James Sullivan
James Sullivan

Will Your Client's Continuing Care Retirement Community Become Unaffordable?

Errors in pricing may result in substantial increases in monthly fees residents pay to their Continuing Care Retirement Community (CCRC). How CPAs can lessen the risk.

October 12, 2010
by James Sullivan, CPA, PFS

A Continuing Care Retirement Community (CCRC) is an age-restricted community that offers independent-living units, assisted-living units as well as skilled-nursing facilities on the same campus. These facilities attract seniors who desire to live independently, but also want to know that they can receive needed care without having to leave the community.

Most CCRCs require a large entrance fee — some in the six- and seven-figure range. In addition, a monthly fee is charged.

Because of the size and complexity of the transaction, a CPA can play an important role assisting clients and their families with making the decision as to which CCRC to move into. It is important to determine if the facility has set its entrance and monthly fee to establish sufficient reserves to cover its future liabilities to provide care. If not, your client may face large fee increases after moving in that could make the facility unaffordable and force your client to move.

A Healthcare Decision

The move into a CCRC is primarily a healthcare decision, not a housing decision. Depending on the type of contract your client signs, the CCRC is liable for providing a stated level of healthcare services as your client ages. In a Type A contract, there is no increase in the monthly fee when the resident moves from independent living to assisted living or to the skilled-nursing facility. In a Type B contract, the skilled-nursing benefits are limited (for example, up to 30 days of skilled care per quarter is provided at no extra cost). If the resident exceeds the limit, there is an increase in their monthly fee. Type C agreements guarantee access to a skilled nursing home bed but the resident pays the full market rate. Thus, Type A and B agreements involve some shifting of risk from the resident to the facility.

Prospective residents hoping to enter a Type A or B facility must pass a health test to make sure they are capable of staying in the independent living units when they first move in. As the resident ages, he or she may need to move into the assisted living facility or into skilled nursing. The additional cost of providing the care over what the resident is paying in monthly fees is the CCRC’s liability. A well-run CCRC would have estimated this liability and priced the entrance fee and the monthly fee accordingly.

Mispricing Can Make the Facility Unaffordable

But what if the CCRC’s calculation proves incorrect and inadequate to cover future liabilities? As housing prices have plunged, fewer seniors are able to sell their homes and use the proceeds to pay the large entrance fee many CCRCs charge. Other seniors are reluctant to sell their home hoping prices will rebound. This has increased the competition for residents, reduced occupancy levels and has led many CCRCs to continually revise their pricing hoping to attract new residents. If not done correctly, this re-pricing may result in the facility having to substantially increase their monthly fee in order to cover the higher than anticipated cost of care.

Another complicating factor is that it is not unusual for established facilities to have several different varieties of agreements outstanding, each with varying levels of promised healthcare benefits. In one case, a 20-year-old facility had 28 different varieties of Type A agreements outstanding. Many of the older agreements had been underpriced substantially by prior management given the promised benefits. After a thorough review these agreements had to be re priced with monthly fees increased significantly — some by as much as 27 percent. CCRC agreements are little different from long-term-care insurance policies that have raised their monthly premiums on existing policyholders in recent years. For this reason, CPAs must review the pricing procedure of the CCRC carefully and raise any concerns with their client.

Determining Future Liabilities

If you are working with a client considering a move to a CCRC, you should begin by requesting financial information regarding their future obligation to provide healthcare to residents. While not required in all states, you should ask for any financial statements filed with the state. Many states require that the facility provide prospective residents a history of recent price increases (e.g., the last five years). While this information is useful, it does not provide a sense of how any recent repricings may impact future increases.

For financial statement purposes, the Future Services Obligation (FSO) is calculated. Information on the FSO can be found in chapter 14 of Health Care Entities — AICPA Audit and Accounting Guide. But the FSO is limited in its usefulness. A more helpful analysis is a comprehensive actuarial study — also referred to as an actuarially-based financial accounting study. Such studies are based on the Actuarial Standards Board Actuarial Standard of Practice No. 3 Continuing Care Retirement Communities.

The FSO as used for financial reporting purposes refers to the amount of reserves, if any, required for the CCRC to cover the projected health costs of the current residents. The number is based on a review of all existing contracts. It assumes no new residents or entrance fees. It looks only at the cost of the existing contractual liability to provide care excluding general and administrative expenses as well as marketing costs. As calculated it is a liquidation liability.

In contrast, a complete actuarial analysis includes factors not considered in the FSO calculation and looks at the facility as an ongoing entity. For example, not only are the current resident obligations included in the calculation, future residents are included. Under the actuarial study, a CCRC is considered in good financial health only if three conditions are met:

  1. All future obligations to current residents must be 100 percent funded.
  2. Future resident entrance and monthly fees must cover the cost of all future obligations to these new residents.
  3. Positive cash balances are projected with respect to both current and future residents for a period of at least 20 years.

A CCRC should have the actuarial study performed periodically — some experts suggest every two years or three years. Many CCRCs are reluctant to show the report to prospective residents (or their accountants) due to the proprietary nature of the information but will provide a copy if asked. If a full actuarial study is not performed, you should inquire about the facility’s pricing methodology. The best source of this information may not be the marketing director of the facility or even the controller or executive director. For large CCRCs with multiple sites, pricing is often controlled at the corporate level, so you may need to speak with someone at corporate headquarters to obtain the pricing information you seek.


There are many factors to consider when evaluating a move into a CCRC. The financial factors are crucial because your client hopes that this move will be their last. With careful analysis you can increase — but not guarantee — the chance that your client can live out the remaining years of their life in the CCRC of their choice.

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James Sullivan, CPA, PFS, MAS, is an investment counselor at Core Capital Solutions LLC. He has almost 25 years of experience in individual tax, investing and personal financial planning. Before joining Core Capital Solutions, Sullivan spent 20 years at Arthur Andersen LLP. He is a member of the AICPA PrimePlus/ElderCare Task Force.