We get a lot of questions from myLifeSite users around the topic of financial viability and how to be sure a continuing care retirement community (CCRC, or life plan community) will be able to fulfill its contractual promises to residents.
This week, we received an email from a user who shared the story of a CCRC that went bankrupt. They noted that as a result, many long-time residents lost a sizeable portion of their deposit. While a CCRC going bankrupt is quite rare, it is understandable that this story may be very concerning to people who are considering a CCRC, as well as those who currently live in one.
The decision to move to a CCRC is a major life decision as far as your senior living years go, but the choice goes beyond lifestyle. It also is a financial investment with residents paying a sometimes-hefty price tag in exchange for certain services and amenities, and also securing peace of mind that they will have access to a full continuum of care services should they ever need them.
So, how can prospective CCRC residents ensure the investment they are making is safe and avoid a disastrous situation similar to the one described in the user email we received? How can you be sure a CCRC will remain financially viable, enabling them to uphold the commitments they have made to their residents?
>> Related: Choosing a CCRC That Will Keep Its Promises (and What to Do If It Doesn’t!)
Understanding a CCRC’s overall financial viability
While CCRCs are home to thousands of seniors across our country, it’s important to remember that they also are businesses — some being for-profit and others not-for-profit. Just like companies in other industries, some CCRCs have better management than others. This is why it is important to do your homework before you agree to “do business” with a CCRC and become one of their customers (i.e., residents).
In researching various CCRC options, prospective residents should inquire about a community’s financial standing and understand the state of the community’s overall long-term financial health — what is often referred to as “financial viability.”
Admittedly, analyzing the financial viability of a CCRC can be challenging even for some tax and financial professionals, much less for the average consumer. Specifically, it can be difficult to get a handle on the actuarial impact of CCRCs’ unique business model and various types of residency contracts. The key is to ask the right questions and get the latest documentation on a community’s financial situation such as:
- The CCRC’s business structure: How a CCRC is set up as a business will impact how they operate and pay their taxes, which in turn will impact their bottom line.
- The state’s CCRC regulations: If the CCRC is in a regulated state, you may be able to glean helpful information from the community’s state filings.
- The CCRC’s financial statements: Evaluating a CCRC’s financial statements helps paint a picture of the community’s current financial situation.
- Other data points: Additional information that can offer insights into a CCRC’s financial viability and stability include debt service coverage ratio, net operating margins, and net assets.
>> Related: A Secure Future: An Actuarial Perspective on CCRC Financial Viability
Factoring in bond ratings (if available)
Another element that should be taken into consideration is a community’s bond rating, if they have one. You will want to inquire if the CCRC you’re considering does in fact have a bond rating, which would most commonly be from either Fitch Ratings and Standard & Poor’s (S&P Global). If they do have one, they should be able to provide additional details about that rating, perhaps most importantly whether they have had a recent upgrade or downgrade to their rating.
All bond ratings fall under one of two categories:
- Investment grade bonds indicate a stronger financial outlook and are generally the only quality eligible for purchase by large institutions such as banks or insurance companies. CCRCs that have the cash flow to meet demand without taking on too much debt have a good chance of acquiring an investment grade rating.
- Speculative bonds, often referred to as high-yield bonds, carry additional risk relative to investment grade bonds. There may still be a place for high-yield bonds among certain investors who are willing to take a little more risk as they may receive higher yields on such bonds.
The ratings scales for S&P and Fitch Ratings are the same, with investment grade ratings ranging from AAA (strongest) to BBB, and speculative ratings ranging from BB and down to D. You also may find that some of these rating have an accompanying plus or minus sign, which, according to Fitch Ratings, indicates “relative differences of probability of default or recovery for issues.”
Understanding a CCRC’s bond rating, if they have one, gives prospective residents yet another piece of objective, quantitative information to make an informed, educated decision about where they want to invest in living.
>> Related: CCRC Bond Ratings Explained
Making a sound CCRC investment
In some ways, making the decision to move to a CCRC is akin to taking out an insurance policy to protect you from life’s “what ifs.” These communities’ distinguishing characteristic — setting them apart from other senior living communities — is their continuum of care services, which ensures residents will receive whatever level of care they need in the future. People who opt to make the financial investment needed to move into a CCRC should have confidence that the community will live up to its contractual obligations, such as the provision of those care services if needed.
For many seniors, the stakes are high, both financially and for long-term security and peace of mind. But thankfully, choosing a financially sound CCRC doesn’t have to be a risk. It is true that there is no way to guarantee an organization will be financially viable in the future, but when you understand the primary factors that contribute to a community’s fiscal health, and do your due diligence to gather the data, you can feel confident that your investment will be secure and that the CCRC will be able to fulfill its commitments to you.
>> FREE RESOURCE: Evaluate the Financial Viability of a CCRC With Our Free Guide
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