North Carolina CCRC Reserve Requirements. White Paper Summer 2012

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1 North Carolina CCRC Reserve Requirements White Paper Summer 2012

2 Continuing Care Retirement Communities (CCRCs) A CCRC is a residential alternative for older adults (usually age 62 and older) that provides flexible housing options, a coordinated system of services and amenities, and a continuum of care that addresses the varying health and wellness needs of residents as they grow older. The emphasis of the CCRC model is to enable residents to avoid having to move except, perhaps, to another level of care within the community if their needs change and they require health care and supervision. Remaining within the community allows residents to continue their existing relationships with a spouse and friends, avoid the stress of a move, and receive health care, should it be needed, in an environment they know and trust. North Carolina has 57 continuing care retirement communities. They serve more than 18,000 North Carolinians and employ 14,000 staff members. They have a tremendous impact on the economic, social, and charitable health of the communities within which they operate. There are more than 1,900 CCRCs in the United States, with North Carolina ranking 11 th in the number of CCRCs nationwide. A CCRC typically includes apartment or cottage living units (independent living), assisted living units, and skilled nursing care in a campus-style setting. Residents have lifetime access to the community s continuum of care. Typically, all of the living options (independent living, assisted living, and nursing) of the CCRC are on a single campus. As care and services for older adults continue to evolve, CCRCs have been adding additional components, such as memory support and wellness programs, to their services mix. Operating Reserves Because CCRCs include contractual requirements where, for certain fees, the facility agrees to provide health care coverage over a given period of time, they are considered a non-traditional insurance type of entity regulated by the N.C. Department of Insurance. They are also licensed by the state Division of Health Service Regulation for the adult care home or nursing home level of care they provide. Chapter 58, Article 64 of the North Carolina General Statutes and Title 11, Chapter 11, Sub Chapter H of the North Carolina Administrative Code provide for regulation of CCRCs by the Commissioner of Insurance, including licensure, disclosure statements, contracts, reserves, and continuing care without lodging. Section 33 of this chapter requires that existing CCRCs provide for a minimum operating reserve: A provider shall maintain after opening the facility: an operating reserve equal to fifty percent (50%) of the total operating costs of the facility forecasted for the 12-month period following the period covered by the most recent disclosure statement filed with the Department If a facility maintains an occupancy level in excess of ninety percent (90%), a 1

3 provider shall only be required to maintain a twenty-five percent (25%) operating reserve upon approval of the Commissioner. History North Carolina was very fortunate in how CCRC regulation began. In the mid-1980s, Jim Long was the very capable and well-respected Commissioner of Insurance. Commissioner Long assembled a group of four individuals Harry Groves, Bob Price, Jim Young, and John Diffey and charged them with drafting legislation that would serve to protect consumers, not unduly inhibit the development and operation of CCRCs, and lead to North Carolina s being a good environment for CCRCs and their residents. In 1987, strong and bi-partisan support emerged for the legislation drafted by the work group. It required and provided a format for CCRC disclosure. The bill was recommended to the floors of both the North Carolina House and Senate by their respective committees without amendment and was passed in each body without negative vote. Subsequent legislation concerning reserve requirements, prepared in the same bipartisan way, passed both chambers of the General Assembly and was signed into law. This legislation and the resulting disclosure and reserve requirements explain in large part why North Carolina has been such a successful state in terms of CCRC development and operations and relatively more problem-free than many other states. North Carolina, thanks to the diligence of the Department of Insurance and the perseverance of its CCRCs, has experienced a level of consumer protection that is among the highest of any state in the country. Outlook The economic downturn of 2008, along with the slump in the housing market, challenged occupancy rates in most CCRCs throughout the country. Many consumers responded to the downturn by waiting for the home resale market to improve before making the decision to sell their home and move to a CCRC. Despite the weak housing market, most CCRCs remain fundamentally strong and financially sound. CCRCs have responded to the latest economic downturn by more tightly managing the expense side of their operations. Even with this diligence, CCRCs economic health and occupancy levels are impacted by uncontrollable factors. The two key uncontrollable factors include: Resident deaths. Resident deaths immediately impact the occupancy rate of a CCRC due to the gap of time before the newly vacated unit can be sold, refurbished and reoccupied. For a CCRC with a census of 300 residents, three deaths equate to a drop in occupancy of one percent. Given that occupancy is measured for the purposes of determining reserve levels on any single day during the year, a CCRC that experiences a greater-than-average number of deaths may see a corresponding drop in its occupancy rates that does not adequately reflect the financial health of the community. 2

4 Homeowner psychology. Many potential CCRC residents will pay their entrance fee from the proceeds of the sale of their home. During the recent economic downturn, home values plummeted. Many home owners put their move to a CCRC on hold in hopes that the housing market would return to previous levels. Given that those previous levels were inflated beyond any comparable period in history, most homeowners are only now accepting the reality of the current market and beginning to put their homes on the market. In addition to occupancy, several other key indicators focusing on liquidity, profitability, capital investment, and debt/risk are used to measure the financial health of a CCRC. Some or all of these indicators are periodically reviewed by accreditation authorities, credit facilities, rating agencies, the North Carolina Department of Insurance and the North Carolina Medical Care Commission. These include: Net Operating Margin Operating Ratio Days Cash on Hand Debt Service Coverage Ratio Unrestricted Cash to Debt Average Age of Facility Summary CCRC residents and prospective residents have benefited from a regulatory environment that has stressed disclosure and required operating reserves for the protection of the consumer. Occupancy is an important factor in determining a CCRC s health and, taken in concert with other financial benchmarks, can give consumers, policy makers, and management the confidence they need to ensure that the aging services field remains a vibrant and important part of North Carolina s future. 3

5 About LeadingAge North Carolina LeadingAge North Carolina, based in Chapel Hill, has 65 member communities statewide that include continuing care retirement communities, assisted living communities, skilled nursing facilities, and affordable housing providers. Our members employ 14,000 mission-oriented staff serving more than 20,000 North Carolinians. In addition, LeadingAge North Carolina has 58 business partners who provide services, products, and trusted advice to our members. The Association offers education, advocacy, networking, and shared services and is the state affiliate for LeadingAge in Washington, DC. Our national partner, LeadingAge is an association of 6,000 not for profit organizations dedicated to expanding the world of possibilities for aging. Together, we advance policies, promote practices and conduct research that supports, enables and empowers people to live fully as they age. LeadingAge North Carolina Mission Through advocacy, education, innovation and collaboration, LeadingAge North Carolina provides expanded possibilities for aging, value to its members, and leadership to the field of aging. Contact LeadingAge North Carolina Tom Akins, President and CEO The following resources were used in the preparation of this report: LeadingAge (formerly AAHSA), American Seniors Housing Association, National Investing. (2010). Today s Continuing Care Retirement Communities. Available at: es/ccrccharacteristics_7_2011.pdf North Carolina Department of Insurance. (2010). Continuing Care Retirement Communities Reference Guide. Available at: mmunities%20reference%20guide.pdf North Carolina Division of Aging and Adult Services. (2007). Continuing Care Retirement Communities. Available at: North Carolina General Statutes Available at: rticle_64.html 4