CCRCs must keep their prices low enough to attract residents, but high enough to meet costs. This Whiteboard video looks at those factors that go into setting fees at a CCRC.
VIDEO SCRIPT – Continuing Care Retirement communities appeal to older Americans because they offer an independent lifestyle for as long as possible, while providing the reassurance that as residents become sick or frail, they will receive the care they need.
Many older Americans sell their homes – which are often their primary asset – to pay the entrance fees. Accordingly, their ability to support themselves in the long run is inextricably tied to the long-term viability of the community. So it is natural that older Americans should be concerned about the financial health of the community where they are considering moving.
Understand, that continuing care retirement communities conform to the principles of sound fiscal management. They are businesses whose model imposes certain operational risks, just like other private sector enterprises. While more than 80 percent of CCRCs are organized as non-profits, they still strive for positive cash-flow, which allows them to fulfill their mission of providing residency and care.
Like other start-up businesses, blue-sky CCRCs…those that have yet to be built, obtain funding through corporate loans and private equity. Significant pre-sales and deposits are necessary before construction begins to ensure there is adequate funding to repay debt and commence operations.
Once operational, continuing care retirement communities set prices (fees) low enough to attract residents and stay competitive in the market, but high enough to meet both short-term and long-term costs. Determining fees at CCRCs requires consideration of future variables such as occupancy levels, mortality rates, medical and labor costs and regular capital improvements. Because the health care commitment is akin to insurance, CCRCs frequently use actuarial consultants to forecast financial risk and set fees sufficient to meet those risks.
Continuing care retirement communities seek high occupancy to sustain positive cash flow; empty residences generate no revenue. Both entrance fees and monthly fees can be used for general operating expenses in addition to funding cash reserves to provide for residents who require assisted living, skilled nursing care or memory support.
Entrance fees are also used to assist financing the refunds of entrance fees. Most residency agreements establish that refunds are contingent upon having a new resident move into the vacated residence.
Just like other businesses, CCRCs are exposed to external economic factors with unique impact, like loss of property tax exemptions or a weak real estate market making it difficult for people to sell their houses so as to fund entrance fees. Declining equity and credit markets can challenge financing of community maintenance and physical upgrades.
But the bottom line is that the business model of continuing care retirement communities has existed for more than 100 years. It is an industry that has an excellent record of fulfilling its financial obligations. Few CCRCs have closed or declared bankruptcy since 1990. While there will always be business risk, a swelling older American population indicates increasing consumer demand for this planned care for life.