What Constitutes Assisted Living

Concept of a “Continuum of Care"

Significant changes in the housing needs and demands of seniors have resulted in the concept of a “continuum of care" in which new types of non-institutional residential options are being created to provide varying degrees of assistance with activities of daily living. These new housing options bridge the gap between fully independent living in single-family homes and traditional apartments, and institutional nursing home settings.

The Definition, Regulation and Subsidization of Assisted Living in Virginia is Still Evolving

In Virginia, as in other states, the definition and regulation of assisted living is still evolving from the traditional “board and care" model of generally small facilities providing shared congregate accommodations and limited supervisory custodial services, to a new model that places higher priority on the residential quality of the living environment and focuses on the provision of broader and more intensive services that prolong the independence of individuals not yet in need of ongoing medical services. This is reflected in Virginia’s current tiered system of licensure and regulation of adult care facilities.

Virginia has also moved toward a parallel, tiered system of reimbursement to residential care facilities for Supplemental Security Income (SSI) recipients based on the level of services provided. A number of legislative and budgetary recommendations are being made to increase reimbursement rates to better reflect the current cost of service provision, and the issue will continue to be addressed by legislative and gubernatorial commissions.

Lack of Consensus on an Assisted Living Model Impacts the Extent and Means Through Which VHDA Can Address Assisted Living Needs

As Virginia’s systems for regulating and subsidizing assisted living continue to evolve, there is still considerable disagreement between proponents of a “social" model of assisted living who place greatest priority on the quality of the residential environment provided to frail seniors, and those who emphasize a “health care" model for whom a primary concern is the need to find less intensive and costly care alternatives to nursing home placement.

How the competing “social" and “health care" models are ultimately reconciled in Virginia will have a significant impact on the type, design and funding of facilities developed to provide assisted living care. In turn, it will impact the extent and means through which “housing" agencies such as VHDA, with access to resources and subsidies that are constrained to serve primarily “residential" purposes, will be able to address assisted living needs.

Major Barriers to Affordable Assisted Living

There Are Four Major Barriers to Facility Feasibility

There are four major barriers that have severely limited the development affordable assisted living facilities:

1. Insufficient level of operations/service subsidies
2. Rising acuity levels
3. Obstacles to use of primary federal housing subsidies
4. High development risks

Barrier #1 — Insufficient Level of Operations/Service Subsidies

First and foremost, the lack of sufficient state subsidies to support facility operations and care services has rendered most attempts by developers to structure affordable projects infeasible before the issue of mortgage financing even becomes a consideration. The deficiency in reimbursement levels has been sufficiently large that, even where debt service costs have been eliminated through outright capital grants, there has still been a gap between the monthly fees that owners must charge and the income (including subsidy assistance) of low-income seniors. Therefore, developers have avoided serving low-income seniors even though they comprise a substantial share of the population in need of assisting living.

Barrier #2 — Rising Acuity Levels

There has been a steady rise in the average acuity level (i.e., acuteness of need) of assisted living residents. This is undermining assumptions underlying the financing and operations of assisted living and forcing facilities to choose between terminating occupancy and providing more intensive levels of service at a correspondingly higher cost. This change blurs the distinction between the social and health care models of assisted living, and raises difficult long-term issues regarding the use of programs and resources (e.g., Low-Income Housing Tax Credits) intended to serve primarily residential needs. In mixed-income facilities, rising acuity levels are also creating problems of asset spend-down among non-Medicaid residents.

Barrier #3 — Obstacles to Use of Primary Federal Housing Subsidies

Currently, tax-exempt bonds and Low-Income Housing Tax Credits are the two primary subsidies that VHDA can use to reduce the cost of developing assisted living facilities. Bricks and mortar costs represent only about 20% of total facility expenses. So, even if use of these subsidies results in a 50% reduction in development costs, the total reduction in monthly fees will be just 10%. The monthly cost of private-pay assisted living is sufficiently high relative to the low-income occupancy requirements imposed under federal regulations, so that even a 10% reduction in costs results in only a very narrow window of affordability for seniors being served. In addition, these subsidies entail federal regulatory requirements that impose offsetting costs on assisted living facilities—particular in regard to the way in which services can be provided—that dilute the benefits otherwise achieved.

Barrier #4 — High Development Risks

Assisted living is a relatively new industry that is changing rapidly as developers respond to shifting market, regulatory and subsidy environments. The lack of long-term experience with development and operation of assisted living facilities, high costs relative to the income of seniors, and difficulty in measuring levels of need and effective demand, are increasing the risk of facility failure. Developers are finding the concept of assisted living more difficult to execute than they have thought. Some markets may already be saturated with private-pay facilities. Consequently, industry shakeouts are anticipated.

VHDA’s Involvement with Assisted Living

VHDA’s Activities to Date

Since the mid 1970s, VHDA has provided financing for the development of 87 senior housing facilities providing over 10,000 affordable senior dwelling units throughout Virginia. VHDA has worked with the owners of these predominantly independent living developments to encourage the provision of supportive services as their senior residents have “aged in place." In addition, VHDA has financed a number of senior developments intended to provide congregate/ assisted living services. Finally, VHDA--in recognition of the desire of most seniors to age in place in homes they own—became a national pioneer in the development and promotion of reverse mortgage options that can be used by very low-income seniors to afford the cost of in-home services.

VHDA’s Section 232 Assisted Living Loan Program

In 1998, VHDA began offering financing for assisted living facilities as an incremental expansion of its existing senior housing programs. This was done to accommodate the desire of for-profit developers for alternative sources of financing for the new larger types of private-pay facilities being developed. VHDA chose to provide loans from bond proceeds rather than from the Virginia Housing Fund, because the Fund is restricted to small loans (i.e., $1 million or less) in recognition of the limited total amount available annually for all types of multifamily lending (approximately $14 million).

VHDA’s lack of underwriting experience with facilities providing more intensive levels of supportive services, together with the difficult experiences of VHDA, HUD and private lenders in financing “congregate care" facilities during the late 1980’s, necessitated the use of external credit enhancement in order to raise bond funds at favorable interest rates. The best source of credit enhancement available to VHDA is HUD Section 232 mortgage insurance. That program has engendered developer resistance due to its perceived “red tape," but remains one of the few cost-effective options for affordable developments.

To date, only taxable bond financing has been offered. Use of tax-exempt bonds and federal Low-Income Housing Tax Credits to reduce development costs have largely been precluded in Virginia due to the low levels of state reimbursement provided under the Auxiliary Grant and Medicaid waiver programs. Current reimbursement levels are insufficient to meet the needs of the low-income seniors whom the tax-exempt bond and tax credit programs are required to serve. Even where debt service costs are completely eliminated through the provision of capital grants, there is still a significant gap between the income of most low-income seniors (including state subsidy payments) and the fee needed to cover the cost of facility operations and individual care. There may be greater opportunities to use tax-exempt 501c3 bonds, which are less constrained by federal income limits. These opportunities will be explored.

Opportunities

New Directions in Affordable Assisted Living in Other States

States have begun to respond to the rapidly growing demand for affordable assisted living by addressing fundamental subsidy and regulatory issues. The most successful efforts have depended on increases in state reimbursement rates for Supplemental Security Income (SSI) recipients living in residential care facilities, in order to provide subsidies fully commensurate with the cost of reasonable minimum levels of quality care. Often, increased reimbursement rates in these states are double current rates in Virginia. Another key element of initiatives in these states are broad Medicaid waivers that expand eligibility for assistance to a much wider range of incomes. Model state housing finance agency lending programs have been made possible by the subsidies provided through their state’s Medicaid plans.

These same states have also made changes in licensure and regulatory policies that have facilitated the development of affordable assisted living options. New Jersey has gone farthest by actively facilitating and promoting the provision of assisted living services within federally assisted senior housing through separate licensure and regulatory requirements and a special Medicaid waiver, which reflect the unique circumstances of these housing developments.

Opportunities VHDA Can Pursue

VHDA’s lending options have been limited by the identified major barriers. Nonetheless, there remain steps that VHDA can take to foster the development of affordable assisted living. These opportunities may expand to the extent that the General Assembly increases state reimbursement levels for assisted living care and takes further steps to create flexibility in state licensure and regulation.
VHDA will take the following actions to pursue current opportunities.

Action Item #1—VHDA will seek assistance from HUD and key senior housing industry organizations in order to develop a pro forma for a prototype affordable assisted living facility in order to document the current level of state subsidies needed to stimulate development of affordable assisted living facilities. Upon completion, VHDA will share this pro forma with legislative and gubernatorial commissions studying long-term care issues.

Action Item #2—VHDA will offer assistance to legislative and gubernatorial commissions studying long-term care issues in: (1) determining the desirability and feasibility of a pilot affordable assisted living program; and (2) if warranted, developing guidelines for such a program.

Action Item #3—VHDA will work with DHCD and senior housing industry groups to identify and disseminate information on innovative means for reducing the cost of developing and operating assisted living facilities.

Action Item #4—VHDA will work with other state housing finance agencies and senior housing industry groups to: (1) identify and disseminate information on creative means for using 501c3 bonds to finance affordable assisted living facilities; and (2) publicize the availability of 501c3 financing through VHDA.