The Looming Crisis in Continuing Care Retirement Communities (CCRCs)

Introduction
Continuing Care Retirement Communities (CCRCs) play a vital role in providing millions of aging Americans with accommodations and healthcare as they age. Offering a combination of independent living, assisted living, and nursing care services, many CCRCs are designed to care for residents throughout the final stages of their lives. However, these facilities also embed complex long-term care insurance obligations that are poorly underwritten and insufficiently regulated.

As a result, many CCRCs face significant financial vulnerabilities, creating systemic risks that could leave elderly residents exposed to financial and medical insecurities. Finance expert Jack Barker highlights the challenges facing CCRCs and proposes an innovative capitalization model that could address this pressing issue.

Table of Contents

Understanding Continuing Care Retirement Communities (CCRCs)

What Are CCRCs?

Continuing Care Retirement Communities (CCRCs) are residential care facilities for older adults, typically aged 70–80, who transition from independent living to more intensive care as needed. CCRCs provide a full continuum of care, from independent living to nursing and memory care, under one roof.

Initially established by nonprofit, faith-based organizations over 75 years ago, CCRCs historically operated as charitable communities offering lifetime care to residents in return for their assets. Today’s CCRCs, however, also include for-profit alternatives that mirror similar living arrangements but do not always guarantee lifetime care.

Types of Services Provided

CCRCs typically offer the following services:

Independent living accommodations with amenities like meals, housekeeping, transportation, and activities.
Health services, including access to physicians, rehabilitation, and prescriptions.
Assisted living services for individuals needing support with daily activities.
Skilled nursing and memory care for residents requiring long-term or intensive care.

Types of CCRC Contracts

CCRC contracts fall into three primary categories, each with distinct financial and care implications:

Life Care/Extended Contracts (Type A)

The most expensive option, Type A offers unlimited access to assisted living and skilled nursing care at no additional charge.
Often includes “soft promises” to continue care—even after a resident exhausts their personal finances.
Entrance fees are typically in the six-figure range, with fixed monthly payments that grow modestly over time.

Modified Contracts (Type B)

Provides a limited set of services for a defined time frame, often at lower monthly costs than Type A contracts.
Additional care services are available after the initial period but at a higher cost.

Fee-for-Service Contracts (Type C)

Involves little or no upfront fees.
Residents pay for additional care services on an as-needed basis, typically at market rates.

The Crisis in CCRCs: Actuarial Risks and Financial Vulnerabilities

Poorly Structured Insurance Obligations

CCRCs primarily function as real estate and healthcare providers. However, Type A contracts also include implicit long-term care insurance and annuity-like obligations that are often neither accurately priced nor adequately reserved.

Most operators rely heavily on high cash flow from entrance fees and access to tax-exempt bonds to fund operations, without setting aside actuarial reserves for promised care. This leaves many CCRCs actuarially insolvent and at risk of bankruptcy under even moderate financial disruptions.

Risk to Residents

Because bondholders hold first liens on CCRC assets, residents—who are essentially unsecured creditors—are the most financially vulnerable if a facility collapses.

According to the Commission on Accreditation of Rehabilitation Facilities (CARF), the bottom 25% of Type A operators:
Cover less than 23% of their debt service with operational revenue.
Maintain negative operating cash flow before new entry fees.
Hold negligible or no equity.

Refundable entry fee plans further exacerbate the problem. These plans allow residents to receive a refund upon death or departure from a facility, but refunds are typically contingent on new residents paying their own entry fees—a cycle that can break during market downturns.

Regulatory Oversight

Historically, regulators have focused more on quality-of-care standards than on financial solvency. While some states like Florida have begun introducing legislation requiring actuarial reserves, most operators lack sufficient capital to comply, leaving the looming risks unaddressed.

A Proposed Solution: A Modified Catastrophe Bond Framework

Current Financial and Regulatory Standards

Generally, CCRC operators are required to hold some level of statutory reserves—calculated as days of cash on hand—to cover operating expenses. However, these reserves often fall short of the long-term obligations inherent in Type A contracts. As a result, actuarially insolvent operators can still meet GAAP and regulatory standards, posing significant risk to residents if financial disruptions occur.

The Modified Catastrophe Bond System

A potential solution for addressing these systemic financial risks in CCRCs is to create a modified catastrophe bond structure. This mechanism could help operators accumulate actuarial reserves while mitigating bankruptcy risks.

How It Works:

A long-duration fixed-income fund (LDFI) is raised by high-net-worth individuals and institutional investors.
The LDFI invests in amortizing preferred shares (APSs) issued by a trust established for CCRC residents.
Residents pay a modest premium (e.g., 3–5% of entrance fees and monthly payments) to this trust.
The trust uses these funds to:

Pay interest on APSs.
Build actuarial reserves over time.
Repay APS principal once reserves reach required levels.

In cases of financial distress, trust assets backstop CCRC operations, ensuring resident care while prioritizing payments to bondholders and other stakeholders.

Benefits of the Catastrophe Bond Structure

If implemented effectively, this structure offers several key advantages:

Resident Security: Residents remain protected in their homes for their lifetime, even in cases of CCRC default.
Financial Stability: Secured bonds remain attractive, ensuring operators retain critical access to debt markets.
Orderly Recovery: Refundable entrance fees and APS shareholders see partial recovery of value through a structured receivership process.
Avoiding Public Burden: By enabling private capital to provide support, taxpayers are shielded from shouldering financial rescue burdens through Medicaid or other state programs.

Challenges and Regulatory Action

While the catastrophe bond framework presents a compelling solution, several obstacles must be addressed:

Adverse Selection and Adoption Resistance

Mandatory adoption would be required to avoid only insolvent operators participating.

Regulatory Requirements for Reserves

State insurance regulations must mandate actuarial reserves and allow nonprofits to leverage the catastrophe bond structure.

Ensuring Operator Accountability

Premiums paid by residents must bypass operator control to avoid misuse, requiring lockbox payment arrangements or direct trust contributions.

To ensure the success of this structure, close collaboration with state legislatures and insurance regulators will be essential. Florida, which already faces proposed legislation for actuarial reserves, presents an opportune market to pilot this model, with other states like Maryland and North Carolina likely following suit.

Conclusion

As millions of Americans age in the coming decades, CCRCs represent a vital solution for progressive elder care. However, their current financial structures leave residents and operators exposed to significant risk. By leveraging a modified catastrophe bond system, the CCRC industry can overcome its capitalization challenges, ensuring long-term security for residents and financial stability for operators.

This solution protects the dignity and well-being of aging residents while offering attractive opportunities for insurers, investors, and CCRC stakeholders in the private sector. It’s a step toward securing the peace of mind that every retiree deserves.