On many pages throughout this website you’ll find discussion of how CCRCs operate as businesses. Even though most CCRCs are not-for-profit, they must operate as self-sustaining enterprises to fulfill their missions. Setting fees at CCRCs is one of the greatest challenges they face because if they are too high, then occupancy will likely suffer. If they are too low, then the economic viability of the community is placed at risk. It’s important that seniors and their families realize that fee structures are not whimsical or capricious or shaded attempts to extract as much money out of people as possible. Rather, they are genuine attempts to balance and equitably apportion costs for the benefit of the community overall.
CCRC operators face an actuarial challenge in prognosticating the the future, i.e., how much do communities need to charge today to be able to meet their contractual obligations of providing future care? Actuaries call it “the present value of expected future costs.”
There are several factors that go into setting the price at a CCRC. Here are a few:
- Demographic factors such as
- health status
- number of residents per residence;
- Contractual provisions relating to refunds and the health care guarantees; and
- Economic factors such as inflation rates and interest rates and the cost of health services.
Let’s apply the present value of future costs to demographics. For younger people entering a community, the present value of future expenses is greater than older people, because younger people are expected to live longer. Thus it will cost more in the future to care for those younger people.
So too is it with women, who generally live longer than men. Accordingly, women require more health care, so their present value for future care is greater than men. A couple who lives together in an apartment has a greater present value for future expenses simply because they will experience twice the health care costs of a single resident.
Sometimes what appears obvious, isn’t. For example, people who enter a community in poor health have a lower present value of expected future costs because they are likely to die sooner, even though they require immediate care before doing so.
Contractual provisions are one way that communities can adjust to the ever-shifting formulas for determining rates. During periods of high occupancy but a weak economy, things like entrance fees and monthly service fees can be adjusted in response to inflation or deflation. This is by far the most common way to monitor and react to economic shifts, but what may be true today is not necessarily going to be what’s happening tomorrow.
There are two primary objectives in setting fees at a CCRC Two logical and desirable goals for setting fees at communities are:
- Group equity, and
- Constraints on increases in monthly fees
Group equity requires that pricing for a group of new residents be self-supporting. A group can be defined as all persons who moved in during a calendar year. The revenue a community derives from that group of new residents must at least be enough to cover the costs of services to those residents. When communities use monies from earlier groups to cover expenses for current groups, then the group equity is out of balance. It’s a pay as you go concept when it comes to group equity.
The second major goal of setting fees at communities is minimizing annual increases in monthly service fees. Most communities tie increases in monthly service fees to their own rate of increases in expenses. The benefit to consumers when CCRCs adhere to constraints on increases in monthly services fees is that they avail themselves of continuing care that has reasonably predictable future costs. Simply put, communities help residents when communities tie monthly services to their own internal rate of inflation.
The key to both group equity and constraints on monthly service fee increases is to set prices that allow the buildup of funds to cover the future shortfalls as a group matures and the demand for health care increases. It is, however, an inexact science because there are so many variables that can affect costs, but communities do the best they can to predict even those factors out of their control.
Why should prospective residents care? Simple, the financial lives of residents are intertwined with the financial well being of the community. Understanding core financial principles offers some comfort in knowing that prices at CCRCs are, in most ways, for the overall benefit of the community, which in turn is good for individual residents.