When Continuous Care Becomes Continuous Grief

Photo by Dominik Lange on Unsplash

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It’s likely some of your aging clients are attracted by the lure of continuous-care retirement communities (CCRCs).

They have an appeal. For many, what’s known as life care type A contracts are particularly alluring. In exchange for a hefty upfront payment (which may be partially refundable under designated circumstances), and a stiff monthly fee, the CCRC “guarantees” lifetime access to a continuum of services, regardless of the level of care required.

These services may include independent living, assisted living, skilled nursing and memory care, as may be required.

Seniors are told buying into a CCRC assures lifetime coverage with predictable costs.

Typically, purchasers must submit to medical screening to ensure they can live independently at the beginning of their CCRC journey. They also need to meet certain financial criteria.

While some CCRC communities deliver on these promises, others don’t.

The risk of insolvency

According to Jack Barker, a finance expert who has studied CCRCs, the assets of CCRC operators are “typically insufficient to account for many of the long-term financial obligations that are inherent in these contracts.” These operators don’t have sufficient actuarial reserves for their long-term obligations.

Becker believes many of these facilities are “actuarially insolvent and at great risk of bankruptcy in the event of even moderate market-based disruptions to their entry fees.”

According to Amir Gamliel, a bankruptcy partner at Perkins Cole LLP, CCRC bankruptcies are “on the rise.” When it occurs, residents may suffer the catastrophic consequences of losing their entrance fees and the discounted future medical services they were promised when they entered the CCRC facility.

Since CCRCs are often financed by bond offerings, the bond holders have first lien on all assets, leaving the residents completely vulnerable.

Reports of CCRCs filing for bankruptcy are abundant.

How to protect your clients

Most financial advisors would agree with this advice attributed to Warren Buffett: “Never invest in a business you cannot understand.”

Yet, few seniors who part with substantial fees to enter a CCRC understand the risks of their investment.

There’s a lot of well-intentioned advice for seniors exploring CCRCs. Checking out the form 990 (for CCRCs that are tax exempt) on the website of Propublica.org will show the net assets of the operator of the CCRC. Bigger is definitely better!

It is also a plus if the CCRC is accredited by CARF. CARF is an independent accreditor of CCRC and other facilities.

To provide meaningful assistance to your clients, you have to go beyond these steps and do a deep dive into the financial statements and actuarial studies of the CCRC to determine if it has sufficient reserves to make good on its promises.

That’s easier said than done.

Even for experts, “CCRC financial statements can be daunting at first blush.” If you’re up for the challenge, you may find these recommendations for what to look for in the financial statements of a CCRC helpful.

To gain more insight, I interviewed Larry Lester and Patrick Carroll, who are both with Wipfli LLP. Lester evaluates annual financial operating budgets for long-term care clients. Carroll specializes in the senior living industry and concentrates on financial feasibility studies, market research and analysis, market demand analysis, strategic planning, and financial assessment of current operations and the impact of potential changes to future operations.

Lester and Carroll told me they would be reluctant to advise seniors to pay a hefty entrance fee to a CCRC. This eliminates CCRCs that offer Type A and Type B agreements. Instead, they suggest limiting the initial due diligence to type C facilities, which charge much lower entrance fees and monthly service fees but require payment at full market rates when you require additional services. These rates are typically higher than those charged by type A or B facilities.

They also believe it’s critical to do the required due diligence before there’s a need for assisted living services, so these decisions won’t be made during a time of emotional turmoil and when there may be a time urgency.

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If your clients are considering a type A or B facility, here are their suggestions:

Obtain audited financials and actuarial reports, if any. Be sure to ask for three to five years of reports, so you can determine trends.

Review filings required by the state where the CCRC is located.

Metrics of special interest in the financials include days cash on hand, retained earnings and the debt coverage ratio (calculated by dividing a company’s EBITDA by all outstanding debt payments of interest and principal).

Due to the complexity of financial statements of CCRCs, if you don’t have specialized industry knowledge, seek out qualified financial professionals who do.

I was unable to find a resource online who would do this analysis for potential CCRC residents for a fee. Most of those with the requisite expertise, like Lester and Carroll, are retained by the CCRC industry. However, in response to my inquiry, they said they would assist advisors or their clients who needed due diligence on a CCRC facility for a fee ranging from $1,000 to $3,000, depending on the scope of the assignment.

As part of my research for this article, I contacted a number of CCRCs in the Naples, FL area, where I live. One of them (a type A facility) had a minimum entrance fee of $3,000,000!

Before your client makes that kind of commitment, engage an expert to do a careful review of the financial statements and related information of the CCRC.

Failing to do so could convert the promise of continuous care into the reality of continuous grief.

Dan trains executives and employees in the lessons based on the research on his latest book, Ask: How to Relate to Anyone. His online course, Ask: Increase Your Sales. Deepen Your Relationships, is currently available.