[Senate Hearing 111-769] [From the U.S. Government Publishing Office] S. Hrg. 111-769 CONTINUING CARE RETIREMENT COMMUNITIES (CCRCs): SECURE RETIREMENT OR RISKY INVESTMENT? ======================================================================= HEARING before the SPECIAL COMMITTEE ON AGING UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION __________ WASHINGTON, DC __________ JULY 21, 2010 __________ Serial No. 111-21 Printed for the use of the Special Committee on Aging Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html U.S. GOVERNMENT PRINTING OFFICE 62-691 WASHINGTON : 2010 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected]. SPECIAL COMMITTEE ON AGING HERB KOHL, Wisconsin, Chairman RON WYDEN, Oregon BOB CORKER, Tennessee BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama EVAN BAYH, Indiana SUSAN COLLINS, Maine BILL NELSON, Florida GEORGE LeMIEUX, FLORIDA ROBERT P. CASEY, Jr., Pennsylvania ORRIN HATCH, Utah CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina MARK UDALL, Colorado SAXBY CHAMBLISS, Georgia KIRSTEN GILLIBRAND, New York MICHAEL BENNET, Colorado ARLEN SPECTER, Pennsylvania AL FRANKEN, Minnesota Debra Whitman, Majority Staff Director Michael Bassett, Ranking Member Staff Director (ii) C O N T E N T S ---------- Page Opening Statement of Senator Herb Kohl........................... 1 Opening Statement of Senator Bob Corker.......................... 3 Opening Statement of Senator Al Franken.......................... 54 Panel of Witnesses Statement of Alicia Cackley, Director, Financial Markets and Community Investment, U.S. Government Accountability Office, Washington, DC................................................. 4 Statement of Kevin McCarty, Insurance Commissioner, Florida Office of Insurance Regulation, Tallahassee, FL................ 14 Statement of Charles Prine, Resident of Concordia of the South Hills CCRC, Mount Lebanon, PA.................................. 29 Statement of Katherine Pearson, Professor, Dickinson School of Law, Pennsylvania State University and Director, Elder Law and Consumer Protection Clinic, University Park, PA................ 34 Statement of David Erickson, Vice President of Legal Affairs, Covenant Retirement Communities on Behalf of the American Association of Homes and Services for the Aging, Skokie, IL.... 48 APPENDIX Alicia Cackley's Responses to Senator Kohl's Questions........... 67 Summary of Committee Investigation Report by the Aging Committee Majority Staff................................................. 69 Testimony Submitted for the Record by B'nai B'rith Housing, Inc.. 82 Testimony Submitted by Susanne Matthiesen, M.B.A., Managing Director, Aging Services and Continuing Care Accreditation Commission CARF International.................................. 85 (iii) CONTINUING CARE RETIREMENT COMMUNITIES (CCRCs): SECURE RETIREMENT OR RISKY INVESTMENT? ---------- -- WEDNESDAY, JULY 21, 2010 U.S. Senate, Special Committee on Aging, Washington, D.C. The committee met, pursuant to notice, at 1:32 p.m. in room SD-106, Dirksen Senate Office Building, Hon. Herb Kohl (chairman of the committee) presiding. Present: Senators Kohl [presiding], Franken, and Corker. OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN The Chairman. Good afternoon. We thank you all for being here. Today, we are going to take a look at continuing care retirement communities, or CCRCs. CCRCs offer three types of senior housing in one location, so that older residents can move from one to the other as their need for care increases throughout retirement. These communities allow seniors to stay among friends and near their spouse during the aging process, and for that reason, they have grown in popularity over recent decades. The number of older adults living in CCRCs has more than doubled between 1997 and 2007 and now totals 745,000 seniors living in over 1,800 CCRCs. With the boomer generation retiring, we can only expect this number to grow. Over the past year, our committee has taken a look at the financial stability of the typical CCRC business model. In most cases, new residents must pay a large deposit in order to join a community. These deposits often represent their life savings or their children's inheritance. In return, residents can generally expect to move within the community as their long- term care needs grow and, in some cases, to receive their deposit back if they decide to move away. Through our investigation, we found that CCRCs are particularly vulnerable during economic downturns. Slow real estate markets can drive down occupancy levels in independent living units, which are the main source of profit for these retirement communities. Occupancy levels for five prominent CCRC companies we questioned have, indeed, dropped in the past 3 years, leading to financial difficulties for some. The result is often an increase in the monthly fees, a reduction in the services and amenities provided, or both. Disturbingly, we have seen instances where seniors had to file lawsuits to keep their CCRC services from being cut back or reduced. Residents may feel forced to put up with these situations because most of their assets are tied up within the CCRC. This is especially true in a stagnant economy, when financial distress can cause long delays in receiving refundable entrance fees, or, as one of our witnesses experienced, the loss of one's refundable deposit altogether. One CCRC company refunded several sizable deposits only after getting a letter of inquiry from this committee. While this represents an extreme scenario, the fact is that many CCRCs who advertise their entrance fees as ``100 percent refundable'' will only repay them if and when they can line up a new tenant. In some States, such as California, CCRCs are granted up to 10 years to repay full or partial refunds. Such a delay can be devastating to an older couple who has their life savings tied up in a CCRC deposit. To supplement our investigation, we asked GAO to survey CCRC regulatory oversight nationwide. As you will hear, they found considerable variation in State regulations, with 12 States having no CCRC-specific regulations at all. Consumer safeguards and protections regarding disclosure, asset reserves, and escrow requirements vary widely, and only 17 States require CCRCs to submit studies that assess their long- term viability. In terms of the industry's internal policing, GAO found that only 16 percent of CCRCs are voluntarily accredited by the Continuing Care Accreditation Commission. That is an astonishingly low number. The fact is that while CCRCs are a good residential option for many retirees, entering into an agreement with one can pose financial risk. Our investigation has found many CCRC ownership structures to be very complex and that financial troubles at any level can have real consequences for individual residents. Evaluating such a transaction can be quite challenging for the average consumer without professional assistance. Today, our committee is releasing a summary of findings from our investigation, which outlines the financial health of the five companies that we questioned, as well as their disclosure policies regarding entrance fees and transitions of care. We also included several helpful resources for consumers and CCRC providers. Finally, we are calling on State regulators to beef up their oversight. Every State should be requiring proof of their long-term viability from CCRCs and ensuring transparency and strong consumer protections for residents. As part of our report, the committee has developed our own checklist for State regulators who wish to expand or improve their oversight of CCRCs, and we urge them to put it to use. Moving forward, we hope to increase both consumer protections and consumer awareness with regard to CCRCs. If these companies are going to take the life savings of seniors, they need to be able to guarantee that they will be around to provide the lifetime of care that they promise. We would like to thank our witnesses today for speaking with us on this important issue. I am very pleased that Senator Corker was able to take just a few minutes away from his other responsibilities to stop here and make some brief comments. OPENING STATEMENT OF SENATOR BOB CORKER Senator Corker. I will be very brief. Mr. Chairman, I thank you for your efforts leading this committee and certainly for asking for this study. I know we have some great witnesses today, certainly one telling a personal story that always affects us and certainly brings home some of the challenges that exist. So I thank you for that. We have Chairman Bernanke in just a few minutes in the Banking Committee. With the economic situations being what they are, I am going to step out, and I will not hear the testimony. But I want to thank you for coming and say that, my dad actually lives in a facility that uses this model with Alzheimer's, and I appreciate you bringing up these issues. I know there is a study that has been done. I would say to our witnesses that sometimes we need to be careful what we ask for, OK? State regulation, it appears to me in some cases, certainly needs to be enhanced. We regulate insurance companies at the State level and have had some pretty good success there. Sometimes us at this level getting involved, again, be careful what you ask for. So, hopefully, States themselves will pick up the pace. I don't know what the outcome ultimately will be, but I certainly appreciate my staff will certainly be here during this hearing. I thank you again for being here. Again, Mr. Chairman, your vigilance in continuing to look at issues where individuals, in many cases unbeknownst to them, end up in situations that certainly damage them. We thank you all for being here. The Chairman. Thanks a lot, Senator Corker. Now I will introduce our panel. Our first witness today will be Alicia Cackley. She is the Director of the Financial Markets and Community Investment team at the U.S. Government Accountability Office, GAO. There she manages research and program evaluation on issues such as consumer protection, financial literacy, the Recovery Act, as well as homelessness. Next, we will be hearing from Kevin McCarty. He is the Commissioner of the Florida Office of Insurance Regulation, where he oversees Florida's insurance market and is responsible for company solvency and market investigations. As Commissioner, Mr. McCarty has focused his efforts on senior protection. He is also the Vice President of the National Association of Insurance Commissioners. Next, we will be hearing from Charles Prine. Mr. Prine is a resident of a CCRC himself in Mount Lebanon, PA. That CCRC declared bankruptcy in 2009. During the bankruptcy, Mr. Prine served as the chairman of the unsecured creditors association, and he is now a resident's advocate on the board of the new CCRC owner. Then we will be hearing from Katherine Pearson. She is a Professor of Law at Pennsylvania State University's Dickinson School of Law, where she teaches law and aging policy. Ms. Pearson directs the Penn State's Elder Law and Consumer Protection Clinic, and she is coauthor of a forthcoming book on protection of older adults against financial exploitation. Finally, we will be hearing from David Erickson. He is the Vice President of Legal Affairs for Covenant Retirement Communities in Chicago. He will be speaking on behalf of the American Association of Homes and Services for the Aging, where he helped developed the resource for providers to improve their disclosure and transparency practices. We thank you all for being here today, and now, Ms. Cackley, we will start with you. ALICIA CACKLEY, DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC Ms. Cackley. Good afternoon. Mr. Chairman, I am pleased to be here today to discuss continuing care retirement communities, or CCRCs. As a growing population of older Americans seeks options for ensuring that their assets and income in retirement will cover the cost of their housing and healthcare needs, some may choose to enter a CCRC, which aims to provide lifelong housing, household assistance, and nursing care in exchange for a sometimes sizable entrance fee and ongoing monthly fees. However, CCRCs are not without risk. My testimony today is based on our June 2010 report, which is being publicly released today and addresses four issues--first, how CCRCs operate and what financial risks are associated with their operation and establishment; second, how State laws address these risks and what is known about how adequately they protect CCRCs' financial condition; third, risks that CCRC residents face; and fourth, how State laws address these risks and what is known about their adequacy. In summary, we found that CCRCs can benefit older Americans by allowing them to move among and through independent living, assisted living, and skilled nursing care in one community. They offer a range of contract types and fees that are designed to provide long-term care and transfer different degrees of the risk of future cost increases from the resident to the CCRC. However, developing CCRCs can be a lengthy, complex process, and CCRCs, like other businesses, face a number of risks, both during their development and after they become operational. While few CCRCs have failed, challenging economic and real estate market conditions have negatively affected some CCRCs' occupancy and financial condition. With respect to financial oversight of CCRCs, according to a broad industry study, 12 States and the District of Columbia do not have CCRC-specific regulations, meaning an entity in one State may be subject to such regulations while a similar entity in another State may not. The eight States we reviewed in detail varied in the extent to which they ensured CCRCs addressed financial and operational risks, and some focused more on long-term viability than others. According to industry participants, actuarial studies can help CCRCs plan for contractual obligations and set appropriate housing and care prices. Without them, they noted, a CCRC may appear financially stable in the short term, yet still face threats to long-term viability. We found that only three of the eight States we reviewed required an actuarial study at regular intervals, and one State, Florida, analyzes CCRC financial trends. This lack of a long-term focus in some States creates a potential mismatch with residents' concerns over their CCRC's long-term viability. While CCRCs offer long-term residence and care in the same community, residents can still face considerable risk. For example, CCRC financial difficulties can lead to unexpected increases in residents' monthly fees. While CCRC bankruptcies or closures have been relatively rare and residents have generally not been forced to leave in such cases, should a CCRC failure occur, it could cause residents to lose all or part of their entrance fee, which may amount to hundreds of thousands of dollars. For example, residents of one CCRC in Pennsylvania, who we will hear from later, lost the refundable portion of their entrance fees in 2009 when the facility became insolvent and was sold to a new operator. Residents can also become dissatisfied if CCRC policies or operations fall short of expectations or there is a change in arrangements they thought were contractually guaranteed, such as charging residents for services that were previously free. In addition, residents also face the risk of being transferred involuntarily from one level of care to another or of not being able to obtain assisted living or nursing care onsite. Most of the States we reviewed take steps to protect the interests of CCRC residents, such as requiring the escrow of entrance fees and mandating certain disclosures. However, not all States review the content of contracts, and the States we reviewed varied considerably in the type of financial and other disclosures they required. While some CCRCs voluntarily exceed disclosures and protections required by their State's regulations, such variation and regulation means that consumers in some States may not receive the same protections as those in others. In closing, we found that CCRCs can benefit older Americans by helping ensure access to housing and healthcare in a single community as they age. However, choosing to enter a CCRC is not without significant financial and other risks. Further, the stress that recent economic events may have placed on CCRC finances underscores the importance of regulators being vigilant in their efforts to monitor CCRCs' long-term viability and protect consumers. Such efforts will only become more important as the number of older Americans grows. Mr. Chairman, this concludes my prepared statement. I would be happy to answer questions. [The prepared statement of Ms. Cackley follows:] [GRAPHIC] [TIFF OMITTED] T2691.001 [GRAPHIC] [TIFF OMITTED] T2691.002 [GRAPHIC] [TIFF OMITTED] T2691.003 [GRAPHIC] [TIFF OMITTED] T2691.004 [GRAPHIC] [TIFF OMITTED] T2691.005 [GRAPHIC] [TIFF OMITTED] T2691.006 [GRAPHIC] [TIFF OMITTED] T2691.007 [GRAPHIC] [TIFF OMITTED] T2691.008 The Chairman. Thank you very much, Ms. Cackley. Mr. McCarty. KEVIN MCCARTY, INSURANCE COMMISSIONER, FLORIDA OFFICE OF INSURANCE REGULATION, TALLAHASSEE, FL Mr. McCarty. Thank you, and good afternoon, Mr. Chairman. My name is Kevin McCarty. I am the Insurance Commissioner of the State of Florida, a State with a substantial population of older Americans. The decision to join a continuing care facility represents a substantial investment on the part of their own personal assets of our seniors, and Florida takes its responsibility to protect their seniors very seriously. In fact, Florida statutes provide for our residents of our senior facilities a bill of rights intended to ensure that residents are continually treated with dignity and respect. Florida's regulatory framework emphasizes four fundamental areas. Firstly, verifying that CCRC owners and management are competent, trustworthy, and responsible. Second, we ensure that the relevant information that is important in decisionmaking is disclosed to the residents of the communities. Third, we are ensuring that the project is in full compliance with Florida's stringent licensing requirements. Last, but certainly most importantly, providing a thorough financial oversight to ensure that the continuing care facilities are there for the long term and that they continue to provide a home for Florida's seniors. To determine professional competency and trustworthiness the Office of Insurance Regulation requires each officer, director, owner, or manager to submit a biographical affidavit, a legible fingerprint card, and an independent investigation background report. This biographical information applies to any new officer and director and management of an existing CCRC, as well as a new facility. These rigorous requirements ensure that the people of Florida are guaranteed not to have people of questionable moral character in a position to harm our seniors. It is very important that prospective and existing residents have sufficient and relevant information on a facility available to them. Florida statutes require numerous disclosures, including, but not limited to a summary of the facility's ownership interests, their plans for expansion of their operations, rules and regulations governing the facility and, of course, a copy of the bill of rights, and a summary of the most recent examination conducted by our office. Since the viability of a CCRC is primarily governed by the number of people in occupancy, it is imperative that the facility demonstrates sufficient demand for a facility prior to placing a consumer's funds at risk. Florida accomplishes this objective by requiring a prospective provider to submit an independent feasibility study with its application for licensure. With respect to financial oversight, each facility is required to file an annual financial report, audited financial statements, and provide a liquid reserve calculation which ensures financial resources to pay in the future. Each facility has an assigned analyst within our office who reviews all financial submissions in great detail. Our office may require a facility that has experienced a declining financial trend to submit to more frequent reports, actuarial studies, submit a corrective action plan to address any of their financial problems. All CCRCs are subject to periodic onsite examination by the Office of Insurance Regulation, and the office may also examine a CCRC at any time at the office's discretion. A facility that has more significant problems may be subject to our onsite management and, ultimately, may be subject to suspension of their certificate of authority. One of the new developments we are seeing in Florida is a trend toward CCRCs at home, also called CCRCs without walls. This new concept usually has a limited number of independent living facilities. Most of these CCRCs at home residents would live at home but eventually move to the facility when they had additional assisted living or nursing care services required. This has been a provider reaction to the steep drop in the housing market when people are reluctant or unable to sell their homes for market value or what they think their properties are worth. We have one proposed facility which currently received the provisional certificate of authority to pursue funding a project of this type. It is important to note that the office staff is in constant contact with a variety of stakeholders through the Florida Continuing Care Advisory Council. This council consists of three resident members, three executive directors of facilities, and four professionals familiar with the industry. Each year, our office hosts a meeting with the council to address industry needs, trends and conditions, and the regulatory environment for our seniors. In conclusion, it has been almost 20 years since we had a failure in Florida, which is perhaps the greatest testament to our regulatory success. OIR continues to monitor ongoing trends in the CCRC industry as these entities adapt to changing economic circumstances. Mr. Chairman, that concludes my prepared remarks, and I will be happy to answer any questions. [The prepared statement of Mr. McCarty follows:] [GRAPHIC] [TIFF OMITTED] T2691.009 [GRAPHIC] [TIFF OMITTED] T2691.010 [GRAPHIC] [TIFF OMITTED] T2691.011 [GRAPHIC] [TIFF OMITTED] T2691.012 [GRAPHIC] [TIFF OMITTED] T2691.013 [GRAPHIC] [TIFF OMITTED] T2691.014 [GRAPHIC] [TIFF OMITTED] T2691.015 [GRAPHIC] [TIFF OMITTED] T2691.016 [GRAPHIC] [TIFF OMITTED] T2691.017 [GRAPHIC] [TIFF OMITTED] T2691.018 [GRAPHIC] [TIFF OMITTED] T2691.019 [GRAPHIC] [TIFF OMITTED] T2691.020 [GRAPHIC] [TIFF OMITTED] T2691.021 The Chairman. Thanks very much, Mr. McCarty. Mr. Prine. CHARLES PRINE, RESIDENT OF CONCORDIA OF THE SOUTH HILLS CCRC, MOUNT LEBANON, PA Mr. Prine. My name is Chuck Prine. I want to thank the committee for providing this opportunity to explain what happened at the Covenant, where the residents lost a total of more than $26 million in refundable deposits. Like most of the residents, my wife and I selected this community primarily because of the reputation of its sponsor, B'nai B'rith, which promoted itself as a leading operator of senior living facilities throughout the United States. It later became apparent that B'nai B'rith's actual experience was primarily in Government-financed low-income rental facilities and that it had no experience whatsoever in building and operating life-care facilities. Furthermore, B'nai B'rith did not invest a penny of its own money in this venture, but rather set up a nonprofit corporation, which financed the construction and operation through a bond issue and bank loans. B'nai B'rith's stated plan was to draw out of the financing and operation a development fee of $1 million and a licensing fee equal to 50 percent of the quarterly net income. Almost from the very start, it became apparent that the Covenant was in trouble. Its occupancy rate did not meet expectations. The cost of the building exceeded estimates by several million dollars. Constant repairs were required. Real estate taxes had been grossly underestimated. All of the board of the dummy corporation set to run this facility were either B'nai B'rith International directors or employees. However, many of them never set a foot in the building. They refused repeated requests for a meeting with the Residents Council. They allowed the escrow fund of resident deposits to be used to make up for lack of other income to pay the various bills. They became delinquent in real estate taxes and finally defaulted on their debt service. Eventually, the bond holders demanded that B'nai B'rith take some drastic action to solve the problem, but B'nai B'rith refused to put any of their funds into the situation. Under a State act passed some 25 years ago, the Pennsylvania Insurance Department had the right to step in and appoint a trustee to take over the facility, but it refused to take this step. In 2009, the bond holders commenced a mortgage foreclosure action in State court. That action could have resulted in us being put out on the street. Eventually, we landed in Federal bankruptcy court, where the bond holders and bank lenders refused to consider any kind of resolution in which the residents would receive a single penny. The Residents Council and the Unsecured Creditors Committee did play a role, however, in the selection of a new buyer. We were able to facilitate a sale in which the new owner agreed to honor our existing residency agreements with our life-care provisions, but with the total loss of our deposits. Based on our experience, I would like to make four recommendations for consideration in any legislation which might be put together to protect senior citizens from losing their life savings in questionably financed life-care projects. One, senior housing facilities, which are financed in part by the use of interest obtained from the investment of refundable deposits from residents, should be required to place these funds in a true escrow account held by a trustee with the proviso that the principal could not be utilized for operating expenses or other purposes. Two, every project should include a minimum of 30 percent of its financing coming from a cash investment of the sponsor/ owner organization. The primary purpose should be to provide guaranteed lifetime care for residents rather than a financial program to provide a high return for speculative investors and lenders. Three, the boards of directors of life-care facilities should include at least 33 percent residents. In effect, the residents should be players, not just pawns in the game. Four, there should be in each State a single responsible governing agency, as opposed to responsibilities split among various State agencies. In Pennsylvania, licenses must be obtained from the Department of Insurance, the Department of Public Health, and the Department of Welfare. None of these agencies now has total control, and they do not have, either individually or collectively, sufficient staff and budget to supervise and regulate the facilities properly. Not in any sense to diminish the loss our residents have suffered, I am happy to report that our current residents are very pleased with the operation under our new identification, Concordia of the South Hills, which is owned by the Concordia Lutheran Ministries of Pittsburgh. I might point out that Concordia of South Hills put up $15 million of their own money in cash to buy our community. There is no debt at all on the facility at this time. Not only that, they went a step further and voluntarily gave us a $1 million endowment fund to help cover the potential losses of somebody in the assisted living or nursing who ran out of money to pay their bills. I thank you very much for this opportunity. I would be happy to offer some other ideas about why Concordia has been successful and what could be done, but thanks for the opportunity to speak at this point. [The prepared statement of Mr. Prine follows:] [GRAPHIC] [TIFF OMITTED] T2691.022 [GRAPHIC] [TIFF OMITTED] T2691.023 [GRAPHIC] [TIFF OMITTED] T2691.024 The Chairman. Thank you, Mr. Prine. Ms. Pearson. KATHERINE PEARSON, PROFESSOR, DICKINSON SCHOOL OF LAW, PENNSYLVANIA STATE UNIVERSITY AND DIRECTOR, ELDER LAW AND CONSUMER PROTECTION CLINIC, UNIVERSITY PARK, PA Ms. Pearson. Thank you very much. I am glad to be here as well, and it is hard to follow Mr. Prine because he is so eloquent in speaking on behalf of his situation and other residents. I feel I am also here on behalf of residents. As the Director of an Elder Law and Consumer Protection Clinic at Penn State University's Dickinson School of Law, I have had opportunities for several years to speak with residents of CCRCs not only in Pennsylvania, but around the country, as I have become more interested in this venture. I am a fan of CCRCs. I would like them to be there when I am ready for this form of living. Therefore, when I am speaking today, I am speaking on behalf of residents. But I am also hoping that the industry is going to be as healthy as it can be. About 6 years ago, I was approached by a group of residents at a CCRC--not Mr. Prine's CCRC, actually another one. They were concerned about an expansion plan at their particular facility. They felt that it was economically not feasible. As with many CCRC resident groups, this was a pretty sophisticated group of residents and they had crunched some numbers, and the numbers didn't look very good. So, I asked them, ``Have you approached the management of your facility?'' They had, and they were not satisfied with the information they were getting in response. I asked whether they had approached the Department of Insurance, the regulating agency in their State. They said they also had done that, and they had received no substantive response. Well, that intrigued me. What was the role of State regulation? So, I went to that same department and started asking some questions. What I discovered was that in that particular State, annual reports were filed and then stacked in a dusty closet and never opened. I found reports that the seal had never been broken on, and that said to me, well, there is something about regulation that is not working here, and particularly in this particular circumstance. I ended up writing an article about it. In response to the article, I talked more to State regulators. One of the State regulators said, ``You know, we feel we have done a great job.'' I think on many respects that the State had had a good track record with CCRCs. But the State regulator said that in our State, we have had a few financial insolvencies. We have been able to solve it without formal action. I said that is great news. What criteria were used to decide whether there was a problem? What criteria were used to solve the problems? How did you make it better? The problem was there was no collective information about that, no collective information about what were standard practices, what were good practices, and what were poor practices. So that began to concern me about what do we mean by State regulation? As I have talked to CCRC residents around the country, I repeatedly hear that they want financial transparency that is more than just disclosures, that also involves actuarial testing, if you will. I think that as a result of that, what I am calling for in my testimony, and I elaborated in greater detail in my written testimony, I am calling for a national residents' bill of rights on behalf of residents of CCRCs. I think it is time to give some real meat to their ability to get useful, transparent information. I think the industry as a whole would be helped by that. The industry is served by transparency, and I think the industry with greater transparency can achieve greater health. So, I don't think the industry should be frightened by the idea of a residents' bill of rights. So that is what I am asking for, and I am happy to respond to questions about that particular item. Thank you very much, Senator Kohl, Senator Franken. [The prepared statement of Ms. Pearson follows:] [GRAPHIC] [TIFF OMITTED] T2691.025 [GRAPHIC] [TIFF OMITTED] T2691.026 [GRAPHIC] [TIFF OMITTED] T2691.027 [GRAPHIC] [TIFF OMITTED] T2691.028 [GRAPHIC] [TIFF OMITTED] T2691.029 [GRAPHIC] [TIFF OMITTED] T2691.030 [GRAPHIC] [TIFF OMITTED] T2691.031 [GRAPHIC] [TIFF OMITTED] T2691.032 [GRAPHIC] [TIFF OMITTED] T2691.033 [GRAPHIC] [TIFF OMITTED] T2691.034 [GRAPHIC] [TIFF OMITTED] T2691.035 [GRAPHIC] [TIFF OMITTED] T2691.036 The Chairman. Thank you very much, Ms. Pearson. Mr. Erickson. DAVID ERICKSON, VICE PRESIDENT OF LEGAL AFFAIRS, COVENANT RETIREMENT COMMUNITIES ON BEHALF OF THE AMERICAN ASSOCIATION OF HOMES AND SERVICES FOR THE AGING, SKOKIE, IL Mr. Erickson. Thank you, Chairman Kohl and members of the committee. I am here testifying on behalf of American Association of Homes and Services for the Aging and Covenant Retirement Communities. Covenant Retirement Communities has 12 CCRCs in 8 States serving over 5,000 residents. Our primary contract has an entry fee and provides for modified life care. Most of our residents choose a 2 percent per month declining refund option. We also offer 90 percent refunds, but less than 10 percent of our residents choose this option. We also offer full life-care contracts in two communities. Let me begin by saying that Covenant Retirement Communities is not connected in any way to Covenant at South Hills. We happen to share the word ``covenant'' in our name, but beyond that, there is absolutely no connection. We are, of course, very aware of the significant loss that the residents of Covenant at South Hills suffered from failure of that community. That bankruptcy, indeed any bankruptcy in our industry, is something we take very seriously. CCRCs exist for one reason--to serve the needs of our residents. Anytime we fail to do that, it is a failure we collectively bear. We deeply regret that it happened. There are nearly 1,900 CCRCs across the country. The vast majority remain financially strong and viable. We recognize that a small number of CCRCs are vulnerable, especially those that opened during the recession or are single-site campuses, and those are being carefully monitored by our lenders. Notwithstanding the situation at Covenant at South Hills, there are relatively few CCRCs which have faced payment defaults or filed bankruptcy. Even in those rare cases, the CCRCs have done so without adverse impact to the financial security of their residents. The Covenant at South Hills was clearly an exception. Fortunately, the residents did retain their right to remain at the CCRC under new ownership and did not have to move. Without question, the weak economy has impacted CCRC occupancies, particularly CCRCs located in regions of the country hardest hit by declining housing values. That said, occupancy rates of CCRCs overall continue to exceed those of free-standing assisted living communities, nursing homes, and even free-standing independent living retirement communities. The ability of CCRCs to actually weather the economic storm as well as they have speaks volumes for the strong preference seniors have for a continuum of care lifestyle. Not coincidentally, the typical CCRC reports that resident referrals are the strongest source of leads. I would like to briefly comment on two reports recently produced by a CCRC task force which I had the honor of chairing. It was formed earlier this year and was comprised of leading experts in the CCRC operations, tax-exempt bond financing, and legal and regulatory requirements. The first report is ``Continuing Care Retirement Communities: Suggested Best Practices for CCRC Disclosure and Transparency.'' The second report is entitled ``Today's Continuing Care Retirement Community: The Strengths of This Popular Senior Living Model, Its Stress Points and Challenges, and Outlook for Tomorrow.'' Both of these reports have been supplied to the committee. CCRCs are an important option in living arrangements for seniors. Over the decades, CCRCs have successfully offered a continuum of care highly desired by seniors. The vast majority are financially stable and provide a style of living which emphasizes healthy aging, have numerous options of living and financial arrangements to meet a variety of consumer preferences, and promote an active and engaged lifestyle. Unlike the housing market or equities market, where large numbers of seniors have had their portfolios affected, the vast majority of CCRCs have provided security and care for seniors who will know where they will live and receive care usually for the rest of their lives. CCRC residents have moved into communities where they have chosen a lifestyle that provides comfort for their families, who will not have to worry about what will happen to Mom and Dad as they age. As the ``CCRC Story'' reports, a common sentiment among CCRCs residents is that they wished they would have moved to the CCRC sooner. CCRC providers recognize the importance and the need for effective State regulatory oversight of CCRCs. But we also believe the regulatory framework has to maintain a balance to provide adequate consumer protection without unreasonably restricting growth and development of CCRCs. There is certainly a place for reasonable requirements, including disclosure requirements, capital reserves, and protections of refundable entry fees. However, if these requirements become too prescriptive, expansion of existing CCRCs and development of new ones will be slowed or halted, and seniors will lose the opportunity to move into a living environment they clearly prefer. Excessive regulatory restrictions could also prevent CCRCs from offering the varieties of living arrangements that consumers seek. Similarly, requirements related to the operating and governance structure should be reasonable. For example, many CCRC sponsoring organizations, often not-for- profit religious and fraternal organizations, recognize a need in their local community for the types of services a CCRC provides, but lack the expertise to develop and operate the CCRC. Third-party developers and operators fill this need, but that doesn't mean that the not-for-profit sponsor isn't an active partner in the operations of the CCRC. In fact, if you look at most of these types of operational structures, you will find an active and involved board of trustees. Thank you for this opportunity to testify on behalf of CCRC providers across the country. We are proud of our longstanding history in serving seniors and stand by and ready to assist the efforts of this committee in any way we can. We will continue to work collaboratively with State regulators to support strong and effective State regulations and oversight. [The prepared statement of Mr. Erickson follows:] [GRAPHIC] [TIFF OMITTED] T2691.037 [GRAPHIC] [TIFF OMITTED] T2691.038 [GRAPHIC] [TIFF OMITTED] T2691.039 [GRAPHIC] [TIFF OMITTED] T2691.040 The Chairman. Thank you very much, Mr. Erickson. We are joined today by Senator Franken from Minnesota to make what comments you would wish. STATEMENT OF SENATOR AL FRANKEN Senator Franken. Thank you, Mr. Chairman, and thank you for holding today's hearing on this important issue to seniors in Minnesota and across the country. I want to thank all of the witnesses for testifying today. One of the biggest challenges facing Minnesotans today is figuring out how to make sure that they will have the services and the supports that they need to maintain the quality of life as they get older. For many Minnesotans, this means being able to live at home, maintain their independence, and be with their families. But there are a lot of options for long-term services and supports out there, and it can be hard to know just which one to choose. This is especially the case when you don't know what your health needs or your spouse's health needs may be in the future. Continuing care retirement communities are an attractive option for some seniors because they offer the opportunity to stay in their communities, even as their long-term care needs change. In many cases, these communities can provide the security and stability that many seniors are looking for. But it is critical that seniors have access to all the information that they need to decide whether a continuing care retirement community is right for them, like information about the owners and the managers of the community and what financial risk there may be. It is also important that seniors have a voice and can play an active role in decisions about their care. Thank you for your testimony. I read it last night, and I am looking forward to hearing your answers to questions as to how we can better enable seniors to be informed consumers and active decision makers when it comes to their long-term care options. Thank you all for being here today again and for sharing your expertise. Thank you. The Chairman. Thank you very much, Senator Franken. Ms. Pearson, when you talked about a bill of rights, would you expand on that a little bit? Ms. Pearson. Yes. I think I have spent some time thinking about this. In essence, what we are talking about is when often the people who know best what the problems might be are the residents in a particular facility. When they want more information, sometimes there is a bit of stonewalling that goes on. So I think what I am really talking about is a financial bill of rights, the ability to get more information when they feel it is necessary. There needs to be somebody to hear when they speak and when they want that information. Right now, that would be the State regulators. So if a particular percentage of residents at a facility went forward to a State regulator and said we need more information about this particular topic, that percentage would trigger that actuarial inquiry. So I think what I am really talking about is a financial bill of rights. The Chairman. That would give the residents or the potential residents what kind of information? Ms. Pearson. I think part of the challenge here is that as each facility adapts with time, adapts to financial circumstances with time, they get creative with their financing. I think that one of the things that happens is the residents begin to get a sense of that. They see, for example, the use of contract management coming in, cutbacks in services, things like that, and they end up wanting to know what are the reasons for that, where is the money going? You know, the financial fees that we have paid, does it really have to be this way? So I think that particularly with respect to actuarial soundness, when that type of inquiry comes about, the States could require a projected type of actuarial study and not simply what goes on in most States, unlike Florida. Florida does better at this. Most States simply require a point in time financial report, rather than an actuarial study. The Chairman. All right. Mr. McCarty, how many of these facilities do you have in Florida? Mr. McCarty. We have 73 licensed facilities in our State that cover the contracts A and B as described in the GAO report, where anytime you have to put up cash up front for the facility, it has to be regulated by the Office of Insurance Regulation. We share that responsibility with the Agency for Healthcare Administration, which does the quality control to ensure the quality of services, and the Department of Financial Services, which handles our complaints. That covers 30,000 residents in Florida. The Chairman. Is it fair to say that Florida's CCRCs are under your supervision? Mr. McCarty. Yes, they are under my supervision. The Chairman. Do you regard that as being important? Mr. McCarty. I believe it is a critical part of my responsibility and my mission to protect the solvency of the CCRCs. Yes, sir. The Chairman. So you would recommend that CCRCs across the country should be regulated, based upon your experience in Florida? Mr. McCarty. Based upon my experience in Florida, we have had a long tradition, since 1953, of regulation of CCRCs. That has been certainly accelerated in the 1970's and 1980's. I think that we have a very strong bias in our State for protecting what we believe are very vulnerable citizens, and we think that if you are protected in Florida, you should be protected in every State. I certainly support what Ranking Member Corker has said about how a State-based regulatory system is a good system, and I think you can harmonize a State-based regulatory system with some minimum standards that may be established by the Congress. If, in their wisdom, they choose to establish those standards, you could use the Medicare supplement insurance model as one where you task the National Association of Insurance Commissioners, who are the experts in this area, to come up with national standards that States would have to abide by. That may be one way of achieving those consumer protections with the least intrusion on the States' sovereignty. The Chairman. How many of the residents of CCRCs in Florida or what percentage of the residents pay an upfront fee? Mr. McCarty. Well, all of the ones pay an upfront fee that are going into our facilities. The Chairman. They all do? Mr. McCarty. They all do. The Chairman. Some, many of them move out, have a change of idea, change of lifestyle? Mr. McCarty. Yes. The Chairman. Are there difficulties in getting the refund back? Mr. McCarty. Refunds are governed by--governed under Florida law. They generally receive their refunds within 120 to 200 days. The Chairman. So you have not experienced difficulty in getting their refunds back to those who decide to move away? Mr. McCarty. No. Again, we have a very broad regulatory framework that looks at required minimum reserves. We require companies to escrow that money to protect that money in the event the consumers choose to exit and go to another facility. The other thing I think is very important is, as a previous speaker has addressed is providing information and not just disclosure, general disclosure, but provide meaningful financial information. We understand that our elderly population is a vulnerable population, but they are also very intelligent. If you provide uniform input data points where they can readily compare one facility to another facility, we need to give them the tools to make those kinds of comparisons. The Chairman. Good. Well, Mr. Prine, you didn't have that experience in Pennsylvania, did you? Mr. Prine. No, we did not. The information that is provided to the State of Pennsylvania is reviewed, I am sure, to some degree. But I don't think it is studied to the extent of really trying to take it all apart and see why it works or why not and project what would happen in the future. One of the problems with all of these facilities is they may look good theoretically on paper, but this is a kind of business where if you get behind in the flow of income from new people coming in, if a place is slow to rent up, it starts to lose ground immediately. The taxes don't stop. The monthly bond payments don't stop. Finally, you have to look around for other sources of funds. What happened in our situation is they immediately tapped, in effect, the residents' deposits and started using them. Even that couldn't catch up with how far behind they started to fall. When we tried to get the State insurance department to intervene, they did meet with us. Mr. Johnson, the insurance commissioner for Pennsylvania, did come over to the Covenant. He explained very carefully that they never had a facility in the State of Pennsylvania ever go through a bankruptcy and close down, and he was sure things would work out in the long run and just be patient. Well, they didn't work out in the long run. They just kept getting worse and finally got so bad that the bond holders ultimately forced a sale. But I would like to point out one thing about the new people that moved in, which shows the difference in the way a place could be operated poorly and a place could be operated well. The new people put up cash to buy the place. They eliminated completely the $4 million a year in interest payments that were a noose around the neck, really, of the previous facility. They put their own money into it. They have a policy which is far different from using the residents' deposits. They put the deposits aside in an account. Interestingly enough, if the value of that account, because of what it is invested in, decreases, they put more money in to keep it up to a balance that is equal to the potential deposit pay out. If they had to--if everybody at once left, they would still be able to return the deposits. This is an extremely conservative way of operating but it is the only really safe way to prevent this possible kind of disaster occurring elsewhere. The Chairman. What happened to the fees? Did you say $26 million? What was that number? Mr. Prine. Twenty-six million dollars of resident deposits were lost completely. We didn't get one penny of that back. The Chairman. So that was a disaster. Mr. Prine. That is the life savings of a lot of people. This ranged from somewhere about $90,000 to $300,000 per apartment. The Chairman. That is a disaster. Ms. Cackley, is that tremendously unusual? Do you have any way of indicating whether or not it is a problem across the country, or is it something that occurred as a sign to us never to see it happen again, but it doesn't happen hardly at all? Ms. Cackley. It does not happen often, as best we have been able to tell. But it is certainly a disaster, and it is a risk that is of concern and needs to be paid attention to as we move forward. As more CCRCs come into existence, as our population ages and demand for such facilities increases, it is certainly something that is a concern and needs to be prevented in the future as well. The Chairman. I suppose you would assure us or tell us with some level of certainty, Mr. McCarty, that that kind of a situation is most unlikely in Florida because of the regulation and oversight that you have? Mr. McCarty. I would say that is generally true, sir. I believe that to be the case. I think that ensuring that you have close scrutiny of the financial statements and so that you can use your financial analyst to evaluate trends and conditions before they become a problem. One of the things that we have been successful doing in Florida is identifying problems early on so that we can take a number of corrective action plans as necessitated by the financial condition of the company. That most oftentimes is bringing in a new purchase or acquisition, and that only works if you get involved in that process early enough in the deterioration of the financial condition of the company. I can't predict what will happen in the future, and we certainly have some unique challenges today with the collapse of the marketplace. Many Floridians have purchased homes that are worth far less today than they were a few years ago. So, that is putting a tremendous--a lot of stress on new people moving into facilities. So, we still need to see how that is going to pan out. But companies have been resourceful. They have been moving to providing other services where they can make profits, but they also are moving toward fee-for-service and rental beds, which augment the bottom--the balance sheet for the company. The Chairman. Before we turn to Senator Franken, Mr. Prine, do you want to make a comment? Mr. Prine. Yes. One thing that I think would be very interesting--and it sort of follows up on the comments of some of the others here--is if the statements that these facilities produce would really show how much of the residents' deposit is still in the account and how much has been spent. I mean, this goes on, and they don't fold up necessarily, but they could be way behind. If they had a run that several people moved out at once, they might have trouble immediately being able to pay everybody off and actually couldn't pay everybody off because they have used some of those deposits for other purposes. There is only one safe way to do this, and that is to lock the deposits up. This is nothing wrong with using the interest of those deposits. That is the purpose of this type of financing. If you have $26 million, you get over $1.5 million in interest or something like that to operate the place. But then you shouldn't be allowed to dip into the principal. When the principal goes way down, of course, the amount of interest that they are getting on it goes way down. So it keeps going further down. If you have very many people move out--and of course, in some places, they don't pay until somebody else moves in. We had a lot of people that moved out, and 2 or 3 years later, they still hadn't received a penny and never did get a penny of what they expected when they moved out. There might have been good reasons for them to move somewhere else, to go somewhere where their kids lived or some other reason. This wasn't just a matter of dissatisfaction or something. Things happen in people's lives that they might have to change where they want to live. But the refund money ought to be there, and it ought to be guaranteed that it is there. The Chairman. Yes. Senator Franken? Senator Franken. Thank you, Chairman Kohl. Commissioner McCarty, have you ever had a CCRC fold in Florida? Mr. McCarty. Yes. Senator Franken. You have? Mr. McCarty. It was 18 years ago. Senator Franken. OK. You know, it seems to me that when seniors put up a deposit to receive services in a continuing care retirement community, they expect that it will follow through as promised to provide them with services when they need them, and I just think that is a reasonable expectation. It sounds, from Mr. Prine's experience, that there was no disclosure to the residents of what was going on. What, Commissioner, can we do to strengthen disclosure requirements so that seniors understand the financial risks that they may be taking on? Mr. McCarty. Well, I think some of the members who have testified today touched on some of those concerns. I think it is critically important that the contracts be reviewed so that they are clear and unambiguous as to the terms and conditions. The contract should spell out very specifically in clear, plain language how the refunds are calculated and how the monies will be retained. I think there ought to be requirements to ensure that monies are escrowed and in an appropriate fashion so that there are still sufficient funds to run the facility, but that there is some guarantee that in a return or refund that those monies are available. I think you need to have, again, as I stated before, a full complement that involves appropriate licensing, strict standards on how money is to be handled, disclosing to consumers information about their bill of rights and protection of them in the facility, but also their financial rights with regard to information about the financial standards and have appropriate resources on the State regulatory system to analyze the information that comes in. Obviously, if you are getting financial trends, actuarial reports, or financial statements that are not reviewed and analyzed in the context of other facilities and trends and conditions, that information is not particularly useful. That information is necessary for you to have early detection. So early detection leads to early intervention to prevent future insolvencies. Senator Franken. Ms. Pearson, the culture of long-term care is changing. I think that is the word they use, ``culture.'' As more options become available to seniors, I think the whole point is that the seniors play an active role in deciding how, when, and where they receive their care. For example, there is a nursing home in Perham, MN, now where if a resident wants to stay up and watch a Twins game, he or she stays up and watches the Twins game. Then if he or she wants to sleep late, they sleep late. Everything isn't dictated by the meal, you know, breakfast at 6:30, lunch at 11, dinner at 4. I think sometimes we forget how important it is for people to decide, to make their own decisions on how they are living. I was wondering about the boards, the governance of long- term care facilities. What do you think about Mr. Prine's proposal to require a certain percentage of CCRCs, CCRCs' board of directors to be made up of residents? Ms. Pearson. I am in favor of it. One of the things that the very first group of residents that contacted me asked me about was whether or not they could be on boards. Their particular facility was taking the position that there was a conflict of interest for residents to be on governing boards, which is kind of ironic in a way. Certainly, other States have found that it is possible to have residents on boards and that it works quite well. It becomes a way of providing transparency of information, and it also eliminates one of the qualities that some residents have complained to me about--that notion that now that you are older, don't worry your graying head about how this facility is run. We will take care of it for you. Well, these people are dynamic people. They don't like that paternalistic attitude, understandably so. One of the ways to do it is to provide residents a voice on the governing boards, and I think many healthy CCRCs do that. In fact, I think perhaps, Mr. Erickson, your CCRCs provide a governing board. Senator Franken. Could this be part of your bill of rights? Ms. Pearson. It certainly could be. Senator Franken. OK. Mr. Prine, speaking of transparency, in your testimony you mentioned you felt that the Covenant community was misrepresented to you. Mr. Prine. The Covenant community was misrepresented to us. The Concordia community that owns the place now was very clearly represented to us because the president of that organization came and talked to our residents before they acquired it and wanted to be very sure that he had our support. He promised that they would have--the people we would have a voice on the board and things like that. Whereas, when I indicated that there was misrepresentation that may have occurred with the Covenant people, a lot of that has to do with the way they marketed the place. They put their name out in front on their promotion material B'nai B'rith. Under the sign on the front of our building, it said ``B'nai B'rith Senior Living Community.'' Yet, when it came down to trying to deal with the B'nai B'rith people, they had a wall up there, and they said, no, you have got to deal with Covenant of South Hills, Inc. Well, the Covenant of South Hills, Inc., had seven directors, and all seven of them were employees or directors of B'nai B'rith. Yet they never met in our building. They never would meet with our Residents' Council. We had limited communication. I had a couple of phone conversations with people, and there always was some sort of evasive answers of questions that I asked. I never felt I was getting to the bottom of anything. We just felt completely left out of it. One of the problems is that when an organization like this promotes itself, particularly church-related organizations, there is a tendency on the residents' or the customers' part, you might say, not to question. I mean, you don't go question the clergy of your particular denomination or whatever it may be about things, about how a place is operated or for example. That is not something that people usually do. They think in terms, well, this is B'nai B'rith, and they advertised and promoted all the experience they had had internationally in housing and so forth. But in the fine print, in the disclosure statement, the big, thick document, it does say somewhere in there that they had never run an assisted living--or they had never run a continuing care community themselves before. But everything else was promoted with the idea that they are the most experienced housing people in the country, and this is just going to be a wonderful thing. There are many, many people--the people that are most seriously concerned about this are the people with strong religious affiliations who came in there because they thought B'nai B'rith would never let them down. Senator Franken. Well, that is a Shonda, as we say. Mr. Erickson, in your testimony just now, you said you were kind of worried that regulatory requirements could impede the growth of the industry. But it sounds like what Mr. Prine's example shows us is that there does need to be regulation. Do you agree with the GAO finding that actuarial studies can provide information on long-term viability? My question is how could anyone say it is unreasonable to require these communities to conduct regular studies and provide this basic information to residents? Mr. Erickson. Yes, the providers support strong State regulations to protect residents, and we believe that, in turn, produces resident satisfaction and helps the industry on the whole. With respect to your question about actuarial studies, one of the things that we put in the disclosure paper, that is the group that I chaired, in there as an area to be disclosed to prospective residents or applicants to a CCRC is the actuarial information, if it is applicable. Some of the CCRCs are the extensive care type of CCRCs where they have the contracts that provide for minimal increases of monthly fees as they progress through from assisted living to skilled nursing care. Those types of facilities are more heavily dependent on actuarial studies. Other CCRCs are the type where they have a modified contract where there is a limited amount of healthcare benefit for residents that progress to the assisted living and also skilled nursing care. Those types of facilities do not need as extensive actuarial studies. So we believe--in the group that I chaired, we did discuss actuarial studies in quite detail, and we believe that they can be helpful for CCRCs to ensure---- Senator Franken. They are helpful, but not required? Mr. Erickson. Yes. But not required because there are so many different models of CCRCs that to have one specific type of actuarial requirement, it might not fit the needs for the various types of providers that are out there. Senator Franken. Well, in your answer to me when I asked about regulation here, you said State regulation. What if a State, like, say, oh, I don't know, Pennsylvania, say, for example--I don't know why I came up with that--didn't provide regulation? Mr. Erickson. There are 12 States that do not regulate CCRCs, and within those States, the providers--there is third- party oversight of the providers through the financing agreements that they enter into. So, within the financing agreements, there are reserves that are often required by the lenders. There is reporting requirements to the lenders and also ratios that providers must meet. So, in the typical situation, there is a high level of lender involvement within a CCRC. In addition to that, several CCRCs have chosen to be rated by the rating agencies, and that provides another area of third-party oversight to the CCRCs. Senator Franken. Those are the ones that have chosen voluntarily. Mr. Erickson. Right. Yes. Senator Franken. Well, we know how that works out sometimes. Ms. Cackley, as you noted in your testimony, State regulations of these retirement communities may vary widely, and as Mr. Erickson just said, many States don't regulate CCRCs at all. What are your recommendations for Federal policies that could protect consumers from some of the risks that were highlighted today? Ms. Cackley. GAO isn't making any specific recommendations at the Federal level right now. While we found--we found the possibility of risk for CCRCs and residents, we did not see a significant number of insolvencies or other problems. So we don't have a large effect to point to. What we do point to is the concern for the future and the need for States to be vigilant. So, right now, we are suggesting that States need to be paying attention. We certainly point to sort of the fundamentals of regulation that include things like licensing, like disclosures, ongoing monitoring, and then the actuarial analysis is certainly something that we are suggesting is important. As Mr. Erickson said, there are some facilities that don't have fee structures that include the healthcare needs being the responsibility of the CCRC. They are still the responsibility of the resident. But for those facilities where the fee structure is what we consider either type A or type B, those are definitely situations where an actuarial study will help the CCRC understand what their obligations are going to be in the future and that they definitely need to be planning for. Senator Franken. But for now, you are not suggesting any Federal regulation? Ms. Cackley. No, sir. Senator Franken. Well, thank you. Thank you, Mr. Chairman. The Chairman. Thank you very much, Senator Franken. Mr. McCarty, in Florida, are all those upfront fees kept separate and kept in escrow, kept in reserve? Mr. McCarty. Parts of it. It is not all kept in reserve. Part of it is used after the establishment. One hundred percent of the money is kept in escrow as they do a demonstration on whether or not there is a feasibility study, and then part of that reserve is released on the issuance of a full certificate of authority. But the ongoing concern, the companies have to maintain a full year of payments on their debt, and they have to maintain 15 percent of their operating cost. So that they have money so they don't dip into their reserves. The Chairman. If you could tweak that in any way, Mr. Prine, do you think that is reasonable? Mr. Prine. I still would like to get back to the point that I believe and that it would be interesting if you could have an investigation by the GAO about all this. So what percentage of the deposits that totally could be due do the owners actually have on hand at any given time to pay? The Chairman. That is a good question. Well, you are from the GAO, Ms. Cackley. What can you tell us about that? Ms. Cackley. Sir, we didn't look at all CCRCs across the country. We did detailed work in eight States. But I don't--off the top of my head, I couldn't tell you what the answer is to that question. I can certainly look into it, ask my staff to get me the information and get it back to you. The Chairman. OK. Mr. McCarty, do you want to make a comment on that? Mr. McCarty. I just want to go back to something that was said before. One of the things we want to make sure of is that we don't over-saturate the market. The way for these facilities to succeed is to ensure that they have a high occupancy rate. If we are going to create a regulatory framework, one of the things we have to ensure is that a facility is able to demonstrate up front before construction that they are able to sell the units before construction begins. Because a recipe for disaster is to construct more facilities than you have demand for those facilities, and that is what causes the problem. One of the conditions preceding any regulatory framework is to ensure that a feasibility study is done and actual contract sales are made to ensure--and those monies are put 100 percent in escrow so if we decide not to go through with it, all the monies are returned. But unless and until we control the numbers of those facilities, you can't guarantee that they are all going to be viable. The Chairman. That is a good point. But it is also true, isn't it, that markets do decline, even when they are operating, as they have now in the last several years, right? Mr. McCarty. Yes, they have in the market, and they have to respond to that. Particularly, the housing. That is a new wrinkle in this because it is making it harder for people to do. As I said before, some ways to deal with that is to go from a continuing care contract with upfront money to a fee-for- service rental bed. The Chairman. Now, Mr. Erickson, do you think this ``accredited'' is a big thing? There are only 16 percent of these CCRCs that are accredited. Do you regard that as serious or just an evolving, developing phenomenon? Mr. Erickson. We think it would be helpful for the providers on the whole that there is a higher number of accredited facilities. The company that I represent, all 12 of our facilities are accredited. The accreditation process is very rigorous, and it requires every 5 years for all aspects of the operations of the CCRC to be reviewed by peers. So, just last year, we had all of our facilities reaccredited. I will say that it is an expensive process. I estimate that it cost our organization at least $100,000 to go through that process in terms of the time of our staff to prepare all the reports that were required for the accreditation process. But I believe it gives the consumers and also our residents a sense of that our facilities are financially strong. The Chairman. Would you include that in your bill of rights, Ms. Pearson? Ms. Pearson. I think I would. In fact, I think Mr. Erickson's example reminds me of something that happens in Pennsylvania. Pennsylvania, by statute, has an every fifth year requirement that the State come in and take a look at the books of the facility. What that really amounts to is a checkbox exercise. Somebody is paid to come in and review the books. It takes time to do it. But they are not--they have no financial sophistication when they do it. So it is something that is a cost to the facility. They are charged for that every fourth or every fifth year review, but it produces no useful information, as opposed to something like what Mr. Erickson just described, which is also expensive but provides useful information. The Chairman. That is interesting. So you both believe that every institution across the country should belong or should be accredited, which would mean that they have to go through a periodic examination. Is that right? Ms. Pearson. I guess what I am saying is that there should be periodic examination. Whether that is part of the industry accreditation process---- The Chairman. Right. Ms. Pearson [continuing]. Or part of a State regulatory process. The Chairman. Right. You would agree with that, Mr. McCarty? Mr. McCarty. Absolutely. There is no substitute for ongoing analysis on an ongoing basis and then onsite examinations. We provide onsite examinations every 3 years for unaccredited, every 5 years for accredited. But more importantly, because we watch trends on a quarterly and annual basis, and any change in that, we exercise our discretion to go onsite at will. The Chairman. That is great. All right. Any other comments, folks? This has been very useful. You have brought a lot of information and experience to the table here, and we will follow up. Yes, go ahead, Mr. McCarty. Mr. McCarty. I just wanted to emphasize a point that I made earlier, and I think Senator Franken made the same remark as about the culture. An important part of this is not just creating a regulatory framework and creating--all of that is important. An important part of this is to do an outreach to the senior communities, to establish advisory councils in each of these facilities so that these people in these facilities have a real voice and communication not only with the facility, but to their regulator. One of the things--and having representation on the board is critical for people to feel they are being heard and having representation and not put in the sense where ``don't worry, we are going to take care of your needs.'' Creating a culture of outreach where there is bilateral communication among and between the parties and also as evidenced in our consumer complaints. If we have problems in a facility, we send people to the facility to see what we can do to reconcile those problems. We have had 22 complaints in 7 years, which I think is a remarkable testimony to the fact that in addition to a strong solvency regime, you have to have a people outreach program as well. The Chairman. That is good. Any other comments from any of the panelists? Mr. Prine? Mr. Prine. I would like to second that comment about the resident involvement. We have found in our own experience a vast difference between the previous management and the current management in terms of responsiveness to our Residents' Council. The current management has a representative of the senior staff attend our resident council meetings and hear the comments that people make right from their own voices at that meeting. Likewise, we are able to report back by having a representative of our residents on the board of the governing body. It is a two-way street, and it is working so far extremely well. It is very reassuring to the residents to see this going on and to feel much more comfortable because they see the senior management in the building. Our new board of directors, even though the parent facility is 45 minutes away, the board has its meetings in our building, and the people see them coming in. Last time we had an open house, there were several board members there at the open house, greeting people that were coming in to look at the facility. This idea, the whole focus of all these facilities should be on the services that is being provided to the residents. That is what they are there for. It should not have to be so focused on the financial manipulations that go on to make some of these things work or not work. I mean, that has to be worked out. But when you look at this bond issue, for example, that we had in our facility, the facility cost, including the architect's fees and so forth, $32 million to build. The bond issue was $62 million. What does that other $30 million go to? Well, you have got all sorts of things--funded interest on the bond. So, in other words, they are borrowing money right from the start to pay themselves back, $9 million of that. Debt service reserve fund, another $5 million. Development costs, well, $5 million. That was for fees that went back to the people who were building the place, paying themselves development fees and so forth. It shouldn't take a $62 million bond issue to build a $30 million building. If they did it for cash or a substantial portion of cash, the interest rates would have been a lot less, and there would have been a lot less chance of failure. The Chairman. Right. What did Senator Franken say, a Shonda? Is that what he said? Do you know what ``Shonda'' means? Mr. Prine. I don't understand. The Chairman. It is a shame. It is a true shame. Let us hope that it is an example that is publicized so well that it doesn't happen again. Your being here to talk about it is very instructive and very important. We thank you. Mr. Prine. Thank you. The Chairman. We thank you all for being here. Ms. Cackley. Thank you. The Chairman. Thank you so much. [Whereupon, at 2:48 p.m., the hearing was adjourned.] A P P E N D I X ---------- Ms. Cackley's Response to Senator Kohl's Question about Entrance Fee Refund Practices Mr. Prine stated that his former B'nai B'rith CCRC used residents' entrance fees to keep their CCRC financially afloat, but eventually went bankrupt and was unable to pay entrance fee refunds it contractually owed residents. This resulted in a $26 million loss for residents. He suggested that CCRC providers should be required to hold entrance fees in escrow and only be able to use the interest from those funds. He also asked if it was known what percentage of the funds that residents had paid as refundable entrance fees were available to pay those refunds. To answer this question, it is important to understand 1) how CCRCs generally pay for entrance fee refunds and what states generally require in terms of escrowing funds, and 2) whether setting aside funds for refunds or completely escrowing refund amounts is practical or possible for CCRCs. With respect to making refunds, many CCRCs stipulate in their contracts with consumers that entrance fee refunds to residents' or their heirs will be made when the unit in question is resold and a new entrance fee is received. As a result, the source of entrance fee refunds comes not from liquid assets held by CCRCs, but by new entrance fees paid by incoming residents. CCRCs do not need to have enough cash on hand to pay all potential refunds at one time, and CCRCs generally do not have set-asides specifically for refund purposes. Many states we reviewed have requirements to escrow resident deposits during the construction phase before residents move in, and escrow entrance fees once the CCRC is operational. These are aimed at ensuring the stability of a CCRC during construction and startup, as well as once CCRCs become operational and begin to provide services set out in contracts with residents. Six of the 8 states we reviewed required that CCRCs escrow consumer deposits or entrance fees received. These funds can be used by CCRCs for operational purposes, but are generally not released to the CCRC until certain benchmarks--such as a percentage of facility completion or long-term financing committed--are met. As additional protection, many, but not all, states we reviewed also required CCRCs to maintain financial reserves. According to regulators, the primary purpose of reserves is to ensure some time exists for a CCRC to address financial issues when distress occurs, but are not intended to ensure the long- term viability of CCRCs. Reserves can be used for debt service payments, paying operating expenses, or dealing with other contingencies. While some states may require specific reserves for facility repair and replacement, operating costs, or debt service, we did not see in the course of our work specific states requirements for CCRCs to set aside reserves for meeting entrance fee refunds. Table 3 of our report provides a summary of state actions to protect CCRC residents' deposits and fees. With respect to question 2, completely escrowing entrance fees, or the refundable portion of entrance fees, may not be practical or financially possible for CCRCs. The general business model for CCRCs involves using entrance fee deposits for facility operations, including debt service payments, provision of residential and health care services, and facility repair and replacement. The feasibility of constructing and operating CCRCs would not be possible if CCRCs had to set aside and keep liquid enough funds to pay all refunds in full when due. With respect to Mr. Prine's question, a central issue is whether a CCRC is able to pay the refundable portion of residents' entrance fees. In the regular course of business, the answer would depend on a CCRC's ability to sell vacated units--something that would be very difficult to measure. If one wanted to know whether a CCRC could refund the deposits in the event of a liquidation, as was the case with Mr. Prine's CCRC, one would need to determine if a CCRC's assets were equal to or greater than its liabilities. Liquidation is really only relevant after a CCRC's financial condition has significantly deteriorated, so it is likely that at the point liabilities would greatly outweigh assets. Whether the residents would actually maintain or receive their refundable deposit would generally depend on the ability find a buyer for the CCRC and that buyer's willingness to assume the refund obligations. Again, this would be very difficult to measure. 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