Return to Virginia Business -August 2002

by Brett Lieberman

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Back in the early 1980s when Paul and Terry Klaassen started marketing an alternative approach to senior care, one of the first things they did was purchase a mailing list of people over 65. Yet within days of sending a promotion for their assisted-living center in Northern Virginia, they realized they had made a mistake. "It was a disaster," recalls Paul Klaassen, the company's CEO. "The wrong people came. The few that did come were looking for golf course communities, maybe condominiums."

At the time, the term "assisted living" had not yet been coined. The Klaassen's notion of caring for the frail and elderly in homey residential settings was unheard of in 1981 when they founded what would become Sunrise Assisted Living, Inc. Back then, elderly people lived at home with family or were placed in sterile nursing homes that smelled of disinfectant.

Twenty-one years later, assisted living has evolved into the fastest-growing sector of retirement care as the elderly and their families shun nursing homes in favor of more comfortable, home-like surroundings. McLean-based Sunrise is one of the biggest operators in the United States, with 208 assisted-living homes. The company rolls out a new site about every two weeks and now has about 16,000 residents and 12,000 employees.

Its rapid growth bucks the doldrums in the retirement living market. Other companies are still dealing with the wreckage left from the late 1990s when the industry exploded and developers overbuilt. Capital dried up and some of the industry's players bailed out. Even industry leaders, such as Alterra Healthcare Corp. of Milwaukee, Wis., were stymied. Alterra's stock is hovering in the 10-cent range, down from $35 four years ago. The firm lost nearly $300 million last year and is in the midst of shedding a quarter of its more than 400 properties.

Sunrise, however, continues to thrive, in part because of the lessons the Klaassens learned in those early days of pioneering a new industry. Lesson number one: figuring out the market. Usually, elderly people weren't the ones hunting for a place to live. Instead, it was younger, female members of their families. "It was always 45- to 64-year-old daughters and daughters-in-law that were the real assisted-living customers in terms of being the decision maker and who signed the contract and who we had to keep happy," says Paul Klaassen, the company's CEO.

That realization continues to drive Sunrise's operations. It steers clear of areas such as South Florida, which are densely populated with seniors, as well as rural or less populated areas. Sunrise prefers the top 25 major metropolitan areas where retiree's children - the decision makers - live. It figures the children will want their aging parents nearby. The positioning has proved to be a good business decision, says Jerry L. Doctrow, a Legg Mason analyst who tracks the industry. "Sunrise markets where the kids are, not the seniors," he says. Adds Frank G. Morgan of Jeffries & Co.: "As Marriott International has done in the lodging and senior-care sectors, Sunrise is well on its way to creating a branded name in senior care."

The rest of the Sunrise philosophy involves creating comfortable surroundings that appeal to residents and their families. All in all, the strategies are paying off. In the first quarter, Sunrise narrowly topped analysts' projections with revenues of $111.1 million, a 6.8 percent gain over 2001.

When they embarked on their mission of improving retirement housing for seniors, neither Klaassen had had much health-care experience. Paul had been working for the U.S. Chamber of Commerce and Terry at Radio Free Europe when they started Sunrise at ages 23 and 25. But the couple was convinced that Sunrise could offer something better than the impersonal atmosphere and poor care they witnessed while volunteering at nursing homes. So they drew upon Paul's experience visiting his grandmothers in residential-style nursing homes in the Netherlands and Terry's struggle as a teenager caring for her terminally ill mother at home. "The fear of growing old in our society has really been not about dying, but about how are we going to live those final months of our lives," says Terry.

Sunrise relies on its own in-house team to design each property. Six months after residents move into a new center, the team does a final walk through, usually making 40 adjustments, some as minor as moving light switches, to make the home comfortable and convenient for tenants. About 50 percent of each home - the term facility is shunned - is devoted to common space to encourage socialization. A house cat or dog usually wanders around and may sleep on a resident's bed. Natural lighting, different wallpaper in each room, carpeting throughout and themed hallways help residents find their rooms and create a cozy environment.

Rather than sterile institutional furnishings ordered out of a catalog, homes use ordinary furniture, possibly with non-traditional fabrics to protect residents and to serve as a buffer against incontinence. Anne Hiatt is typical of many assisted-living residents. After her husband died, her children didn't want her living alone at her McLean home. So she accepted an offer to try out a Sunrise home for a weekend. The visit convinced her to make the move, and she has been living at one of Sunrise's Oakton homes for six years. "I don't think there's a better place to live," says Hiatt, 80. "It's certainly better to live here out of your family's hair. That can sometimes foul up your relationships."

While Sunrise is best known by its Victorian designs, especially in the Northeast, architecture varies by location. Its signature turrets are still a common feature at many sites, but others such as the Hermosa Beach, Calif., location, which looks like a beach house, blend in with their surroundings.

Paul Klaassen believes there is plenty of room for continued expansion in the U.S. Yet, over the next five to 10 years major growth is likely to come outside the country. Sunrise plans to open as many as 50 locations in Germany through a partnership with a Prudential subsidiary. It already operates eight Canadian properties. Later this year, it's scheduled to break ground on a third London site. Klaassen is eyeing Japan as well.

In 2002 Sunrise launched its "At Home" program, which provides in-home care for seniors who want to stay in familiar surroundings and need minimal help. Wall Street analysts and industry experts call it a smart decision that will help introduce the company to future residents while they are still independent.

Though by far the most successful company nationally, Sunrise has plenty of competition. Marriott, its biggest direct competitor around Washington, D.C., and Northern Virginia, uses its internationally known name and hospitality industry experience to target a similar upper-middle to upper-class customer in metropolitan areas. It cares for 22,000 residents at nearly 160 properties, including six in Virginia.
Marriott has taken a broader approach to providing a continuum of care. Residents can move into properties such as The Colonnades in Charlottesville as independent seniors and move to assisted living or nursing care as their health conditions dictate. "We are the broadest based provider of senior services," says Jeff Ferguson, Marriott's executive vice president and general manager.

Other companies, such as Westminster Canter-bury in Virginia Beach, provide assisted-living care, but are predominantly independent living properties. They offer on-site health care and services along with swimming pools, golfing and other amenities to seniors who live in 400- to 1,800-square-foot apartments or condominiums.

While the Sunrises and Mar-riotts are well known, they're not the most common form of assisted-living care. Senior group homes run by individuals and nonprofits dominate the industry, but are far more difficult to find. Most referrals come from family and friends, not doctors, says Linda J. McCorkindale, who opened her first home in Annandale almost three years ago.

Licensed to have as many as eight residents, group homes operate in ordinary houses in residential neighborhoods. They care for the same range of seniors, including those with Alzheimer's and dementia, as the larger facilities. "It's more like a home," says McCorkindale, who operates as Potomac Homes and recently opened a second home nearby. "You are in a residential neighborhood versus a large facility."
Group homes often offer the advantage of lower staff-to-resident ratios - about 5 to 1 - though it varies from home to home. State regulations, which also cover larger facilities, set the bar low. A home can operate unlicensed with up to three residents.

A bigger challenge at senior-living facilities is uneven care. All that Virginia and many other states require from a nursing perspective is that a licensed health care professional come in quarterly. McCorkindale, who happens to be a registered nurse, says residents at many homes and larger facilities are getting lackluster care. She describes one home she's visited as "horrific," but says it remains open because it's willing to take residents that nobody else will. McCorkindale declined to reveal the home's name or location, saying that state regulators are aware of the problems.

Despite industry complaints to the contrary, assisted living facilities are not well regulated. Oversight varies from state to state, but most operators will see an inspector only a couple times per year. Major operators such as Sunrise generally earn strong praise from state officials, but no company or facility is immune to problems.

One of the most common complaints heard by government officials is that assisted-living centers practically push some residents out the door. Most contracts allow the provider to say when a resident is too sick and needs more skilled nursing care. The result is heartache for residents and their families who want to avoid nursing homes.

Perhaps the biggest challenge to assisted living is the cost, which runs about $3,400 per month even in group homes such as McCorkindale's. Sunrise says its basic costs range from $2,400 to $3,400 per month, but costs can be higher depending on the level of care. In addition, residents pay extra for a la carte items such as services from a center's beauty salon or assistance with medication.
Long-term care insurance often covers the cost, but many Americans lack such insurance or retirement planning. As a result, a few years in assisted living can quickly drain senior bank accounts leaving them the unenviable choice of moving in with family or into a nursing home that accepts Medicaid.

Assisted living is strictly private pay. Medicare will not cover any costs, except for a few medical expenses. Medicaid also doesn't cover care, although a few facilities willing to accept $910 in monthly state grants do qualify. Few places can afford to accept such low reimbursements, and the care and conditions of such centers may be of a lower quality.

Despite the present glut, developers definitely have demographics on their side. During the 1990s, the number of senior citizens 85 and older increased 37 percent. As aging Baby Boomers pump up the senior population in the next two decades, they will create an enormous need for elderly care. Increased demand, high costs and people living longer lives may create a society of haves and have nots when it comes to having the resources to live out one's golden years. Marriott's Ferguson is quite frank about who his company is targeting. "We see ourselves as an excellent provider in the premium tier of the market," he says. The nagging question remains: what happens to all the people in the non-premium tier?

For information on licensing, complaint history and the date and results of a facility's most recent inspection, people can call the State Department of Social Services' Division of Licensing Programs at (804) 692-1787. They will be directed to a regional office for information on facilities in their area.

Return to Virginia Business - August 2002