Seniors have a broader range of housing choices today than ever before. While the majority would prefer to stay in their homes and “age in place” over 750,000 seniors have chosen to live in a Continuing Care Retirement Community (CCRC). A typical CCRC requires a large entrance fee — some in the six- and seven-figure range. In addition, a monthly fee is charged. Because of the size and complexity of the transaction, a CPA can play an important role in assisting clients with making the decision whether or not to move into a CCRC — or into which CCRC to move. But the structure of the CCRC contracts and imposition of large entrance fees has recently drawn the scrutiny of the United States Senate Special Committee on Aging.
This article reveals the basics of CCRCs. An upcoming article will provide the analysis a CPA can perform for his client to help determine if the move into a CCRC makes financial sense.
What Is a CCRC?
A CCRC is defined as an age-restricted community (usually incoming residents must be age 65 or older) that offer independent-living units, assisted-living units and skilled-nursing facilities all on the same campus. These facilities attract seniors who desire to live independently upon entering the CCRC, but also want to know that they can receive needed care without leaving the community. This arrangement allows the resident to stay close to their spouse and friends as they move through different levels of care.
Many CCRCs require large entrance fees before a senior can move in. It is not unusual for these fees to be in the five- and six- (and even seven-) figure range. In addition, the resident must pay a monthly fee. Neither the entrance nor the monthly fees paid by the resident establish an ownership interest in the facility. Typically, the entrance fee is returned in whole or in part when the resident leaves the CCRC, and another resident is found to occupy the unit. Once the new resident pays the entrance fee the former resident (or his or her estate) receives a refund.
In exchange for the entrance fee, the CCRC provides residents with access to the assisted living and skilled-nursing facilities. As the resident moves from independent living to assisted living to the skilled nursing facility, the monthly fee may or may not increase. Whether the monthly fee increases and by how much usually depends on the size of the entrance fee. In some cases, the entrance fee may be large enough that moving to assisted living or skilled nursing does not result in an increase in the monthly fee. Other facilities charging a lower entrance fee may increase the monthly fee as more care is needed. In either case, the resident is typically paying less than the full-market rate for the care received.
Note that payment of the entrance fee in conjunction with paying less than market for assisted living and skilled-nursing care results in the shifting of risk from the resident to the facility. Residents who need care are subsidized by residents who never need care. The ability of the facility to fulfill its promise of providing care when needed depends on its financial stability. If a higher-than-expected number of residents requires care, the facility may run into financial difficulty. For this reason, applicants are asked to submit their health information to the facility before they are admitted. It is possible for an applicant to be denied admittance due to health problems.
CCRCs are also concerned that residents will run out of money and no longer be able to afford the monthly fee. Understandably, few facilities wish to be in a position of having to evict a frail, 90-year-old resident for lack of funds. To avoid this, facilities also require prospective residents to submit financial information. An applicant may be denied admittance if the facility believes their assets and income will be depleted before death. Some facilities establish charitable funds that are available to residents who can no longer afford to pay the monthly fee. This assistance, however, is not guaranteed and subject to various restrictions.
Overall regulation of CCRCs is the responsibility of the states, not the federal government. A CCRC is made up of independent living units, assisted-living facilities and skilled nursing. In many state assisted-living facilities have license requirements, regardless of how the state regulates CCRCs. In all states skilled nursing facilities are licensed. This is especially true of skilled nursing facilities which must be licensed if they accept payment from Medicare or Medicaid. CCRCs are regulated in 38 states.
Responsibility for regulation differs among the states. In some states the department of insurance regulates the facility while in others it may be the department of health.
Downturn in the Economy Upsets the CCRC Business Model
This business model worked well while the economy was strong, real estate values were increasing and there was growing demand for CCRC units. When the housing market crashed, seniors found it difficult to sell their homes. For the average resident, it is the home-sale proceeds that are used to pay the entrance fee. This resulted in the demand for units falling. Occupancy rates decreased. With fewer than expected residents to support ongoing operations, many CCRCs found it necessary to substantially raise monthly fees.
For example, a large CCRC in Washington State increased its monthly fee by almost 35 percent. For many residents, this increase in monthly fees from just under $3,000 to $4,000 was unaffordable. But their ability to move out was problematic — with demand for units down, it was unlikely that they would receive a refund of their entrance fee anytime soon. With few other assets to live on, many residents were stuck.
At the same time, CCRC developers found it harder to obtain financing during the credit crunch. One large developer — Erickson Retirement Communities — declared bankruptcy. Several individual CCRCs also declared bankruptcy. Many former residents attempting to recover their entrance fees found themselves standing behind bondholders and other secured creditors.
CCRCs Draw Scrutiny From the U.S. Senate
In response to the industry’s problems, the U.S. Senate Special Committee on Aging held hearings on July 21. Simultaneously, the Government Accountability Office (GAO) released its report, Older Americans Continuing Care Retirement Communities Can Provide Benefits, But Not Without Some Risk. The Majority Staff of the committee also released a report to coincide with the hearings, Continuing Care Retirement Communities: Risks to Seniors (PDF).
Neither report called for Federal regulation of CCRCs. In light of the bankruptcies, each advocated more uniform regulation among the states including more financial (and nonfinancial information) disclosure. The Majority Staff report concluded that “Residents need to be aware of the risks that CCRCs pose and consider retaining independent counsel to review these complex agreements.”
While CPAs cannot comment on the legal aspects of the agreement, they can analyze the financial aspects. In an upcoming article I will decipher assisting clients with understanding the financial commitments and risks such agreements entail.
|Rate this article 5 (excellent) to 1 (poor). Send your responses here
James Sullivan, CPA, PFS, MAS, is an investment counselor at Core Capital Solutions LLC. He has almost 25 years of experience in individual tax, investing and personal financial planning. Before joining Core Capital Solutions, Sullivan spent 20 years at Arthur Andersen LLP. He is a member of the AICPA PrimePlus/ElderCare Task Force.
* PFP Section members, including PFS credential holders will benefit from additional Medicare resources in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp. Non-members can click here to join the section.