[Senate Hearing 111-769]
[From the U.S. Government Publishing Office]
S. Hrg. 111-769
CONTINUING CARE RETIREMENT COMMUNITIES
(CCRCs): SECURE RETIREMENT OR RISKY INVESTMENT?
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC
__________
JULY 21, 2010
__________
Serial No. 111-21
Printed for the use of the Special Committee on Aging
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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SPECIAL COMMITTEE ON AGING
HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon BOB CORKER, Tennessee
BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama
EVAN BAYH, Indiana SUSAN COLLINS, Maine
BILL NELSON, Florida GEORGE LeMIEUX, FLORIDA
ROBERT P. CASEY, Jr., Pennsylvania ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado SAXBY CHAMBLISS, Georgia
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Debra Whitman, Majority Staff Director
Michael Bassett, Ranking Member Staff Director
(ii)
C O N T E N T S
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Page
Opening Statement of Senator Herb Kohl........................... 1
Opening Statement of Senator Bob Corker.......................... 3
Opening Statement of Senator Al Franken.......................... 54
Panel of Witnesses
Statement of Alicia Cackley, Director, Financial Markets and
Community Investment, U.S. Government Accountability Office,
Washington, DC................................................. 4
Statement of Kevin McCarty, Insurance Commissioner, Florida
Office of Insurance Regulation, Tallahassee, FL................ 14
Statement of Charles Prine, Resident of Concordia of the South
Hills CCRC, Mount Lebanon, PA.................................. 29
Statement of Katherine Pearson, Professor, Dickinson School of
Law, Pennsylvania State University and Director, Elder Law and
Consumer Protection Clinic, University Park, PA................ 34
Statement of David Erickson, Vice President of Legal Affairs,
Covenant Retirement Communities on Behalf of the American
Association of Homes and Services for the Aging, Skokie, IL.... 48
APPENDIX
Alicia Cackley's Responses to Senator Kohl's Questions........... 67
Summary of Committee Investigation Report by the Aging Committee
Majority Staff................................................. 69
Testimony Submitted for the Record by B'nai B'rith Housing, Inc.. 82
Testimony Submitted by Susanne Matthiesen, M.B.A., Managing
Director, Aging Services and Continuing Care Accreditation
Commission CARF International.................................. 85
(iii)
CONTINUING CARE RETIREMENT
COMMUNITIES (CCRCs): SECURE RETIREMENT OR RISKY INVESTMENT?
---------- --
WEDNESDAY, JULY 21, 2010
U.S. Senate,
Special Committee on Aging,
Washington, D.C.
The committee met, pursuant to notice, at 1:32 p.m. in room
SD-106, Dirksen Senate Office Building, Hon. Herb Kohl
(chairman of the committee) presiding.
Present: Senators Kohl [presiding], Franken, and Corker.
OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN
The Chairman. Good afternoon. We thank you all for being
here.
Today, we are going to take a look at continuing care
retirement communities, or CCRCs. CCRCs offer three types of
senior housing in one location, so that older residents can
move from one to the other as their need for care increases
throughout retirement.
These communities allow seniors to stay among friends and
near their spouse during the aging process, and for that
reason, they have grown in popularity over recent decades.
The number of older adults living in CCRCs has more than
doubled between 1997 and 2007 and now totals 745,000 seniors
living in over 1,800 CCRCs. With the boomer generation
retiring, we can only expect this number to grow.
Over the past year, our committee has taken a look at the
financial stability of the typical CCRC business model. In most
cases, new residents must pay a large deposit in order to join
a community. These deposits often represent their life savings
or their children's inheritance. In return, residents can
generally expect to move within the community as their long-
term care needs grow and, in some cases, to receive their
deposit back if they decide to move away.
Through our investigation, we found that CCRCs are
particularly vulnerable during economic downturns. Slow real
estate markets can drive down occupancy levels in independent
living units, which are the main source of profit for these
retirement communities. Occupancy levels for five prominent
CCRC companies we questioned have, indeed, dropped in the past
3 years, leading to financial difficulties for some. The result
is often an increase in the monthly fees, a reduction in the
services and amenities provided, or both.
Disturbingly, we have seen instances where seniors had to
file lawsuits to keep their CCRC services from being cut back
or reduced. Residents may feel forced to put up with these
situations because most of their assets are tied up within the
CCRC. This is especially true in a stagnant economy, when
financial distress can cause long delays in receiving
refundable entrance fees, or, as one of our witnesses
experienced, the loss of one's refundable deposit altogether.
One CCRC company refunded several sizable deposits only
after getting a letter of inquiry from this committee. While
this represents an extreme scenario, the fact is that many
CCRCs who advertise their entrance fees as ``100 percent
refundable'' will only repay them if and when they can line up
a new tenant.
In some States, such as California, CCRCs are granted up to
10 years to repay full or partial refunds. Such a delay can be
devastating to an older couple who has their life savings tied
up in a CCRC deposit.
To supplement our investigation, we asked GAO to survey
CCRC regulatory oversight nationwide. As you will hear, they
found considerable variation in State regulations, with 12
States having no CCRC-specific regulations at all. Consumer
safeguards and protections regarding disclosure, asset
reserves, and escrow requirements vary widely, and only 17
States require CCRCs to submit studies that assess their long-
term viability.
In terms of the industry's internal policing, GAO found
that only 16 percent of CCRCs are voluntarily accredited by the
Continuing Care Accreditation Commission. That is an
astonishingly low number. The fact is that while CCRCs are a
good residential option for many retirees, entering into an
agreement with one can pose financial risk.
Our investigation has found many CCRC ownership structures
to be very complex and that financial troubles at any level can
have real consequences for individual residents. Evaluating
such a transaction can be quite challenging for the average
consumer without professional assistance.
Today, our committee is releasing a summary of findings
from our investigation, which outlines the financial health of
the five companies that we questioned, as well as their
disclosure policies regarding entrance fees and transitions of
care. We also included several helpful resources for consumers
and CCRC providers.
Finally, we are calling on State regulators to beef up
their oversight. Every State should be requiring proof of their
long-term viability from CCRCs and ensuring transparency and
strong consumer protections for residents. As part of our
report, the committee has developed our own checklist for State
regulators who wish to expand or improve their oversight of
CCRCs, and we urge them to put it to use.
Moving forward, we hope to increase both consumer
protections and consumer awareness with regard to CCRCs. If
these companies are going to take the life savings of seniors,
they need to be able to guarantee that they will be around to
provide the lifetime of care that they promise.
We would like to thank our witnesses today for speaking
with us on this important issue. I am very pleased that Senator
Corker was able to take just a few minutes away from his other
responsibilities to stop here and make some brief comments.
OPENING STATEMENT OF SENATOR BOB CORKER
Senator Corker. I will be very brief. Mr. Chairman, I thank
you for your efforts leading this committee and certainly for
asking for this study.
I know we have some great witnesses today, certainly one
telling a personal story that always affects us and certainly
brings home some of the challenges that exist. So I thank you
for that.
We have Chairman Bernanke in just a few minutes in the
Banking Committee. With the economic situations being what they
are, I am going to step out, and I will not hear the testimony.
But I want to thank you for coming and say that, my dad
actually lives in a facility that uses this model with
Alzheimer's, and I appreciate you bringing up these issues.
I know there is a study that has been done. I would say to
our witnesses that sometimes we need to be careful what we ask
for, OK? State regulation, it appears to me in some cases,
certainly needs to be enhanced. We regulate insurance companies
at the State level and have had some pretty good success there.
Sometimes us at this level getting involved, again, be careful
what you ask for.
So, hopefully, States themselves will pick up the pace. I
don't know what the outcome ultimately will be, but I certainly
appreciate my staff will certainly be here during this hearing.
I thank you again for being here.
Again, Mr. Chairman, your vigilance in continuing to look
at issues where individuals, in many cases unbeknownst to them,
end up in situations that certainly damage them.
We thank you all for being here.
The Chairman. Thanks a lot, Senator Corker.
Now I will introduce our panel. Our first witness today
will be Alicia Cackley. She is the Director of the Financial
Markets and Community Investment team at the U.S. Government
Accountability Office, GAO. There she manages research and
program evaluation on issues such as consumer protection,
financial literacy, the Recovery Act, as well as homelessness.
Next, we will be hearing from Kevin McCarty. He is the
Commissioner of the Florida Office of Insurance Regulation,
where he oversees Florida's insurance market and is responsible
for company solvency and market investigations. As
Commissioner, Mr. McCarty has focused his efforts on senior
protection. He is also the Vice President of the National
Association of Insurance Commissioners.
Next, we will be hearing from Charles Prine. Mr. Prine is a
resident of a CCRC himself in Mount Lebanon, PA. That CCRC
declared bankruptcy in 2009. During the bankruptcy, Mr. Prine
served as the chairman of the unsecured creditors association,
and he is now a resident's advocate on the board of the new
CCRC owner.
Then we will be hearing from Katherine Pearson. She is a
Professor of Law at Pennsylvania State University's Dickinson
School of Law, where she teaches law and aging policy. Ms.
Pearson directs the Penn State's Elder Law and Consumer
Protection Clinic, and she is coauthor of a forthcoming book on
protection of older adults against financial exploitation.
Finally, we will be hearing from David Erickson. He is the
Vice President of Legal Affairs for Covenant Retirement
Communities in Chicago. He will be speaking on behalf of the
American Association of Homes and Services for the Aging, where
he helped developed the resource for providers to improve their
disclosure and transparency practices.
We thank you all for being here today, and now, Ms.
Cackley, we will start with you.
ALICIA CACKLEY, DIRECTOR, FINANCIAL MARKETS AND COMMUNITY
INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON,
DC
Ms. Cackley. Good afternoon.
Mr. Chairman, I am pleased to be here today to discuss
continuing care retirement communities, or CCRCs. As a growing
population of older Americans seeks options for ensuring that
their assets and income in retirement will cover the cost of
their housing and healthcare needs, some may choose to enter a
CCRC, which aims to provide lifelong housing, household
assistance, and nursing care in exchange for a sometimes
sizable entrance fee and ongoing monthly fees.
However, CCRCs are not without risk. My testimony today is
based on our June 2010 report, which is being publicly released
today and addresses four issues--first, how CCRCs operate and
what financial risks are associated with their operation and
establishment; second, how State laws address these risks and
what is known about how adequately they protect CCRCs'
financial condition; third, risks that CCRC residents face; and
fourth, how State laws address these risks and what is known
about their adequacy.
In summary, we found that CCRCs can benefit older Americans
by allowing them to move among and through independent living,
assisted living, and skilled nursing care in one community.
They offer a range of contract types and fees that are designed
to provide long-term care and transfer different degrees of the
risk of future cost increases from the resident to the CCRC.
However, developing CCRCs can be a lengthy, complex
process, and CCRCs, like other businesses, face a number of
risks, both during their development and after they become
operational. While few CCRCs have failed, challenging economic
and real estate market conditions have negatively affected some
CCRCs' occupancy and financial condition.
With respect to financial oversight of CCRCs, according to
a broad industry study, 12 States and the District of Columbia
do not have CCRC-specific regulations, meaning an entity in one
State may be subject to such regulations while a similar entity
in another State may not. The eight States we reviewed in
detail varied in the extent to which they ensured CCRCs
addressed financial and operational risks, and some focused
more on long-term viability than others.
According to industry participants, actuarial studies can
help CCRCs plan for contractual obligations and set appropriate
housing and care prices. Without them, they noted, a CCRC may
appear financially stable in the short term, yet still face
threats to long-term viability.
We found that only three of the eight States we reviewed
required an actuarial study at regular intervals, and one
State, Florida, analyzes CCRC financial trends. This lack of a
long-term focus in some States creates a potential mismatch
with residents' concerns over their CCRC's long-term viability.
While CCRCs offer long-term residence and care in the same
community, residents can still face considerable risk. For
example, CCRC financial difficulties can lead to unexpected
increases in residents' monthly fees.
While CCRC bankruptcies or closures have been relatively
rare and residents have generally not been forced to leave in
such cases, should a CCRC failure occur, it could cause
residents to lose all or part of their entrance fee, which may
amount to hundreds of thousands of dollars. For example,
residents of one CCRC in Pennsylvania, who we will hear from
later, lost the refundable portion of their entrance fees in
2009 when the facility became insolvent and was sold to a new
operator.
Residents can also become dissatisfied if CCRC policies or
operations fall short of expectations or there is a change in
arrangements they thought were contractually guaranteed, such
as charging residents for services that were previously free.
In addition, residents also face the risk of being transferred
involuntarily from one level of care to another or of not being
able to obtain assisted living or nursing care onsite.
Most of the States we reviewed take steps to protect the
interests of CCRC residents, such as requiring the escrow of
entrance fees and mandating certain disclosures. However, not
all States review the content of contracts, and the States we
reviewed varied considerably in the type of financial and other
disclosures they required.
While some CCRCs voluntarily exceed disclosures and
protections required by their State's regulations, such
variation and regulation means that consumers in some States
may not receive the same protections as those in others.
In closing, we found that CCRCs can benefit older Americans
by helping ensure access to housing and healthcare in a single
community as they age. However, choosing to enter a CCRC is not
without significant financial and other risks.
Further, the stress that recent economic events may have
placed on CCRC finances underscores the importance of
regulators being vigilant in their efforts to monitor CCRCs'
long-term viability and protect consumers. Such efforts will
only become more important as the number of older Americans
grows.
Mr. Chairman, this concludes my prepared statement. I would
be happy to answer questions.
[The prepared statement of Ms. Cackley follows:]
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The Chairman. Thank you very much, Ms. Cackley.
Mr. McCarty.
KEVIN MCCARTY, INSURANCE COMMISSIONER, FLORIDA OFFICE OF
INSURANCE REGULATION, TALLAHASSEE, FL
Mr. McCarty. Thank you, and good afternoon, Mr. Chairman.
My name is Kevin McCarty. I am the Insurance Commissioner
of the State of Florida, a State with a substantial population
of older Americans.
The decision to join a continuing care facility represents
a substantial investment on the part of their own personal
assets of our seniors, and Florida takes its responsibility to
protect their seniors very seriously. In fact, Florida statutes
provide for our residents of our senior facilities a bill of
rights intended to ensure that residents are continually
treated with dignity and respect.
Florida's regulatory framework emphasizes four fundamental
areas. Firstly, verifying that CCRC owners and management are
competent, trustworthy, and responsible. Second, we ensure that
the relevant information that is important in decisionmaking is
disclosed to the residents of the communities. Third, we are
ensuring that the project is in full compliance with Florida's
stringent licensing requirements. Last, but certainly most
importantly, providing a thorough financial oversight to ensure
that the continuing care facilities are there for the long term
and that they continue to provide a home for Florida's seniors.
To determine professional competency and trustworthiness
the Office of Insurance Regulation requires each officer,
director, owner, or manager to submit a biographical affidavit,
a legible fingerprint card, and an independent investigation
background report. This biographical information applies to any
new officer and director and management of an existing CCRC, as
well as a new facility. These rigorous requirements ensure that
the people of Florida are guaranteed not to have people of
questionable moral character in a position to harm our seniors.
It is very important that prospective and existing
residents have sufficient and relevant information on a
facility available to them. Florida statutes require numerous
disclosures, including, but not limited to a summary of the
facility's ownership interests, their plans for expansion of
their operations, rules and regulations governing the facility
and, of course, a copy of the bill of rights, and a summary of
the most recent examination conducted by our office.
Since the viability of a CCRC is primarily governed by the
number of people in occupancy, it is imperative that the
facility demonstrates sufficient demand for a facility prior to
placing a consumer's funds at risk. Florida accomplishes this
objective by requiring a prospective provider to submit an
independent feasibility study with its application for
licensure.
With respect to financial oversight, each facility is
required to file an annual financial report, audited financial
statements, and provide a liquid reserve calculation which
ensures financial resources to pay in the future. Each facility
has an assigned analyst within our office who reviews all
financial submissions in great detail.
Our office may require a facility that has experienced a
declining financial trend to submit to more frequent reports,
actuarial studies, submit a corrective action plan to address
any of their financial problems. All CCRCs are subject to
periodic onsite examination by the Office of Insurance
Regulation, and the office may also examine a CCRC at any time
at the office's discretion.
A facility that has more significant problems may be
subject to our onsite management and, ultimately, may be
subject to suspension of their certificate of authority.
One of the new developments we are seeing in Florida is a
trend toward CCRCs at home, also called CCRCs without walls.
This new concept usually has a limited number of independent
living facilities. Most of these CCRCs at home residents would
live at home but eventually move to the facility when they had
additional assisted living or nursing care services required.
This has been a provider reaction to the steep drop in the
housing market when people are reluctant or unable to sell
their homes for market value or what they think their
properties are worth. We have one proposed facility which
currently received the provisional certificate of authority to
pursue funding a project of this type.
It is important to note that the office staff is in
constant contact with a variety of stakeholders through the
Florida Continuing Care Advisory Council. This council consists
of three resident members, three executive directors of
facilities, and four professionals familiar with the industry.
Each year, our office hosts a meeting with the council to
address industry needs, trends and conditions, and the
regulatory environment for our seniors.
In conclusion, it has been almost 20 years since we had a
failure in Florida, which is perhaps the greatest testament to
our regulatory success. OIR continues to monitor ongoing trends
in the CCRC industry as these entities adapt to changing
economic circumstances.
Mr. Chairman, that concludes my prepared remarks, and I
will be happy to answer any questions.
[The prepared statement of Mr. McCarty follows:]
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The Chairman. Thanks very much, Mr. McCarty.
Mr. Prine.
CHARLES PRINE, RESIDENT OF CONCORDIA OF THE SOUTH HILLS CCRC,
MOUNT LEBANON, PA
Mr. Prine. My name is Chuck Prine. I want to thank the
committee for providing this opportunity to explain what
happened at the Covenant, where the residents lost a total of
more than $26 million in refundable deposits.
Like most of the residents, my wife and I selected this
community primarily because of the reputation of its sponsor,
B'nai B'rith, which promoted itself as a leading operator of
senior living facilities throughout the United States. It later
became apparent that B'nai B'rith's actual experience was
primarily in Government-financed low-income rental facilities
and that it had no experience whatsoever in building and
operating life-care facilities.
Furthermore, B'nai B'rith did not invest a penny of its own
money in this venture, but rather set up a nonprofit
corporation, which financed the construction and operation
through a bond issue and bank loans. B'nai B'rith's stated plan
was to draw out of the financing and operation a development
fee of $1 million and a licensing fee equal to 50 percent of
the quarterly net income.
Almost from the very start, it became apparent that the
Covenant was in trouble. Its occupancy rate did not meet
expectations. The cost of the building exceeded estimates by
several million dollars. Constant repairs were required. Real
estate taxes had been grossly underestimated.
All of the board of the dummy corporation set to run this
facility were either B'nai B'rith International directors or
employees. However, many of them never set a foot in the
building. They refused repeated requests for a meeting with the
Residents Council.
They allowed the escrow fund of resident deposits to be
used to make up for lack of other income to pay the various
bills. They became delinquent in real estate taxes and finally
defaulted on their debt service. Eventually, the bond holders
demanded that B'nai B'rith take some drastic action to solve
the problem, but B'nai B'rith refused to put any of their funds
into the situation.
Under a State act passed some 25 years ago, the
Pennsylvania Insurance Department had the right to step in and
appoint a trustee to take over the facility, but it refused to
take this step. In 2009, the bond holders commenced a mortgage
foreclosure action in State court. That action could have
resulted in us being put out on the street.
Eventually, we landed in Federal bankruptcy court, where
the bond holders and bank lenders refused to consider any kind
of resolution in which the residents would receive a single
penny. The Residents Council and the Unsecured Creditors
Committee did play a role, however, in the selection of a new
buyer. We were able to facilitate a sale in which the new owner
agreed to honor our existing residency agreements with our
life-care provisions, but with the total loss of our deposits.
Based on our experience, I would like to make four
recommendations for consideration in any legislation which
might be put together to protect senior citizens from losing
their life savings in questionably financed life-care projects.
One, senior housing facilities, which are financed in part
by the use of interest obtained from the investment of
refundable deposits from residents, should be required to place
these funds in a true escrow account held by a trustee with the
proviso that the principal could not be utilized for operating
expenses or other purposes.
Two, every project should include a minimum of 30 percent
of its financing coming from a cash investment of the sponsor/
owner organization. The primary purpose should be to provide
guaranteed lifetime care for residents rather than a financial
program to provide a high return for speculative investors and
lenders.
Three, the boards of directors of life-care facilities
should include at least 33 percent residents. In effect, the
residents should be players, not just pawns in the game.
Four, there should be in each State a single responsible
governing agency, as opposed to responsibilities split among
various State agencies. In Pennsylvania, licenses must be
obtained from the Department of Insurance, the Department of
Public Health, and the Department of Welfare. None of these
agencies now has total control, and they do not have, either
individually or collectively, sufficient staff and budget to
supervise and regulate the facilities properly.
Not in any sense to diminish the loss our residents have
suffered, I am happy to report that our current residents are
very pleased with the operation under our new identification,
Concordia of the South Hills, which is owned by the Concordia
Lutheran Ministries of Pittsburgh. I might point out that
Concordia of South Hills put up $15 million of their own money
in cash to buy our community. There is no debt at all on the
facility at this time.
Not only that, they went a step further and voluntarily
gave us a $1 million endowment fund to help cover the potential
losses of somebody in the assisted living or nursing who ran
out of money to pay their bills.
I thank you very much for this opportunity. I would be
happy to offer some other ideas about why Concordia has been
successful and what could be done, but thanks for the
opportunity to speak at this point.
[The prepared statement of Mr. Prine follows:]
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The Chairman. Thank you, Mr. Prine.
Ms. Pearson.
KATHERINE PEARSON, PROFESSOR, DICKINSON SCHOOL OF LAW,
PENNSYLVANIA STATE UNIVERSITY AND DIRECTOR, ELDER LAW AND
CONSUMER PROTECTION CLINIC, UNIVERSITY PARK, PA
Ms. Pearson. Thank you very much.
I am glad to be here as well, and it is hard to follow Mr.
Prine because he is so eloquent in speaking on behalf of his
situation and other residents.
I feel I am also here on behalf of residents. As the
Director of an Elder Law and Consumer Protection Clinic at Penn
State University's Dickinson School of Law, I have had
opportunities for several years to speak with residents of
CCRCs not only in Pennsylvania, but around the country, as I
have become more interested in this venture.
I am a fan of CCRCs. I would like them to be there when I
am ready for this form of living. Therefore, when I am speaking
today, I am speaking on behalf of residents. But I am also
hoping that the industry is going to be as healthy as it can
be.
About 6 years ago, I was approached by a group of residents
at a CCRC--not Mr. Prine's CCRC, actually another one. They
were concerned about an expansion plan at their particular
facility. They felt that it was economically not feasible.
As with many CCRC resident groups, this was a pretty
sophisticated group of residents and they had crunched some
numbers, and the numbers didn't look very good. So, I asked
them, ``Have you approached the management of your facility?''
They had, and they were not satisfied with the information they
were getting in response. I asked whether they had approached
the Department of Insurance, the regulating agency in their
State. They said they also had done that, and they had received
no substantive response.
Well, that intrigued me. What was the role of State
regulation? So, I went to that same department and started
asking some questions.
What I discovered was that in that particular State, annual
reports were filed and then stacked in a dusty closet and never
opened. I found reports that the seal had never been broken on,
and that said to me, well, there is something about regulation
that is not working here, and particularly in this particular
circumstance.
I ended up writing an article about it. In response to the
article, I talked more to State regulators. One of the State
regulators said, ``You know, we feel we have done a great
job.'' I think on many respects that the State had had a good
track record with CCRCs. But the State regulator said that in
our State, we have had a few financial insolvencies. We have
been able to solve it without formal action.
I said that is great news. What criteria were used to
decide whether there was a problem? What criteria were used to
solve the problems? How did you make it better? The problem was
there was no collective information about that, no collective
information about what were standard practices, what were good
practices, and what were poor practices. So that began to
concern me about what do we mean by State regulation?
As I have talked to CCRC residents around the country, I
repeatedly hear that they want financial transparency that is
more than just disclosures, that also involves actuarial
testing, if you will. I think that as a result of that, what I
am calling for in my testimony, and I elaborated in greater
detail in my written testimony, I am calling for a national
residents' bill of rights on behalf of residents of CCRCs.
I think it is time to give some real meat to their ability
to get useful, transparent information. I think the industry as
a whole would be helped by that. The industry is served by
transparency, and I think the industry with greater
transparency can achieve greater health. So, I don't think the
industry should be frightened by the idea of a residents' bill
of rights.
So that is what I am asking for, and I am happy to respond
to questions about that particular item.
Thank you very much, Senator Kohl, Senator Franken.
[The prepared statement of Ms. Pearson follows:]
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The Chairman. Thank you very much, Ms. Pearson.
Mr. Erickson.
DAVID ERICKSON, VICE PRESIDENT OF LEGAL AFFAIRS, COVENANT
RETIREMENT COMMUNITIES ON BEHALF OF THE AMERICAN ASSOCIATION OF
HOMES AND SERVICES FOR THE AGING, SKOKIE, IL
Mr. Erickson. Thank you, Chairman Kohl and members of the
committee.
I am here testifying on behalf of American Association of
Homes and Services for the Aging and Covenant Retirement
Communities. Covenant Retirement Communities has 12 CCRCs in 8
States serving over 5,000 residents. Our primary contract has
an entry fee and provides for modified life care.
Most of our residents choose a 2 percent per month
declining refund option. We also offer 90 percent refunds, but
less than 10 percent of our residents choose this option. We
also offer full life-care contracts in two communities.
Let me begin by saying that Covenant Retirement Communities
is not connected in any way to Covenant at South Hills. We
happen to share the word ``covenant'' in our name, but beyond
that, there is absolutely no connection.
We are, of course, very aware of the significant loss that
the residents of Covenant at South Hills suffered from failure
of that community. That bankruptcy, indeed any bankruptcy in
our industry, is something we take very seriously.
CCRCs exist for one reason--to serve the needs of our
residents. Anytime we fail to do that, it is a failure we
collectively bear. We deeply regret that it happened.
There are nearly 1,900 CCRCs across the country. The vast
majority remain financially strong and viable. We recognize
that a small number of CCRCs are vulnerable, especially those
that opened during the recession or are single-site campuses,
and those are being carefully monitored by our lenders.
Notwithstanding the situation at Covenant at South Hills,
there are relatively few CCRCs which have faced payment
defaults or filed bankruptcy. Even in those rare cases, the
CCRCs have done so without adverse impact to the financial
security of their residents. The Covenant at South Hills was
clearly an exception. Fortunately, the residents did retain
their right to remain at the CCRC under new ownership and did
not have to move.
Without question, the weak economy has impacted CCRC
occupancies, particularly CCRCs located in regions of the
country hardest hit by declining housing values. That said,
occupancy rates of CCRCs overall continue to exceed those of
free-standing assisted living communities, nursing homes, and
even free-standing independent living retirement communities.
The ability of CCRCs to actually weather the economic storm
as well as they have speaks volumes for the strong preference
seniors have for a continuum of care lifestyle. Not
coincidentally, the typical CCRC reports that resident
referrals are the strongest source of leads.
I would like to briefly comment on two reports recently
produced by a CCRC task force which I had the honor of
chairing. It was formed earlier this year and was comprised of
leading experts in the CCRC operations, tax-exempt bond
financing, and legal and regulatory requirements.
The first report is ``Continuing Care Retirement
Communities: Suggested Best Practices for CCRC Disclosure and
Transparency.'' The second report is entitled ``Today's
Continuing Care Retirement Community: The Strengths of This
Popular Senior Living Model, Its Stress Points and Challenges,
and Outlook for Tomorrow.'' Both of these reports have been
supplied to the committee.
CCRCs are an important option in living arrangements for
seniors. Over the decades, CCRCs have successfully offered a
continuum of care highly desired by seniors. The vast majority
are financially stable and provide a style of living which
emphasizes healthy aging, have numerous options of living and
financial arrangements to meet a variety of consumer
preferences, and promote an active and engaged lifestyle.
Unlike the housing market or equities market, where large
numbers of seniors have had their portfolios affected, the vast
majority of CCRCs have provided security and care for seniors
who will know where they will live and receive care usually for
the rest of their lives. CCRC residents have moved into
communities where they have chosen a lifestyle that provides
comfort for their families, who will not have to worry about
what will happen to Mom and Dad as they age. As the ``CCRC
Story'' reports, a common sentiment among CCRCs residents is
that they wished they would have moved to the CCRC sooner.
CCRC providers recognize the importance and the need for
effective State regulatory oversight of CCRCs. But we also
believe the regulatory framework has to maintain a balance to
provide adequate consumer protection without unreasonably
restricting growth and development of CCRCs.
There is certainly a place for reasonable requirements,
including disclosure requirements, capital reserves, and
protections of refundable entry fees. However, if these
requirements become too prescriptive, expansion of existing
CCRCs and development of new ones will be slowed or halted, and
seniors will lose the opportunity to move into a living
environment they clearly prefer.
Excessive regulatory restrictions could also prevent CCRCs
from offering the varieties of living arrangements that
consumers seek. Similarly, requirements related to the
operating and governance structure should be reasonable. For
example, many CCRC sponsoring organizations, often not-for-
profit religious and fraternal organizations, recognize a need
in their local community for the types of services a CCRC
provides, but lack the expertise to develop and operate the
CCRC.
Third-party developers and operators fill this need, but
that doesn't mean that the not-for-profit sponsor isn't an
active partner in the operations of the CCRC. In fact, if you
look at most of these types of operational structures, you will
find an active and involved board of trustees.
Thank you for this opportunity to testify on behalf of CCRC
providers across the country. We are proud of our longstanding
history in serving seniors and stand by and ready to assist the
efforts of this committee in any way we can. We will continue
to work collaboratively with State regulators to support strong
and effective State regulations and oversight.
[The prepared statement of Mr. Erickson follows:]
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The Chairman. Thank you very much, Mr. Erickson.
We are joined today by Senator Franken from Minnesota to
make what comments you would wish.
STATEMENT OF SENATOR AL FRANKEN
Senator Franken. Thank you, Mr. Chairman, and thank you for
holding today's hearing on this important issue to seniors in
Minnesota and across the country.
I want to thank all of the witnesses for testifying today.
One of the biggest challenges facing Minnesotans today is
figuring out how to make sure that they will have the services
and the supports that they need to maintain the quality of life
as they get older. For many Minnesotans, this means being able
to live at home, maintain their independence, and be with their
families.
But there are a lot of options for long-term services and
supports out there, and it can be hard to know just which one
to choose. This is especially the case when you don't know what
your health needs or your spouse's health needs may be in the
future.
Continuing care retirement communities are an attractive
option for some seniors because they offer the opportunity to
stay in their communities, even as their long-term care needs
change. In many cases, these communities can provide the
security and stability that many seniors are looking for.
But it is critical that seniors have access to all the
information that they need to decide whether a continuing care
retirement community is right for them, like information about
the owners and the managers of the community and what financial
risk there may be. It is also important that seniors have a
voice and can play an active role in decisions about their
care.
Thank you for your testimony. I read it last night, and I
am looking forward to hearing your answers to questions as to
how we can better enable seniors to be informed consumers and
active decision makers when it comes to their long-term care
options.
Thank you all for being here today again and for sharing
your expertise.
Thank you.
The Chairman. Thank you very much, Senator Franken.
Ms. Pearson, when you talked about a bill of rights, would
you expand on that a little bit?
Ms. Pearson. Yes. I think I have spent some time thinking
about this. In essence, what we are talking about is when often
the people who know best what the problems might be are the
residents in a particular facility. When they want more
information, sometimes there is a bit of stonewalling that goes
on.
So I think what I am really talking about is a financial
bill of rights, the ability to get more information when they
feel it is necessary. There needs to be somebody to hear when
they speak and when they want that information. Right now, that
would be the State regulators.
So if a particular percentage of residents at a facility
went forward to a State regulator and said we need more
information about this particular topic, that percentage would
trigger that actuarial inquiry. So I think what I am really
talking about is a financial bill of rights.
The Chairman. That would give the residents or the
potential residents what kind of information?
Ms. Pearson. I think part of the challenge here is that as
each facility adapts with time, adapts to financial
circumstances with time, they get creative with their
financing. I think that one of the things that happens is the
residents begin to get a sense of that.
They see, for example, the use of contract management
coming in, cutbacks in services, things like that, and they end
up wanting to know what are the reasons for that, where is the
money going? You know, the financial fees that we have paid,
does it really have to be this way?
So I think that particularly with respect to actuarial
soundness, when that type of inquiry comes about, the States
could require a projected type of actuarial study and not
simply what goes on in most States, unlike Florida. Florida
does better at this. Most States simply require a point in time
financial report, rather than an actuarial study.
The Chairman. All right. Mr. McCarty, how many of these
facilities do you have in Florida?
Mr. McCarty. We have 73 licensed facilities in our State
that cover the contracts A and B as described in the GAO
report, where anytime you have to put up cash up front for the
facility, it has to be regulated by the Office of Insurance
Regulation. We share that responsibility with the Agency for
Healthcare Administration, which does the quality control to
ensure the quality of services, and the Department of Financial
Services, which handles our complaints. That covers 30,000
residents in Florida.
The Chairman. Is it fair to say that Florida's CCRCs are
under your supervision?
Mr. McCarty. Yes, they are under my supervision.
The Chairman. Do you regard that as being important?
Mr. McCarty. I believe it is a critical part of my
responsibility and my mission to protect the solvency of the
CCRCs. Yes, sir.
The Chairman. So you would recommend that CCRCs across the
country should be regulated, based upon your experience in
Florida?
Mr. McCarty. Based upon my experience in Florida, we have
had a long tradition, since 1953, of regulation of CCRCs. That
has been certainly accelerated in the 1970's and 1980's. I
think that we have a very strong bias in our State for
protecting what we believe are very vulnerable citizens, and we
think that if you are protected in Florida, you should be
protected in every State.
I certainly support what Ranking Member Corker has said
about how a State-based regulatory system is a good system, and
I think you can harmonize a State-based regulatory system with
some minimum standards that may be established by the Congress.
If, in their wisdom, they choose to establish those standards,
you could use the Medicare supplement insurance model as one
where you task the National Association of Insurance
Commissioners, who are the experts in this area, to come up
with national standards that States would have to abide by.
That may be one way of achieving those consumer protections
with the least intrusion on the States' sovereignty.
The Chairman. How many of the residents of CCRCs in Florida
or what percentage of the residents pay an upfront fee?
Mr. McCarty. Well, all of the ones pay an upfront fee that
are going into our facilities.
The Chairman. They all do?
Mr. McCarty. They all do.
The Chairman. Some, many of them move out, have a change of
idea, change of lifestyle?
Mr. McCarty. Yes.
The Chairman. Are there difficulties in getting the refund
back?
Mr. McCarty. Refunds are governed by--governed under
Florida law. They generally receive their refunds within 120 to
200 days.
The Chairman. So you have not experienced difficulty in
getting their refunds back to those who decide to move away?
Mr. McCarty. No. Again, we have a very broad regulatory
framework that looks at required minimum reserves. We require
companies to escrow that money to protect that money in the
event the consumers choose to exit and go to another facility.
The other thing I think is very important is, as a previous
speaker has addressed is providing information and not just
disclosure, general disclosure, but provide meaningful
financial information. We understand that our elderly
population is a vulnerable population, but they are also very
intelligent. If you provide uniform input data points where
they can readily compare one facility to another facility, we
need to give them the tools to make those kinds of comparisons.
The Chairman. Good. Well, Mr. Prine, you didn't have that
experience in Pennsylvania, did you?
Mr. Prine. No, we did not. The information that is provided
to the State of Pennsylvania is reviewed, I am sure, to some
degree. But I don't think it is studied to the extent of really
trying to take it all apart and see why it works or why not and
project what would happen in the future.
One of the problems with all of these facilities is they
may look good theoretically on paper, but this is a kind of
business where if you get behind in the flow of income from new
people coming in, if a place is slow to rent up, it starts to
lose ground immediately. The taxes don't stop. The monthly bond
payments don't stop.
Finally, you have to look around for other sources of
funds. What happened in our situation is they immediately
tapped, in effect, the residents' deposits and started using
them. Even that couldn't catch up with how far behind they
started to fall.
When we tried to get the State insurance department to
intervene, they did meet with us. Mr. Johnson, the insurance
commissioner for Pennsylvania, did come over to the Covenant.
He explained very carefully that they never had a facility in
the State of Pennsylvania ever go through a bankruptcy and
close down, and he was sure things would work out in the long
run and just be patient.
Well, they didn't work out in the long run. They just kept
getting worse and finally got so bad that the bond holders
ultimately forced a sale. But I would like to point out one
thing about the new people that moved in, which shows the
difference in the way a place could be operated poorly and a
place could be operated well.
The new people put up cash to buy the place. They
eliminated completely the $4 million a year in interest
payments that were a noose around the neck, really, of the
previous facility. They put their own money into it. They have
a policy which is far different from using the residents'
deposits. They put the deposits aside in an account.
Interestingly enough, if the value of that account, because
of what it is invested in, decreases, they put more money in to
keep it up to a balance that is equal to the potential deposit
pay out. If they had to--if everybody at once left, they would
still be able to return the deposits. This is an extremely
conservative way of operating but it is the only really safe
way to prevent this possible kind of disaster occurring
elsewhere.
The Chairman. What happened to the fees? Did you say $26
million? What was that number?
Mr. Prine. Twenty-six million dollars of resident deposits
were lost completely. We didn't get one penny of that back.
The Chairman. So that was a disaster.
Mr. Prine. That is the life savings of a lot of people.
This ranged from somewhere about $90,000 to $300,000 per
apartment.
The Chairman. That is a disaster.
Ms. Cackley, is that tremendously unusual? Do you have any
way of indicating whether or not it is a problem across the
country, or is it something that occurred as a sign to us never
to see it happen again, but it doesn't happen hardly at all?
Ms. Cackley. It does not happen often, as best we have been
able to tell. But it is certainly a disaster, and it is a risk
that is of concern and needs to be paid attention to as we move
forward. As more CCRCs come into existence, as our population
ages and demand for such facilities increases, it is certainly
something that is a concern and needs to be prevented in the
future as well.
The Chairman. I suppose you would assure us or tell us with
some level of certainty, Mr. McCarty, that that kind of a
situation is most unlikely in Florida because of the regulation
and oversight that you have?
Mr. McCarty. I would say that is generally true, sir. I
believe that to be the case. I think that ensuring that you
have close scrutiny of the financial statements and so that you
can use your financial analyst to evaluate trends and
conditions before they become a problem.
One of the things that we have been successful doing in
Florida is identifying problems early on so that we can take a
number of corrective action plans as necessitated by the
financial condition of the company. That most oftentimes is
bringing in a new purchase or acquisition, and that only works
if you get involved in that process early enough in the
deterioration of the financial condition of the company.
I can't predict what will happen in the future, and we
certainly have some unique challenges today with the collapse
of the marketplace. Many Floridians have purchased homes that
are worth far less today than they were a few years ago. So,
that is putting a tremendous--a lot of stress on new people
moving into facilities. So, we still need to see how that is
going to pan out.
But companies have been resourceful. They have been moving
to providing other services where they can make profits, but
they also are moving toward fee-for-service and rental beds,
which augment the bottom--the balance sheet for the company.
The Chairman. Before we turn to Senator Franken, Mr. Prine,
do you want to make a comment?
Mr. Prine. Yes. One thing that I think would be very
interesting--and it sort of follows up on the comments of some
of the others here--is if the statements that these facilities
produce would really show how much of the residents' deposit is
still in the account and how much has been spent. I mean, this
goes on, and they don't fold up necessarily, but they could be
way behind.
If they had a run that several people moved out at once,
they might have trouble immediately being able to pay everybody
off and actually couldn't pay everybody off because they have
used some of those deposits for other purposes.
There is only one safe way to do this, and that is to lock
the deposits up. This is nothing wrong with using the interest
of those deposits. That is the purpose of this type of
financing. If you have $26 million, you get over $1.5 million
in interest or something like that to operate the place. But
then you shouldn't be allowed to dip into the principal.
When the principal goes way down, of course, the amount of
interest that they are getting on it goes way down. So it keeps
going further down. If you have very many people move out--and
of course, in some places, they don't pay until somebody else
moves in. We had a lot of people that moved out, and 2 or 3
years later, they still hadn't received a penny and never did
get a penny of what they expected when they moved out.
There might have been good reasons for them to move
somewhere else, to go somewhere where their kids lived or some
other reason. This wasn't just a matter of dissatisfaction or
something. Things happen in people's lives that they might have
to change where they want to live.
But the refund money ought to be there, and it ought to be
guaranteed that it is there.
The Chairman. Yes. Senator Franken?
Senator Franken. Thank you, Chairman Kohl.
Commissioner McCarty, have you ever had a CCRC fold in
Florida?
Mr. McCarty. Yes.
Senator Franken. You have?
Mr. McCarty. It was 18 years ago.
Senator Franken. OK. You know, it seems to me that when
seniors put up a deposit to receive services in a continuing
care retirement community, they expect that it will follow
through as promised to provide them with services when they
need them, and I just think that is a reasonable expectation.
It sounds, from Mr. Prine's experience, that there was no
disclosure to the residents of what was going on. What,
Commissioner, can we do to strengthen disclosure requirements
so that seniors understand the financial risks that they may be
taking on?
Mr. McCarty. Well, I think some of the members who have
testified today touched on some of those concerns. I think it
is critically important that the contracts be reviewed so that
they are clear and unambiguous as to the terms and conditions.
The contract should spell out very specifically in clear, plain
language how the refunds are calculated and how the monies will
be retained.
I think there ought to be requirements to ensure that
monies are escrowed and in an appropriate fashion so that there
are still sufficient funds to run the facility, but that there
is some guarantee that in a return or refund that those monies
are available.
I think you need to have, again, as I stated before, a full
complement that involves appropriate licensing, strict
standards on how money is to be handled, disclosing to
consumers information about their bill of rights and protection
of them in the facility, but also their financial rights with
regard to information about the financial standards and have
appropriate resources on the State regulatory system to analyze
the information that comes in.
Obviously, if you are getting financial trends, actuarial
reports, or financial statements that are not reviewed and
analyzed in the context of other facilities and trends and
conditions, that information is not particularly useful. That
information is necessary for you to have early detection. So
early detection leads to early intervention to prevent future
insolvencies.
Senator Franken. Ms. Pearson, the culture of long-term care
is changing. I think that is the word they use, ``culture.'' As
more options become available to seniors, I think the whole
point is that the seniors play an active role in deciding how,
when, and where they receive their care.
For example, there is a nursing home in Perham, MN, now
where if a resident wants to stay up and watch a Twins game, he
or she stays up and watches the Twins game. Then if he or she
wants to sleep late, they sleep late. Everything isn't dictated
by the meal, you know, breakfast at 6:30, lunch at 11, dinner
at 4. I think sometimes we forget how important it is for
people to decide, to make their own decisions on how they are
living.
I was wondering about the boards, the governance of long-
term care facilities. What do you think about Mr. Prine's
proposal to require a certain percentage of CCRCs, CCRCs' board
of directors to be made up of residents?
Ms. Pearson. I am in favor of it. One of the things that
the very first group of residents that contacted me asked me
about was whether or not they could be on boards. Their
particular facility was taking the position that there was a
conflict of interest for residents to be on governing boards,
which is kind of ironic in a way.
Certainly, other States have found that it is possible to
have residents on boards and that it works quite well. It
becomes a way of providing transparency of information, and it
also eliminates one of the qualities that some residents have
complained to me about--that notion that now that you are
older, don't worry your graying head about how this facility is
run. We will take care of it for you.
Well, these people are dynamic people. They don't like that
paternalistic attitude, understandably so. One of the ways to
do it is to provide residents a voice on the governing boards,
and I think many healthy CCRCs do that. In fact, I think
perhaps, Mr. Erickson, your CCRCs provide a governing board.
Senator Franken. Could this be part of your bill of rights?
Ms. Pearson. It certainly could be.
Senator Franken. OK. Mr. Prine, speaking of transparency,
in your testimony you mentioned you felt that the Covenant
community was misrepresented to you.
Mr. Prine. The Covenant community was misrepresented to us.
The Concordia community that owns the place now was very
clearly represented to us because the president of that
organization came and talked to our residents before they
acquired it and wanted to be very sure that he had our support.
He promised that they would have--the people we would have a
voice on the board and things like that.
Whereas, when I indicated that there was misrepresentation
that may have occurred with the Covenant people, a lot of that
has to do with the way they marketed the place. They put their
name out in front on their promotion material B'nai B'rith.
Under the sign on the front of our building, it said ``B'nai
B'rith Senior Living Community.''
Yet, when it came down to trying to deal with the B'nai
B'rith people, they had a wall up there, and they said, no, you
have got to deal with Covenant of South Hills, Inc. Well, the
Covenant of South Hills, Inc., had seven directors, and all
seven of them were employees or directors of B'nai B'rith. Yet
they never met in our building. They never would meet with our
Residents' Council.
We had limited communication. I had a couple of phone
conversations with people, and there always was some sort of
evasive answers of questions that I asked. I never felt I was
getting to the bottom of anything. We just felt completely left
out of it.
One of the problems is that when an organization like this
promotes itself, particularly church-related organizations,
there is a tendency on the residents' or the customers' part,
you might say, not to question. I mean, you don't go question
the clergy of your particular denomination or whatever it may
be about things, about how a place is operated or for example.
That is not something that people usually do. They think in
terms, well, this is B'nai B'rith, and they advertised and
promoted all the experience they had had internationally in
housing and so forth.
But in the fine print, in the disclosure statement, the
big, thick document, it does say somewhere in there that they
had never run an assisted living--or they had never run a
continuing care community themselves before. But everything
else was promoted with the idea that they are the most
experienced housing people in the country, and this is just
going to be a wonderful thing.
There are many, many people--the people that are most
seriously concerned about this are the people with strong
religious affiliations who came in there because they thought
B'nai B'rith would never let them down.
Senator Franken. Well, that is a Shonda, as we say.
Mr. Erickson, in your testimony just now, you said you were
kind of worried that regulatory requirements could impede the
growth of the industry. But it sounds like what Mr. Prine's
example shows us is that there does need to be regulation. Do
you agree with the GAO finding that actuarial studies can
provide information on long-term viability?
My question is how could anyone say it is unreasonable to
require these communities to conduct regular studies and
provide this basic information to residents?
Mr. Erickson. Yes, the providers support strong State
regulations to protect residents, and we believe that, in turn,
produces resident satisfaction and helps the industry on the
whole.
With respect to your question about actuarial studies, one
of the things that we put in the disclosure paper, that is the
group that I chaired, in there as an area to be disclosed to
prospective residents or applicants to a CCRC is the actuarial
information, if it is applicable. Some of the CCRCs are the
extensive care type of CCRCs where they have the contracts that
provide for minimal increases of monthly fees as they progress
through from assisted living to skilled nursing care. Those
types of facilities are more heavily dependent on actuarial
studies.
Other CCRCs are the type where they have a modified
contract where there is a limited amount of healthcare benefit
for residents that progress to the assisted living and also
skilled nursing care. Those types of facilities do not need as
extensive actuarial studies.
So we believe--in the group that I chaired, we did discuss
actuarial studies in quite detail, and we believe that they can
be helpful for CCRCs to ensure----
Senator Franken. They are helpful, but not required?
Mr. Erickson. Yes. But not required because there are so
many different models of CCRCs that to have one specific type
of actuarial requirement, it might not fit the needs for the
various types of providers that are out there.
Senator Franken. Well, in your answer to me when I asked
about regulation here, you said State regulation. What if a
State, like, say, oh, I don't know, Pennsylvania, say, for
example--I don't know why I came up with that--didn't provide
regulation?
Mr. Erickson. There are 12 States that do not regulate
CCRCs, and within those States, the providers--there is third-
party oversight of the providers through the financing
agreements that they enter into. So, within the financing
agreements, there are reserves that are often required by the
lenders. There is reporting requirements to the lenders and
also ratios that providers must meet.
So, in the typical situation, there is a high level of
lender involvement within a CCRC. In addition to that, several
CCRCs have chosen to be rated by the rating agencies, and that
provides another area of third-party oversight to the CCRCs.
Senator Franken. Those are the ones that have chosen
voluntarily.
Mr. Erickson. Right. Yes.
Senator Franken. Well, we know how that works out
sometimes.
Ms. Cackley, as you noted in your testimony, State
regulations of these retirement communities may vary widely,
and as Mr. Erickson just said, many States don't regulate CCRCs
at all. What are your recommendations for Federal policies that
could protect consumers from some of the risks that were
highlighted today?
Ms. Cackley. GAO isn't making any specific recommendations
at the Federal level right now. While we found--we found the
possibility of risk for CCRCs and residents, we did not see a
significant number of insolvencies or other problems. So we
don't have a large effect to point to. What we do point to is
the concern for the future and the need for States to be
vigilant.
So, right now, we are suggesting that States need to be
paying attention. We certainly point to sort of the
fundamentals of regulation that include things like licensing,
like disclosures, ongoing monitoring, and then the actuarial
analysis is certainly something that we are suggesting is
important.
As Mr. Erickson said, there are some facilities that don't
have fee structures that include the healthcare needs being the
responsibility of the CCRC. They are still the responsibility
of the resident. But for those facilities where the fee
structure is what we consider either type A or type B, those
are definitely situations where an actuarial study will help
the CCRC understand what their obligations are going to be in
the future and that they definitely need to be planning for.
Senator Franken. But for now, you are not suggesting any
Federal regulation?
Ms. Cackley. No, sir.
Senator Franken. Well, thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Franken.
Mr. McCarty, in Florida, are all those upfront fees kept
separate and kept in escrow, kept in reserve?
Mr. McCarty. Parts of it. It is not all kept in reserve.
Part of it is used after the establishment. One hundred percent
of the money is kept in escrow as they do a demonstration on
whether or not there is a feasibility study, and then part of
that reserve is released on the issuance of a full certificate
of authority.
But the ongoing concern, the companies have to maintain a
full year of payments on their debt, and they have to maintain
15 percent of their operating cost. So that they have money so
they don't dip into their reserves.
The Chairman. If you could tweak that in any way, Mr.
Prine, do you think that is reasonable?
Mr. Prine. I still would like to get back to the point that
I believe and that it would be interesting if you could have an
investigation by the GAO about all this. So what percentage of
the deposits that totally could be due do the owners actually
have on hand at any given time to pay?
The Chairman. That is a good question.
Well, you are from the GAO, Ms. Cackley. What can you tell
us about that?
Ms. Cackley. Sir, we didn't look at all CCRCs across the
country. We did detailed work in eight States. But I don't--off
the top of my head, I couldn't tell you what the answer is to
that question. I can certainly look into it, ask my staff to
get me the information and get it back to you.
The Chairman. OK. Mr. McCarty, do you want to make a
comment on that?
Mr. McCarty. I just want to go back to something that was
said before. One of the things we want to make sure of is that
we don't over-saturate the market. The way for these facilities
to succeed is to ensure that they have a high occupancy rate.
If we are going to create a regulatory framework, one of
the things we have to ensure is that a facility is able to
demonstrate up front before construction that they are able to
sell the units before construction begins. Because a recipe for
disaster is to construct more facilities than you have demand
for those facilities, and that is what causes the problem.
One of the conditions preceding any regulatory framework is
to ensure that a feasibility study is done and actual contract
sales are made to ensure--and those monies are put 100 percent
in escrow so if we decide not to go through with it, all the
monies are returned. But unless and until we control the
numbers of those facilities, you can't guarantee that they are
all going to be viable.
The Chairman. That is a good point. But it is also true,
isn't it, that markets do decline, even when they are
operating, as they have now in the last several years, right?
Mr. McCarty. Yes, they have in the market, and they have to
respond to that. Particularly, the housing. That is a new
wrinkle in this because it is making it harder for people to
do. As I said before, some ways to deal with that is to go from
a continuing care contract with upfront money to a fee-for-
service rental bed.
The Chairman. Now, Mr. Erickson, do you think this
``accredited'' is a big thing? There are only 16 percent of
these CCRCs that are accredited. Do you regard that as serious
or just an evolving, developing phenomenon?
Mr. Erickson. We think it would be helpful for the
providers on the whole that there is a higher number of
accredited facilities. The company that I represent, all 12 of
our facilities are accredited. The accreditation process is
very rigorous, and it requires every 5 years for all aspects of
the operations of the CCRC to be reviewed by peers.
So, just last year, we had all of our facilities
reaccredited. I will say that it is an expensive process. I
estimate that it cost our organization at least $100,000 to go
through that process in terms of the time of our staff to
prepare all the reports that were required for the
accreditation process. But I believe it gives the consumers and
also our residents a sense of that our facilities are
financially strong.
The Chairman. Would you include that in your bill of
rights, Ms. Pearson?
Ms. Pearson. I think I would. In fact, I think Mr.
Erickson's example reminds me of something that happens in
Pennsylvania. Pennsylvania, by statute, has an every fifth year
requirement that the State come in and take a look at the books
of the facility. What that really amounts to is a checkbox
exercise. Somebody is paid to come in and review the books. It
takes time to do it. But they are not--they have no financial
sophistication when they do it.
So it is something that is a cost to the facility. They are
charged for that every fourth or every fifth year review, but
it produces no useful information, as opposed to something like
what Mr. Erickson just described, which is also expensive but
provides useful information.
The Chairman. That is interesting. So you both believe that
every institution across the country should belong or should be
accredited, which would mean that they have to go through a
periodic examination. Is that right?
Ms. Pearson. I guess what I am saying is that there should
be periodic examination. Whether that is part of the industry
accreditation process----
The Chairman. Right.
Ms. Pearson [continuing]. Or part of a State regulatory
process.
The Chairman. Right. You would agree with that, Mr.
McCarty?
Mr. McCarty. Absolutely. There is no substitute for ongoing
analysis on an ongoing basis and then onsite examinations. We
provide onsite examinations every 3 years for unaccredited,
every 5 years for accredited. But more importantly, because we
watch trends on a quarterly and annual basis, and any change in
that, we exercise our discretion to go onsite at will.
The Chairman. That is great.
All right. Any other comments, folks? This has been very
useful. You have brought a lot of information and experience to
the table here, and we will follow up.
Yes, go ahead, Mr. McCarty.
Mr. McCarty. I just wanted to emphasize a point that I made
earlier, and I think Senator Franken made the same remark as
about the culture. An important part of this is not just
creating a regulatory framework and creating--all of that is
important. An important part of this is to do an outreach to
the senior communities, to establish advisory councils in each
of these facilities so that these people in these facilities
have a real voice and communication not only with the facility,
but to their regulator.
One of the things--and having representation on the board
is critical for people to feel they are being heard and having
representation and not put in the sense where ``don't worry, we
are going to take care of your needs.'' Creating a culture of
outreach where there is bilateral communication among and
between the parties and also as evidenced in our consumer
complaints.
If we have problems in a facility, we send people to the
facility to see what we can do to reconcile those problems. We
have had 22 complaints in 7 years, which I think is a
remarkable testimony to the fact that in addition to a strong
solvency regime, you have to have a people outreach program as
well.
The Chairman. That is good. Any other comments from any of
the panelists? Mr. Prine?
Mr. Prine. I would like to second that comment about the
resident involvement. We have found in our own experience a
vast difference between the previous management and the current
management in terms of responsiveness to our Residents'
Council.
The current management has a representative of the senior
staff attend our resident council meetings and hear the
comments that people make right from their own voices at that
meeting. Likewise, we are able to report back by having a
representative of our residents on the board of the governing
body. It is a two-way street, and it is working so far
extremely well.
It is very reassuring to the residents to see this going on
and to feel much more comfortable because they see the senior
management in the building. Our new board of directors, even
though the parent facility is 45 minutes away, the board has
its meetings in our building, and the people see them coming
in. Last time we had an open house, there were several board
members there at the open house, greeting people that were
coming in to look at the facility.
This idea, the whole focus of all these facilities should
be on the services that is being provided to the residents.
That is what they are there for. It should not have to be so
focused on the financial manipulations that go on to make some
of these things work or not work.
I mean, that has to be worked out. But when you look at
this bond issue, for example, that we had in our facility, the
facility cost, including the architect's fees and so forth, $32
million to build. The bond issue was $62 million. What does
that other $30 million go to?
Well, you have got all sorts of things--funded interest on
the bond. So, in other words, they are borrowing money right
from the start to pay themselves back, $9 million of that. Debt
service reserve fund, another $5 million. Development costs,
well, $5 million. That was for fees that went back to the
people who were building the place, paying themselves
development fees and so forth.
It shouldn't take a $62 million bond issue to build a $30
million building. If they did it for cash or a substantial
portion of cash, the interest rates would have been a lot less,
and there would have been a lot less chance of failure.
The Chairman. Right. What did Senator Franken say, a
Shonda? Is that what he said? Do you know what ``Shonda''
means?
Mr. Prine. I don't understand.
The Chairman. It is a shame. It is a true shame. Let us
hope that it is an example that is publicized so well that it
doesn't happen again. Your being here to talk about it is very
instructive and very important. We thank you.
Mr. Prine. Thank you.
The Chairman. We thank you all for being here.
Ms. Cackley. Thank you.
The Chairman. Thank you so much.
[Whereupon, at 2:48 p.m., the hearing was adjourned.]
A P P E N D I X
----------
Ms. Cackley's Response to Senator Kohl's Question about Entrance Fee
Refund Practices
Mr. Prine stated that his former B'nai B'rith CCRC used
residents' entrance fees to keep their CCRC financially afloat,
but eventually went bankrupt and was unable to pay entrance fee
refunds it contractually owed residents. This resulted in a $26
million loss for residents. He suggested that CCRC providers
should be required to hold entrance fees in escrow and only be
able to use the interest from those funds. He also asked if it
was known what percentage of the funds that residents had paid
as refundable entrance fees were available to pay those
refunds.
To answer this question, it is important to understand 1)
how CCRCs generally pay for entrance fee refunds and what
states generally require in terms of escrowing funds, and 2)
whether setting aside funds for refunds or completely escrowing
refund amounts is practical or possible for CCRCs.
With respect to making refunds, many CCRCs stipulate in
their contracts with consumers that entrance fee refunds to
residents' or their heirs will be made when the unit in
question is resold and a new entrance fee is received. As a
result, the source of entrance fee refunds comes not from
liquid assets held by CCRCs, but by new entrance fees paid by
incoming residents. CCRCs do not need to have enough cash on
hand to pay all potential refunds at one time, and CCRCs
generally do not have set-asides specifically for refund
purposes.
Many states we reviewed have requirements to escrow
resident deposits during the construction phase before
residents move in, and escrow entrance fees once the CCRC is
operational. These are aimed at ensuring the stability of a
CCRC during construction and startup, as well as once CCRCs
become operational and begin to provide services set out in
contracts with residents. Six of the 8 states we reviewed
required that CCRCs escrow consumer deposits or entrance fees
received. These funds can be used by CCRCs for operational
purposes, but are generally not released to the CCRC until
certain benchmarks--such as a percentage of facility completion
or long-term financing committed--are met.
As additional protection, many, but not all, states we
reviewed also required CCRCs to maintain financial reserves.
According to regulators, the primary purpose of reserves is to
ensure some time exists for a CCRC to address financial issues
when distress occurs, but are not intended to ensure the long-
term viability of CCRCs. Reserves can be used for debt service
payments, paying operating expenses, or dealing with other
contingencies. While some states may require specific reserves
for facility repair and replacement, operating costs, or debt
service, we did not see in the course of our work specific
states requirements for CCRCs to set aside reserves for meeting
entrance fee refunds. Table 3 of our report provides a summary
of state actions to protect CCRC residents' deposits and fees.
With respect to question 2, completely escrowing entrance
fees, or the refundable portion of entrance fees, may not be
practical or financially possible for CCRCs. The general
business model for CCRCs involves using entrance fee deposits
for facility operations, including debt service payments,
provision of residential and health care services, and facility
repair and replacement. The feasibility of constructing and
operating CCRCs would not be possible if CCRCs had to set aside
and keep liquid enough funds to pay all refunds in full when
due.
With respect to Mr. Prine's question, a central issue is
whether a CCRC is able to pay the refundable portion of
residents' entrance fees. In the regular course of business,
the answer would depend on a CCRC's ability to sell vacated
units--something that would be very difficult to measure. If
one wanted to know whether a CCRC could refund the deposits in
the event of a liquidation, as was the case with Mr. Prine's
CCRC, one would need to determine if a CCRC's assets were equal
to or greater than its liabilities. Liquidation is really only
relevant after a CCRC's financial condition has significantly
deteriorated, so it is likely that at the point liabilities
would greatly outweigh assets. Whether the residents would
actually maintain or receive their refundable deposit would
generally depend on the ability find a buyer for the CCRC and
that buyer's willingness to assume the refund obligations.
Again, this would be very difficult to measure.
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