Active Aging Advocates    New Life Beckons  
   Acting Together for a Better Tomorrow Through
Lifelong Growing, Caring, Giving and Living
 
Active Aging Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life Active Aging Advocates  New Life

The Financial Soundness Challenge

Financial Soundness refers to the balance sheet and contract fulfillment soundness of business – tax exempt or otherwise – on which older people rely for trusted services needed to sustain them.

The importance of Financial Soundness to a particular senior services situation will depend on the risk exposure for the participant and that participant’s risk appetite.  For instance, an older person with substantial assets may find a $500,000 entry fee investment to be minor in proportion to that person’s total investment asset holding; such a person might reasonably have a higher risk appetite than would a person for whom such an entry fee investment would require the sale of the family home.

We can show the risk exposure graphically comparing entry fee contracts that require residence, CCRCs, with entry fee contracts that allow participants to stay in their own homes, Continuing Care at Home (CCaH).  Using arbitrary risk values that would display as follows.

Of course, other risk variables have to be assessed.  This can be complex.  Consider, for example, the following risk factors concerning just the refund provisions in an entry fee arrangement:

Is there a return of entry fee provision?  If no, can we afford the loss of our entry fee?  If yes, is the return contingent on a successor resident?  If yes, can we afford the market risk without having a say in the marketing?  If no, does the provider reserve the liquidity needed to pay refunds when due?

Other risks also come into play. 

For instance, is the contract a lifetime contract or time delineated?  Does the contract include care as needed or are the participants on their own risk for care services?  Are participants required to take their meals on the premises or can they opt out of meals?

From this, it’s evident that financial risk assessment in entering into a senior services agreement is highly complex and beyond the normal skills of ordinary users of such services.   This requires that consumers be able to rely on the provider organizations to perform as expected and not to assert contractual technicalities as a bar to expected services.  People who contract for services do so in trust that they can then have the peace of mind of knowing that services will be provided as needed and that they will not be abandoned late in life when they can no longer act for themselves and when frailty makes them vulnerable to dislocation.

This state of reliance on the meaningful delivery of promised future services for which the participant pays in advance is characteristic of insurance undertakings.  Insurance is highly regulated while the financial and contractual aspects of senior services are less regulated.  Note that financial and contractual regulation is to be distinguished from health and safety regulation, which tends to be quite strong in most states and localities.

To the right are materials that can help in the consideration of Financial Soundness.  Paramount is a strong balance sheet, meaning that assets exceed liabilities with sufficient margin to assure fulfillment of expected services even under conditions of economic strain such as occurred in 1930 and again in 2008.

Generally, balance sheet strength is measured by the percentage to which assets exceed liabilities, since liabilities represent the financial valuation of the commitments undertaken by the business which assets are expected to cover.  The following shows the excess for the Fortune Top 5 Companies plus Kaiser Healthcare, the largest tax exempt business.

Since many tax exempt senior housing enterprises have negative net assets, they are technically impaired financially which means that they are relying on future revenues in excess of future commitments to make up the shortfall.  These enterprises are often able to avoid having to resort to bankruptcy protection by using the cash from resident entry fees to meet obligations.  Prospective residents should only undertake such a risky contractual investment if their risk appetite is sufficient to cover the prospective losses.

 

Financial Soundness Resources

October 2015 Report of NaCCRA Financial Soundness Committee

Financial Questions and Answers for Prospective Residents

The Continuing Care Accreditation Commission (CCAC), a subsidiary of the Commission on Accreditation of Rehabilitation Facilities, provides evaluations of CCRCs paid for by the facilities evaluated.  Click here for the CCAC Consumer Guide.

Model Laws to Protect CCRC Residents Financial and Contract Interests.

   

 

Content can be enlarged by pressing the Ctrl Button on a Windows computer and scrolling the mouse wheel to change the size.  On an Apple hold down the "Command" key and press the + key to enlarge or the - key to reduce content.  "We strive for fulfillment of promises and for human dignity."

Adminstration:  Active Aging Advocates, 2855 Carlsbad Blvd., N116, Carlsbad, CA 92008

© 2016 Active Aging Advocates, All Rights Reserved