Older Americans: Continuing Care Retirement Communities Can Provide Benefits, but Not Without Some Risk
Published: 2010-06-21T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: A growing number of older Americans are choosing continuing care retirement communities (CCRC) to help ensure that their finances in retirement will cover the cost of housing and care they may require. However, recent economic conditions have placed financial stress on some CCRCs. GAO was asked to (1) describe how CCRCs operate and the risks they face, (2) describe how state laws address these risks, (3) describe risks that CCRC residents face, and (4) describe how state laws address these risks. To review these areas, GAO analyzed state statutory provisions pertaining to CCRCs with respect to financial oversight and consumer protection, met with selected state regulators, and interviewed CCRC providers, resident's associations, and consumer groups. While GAO is not recommending specific action at this time, the potential risks to CCRC residents--as well as the potential for this industry to grow--highlight the importance of states being vigilant in their efforts to help ensure adequate consumer protections for residents. GAO provided a draft copy of this report to the Department of Health and Human Services and the National Association of Insurance Commissioners for review, but neither commented on the draft.
section_title: What GAO Found
paragraphs: 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. Developing CCRCs can be a lengthy, complex process that requires significant long-term financing and accurate revenue and cost projections. Once operational, risks to long-term viability include declining occupancy and unexpected cost increases. While few CCRCs have failed, challenging economic and real estate market conditions have negatively affected some CCRCs' occupancy and financial condition. Seven of the eight states GAO reviewed had CCRC-specific regulations, and these states varied in the extent to which they helped ensure that CCRCs addressed risks to their long-term viability. For example, while each licensed and required periodic financial information from CCRCs, only four either examined trended financial data or required periodic actuarial reviews. The lack of a long-term focus creates a potential mismatch with residents' concerns over their CCRCs' long-term viability. CCRC bondholders and rating agencies, which focus on long-term viability, often place requirements on CCRCs that go beyond those used by states in their licensing and oversight activities. Regulators and CCRC providers GAO spoke with generally believed that current regulations were adequate, but some consumer groups felt more comprehensive oversight was needed. 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. Residents can also become dissatisfied if CCRC policies or operations fall short of residents' expectations or there is a change in arrangements thought to be contractually guaranteed, such as charging residents for services that were previously free. 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 readable, but not all review the content of contracts even though some industry participants questioned residents' ability to fully understand them. Also, not all require disclosure of policies likely to have a significant impact on residents' satisfaction, such as policies for moving between levels of care. According to an industry study, 12 states do not have CCRC-specific regulations, meaning an entity in 1 state may be subject to such regulations while a similar entity in another state may not, and consumers in some states may not receive the same protections as those in others. In contrast, some CCRCs voluntarily exceed disclosures and protections required by state regulations.

section_title: Letter
paragraphs: 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 continuing care retirement community (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. But choosing to enter a CCRC can be a difficult  decision and is not without risks. Moving to a CCRC generally involves a  significant financial and emotional investment, often with hundreds of  thousands of dollars at stake. Many older Americans sell their homes,  which are often their primary asset, 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.
This report, which responds to your interest in the financial risks  associated with CCRCs and consumer protections for CCRC residents,  describes    how CCRCs operate and what financial risks are associated with their    how state laws address these risks and what is known about how  adequately they protect CCRCs’ financial condition;  risks that CCRC residents face; and   how state laws address these risks and what is known about their  adequacy.
To describe how CCRCs are established, operated, and financed and the  risks they face, we interviewed officials from eight CCRCs and obtained  relevant documentation to understand their specific experiences  developing and operating CCRC facilities. We selected these CCRCs based  on a number of criteria, including size, nonprofit/for-profit status, and  geographic location. In addition, we interviewed a variety of CCRC  industry association officials and experts, including two attorneys who  specialize in CCRCs and managers from national financial firms that are  involved in the financing of CCRCs and other facilities for older  Americans. To describe how states oversee CCRCs’ compliance with  financial viability and consumer protection requirements and what is  known about the effectiveness of such requirements, we reviewed  statutory provisions pertaining specifically to CCRCs with respect to  financial oversight and consumer protection from eight selected states— California, Florida, Illinois, Ohio, New York, Pennsylvania, Texas, and  Wisconsin—and interviewed regulators from those states. We selected  these states based on a number of criteria, including extent of regulatory  requirements, size of CCRC population, and geographic location.  Understanding the extent of oversight the entities themselves receive—or  the contracts residents sign—when they are not specifically regulated as  CCRCs was beyond the scope of this work, and no national source of such  information exists. We also interviewed national industry associations,  actuaries specializing in CCRCs, attorneys specializing in senior issues,  CCRC providers, national and state residents’ associations, and officials  involved with CCRC finance and debt ratings. Because we judgmentally  selected the states and CCRCs we reviewed, the information we obtained  cannot be generalized to additional states and CCRCs.
We conducted this performance audit from June 2009 to June 2010 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
paragraphs: CCRCs are one of a number of options older Americans may choose to  meet housing and other daily needs and especially to receive long-term  care, which Medicare and private health insurance typically do not cover  and which can be extremely costly. Older Americans may use a number of  options to pay for their short- and long-term care as they age, including  relying on savings or investments, purchasing long-term care insurance or  annuities, entering into a reverse mortgage, or relying on government- financed programs such as Medicare and Medicaid. For CCRCs  specifically, many use the proceeds from the sale of their homes and any  retirement assets to pay for the housing and care arrangements.
CCRCs are generally residential facilities established in a campus-like  setting that provide access for older Americans to three levels of housing  and care: independent homes or apartments where residents live much as  they did in their own homes; assisted living, which provides help with the  daily tasks of living; and skilled nursing care for those with greater  physical needs. Most residents must be able to live independently when  they enter into a contract with a CCRC, with the intent of moving through  the three levels of care as their needs change.
According to industry sources, the CCRC model has existed for over 100  years, starting with religious and fraternal organizations that provided care  for older Americans who turned over their homes and assets to those  organizations. As of July 2009, some 1,861 individual CCRCs existed in the  United States, most of them nonprofit organizations. Over the last 2  decades, the CCRC industry has grown and diversified, with religious,  fraternal, nonprofit, and for-profit entities operating CCRCs of various  sizes that have different structures, residential and care choices, and  payment options.
CCRCs are primarily regulated by states rather than by the federal  government. State CCRC regulation developed over time and in some  instances grew out of the need to address financial and consumer  protection issues, including insolvency, which arose in the CCRC industry  in the 1970s and 1980s. States generally license CCRC providers, monitor  and oversee their financial condition, and have regulatory provisions  designed to inform and protect consumers. The U.S. Department of Health  and Human Services (HHS) provides oversight of nursing facilities that are  commonly part of CCRCs, but this oversight focuses on the quality of care  and safety of residents in those facilities that receive payments under the  Medicare and Medicaid programs.
While states primarily regulate CCRCs, Congress has considered proposals  to introduce greater federal oversight. For example, in 1977  Representatives William Cohen and Gladys Spellman introduced a bill that  would provide federal oversight of certain continuing care institutions that  received Medicare or Medicaid payments or were constructed with federal  assistance. The bill proposed, among other things, requiring that CCRC  contracts clearly explain all charges and that CCRCs provide full financial  disclosures, maintain sufficient financial reserves, and undergo an annual  audit. While the bill did not pass, one industry source noted that several  states at the time were developing or refining their own CCRC regulation.
section_title: CCRCs Can Help Ensure That Older Americans Have Long-Term Care, but Face Financial and Operational Risks
subsections: section_title: CCRCs Can Provide Older Americans with Ongoing Housing and Health Care Services
paragraphs: CCRCs offer older Americans a range of housing and health care options  that include independent living, assisted living, and skilled nursing units all  within the same community. CCRCs generally offer independent living  units such as apartments, cottages, town homes, or small single-family  homes for incoming residents who are relatively healthy and self- sufficient. They also provide residents opportunities to arrange for certain  convenience services, including meals, housekeeping, and laundry and  provide amenities such as fitness centers, libraries, health clinics, and  emergency services. While residents may move back and forth among the  levels of care to meet changing health needs, residents generally move to a  CCRC’s assisted living facility when they need assistance with specific  activities of daily living, including eating, dressing, and bathing. CCRCs’  assisted living units are usually located separately from the independent  living units and skilled nursing facilities. If a resident needs 24-hour  monitoring, assistance, and care, CCRCs can offer skilled nursing care that  includes supervision by nurses or other medical staff.
CCRCs typically offer one of three general types of contracts that involve  different combinations of entrance and monthly fee payments. Some  CCRCs may offer residents a choice of the following contract types, while  others may choose to offer only one.
Type A, extensive or Life Care contracts, include housing, residential  services, and amenities—including unlimited use of health care services— at little or no increase in monthly fees as a resident moves from  independent living to assisted living, and, if needed, to nursing care. Type  A contracts generally feature substantial entrance fees but may be  attractive because monthly payments do not increase substantially as  residents move through the different levels of care. As a result, CCRCs  absorb the risk of any increases in the cost of providing health and long- term care to residents with these contracts.
Type B, or modified contracts, often have lower monthly fees than Type A  contracts, and include the same housing and residential amenities as Type  A contracts. However, only some health care services are included in the  initial monthly fee. When a resident’s needs exceed those services, the fees  increase to market rates. For example, a resident may receive 30, 60, or 90  days of assisted living or nursing care without an increased charge.  Thereafter, residents would pay the market daily rate or a discounted daily  rate—as determined by the CCRC—for all assisted living or nursing care  required and face the risk of having to pay high costs for needed care.
Type C, or fee-for-service contracts, include the same housing, residential  services, and amenities as Type A and B arrangements but require  residents to pay market rates for all health-related services on an as- needed basis. Type C contracts may involve lower entrance and monthly  fees while a resident resides in independent living, but the risk of higher  long-term care expenses rests with the resident.
Some CCRCs offer a fourth type of contract, Type D or rental agreements,  which generally require no entrance fee but guarantee access to CCRC  services and health care. Type D contracts are essentially pay-as-you-go:  CCRCs charge monthly fees of residents based on the size of the living unit  and the services and care provided.
According to CCRC providers, prospective residents are generally  screened to determine their general health status in order to determine the  best living situation. Prospective residents must also submit detailed  financial information that includes income and tax records to ensure that  they can pay CCRC fees over time. Industry participants noted that entry  fees—typically made as a large lump-sum payment—can represent a  substantial portion, if not all, of potential residents’ assets. Residents  must also be able to pay monthly fees, which typically cover housing and  convenience services associated with housing and are based on the type of  contract, size of the living unit, and level of care provided. As we have  seen, these fees may also include all or some health care services. CCRCs  use a variety of techniques to determine fees, including actuarial studies  and financial analyses. For example, one CCRC we reviewed uses  actuarial studies with mortality and morbidity tables to assess the likely  inflow, outflow, and turnover of the CCRC occupants. Other CCRCs use  some combination of resident statistics, Medicare and Medicaid  reimbursement rates, marketing needs, and operating costs. Table 1  provides information on the range of entrance and monthly fee costs for  the eight CCRCs we reviewed and illustrates how—depending on contract  type—costs may change for consumers as they move among the  independent, assisted, and skilled nursing living units.
section_title: Establishing a CCRC Is a Complex Process That Involves Several Risks
paragraphs: According to industry participants, building and operating a CCRC is a  complex process that typically begins with an initial planning phase.  During this phase, the company assembles a development team, makes  financial projections, assesses market demand, and determines the kinds  of housing and services to be offered. Initial and longer-term planning  also entails assessing funding sources and seeking funding commitments  from investors and lenders, particularly construction loans and state tax- exempt bond proceeds, where applicable. During the developmental  phase, developers will presell units to begin building capital to fund  construction of CCRC housing and other facilities and begin constructio structio n.  n.  Once the initial phases of construction are complete, CCRC providers have Once the initial phases of construction are complete, CCRC providers have move-in periods for new residents, continue marketing efforts to build  move-in periods for new residents, continue marketing efforts to build  toward full occupancy, complete construction, and begin making long toward full occupancy, complete construction, and begin making long - - term debt service payments (fig. 1).  term debt service payments (fig. 1).
CCRCs, like other businesses, face a number of risks during the start-up  phase. First, actual construction costs and consumer demand may not  match developers’ forecasts. To attract financing from lenders and ensure  adequate underwriting for CCRC projects, developers need to generate  sufficient pre-sales and deposits prior to construction to show a tangible  commitment from prospective residents. In addition, facilities in the start- up stage need to reach full occupancy as quickly as possible in order to  generate income that will not only cover operational costs once built but  also help pay down construction loans. As a result, accurate projections of  future revenues and costs are important as a CCRC becomes operational.
Second, entrance fees and monthly fees may ultimately prove to be  inadequate to cover the CCRC’s costs. CCRCs generally have to keep  prices low enough to attract residents and stay competitive but high  enough to meet short- and long-term costs. Determining appropriate fees  can, in itself, be a complex process because it involves projecting a  number of variables into the future, including occupancy levels, mortality  rates, medical and labor costs, and capital improvement costs. For this  reason, many CCRCs use actuarial consultants to help in these  determinations. CCRCs that set fees too low may have to significantly  raise entrance and other fees to meet the costs of care and future capital  improvements. Fee increases can take the form of larger-than-projected  monthly fees for assisted living or nursing care and fees on other  miscellaneous services, both of which can affect residents’ long-term  ability to pay and the competitive position of the CCRC in the  marketplace.
CCRCs may face other financial risks, including unforeseen events that  lead to higher-than-expected costs. For example, many nonprofit CCRCs  rely on property tax exemptions when estimating CCRC costs and  developing CCRC projects. According to industry associations and a state  regulator, however, difficult economic times are causing some  municipalities to look for new sources of revenue, and some may be  reevaluating property tax exemptions previously granted to CCRCs. Loss  of these exemptions can be very costly; for example, industry participants  attributed one recent CCRC failure in Pennsylvania in part to the loss of its  property tax exemption.
section_title: Established CCRCs Face Risks from Low Occupancy Levels and Challenging Market Conditions
paragraphs: Erickon Retirement Commnitieas one of  the lrget CCRC developer. Typiclly it built  lrge non-profit CCRC fcilitie, ech with  1,500 to 2,000 nit, for middle-income  reident. Erickon eablihed  contrction  firm to build CCRC nd gement  compny to help operte itcilitie. Another  prt of Erickon’ CCRC business model  generlly involved leasing the lnd nd  fcilitie it developed to epte indepen- dent, non-profit CCRC, which it creted.  Thee non-profit wold then often eventually  end p prchasing the CCRC fcilitie. A of  Feuary 2010, Erickon hd developed 1  CCRC tht provided home nd ervice to  pproximtely 22,000 reident. resident vacates a unit. These refunds represent substantial financial  obligations that CCRCs must meet and can significantly affect operations  because fees are used to maintain a certain level of liquidity, or cash on  hand. CCRC officials said that refunds were usually contingent on having a  new resident move into the vacated unit and that a recent reduction in  occupancy levels has meant former residents and their families have had  to wait longer for refunds. For example, some CCRC officials noted that  due to real estate market and other factors, refunds are taking several  months longer than during stronger market conditions.
Erickon, however, filed for bankrptcy in  2009. Like mny CCRC, Erickon used  contrction lo nd other finncing  intrment to meet the coniderable cot of  building CCRC fcilitie nd redy them for  occncy y older Americ. According to  Erickon offici, er of condition  contributed to their finncil chllenge nd  bankrptcy filing. Declining economic nd rel  ete condition lowed the demnd for nd  prchase of CCRC nit nd chllenged  Erickon’ ability to re revene needed to  develop CCRC. Simltneously, tightening  credit mrket redced or eliminted  Erickon’ ability to ccess new rce of  cpitl or to retrctre or refinnce exiting  lorrngement. Thee condition  prevented Erickon from meeting deervice  nd other CCRC expen nd led to it  bankrptcy filing. Ultimtely, Erickon  emerged from bankrptcy with  new owner,  Redwood LLC, in My 2010. Depite the  ownerhip chnge, Erickon offici do not  expect ny CCRC reident’ contrct or  living condition to e impcted, as thoe  contrct were with the CCRC themelve,  which were not prt of the bankrptcy filing.
CCRCs also face risks from external economic factors that are out of their  control and could adversely affect occupancy levels and financial  condition. First, slow real estate markets, such as those of the last several  years, can make it very difficult for older Americans to sell their homes to  pay CCRC entrance fees. As a result, according to CCRC providers,  occupancy levels at many CCRCs have fallen over the past several years.  In addition, because older Americans may be staying in their homes longer  and thus moving into CCRCs at a higher age, residents may spend less time  in independent living units than they had in the past. This can negatively  affect CCRCs’ long-term financial condition because residents in  independent living may help subsidize those living in assisted living or  nursing care. Second, declining equity and credit markets, which have also  been a feature of the recent financial crisis, can also affect occupancy and  financial condition. During the development phase, CCRCs often depend  on access to credit in order to complete construction, and reduced access  to funds can be problematic. For example, CCRC and state regulatory  officials suggested that tightening credit and real estate markets,  combined with Erickson Retirement Communities’ reliance on borrowed  funds, were the primary financial challenges that resulted in Erickson’s  2009 filing for bankruptcy protection (see sidebar on Erickson Retirement  Communities). In addition, occupancy can depend on CCRCs’ ability to  remain attractive to new residents by maintaining and upgrading their  facilities. While the ability to maintain and upgrade facilities depends in  part on long-range planning, it can also depend on access to credit. CCRC  officials said that over the last several years the availability of both state  financing and commercial bank financing had diminished due to tightened  credit markets.
Although few CCRCs have closed or declared bankruptcy over the last 20  years, recent economic conditions have negatively affected the financial  condition of many facilities and highlighted some of the risks that they  face. One rating firm, which produces an annual industry outlook for  CCRCs, said the outlook for CCRCs in 2009 and into 2010 is negative  because of their declining liquidity and other financial ratios, tightening  financial markets, and difficult real estate markets. The firm also noted,  however, that the negative effect of the slow real estate market and falling  occupancy levels could be softened somewhat by some favorable factors,  including strong demand for entrance into CCRCs, effective management  practices, and favorable labor costs.
section_title: States We Reviewed Varied in the Extent to Which They Ensured CCRCs Address Risks to Their Financial Viability
subsections: section_title: States We Reviewed Generally Used Similar Licensing Requirements, but Some Required More Information Than Others
paragraphs: To help ensure that CCRCs address the risks they face during their start-up  period, seven of the eight states we reviewed used a similar application  and licensing process. For example, these seven states required CCRC  providers to submit detailed financial information on CCRC projects for  review by regulators. Most states we reviewed also required financial  feasibility studies as part of the licensing process. These studies included  projected income and expense information, alternative pricing structures,  and, for CCRCs planning to charge entrance fees, estimates of the CCRCs’  ability to resell its units that are based on actuarial assumptions.
Among the states we reviewed that license CCRCs, some required more  information from CCRCs than others. For example, California, Florida,  and New York required CCRCs to conduct and provide a market study as  part of its application for licensing, while others—Illinois, Pennsylvania,  and Wisconsin—did not. Such studies can include descriptions of the  market area and targeted consumers as well as projections of how long it  might take the CCRC to reach a stable occupancy level. Pennsylvania  required CCRCs to provide a market study only if one was being  conducted to help obtain project financing. One state we reviewed—New  York—required CCRC providers that offer Type A or B contracts to  conduct an actuarial study during the licensing process to help project  long-term expenses and revenues and help regulators assess financial  viability over time.
section_title: States We Reviewed Varied in Their Efforts to Ensure That CCRCs Addressed Risks to Their Operations, with Some Focusing More on Long-Term Viability Than Others
paragraphs: To help ensure that CCRCs addressed risks to their operations, states we  reviewed generally required that CCRCs periodically submit financial  information, but the type of information required and what they did with it  varied. Of the states we reviewed that license and oversee CCRCs, most  required CCRCs to submit audited financial statements each year to  demonstrate their basic financial health, including balance sheet, income,  and cash flow information. These statements generally reflect financial  performance for the past year and provide a financial snapshot of a point  in time, and are not assessments of longer-term financial trends or  financial stability.
To help ensure that CCRCs addressed risks to their long-term viability, a  few states we reviewed required periodic actuarial studies, but the others  did not. In particular, California, New York, and Texas required periodic  actuarial studies, but only for CCRCs that offered contracts which incur  long-term liabilities by guaranteeing health care services over the long  term. One state we reviewed—Florida—did not require periodic actuarial  studies but did analyze financial trend and projection data to help track  the direction of the financial condition of CCRCs over time. Florida  regulators said that they maintained a spreadsheet containing financial  information on CCRCs dating back over a decade and used the data to  develop financial trend information on each CCRC, including trends of  ratios related to CCRCs’ revenues and expenses. Florida officials said that  since CCRCs generally do not go from stable 1 year to financially  distressed the next, their trend data enabled them to identify early on  CCRCs that might be in trouble.
According to industry participants, actuarial studies can help in  quantifying long-term liabilities and planning for ways to meet them. For  example, some said that the studies can provide CCRC management with  the information needed to make appropriate plans to meet future liabilities  and contractual obligations and to set appropriate prices for short- and  long-term housing and care options. In addition, some noted that actuarial  studies can help regulators identify potential threats to CCRCs’ long-term  viability. For example, New York officials noted that requiring an actuarial  study from CCRCs every 3 years provided 10-year cash flow projections  and CCRC information on actuarial assets and liabilities that were critical  to understanding long-term viability. According to industry participants,  only an actuarial study incorporates mortality, morbidity, and other  information unique to a CCRC to help it anticipate and make plans to  address risks to its long-term viability, such as lower-than-expected  occupancy levels and higher-than-expected costs. Without actuarial  studies, they said, a CCRC may appear financially stable in the short term  yet still face threats to its long-term viability.
To help ensure that CCRCs have funds available to pay for expenses such  as debt service and operations, most of the states we reviewed also  required CCRC providers to maintain some minimum level of financial  reserves. According to state regulators, the primary purpose of reserve  requirements is to ensure enough time for a financially distressed CCRC to  reorganize or restructure financing while keeping the CCRC operational  for its residents. For example, these reserves could be used to help make  debt service principal and interest payments, pay for operating expenses,  or assist with difficult economic times or other types of contingencies.  Reserve requirements in the states we reviewed were typically expressed  in terms of total debt service payments for a time period ranging from 6  months in Illinois to 1 year in states such as California, Florida, New York,  Pennsylvania, and Texas. Some states also required a reserve for operating  costs that ranged from 2-½ months to 1 year. New York, by comparison,  required debt service and operating cost reserves along with an additional  reserve for CCRC facility repairs and replacement. One state— Wisconsin—did not have reserve requirements. Wisconsin state officials  said that their statutory authority generally focused on the content of  CCRC resident contracts. While these reserve requirements can provide a  CCRC with enough time to work to improve financial conditions, several  industry participants said that reserves are not intended to ensure viability  over the long term. In addition, one industry official said that CCRCs  experiencing financial difficulties are often purchased by other CCRCs.
Finally, though most states required CCRCs to submit financial  information, not all states we reviewed did financial examinations.  According to regulatory officials, California, Florida, Illinois, New York,  Pennsylvania, Texas, and Wisconsin all had the regulatory authority to  financially examine CCRCs to assess financial condition or viability, but  only Florida, New York, and Pennsylvania had conducted examinations.  Some states also said that they maintained ongoing communication with  CCRC management, particularly when regulators had any questions or  needed clarification on financial documents under review. These state  regulators said that the informal communication channels helped them to  understand CCRC operations better than they would if they relied on  periodically reported information alone.
section_title: Industry Information Suggests Most States Regulate CCRCs and Do So with Various State Departments, but Some Have No CCRC-Specific Regulations
paragraphs: While we did not survey all 50 states as part of our review, according to  one industry study, 38 states have some level of regulation specifically  addressing CCRCs, while 12 states plus the District of Columbia do not.  Among the 38 states that have CCRC-specific regulation, CCRCs are  overseen by a variety of state departments. Some states oversee CCRCs  through departments that concentrate on insurance, financial services, or  banking. Other states regulate CCRCs through departments of social  services, aging or elder services, or community affairs. Figure 2 provides  information as of 2009 on the states that specifically regulate CCRCs, the  type of department with oversight responsibility, and the number of  CCRCs in each state. In addition, all nursing homes—including those that  are part of a CCRC—are subject to federal oversight if they participate in  Medicare or Medicaid programs. Because some states do not appear to  have CCRC-specific regulations, an entity in one state might be licensed  and regulated as a CCRC while a similar entity in another state may not.  While we did not review laws and regulations in the states that did not  appear to have specific CCRC regulations, to the extent that states do not  license CCRCs and oversee their contracts, residents in those states may  not receive the same protections as CCRC residents in states with such  regulations. One of the eight states we reviewed—Ohio—did not  specifically license or regulate CCRCs. However, an industry official from  Ohio said the separate components of CCRCs operating within that state  are generally regulated as if they were stand-alone entities. For example,  Ohio’s Department of Health regulates assisted living and nursing home  facilities. In prior work that also looked at the regulation of financial  contracts across states, we have pointed out the importance of ensuring  that consumers entering similar contracts receive similar regulatory  protections across states. That work, which was designed to provide  insights for the development of a federal financial services regulatory  framework, also highlighted the importance of, among other things,  providing consistent consumer protections in similar situations and  ensuring consumers receive useful information and disclosures. In a  recent report looking at regulation of the insurance industry, a function  carried out by the states, we pointed out the importance of state regulation  supporting the goals of this framework.
section_title: Debt-Related Requirements and Accreditation Standards Generally Exceed Those of State Regulators and Often Focus on Long-Term Viability
paragraphs: When CCRCs obtain financing through debt instruments such as loans or  bonds, creditors and bondholders often impose financial requirements and  standards that are designed to ensure that CCRCs can repay the borrowed  funds. For example, state regulators and industry participants said states  and lenders require CCRCs to maintain levels of reserves that are intended  to give the facilities enough time to meet financial challenges such as  refinancing or restructuring debt. According to regulators and industry  officials, lender and bondholder reserve requirements generally exceed  those of state regulators. As noted earlier, most states we reviewed have  reserve requirements that focus on a short period such as 6 months or a  year. But a CCRC provider noted that lender and bondholder requirements  are generally more stringent and may require reserve levels twice as high.  In addition, bondholders may conduct analyses that appear to go beyond  those used by states. For example, according to one company that  facilitates financing for CCRCs, bondholders might require quarterly  financial statements as well as annual statements.
In addition, some nonprofit CCRCs that obtain state-based financing  choose to be assessed by rating firms to help determine their ability to  repay long-term debt. We reviewed one rating firm’s guidelines, which  contain many quantitative and qualitative variables to assess CCRCs’  credit quality and financial solvency. The guidelines include financial ratio  analysis, trend analysis of financial ratios, review of cash flow statements,  and the use of recent actuarial studies for CCRCs offering Type A  contracts as well as certain qualitative factors—such as strength of  management and governance—to make assessments about long-term  viability. Officials from the rating firm noted that their metrics were more  focused on CCRCs’ ability to pay on their bond obligations over the long  term.
Some CCRCs may also choose to become accredited by an independent  organization. As of April 2010, 300 CCRCs had become accredited by the  Continuing Care Accreditation Commission (CCAC), according to a  commission official. Accreditation involves an initial review that assesses  CCRCs on an extensive set of standards. For example, the financial  aspects of the accreditation process include analyses of many financial  ratios, including profitability, liquidity, and capital structure, to assess a  CCRC’s financial solvency, identify trends, and compare them to industry  benchmarks. While accreditation standards do not require periodic  actuarial studies, according to CCAC officials CCRCs are expected to use  actuarial and other information to appropriately set their fees. Two CCRC  providers and accreditation officials suggested CCAC’s standards  represent best practices and guidelines for CCRCs and they help to assess  short- and long-term financial stability.
section_title: Regulators and Industry Participants Held Different Views on the Effectiveness of State Financial Oversight of CCRCs
paragraphs: State regulators from the eight states we reviewed generally reported that  their regulations and regulatory efforts were adequate to properly oversee  the financial condition of CCRCs. Some suggested that the small number  of CCRCs that were financially distressed, insolvent, or had filed for  bankruptcy pointed to the adequacy of state regulatory oversight. In  addition, officials from one state noted that they periodically review  audited financial statements and other required information, and have the  authority to do on-site inspections of CCRCs’ books and records.  However, they noted that audited financial statements generally do not  contain information that would cause further review through inspection.  One state agency had broader statutory authority but an official there said  that financially regulating CCRCs was not their central mission. Another  state official commented that they lacked the staffing resources to do  more than review audited financial statements.
Officials from one residents’ association we spoke to expressed concerns  about the overall financial condition of CCRCs and how it affects their  housing and care, while another believed regulatory requirements were  generally adequate. Residents’ association officials who expressed  concerns said regulators needed to provide more overall financial  oversight to compensate for the short-term focus that most CCRCs have  on their financial solvency. They said that most CCRCs tended to  emphasize the availability of liquid assets to cover operating costs such as  debt servicing as the most significant indicator of financial health. The  officials noted that this approach emphasized short-term liquidity and  current asset and liability information and did not sufficiently consider  long-term liquidity, liabilities, capital planning, and budgeting. Another  state residents’ association official provided a different view and said that  its state statute established strict financial requirements that helped  discourage speculative CCRC operators from entering the market and  encouraged long-term stability in the state’s CCRC market.
CCRC providers did not convey strong positive or negative views about  the strength or effectiveness of CCRC regulation but did provide various  insights. One CCRC provider said that the extent and effectiveness of  regulators’ financial oversight of CCRCs varied from state to state but  noted that for oversight to be effective, states would need specific  expertise. The provider also felt that state agencies that had devoted few  resources to CCRC oversight might lack the requisite expertise. Another  CCRC provider said its state regulator required each provider to annually  submit a report containing a number of financial indicators and expressed  hope that the regulator would use the data to create a database to monitor  financial trends. The provider said that the statutes were adequate, noting  that few CCRCs had failed in their state. By contrast, actuaries GAO spoke  with said that, overall, only a few states nationwide were appropriately  using actuarial studies to assess CCRC providers and that many states  were using very little actuarial information for financial oversight.  Actuaries said this situation reflected the wide variety of state laws and  regulations on CCRCs and noted that states that did not require actuarial  studies could have a difficult time assessing the adequacy of CCRCs’ short-  and long-term pricing structures and long-term financial position.
section_title: CCRC Residents Face Many Major Financial and Other Risks
subsections: section_title: CCRC Residents Face a Number of Financial Risks
paragraphs: Although CCRCs offer older Americans the benefit of long-term residence  and care in a single community, residents face a number of financial risks  in the course of their relationship with their CCRC. For example, residents  could lose the refundable portion of their entrance fees—which may  amount to hundreds of thousand of dollars or more—if a CCRC  encountered financial difficulties. According to state officials in two states  and a CCRC expert, residents are at a disadvantage because any claim they  have on a CCRC that is forced into bankruptcy is subordinate to the claims  of secured creditors, such as tax-exempt bondholders and mortgage  lenders. As a result, residents are grouped with all other unsecured  creditors, which generally include everyone who does business with the  CCRC, for recouping any financial losses in the case of CCRC financial  distress.
We identified no national data that would reflect the incidence of such  losses, and several state officials believed that they are rare. For example,  a California official told us that there had been at least two situations in  the 1990s in which California residents had nearly lost their entrance fees  but that these situations had been resolved in the residents’ favor.  However, Pennsylvania officials told us about a financially insolvent CCRC  in Pennsylvania whose residents lost the refundable portion of their  entrance fees in 2009 when the facility was sold to a new operator.  According to the officials, the CCRC became financially distressed and  filed for bankruptcy after it lost its tax-exempt status and became liable  for substantial state and local taxes. As part of the negotiations to fulfill  residents’ contracts and maintain services under the new owner, residents  relinquished the refundable portion of their entrance fees. The state  officials noted that this concession had limited residents’ ability to move  to another CCRC, since they would no longer receive a portion of their  entrance fee to pay the entrance fee at the new facility. In addition,  residents’ heirs were deprived of the refundable portion of the entrance  fee.
Residents can also face greater-than-expected increases in monthly and  other fees that can erode their existing assets or make the CCRC  unaffordable to them. Officials of CCRCs, an expert, and resident  advocates told us that CCRC residents were at risk of having to pay  monthly fees that rise beyond their ability to pay. According to some state  and CCRC officials we contacted, CCRCs in financial distress may need to  increase monthly fees beyond the typical yearly increase outlined in the  contract. Such increases can occur for a number of reasons—for example,  to continue to operate when occupancy rates drop, to make necessary or  deferred physical improvements, cover unplanned increases in operational  expenses such as rising labor costs, or to keep the facility competitive in  order to attract new residents.
Residents may be living on a fixed income and may not be able to afford  these increases, especially over an extended period. CCRC providers in  Florida and Wisconsin said that they had had residents who exhausted  their assets earlier than planned because of monthly fee increases.  According to CCRC operators, residents are not generally at risk of being  required to leave a CCRC when they exhaust their assets but instead use  the refundable portion of their entrance fee, if there is one, to cover  monthly costs. When these funds are gone, the CCRC uses charitable  funds, voluntarily contributed by other CCRC residents, to support the  residents.
CCRC residents also face the risk of losing their residence and familiar  surroundings in the event of a CCRC closure. According to CCRC and  elder care experts, closures occur for a number of reasons, including  bankruptcy or an operator’s decision to consolidate multiple CCRCs and  close less profitable locations. Although state officials and other CCRC  experts indicated that such events are rare, they have happened. For  example, a residents’ advocate and state regulators told us that in 2007, a  CCRC in California that had lost $11 million over 10 years closed due to  consistently low occupancy rates. Several residents were dissatisfied with  the CCRC’s handling of their contracts and resisted the proposed transfer  to an alternate facility, and filed a lawsuit against the facility. Ultimately,  they were removed from their residence when the CCRC closed.  According to CCRC and elder care experts, residents who must move  when their CCRC closes face the risk of trauma during and after the  transfer to a new CCRC facility. One resident advocacy group told us that  a forced move can be very disruptive to members of a CCRC population, in  some cases with consequences for their physical and emotional well- being.
section_title: Residents also Face Other Risks Related to CCRC Operations
paragraphs: Residents may not be satisfied initially—or over the long term—with the  CCRC into which they have moved and may have limited financial and  other recourse. For example, dissatisfied residents may have limited  ability to move out. According to an expert on CCRCs, some residents may  experience “buyer’s remorse” after entering a CCRC if the community,  services, or other aspects of the CCRC do not match their initial  perceptions. These advocates told us that residents were often focused on  certain elements of care and housing, such as amenities and culture, when  choosing a CCRC and might not, for example, pay enough attention to  financial information that could affect them. Residents who wish to move,  for instance, may find that the contractually designated rescission period  has ended and that moving will result in significant fines or reductions to  the refundable portion of their entrance fee. But these financial losses can  limit their choice of other long-term care options that require a similar  investment. Residents also face the risk of being transferred involuntarily  from one level of care to another or of not being able to obtain on-site  assisted living or nursing care when needed. Policies regarding admission  and discharge from different levels of care can be subject to state law, but  this decision can be a point of contention as well. One 2009 study states  that relocation within a CCRC and between levels of health care is one of  the most stressful events older adults face because it threatens their  autonomy—that is, their ability to make decisions for themselves.  Individuals representing various parts of the CCRC community told us that  the transfer from one level of care to another is often regulated by state  law and that, while residents may disagree with the decision to transfer,  the CCRC, in some cases must move them over their objections. CCRC  residents generally enjoy continuous residency in the same community  regardless of the level of care. However, state regulators and resident  advocates told us that while many CCRCs without space in assisted living  or skilled nursing guarantee space to residents in a nearby facility for no  additional cost, residents can face additional stress due to the transfer  outside of their contracted community.
Residents’ dissatisfaction with CCRC management, policies, or services  can grow out of a lack of full understanding of contracts and related  disclosure documents or may result from ambiguities in the contract,  according to representatives of CCRC management and resident  organizations. Although state officials told us that many CCRC residents  are highly affluent and educated consumers, others noted that some  consumers do not understand the contractual provisions or disclosures.  Further, experts and resident advocacy groups said that the contracts are  very lengthy and detailed, containing terms that are difficult to understand  and potential ambiguities, and they noted that some residents might not  fully understand their rights and responsibilities or the obligations of the  CCRC. Finally, a statewide resident’s association in Florida noted that  some residents have become unhappy with service or policy changes  made through the residents’ handbook that they believed were  contractually guaranteed. CCRC contracts and the residents’ handbook are  different documents and some residents do not fully appreciate the  difference until an issue arises. Further, some CCRCs may impose  additional fees during times of financial hardship. According to Florida  CCRC operators, for example, CCRCs may impose fees on services that  were previously free, such as transportation to activities in the local  community.
section_title: State Laws Designed to Protect Residents Vary, and Some States Do Not Mandate Key Disclosures or Contract Provisions
subsections: section_title: Regulating Contract Content and Clarity
paragraphs: According to a CCRC industry study, of the 38 states that have some level  of regulation specifically addressing CCRCs, 34 states collect and review  the standard form contract that the CCRC enters into with residents.  Based on our analysis of CCRC industry data, about four out of every five  CCRCs are located in states that collect and review these contracts. The  industry summary also indicates that, of the 38 states with CCRC-specific  licensure laws, 30 require that CCRC contracts include a provision that  confers on residents a “cooling off” period in which the resident has the  right to cancel a contract and receive a full refund of the entrance fees,  less certain costs. The prescribed periods during which such cancellation  rights may be exercised range from prior to occupancy to as long as 1 year  after occupancy, and they allow residents to cancel the contract without  penalty or forfeiture of previously paid funds.
Of the eight states we reviewed, seven require that CCRC license  applicants, as part of the licensure process, submit a copy of the contract  form to be entered into with residents. In some of those states the contract  form must be approved by the state. A few of the states we reviewed  required that the contract be legible or written in clear and understandable  language. Regulators from New York, Pennsylvania, and Wisconsin said  that they review the contract for understandable language. Seven of the  state laws we reviewed also require CCRC contracts to provide for a  minimum time period in which a resident has the right to cancel the CCRC  contract without forfeiting their paid entrance fees. Such cancellation  periods vary across these seven states from 7 days after signing the  contract to 90 days after occupancy.
States we reviewed varied in how they collected and reviewed the  contract. For example, officials in Wisconsin told us that they played an  active role in ensuring that the contract contained the items required by  law and met readability criteria. In some states, such as Pennsylvania, staff  uses checklists or other tools to ensure that the content meets state  requirements and readability standards. Officials in Wisconsin told us that  contract reviews there were less structured and that staff generally used  their own judgment to decide whether contracts were deceptive,  incomplete, or obscure. States can also levy significant penalties if they  find that a CCRC uses a contract that has not been reviewed and approved  by the state. For example, California officials told us that if they found that  a resident had an unapproved contract, the provider would be required to  return all entrance and monthly fees (in total, including the costs incurred  for services) to the resident. The state can also revoke the CCRC’s  certificate of authority, rendering the facility unable to accept entrance  fees or offer new contracts.
section_title: Protecting CCRC Residents’ Fees and Deposits
paragraphs: Some states directly protect the financial interests of residents by (1)  establishing requirements for fees and deposits to be escrowed, (2)  addressing criteria for monthly fee increases, or (3) placing liens on CCRC  assets on behalf of residents or confer a preferred status on resident  claims on such assets in the event of liquidation. As table 2 shows,  escrow requirements varied among the eight states we reviewed but in  general mandated setting aside some portion of the down payment or  entrance fee for all units in a CCRC. The portion of down payments or  entrance fees required to be set aside in an escrow account varied among  the eight states we reviewed. Escrow requirements are aimed at ensuring  the stability of a CCRC during start-up and construction and its ability to  provide the services set out in the contract with residents. Six of the states  we reviewed required that CCRCs escrow some portion of consumer  deposits or entrance fees it received and such funds are not released to the  CCRC until ascertainment of certain benchmarks, such as a certain  percentage of construction completed or long-term financing committed.
Some of the states we reviewed addressed increases in CCRCs’ monthly  fees or required CCRCs to justify increases to residents. As table 2 shows,  Florida requires CCRC providers that raise monthly maintenance fees  above the consumer price index to provide an explanation for the increase  to CCRC residents. In California, regulators address fee increases by  requiring CCRCs to include in every continuing care contract a provision  that states that changes in monthly care fees shall be based on projected  costs, prior year per capita costs, and economic indicators. New York law  provides that monthly fee increases beyond the previously approved rating  methodology must again be approved by the Superintendent of Insurance.
According to the industry summary, 12 out of 38 states that license CCRCs  have the authority to place a lien or another form of protection, such as a  surety bond or preferred claim, to ensure that residents have some  financial recourse if a CCRC enters bankruptcy. Of the eight states that  GAO reviewed in more detail, the regulators of five indicated that they  place a lien for the benefit of the residents, or that the residents have a  preferred claim on the assets of the CCRC facility in the event of  liquidation. In Texas, for example, a lien attaches to facilities and assets of  the CCRC provider when a resident moves into a facility. In Pennsylvania,  the regulating department has the option of filing a lien on property or  assets of a provider or facility to secure the obligations under CCRC  contracts. According to one expert and some regulators, preferred claims  and liens offer limited protection; however, as such claims are generally  subordinate to those of all other secured creditors, such as bondholders  and commercial lenders.
Further, some of the states we reviewed required CCRCs to communicate  with regulators and residents before a potential closure in order to reduce  the financial and other impacts on residents. In California, CCRCs that are  slated to close must submit plans to regulators that generally address  refunds and include a time frame for transferring displaced residents to  other facilities.  In Florida, if a CCRC ceases to operate due to liquidation  or pending liquidation, regulators use the unencumbered assets of the  CCRC to provide relocation and other assistance to displaced residents.
section_title: Disclosing CCRCs’ Financial Condition to Consumers
paragraphs: States may also require that CCRCs disclose information pertaining to the  financial condition of the CCRC. According to the regulatory history and  literature we reviewed, requiring the disclosure of information about the  past, present, and projected future financial conditions of CCRCs allows  current and prospective residents to make informed decisions before  entering a facility. Among states we reviewed that had such a requirement,  we found that the format, extent, detail, and timing of these disclosures  varied considerably. For example, Illinois state law simply requires that a  CCRC provide residents with a statement that reflects the provider’s  financial condition and that, at a minimum, includes disclosure of short- term assets and liabilities. On the other hand, the Florida statute requires  CCRCs to file an annual report in such form as the regulating entity  prescribes, and such statement must include, at a minimum, an audited  balance sheet, a statement of income and expenses, and a statement of  changes in cash flow, as well as a list of reserve assets.
The extent of additional disclosure requirements also varied across the  states we reviewed. As table 3 indicates, disclosures can include  information with significant financial implications to residents, such as fee  schedules, a history of fee increases, refund policies, and the status of  residents’ claim on the assets and facility of a CCRC in case of bankruptcy  or insolvency. For example, California requires CCRCs to provide  residents with a history of fee increases over the past 5 years. California,  Florida, and New York require that residents receive advance notice of any  increases or changes to monthly fees. California and Wisconsin require  CCRCs to disclose to residents that any claims they have against the CCRC  in the event of its liquidation may be subordinate to secured creditors,  such as mortgage lenders.
Statutory provisions regarding the delivery and timing of disclosures to  prospective residents also varied among the states we reviewed. For  example, while the states we reviewed required providers to disclose  financial information to prospective residents prior to signing the CCRC  contract, five states we reviewed also required that such information be  subsequently disclosed periodically to residents. Exactly where and how  the information must be disclosed can vary as well. For example, some  states require that financial information be posted in public areas of the  CCRC, others require providers to convene periodic meetings with  residents to discuss the financial condition of the facility, and still others  that financial information is made available to residents upon request. A  New York state official said the state posts the results of any CCRC  examinations on a Web site so that consumers can access the information  and compare results across CCRCs.
Some of the states we reviewed performed on-site audits and  examinations of CCRCs on a periodic basis to help ensure consumer  protections, including the disclosure of important financial information.  The states we reviewed generally have discretionary authority to conduct  on-site audits or examinations, but some are required to conducted  periodic audit or examinations. For example, the Florida regulatory  authority is required to conduct on-site examinations at least once every 3  years and may visit more frequently if regulators receive complaints from  residents. Such on-site exams may include inspections of financial  information, contracts, and disclosures and conversations with staff,  management, and residents. Other states said that they had the authority  to conduct on-site investigations but had not done so. For example,  regulators in Texas said that they have not yet faced an issue with a CCRC  that would compel them to conduct an examination or investigation, but  historically have exercised other regulatory authority over CCRCs for  financial oversight. Regulatory officials told us that the state had relied on  documents submitted by CCRCs and has called CCRC management on an  informal basis to obtain additional information or clarification when  necessary.
section_title: Disclosing Nonfinancial Policies and Practices
paragraphs: Other requirements mandate disclosure of policies that may have  important implications for the length and quality of residents’ stay at their  CCRC. Some states we reviewed required that CCRCs explicitly disclose  policies regarding (1) the conditions under which a resident could remain  in the event the resident experiences financial difficulties, and (2)  conditions under which residents would be required to move to a higher  level of care. For example, Pennsylvania requires that each CCRC contract  describe the circumstances under which a resident may remain at the  facility in the event the resident has financial difficulties. California  specifically mandates that CCRCs offering life care contracts subsidize  residents who are unable to pay their monthly or other fees, provided the  financial need of the resident does not arise from the resident’s own action  to divest of his or her assets.
Seven of the states we reviewed also have specific, nonfinancial provisions  that must be contained in the residential contract or disclosure statement,  but these provisions varied, as shown in table 4. For instance, some states  not only require disclosure of certain policies, but specifically prescribe  minimum procedures that CCRCs must follow while other states require  that certain policies be disclosed to residents but do not prescribe the  substance of those policies. For example, in addition to requiring that the  resident contract describe the procedures and conditions under which a  resident may be transferred from a designated living unit, the applicable  California statute prescribes minimum transfer procedures. These policies  must be disclosed at the time that the contract is signed in an effort to  ensure that residents understand how they will move through the  continuum of care. Florida and New York also require that residents be  advised of policies for transferring residents among the levels of care but  do not specifically set those policies. According to an expert, such policies  have been a point of friction between residents and CCRC management.  As table 4 indicates, some of the states we reviewed did not have such  certain disclosure requirements.
section_title: Other Regulatory Protections
paragraphs: Some state regulations are aimed at ensuring that residents can  communicate their concerns to management and receive ongoing financial  and nonfinancial information concerning a CCRC by forming residents’  councils and creating a residents’ bill of rights. Six of the states that we  reviewed required that residents of a CCRC be allowed and encouraged to  form groups in order to communicate with management, including Ohio  which has no other CCRC specific law. CCRC management coordinates  with representatives from the resident groups to communicate information  on the facility’s financial condition, fee increases, policy changes, and  other issues. In Florida and California, for example, the resident councils  are the designated recipients of mandated disclosures such as reports on  the CCRCs financial condition, and fee structure. Two states we reviewed  prescribed a statutory residents’ bill of rights and required CCRCs provide  a copy of such rights to residents prior to their occupancy.
Finally, some of the state regulators we interviewed indicated that they  require CCRCs to provide marketing and advertising materials for  approval. One regulator we spoke with commented that claims or  incidents of false advertising were rare to nonexistent. Residents had not  highlighted this issue as a major concern for consumers.
section_title: Opinions Differed on the Effectiveness and Adequacy of State Regulations
paragraphs: Based on our interviews with state officials, we found no assessments of  the effectiveness of state regulations in protecting consumers at either the  national level or the state level, and state officials, resident advocates, and  experts expressed a wide range of opinions on the adequacy of state law  to protect consumers. First, state officials and others noted the  importance of certain CCRC law provisions. For example, regulatory  officials in Florida said that requiring CCRCs to provide financial  information publicly through a state was necessary, because without such  information residents would be unable to compare in-state CCRCs in a  uniform manner and regulators would be unable to ensure that residents  had enough information to make an informed choice of facilities. Members  of a national association of CCRC residents expressed concern  that some state laws might not address the terms of the residency  contract, including the refundable portion of the entrance fee and  residents’ rights within the contract, such as the ability to renegotiate fees  in the event of a CCRC sale due to financial insolvency. Additionally,  members of this association expressed concern that CCRCs in financial  difficulties might not notify residents if states did not require CCRCs to  provide disclosures regarding CCRCs’ financial condition. Seven of the  eight states we contacted did have a CCRC law that required such  disclosure, but one—Ohio—did not.
Other experts and resident advocates we interviewed pointed out possible  further improvements to state laws. For example, a law professor with  expertise on the Pennsylvania law told us that states should take a greater  role in facilitating the ability of prospective residents to access  information about CCRCs for purposes of making meaningful  comparisons. For example, states could publish information about the  financial and operating conditions of CCRCs in a statewide database so  that CCRC residents could make comparisons across the statewide  industry. The law professor advocates that states could publish  information about (1) the numbers and types of complaints about CCRCs,  (2) comparative information on entrance fees and monthly fees, and (3)  instances of the state requiring a CCRC provider to give revised financial  projections. Similarly, representatives of two statewide resident’s groups  said that residents would like to see states require that CCRCs provide  disclosures on their financial condition along with an extensive,  understandable explanation of the disclosure.
Finally, although state laws differ significantly in breadth and detail, it is  not clear that CCRC residents in states with less stringent requirements  are necessarily at greater risk than residents in heavily regulated states. In  one state, regulators told us that despite extensive CCRC regulation, a  CCRC bankruptcy cost residents the refundable portion of their entrance  fees. In another state, regulators said that, while the CCRC law is not as  extensive as in other states, they are not aware of any CCRCs that have  faced bankruptcies or failures. In part, protection may come from the  CCRCs themselves. In our contacts with CCRCs, we found that some took  steps that went well beyond what the state law required. The Illinois  statute, for instance, requires comparatively fewer disclosures than other  states, such as California and Florida, and, according to an Illinois  regulatory official, does not mandate that CCRCs provide financial  information on an ongoing basis. Nonetheless, officials from CCRCs in  Wisconsin and Illinois told us that they provided additional disclosures,  beyond what is required by state law. Representatives from one CCRC told  us that they offered prospective residents a lengthy “discovery phase” so  that residents were not unpleasantly surprised after signing the contract or  moving in. In this discovery phase, prospective residents discussed their  expectations with staff, had a meal at the CCRC, and visited with current  residents and staff. The CCRC had also established a residents’ finance  committee that received ongoing budget and other financial information  and gave residents a vehicle for communicating with management. Finally,  the CCRC provided a quarterly operating budget to each resident and  made other financial information available upon request. CCRC officials in  several other states, including California and Pennsylvania, told us they  exceed statutory requirements. Nonetheless, because we visited only  seven CCRCs in the course of our work, we do not know how widespread  such actions are.
section_title: Concluding Observations
paragraphs: CCRCs can help ensure that older Americans have access to housing and  health care in a single community as they age. However, entering a CCRC  often means committing a large portion of one’s assets, and while CCRC  bankruptcies have been rare, and few residents have lost their housing or  their entrance fees, a CCRC failure could put residents in a difficult  financial situation. As a result, residents have a strong interest in fully  understanding the long–term viability of their CCRC and their contract  with it. However, resident contracts and CCRC finances are often  complex, and prospective residents may find it challenging to evaluate the  risks they face or the likelihood that a particular CCRC has done sufficient  long-range financial and operational planning. Such difficulties, coupled  with the stress that recent economic events have placed on CCRC  finances, underscore the importance of regulators being vigilant in their  efforts to monitor CCRCs’ long-term viability and protect consumers.
CCRCs as entities are not regulated by the federal government, and,  according to an industry study, 12 states do not appear to have CCRC- specific regulations. As a result, an entity that might be licensed and  regulated as a CCRC in some states may not be in others, and resident  contracts that might receive regulatory scrutiny in some states may not in  others. In other work looking at the regulation of financial contracts  across states, we have pointed out the importance of ensuring that citizens  entering similar contracts receive similar regulatory protections across  states. Because there is no federal regulator for CCRCs, we are not making  a recommendation for specific action. However, the potential risks to  residents that result from committing a considerable amount of money to  a CCRC highlight the importance of states being vigilant in their efforts to  help ensure that CCRC residents’ long-term interests are adequately  protected. Such efforts will only become more important as the number of  older Americans requiring assisted living and nursing home care increases.
section_title: NAIC and HHS Comments and Our Evaluation
paragraphs: We provided a draft of the report to the Department of Health and Human  Services and the National Association of Insurance Commissioners, but  neither commented on the draft.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to interested  congressional committees, the Chief Executive Officer of the National  Association of Insurance Commissioners, the Secretary of the U.S.  Department of Health and Human Services, and others. In addition, the  report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff has any questions regarding this report, please contact  us at (202) 512-7022 or cackleya@gao.gov or (202) 512-5491 or  bovbjergb@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff that made major contributions to this report are listed in  appendix II.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To address concerns about the risks and regulation of CCRCs, we have  been asked to (1) describe how CCRCs operate and what financial risks  are associated with their operation and establishment, (2) describe how  state laws address these risks and identifies what is known about how  adequately they protect CCRCs’ financial condition, (3) describe risks that  CCRC residents face; and (4) describe how state laws address these risks  and identifies what is known about their adequacy.
To describe how CCRCs are established and operated, methods CCRCs  use for initial financing and on-going operations, and what initial and on- going risks CCRCs may experience, we interviewed CCRC providers,  CCRC industry associations—including the American Association for  Homes and Services for the Aging (AAHSA), American Seniors Housing  Association (ASHA), National Association of Insurance Commissioners  (NAIC), and National Center for Assisted Living (NCAL)—and two  attorneys who specialize in housing and health care for older Americans.  In addition, we met with officials from eight CCRC facilities. We selected  these providers based on the providers’ geographic diversity, facility size,  non-profit or for-profit status, type of contracts offered, and income or  market segment served. We also met with state CCRC regulators from  eight states—California, Florida, Illinois, New York, Ohio, Pennsylvania,  Texas, and Wisconsin. We selected these states due to the states’  geographic diversity, CCRC population size, and type of state regulatory  department with CCRC oversight responsibility. Because we judgmentally  selected the states and CCRCs we reviewed, we cannot generalize  information we obtained to other states or CCRCs. In addition, we  reviewed literature and academic articles by experts in the senior living  industry.
To describe what state laws exist to ensure CCRCs’ financial stability, and  what is known about how adequately they protect CCRCs financial  condition, in the eight states we selected we reviewed and analyzed state  CCRC laws that govern the financial aspects of CCRC licensing and  periodic state oversight, and met with selected state regulatory officials. In  addition, we met with industry associations, CCRC providers, and two  attorneys who specialized in housing and health care for older Americans.  We also met with two actuaries, two actuarial industry associations, and  members of CCRC residents’ associations that work with CCRC  management on behalf of older Americans who reside in CCRCs.
To describe what risks CCRC consumers face, as well as what state laws  exist to protect consumers from financial and other risks, and what is  known about how adequately they protect consumers, in the states we  selected we reviewed and analyzed state laws pertaining to specifically to  CCRCs that are designed to inform and protect consumers, and met with  selected state regulatory officials. We also reviewed summary information  on laws and regulations across all states that was compiled by an industry  association. We also reviewed examples of CCRC disclosures and other  information provided by CCRCs in states we reviewed. In addition, we met  with industry associations, CCRC providers, and two attorneys who  specialize in housing and health care for older Americans. In addition, we  met with members of CCRC residents’ associations that work with CCRC  management on behalf of older Americans who reside in CCRCs.
We conducted this performance audit from June 2009 to June 2010 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: GAO Contacts and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Patrick Ward (Assistant  Director), Clarita Mrena (Assistant Director), Joe Applebaum, Emily  Chalmers, Erin Cohen, Andrew Curry, Mike Hartnett, Marc Molino, Walter  Ochinko, Angela Pun, and Steve Ruszczyk made key contributions to this  report.