A Continuing Care Retirement Community (CCRC) is a residential facility for retired persons that provides housekeeping, social, and health-care services. Fees are usually charged upon admittance (Entrance Fee), for living accommodations (Rental or Living Fee), and for additional services (Optional Fees).
Some CCRC's are profit seekng; others are non-profit. Either way, the financial stability of a CCRC depends upon carefully monitoring the Entrance Fees, Rental or Living Fees, and Optional Fees (a) to maintain adequate cash flow; (b) to see that fees charged for all services are fairly borne by those utilizing those services; (c) to keep one generation of residents from subsidizing another; and (d) to maintain competitive pricing in the industry.
Most residents will live at the CCRC, in one status or another, for the rest of their lives. Since it is desirable to keep the resident living units as full as possible, forecasting the longevity and health status of residents is crucial. This where the actuary comes in. The American Academy of Actuaries has published guidance as to how actuarial services should be applied to this situation.
(1) The profitability and cash flow of current residents, accounting for all anticipated fees and expenses, including depletion of tangible assets, is forecast actuarially to the date that all current residents are expected to expire. The concept of "present value" is important - all future expected fees for current residents, allowing for changes in health status and death, as well as the time value of money, is determined. Likewise, the present value of expected expenses can be calculated. The results, combined with other assets and liabilities, form the Actuarial Balance Sheet. An imbalance indicates a festering financial problem, which should be immediately addressed.
(2) The same calculation is done for the newest crop of residents - those expected to enter the CCRC in the coming year. This group also needs to be in actuarial balance. If for example, the current residents are in balance, but new entrants are not, then one group will subsidize the other over time.
(3) The same calculation is done for all residents assumed to join the community after one year hence. This group also needs to be in balance.
The forecasting is done using an open group actuarial model with Monte Carlo techniques. This predicts a reasonable future population and determines the associated revenues and fees. Because all CCRC's are different in their contracts, residents, and practices, the model can be customized for each CCRC we encounter.
Please call us at 919-357-2267 if you have any questions about how we can help evaluate the financial condition of your CCRC.