Evolution of the Old Folks Home

Evolution of the Old Folks Home

In the early 1950s, wide recognition was given to retirement communities which offered a "pre-payment" of future health care expenses. While the Continuing Care Retirement Communities (CCRCs) charged a one-time, non-refundable entry fee, the appeal of these facilities to retirees was nevertheless quite strong. Residents were promised that once they entered the retirement community, they need never worry again about unanticipated healthcare expenses.

Now, four decades later, many of these communities are beginning to lose some of their appeal to the new retiree. This is occurring even though the traditional CCRC remains a strong majority of all CCRC types.

Senior Population Burgeons

In 1960, there were 16.5 million people over the age of 65 in the United States, representing 9.2 percent of the total population. Today, there are nearly 32 million people in this same age group, representing a phenomenal 12.6 percent of the total population. While the growth rate of this segment of the population will slow during the last decade of the century, its growth will reach epic proportions as the "baby boomers" approach retirement age during the early twenty-first century. By the year 2030, the full force of the graying of the baby boom will be 65.5 million people over the age of 65.

The retiree of today is better educated, holds a greater percentage of the country's wealth, and will live longer than his or her counterpart of the 1950's. As a result, the providers of housing and health care for seniors will need to re-equip themselves in an effort to effectively address the needs of this market.

CCRC Alternatives for the Retiree

Without a doubt, the traditional Continuing Care Retirement Community held many advantages for the retiree. Life-long peace of mind was often the result as residents traded a substantial entrance fee for the "contract" guaranteeing future health care. However, benefits were not always as readily forthcoming to the sponsors of such communities. The underestimation of a resident's life expectancy and overestimation of the sponsor's ability to fund overly-optimistic and unrealistic health care benefits, led to the death of many CCRCs. The unraveling of Pacific Homes in the late 70s was the result of just such a combination of events.

There are now emerging several variations of the traditional CCRC theme which maximize the benefits and minimize the risks for sponsor and resident alike. Included in retirement options of the 90s are such innovative concepts as the equity preserving Condominium or Cooperative CCRC, Rental CCRCs, and the approach which is just now in its infancy and is coined "Lifecare Without Walls."

Condominium and Cooperative CCRCs

The condominium and cooperative approaches to CCRCs capitalize on one key interest of the new retiree: equity in their retirement residence. The entry fee that is paid to the traditional CCRC is not an asset that can be given, sold, or willed to others. however, the financial structuring of a condominium or cooperative provides an equity position for the resident that can take advantage of several attributes which have proven to be elusive in the traditional CCRC. These benefits include the following:

Equities, being part of the estate, may be willed to others, while the entry fee applied toward the purchase of a care contract is a net deduction to the estate for inheritance purposes.
Condominium owners and cooperative members may itemize a prorated share fof real estate taxes as a deduction to income for tax purposes.
Residents in these two approaches to CCRC's may continue to purchase residential equities and still preserve their one-time capital gains exclusions on the first $125,000 lifetime increase in the equity of their homes upon sale after the age of 55.

The condominium approach sells the actual unit and a prorated share of some common areas to the resident. Resident owned areas include those items generally related to housing such as hallways, storage rooms, lobbies, elevators, stairways, common lounges, parking facilities, and perhaps the immediate grounds and related site improvements. The remaining common areas such as food service and health care facilities can then remain under the ownership and control of the community sponsor. Monthly service fees can be paid to the sponsor for facility maintenance, meals, and health care. In addition, when the resident moves or passes away, the community sponsor is able to act as a broker for the property while the resident or estate can realize any appreciation in the value of the property. The sponsor is able to incorporate its service mission by providing health care and services for the elderly while minimizing risk at the same time.

The cooperative approach sells the resident a "share" in the real property and ongoing operation of the retirement community. While the resident does not own his unit outright, the investment in the ongoing operation of the community allows him the opportunity to reside on campus. The sponsor in this case generally acts as developer, manager, marketing agent and broker of the community and will frequently own and operate any health care facilities at the site. When the resident moves or passes away, his ownership position in the community is sold, and any appreciation in the value of his share is passed on to the resident or his estate.

These two equity approaches to CCRCs are not without potential pitfalls for the operator. There are inherent differences in perspective between residents and providers when the CCRC residents have an equity interest in their housing. Control of independent units and their immediate common areas will inevitably be held by the homeowner's association. As a result, deed restrictions are a potential problem if the homeowner's association is not necessarily committed to the concepts of restrictions on age, health and income of new entrants.

Many of these problems can be alleviated if the sponsor retains control of all service-related areas such as dietary, health, and managed activities and services such as housekeeping and transportation. Not only will the sponsor be able to maintain congruence of operation, but opportunities for cash generation can be tied to profitable transfer agreements, management agreements, marketing contracts, development contracts and land lease revenues.

Rental CCRCs

The rental approach to CCRCs tends to target a different segment of the retirement market than the equity approach. While the condominium or cooperative community is most successfully marketed to the younger retiree interested in preserving equity, the rental community targets the retiree who is primarily interested in the availability of health care. With the advent of group long-term care insurance, it is now possible to offer all of the programmatic features of a CCRC without the requirement to pay an entry fee. The growth and increasing popularity of this concept has led many underwriters to offer a wide array of long term health care policies.

When the resident's monthly service fee includes a provision for long term care insurance, the resident can be virtually assured of never having to pay more than the fee required for independent units. If the health care needs of a resident change, and he has to relinquish his $1,500/month apartment in exchange for a $3,000/month nursing bed, the insurance policy can cover the differential costs. Consequently, a win-win-win situation is created. The resident wins by never having to pay a monthly fee which is greater than the fee for an independent apartment. The sponsor wins by not having to subsidize resident care and also being given the opportunity to operate a nursing facility which is filled with private-paying patients. The insurance underwriter is also a winner by being able to spread the costs of such a program across a potentially massive pool of participants which are -- for the most part -- healthy.

The primary advantage for the sponsor of a rental versus traditional CCRC is the substantially reduced risk. The operators of traditional CCRCs find themselves in the self-insurance business and are forced to spread substantial cost and risk over a relatively small population of residents. The rental CCRC is able to transfer potential risks to a third party (in this case, the insurance underwriter).

The rental CCRC approach is also a profitable marketing option for operators of existing congregate care facilities. The capital costs involved in the construction and operation of nursing and assisted living facilities have kept many operators from offering health-related services of any kind. By providing long term care insurance as part of the monthly maintenance fee, and orchestrating a transfer agreement with an off-campus health care provider, another win-win situation is created. In this case, sponsors of independent units which offer such services as meals, housekeeping, utilities, scheduled transportation and activities can now provide a health care component as well.

While the monthly maintenance fee for the rental CCRC is generally larger than would be charged if an entry fee were required, the economically-qualified market for rental CCRCs can also be substantially greater.

Lifecare Without Walls

"Lifecare Without Walls" is one step beyond the Leisure Worlds and Sun Cities created in the 70s. This concept allow retirees to purchase their own homes which are then programmatically tied together by the community sponsor or developer. The sponsor in this case can offer a wide range of services which might include, but are not limited to, the following:

Long Term Care Insurance as described above could be incoporated into the program of services once applicants pass an initial examination,
Meal Service could be offered in a centrally located dining room or restaurant with open of\r fixed menus,
Activities can be planned and coordinated through a community "clubhouse" which offers various recreational programs, fitness equipment and commpn areas for "member" use,
Maintenance of the individual homes could be provided as gardening services, housekeeping services, maintenance contracts or any combination of the above,
Health Care could be operated autonomously which would provide assisted living or nursing care for community residents while being paid through insurance.

"Lifecare Without Walls" is the newest of emerging CCRC trends, and as such is still in its formative stages. This approach naturally lends itself to being service oriented rather than facility oriented. Consequently, there are low capital costs required because housing is not a component.

The sponsors of "Lifecare Without Walls" may choose to act as builders, developers and marketers of the residential communities, or as the operators which can offer a cafeteria plan of services which would be purchased by the resident. Furthermore, this approach can create a market for the future use of more conventional CCRCs or congregate care facilities.

The Future... Today

Examples of all four of the communities listed above can be found in California and selected East Coast cities, and their popularity is unquestionably spreading. For the sponsors of new communities, rental and equity CCRCs should be given serious consideration. The growth in the size of the retired population continues, and this segment of the population will shop to find the retirement community and lifestyle that can best address their needs. By offering new approaches in the provision of retirement housing and healthcare services, the potential to capture a greater share of the new retiree market is enhanced.

"... the providers of housing

and healthcare for seniors

will need to re-equip

themselves in an effort to

effectively address the needs

of this market."

Existing facilities are not excluded from offering a less traditional approach to CCRCs. It is inadvisable to offer a wide variety of entry options in one building, but new construction or the expansion of existing facilities can provide an easy entry to variations on the theme of CCRCs. As a result, existing providers are the natural sponsors of "Lifecare Without Walls." The "Lifecare Without Walls" concept and equity CCRCs have the true ability to capture a younger market, while expanding the range of services and facilities that are offered on one campus.

Whether an owner, operator, affiliated service provider or bystander -- the change in the retirement community as we know it, is happening today. We are currently in the midst of the evolution of the old folks home. How one responds to the winds of change is simply a matter of choice.

Mark Miles is director of market research at Crown Research Corporation in Gresham, which helps plan, finance, develop and operate retirement communities and healthcare centers nationally. This article was the first-place entry in a recent "Call for Papers" sponsored by the Oregon Association of Homes for the Aging.

This article was originally published in:

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