To help bolster the credibility of the booming assisted-living industry, some companies are turning to physicians for guidance.
The euphoria surrounding assisted living has spurred the creation of at least 15 companies that have made initial public offerings in the past four years. Wall Street analysts estimate the assisted-living industry will grow 70% to $22 billion during the next two years from its current level of $13 billion.
Boosters of this specialized long-term-care sector cite promising demographics as a key contributor to future development. Companies are banking on the assisted-living industry to grow along with the nation's elderly. The number of people age 65 and older is expected to be about 80 million by 2010, compared with 34 million today, according to U.S. Census Bureau statistics.
The assisted-living sector is particularly attractive because nearly all of its residents are private-payers, unlike the residents of long-term care facilities, which mostly are funded by Medicaid.
Executives at assisted-living companies say they have begun to look to physicians as a way to further legitimize their business ventures. "We are getting to a stage where we need to bring on a medical director who understands geriatric care in Medicine," says Clayton McWhorter, founder of the assisted-living company, LifeTrust America. "That will help us in the long run." Nashville, Tenn.-based LifeTrust was founded two years ago.
Through a combination of housing and personal support for the elderly, assisted-living residences cater to a more affluent and ambulatory clientele than most nursing homes. Assisted living differs from continuing care retirement communities that offer independent living options such as golf and shuffle board. For example, many assisted living facilities specialize in Alzheimer's care.
"Assisted living is thus far unlike nursing homes where residents need IVs and dressing changes," says Sheryl Skolnick, who follows assisted-living companies as an analyst at BancAmerica Robertson Stephens in New York.
McWhorter's company is among many new assisted-living firms. LifeTrust, which is privately held, has 20 operating assisted-living facilities with 642 residents. It has yet to go to the public market for additional financing.
Morgan Stanley in 1996 provided the initial $30 million in venture capital while McWhorter's Clayton Associates of Nashville provided another $3 million.
The initial capital infusion is expected to allow LifeTrust to triple the number of facilities it operates, with 20 new facilities in varying stages of construction and another 20 in development.
McWhorter is the former top executive of Healthtrust, an investor-owned hospital company, and a current member of the board of directors at Columbia/HCA Healthcare Corp. in Nashville. McWhorter was president, chairman and CEO of Healthtrust before it was acquired by Columbia in 1995.
That same year, McWhorter got a multimillion-dollar payday from Columbia before leaving as its chairman the following May (1996). He received $3.1 million in total compensation -- including a $2.4 million severance package. In 1995, he also exercised $11 million in stock options.
"Physicians will help us understand medical and quality-of-life issues of the aging," McWhorter says. "As this industry grows and grows, I see us connecting up with physician groups who have a specific specialty in gerontology."
Lifetrust's approach appears to be the rule, rather than the exception. Few assisted living companies have medical directors at the corporate level, let alone at individual assisted-living communities, Skolnick says.
However, some newer companies have included physicians on their advisory boards, she says.
In an effort to differentiate itself from the pack of start-up and new publicly-traded assisted living firms, Gaithersburg, Md.-based Manor Care has taken ideas from the nursing home side of its business to its growing assisted-living ventures.
Manor Care earlier this year hired Karen Babos, D.O., as its national medical director and vice president of medical affairs.
Babos, 40, joined Manor Care from Oak Brook, Ill.-based Advocate Health Care, where she was medical director of the Chicago area not-for-profit hospital system's subsidiary, Advocate Home Health.
"It was a position whose time had come," Babos says. "I was hired to help take quality in the company to a new level. It was nurse-directed prior to this, which is fine, but the company needed physician input to go to a new level."
Manor Care operates 37 assisted-living communities and 176 nursing homes. Its strategy is to focus on the assisted-living industry as a major growth component. Manor Care's annual revenues are about $1.1 billion.
"We are not going to aggressively grow the nursing home side. We're going to keep what we've got," Babos says. "Assisted living is a major growth area for the company."
Manor Care plans to add 205 new assisted-living facilities in the next five years including 60 in the next 18 months. The company wouldn't disclose its planned investment in assisted living.
Similar expansion is expected by other firms because of the industry's ability to attract many sources of capital.
The assisted-living industry continues to attract plenty of attention from both investors and lenders, according to Annapolis, Md.-based National Investment Conference for the Senior Living and Long Term Care Industries and Valuation Counselors Group.
Investors and lenders are placing between $5 billion and $8 billion in debt and equity annually in the senior housing and long-term care industries, NIC says.
Nevertheless, companies in the assisted-living field are struggling to turn the corner to reach profitability. Overall in 1997, 15 publicly traded companies lost $14.9 million despite a 78% increase in revenues to $908 million, according to WDI.
"There will definitely be some consolidation this year if some of these players don't improve their margins," says Jack Cumming, chief executive officer of WDI Capital Markets.
Because of such financial attention and the competition among firms, Manor Care decided to hire Babos. "Because of all of this competition, we wanted to do better," Babos says.
One way to differentiate itself is to strengthen the role of its medical managers. Manor Care has about 240 medical directors at its nursing homes as well as assisted-living communities. Most assisted-living firms don't have individual medical directors, Skolnick says.
"We wanted a medical model throughout our company," Babos says.
Analysts expect the importance of medical management will grow for other firms besides Manor Care because residents of assisted-living communities are going to want to stay for longer periods and avoid nursing homes. "No one wants to live in a nursing home," Babos says.
Under Babos' direction, Manor Care plans to require all of its medical directors to gain certification from the American Medical Directors Association, which is based in Columbia, Maryland. "They need two to four years clinical practice in long-term care settings and additional education in becoming a medical director through the (AMDA)," Babos says.
"As these residents age in place, you are going to see the need for physicians," Skolnick says. "Physicians will help assisted living do what it is supposed to do -- help people age in a healthy way."
Bruce Japsen is a healthcare business writer for the Chicago Tribune.