I am a big fan of continuing care retirement communities (also known as CCRCs or life plan communities), specifically the ones that are well-run, financially sound, and put residents and staff first. Compared to the myriad challenges and uncertainty that often come with aging at home, particularly when one’s mobility or cognitive functions decline, CCRCs provide peace of mind for residents and their family members, as well as many social and wellness benefits. I’ve visited nearly 80 CCRCs over the last couple of years, and the vast majority of residents I have spoken with are very pleased with their decision to live in a CCRC, often saying they wish they’d moved sooner. Their adult children are happy too, knowing their parents live someplace where they’ll be provided for as their needs change.
I also think the CCRC model offers at least part of the solution to the long-term care crisis that is bearing down on our country, resulting from the combination of a rapidly aging population, a shortage of caregivers (both unpaid and paid), and growing financial strains on federal and state budgets. But fully capitalizing on this opportunity will require some changes on the part of the CCRC industry, including finding cost-effective ways to better serve the middle market, adequately addressing the lifestyle preferences of the next generation of retirees, and building rock-solid trust. It’s this last one that encompasses an issue I believe could become a stumbling block for CCRCs if not addressed.
Shoring up entry fee reserves
Approximately three-quarters of CCRCs require an entry fee. The primary purpose of the entry fee is to offset some or all of the cost of care services that may be required by the resident in the future. Payment of the entry fee by a new resident shows a level of trust in the community to provide housing and a continuum of care for life. Many providers also offer refundable entry fees, whereby a portion of the entry fee is payable to the resident or the resident’s estate when the residence is vacated, resulting either from a voluntary move or death.
It is important to understand that the entry fee will be higher for a refundable contract than it would be for a traditional, amortizing contract. It is generally assumed by residents that some portion of the difference is being set aside in reserves to help pay out entry fee refunds as they come due. Yet, this is not standard practice. Instead, the funds are sometimes used to help secure debt for development or expansion, or to help cover operating expenses.
So, in this case, where does the money come from to pay entry fee refunds? Typically the vacated residence has to be re-occupied before the refund will be paid. Therefore, the money is essentially coming from the entry fee paid by the next resident. When demand for the community is high, the turnaround on the refund could be very quick, but in other cases it could take years. This is an invitation for a PR crisis because when this happens it can lead to very bad publicity for the community, not to mention the impact on the family. This stipulation is (or definitely should be) described in the residency contract, but that doesn’t mean that it is good policy.
There are other reasons why a lack of entry fee reserves is problematic. For example, what if the CCRC changes its pricing structure or offers multiple contract types to choose from? Let’s say the future occupant pays a lower entry fee than the current resident did? Who makes up for the difference? This would compound the problem of not having reserves set aside.
Or what if the CCRC experiences financial trouble and, in the worst case, files for bankruptcy? (Only a small fraction of CCRCs have actually experienced bankruptcy, but it can happen.) I think many CCRC residents would be surprised to know that their entry fee refunds are not legally protected in this case.
Finding a reasonable middle ground
I’m not suggesting that refunds should necessarily be due immediately after a resident’s unit is vacated. Allowing a reasonable period of time does help to take some financial pressure off of the community, and from the standpoint of financial stability, this is a benefit to residents still living in the community. But there should be reserves set aside to pay out all refunds due after a certain period of time, even if the residence has not been reoccupied. In other words, the resident or the resident’s family should not have to bear all of the marketing risk. I don’t know exactly what that period of time should be, but some states have enacted legislation that requires a maximum time limit. Connecticut has instituted a three-year limit, which is still quite long, but it’s better than indefinite. Florida is also currently exploring similar legislation.
Aside from state-level requirements, I’ve seen a number of CCRCs that have voluntarily enacted a time limit, ranging anywhere from a couple of months to one year–a timeframe that most would probably find reasonable.
A marketing advantage
From the organization’s perspective, setting more aside in reserves may seem problematic because in order to do this, something has to give, right? Either the community has to charge higher fees, which is not likely if they want to remain competitive, or it has to cut expenses, which may include executive salaries. It definitely shouldn’t be the first of these two. Remember, the community is already charging a higher amount for an entry fee contract for this very purpose. Therefore, the organization may have to unwind some things in terms of how those funds are currently being utilized. But this doesn’t necessarily mean expenses will need to be cut. Putting a reasonable time limit on the release of entry fee refunds makes a community more competitive in the marketplace. In fact, this can be a huge marketing advantage! Suppose a community goes from an occupancy trend of 90 percent to, let’s say, 95 percent or higher, it solves the problem. By itself, this one change may not increase occupancy to that extent, but combined with other best practices, it sure could help.