Growing Pains continued
a Type A (or extensive) contract, the resident
pays essentially the same monthly service fees
whether residing in nursing care or in independent living, despite the much higher daily cost of
nursing care. Type B (also known as modified)
contracts provide a resident either a discount on
the fee-for-service cost of nursing care or a limited amount of free nursing care. Under the Type
C (or fee-for-service) contract, the resident generally assumes the health care risk and pays the cost of whatever
care is required. The community, however, assumes a greater risk
that residents will exhaust their assets and, as a result, be unable
to pay their periodic service fees. Rental contracts (also known
as Type D contracts) charge on a fee-for-service basis for each
level of care and do not require the resident to pay an entrance
fee. (Because of the limited risk involved, communities offering
Type D contracts rarely engage actuaries.)
Entrance fees may vary according to the extent that they are
refundable at the end of the contract. Refunds usually are triggered by voluntary withdrawal from the community or at death,
although they occasionally occur at the time of a permanent
transfer to skilled nursing care. Most contracts issued today are
60 percent to 100 percent refundable. The entrance fee for a
refundable contract has an insurance component to cover its
eventual refund. This component is developed using actuarial
pricing principles and mortality and morbidity experience to assess the present value of the risk at the beginning of the contract.
in mortality, morbidity, and operating costs in
providing services.
Once operational, CCRCs face the risk of attaining occupancy in all stages of care at a level
that ensures financial sustainability. It should
be noted that this level will vary for CCRCs,
The GAO report notes that CCRCs also face risks from external economic factors, including slow real estate markets
and declining equity and credit markets that reduce the asset
liquidity needed by potential entrants for their entrance fees.
According to a National Investment Center analysis of mature
CCRCs, independent living occupancy reached a peak of 94.9
percent in the second quarter of 2007. By 2009, the same analysis concluded that occupancy had dropped to 90.6 percent for
mature CCRCs. The GAO study notes that the industry’s access
to capital currently is limited because of tightened credit markets. This has impeded the plans of some CCRCs to maintain
and upgrade facilities, possibly triggering further declines in
occupancy. Under this reasoning, it is more of a challenge to
fill a community that is viewed by prospective residents as outdated and lacking in new and modern amenities.
The Gao report notes that CCRCs also face risks from external
economic factors, including slow real estate markets and
declining equity and credit markets that reduce the asset liquidity
needed by potential entrants for their entrance fees.
The Gao Report
The GAO in June 2010 issued findings from its analysis of eight
sample CCRCs and the regulatory structures governing CCRCs
in California, Florida, Illinois, New York, Ohio, Pennsylvania,
Texas, and Wisconsin. The report, Continuing Care Retirement
Communities Can Provide Benefits, but Not Without Some Risk,
describes in some detail the focus of the GAO’s investigation:
■ ■ How CCRCs operate and what financial risks are associated
with their operation and establishment;
■ ■ Risks that CCRC residents face;
■ ■ How state laws and regulations address the financial risks of
both CCRC operations and CCRC residents.
The GAO focused first on the risks that CCRCs face, such
as excessive construction costs during development and slow
enrollment compared with projections. The CCRC’s pricing
structure also may prove to be inadequate because of many
factors including, but not limited to, unanticipated changes
The GAO study concedes that CCRCs beneficially provide
housing and long-term care to the aged but cautions that resi-
dents can face financial risks when they enter into contracts
with CCRCs. Many contracts offer refundable entrance fees,
and residents face the risk that these refunds might not be paid.
The GAO identified few incidences of such a loss, however, and
concluded it has occurred only rarely.
