Updated: Aug 10
My last post discussed how senior housing labor productivity growth never outpaced supply and demand growth. In fact, it was often negative, creating operational pressures. Labor productivity is important because it drives profitability. Economic theory suggests that when productivity rises, costs fall, boosting profitability. In contrast, when productivity falls, costs rise, dampening profitability. We see historical evidence where productivity declines preceded margin declines and vice versa.
Is there room to improve productivity? Let’s start by comparing senior housing’s productivity growth to other “comparable” industries. From 2000 - 2019, senior housing saw annual productivity declines in 14 of these years, hospitals saw declines in 10, while hotels/motels and restaurants saw declines in only seven years. Even though both hospitals and senior housing face regulated staffing requirements, senior housing is also a hybrid setting providing accommodations, recreation, and dining services. Yes, we aren’t making direct “apples-to-apples” comparisons, yet we also aren’t making “apples-to-oranges” comparisons. We’re making “apples-to-pears” comparisons.
This certainly raises operational concerns, but I wonder if it also raises opportunities. When anticipating the coming deluge of aging adults, senior housing often focuses on innovating the campus, the housing unit, the care provided, and the services. Innovation can take a backseat to the more immediate and urgent issue of staffing shortages. All these aspects of senior housing are certainly important, but there seems to be low-hanging fruit regarding the labor force it already has. What if innovations focused on increasing productivity? In light of staffing challenges, it seems essential. Compared to other sectors’ productivity growth, it also seems possible. Technology will be key.
A more productive labor force does a few things. First, operators extract maximum benefits from their labor force. In turn, they are able to hire fewer workers while paying higher wages because the staff is more productive, attracting top talent. Second, it also changes the cost structure, enabling new operating models.
In being able to do more with less, firms lower their costs and increase their profits. So while a focus on productivity, in and of itself, doesn’t directly innovate senior housing, by changing the cost structure, it necessarily evolves. For example, lower costs make smaller campuses or more affordable properties financially viable.
Dan Lindberg is the founder and principal of Applied Economic Insight LLC, which enables municipalities, developers, owners, and operators to enliven residential, senior housing, and healthcare real estate. He has a graduate degree in economics, teaches courses in business analytics at Marquette University, and his article “The price elasticity of senior housing demand: is it a necessity or a luxury?” published in Business Economics won the 2022 Contributed Paper Award with the National Association for Business Economics. His firm is part of the network of healthcare consultants, Stackpole and Associates.