Premise vs. Promise: When an Assisted Living Facility Declares Bankruptcy
Posted by Dorothy at 9/11/2009 4:39 PM 
Categories: uncategorized
Tags: long term care insurance LTC insurance employee benefits medicare medicade LTC medicaid
Categories: uncategorized
Tags: long term care insurance LTC insurance employee benefits medicare medicade LTC medicaid
Is it possible that planning for your long-term care could actually leave you in a more vulnerable position than if you had made no plans?
One of the ways to plan for future long-term care is to move into a continuing-care retirement community (CCRC). CCRCs offer a variety of living arrangements and support, including independent living, assisted living and skilled nursing care. The financial arrangements and amenities on site are designed to provide peace of mind to residents, and some new residents are motivated to move to a CCRC thinking it's the last move they will ever make.
Although the premise of a CCRC is relatively consistent across states and operators, the promise of a worry-free future is only as strong as the legal entity on the other side of the contract. That's a tough lesson being learned by the 200 or so residents of Covenant at South Hills, a CCRC community in Mt. Lebanon, Pennsylvania. Covenant is under Chapter 11 bankruptcy protection and attorneys are trying to work out a sale that would allow two bondholders to recoup the almost $50 million they say they are owed.
Covenant at South Hills is typical of the ‘flat price, no matter what care you need’ financial model. Residents pay a fee to move in, usually several hundred thousand dollars. Thereafter, they pay a monthly fee of several thousand dollars. A large percentage of the entrance fee usually is refunded when a resident leaves or dies. While living at Covenant, a resident pays the same monthly fee, whether or not they are receiving care. Another CCRC model is the ‘pay-as-you-go model,’ where care expenses are paid when incurred, above and beyond regular monthly fees. As reported in the May 17, 2009 issue of the Tribune-Review, Covenant had promised lifelong care; and with an average age of 87, the residents are hardly in a position to regroup and rebound from the negative implications of the bankruptcy.
Pouring salt in the wound, the CCRC was built using $59 million in tax-exempt bonds, and the sponsoring organization is a highly-respected international religious charity. Some residents thought that the religious charity would back up the promises being made. However, the charity was not legally guaranteeing the risk.
The Tribune-Review also reported only 74% of the apartments are full. When a CCRC built for 270 has only 200 residents, it's financially handicapped. The financial cushion that could be provided by an additional 70 residents is not there, and if a significant number of the 200 residents unexpectedly need more care sooner or for longer than anticipated, the financial model falters quickly.
This points to one of the flaws in trying to use a micro approach to long-term care risk as opposed to a macro approach. The ultimate micro-approach would be for your spouse or child to take care of you. That plan has obvious risks. Your spouse may predecease you. Your child may be unable or unwilling to provide proper care over months or years, while holding down a job and juggling other responsibilities.
Compare that to the millions of policies issued by long-term care insurance companies. Insurance companies benefit from a macro approach: the health of 200 people is irrelevant to insurance pricing. Medical underwriting, the process of deciding whether to enter a contract with the individual, is often much more stringent when done by an insurance company than a CCRC admissions employee.
When making long-term plans, it's prudent to consider who or what is legally behind the promise. Even in this economic downturn, insurance holding companies stand relatively unscathed compared to investment firms and banks. Meeting contractual promises for worst-case scenarios in the future is the bread-and-butter premise of insurance companies. It's their premise, and a promise on which policyholders can rely.
Dorothy McMahon, president of McMahon and Associates in Bloomfield Hills, is a specialist offering “Straight Talk about Long-Term Care Insurance.” She has brought her program to professional associations, family support groups, meetings, and conferences. Contact her at (248) 844-9787 or LTCINSUSA@AOL.COM and visit www.mcmahonltcins.com.
One of the ways to plan for future long-term care is to move into a continuing-care retirement community (CCRC). CCRCs offer a variety of living arrangements and support, including independent living, assisted living and skilled nursing care. The financial arrangements and amenities on site are designed to provide peace of mind to residents, and some new residents are motivated to move to a CCRC thinking it's the last move they will ever make.
Although the premise of a CCRC is relatively consistent across states and operators, the promise of a worry-free future is only as strong as the legal entity on the other side of the contract. That's a tough lesson being learned by the 200 or so residents of Covenant at South Hills, a CCRC community in Mt. Lebanon, Pennsylvania. Covenant is under Chapter 11 bankruptcy protection and attorneys are trying to work out a sale that would allow two bondholders to recoup the almost $50 million they say they are owed.
Covenant at South Hills is typical of the ‘flat price, no matter what care you need’ financial model. Residents pay a fee to move in, usually several hundred thousand dollars. Thereafter, they pay a monthly fee of several thousand dollars. A large percentage of the entrance fee usually is refunded when a resident leaves or dies. While living at Covenant, a resident pays the same monthly fee, whether or not they are receiving care. Another CCRC model is the ‘pay-as-you-go model,’ where care expenses are paid when incurred, above and beyond regular monthly fees. As reported in the May 17, 2009 issue of the Tribune-Review, Covenant had promised lifelong care; and with an average age of 87, the residents are hardly in a position to regroup and rebound from the negative implications of the bankruptcy.
Pouring salt in the wound, the CCRC was built using $59 million in tax-exempt bonds, and the sponsoring organization is a highly-respected international religious charity. Some residents thought that the religious charity would back up the promises being made. However, the charity was not legally guaranteeing the risk.
The Tribune-Review also reported only 74% of the apartments are full. When a CCRC built for 270 has only 200 residents, it's financially handicapped. The financial cushion that could be provided by an additional 70 residents is not there, and if a significant number of the 200 residents unexpectedly need more care sooner or for longer than anticipated, the financial model falters quickly.
This points to one of the flaws in trying to use a micro approach to long-term care risk as opposed to a macro approach. The ultimate micro-approach would be for your spouse or child to take care of you. That plan has obvious risks. Your spouse may predecease you. Your child may be unable or unwilling to provide proper care over months or years, while holding down a job and juggling other responsibilities.
Compare that to the millions of policies issued by long-term care insurance companies. Insurance companies benefit from a macro approach: the health of 200 people is irrelevant to insurance pricing. Medical underwriting, the process of deciding whether to enter a contract with the individual, is often much more stringent when done by an insurance company than a CCRC admissions employee.
When making long-term plans, it's prudent to consider who or what is legally behind the promise. Even in this economic downturn, insurance holding companies stand relatively unscathed compared to investment firms and banks. Meeting contractual promises for worst-case scenarios in the future is the bread-and-butter premise of insurance companies. It's their premise, and a promise on which policyholders can rely.
Dorothy McMahon, president of McMahon and Associates in Bloomfield Hills, is a specialist offering “Straight Talk about Long-Term Care Insurance.” She has brought her program to professional associations, family support groups, meetings, and conferences. Contact her at (248) 844-9787 or LTCINSUSA@AOL.COM and visit www.mcmahonltcins.com.
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