Older Americans:

Continuing Care Retirement Communities Can Provide Benefits, but Not Without Some Risk

GAO-10-904T: Published: Jul 21, 2010. Publicly Released: Jul 21, 2010.

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Alicia P. Cackley
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This testimoney discusses continuing care retirement communities (CCRC), the risks they and their residents face, and their regulation. A growing population of older Americans is seeking options for ensuring that their assets and income in retirement will cover the cost of their housing and health care needs. One option for meeting these long-term care needs is 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. These communities may appeal to older Americans because they offer an independent lifestyle for as long as possible but also provide the reassurance that, as residents age or become sick or frail, they will receive the care they need within the same community. But choosing to enter a CCRC can be a difficult decision and is not without risk. Moving to a CCRC generally involves a significant financial and emotional investment. Many older Americans sell their homes, which are often their primary assets, to pay the required fees, and, as a result, their ability to support themselves in the long run is inextricably tied to the long-term viability of their CCRC. Further, many CCRCs may be financially vulnerable during periods of economic decline--such as the recent downturn--that can result in tight real estate and credit markets. My testimony is based on our June 2010 report, which is being publicly released today and addresses four issues: (1) how CCRCs operate and what financial risks are associated with their operation and establishment, (2) how state laws address these risks and what is known about how adequately they protect CCRCs' financial condition, (3) risks that CCRC residents face, and (4) how state laws address these risks and what is known about their adequacy. To address these questions, we reviewed CCRC statutory provisions from eight states--California, Florida, Illinois, Ohio, New York, Pennsylvania, Texas, and Wisconsin--and interviewed regulators from those states.

The following summarizes our findings on each of the four issue areas: (1) 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. (2) With respect to financial oversight of CCRCs, states we reviewed varied in the extent to which they ensured CCRCs addressed their risks, and some focused more on long-term viability than others. Most of the states we reviewed required CCRC providers to maintain some level of financial reserves to address financial challenges. In addition, most of the states we reviewed required CCRCs to annually submit audited financial statements that reflected financial performance for the past year. However, only four of the states required information that could help them assess each CCRC's long-term viability, and three states had conducted financial examinations. Three of the states we reviewed required certain CCRCs to perform actuarial studies at regular intervals and one used financial information submitted over the years to assemble trend information including financial ratio trends. (3) 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. And 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 lost the refundable portion of their entrance fees in 2009 when the facility became insolvent after a change in municipal tax policy made the CCRC liable for unanticipated local taxes. Ultimately, it was sold to a new operator. Residents can also become dissatisfied if CCRC policies or operations fall short of residents' expectations or there is a change in arrangements they thought were contractually guaranteed, such as charging residents for services that were previously free. (4) Most of the states GAO reviewed take steps to protect the interests of CCRC residents, such as requiring the escrow of entrance fees and mandating certain disclosures. For example, a number require contracts to be written in clear and understandable language, though some industry participants questioned residents' ability to fully understand them. In addition, not all review the content of contracts. The report we are releasing today acknowledges that CCRCs can benefit older Americans by helping ensure access to housing and health care in a single community as they age. However, choosing to enter a CCRC can be a difficult decision, and is not without significant financial and other risks. Entering a CCRC often means committing a large portion of one's assets with the expectation of receiving lifelong housing and care.

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