Sensible Perspectives

The ABCs of CCRC Contracts

Posted by on July 27, 2018

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.

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:

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:

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.

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:

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!