintain coolheaded judgment. Besides the potential of price disruptions due to tariffs, or labor disruptions due to deportations, or inflationary forces due to deficit government financing, there are the prospects for AI-enabled robotics, which may counterbalance some other disruptions.

It’s a difficult time to be an executive, owner, or board member responsible for a senior living enterprise, especially an entrance-fee-financed not-for-profit CCRC. Responsive guidance is hard to find, as most advisers struggle to see beyond immediate senior living industry concerns and hopes. Under the circumstances, there is nothing to be done but to recognize the risk potential, to get perceptive advice, and to be prepared.