In my previous articles on Continuing Care Retirement Communities (CCRCs), I described the amenities these communities offer and what it’s like to live there. In this article, I’ll explain the contractual options for residents and the implications of each choice.
First things first
Before we explore CCRC contracts, let’s discuss the differences between health care and long-term care. Because the dividing line is not always clear, this is perhaps the most confusing aspect of CCRCs.
- Health care refers to the maintenance and improvement of physical and mental health, especially through the provision of medical or psychological services. It typically includes:
- Doctor visits
- Diagnostic testing
- Medical equipment
- Physical, occupational, and speech therapy
- Mental health services
- Long-term care refers to custodial or personal care services, encompassing assisted living and skilled nursing care as well. Long-term care addresses the basic needs of daily living including:
- Eating and meal preparation
- Getting dressed
- Help with general mobility like moving from a bed to a chair, and managing stairs
- Bathing and bathroom issues
- Aid for those with severe cognitive impairment like dementia and Alzheimer’s
CCRCs charge for each type of care differently. Most CCRCs bill Medicare for any health care the resident needs, regardless of the type of contract (even if that care is received outside the community). Anything Medicare doesn’t pay for is billed directly to the resident by the health care provider. It is not covered by the CCRC monthly service fee.
CCRC contracts require that residents maintain Medicare coverage throughout their stay because it pays for some limited, long-term care services which are factored into the billing arrangements. Moreover, residents must maintain a relationship with a personal physician, whose main place of business is not at the CCRC (although sometimes the physician may visit).
Long-term care expenses, on the other hand, are covered under the CCRC’s monthly service fee. The fee amount depends on the size of the residence chosen and either remains static or varies monthly, depending on contract type.
CCRC Contract Types
All CCRCs require an application and a signed contract. The contract includes a list of residential and community services or amenities, as well as a description of the resident’s financial and non-financial obligations. In return for these services, the resident pays an up-front entry fee and/or a monthly service fee. According to McKnight’s Senior Living, Ziegler’s National Life Plan Community Database, which currently tracks 1,955 CCRCs, entry-fee contracts are the most common contract type offered by not-for-profit communities, with 64% of them offering such contracts, and 25% offering a rental contract option. The percentages are reversed for for-profit and private-sector CCRCs, with 64% offering rental contracts and 26% offering entry-fee contracts.
There are six types of CCRC contracts:
- Type A, also known as an “Extensive” or “Life Care” contract, includes housing, residential services, and other amenities, with only a modest increase in the monthly service fee each year. The increase in fee covers annual inflationary adjustments (typically between 3% and 5%) and additional chef-prepared meals each day if a resident moves into the assisted living or skilled nursing wing. These contracts are the most robust, but they also have the highest entrance and monthly service fees because the CCRC incurs the risk that more residents might need assisted living and skilled nursing care than projected.
- Type B, or a modified Fee-for-Service contract, offers lower entrance and monthly service fees for independent living. The Type B contract provides the same services and amenities to independent residents as Type A but sets limits on the amount of assisted living and/or skilled nursing services that may be used before there is an increase in the monthly fee. Despite a fee increase when the resident exceeds the contractual maximum, most Type B contracts still offer a substantial discount for those extra services relative to market rates (e.g., 20% below market). However, the resident absorbs more of the financial risk of higher monthly service fees than with Type A.
- Type C, or a Fee-for-Service contract, includes similar independent living services as Type A and B contracts but requires residents to pay the full market rate for any assisted living or skilled nursing services they may need. Type C contracts generally offer lower entrance and monthly service fees for independent living, but residents must absorb the full risk of incurring large service fees if they require higher levels of care.
- Rental contracts require no (or minimal) entry fee. Contracts are often month-to-month. The level of residential services and amenities varies and is reflected in the monthly service fee, which may be higher than in comparable “entry fee” communities. Moreover, rental residents are not necessarily guaranteed access to the assisted living and skilled nursing facilities, as is the case with entry fee contracts. If admitted, the resident pays the full market rate for these higher levels of care.
- Equity contracts offer homes or apartments for sale; residents own their own homes, but they are still required to pay a monthly service fee. An alternative arrangement is to operate as a co-op and offer shares in a corporation. Under this arrangement, the community owns the home. Under both arrangements, long-term care services are usually offered at the full market rate.
- CCRC Without Walls delivers many of the same programs and services available to residents of the community but does so for those who remain in their own homes. The concept is much like that of a Life Care contract: in exchange for an entry fee and monthly fee, the “member” will receive access to a broad range of services and amenities including long-term care in the home, but the fees are much lower than they would be otherwise. If the member wishes to become a resident of the CCRC, they will have priority over non-members.
While some CCRCs offer more than one contract type, many offer only one. CCRCs that are exclusively “Type A”, for example, are not uncommon. A portion of the entry fee (the non-refundable portion) and monthly service fee are tax-deductible as health care expenses, subject to the 7.5% of AGI limit (10% starting in 2019).
There is one exception to the Type A monthly service fee arrangement: if an applicant is in the early stages of a serious and permanently debilitating condition like early stage Parkinson’s, and the CCRC accepts their application (not all communities will), the resident may be required to pay a higher monthly service fee should he or she eventually require skilled nursing care. Some CCRCs, however, may waive this fee supplement after a set period.
Getting (some of) your money back
In every contract type except for the equity contract, residents don’t own their homes, so they don’t accrue home equity. The combination of the entry fee (if there is one) and the monthly service fee simply gives you the right to live in one of the residences and use the services offered in the contract. If there is an entry fee, the CCRC will return a portion of that fee when you leave the community. However, the refund will not include any increase in the market value of your residence during your time there. Also, the CCRC must first find someone else to move into your unit before refunding to you or your estate. The amount of the refund depends on the following factors:
- The refund percentage indicated in the signed contract
- Whether the refund amount is based on the resident’s original entry fee or the new entry fee for which the unit is eventually resold, as stipulated in the contract. (For equity contracts, it would be based on the sale price.)
- The amount of the original entry fee (if any) used to cover the monthly service fee
This last item may occur if the resident prematurely depleted his or her financial assets during their stay, and the CCRC contract allowed them to use some of their entry fee to cover the monthly service fee. If this occurs, the amount used will be subtracted from the refund. (Note: This contract provision is not offered by all CCRCs.)
Under the equity contract arrangement, the resident’s home will eventually pass on to his or her heirs. The monthly service fee, however, may continue until the heirs resell the residence to someone who qualifies under the community’s eligibility criteria.
Some CCRC contracts offer different entry fee refund schedules. With Type A contracts, CCRCs commonly offer a 90% refund. Other CCRCs require a substantially lower entry fee but offer a steadily decreasing refund amount over time.
How long-term care insurance integrates with CCRCs
If you already have a long-term care insurance policy, it may be worth keeping.
- Due to their robust nature, Type A contracts can be thought of as a type of long-term care insurance. However, a private policy would offset some of the monthly service fee if you moved to an assisted living or skilled nursing unit. In addition, a policy can pay for custodial care services you may receive while residing in the independent living wing of the community, as monthly service fees do not cover all this care, and some contracts only cover these types of services if provided in the assisted living wing. You should weigh these benefits against the cost of retaining the insurance policy. Those with reasonably priced policies might decide to keep them even with a Type A contract. (If the policy is expensive, some people scale back their coverage to lower their premium.)
- Type B and C contracts, as well as rental and equity/co-op contracts, do not cover all the assisted living and skilled nursing care expenses you may incur, so having long-term care insurance can help defray the additional cost of care.
Another reason to keep your long-term care insurance, regardless of contract type, is that if you decide to leave the CCRC, you might need insurance for a future housing situation. Your decision depends on the cost of the policy, as your long-term care insurance premium might increase over time.
It is important to consider the robustness of your LTC insurance policy – specifically, the monthly benefit, lifetime benefit pool, scope of services covered, and yearly inflation adjustment before you choose one of the CCRC contract options. All other things being equal, “light” insurance coverage would strongly favor purchasing a Type A contract.
Finally, it’s worth noting that CCRCs generally take an arms-length approach when it comes to long-term care insurance. They may assist residents in filling out the paperwork and even coach them on how to position some of the services for which they are filing a claim. In general, however, CCRCs do not want to assume responsibility for the outcome of long-term care insurance claims. A willingness to help residents with complex paperwork is a huge plus. This offering varies from one community to another and is worth asking about.
Before making a final decision about whether to keep your LTC insurance policy, talk with a representative of the insurance company to find out how to qualify for a claim. You should also talk with a member of the staff at the CCRC, preferably someone on the finance team, to find out whether there are limits on the percentage of the monthly fee the community will submit to the insurance company for reimbursement.
Which type of contract might be best for you?
This isn’t an easy question to answer because of the unpredictability of needing long-term care. Some contend that in theory, all the contract types should be actuarially equivalent, if the method used to price the contracts works off the same or similar statistical and actuarial averages.
The biggest variable, quite frankly, is you. Will you need assisted living or skilled nursing care at some point? How much will you need and for how long? What is your family history of needing care? How much risk are you willing to take, and do you have the financial resources to absorb it?
Here are some guidelines to consider when choosing among the contract types:
- Type A contracts might appeal to you if one or both of your parents needed a long duration of long-term care (e.g., Alzheimer’s or a progressive neurological disorder), or if you want more predictable costs during retirement.
- If you do not have a family history of needing long-term care, or if you have ample resources and the willingness to absorb more financial risk, you might prefer the independent living discounts that come with a Type B or C contract, especially if you have a robust long-term care insurance policy.
- A rental contract might appeal to someone at an advanced age at move-in who has enough steady income (e.g., annuity income, a pension, and Social Security) to afford the monthly service fees, but insufficient assets to afford a lump-sum entry fee.
- A “CCRC Without Walls” contract might be preferable if you don’t want to leave your own home while you’re still independent, but want to build familiarity with a nearby CCRC so that, when the time comes, your transition to on-campus living will be smooth and natural.
In my next article, I will explain the CCRC application process and how to assess financial and health-related eligibility.
Rick Fine is a Principal and CERTIFIED FINANCIAL PLANNERTM at Sensible Financial. Have a question for Rick about Continuing Care Retirement Communities? Ask in the comments section below. To speak with someone from our dedicated team about how we can help you plan for your financial future, click here!