An Actuarial Perspective on CCRC Financial Viability

If you are a regular follower of our blog then you know I am a fan in general of life plan communities, also referred to as CCRCs or “continuing care retirement communities.” Just this week, I spoke with a resident of a CCRC who told me she had lived there for 16 years, and it was the best thing she had ever done. “This is my home,” she told me.

I really believe that for many older adults, CCRCs offer the best opportunity for health, happiness, and peace of mind, although I also recognize that it isn’t for everyone.

Entry fees and CCRC financial obligations

Like any other industry, of course, there is always room to improve. In this post, I want to focus on entry fees in relation to financial reserves and a CCRC’s ability to fulfill promises to residents. The crux of the issue is whether a CCRC relies on the payment of new entry fees from future residents to help meet any part of their financial obligation to longer-time residents.

To help shed some light on this issue, I spoke with my colleague A.V. Powell of A.V. Powell & Associates, an organization that has provided actuarial modeling and pricing guidance to CCRCs for nearly 40 years.

Brad: Let’s begin with the origin of the entry fee model. The entry fee model evolved out of a concept that formed over 100 years ago whereby a senior adult, often a widow, assigned their assets over to the church or other charitable organization in exchange for housing and healthcare for the rest of their life. Can you speak to what prompted the entry fee model and how it is effective in providing for residents’ needs over the long term?

A.V.: The turnover of assets approach was noble because most folks probably had fewer assets than their expected lifetime costs. But over time, more and more individuals had accumulated the necessary wealth. In those situations, the turnover of asset model became unfair for them. As consumers began to raise concerns of what was fair, some organizations began to develop a fee structure that better reflected anticipated costs, and the result was a fee structure that consisted of monthly and entry fees that varied by unit type and number of entrants.

Brad: And how was the pricing for the entry fees established back then?

A.V.: Typically, entry fees were set in relationship to market conditions, with a focus on the average housing values since most consumers used those dollars to pay their entry fee. But the economic reality is that entry fees are mathematically designed to cover the shortfall between costs and the monthly fees paid at the time when those costs are incurred, plus a reasonable contingency surplus. In other words, entry fees are essentially a prepayment of monthly fees.

Brad: In today’s marketplace, there are a variety of entry fee refund options from which consumers can choose, including refundable entry fees or “return of capital,” whereby a large portion of the entry fee is refunded to the resident or their estate if the residence is permanently vacated. Do you feel that having all these options is good for the consumer?

A.V.: I believe choices are good for the consumer, but it is my opinion that all entry fees should have an actuarial foundation such that funding for any provisions, including refundable portions of the entry fee, should be part of the fee structure for the consumer purchasing the contract, a.k.a., actuarial funding, and not dependent upon a future resident to provide fees to meet that obligation, a.k.a., pay-as-you-go funding.

Brad: The pay-as-you-go model, as you call it, is quite common in the industry. An example would be that a resident’s entry fee refund is not paid until a new entry fee is received on the same residence or a similarly priced one. But if I understand correctly, you are suggesting that regardless of the residency contract, all entry fees should be calculated or set in such a way that, when combined with monthly fees, it is actuarially sufficient to meet future obligations to the resident—future healthcare services, entry fee refunds, or otherwise.

A.V.: That’s right. There are many factors that go into pricing, but ultimately, the combination of entry fees and monthly fees over lifetime should be adequate to meet all obligations to residents, both today and in the future.

Brad: Entry fees cause sticker shock for some people. For a consumer, are there advantages of the entry fee model that may not at first be understood, relative to other types of options in the marketplace?

A.V.: As I mentioned before, from an actuarial perspective, entry fees are simply prepaid monthly fees, so the inherent advantage, especially for a lifecare [Type A] contract, is that the use of entry fees can provide a lower monthly fee price point. Also, entry fees may allow the consumer to prefund a portion [or most] of their long-term care actuarial risks.

Brad: Okay, so in other words, without the entry fee, the monthly fee would necessarily be higher, perhaps significantly so. But in the case of refundable entry fees, there are some who may be concerned about the idea that they won’t get a refund back until/unless someone else moves into the community. Should the industry consider new ways to instill confidence for consumers on these concerns?

A.V.: In the case where refundable entry fees are dependent on a new entry fee being received, the refund risk is placed on the consumer, so it’s natural that this may give pause. And the CCRC provider can use these funds until the refund is due, and so it may not be in a position to pay the refund until the unit, or a similar unit, is resold or reoccupied. Moreover, for CCRCs that offer a variety of refundable and non-refundable contracts, if the unit is sold to a nonrefundable contract, then there could be a shortfall in funds available to pay out the refund. So, the wording of the contract is very important on this issue.

While legally a CCRC can execute a contingent provision that mitigates the obligation and timing of when the refund might be paid, and even though it may be clearly stated in the contract, the question really is whether this is the best public policy as opposed to requiring actuarial refund reserves be established and funded for this type of contract.

A secure future for residents and the industry

Having seen first-hand the benefits of CCRCs for residents, I really want to see the industry thrive in the coming years. As CCRCs continue to innovate through technology and design, and especially as they discover ways to deliver the model to the middle market, I believe the future opportunity is huge.

However, I believe more people would choose a CCRC if they had more confidence in the financial methodology driving the high fees they are asked to pay. In fact, I wrote a previous post that discusses why financial soundness is critical to sales and marketing, even though these two divisions often don’t communicate very much.

Residents of CCRCs want to know that their money is safe and that the promises made by the community (explicit or implied) will be fulfilled. This includes the delivery of long-term care services and entry fee refunds, among other things. A financial model that relies too heavily on the fees received by future residents to meet obligations to existing residents doesn’t inspire the confidence that many people want in a financial decision as big as this one.

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