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Avoiding the Hidden Risk That Could Sink Your CCRC

October 1, 2004
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Ways to minimize the impact of uncovered healthcare costs as residents age by David Dillon, ASA, and Bonnie Albritton, ASA

Many CCRCs conduct operations on a short-term cash basis. They pore over last quarter's monthly fee income and cash receipts, but give no thought to the financial viability of the facility over the long-term. This raises an often overlooked question: How does the CCRC expect to provide care for its residents several years from now?

The risk involved is called benevolence or subsidy risk-the risk of a resident spending all his or her financial resources before the community has finished providing the necessary care. Most CCRCs continue to provide that care rather than ask the resident to leave the facility, whether as a result of the community's tax-exempt status or simple goodwill. In so doing, they accept financial risk.

Many CCRCs attempt to reduce financial risk by shifting some of the healthcare cost to the residents. This, though, will increase the benevolence risk. Because the resident will be personally responsible for a larger portion of their own costs, the resident's available assets for future care will decrease.

To measure the potential impact of a long-term care subsidy, the community must calculate the present value of estimated future costs for a current or future resident. To project the future costs of care, the CCRC must be able to accurately estimate the timing and duration of stays at each level of care. The cost of future care is then compared with the projected income spent by the resident on fees, as well as other personal assets that can be used to pay for care. If there is an apparent shortfall in the ability of a resident to pay for future care, the community needs to set aside amounts equal to that "subsidy" so that the money will be there when it is needed.

An effective way of mitigating subsidy risk is to use the subsidy estimation as a financial qualification procedure before a resident moves into a community. If a potential subsidy exists for a prospective resident, the community must then make the decision whether they should accept the potential resident. If the decision is made to accept the resident, the community should then set aside funds to help cover anticipated future shortfalls. Many communities decide not to set aside these funds because of current cash needs, but in the process, they may be sowing the seeds for future financial stress.

In an attempt to mitigate subsidy risk, many CCRCs typically use an average or median life expectancy statistic to estimate how much longer a resident will need care versus the financial resources set aside for that care. This approach can leave a community severely underfunded for future benevolence care. By definition, only 50% of residents live as long as the median life expectancy. But what about the 50% of the residents who will live in a community longer than expected? This is especially important in light of residents increasingly living longer than in years past. A more appropriate measure for a CCRC may be to set aside funds based upon the notion of having enough funds to pay for care based upon the 95th percentile of life expectancy. That is, only 5% of the time will the CCRC not have enough money set aside for a given resident.

Communities also typically use the estimate that a resident's needed assets are equal to twice the entrance fees to cover all future costs. It can be shown by actuarial projection models that this method is usually inadequate. For some residents, their projected future care could require significantly greater or fewer assets.

Because of the many limitations of current practices of assessing subsidy risk, a community may need to evaluate the methods it uses to analyze the future impact of a resident's ability to pay for future care. It should attempt to increase the accuracy of its long-term assessments and set aside the necessary funds to cover anticipated needs. This would not only allow a community to remain financially stable, but allow it to better budget and allocate assets for future use in other areas.
David Dillon, ASA, and Bonnie Albritton, ASA, of Lewis & Ellis, Inc., Actuaries & Consultants, Dallas, are actuaries who have a combined 18 years' experience in health financial analysis and assessment, as well as assisting employers in providing efficient and financially viable health benefits to their employees. For further information, phone (972) 850-0850. To comment on this article, please send e-mail to dillon1004@nursinghomesmagazine.com. For reprints in quantities of 100 or more, call (866) 377-6454.