By Steve Moran
I woke up at the end of last week to a WSJ article titled She Paid $1 Million to Join a Senior Facility. Its Bankruptcy Wiped Her Out. (This should be an unlocked link.)
Here is a summary of what the article says:
This recent investigation by the WSJ addresses the devastating financial impact of continuing care retirement community (CCRC) bankruptcies on residents and their families.
It details the story of 89-year-old Arlene Kohen, who paid a $945,000 entrance fee to Harborside in Port Washington, New York, along with $5,700 per month. She was forced to leave the community after the community’s 3rd bankruptcy filing, which eliminated licensed care services.
When the bankruptcy is settled, her family expects to recover less than ⅓ of the promised $710,000 refund.
This is just one story at one community. Since March 2020, at least 16 CCRCs have filed for Chapter 11 bankruptcy, wiping out the savings of more than 1,000 individuals for a total of around $190 million.
It turns out that around half of the entrance-fee-based communities are using entrance fees to service current debt and fund operations, which means minimal reserves. This means that any kind of economic downturn can quickly put residents’ refundable payments at significant risk.
Harborside is a textbook case about what can go wrong.
It turns out that secured creditors like bondholders receive priority in bankruptcy proceedings. Residents are classified as unsecured creditors, often recovering only pennies on the dollar.
Nearly all CCRC regulation is done by the individual states, and rarely does it provide significant protection of residents.
These failures don’t just eliminate life savings—they shatter the security and care continuity that seniors believed they had purchased for their final years.
American Airlines Flight 5342
Recently, the entire nation, the entire world, was shocked to learn about the midair collision between an American Airlines flight and a Blackhawk helicopter that killed 67 people at Washington National. It was the first fatal commercial flight in the United States in more than 15 years.
Since that crash, there have been, and continue to be, massive “all hands on board” efforts that are laser-focused on making sure it never happens again.
While some experts have rightly noted that flying is extraordinarily safe — that you are more likely to die driving to the airport than while flying — no one has said … the statistics tell us it is safe enough; we can simply proceed as if it never happened.
Everyone — the government, American Airlines, the rest of the aviation community, the aircraft manufactures, the military — has committed to making sure this doesn’t happen again.
The Industry response
The senior industry response has been very different from how the airline industry responded to Flight 5342. It has mostly been to point to the statistics, which tell us that CCRC bankruptcies are very rare, representing less than 1% of the total number of communities. This is accurate, but I find myself wondering if this is an adequate response.
One might argue that the loss of 67 lives is worse than destroying the lives of more than 1,000 elders, but I am not so sure.
There are things that could be done. Jack Cumming talked about what solutions would look like in his recent article at Foresight Patching the Hole. It is something the senior living industry should be talking about. More specifically, those who are heavily invested in the CCRC sector of the industry should be considering workable solutions.
A Few More Things
- In researching this issue, while there are several for-profit CCRC operators, it appears that every single failure where residents lost money was operated as a not-for-profit.
- If the industry is unwilling to regulate itself, it seems likely we will see more stringent state regulation, and perhaps even federal regulation, which will make everything more cumbersome and more expensive.
- Not dealing with the problem will make it increasingly difficult for all CCRCs to attract residents.
We must do better. We need the public to trust us. And, to do that, we need to be trustworthy. As an industry, we respond to one of the most difficult challenges that affects humans: old age. We do an outstanding job on the health, safety, and social aspects of that mission. We should congratulate ourselves for that. Finances shouldn’t be where we stumble. Let’s come together to figure out how best to put financial fears behind us.
Thank you, Steve, for this candid article. I’m sure it took courage. As a resident, I hope that providers and residents can work together to find common ground. The regulators have fallen short, and nowhere was that more evident than in the case of Harborside. Still, the industry and its residents will be the gainers if we can do better than the regulators.
In the “Patching the Hole” article that Steve alludes to, I advocated for an early intervention approach combined with assessment insurance, similar to that which protects life insurance policyholders and insured annuity recipients. Bank deposit and pension guarantees are different and less favorable to industry interests.
Since then, I’ve been told that explicit guaranties aren’t needed because multi-facility operators are less likely to fail than are single-facility communities. As I understand that view, the multi-facility operates like the industry assessment enterprise, since successful communities support weaker ones within the multi-facility operator.
If, say, LeadingAge, or an industry enterprise, were to form the inter-insurance exchange suggested in the patching article, then the single-facility communities would have that same reciprocal support that multi-facility oversight provides. Moreover, the security pledge could then become a market differentiator, which could elevate safer retirement communities above the rest.
The sole difference between a voluntary association and a guaranty law like that for insurance is that a law can make participation mandatory and universal.
My hope is that industry leaders will, at least, be willing to come together to acknowledge the vulnerability and to discuss possible solutions. You can trust your life insurance more than your CCRC residence. Let’s change that.