By Jack Cumming

No one would knowingly set sail on a cruise ship that was slowly sinking. Yet, many residents regularly pay entrance fees for CCRC residency to owner-entities that are spending more than their revenues and that have deepening “negative net asset positions.” “Net asset position” is an auditor’s euphemism for the “net worth,” or if negative, the “impairment,” of a not-for-profit CCRC.

The Leaky Ship

No one would knowingly jump on such a ship, would they? Still, if they did, they would want to patch the hole. They might, if they were allowed to. Of course, this is just a metaphor. We’ll unravel it to make manifest the challenge and the opportunity.

In the 1970s, not-for-profit Pacific Homes went through financial failure and bankruptcy reorganization after the board tried to parlay entrance fees from new development to cover losses in its earlier homes. More recently, Air Force Village West over-expanded, building new “villas” as the market potential of the area shifted from residential to warehouses.

Moreover, many ongoing nonprofit CCRCs operate with negative net assets and expenses greater than revenues. That’s a recipe for a slow decline into oblivion.

Financial Weakness

Financial weakness in the not-for-profit sector of the CCRC industry is not a new phenomenon. The emphasis here is not-for-profit because the equity funding by investors in the for-profit sector provides a cushion to shield residents from loss. In most of the not-for-profit sector, resident entrance fees are the equity funding unless there are sufficient retained earnings from past profits. Donor-provided equity funding is rare if it occurs at all.

Naturally, this weakness hurts occupancy and does not speak well for the industry. No one wants to cruise on a sinking ship or even on a ship with lax maintenance. Moreover, the answer is simple, though its implementation is intricate. The simple solution is a guaranty program, like those that give consumers confidence in the banking (FDIC), life insurance (NOLGHA), pension (PBGC), and stock brokerage (SIPC) industries.

Ghosting a Solution

Over a decade ago, the National Continuing Care Residents Association (NaCCRA), in its eagerness to work with the CCRC industry, proposed such a program. At that time, the hope was that LeadingAge would work with residents to build trust.

For too long, that outstretched hand has been ignored. The residents’ proposal has been ghosted. Click here for details on that comprehensive program, which includes a detailed guaranty proposal. Warning: This is demanding to absorb, scroll down the page for video discussion.

Restoring Good Faith

There are a number of steps that the industry might take to restore credibility. The Continuing Care Accreditation Commission (CCAC) was once part of LeadingAge. A comprehensive rating system with multiple levels of excellence could help consumers find good providers. That’s one step that might be taken. But it would require that the industry opt in to being rated.

We’ve mentioned the possibility of a guaranty approach. That can be at the federal level, as is the case for banks and pensions. The senior living industry also knows how federal regulation can work from its familiarity with the regulation of skilled nursing facilities. Federal regulation can provide instant, nationwide uniformity, but it’s high risk and difficult for the industry to influence.

Better is a state-level program like the assessment model used for life, annuities, and health insurance. Lest you recoil at the word “assessment,” consider the alternative FDIC model in which taxes create a fund, trusting Congress not to be tempted to encumber that money. The assessment model allows industry experts to intervene before a facility’s financial trend becomes a debacle. That’s why the life insurance industry fared better through the 2008 economic crisis than did the banking industry.

Do-It-Yourself Approach

Finally, the industry, or a major player in the industry, could create what’s known as “an inter-insurance exchange.” This is an arrangement by which a group of “members” contract with each other to guarantee each other’s results. Specifically, the guaranty group would protect the residents from loss in the case of a group member’s failure.

Residents are now at the bottom of the priority list in the case of failure. An inter-insurance exchange can lift them to the top, with the “exchange” taking the residents’ place at the bottom. It can be devastating for the industry’s reputation when residents lose dignity and more due to a CCRC’s collapse.

Of course, a private exchange establishes qualification standards for membership and can intervene when a member’s numbers start to drift adversely. The advantage, though, is that prospective residents can be advised to trust only CCRCs that are members of the exchange. Nonmembers can still do business, but residents would understand the risk they take in trusting a nonmember entity. It would be like buying a flood-damaged house in as-is condition.

A Time for Action

The not-for-profit CCRC industry has tolerated rusty old leakers for too long. Aging CCRC ships, and even some sloppily rigged new ones, are riding lower and lower in the water, and some are sinking. Their captains are well-intentioned. The camaraderie among executive directors is uplifting.

We know. Those struggling boards, executives, and managers are your industry colleagues and your friends, but they’re not performing. It’s time to get the industry’s house in order or face the justifiable increasing distrust in CCRCs as a safe haven for aging.

This article was inspired in part by a recent article in the Wall Street Journal (paywall warning).