By Jack Cumming

On April 28, my wife and I were docked in San Diego on a West Coast cruise from Princess Cruise lines. It was great fun and very relaxing. That same day, there was also a LeadingAge webinar on risk, liability, and contracts. For the one hour it lasted, I chose the webinar over the port.

Two senior living lawyers were the experts on the presentation. One, Julie Woolley, is vice president and general counsel for Ohio-based National Church Residences. The other, Cory Macdonald, is an attorney with Texas-based Macdonald Resnevic, PLLC. As an actuary (and a resident) with a long history in insurance, I was curious how the attorneys would view risk. The actuarial profession has been dealing with risk since the profession’s origins nearly three centuries ago.

Aging Is Risky

Senior living is a risky undertaking. The senior living industry serves those who are aging. We know that aging doesn’t end well. It ends with death and sadness. The industry’s purpose is not only risky, it’s also fraught with sadness. For some, that bleak outlook evokes fear and feelings of helplessness.

The webinar did not deal with these risks of aging nor with the associated emotions. The lawyers were concerned with contracts to protect providers from litigation. Of course, disappointed resident expectations are a potential source for litigation, as are grieving families saddened by a resident’s treatment or death. But, listening to the lawyers speak on behalf of their side of the process — the provider side — one couldn’t help but think of the larger context. It’s human nature to want control.

The alternative, helplessness in the face of impending risk, can be frightening. It’s natural for business managers to believe they are called to control. The gist of the contract approach to risk is to shift risks from the contracting corporation to the residents who accept the corporate contract as a condition for admission. That can give corporate adherents and attorney advocates the illusion of control. It also leaves the residents vulnerable in ways they may not fully understand or appreciate.

Vulnerabilities

Here are some examples:

  1. Many nonprofit CCRC corporations originated as bootstrap operations in which there was no, or minimal, equity investment, e.g., donations, with the startup funding coming from “entrance fees” paid by entering residents. Those entrance fees were immediately put at risk to secure the debt funding, which is the principal financing source. Few residents understand that their entrance fees are thus at risk.
  2. Residents rely on the promise of lifetime occupancy in return for 1) those “entrance fee” investments, together with 2) their demonstration of sufficient wealth to be able to pay anticipated future fees and fee increases. The contracting corporation, however, may not be fully licensed to be able to fulfill that reasonable resident expectation. Many residents pay little heed to this risk of future ouster.
  3. Most prospects don’t understand the significance, nor the financial consequences, of the differences among residential agreements that shield residents from the possibility of their later needing long-term care. Many residents imagine that long-term care insurance will cover that full cost (it often does not), and most residents underestimate the cost of long-term care.

If the senior living mission is to be trusted to ameliorate the hazards and potential detriments of aging, then these and other challenges, e.g. post-entry amenities and fee changes, are risk factors to be mitigated. Obviously, it’s not possible to avoid all risks. Pacific Homes, at one time, tried to shield residents from inflation. That ended badly with the high inflation of the 1970s. The risks of economic and currency changes are too unpredictable to mitigate.

Sophisticated Options

Conversations with many of the actuaries who now advise CCRC clients suggest that none of them have proposed reinsurance concepts to their provider clients. Moreover, the industry has preferred to follow the pay-as-you-go “cash is king” philosophy rather than to follow the less risky precepts of contingency anticipation and scientific reserving. The focus has been more on meeting debt requirements, which leaves the residents at risk.

At one time, insurance companies took an interest in senior living, but they were not able to compete with the riskier financial approaches preferred by the nonprofit enterprises and their advisors. For instance, insurance develops highly sophisticated risk classification concepts (differentiated pricing) so that cohorts have equitably common expectations. CCRCs typically have one price for all approaches similar to rental housing. There is a risk in that “community pricing” model.

Benefit of Their Expertise

Both insurers and investment bankers work in what can seem to be the esoteric world of the capital markets. Most people don’t care a hoot about Black–Scholes or “collars,” but investment bankers and actuaries do, and their job is to give their clients the benefit of their expertise.

Among other aids in reinsurance, a toolbox is specific and aggregate guarantees, captive insurers, offshore facilities, interinsurance exchanges, self-insurance, welfare arrangements, and most intriguing of all, surplus lines insurance. In 2020, Lloyds alone wrote $12.8 billion in surplus lines premiums. That’s a lot. If these terms are not familiar to you, you’re not alone, though their astute deployment might help senior living with its trust commitment.

The Happy Resident Defense

These thoughts were impacting my thinking as I listened to the two lawyers discussing how to shield their corporate employers from exposure to disgruntled residents and their families. Of course, they wisely recognized that happy residents are the best defense.

Since my purpose is to make senior living a collaborative, trustworthy, safe choice for prospective residents, the happy resident defense was what resonated most with me. I am, after all, myself, a happy resident who sees a bright future for an industry that puts residents first. Any lawyer can tell you that the best way to avoid the contract and other litigation is to maintain positive relations with residents, employees, suppliers, and other potential litigants.

Both presenters were clear that it’s always better to avoid disputes than to let them escalate into the legal realm. Still, even these very astute provider attorneys were unable to avoid a “we-they” mindset. As an example, the provider counsel remarked, “as you know, we’re always striving to make things better for our residents.” Should residents say, “thanks,” or should they say, “if it’s about us, then why isn’t it with us?”

Resident Viewpoint

From my resident viewpoint, it occurred to me that risk is embedded in that “we-they” thinking, but this was not the forum to delve into that. A more covenantal concept among residents and staff together may be the future. For now, though, providers are in the power position, and residents are largely expected to accept the providers’ determinations.

LeadingAge is an organization of providers for providers. It’s not surprising, therefore, that the resident voice, and the views of those who are already aging, were not represented. Still, the conversation between the two lawyers and the other participants was revealing and valuable for providers who are seeking to minimize their risk exposure by avoiding as much liability as they can.

Click here for a glossary of the exotic vocabulary of the world of reinsurance.