Captive insurance: The health insurance analogy
We illustrate a captive insurance program using health insurance that a company provides to its employees.
While there is no formal definition of a continuing care retirement community (CCRC), for the purposes of this article the term will refer to a senior living community that offers a broad spectrum of housing and healthcare—ranging from independent living to skilled nursing care—usually on one campus.
But as a caveat, if you have seen one CCRC, you have seen one CCRC! No simple definition can capture the variety of CCRCs that exist today. At the end of 2010, there were approximately 1,900 CCRCs in the United States. Today, that number is easily over 2,000. Each one is unique; each one is different.
Typical services offered to residents at a CCRC include meals/dining, activities, transportation, housekeeping/laundry, maintenance, utilities, telephone, wellness services, recreational facilities, and a full range of healthcare options. Virtually all CCRCs offer skilled nursing care, and most have assisted living units that provide care to residents who need help with one or more activities of daily living. Other healthcare services that may be offered include specialized dementia care, home healthcare, and adult day care.
New residents at a CCRC may range in age from 65 to 95 and must be capable of living independently upon entry to the community. They will generally have priority access to various levels of healthcare, as needed, for the remainder of their lifetimes. The typical care progression at a CCRC is from independent living to assisted living to skilled nursing, although residents may also transfer from independent living directly to skilled nursing.
What makes CCRCs different from other senior housing options?
Continuum of care offered – While seniors may choose to live at a single family residence, a stand-alone independent living community, or an assisted living community, only a CCRC offers all the levels of care in one setting.
Residency contract that guarantees access to needed long-term care – Independent living communities do not generally provide access to any healthcare or long-term care services. Assisted living communities and nursing facilities offer only one level of care—if a resident needs a different type or level of care, he or she must terminate residency and move to a new community.
Fee structure – Residents who enter a CCRC usually pay a large entry fee (or purchase their unit) plus an ongoing monthly fee that may or may not change over time. The entry fee may be refundable.
Underwriting/screening at entry – Residents who move into a CCRC must be capable of independent living. Typical requirements include a medical exam, physician’s statement, cognitive testing, and interviews with medical staff at the community.
CCRCs are typically sponsored by either a faith-based organization or a private company and can be either not-for-profit or for-profit. While the type of residency agreements offered to residents (see below) can vary, there are very few differences between CCRCs based solely on the type of sponsorship.
CCRCs give residents the comfort and assurance that everything they will need for the rest of their life will be provided at the community. CCRCs also give financial security for residents and their families by agreeing to provide future long-term care on site, if needed. Unlike much of the population of seniors, potential residents are able to see the healthcare facilities that they may need to use up front, at the time they consider moving to a CCRC. No other type of senior housing or retirement community offers this.
Types of residency agreements
There are five broad categories of residency agreements, or contracts, offered at CCRCs:
1. Extensive, or Type A (also called life care, or full life care) – Residents pay an entry fee and a monthly fee that does not increase (other than inflationary increases) upon transfer from independent living to assisted living or skilled nursing care at the CCRC. The entry fee may be refundable upon death or termination of the contract. Future healthcare and long-term care costs are essentially prepaid via the entry fee and/or the monthly fees.
2. Modified life care, or Type B – Residents pay an entry fee and a monthly fee that may increase upon transfer to a higher care level, but not to the full cost of care. Examples include contracts that provide for needed future care at discounted rates, contracts that provide for a limited number of days of care for no additional cost, or some combination thereof. There is still prepayment of future healthcare and long-term care costs, but it is limited.
3. Fee-for-service, or Type C – Residents pay an entry fee and a monthly fee that changes as the level of care changes. Residents essentially pay the full cost of any care needed. There is no prepayment of future healthcare or long-term care costs.
4. Equity model – Instead of paying an entry fee, residents purchase their unit or, alternatively, purchase a membership or equity share in the community. Under this type of contract, the residents often own the community. Upon death or termination of the contract, the resident (or the resident’s estate) sells the unit or membership to a new resident. This type of contract is less common than the entry fee types A, B, and C above and is more typically offered by CCRCs sponsored by private entities. Future healthcare is typically provided by prepayment via monthly fees or through a separate healthcare fee; however, there are many variations.
5. Rental/lease – A monthly fee is paid that increases with level of care at the community. There is no prepayment of future healthcare or long-term care costs. No entry fee is paid. This type of agreement is relatively rare and is typically used in situations where certain units are sitting vacant and cannot be occupied with residents under one of the above contract types.
There are nearly endless variations of all of the above contract types. For example, one type A contract may provide for residents to continue to pay the same fee after transfer to nursing care that they paid while in their independent living unit, while another type A contract may provide that all residents pay a common fee after transfer, e.g., the monthly fee for the lowest level two-bedroom unit type.
As mentioned above, entry fees may be refundable. Again, there are many potential variations. Refunds may be a level percentage of the original entry fee paid, e.g., 90%, 50%, 25%, or the refund may decline over time, e.g., 100% grading down (or amortizing) to zero over 50 months. Refunds may be payable upon death only, withdrawal only, or upon either death or withdrawal. In the case of couples, refunds are typically paid only upon the death or withdrawal of the second of two residents.
All residency agreements provide for access to future healthcare and long-term care services at the community, including assisted living, dementia care, and skilled nursing care. In some cases, the agreement will also provide additional needed medical care, such as home healthcare, physician’s services, hospital and surgical care, and pharmaceuticals. Again, there are numerous potential variations.
Residents who enter CCRCs tend to be a rather “select” and healthy group. This is due to several factors:
The ages at entry of residents who enter CCRCs typically range from 65 to 95. In the last 20 years, average entry ages have increased from the mid 70s to the lower 80s. Today, average ages at entry are generally in the 80 to 83 range, but this can vary from community to community. A mature CCRC (over 10 years old) will have an independent living population with an average age of between 85 and 87.
Both singles and couples enter all CCRCs. The percentage of couples at entry can range from as low as 10% to as high as 70%. While most couples are married males and females, there are also same-sex couples, sisters, brothers, or mother and daughter couples that occupy CCRC units. Because residents tend to spend their remaining lifetime at the CCRC, the existing resident population at any community will contain many single residents who originally entered as part of a couple, but are now living as a single resident due to the death or permanent transfer of their spouse or partner.
Residents who enter CCRCs as singles are overwhelmingly female, although this has changed somewhat in the last 20 years. The percentage of single residents who are female can range from 70% to 85%.
Average life expectancies range from 10 to 12 years at entry, but this can obviously vary by age, sex, and health status. On average, residents can expect to spend 70% to 80 % of their lifetime at a CCRC in the independent living level of care (ILU), 10% to 20% in the assisted living level of care (ALU), and 10% to 20% in the skilled nursing level of care (SNF).
Issues facing CCRCs
Continuing care retirement communities face a unique set of challenges and issues due to their unique fee structure and the way in which healthcare is provided. Following are some of the more important examples:
Transition from opening to maturity – When a new CCRC opens and fills with new and relatively young and healthy residents, there are few contractual residents needing healthcare and long-term care services in the assisted living and skilled nursing levels of care. During the initial years of operation, management will need to fill many of the units and beds in the ALU and SNF with outside private pay patients. Over the first 10 to 12 years after opening, progressively more of these units and beds will be needed for contractual residents who transfer from the ILU. This transition to maturity is a critical phase for a CCRC, as higher-paying outside residents in the ALU and SNF are replaced by lower-paying contractual residents.
Managing the provision of care in ILU and ALU – Every CCRC will have to decide how it will provide care to residents as they progress along the continuum. Some will adopt a philosophy of keeping residents in the ILU for longer by providing “home health” services to residents in the ILU, while others will encourage permanent transfer to ALU to receive those services. Other factors involved in this decision include state regulatory requirements, benefits provided under the residency agreement, and financial resources of residents in the ILU.
Occupancy levels – CCRCs must maintain high numbers of occupied units and beds at all levels of care in order to remain financially sound. Sales and marketing of independent living units is a particularly important function. Most communities have a marketing department with a dedicated staff that is focused on maintaining a waiting list of future new residents, so that when independent living units become available for resale, a new resident can move in as soon as possible.
Competition – Management must be continually aware of other CCRCs in the market and should monitor not only the relative pricing of units, but also the types of contracts offered, amenities, and other benefits at competing communities.
Aging in place - As existing ILU residents age, it is particularly important for a community to maintain its appeal to potential new residents at younger ages. A successful CCRC must be willing to reinvent itself over time, stay modern and attractive, and constantly ask how it can provide a better product for residents. This may include offering new contract types, renovating existing facilities, expanding the independent living units, or adding new common areas and amenities.
Economic issues – Due to the entrance fee structure at most CCRCs, these communities are more susceptible to economic downturns. Most residents who move into a CCRC are selling their homes in order to finance the entrance fee, at least in part. Disruptions in the real estate and equity markets can result in fewer residents being willing to move into a CCRC.
Shortage of nursing and healthcare professionals – The largest component of operating expenses at any CCRC is salaries and benefits, particularly those related to nursing and healthcare. In some parts of the country, CCRCs have struggled to hire sufficient numbers of nursing staff. This drives up operating expenses, as wage inflation has increased, and as communities have been forced to hire outside contract labor. Despite this factor, the internal expense inflation rate experienced by CCRCs is lower than the rate of inflation observed in the acute care medical arena.
Risk management – CCRCs are exposed to risks not seen at other types of senior housing. There are several types of risk evident at these communities:
What type of work do actuaries do for CCRCs? In general, actuaries help these communities manage and analyze risk. Possible actuarial assignments for CCRCs include the following:
Population projections – These projections of the resident population at a CCRC—including independent living, assisted living, and skilled nursing—provide a valuable planning tool for management. Key projection results include independent living units released for resale each year, numbers of deaths (mortality) in each level of care, and numbers of transfers (morbidity) between ILU, ALU, and SNF. These projections also provide an actuarial basis for performing other financial analyses (below). Both open group (includes existing and future new residents) and closed group (existing residents or new entrant cohort only) population projections are performed as of a starting (valuation) date.
Actuarial balance sheet - The purpose of the actuarial balance sheet is to evaluate the CCRC’s ability to satisfy all its obligations to current residents and thus remain a viable operating concern. The actuarial balance sheet provides an analysis of the long-term relationship between the community’s assets and liabilities. The existing resident closed group population projection forms the basis of this financial analysis. The actuarial balance sheet varies from the GAAP (accounting) balance sheet and generally recognizes all income and expenses at the times they occur. No deferral of recognition of entrance fees or expenses occurs. Actuarial calculations include the present value of future monthly fees and other revenues, the present value of future allocated operating expenses in each level of care, and the actuarial values of fixed assets and capital depreciation expenses.
Actuarial pricing analysis - The purpose of this analysis is to evaluate the adequacy of the current pricing structure for new entrants at a CCRC. A theoretical cohort (new entrant model) is projected from entry through the end of the lifetime of all residents in the cohort. This new entrant closed group population projection forms the basis of the actuarial pricing analysis. Actuarial calculations include the present value of all income and expenses incurred over the lifetime of the cohort of residents, including a charge for depreciation of fixed assets.
Actuarial cash flow projection - This basic financial forecasting tool estimates future sources and uses of funds on an open group basis and includes key items such as monthly fees, attrition income, entry fee refunds, health center fee income, operating expenses (separately for independent living, assisted living, and skilled nursing), and others that depend on actuarial estimates. The open group population projection forms the basis of the actuarial cash flow projection.
Accounting calculations – CCRCs are required (under current American Institute of Certified Public Accountants guidance) to calculate the “obligation to perform future services” related to current residents as of the valuation date. They are also required to amortize non-refundable entrance fees into income over the life of the resident and to determine the related deferred entrance fee liability. Actuaries often assist with these calculations.
By utilizing one or more of the above analyses, actuaries assist CCRCs in meeting regulatory requirements, pricing new or alternative residency agreements, evaluating the future need for nursing beds, strategic planning, and many other tasks.
CCRCs are regulated by the states—either via the state departments of insurance or separate departments on aging. While most states require some kind of feasibility study and an application for certificate of authority in order to operate as a CCRC, only a handful require any kind of actuarial study (one that would include an actuarial valuation or balance sheet). States such as Arizona, Texas, California, New York, and Maryland require such a study every three to five years. Most states are not equipped to evaluate the special circumstances surrounding these communities and their operation and financial health and solvency. Many states have virtually no ongoing regulation of CCRCs once they are built and occupied.
Financial characteristics of healthy CCRCs
Many of the CCRCs around the country are mature communities that face some of the challenges and issues outlined above. Existing CCRCs must be diligent in order to maintain their financial health. The most important aspects of that diligence involve asking the following:
In performing actuarial studies for CCRC clients, the results of financial analyses are highly dependent on the assumptions used, and continued high occupancy is one of the most important. Communities that are successful in maintaining high occupancy do so because they ask the above questions and then respond by investing the capital to keep their community attractive, vibrant, and up to date. These communities are constantly re-inventing themselves, adding services, improving their staff, and working to ensure that both current and future residents will want to live there.
By accumulating sufficient levels of surplus on the actuarial balance sheet, and by pricing at a sufficient level of surplus for future new residents, a CCRC will be better able to get through periods of adverse experience. But surplus also gives CCRCs the freedom to be creative and to invest in their community to make it even better. As mentioned above, that can mean renovating current units, building new independent living units or healthcare facilities, and providing new services and amenities. Communities that have not developed adequate surplus are not as “able” to do this.
Continuing care retirement communities make up an important segment of the senior housing and healthcare marketplace. They are a unique and attractive long-term care option to a growing number of the independent elderly population in this country, and they enable seniors to provide for their own future long-term care needs and, therefore, their financial security. CCRCs have demonstrated a successful model for providing a continuum of care to seniors, from independent living to skilled nursing care. As the baby boom generation continues to age, CCRCs are poised to meet the challenges of providing housing and long-term care to ever-larger numbers of the elderly in our country.