[Senate Hearing 111-769]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-769
 
                 CONTINUING CARE RETIREMENT COMMUNITIES
            (CCRCs): SECURE RETIREMENT OR RISKY INVESTMENT?

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JULY 21, 2010

                               __________

                           Serial No. 111-21

         Printed for the use of the Special Committee on Aging



  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html



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                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    BOB CORKER, Tennessee
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
BILL NELSON, Florida                 GEORGE LeMIEUX, FLORIDA
ROBERT P. CASEY, Jr., Pennsylvania   ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri           SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado                 SAXBY CHAMBLISS, Georgia
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
                 Debra Whitman, Majority Staff Director
             Michael Bassett, Ranking Member Staff Director

                                  (ii)

  


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Herb Kohl...........................     1
Opening Statement of Senator Bob Corker..........................     3
Opening Statement of Senator Al Franken..........................    54

                           Panel of Witnesses

Statement of Alicia Cackley, Director, Financial Markets and 
  Community Investment, U.S. Government Accountability Office, 
  Washington, DC.................................................     4
Statement of Kevin McCarty, Insurance Commissioner, Florida 
  Office of Insurance Regulation, Tallahassee, FL................    14
Statement of Charles Prine, Resident of Concordia of the South 
  Hills CCRC, Mount Lebanon, PA..................................    29
Statement of Katherine Pearson, Professor, Dickinson School of 
  Law, Pennsylvania State University and Director, Elder Law and 
  Consumer Protection Clinic, University Park, PA................    34
Statement of David Erickson, Vice President of Legal Affairs, 
  Covenant Retirement Communities on Behalf of the American 
  Association of Homes and Services for the Aging, Skokie, IL....    48

                                APPENDIX

Alicia Cackley's Responses to Senator Kohl's Questions...........    67
Summary of Committee Investigation Report by the Aging Committee 
  Majority Staff.................................................    69
Testimony Submitted for the Record by B'nai B'rith Housing, Inc..    82
Testimony Submitted by Susanne Matthiesen, M.B.A., Managing 
  Director, Aging Services and Continuing Care Accreditation 
  Commission CARF International..................................    85

                                 (iii)

  


                       CONTINUING CARE RETIREMENT
      COMMUNITIES (CCRCs): SECURE RETIREMENT OR RISKY INVESTMENT?

                              ----------                              --



                        WEDNESDAY, JULY 21, 2010

                                       U.S. Senate,
                                Special Committee on Aging,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 1:32 p.m. in room 
SD-106, Dirksen Senate Office Building, Hon. Herb Kohl 
(chairman of the committee) presiding.
    Present: Senators Kohl [presiding], Franken, and Corker.

        OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

    The Chairman. Good afternoon. We thank you all for being 
here.
    Today, we are going to take a look at continuing care 
retirement communities, or CCRCs. CCRCs offer three types of 
senior housing in one location, so that older residents can 
move from one to the other as their need for care increases 
throughout retirement.
    These communities allow seniors to stay among friends and 
near their spouse during the aging process, and for that 
reason, they have grown in popularity over recent decades.
    The number of older adults living in CCRCs has more than 
doubled between 1997 and 2007 and now totals 745,000 seniors 
living in over 1,800 CCRCs. With the boomer generation 
retiring, we can only expect this number to grow.
    Over the past year, our committee has taken a look at the 
financial stability of the typical CCRC business model. In most 
cases, new residents must pay a large deposit in order to join 
a community. These deposits often represent their life savings 
or their children's inheritance. In return, residents can 
generally expect to move within the community as their long-
term care needs grow and, in some cases, to receive their 
deposit back if they decide to move away.
    Through our investigation, we found that CCRCs are 
particularly vulnerable during economic downturns. Slow real 
estate markets can drive down occupancy levels in independent 
living units, which are the main source of profit for these 
retirement communities. Occupancy levels for five prominent 
CCRC companies we questioned have, indeed, dropped in the past 
3 years, leading to financial difficulties for some. The result 
is often an increase in the monthly fees, a reduction in the 
services and amenities provided, or both.
    Disturbingly, we have seen instances where seniors had to 
file lawsuits to keep their CCRC services from being cut back 
or reduced. Residents may feel forced to put up with these 
situations because most of their assets are tied up within the 
CCRC. This is especially true in a stagnant economy, when 
financial distress can cause long delays in receiving 
refundable entrance fees, or, as one of our witnesses 
experienced, the loss of one's refundable deposit altogether.
    One CCRC company refunded several sizable deposits only 
after getting a letter of inquiry from this committee. While 
this represents an extreme scenario, the fact is that many 
CCRCs who advertise their entrance fees as ``100 percent 
refundable'' will only repay them if and when they can line up 
a new tenant.
    In some States, such as California, CCRCs are granted up to 
10 years to repay full or partial refunds. Such a delay can be 
devastating to an older couple who has their life savings tied 
up in a CCRC deposit.
    To supplement our investigation, we asked GAO to survey 
CCRC regulatory oversight nationwide. As you will hear, they 
found considerable variation in State regulations, with 12 
States having no CCRC-specific regulations at all. Consumer 
safeguards and protections regarding disclosure, asset 
reserves, and escrow requirements vary widely, and only 17 
States require CCRCs to submit studies that assess their long-
term viability.
    In terms of the industry's internal policing, GAO found 
that only 16 percent of CCRCs are voluntarily accredited by the 
Continuing Care Accreditation Commission. That is an 
astonishingly low number. The fact is that while CCRCs are a 
good residential option for many retirees, entering into an 
agreement with one can pose financial risk.
    Our investigation has found many CCRC ownership structures 
to be very complex and that financial troubles at any level can 
have real consequences for individual residents. Evaluating 
such a transaction can be quite challenging for the average 
consumer without professional assistance.
    Today, our committee is releasing a summary of findings 
from our investigation, which outlines the financial health of 
the five companies that we questioned, as well as their 
disclosure policies regarding entrance fees and transitions of 
care. We also included several helpful resources for consumers 
and CCRC providers.
    Finally, we are calling on State regulators to beef up 
their oversight. Every State should be requiring proof of their 
long-term viability from CCRCs and ensuring transparency and 
strong consumer protections for residents. As part of our 
report, the committee has developed our own checklist for State 
regulators who wish to expand or improve their oversight of 
CCRCs, and we urge them to put it to use.
    Moving forward, we hope to increase both consumer 
protections and consumer awareness with regard to CCRCs. If 
these companies are going to take the life savings of seniors, 
they need to be able to guarantee that they will be around to 
provide the lifetime of care that they promise.
    We would like to thank our witnesses today for speaking 
with us on this important issue. I am very pleased that Senator 
Corker was able to take just a few minutes away from his other 
responsibilities to stop here and make some brief comments.

            OPENING STATEMENT OF SENATOR BOB CORKER

    Senator Corker. I will be very brief. Mr. Chairman, I thank 
you for your efforts leading this committee and certainly for 
asking for this study.
    I know we have some great witnesses today, certainly one 
telling a personal story that always affects us and certainly 
brings home some of the challenges that exist. So I thank you 
for that.
    We have Chairman Bernanke in just a few minutes in the 
Banking Committee. With the economic situations being what they 
are, I am going to step out, and I will not hear the testimony. 
But I want to thank you for coming and say that, my dad 
actually lives in a facility that uses this model with 
Alzheimer's, and I appreciate you bringing up these issues.
    I know there is a study that has been done. I would say to 
our witnesses that sometimes we need to be careful what we ask 
for, OK? State regulation, it appears to me in some cases, 
certainly needs to be enhanced. We regulate insurance companies 
at the State level and have had some pretty good success there. 
Sometimes us at this level getting involved, again, be careful 
what you ask for.
    So, hopefully, States themselves will pick up the pace. I 
don't know what the outcome ultimately will be, but I certainly 
appreciate my staff will certainly be here during this hearing. 
I thank you again for being here.
    Again, Mr. Chairman, your vigilance in continuing to look 
at issues where individuals, in many cases unbeknownst to them, 
end up in situations that certainly damage them.
    We thank you all for being here.
    The Chairman. Thanks a lot, Senator Corker.
    Now I will introduce our panel. Our first witness today 
will be Alicia Cackley. She is the Director of the Financial 
Markets and Community Investment team at the U.S. Government 
Accountability Office, GAO. There she manages research and 
program evaluation on issues such as consumer protection, 
financial literacy, the Recovery Act, as well as homelessness.
    Next, we will be hearing from Kevin McCarty. He is the 
Commissioner of the Florida Office of Insurance Regulation, 
where he oversees Florida's insurance market and is responsible 
for company solvency and market investigations. As 
Commissioner, Mr. McCarty has focused his efforts on senior 
protection. He is also the Vice President of the National 
Association of Insurance Commissioners.
    Next, we will be hearing from Charles Prine. Mr. Prine is a 
resident of a CCRC himself in Mount Lebanon, PA. That CCRC 
declared bankruptcy in 2009. During the bankruptcy, Mr. Prine 
served as the chairman of the unsecured creditors association, 
and he is now a resident's advocate on the board of the new 
CCRC owner.
    Then we will be hearing from Katherine Pearson. She is a 
Professor of Law at Pennsylvania State University's Dickinson 
School of Law, where she teaches law and aging policy. Ms. 
Pearson directs the Penn State's Elder Law and Consumer 
Protection Clinic, and she is coauthor of a forthcoming book on 
protection of older adults against financial exploitation.
    Finally, we will be hearing from David Erickson. He is the 
Vice President of Legal Affairs for Covenant Retirement 
Communities in Chicago. He will be speaking on behalf of the 
American Association of Homes and Services for the Aging, where 
he helped developed the resource for providers to improve their 
disclosure and transparency practices.
    We thank you all for being here today, and now, Ms. 
Cackley, we will start with you.

   ALICIA CACKLEY, DIRECTOR, FINANCIAL MARKETS AND COMMUNITY 
INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, 
                               DC

    Ms. Cackley. Good afternoon.
    Mr. Chairman, I am pleased to be here today to discuss 
continuing care retirement communities, or CCRCs. As a growing 
population of older Americans seeks options for ensuring that 
their assets and income in retirement will cover the cost of 
their housing and healthcare needs, some may choose to enter a 
CCRC, which aims to provide lifelong housing, household 
assistance, and nursing care in exchange for a sometimes 
sizable entrance fee and ongoing monthly fees.
    However, CCRCs are not without risk. My testimony today is 
based on our June 2010 report, which is being publicly released 
today and addresses four issues--first, how CCRCs operate and 
what financial risks are associated with their operation and 
establishment; second, how State laws address these risks and 
what is known about how adequately they protect CCRCs' 
financial condition; third, risks that CCRC residents face; and 
fourth, how State laws address these risks and what is known 
about their adequacy.
    In summary, we found that CCRCs can benefit older Americans 
by allowing them to move among and through independent living, 
assisted living, and skilled nursing care in one community. 
They offer a range of contract types and fees that are designed 
to provide long-term care and transfer different degrees of the 
risk of future cost increases from the resident to the CCRC.
    However, developing CCRCs can be a lengthy, complex 
process, and CCRCs, like other businesses, face a number of 
risks, both during their development and after they become 
operational. While few CCRCs have failed, challenging economic 
and real estate market conditions have negatively affected some 
CCRCs' occupancy and financial condition.
    With respect to financial oversight of CCRCs, according to 
a broad industry study, 12 States and the District of Columbia 
do not have CCRC-specific regulations, meaning an entity in one 
State may be subject to such regulations while a similar entity 
in another State may not. The eight States we reviewed in 
detail varied in the extent to which they ensured CCRCs 
addressed financial and operational risks, and some focused 
more on long-term viability than others.
    According to industry participants, actuarial studies can 
help CCRCs plan for contractual obligations and set appropriate 
housing and care prices. Without them, they noted, a CCRC may 
appear financially stable in the short term, yet still face 
threats to long-term viability.
    We found that only three of the eight States we reviewed 
required an actuarial study at regular intervals, and one 
State, Florida, analyzes CCRC financial trends. This lack of a 
long-term focus in some States creates a potential mismatch 
with residents' concerns over their CCRC's long-term viability.
    While CCRCs offer long-term residence and care in the same 
community, residents can still face considerable risk. For 
example, CCRC financial difficulties can lead to unexpected 
increases in residents' monthly fees.
    While CCRC bankruptcies or closures have been relatively 
rare and residents have generally not been forced to leave in 
such cases, should a CCRC failure occur, it could cause 
residents to lose all or part of their entrance fee, which may 
amount to hundreds of thousands of dollars. For example, 
residents of one CCRC in Pennsylvania, who we will hear from 
later, lost the refundable portion of their entrance fees in 
2009 when the facility became insolvent and was sold to a new 
operator.
    Residents can also become dissatisfied if CCRC policies or 
operations fall short of expectations or there is a change in 
arrangements they thought were contractually guaranteed, such 
as charging residents for services that were previously free. 
In addition, residents also face the risk of being transferred 
involuntarily from one level of care to another or of not being 
able to obtain assisted living or nursing care onsite.
    Most of the States we reviewed take steps to protect the 
interests of CCRC residents, such as requiring the escrow of 
entrance fees and mandating certain disclosures. However, not 
all States review the content of contracts, and the States we 
reviewed varied considerably in the type of financial and other 
disclosures they required.
    While some CCRCs voluntarily exceed disclosures and 
protections required by their State's regulations, such 
variation and regulation means that consumers in some States 
may not receive the same protections as those in others.
    In closing, we found that CCRCs can benefit older Americans 
by helping ensure access to housing and healthcare in a single 
community as they age. However, choosing to enter a CCRC is not 
without significant financial and other risks.
    Further, the stress that recent economic events may have 
placed on CCRC finances underscores the importance of 
regulators being vigilant in their efforts to monitor CCRCs' 
long-term viability and protect consumers. Such efforts will 
only become more important as the number of older Americans 
grows.
    Mr. Chairman, this concludes my prepared statement. I would 
be happy to answer questions.
    [The prepared statement of Ms. Cackley follows:]

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    The Chairman. Thank you very much, Ms. Cackley.
    Mr. McCarty.

   KEVIN MCCARTY, INSURANCE COMMISSIONER, FLORIDA OFFICE OF 
             INSURANCE REGULATION, TALLAHASSEE, FL

    Mr. McCarty. Thank you, and good afternoon, Mr. Chairman.
    My name is Kevin McCarty. I am the Insurance Commissioner 
of the State of Florida, a State with a substantial population 
of older Americans.
    The decision to join a continuing care facility represents 
a substantial investment on the part of their own personal 
assets of our seniors, and Florida takes its responsibility to 
protect their seniors very seriously. In fact, Florida statutes 
provide for our residents of our senior facilities a bill of 
rights intended to ensure that residents are continually 
treated with dignity and respect.
    Florida's regulatory framework emphasizes four fundamental 
areas. Firstly, verifying that CCRC owners and management are 
competent, trustworthy, and responsible. Second, we ensure that 
the relevant information that is important in decisionmaking is 
disclosed to the residents of the communities. Third, we are 
ensuring that the project is in full compliance with Florida's 
stringent licensing requirements. Last, but certainly most 
importantly, providing a thorough financial oversight to ensure 
that the continuing care facilities are there for the long term 
and that they continue to provide a home for Florida's seniors.
    To determine professional competency and trustworthiness 
the Office of Insurance Regulation requires each officer, 
director, owner, or manager to submit a biographical affidavit, 
a legible fingerprint card, and an independent investigation 
background report. This biographical information applies to any 
new officer and director and management of an existing CCRC, as 
well as a new facility. These rigorous requirements ensure that 
the people of Florida are guaranteed not to have people of 
questionable moral character in a position to harm our seniors.
    It is very important that prospective and existing 
residents have sufficient and relevant information on a 
facility available to them. Florida statutes require numerous 
disclosures, including, but not limited to a summary of the 
facility's ownership interests, their plans for expansion of 
their operations, rules and regulations governing the facility 
and, of course, a copy of the bill of rights, and a summary of 
the most recent examination conducted by our office.
    Since the viability of a CCRC is primarily governed by the 
number of people in occupancy, it is imperative that the 
facility demonstrates sufficient demand for a facility prior to 
placing a consumer's funds at risk. Florida accomplishes this 
objective by requiring a prospective provider to submit an 
independent feasibility study with its application for 
licensure.
    With respect to financial oversight, each facility is 
required to file an annual financial report, audited financial 
statements, and provide a liquid reserve calculation which 
ensures financial resources to pay in the future. Each facility 
has an assigned analyst within our office who reviews all 
financial submissions in great detail.
    Our office may require a facility that has experienced a 
declining financial trend to submit to more frequent reports, 
actuarial studies, submit a corrective action plan to address 
any of their financial problems. All CCRCs are subject to 
periodic onsite examination by the Office of Insurance 
Regulation, and the office may also examine a CCRC at any time 
at the office's discretion.
    A facility that has more significant problems may be 
subject to our onsite management and, ultimately, may be 
subject to suspension of their certificate of authority.
    One of the new developments we are seeing in Florida is a 
trend toward CCRCs at home, also called CCRCs without walls. 
This new concept usually has a limited number of independent 
living facilities. Most of these CCRCs at home residents would 
live at home but eventually move to the facility when they had 
additional assisted living or nursing care services required.
    This has been a provider reaction to the steep drop in the 
housing market when people are reluctant or unable to sell 
their homes for market value or what they think their 
properties are worth. We have one proposed facility which 
currently received the provisional certificate of authority to 
pursue funding a project of this type.
    It is important to note that the office staff is in 
constant contact with a variety of stakeholders through the 
Florida Continuing Care Advisory Council. This council consists 
of three resident members, three executive directors of 
facilities, and four professionals familiar with the industry. 
Each year, our office hosts a meeting with the council to 
address industry needs, trends and conditions, and the 
regulatory environment for our seniors.
    In conclusion, it has been almost 20 years since we had a 
failure in Florida, which is perhaps the greatest testament to 
our regulatory success. OIR continues to monitor ongoing trends 
in the CCRC industry as these entities adapt to changing 
economic circumstances.
    Mr. Chairman, that concludes my prepared remarks, and I
    will be happy to answer any questions.
    [The prepared statement of Mr. McCarty follows:]

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    The Chairman. Thanks very much, Mr. McCarty.
    Mr. Prine.

 CHARLES PRINE, RESIDENT OF CONCORDIA OF THE SOUTH HILLS CCRC, 
                       MOUNT LEBANON, PA

    Mr. Prine. My name is Chuck Prine. I want to thank the 
committee for providing this opportunity to explain what 
happened at the Covenant, where the residents lost a total of 
more than $26 million in refundable deposits.
    Like most of the residents, my wife and I selected this 
community primarily because of the reputation of its sponsor, 
B'nai B'rith, which promoted itself as a leading operator of 
senior living facilities throughout the United States. It later 
became apparent that B'nai B'rith's actual experience was 
primarily in Government-financed low-income rental facilities 
and that it had no experience whatsoever in building and 
operating life-care facilities.
    Furthermore, B'nai B'rith did not invest a penny of its own 
money in this venture, but rather set up a nonprofit 
corporation, which financed the construction and operation 
through a bond issue and bank loans. B'nai B'rith's stated plan 
was to draw out of the financing and operation a development 
fee of $1 million and a licensing fee equal to 50 percent of 
the quarterly net income.
    Almost from the very start, it became apparent that the 
Covenant was in trouble. Its occupancy rate did not meet 
expectations. The cost of the building exceeded estimates by 
several million dollars. Constant repairs were required. Real 
estate taxes had been grossly underestimated.
    All of the board of the dummy corporation set to run this 
facility were either B'nai B'rith International directors or 
employees. However, many of them never set a foot in the 
building. They refused repeated requests for a meeting with the 
Residents Council.
    They allowed the escrow fund of resident deposits to be 
used to make up for lack of other income to pay the various 
bills. They became delinquent in real estate taxes and finally 
defaulted on their debt service. Eventually, the bond holders 
demanded that B'nai B'rith take some drastic action to solve 
the problem, but B'nai B'rith refused to put any of their funds 
into the situation.
    Under a State act passed some 25 years ago, the 
Pennsylvania Insurance Department had the right to step in and 
appoint a trustee to take over the facility, but it refused to 
take this step. In 2009, the bond holders commenced a mortgage 
foreclosure action in State court. That action could have 
resulted in us being put out on the street.
    Eventually, we landed in Federal bankruptcy court, where 
the bond holders and bank lenders refused to consider any kind 
of resolution in which the residents would receive a single 
penny. The Residents Council and the Unsecured Creditors 
Committee did play a role, however, in the selection of a new 
buyer. We were able to facilitate a sale in which the new owner 
agreed to honor our existing residency agreements with our 
life-care provisions, but with the total loss of our deposits.
    Based on our experience, I would like to make four 
recommendations for consideration in any legislation which  
might be put together to protect senior citizens from losing 
their life savings in questionably financed life-care projects.
    One, senior housing facilities, which are financed in part 
by the use of interest obtained from the investment of 
refundable deposits from residents, should be required to place 
these funds in a true escrow account held by a trustee with the 
proviso that the principal could not be utilized for operating 
expenses or other purposes.
    Two, every project should include a minimum of 30 percent 
of its financing coming from a cash investment of the sponsor/
owner organization. The primary purpose should be to provide 
guaranteed lifetime care for residents rather than a financial 
program to provide a high return for speculative investors and 
lenders.
    Three, the boards of directors of life-care facilities 
should include at least 33 percent residents. In effect, the 
residents should be players, not just pawns in the game.
    Four, there should be in each State a single responsible 
governing agency, as opposed to responsibilities split among 
various State agencies. In Pennsylvania, licenses must be 
obtained from the Department of Insurance, the Department of 
Public Health, and the Department of Welfare. None of these 
agencies now has total control, and they do not have, either 
individually or collectively, sufficient staff and budget to 
supervise and regulate the facilities properly.
    Not in any sense to diminish the loss our residents have 
suffered, I am happy to report that our current residents are 
very pleased with the operation under our new identification, 
Concordia of the South Hills, which is owned by the Concordia 
Lutheran Ministries of Pittsburgh. I might point out that 
Concordia of South Hills put up $15 million of their own money 
in cash to buy our community. There is no debt at all on the 
facility at this time.
    Not only that, they went a step further and voluntarily 
gave us a $1 million endowment fund to help cover the potential 
losses of somebody in the assisted living or nursing who ran 
out of money to pay their bills.
    I thank you very much for this opportunity. I would be 
happy to offer some other ideas about why Concordia has been 
successful and what could be done, but thanks for the 
opportunity to speak at this point.
    [The prepared statement of Mr. Prine follows:]

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    The Chairman. Thank you, Mr. Prine.
    Ms. Pearson.

    KATHERINE PEARSON, PROFESSOR, DICKINSON SCHOOL OF LAW, 
   PENNSYLVANIA STATE UNIVERSITY AND DIRECTOR, ELDER LAW AND 
        CONSUMER PROTECTION CLINIC, UNIVERSITY PARK, PA

    Ms. Pearson. Thank you very much.
    I am glad to be here as well, and it is hard to follow Mr. 
Prine because he is so eloquent in speaking on behalf of his 
situation and other residents.
    I feel I am also here on behalf of residents. As the 
Director of an Elder Law and Consumer Protection Clinic at Penn 
State University's Dickinson School of Law, I have had 
opportunities for several years to speak with residents of 
CCRCs not only in Pennsylvania, but around the country, as I 
have become more interested in this venture.
    I am a fan of CCRCs. I would like them to be there when I 
am ready for this form of living. Therefore, when I am speaking 
today, I am speaking on behalf of residents. But I am also 
hoping that the industry is going to be as healthy as it can 
be.
    About 6 years ago, I was approached by a group of residents 
at a CCRC--not Mr. Prine's CCRC, actually another one. They 
were concerned about an expansion plan at their particular 
facility. They felt that it was economically not feasible.
    As with many CCRC resident groups, this was a pretty 
sophisticated group of residents and they had crunched some 
numbers, and the numbers didn't look very good. So, I asked 
them, ``Have you approached the management of your facility?'' 
They had, and they were not satisfied with the information they 
were getting in response. I asked whether they had approached 
the Department of Insurance, the regulating agency in their 
State. They said they also had done that, and they had received 
no substantive response.
    Well, that intrigued me. What was the role of State 
regulation? So, I went to that same department and started 
asking some questions.
    What I discovered was that in that particular State, annual 
reports were filed and then stacked in a dusty closet and never 
opened. I found reports that the seal had never been broken on, 
and that said to me, well, there is something about regulation 
that is not working here, and particularly in this particular 
circumstance.
    I ended up writing an article about it. In response to the 
article, I talked more to State regulators. One of the State 
regulators said, ``You know, we feel we have done a great 
job.'' I think on many respects that the State had had a good 
track record with CCRCs. But the State regulator said that in 
our State, we have had a few financial insolvencies. We have 
been able to solve it without formal action.
    I said that is great news. What criteria were used to 
decide whether there was a problem? What criteria were used to 
solve the problems? How did you make it better? The problem was 
there was no collective information about that, no collective 
information about what were standard practices, what were good 
practices, and what were poor practices. So that began to 
concern me about what do we mean by State regulation?
    As I have talked to CCRC residents around the country, I 
repeatedly hear that they want financial transparency that is 
more than just disclosures, that also involves actuarial 
testing, if you will. I think that as a result of that, what I 
am calling for in my testimony, and I elaborated in greater 
detail in my written testimony, I am calling for a national 
residents' bill of rights on behalf of residents of CCRCs.
    I think it is time to give some real meat to their ability 
to get useful, transparent information. I think the industry as 
a whole would be helped by that. The industry is served by 
transparency, and I think the industry with greater 
transparency can achieve greater health. So, I don't think the 
industry should be frightened by the idea of a residents' bill 
of rights.
    So that is what I am asking for, and I am happy to respond 
to questions about that particular item.
    Thank you very much, Senator Kohl, Senator Franken.
    [The prepared statement of Ms. Pearson follows:]

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    The Chairman. Thank you very much, Ms. Pearson.
    Mr. Erickson.

   DAVID ERICKSON, VICE PRESIDENT OF LEGAL AFFAIRS, COVENANT 
RETIREMENT COMMUNITIES ON BEHALF OF THE AMERICAN ASSOCIATION OF 
          HOMES AND SERVICES FOR THE AGING, SKOKIE, IL

    Mr. Erickson. Thank you, Chairman Kohl and members of the 
committee.
    I am here testifying on behalf of American Association of 
Homes and Services for the Aging and Covenant Retirement 
Communities. Covenant Retirement Communities has 12 CCRCs in 8 
States serving over 5,000 residents. Our primary contract has 
an entry fee and provides for modified life care.
    Most of our residents choose a 2 percent per month 
declining refund option. We also offer 90 percent refunds, but 
less than 10 percent of our residents choose this option. We 
also offer full life-care contracts in two communities.
    Let me begin by saying that Covenant Retirement Communities 
is not connected in any way to Covenant at South Hills. We 
happen to share the word ``covenant'' in our name, but beyond 
that, there is absolutely no connection.
    We are, of course, very aware of the significant loss that 
the residents of Covenant at South Hills suffered from failure 
of that community. That bankruptcy, indeed any bankruptcy in 
our industry, is something we take very seriously.
    CCRCs exist for one reason--to serve the needs of our 
residents. Anytime we fail to do that, it is a failure we 
collectively bear. We deeply regret that it happened.
    There are nearly 1,900 CCRCs across the country. The vast 
majority remain financially strong and viable. We recognize 
that a small number of CCRCs are vulnerable, especially those 
that opened during the recession or are single-site campuses, 
and those are being carefully monitored by our lenders.
    Notwithstanding the situation at Covenant at South Hills, 
there are relatively few CCRCs which have faced payment 
defaults or filed bankruptcy. Even in those rare cases, the 
CCRCs have done so without adverse impact to the financial 
security of their residents. The Covenant at South Hills was 
clearly an exception. Fortunately, the residents did retain 
their right to remain at the CCRC under new ownership and did 
not have to move.
    Without question, the weak economy has impacted CCRC 
occupancies, particularly CCRCs located in regions of the 
country hardest hit by declining housing values. That said, 
occupancy rates of CCRCs overall continue to exceed those of 
free-standing assisted living communities, nursing homes, and 
even free-standing independent living retirement communities.
    The ability of CCRCs to actually weather the economic storm 
as well as they have speaks volumes for the strong preference 
seniors have for a continuum of care lifestyle. Not 
coincidentally, the typical CCRC reports that resident 
referrals are the strongest source of leads.
    I would like to briefly comment on two reports recently 
produced by a CCRC task force which I had the honor of 
chairing. It was formed earlier this year and was comprised of 
leading experts in the CCRC operations, tax-exempt bond 
financing, and legal and regulatory requirements.
    The first report is ``Continuing Care Retirement 
Communities: Suggested Best Practices for CCRC Disclosure and 
Transparency.'' The second report is entitled ``Today's 
Continuing Care Retirement Community: The Strengths of This 
Popular Senior Living Model, Its Stress Points and Challenges, 
and Outlook for Tomorrow.'' Both of these reports have been 
supplied to the committee.
    CCRCs are an important option in living arrangements for 
seniors. Over the decades, CCRCs have successfully offered a 
continuum of care highly desired by seniors. The vast majority 
are financially stable and provide a style of living which 
emphasizes healthy aging, have numerous options of living and 
financial arrangements to meet a variety of consumer 
preferences, and promote an active and engaged lifestyle.
    Unlike the housing market or equities market, where large 
numbers of seniors have had their portfolios affected, the vast 
majority of CCRCs have provided security and care for seniors 
who will know where they will live and receive care usually for 
the rest of their lives. CCRC residents have moved into 
communities where they have chosen a lifestyle that provides 
comfort for their families, who will not have to worry about 
what will happen to Mom and Dad as they age. As the ``CCRC 
Story'' reports, a common sentiment among CCRCs residents is 
that they wished they would have moved to the CCRC sooner.
    CCRC providers recognize the importance and the need for 
effective State regulatory oversight of CCRCs. But we also 
believe the regulatory framework has to maintain a balance to 
provide adequate consumer protection without unreasonably 
restricting growth and development of CCRCs.
    There is certainly a place for reasonable requirements, 
including disclosure requirements, capital reserves, and 
protections of refundable entry fees. However, if these 
requirements become too prescriptive, expansion of existing 
CCRCs and development of new ones will be slowed or halted, and 
seniors will lose the opportunity to move into a living 
environment they clearly prefer.
    Excessive regulatory restrictions could also prevent CCRCs 
from offering the varieties of living arrangements that 
consumers seek. Similarly, requirements related to the 
operating and governance structure should be reasonable. For 
example, many CCRC sponsoring organizations, often not-for-
profit religious and fraternal organizations, recognize a need 
in their local community for the types of services a CCRC 
provides, but lack the expertise to develop and operate the 
CCRC.
    Third-party developers and operators fill this need, but 
that doesn't mean that the not-for-profit sponsor isn't an 
active partner in the operations of the CCRC. In fact, if you 
look at most of these types of operational structures, you will 
find an active and involved board of trustees.
    Thank you for this opportunity to testify on behalf of CCRC 
providers across the country. We are proud of our longstanding 
history in serving seniors and stand by and ready to assist the 
efforts of this committee in any way we can. We will continue 
to work collaboratively with State regulators to support strong 
and effective State regulations and oversight.
    [The prepared statement of Mr. Erickson follows:]

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    The Chairman. Thank you very much, Mr. Erickson.
    We are joined today by Senator Franken from Minnesota to 
make what comments you would wish.

                STATEMENT OF SENATOR AL FRANKEN

    Senator Franken. Thank you, Mr. Chairman, and thank you for 
holding today's hearing on this important issue to seniors in 
Minnesota and across the country.
    I want to thank all of the witnesses for testifying today.
    One of the biggest challenges facing Minnesotans today is 
figuring out how to make sure that they will have the services 
and the supports that they need to maintain the quality of life 
as they get older. For many Minnesotans, this means being able 
to live at home, maintain their independence, and be with their 
families.
    But there are a lot of options for long-term services and 
supports out there, and it can be hard to know just which one 
to choose. This is especially the case when you don't know what 
your health needs or your spouse's health needs may be in the 
future.
    Continuing care retirement communities are an attractive 
option for some seniors because they offer the opportunity to 
stay in their communities, even as their long-term care needs 
change. In many cases, these communities can provide the 
security and stability that many seniors are looking for.
    But it is critical that seniors have access to all the 
information that they need to decide whether a continuing care 
retirement community is right for them, like information about 
the owners and the managers of the community and what financial 
risk there may be. It is also important that seniors have a 
voice and can play an active role in decisions about their 
care.
    Thank you for your testimony. I read it last night, and I 
am looking forward to hearing your answers to questions as to 
how we can better enable seniors to be informed consumers and 
active decision makers when it comes to their long-term care 
options.
    Thank you all for being here today again and for sharing 
your expertise.
    Thank you.
    The Chairman. Thank you very much, Senator Franken.
    Ms. Pearson, when you talked about a bill of rights, would 
you expand on that a little bit?
    Ms. Pearson. Yes. I think I have spent some time thinking 
about this. In essence, what we are talking about is when often 
the people who know best what the problems might be are the 
residents in a particular facility. When they want more 
information, sometimes there is a bit of stonewalling that goes 
on.
    So I think what I am really talking about is a financial 
bill of rights, the ability to get more information when they 
feel it is necessary. There needs to be somebody to hear when 
they speak and when they want that information. Right now, that 
would be the State regulators.
    So if a particular percentage of residents at a facility 
went forward to a State regulator and said we need more 
information about this particular topic, that percentage would 
trigger that actuarial inquiry. So I think what I am really 
talking about is a financial bill of rights.
    The Chairman. That would give the residents or the 
potential residents what kind of information?
    Ms. Pearson. I think part of the challenge here is that as 
each facility adapts with time, adapts to financial 
circumstances with time, they get creative with their 
financing. I think that one of the things that happens is the 
residents begin to get a sense of that.
    They see, for example, the use of contract management 
coming in, cutbacks in services, things like that, and they end 
up wanting to know what are the reasons for that, where is the 
money going? You know, the financial fees that we have paid, 
does it really have to be this way?
    So I think that particularly with respect to actuarial 
soundness, when that type of inquiry comes about, the States 
could require a projected type of actuarial study and not 
simply what goes on in most States, unlike Florida. Florida 
does better at this. Most States simply require a point in time 
financial report, rather than an actuarial study.
    The Chairman. All right. Mr. McCarty, how many of these 
facilities do you have in Florida?
    Mr. McCarty. We have 73 licensed facilities in our State 
that cover the contracts A and B as described in the GAO 
report, where anytime you have to put up cash up front for the 
facility, it has to be regulated by the Office of Insurance 
Regulation. We share that responsibility with the Agency for 
Healthcare Administration, which does the quality control to 
ensure the quality of services, and the Department of Financial 
Services, which handles our complaints. That covers 30,000 
residents in Florida.
    The Chairman. Is it fair to say that Florida's CCRCs are 
under your supervision?
    Mr. McCarty. Yes, they are under my supervision.
    The Chairman. Do you regard that as being important?
    Mr. McCarty. I believe it is a critical part of my 
responsibility and my mission to protect the solvency of the 
CCRCs. Yes, sir.
    The Chairman. So you would recommend that CCRCs across the 
country should be regulated, based upon your experience in 
Florida?
    Mr. McCarty. Based upon my experience in Florida, we have 
had a long tradition, since 1953, of regulation of CCRCs. That 
has been certainly accelerated in the 1970's and 1980's. I 
think that we have a very strong bias in our State for 
protecting what we believe are very vulnerable citizens, and we 
think that if you are protected in Florida, you should be 
protected in every State.
    I certainly support what Ranking Member Corker has said 
about how a State-based regulatory system is a good system, and 
I think you can harmonize a State-based regulatory system with 
some minimum standards that may be established by the Congress. 
If, in their wisdom, they choose to establish those standards, 
you could use the Medicare supplement insurance model as one 
where you task the National Association of Insurance 
Commissioners, who are the experts in this area, to come up 
with national standards that States would have to abide by.
    That may be one way of achieving those consumer protections 
with the least intrusion on the States' sovereignty.
    The Chairman. How many of the residents of CCRCs in Florida 
or what percentage of the residents pay an upfront fee?
    Mr. McCarty. Well, all of the ones pay an upfront fee that 
are going into our facilities.
    The Chairman. They all do?
    Mr. McCarty. They all do.
    The Chairman. Some, many of them move out, have a change of 
idea, change of lifestyle?
    Mr. McCarty. Yes.
    The Chairman. Are there difficulties in getting the refund 
back?
    Mr. McCarty. Refunds are governed by--governed under 
Florida law. They generally receive their refunds within 120 to 
200 days.
    The Chairman. So you have not experienced difficulty in 
getting their refunds back to those who decide to move away?
    Mr. McCarty. No. Again, we have a very broad regulatory 
framework that looks at required minimum reserves. We require 
companies to escrow that money to protect that money in the 
event the consumers choose to exit and go to another facility.
    The other thing I think is very important is, as a previous 
speaker has addressed is providing information and not just 
disclosure, general disclosure, but provide meaningful 
financial information. We understand that our elderly 
population is a vulnerable population, but they are also very 
intelligent. If you provide uniform input data points where 
they can readily compare one facility to another facility, we 
need to give them the tools to make those kinds of comparisons.
    The Chairman. Good. Well, Mr. Prine, you didn't have that 
experience in Pennsylvania, did you?
    Mr. Prine. No, we did not. The information that is provided 
to the State of Pennsylvania is reviewed, I am sure, to some 
degree. But I don't think it is studied to the extent of really 
trying to take it all apart and see why it works or why not and 
project what would happen in the future.
    One of the problems with all of these facilities is they 
may look good theoretically on paper, but this is a kind of 
business where if you get behind in the flow of income from new 
people coming in, if a place is slow to rent up, it starts to 
lose ground immediately. The taxes don't stop. The monthly bond 
payments don't stop.
    Finally, you have to look around for other sources of 
funds. What happened in our situation is they immediately 
tapped, in effect, the residents' deposits and started using 
them. Even that couldn't catch up with how far behind they 
started to fall.
    When we tried to get the State insurance department to 
intervene, they did meet with us. Mr. Johnson, the insurance 
commissioner for Pennsylvania, did come over to the Covenant. 
He explained very carefully that they never had a facility in 
the State of Pennsylvania ever go through a bankruptcy and 
close down, and he was sure things would work out in the long 
run and just be patient.
    Well, they didn't work out in the long run. They just kept 
getting worse and finally got so bad that the bond holders 
ultimately forced a sale. But I would like to point out one 
thing about the new people that moved in, which shows the 
difference in the way a place could be operated poorly and a 
place could be operated well.
    The new people put up cash to buy the place. They 
eliminated completely the $4 million a year in interest 
payments that were a noose around the neck, really, of the 
previous facility. They put their own money into it. They have 
a policy which is far different from using the residents' 
deposits. They put the deposits aside in an account.
    Interestingly enough, if the value of that account, because 
of what it is invested in, decreases, they put more money in to 
keep it up to a balance that is equal to the potential deposit 
pay out. If they had to--if everybody at once left, they would 
still be able to return the deposits. This is an extremely 
conservative way of operating but it is the only really safe 
way to prevent this possible kind of disaster occurring 
elsewhere.
    The Chairman. What happened to the fees? Did you say $26 
million? What was that number?
    Mr. Prine. Twenty-six million dollars of resident deposits 
were lost completely. We didn't get one penny of that back.
    The Chairman. So that was a disaster.
    Mr. Prine. That is the life savings of a lot of people. 
This ranged from somewhere about $90,000 to $300,000 per 
apartment.
    The Chairman. That is a disaster.
    Ms. Cackley, is that tremendously unusual? Do you have any 
way of indicating whether or not it is a problem across the 
country, or is it something that occurred as a sign to us never 
to see it happen again, but it doesn't happen hardly at all?
    Ms. Cackley. It does not happen often, as best we have been 
able to tell. But it is certainly a disaster, and it is a risk 
that is of concern and needs to be paid attention to as we move 
forward. As more CCRCs come into existence, as our population 
ages and demand for such facilities increases, it is certainly 
something that is a concern and needs to be prevented in the 
future as well.
    The Chairman. I suppose you would assure us or tell us with 
some level of certainty, Mr. McCarty, that that kind of a 
situation is most unlikely in Florida because of the regulation 
and oversight that you have?
    Mr. McCarty. I would say that is generally true, sir. I 
believe that to be the case. I think that ensuring that you 
have close scrutiny of the financial statements and so that you 
can use your financial analyst to evaluate trends and 
conditions before they become a problem.
    One of the things that we have been successful doing in 
Florida is identifying problems early on so that we can take a 
number of corrective action plans as necessitated by the 
financial condition of the company. That most oftentimes is 
bringing in a new purchase or acquisition, and that only works 
if you get involved in that process early enough in the 
deterioration of the financial condition of the company.
    I can't predict what will happen in the future, and we 
certainly have some unique challenges today with the collapse 
of the marketplace. Many Floridians have purchased homes that 
are worth far less today than they were a few years ago. So, 
that is putting a tremendous--a lot of stress on new people 
moving into facilities. So, we still need to see how that is 
going to pan out.
    But companies have been resourceful. They have been moving 
to providing other services where they can make profits, but 
they also are moving toward fee-for-service and rental beds, 
which augment the bottom--the balance sheet for the company.
    The Chairman. Before we turn to Senator Franken, Mr. Prine, 
do you want to make a comment?
    Mr. Prine. Yes. One thing that I think would be very 
interesting--and it sort of follows up on the comments of some 
of the others here--is if the statements that these facilities 
produce would really show how much of the residents' deposit is 
still in the account and how much has been spent. I mean, this 
goes on, and they don't fold up necessarily, but they could be 
way behind.
    If they had a run that several people moved out at once, 
they might have trouble immediately being able to pay everybody 
off and actually couldn't pay everybody off because they have 
used some of those deposits for other purposes.
    There is only one safe way to do this, and that is to lock 
the deposits up. This is nothing wrong with using the interest 
of those deposits. That is the purpose of this type of 
financing. If you have $26 million, you get over $1.5 million 
in interest or something like that to operate the place. But 
then you shouldn't be allowed to dip into the principal.
    When the principal goes way down, of course, the amount of 
interest that they are getting on it goes way down. So it keeps 
going further down. If you have very many people move out--and 
of course, in some places, they don't pay until somebody else 
moves in. We had a lot of people that moved out, and 2 or 3 
years later, they still hadn't received a penny and never did 
get a penny of what they expected when they moved out.
    There might have been good reasons for them to move 
somewhere else, to go somewhere where their kids lived or some 
other reason. This wasn't just a matter of dissatisfaction or 
something. Things happen in people's lives that they might have 
to change where they want to live.
    But the refund money ought to be there, and it ought to be 
guaranteed that it is there.
    The Chairman. Yes. Senator Franken?
    Senator Franken. Thank you, Chairman Kohl.
    Commissioner McCarty, have you ever had a CCRC fold in 
Florida?
    Mr. McCarty. Yes.
    Senator Franken. You have?
    Mr. McCarty. It was 18 years ago.
    Senator Franken. OK. You know, it seems to me that when 
seniors put up a deposit to receive services in a continuing 
care retirement community, they expect that it will follow 
through as promised to provide them with services when they 
need them, and I just think that is a reasonable expectation.
    It sounds, from Mr. Prine's experience, that there was no 
disclosure to the residents of what was going on. What, 
Commissioner, can we do to strengthen disclosure requirements 
so that seniors understand the financial risks that they may be 
taking on?
    Mr. McCarty. Well, I think some of the members who have 
testified today touched on some of those concerns. I think it 
is critically important that the contracts be reviewed so that 
they are clear and unambiguous as to the terms and conditions. 
The contract should spell out very specifically in clear, plain 
language how the refunds are calculated and how the monies will 
be retained.
    I think there ought to be requirements to ensure that 
monies are escrowed and in an appropriate fashion so that there 
are still sufficient funds to run the facility, but that there 
is some guarantee that in a return or refund that those monies 
are available.
    I think you need to have, again, as I stated before, a full 
complement that involves appropriate licensing, strict 
standards on how money is to be handled, disclosing to 
consumers information about their bill of rights and protection 
of them in the facility, but also their financial rights with 
regard to information about the financial standards and have 
appropriate resources on the State regulatory system to analyze 
the information that comes in.
    Obviously, if you are getting financial trends, actuarial 
reports, or financial statements that are not reviewed and 
analyzed in the context of other facilities and trends and 
conditions, that information is not particularly useful. That 
information is necessary for you to have early detection. So 
early detection leads to early intervention to prevent future 
insolvencies.
    Senator Franken. Ms. Pearson, the culture of long-term care 
is changing. I think that is the word they use, ``culture.'' As 
more options become available to seniors, I think the whole 
point is that the seniors play an active role in deciding how, 
when, and where they receive their care.
    For example, there is a nursing home in Perham, MN, now 
where if a resident wants to stay up and watch a Twins game, he 
or she stays up and watches the Twins game. Then if he or she 
wants to sleep late, they sleep late. Everything isn't dictated 
by the meal, you know, breakfast at 6:30, lunch at 11, dinner 
at 4. I think sometimes we forget how important it is for 
people to decide, to make their own decisions on how they are 
living.
    I was wondering about the boards, the governance of long-
term care facilities. What do you think about Mr. Prine's 
proposal to require a certain percentage of CCRCs, CCRCs' board 
of directors to be made up of residents?
    Ms. Pearson. I am in favor of it. One of the things that 
the very first group of residents that contacted me asked me 
about was whether or not they could be on boards. Their 
particular facility was taking the position that there was a 
conflict of interest for residents to be on governing boards, 
which is kind of ironic in a way.
    Certainly, other States have found that it is possible to 
have residents on boards and that it works quite well. It 
becomes a way of providing transparency of information, and it 
also eliminates one of the qualities that some residents have 
complained to me about--that notion that now that you are 
older, don't worry your graying head about how this facility is 
run. We will take care of it for you.
    Well, these people are dynamic people. They don't like that 
paternalistic attitude, understandably so. One of the ways to 
do it is to provide residents a voice on the governing boards, 
and I think many healthy CCRCs do that. In fact, I think 
perhaps, Mr. Erickson, your CCRCs provide a governing board.
    Senator Franken. Could this be part of your bill of rights?
    Ms. Pearson. It certainly could be.
    Senator Franken. OK. Mr. Prine, speaking of transparency, 
in your testimony you mentioned you felt that the Covenant 
community was misrepresented to you.
    Mr. Prine. The Covenant community was misrepresented to us.
    The Concordia community that owns the place now was very 
clearly represented to us because the president of that 
organization came and talked to our residents before they 
acquired it and wanted to be very sure that he had our support. 
He promised that they would have--the people we would have a 
voice on the board and things like that.
    Whereas, when I indicated that there was misrepresentation 
that may have occurred with the Covenant people, a lot of that 
has to do with the way they marketed the place. They put their 
name out in front on their promotion material B'nai B'rith. 
Under the sign on the front of our building, it said ``B'nai 
B'rith Senior Living Community.''
    Yet, when it came down to trying to deal with the B'nai 
B'rith people, they had a wall up there, and they said, no, you 
have got to deal with Covenant of South Hills, Inc. Well, the 
Covenant of South Hills, Inc., had seven directors, and all 
seven of them were employees or directors of B'nai B'rith. Yet 
they never met in our building. They never would meet with our 
Residents' Council.
    We had limited communication. I had a couple of phone 
conversations with people, and there always was some sort of 
evasive answers of questions that I asked. I never felt I was 
getting to the bottom of anything. We just felt completely left 
out of it.
    One of the problems is that when an organization like this 
promotes itself, particularly church-related organizations, 
there is a tendency on the residents' or the customers' part, 
you might say, not to question. I mean, you don't go question 
the clergy of your particular denomination or whatever it may 
be about things, about how a place is operated or for example. 
That is not something that people usually do. They think in 
terms, well, this is B'nai B'rith, and they advertised and 
promoted all the experience they had had internationally in 
housing and so forth.
    But in the fine print, in the disclosure statement, the 
big, thick document, it does say somewhere in there that they 
had never run an assisted living--or they had never run a 
continuing care community themselves before. But everything 
else was promoted with the idea that they are the most 
experienced housing people in the country, and this is just 
going to be a wonderful thing.
    There are many, many people--the people that are most 
seriously concerned about this are the people with strong 
religious affiliations who came in there because they thought 
B'nai B'rith would never let them down.
    Senator Franken. Well, that is a Shonda, as we say.
    Mr. Erickson, in your testimony just now, you said you were 
kind of worried that regulatory requirements could impede the 
growth of the industry. But it sounds like what Mr. Prine's 
example shows us is that there does need to be regulation. Do 
you agree with the GAO finding that actuarial studies can 
provide information on long-term viability?
    My question is how could anyone say it is unreasonable to 
require these communities to conduct regular studies and 
provide this basic information to residents?
    Mr. Erickson. Yes, the providers support strong State 
regulations to protect residents, and we believe that, in turn, 
produces resident satisfaction and helps the industry on the 
whole.
    With respect to your question about actuarial studies, one 
of the things that we put in the disclosure paper, that is the 
group that I chaired, in there as an area to be disclosed to 
prospective residents or applicants to a CCRC is the actuarial 
information, if it is applicable. Some of the CCRCs are the 
extensive care type of CCRCs where they have the contracts that 
provide for minimal increases of monthly fees as they progress 
through from assisted living to skilled nursing care. Those 
types of facilities are more heavily dependent on actuarial 
studies.
    Other CCRCs are the type where they have a modified 
contract where there is a limited amount of healthcare benefit 
for residents that progress to the assisted living and also 
skilled nursing care. Those types of facilities do not need as 
extensive actuarial studies.
    So we believe--in the group that I chaired, we did discuss 
actuarial studies in quite detail, and we believe that they can 
be helpful for CCRCs to ensure----
    Senator Franken. They are helpful, but not required?
    Mr. Erickson. Yes. But not required because there are so 
many different models of CCRCs that to have one specific type 
of actuarial requirement, it might not fit the needs for the 
various types of providers that are out there.
    Senator Franken. Well, in your answer to me when I asked 
about regulation here, you said State regulation. What if a 
State, like, say, oh, I don't know, Pennsylvania, say, for 
example--I don't know why I came up with that--didn't provide 
regulation?
    Mr. Erickson. There are 12 States that do not regulate 
CCRCs, and within those States, the providers--there is third-
party oversight of the providers through the financing 
agreements that they enter into. So, within the financing 
agreements, there are reserves that are often required by the 
lenders. There is reporting requirements to the lenders and 
also ratios that providers must meet.
    So, in the typical situation, there is a high level of 
lender involvement within a CCRC. In addition to that, several 
CCRCs have chosen to be rated by the rating agencies, and that 
provides another area of third-party oversight to the CCRCs.
    Senator Franken. Those are the ones that have chosen 
voluntarily.
    Mr. Erickson. Right. Yes.
    Senator Franken. Well, we know how that works out 
sometimes.
    Ms. Cackley, as you noted in your testimony, State 
regulations of these retirement communities may vary widely, 
and as Mr. Erickson just said, many States don't regulate CCRCs 
at all. What are your recommendations for Federal policies that 
could protect consumers from some of the risks that were 
highlighted today?
    Ms. Cackley. GAO isn't making any specific recommendations 
at the Federal level right now. While we found--we found the 
possibility of risk for CCRCs and residents, we did not see a 
significant number of insolvencies or other problems. So we 
don't have a large effect to point to. What we do point to is 
the concern for the future and the need for States to be 
vigilant.
    So, right now, we are suggesting that States need to be 
paying attention. We certainly point to sort of the 
fundamentals of regulation that include things like licensing, 
like disclosures, ongoing monitoring, and then the actuarial 
analysis is certainly something that we are suggesting is 
important.
    As Mr. Erickson said, there are some facilities that don't 
have fee structures that include the healthcare needs being the 
responsibility of the CCRC. They are still the responsibility 
of the resident. But for those facilities where the fee 
structure is what we consider either type A or type B, those 
are definitely situations where an actuarial study will help 
the CCRC understand what their obligations are going to be in 
the future and that they definitely need to be planning for.
    Senator Franken. But for now, you are not suggesting any 
Federal regulation?
    Ms. Cackley. No, sir.
    Senator Franken. Well, thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Franken.
    Mr. McCarty, in Florida, are all those upfront fees kept 
separate and kept in escrow, kept in reserve?
    Mr. McCarty. Parts of it. It is not all kept in reserve. 
Part of it is used after the establishment. One hundred percent 
of the money is kept in escrow as they do a demonstration on 
whether or not there is a feasibility study, and then part of 
that reserve is released on the issuance of a full certificate 
of authority.
    But the ongoing concern, the companies have to maintain a 
full year of payments on their debt, and they have to maintain 
15 percent of their operating cost. So that they have money so 
they don't dip into their reserves.
    The Chairman. If you could tweak that in any way, Mr. 
Prine, do you think that is reasonable?
    Mr. Prine. I still would like to get back to the point that 
I believe and that it would be interesting if you could have an 
investigation by the GAO about all this. So what percentage of 
the deposits that totally could be due do the owners actually 
have on hand at any given time to pay?
    The Chairman. That is a good question.
    Well, you are from the GAO, Ms. Cackley. What can you tell 
us about that?
    Ms. Cackley. Sir, we didn't look at all CCRCs across the 
country. We did detailed work in eight States. But I don't--off 
the top of my head, I couldn't tell you what the answer is to 
that question. I can certainly look into it, ask my staff to 
get me the information and get it back to you.
    The Chairman. OK. Mr. McCarty, do you want to make a 
comment on that?
    Mr. McCarty. I just want to go back to something that was 
said before. One of the things we want to make sure of is that 
we don't over-saturate the market. The way for these facilities 
to succeed is to ensure that they have a high occupancy rate.
    If we are going to create a regulatory framework, one of 
the things we have to ensure is that a facility is able to 
demonstrate up front before construction that they are able to 
sell the units before construction begins. Because a recipe for 
disaster is to construct more facilities than you have demand 
for those facilities, and that is what causes the problem.
    One of the conditions preceding any regulatory framework is 
to ensure that a feasibility study is done and actual contract 
sales are made to ensure--and those monies are put 100 percent 
in escrow so if we decide not to go through with it, all the 
monies are returned. But unless and until we control the 
numbers of those facilities, you can't guarantee that they are 
all going to be viable.
    The Chairman. That is a good point. But it is also true, 
isn't it, that markets do decline, even when they are 
operating, as they have now in the last several years, right?
    Mr. McCarty. Yes, they have in the market, and they have to 
respond to that. Particularly, the housing. That is a new 
wrinkle in this because it is making it harder for people to 
do. As I said before, some ways to deal with that is to go from 
a continuing care contract with upfront money to a fee-for-
service rental bed.
    The Chairman. Now, Mr. Erickson, do you think this 
``accredited'' is a big thing? There are only 16 percent of 
these CCRCs that are accredited. Do you regard that as serious 
or just an evolving, developing phenomenon?
    Mr. Erickson. We think it would be helpful for the 
providers on the whole that there is a higher number of 
accredited facilities. The company that I represent, all 12 of 
our facilities are accredited. The accreditation process is 
very rigorous, and it requires every 5 years for all aspects of 
the operations of the CCRC to be reviewed by peers.
    So, just last year, we had all of our facilities 
reaccredited. I will say that it is an expensive process. I 
estimate that it cost our organization at least $100,000 to go 
through that process in terms of the time of our staff to 
prepare all the reports that were required for the 
accreditation process. But I believe it gives the consumers and 
also our residents a sense of that our facilities are 
financially strong.
    The Chairman. Would you include that in your bill of 
rights, Ms. Pearson?
    Ms. Pearson. I think I would. In fact, I think Mr. 
Erickson's example reminds me of something that happens in 
Pennsylvania. Pennsylvania, by statute, has an every fifth year 
requirement that the State come in and take a look at the books 
of the facility. What that really amounts to is a checkbox 
exercise. Somebody is paid to come in and review the books. It 
takes time to do it. But they are not--they have no financial 
sophistication when they do it.
    So it is something that is a cost to the facility. They are 
charged for that every fourth or every fifth year review, but 
it produces no useful information, as opposed to something like 
what Mr. Erickson just described, which is also expensive but 
provides useful information.
    The Chairman. That is interesting. So you both believe that 
every institution across the country should belong or should be 
accredited, which would mean that they have to go through a 
periodic examination. Is that right?
    Ms. Pearson. I guess what I am saying is that there should 
be periodic examination. Whether that is part of the industry 
accreditation process----
    The Chairman. Right.
    Ms. Pearson [continuing]. Or part of a State regulatory 
process.
    The Chairman. Right. You would agree with that, Mr. 
McCarty?
    Mr. McCarty. Absolutely. There is no substitute for ongoing 
analysis on an ongoing basis and then onsite examinations. We 
provide onsite examinations every 3 years for unaccredited, 
every 5 years for accredited. But more importantly, because we 
watch trends on a quarterly and annual basis, and any change in 
that, we exercise our discretion to go onsite at will.
    The Chairman. That is great.
    All right. Any other comments, folks? This has been very 
useful. You have brought a lot of information and experience to 
the table here, and we will follow up.
    Yes, go ahead, Mr. McCarty.
    Mr. McCarty. I just wanted to emphasize a point that I made 
earlier, and I think Senator Franken made the same remark as 
about the culture. An important part of this is not just 
creating a regulatory framework and creating--all of that is 
important. An important part of this is to do an outreach to 
the senior communities, to establish advisory councils in each 
of these facilities so that these people in these facilities 
have a real voice and communication not only with the facility, 
but to their regulator.
    One of the things--and having representation on the board 
is critical for people to feel they are being heard and having 
representation and not put in the sense where ``don't worry, we 
are going to take care of your needs.'' Creating a culture of 
outreach where there is bilateral communication among and 
between the parties and also as evidenced in our consumer 
complaints.
    If we have problems in a facility, we send people to the 
facility to see what we can do to reconcile those problems. We 
have had 22 complaints in 7 years, which I think is a 
remarkable testimony to the fact that in addition to a strong 
solvency regime, you have to have a people outreach program as 
well.
    The Chairman. That is good. Any other comments from any of 
the panelists? Mr. Prine?
    Mr. Prine. I would like to second that comment about the 
resident involvement. We have found in our own experience a 
vast difference between the previous management and the current 
management in terms of responsiveness to our Residents' 
Council.
    The current management has a representative of the senior 
staff attend our resident council meetings and hear the 
comments that people make right from their own voices at that 
meeting. Likewise, we are able to report back by having a 
representative of our residents on the board of the governing 
body. It is a two-way street, and it is working so far 
extremely well.
    It is very reassuring to the residents to see this going on 
and to feel much more comfortable because they see the senior 
management in the building. Our new board of directors, even 
though the parent facility is 45 minutes away, the board has 
its meetings in our building, and the people see them coming 
in. Last time we had an open house, there were several board 
members there at the open house, greeting people that were 
coming in to look at the facility.
    This idea, the whole focus of all these facilities should 
be on the services that is being provided to the residents. 
That is what they are there for. It should not have to be so 
focused on the financial manipulations that go on to make some 
of these things work or not work.
    I mean, that has to be worked out. But when you look at 
this bond issue, for example, that we had in our facility, the 
facility cost, including the architect's fees and so forth, $32 
million to build. The bond issue was $62 million. What does 
that other $30 million go to?
    Well, you have got all sorts of things--funded interest on 
the bond. So, in other words, they are borrowing money right 
from the start to pay themselves back, $9 million of that. Debt 
service reserve fund, another $5 million. Development costs, 
well, $5 million. That was for fees that went back to the 
people who were building the place, paying themselves 
development fees and so forth.
    It shouldn't take a $62 million bond issue to build a $30 
million building. If they did it for cash or a substantial 
portion of cash, the interest rates would have been a lot less, 
and there would have been a lot less chance of failure.
    The Chairman. Right. What did Senator Franken say, a 
Shonda? Is that what he said? Do you know what ``Shonda'' 
means?
    Mr. Prine. I don't understand.
    The Chairman. It is a shame. It is a true shame. Let us 
hope that it is an example that is publicized so well that it 
doesn't happen again. Your being here to talk about it is very 
instructive and very important. We thank you.
    Mr. Prine. Thank you.
    The Chairman. We thank you all for being here.
    Ms. Cackley. Thank you.
    The Chairman. Thank you so much.
    [Whereupon, at 2:48 p.m., the hearing was adjourned.]
                            A P P E N D I X

                              ----------                              


 Ms. Cackley's Response to Senator Kohl's Question about Entrance Fee 
                            Refund Practices

    Mr. Prine stated that his former B'nai B'rith CCRC used 
residents' entrance fees to keep their CCRC financially afloat, 
but eventually went bankrupt and was unable to pay entrance fee 
refunds it contractually owed residents. This resulted in a $26 
million loss for residents. He suggested that CCRC providers 
should be required to hold entrance fees in escrow and only be 
able to use the interest from those funds. He also asked if it 
was known what percentage of the funds that residents had paid 
as refundable entrance fees were available to pay those 
refunds.
    To answer this question, it is important to understand 1) 
how CCRCs generally pay for entrance fee refunds and what 
states generally require in terms of escrowing funds, and 2) 
whether setting aside funds for refunds or completely escrowing 
refund amounts is practical or possible for CCRCs.
    With respect to making refunds, many CCRCs stipulate in 
their contracts with consumers that entrance fee refunds to 
residents' or their heirs will be made when the unit in 
question is resold and a new entrance fee is received. As a 
result, the source of entrance fee refunds comes not from 
liquid assets held by CCRCs, but by new entrance fees paid by 
incoming residents. CCRCs do not need to have enough cash on 
hand to pay all potential refunds at one time, and CCRCs 
generally do not have set-asides specifically for refund 
purposes.
    Many states we reviewed have requirements to escrow 
resident deposits during the construction phase before 
residents move in, and escrow entrance fees once the CCRC is 
operational. These are aimed at ensuring the stability of a 
CCRC during construction and startup, as well as once CCRCs 
become operational and begin to provide services set out in 
contracts with residents. Six of the 8 states we reviewed 
required that CCRCs escrow consumer deposits or entrance fees 
received. These funds can be used by CCRCs for operational 
purposes, but are generally not released to the CCRC until 
certain benchmarks--such as a percentage of facility completion 
or long-term financing committed--are met.
    As additional protection, many, but not all, states we 
reviewed also required CCRCs to maintain financial reserves. 
According to regulators, the primary purpose of reserves is to 
ensure some time exists for a CCRC to address financial issues 
when distress occurs, but are not intended to ensure the long-
term viability of CCRCs. Reserves can be used for debt service 
payments, paying operating expenses, or dealing with other 
contingencies. While some states may require specific reserves 
for facility repair and replacement, operating costs, or debt 
service, we did not see in the course of our work specific 
states requirements for CCRCs to set aside reserves for meeting 
entrance fee refunds. Table 3 of our report provides a summary 
of state actions to protect CCRC residents' deposits and fees.
    With respect to question 2, completely escrowing entrance 
fees, or the refundable portion of entrance fees, may not be 
practical or financially possible for CCRCs. The general 
business model for CCRCs involves using entrance fee deposits 
for facility operations, including debt service payments, 
provision of residential and health care services, and facility 
repair and replacement. The feasibility of constructing and 
operating CCRCs would not be possible if CCRCs had to set aside 
and keep liquid enough funds to pay all refunds in full when 
due.
    With respect to Mr. Prine's question, a central issue is 
whether a CCRC is able to pay the refundable portion of 
residents' entrance fees. In the regular course of business, 
the answer would depend on a CCRC's ability to sell vacated 
units--something that would be very difficult to measure. If 
one wanted to know whether a CCRC could refund the deposits in 
the event of a liquidation, as was the case with Mr. Prine's 
CCRC, one would need to determine if a CCRC's assets were equal 
to or greater than its liabilities. Liquidation is really only 
relevant after a CCRC's financial condition has significantly 
deteriorated, so it is likely that at the point liabilities 
would greatly outweigh assets. Whether the residents would 
actually maintain or receive their refundable deposit would 
generally depend on the ability find a buyer for the CCRC and 
that buyer's willingness to assume the refund obligations. 
Again, this would be very difficult to measure.

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