Understanding the Ups and Downs of the Cost of Care

The rule of supply and demand is simple. When there is a high demand, the cost of the supply goes up. When supplies flood the market, the demand and associated costs go down due to the ease of getting the product or service. That model does not hold up when it comes to the senior care industry.

According to a 2011 Aging in Place study by the National Conference of State Legislatures and the AARP Public Policy Institute, demand is higher for home care services than for more traditional, facility-based models of senior care. The study found that 90 percent of those older than 65 want to stay in their home as long as possible; and 80 percent believe they will always live where they are now.

“What’s interesting about this increase in demand,” said Robert Bua, President of CareScout, a Genworth company, “is that the cost of home care is not increasing year-to-year.”

The Cost of Care

Each year, Genworth completes the Cost of Care study. The study collects and compares the costs of home care agencies, assisted living communities, and nursing home facilities.

In the past year, the cost of private duty home care remained flat with zero percent growth, and in the past five years it only went up by 1.15 percent for companion care and 1.09 percent for personal care (services like bathing, dressing and transferring). Nursing home costs are up 3.63 percent (for a semi-private room) and 4.23 percent (for a private room) over the 2011 number. The five-year cost growth for nursing homes is 4.5 percent and 4.28 percent respectively. Click here to learn more.

Competition Overcomes Demand

“Competition driven by demand, I believe, is the number one reason that home care costs are staying in place,” Bua said. “There is greater pressure on the home care industry to keep prices low due to the increased competition.”

The proliferation of senior home care options and providers creates the high competition. There are several older agencies, like Homewatch CareGivers, but there are also many new-comers popping up whose primary motivation is to capitalize on the growing aging population of the United States. Home care is also typically not a regulated market and the free market lets companies move in rapidly with little overhead.

Facility-based models, like nursing homes, must prove to their state’s regulatory body the community need for the facility. By imposing limits to the number of facilities, these regulations maintain a balance between supply and demand. The idea is that there will never be more facilities than the existing senior population needs.

The reality is clients often transition between receiving care at home, moving into assisted living communities or in and out of skilled facilities, like nursing homes. In that way, home care agencies, nursing homes and assisted living facilities have a symbiotic relationship.

The Cost of Maintaining a Facility

Bua believes nursing home costs increase over time because of fixed expenses, including rent, utilities, skilled employees, and the cost of replacing or improving equipment.

“The cost to maintain buildings doesn’t typically decline,” he said. “Another significant difference between nursing homes and home care is that the staffing of the facility is tied to the number of beds, not the number of residents, making it less flexible.”

A nursing home’s employees do not scale with the number of occupied beds in the facility, but rather the overall number of beds. This lack of flexibility causes a rigid, but costly overhead. Even if the nursing home’s 100 beds are not all filled, the facility must still have enough employees to maintain all 100 beds. A home care agency has greater flexibility in this area because they may only pay their caregivers when they are working.

Inflation & the Economy

Inflation adds another complication to the cost of care. According to Bloomberg News, doctors, hospitals and drugmakers raise prices faster than inflation, driving U.S. health care costs higher. For example, in 2010 spending on health care was twice the general inflation rate.

A weak economy also affects the price of care. Because many potential clients are shopping on price, home care agencies must stay competitive to attract consumers or families will look at the advantages of providing care themselves to save money.

“I think when people feel a pinch on their budgets, they are less likely to spend money on home care services,” Bua said.

“A nursing home that has 50 employed nurses has to employ them for the whole year, regardless of the economy being good or bad, or their facility being partially or completely full.” he said.

Different costs come with the different types and duration of home care. Unlike nursing homes, many home care agencies typically charge by the hour at a rate that is based on the type of care (hands-on personal care vs. homemaking services or companion care) that is needed.

“In nursing homes, there’s a lot less of the individualized and customized matching of needs and wishes. Nursing homes charge a set rate – that’s what it is and that’s what it shall be,” Bua said.

Quality Above All

When it comes down to it, quality is always the deciding factor for people when it comes to determining how much a family will spend on care.

“Quality is a family’s first benchmark for determining ‘bang for your buck,’” Bua said. “It depends on elements like where you live or which facility feels most comfortable to you to determine if you get more bang for your buck in a nursing home or a home setting.”

According to the Genworth study, in the state of New York, it costs $337 per day to live in a nursing home and it costs an average of $22 an hour for home care. That means even if you use 15 hours of home care a day, your costs may be less than a nursing home However, in New Mexico the median cost for nursing home care is $207 a day and the hourly rate for home care is, on average, $20. That means after 10 hours a day, a nursing home may become more cost effective. Of course you need to make certain you are doing an apples to apples comparison; there are several differences in the service models between nursing homes and home care.

In the end, it has to be an individual family’s decision on what works best for their situation.

“Regardless of cost, you need to be comfortable and have peace of mind that you’ve made the right choice,’ Bua said.

To learn more about CareScout and Genworth, please visit http://caregiving.genworth.com.

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