Should you consider the continuing care retirement community (CCRC) as a retirement living option? CCRCs typically provide—in one location—a range of living arrangements from independent living through assisted living and skilled nursing.
Most CCRCs offer a “life care” option. On moving in, one pays an entry fee that, according to a recent Wall Street Journal article, can range from $160,000 to $600,000. The resident then typically pays a monthly fee for independent living that covers rent and some meals. CCRCs provide many amenities, including recreational facilities and social activities, appealing to more affluent residents by cultivating a resort or country club-like ambiance.
Should the resident need assistance with activities of daily living, additional services may be provided in the living unit, or the resident may move to an assisted living area of the CCRC, usually for the same monthly fee as independent living. If nursing care is needed, the resident is moved to the onsite skilled nursing care area, again at the same monthly rate.
If one can afford to post the entrance fee and pay the monthly charges for independent living, then one can afford any level of care required, including expensive skilled nursing care. Since the typical CCRC resident sells his or her home at time of entry, paying the entrance fee is usually not a barrier. Because the “life care” contract is considered, in part, a contract for medical services, a portion of both the entrance fee and the monthly fees are deductible medical expenses. For our clients who have moved to CCRCs, between 30 and 40 percent of the entrance and monthly fees end up as deductions on their tax returns.
One may think of the CCRC as an alternative to long-term care insurance. However, few consider the CCRC option until they’re well into their 70s, an age where long-term care insurance may be prohibitively expensive. What a life care contract has in common with insurance is that a person is paying now, with the expectation of receiving future benefits. A critical question is, “Will the CCRC or insurance company have the financial wherewithal to provide the promised benefits many years from now?”
CCRCs aren’t regulated financially in the way insurance companies are. Fortunately, help in understanding the financial risks is available for those considering buying a CCRC life care contract. Established in 1966 as a nonprofit accreditor of health services, the Commission for Accreditation of Rehabilitative Facilities (CARF) has produced a guide called “Consumer Guide to Understanding Financial Performance and Reporting in Continuing Care Retirement Communities” (http://www.carf.org/home).
The CARF guide explains the different contracts available from CCRCs, ranging from the “extensive” or Type A contract (the life care contract) to the Type D rental agreement that’s little more than an apartment lease. The Type B (“modified”) contract guarantees access to health care but requires the resident to pay for health care services exceeding a contract limit. The Type C (“fee-for-service”) contract provides only guaranteed access to onsite health care but requires the resident to pay for living assistance and nursing care. The entrance fee is typically highest for Type A, followed by Type B, then Type C.
One who already has long-term care insurance should opt for the lower entrance fees of a modified or fee-for service contract. Not only would this avoid paying twice for the same thing, but it follows a classic rule of wise investing—diversifying to lower risk. With the life-care contract, the CCRC resident puts all his financial risk in one basket—the CCRC itself. Signing a Type C contract and keeping one’s long-term care policy spreads that risk between the CCRC and the insurance company. Should the CCRC run into financial difficulties, the Type C contract resident cannot lose the already paid-for cost of assisted living and nursing care. Instead, he or she can move to another facility if poor financial performance degrades the level of upkeep and amenities. The Type A resident may be called upon to pay for part or all of the cost of health care if the CCRC goes bankrupt or is otherwise unable to deliver the promised benefits.
The financial risk of a life-care contract may be especially high in stand-alone proprietary CCRCs—those in which the resident owns his apartment or townhome. In a poorly run proprietary CCRC, the resident may be assessed to pay for the health care costs of other residents. These assessments may drive the market value of the living units down, possibly well below the resident’s purchase price.
The CARF guide explains how financial performance may be affected by whether the CCRC is a stand-alone facility or part of a multi-facility group, whether or not there’s a sponsoring organization (such as Northern California Presbyterian Homes, which operates the Tamalpais in Greenbrae) and whether the facility is proprietary (Villa Marin in San Rafael is a good example of a proprietary CCRC). The guide also provides a primer on understanding CCRC financial statements.
Even if one doesn’t already have long-term care insurance, the newly available long-term care annuity I wrote about last month should be considered as an option to a life-care contract.
Suppose the entrance fee for a Type C contract is $200,000 less than the available Type A contract. Whether it’s better financially to pay the Type A fee or to put the money saved with the Type C fee into a fixed annuity with long-term care benefits will be determined in large part by the assumptions one makes about when and for how long additional care will be needed; how much it’s likely to cost; how much one can expect the annuity to grow in value; and refunds of the entrance fees that may be available should one move out or die in the early years of the CCRC contract. Factoring in the risk-lowering nature of the annuity choice adds more complexity to the analysis. You’d be well advised to run these questions by your accountant or financial planner.
