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GAO Report Raises Some Concerns About Regulation of Retirement Communities

Last Updated: 9/7/2010

A report by the Government Accountability Office (GAO) warns that given the weak economy, Continuing Care Retirement Communities (CCRCs) are facing challenging times. While few CCRCs have gone bankrupt so far, CCRCs are primarily regulated by states rather than by the federal government, and states vary in how much they help ensure that CCRCs stay solvent or don't sharply raise monthly fees on residents.

CCRCs offer the entire residential continuum of care -- from independent housing to assisted living to round-the-clock nursing services -- under one "roof." Residents pay an often sizeable entry fee and an adjustable monthly rent in return for the guarantee of care for the rest of their life. Many older Americans sell their homes, which are often their primary asset, to pay the required fees, and, as a result, their ability to support themselves is inextricably tied to the long-term viability of their CCRC. For example, residents could lose the refundable portion of their entrance fees which may amount to hundreds of thousand of dollars or more if a CCRC encounters financial difficulties.

In its new report, "Continuing Care Retirement Communities Can Provide Benefits, but Not Without Some Risk," the GAO notes that although few CCRCs have failed, "challenging economic and real estate market conditions have negatively affected some CCRCs' occupancy and financial condition." The GAO's report notes that CCRC residents "are at a disadvantage because any claim they have on a CCRC that is forced into bankruptcy is subordinate to the claims of secured creditors, such as tax-exempt bondholders and mortgage lenders." (Last November, Newsweek reported on bankruptcies hitting retirement communities.)

In its review of state regulation of CCRCs, the GAO found that 38 states have some level of regulation specifically addressing CCRCs, while 12 states and the District of Columbia do not. The states that have no specific CCRC regulation are: Alabama, Alaska, Colorado, Hawaii, Mississippi, Montana, Nebraska, Nevada, North Dakota, South Dakota, Utah, and West Virginia,. As a group, these states have few CCRCs and two -- Alaska and Colorado -- have none.

States that do regulate CCRCs generally require that the communities periodically submit financial information, but the type of information required and what the state does with it varies, and not all states do their own financial examinations. The GAO looked closely at how eight selected states -- California, Florida, Illinois, Ohio, New York, Pennsylvania, Texas, and Wisconsin -- regulate CCRCs with respect to financial oversight and consumer protection.

CCRCs generally depend on high occupancy rates to remain financially viable. Slow real estate markets like the current one can make it difficult for older Americans to sell their homes to pay CCRC entrance fees. As a result, occupancy levels at many CCRCs have fallen. In addition, some older Americans may be staying in their homes longer and thus moving into CCRCs when they need more care, which can worsen CCRCs' long-term financial picture.

One industry rating firm said the outlook for CCRCs in 2009 and into 2010 is negative because of their declining liquidity and other financial ratios, tightening financial markets, and difficult real estate markets. But the firm also noted that these negative effects could be softened somewhat by factors like the continuing strong demand for entrance into CCRCs and favorable labor costs.

Officials of some CCRC residents associations said state regulators need to provide more overall financial oversight to compensate for the short-term focus that most CCRCs have on their financial solvency. And actuaries told the GAO that, overall, only a few states are appropriately using actuarial studies to assess CCRC providers and that many states are using very little actuarial information for financial oversight.

For a copy of the GAO report, which includes a description of the types of contracts CCRCs typically offer (see page 5), click here.

To read testimony presented at a July 21, 2010, Senate hearing titled "Continuing Care Retirement Communities (CCRCs): Secure Retirement or Risky Investment?," click here.

For more on CCRCs, click here.