Examining Continuing Care Centers

A few years ago the rage in silver years’ housing was the continuing care community (CCC). Sales were soaring, and new projects were planned or popping up. As with other forms of real estate, the financial crisis damaged the finances of many CCCs and also reduced demand by dragging down the finances of many of their residents and potential residents. The experience emphasizes the importance of properly checking out a CCC before making a decision.

A CCC is an integrated community, usually restricted to those ages 65 and older, that offers independent living, assisted living, and skilled nursing care facilities on the same campus. A CCC usually also has a range of amenities, such as eating and exercise facilities, meeting rooms, and sometimes more. The attraction of a CCC is you enter the independent living section as a healthy senior and are guaranteed that if you need higher levels of care through the years, you’ll move into that level of care when needed on the same campus. It also means you’ll stay near a spouse and friends as higher levels of care are needed. If you never need to leave independent living, you can stay in the same unit and enjoy all the facilities.

There are two basic financing models for CCCs.

The life care model requires a large deposit or entrance fee, often of hundreds of thousands of dollars, plus a monthly fee. The monthly fee usually is fixed regardless of the level of care you need. Should you leave the community within a certain period, a pro rata portion of your deposit is returned to you or your heirs. No deposit is returned after you’ve resided there beyond the time limit.

The Type B model requires a smaller deposit or entrance fee, which also could be partially refundable depending on how long you live there. The monthly fees are higher under this model and usually are increased as you move to higher levels of care.

You don’t have any equity under either model. You have only a contract with the facility.

Neither model is necessarily better than the other. The choice depends on which model appeals more to you and better suits your finances. It also could depend on details of the individual CCCs you are considering, such as the relative level of the deposits and fees. The life care model generally is considered more risky. If the CCC sets the deposit or monthly fee levels too low, it could run out of money as people move into higher levels of care since the monthly fee is fixed.

Carefully review the terms covering when a deposit or entrance fee is returned. In many cases nothing is returned until the facility finds a new resident for your unit and collects their deposit. You or your estate could be obligated to continue paying monthly fees until the new resident is found. When the CCC still is building or expanding, these terms could be very important. The CCC has greater incentive to market its own new units than the one you vacated.

CCCs are a relatively new concept, and some residents are learning about them the hard way. Originally offered by non-profits, especially religious orders, CCCs now largely are built and run by for-profit entities as another form of real estate investment. During the boom some of them they built too rapidly and took on too much debt. When the financial crisis hit, many potential residents no longer could afford to enter or couldn’t sell their old homes. The CCCs ran into financial trouble. A major CCC developer, Erickson Retirement Communities, filed for bankruptcy reorganization. Other individual CCCs or smaller operators had financial troubles. It is estimated that 23 communities defaulted on municipal debt issued to finance them.

In one case a CCC’s residents lost their deposits when the facility went bankrupt. But losing a deposit is not your only risk. When a facility runs into financial trouble, it can raise fees or cut services to residents. The CCC could end up costing you more than expected while also providing fewer or lower quality services.

You need to minimize the risk of entering a CCC with financial troubles by closely investigating its finances. If you aren’t comfortable studying financial statements and documents, you need to consult with a CPA or other financial advisor before making a decision. Keep in mind there is no federal regulation and only 38 states regulate CCCs. The extent of the regulations differs. For example, in some states the health department oversees the projects while in others it’s the insurance department. The nursing care and assisted living units are separately regulated in all states.

Before accepting a resident, a CCC reviews both the health and finances of an individual or couple. You should investigate the CCC at least as thoroughly.

The best approach is to visit the web sites of two industry organizations. They have detailed publications and checklists for prospective residents. The Commission on Accreditation of Rehabilitation Facilities (www.carf.org) offers “Consumer Guide to Understanding Financial Performance and Reporting in CCRCs.” Click on “Public” then “Consumer Resources.” Other useful publications also are on that page.

The American Association of Homes and Services for the Aging (www.aahsa.org) has “The Continuing Care Retirement Community: A Guidebook for Consumers.” Scroll over “Consumers” then click “Choosing Services.”

You’ll then need a copy of the facility’s audited financial statements. The publications on these web sites will tell you which numbers and ratios to examine to determine if the CCC is financially sound. Most facilities also have a committee of residents that monitors the CCC’s finances. If such a committee exists, contact one or more of its members for details about the CCC’s finances.

Other good sources of information are at aging.senate.gov/pressroom.cfm. Scroll down and click on the 7/21/10 entry on continuing care retirement facilities. The press release has links to two government reports on CCCs. The reports provide interesting background, consumer advice, and references to other resources.

You’ll also want to examine the facility’s sources of income. Does it receive enough from fees to cover its costs, or is it relying on donations, entry fees, transfers from the parent company, or other cash flows to pay its bills?

You also should examine the CCCs policies regarding a resident with financial problems. A CCC reviews your finances before allowing you to enter to ensure you can afford to live there. But residents can suffer financial setbacks and be unable to pay their monthly fees. Most CCCs won’t kick out a resident or deny him or her the level of care needed, even when the resident no longer can pay the fees. But you need to probe deeper. Most CCCs will seek to recover any unpaid fees from the resident’s estate and will seek interest at an unspecified rate plus costs related to the collection.

A CCC is complicated. You need to examine it in detail. A thorough review of the CCC’s finances and policies is necessary to minimize surprises.

RW March 2011.