If you follow this blog, you already know I’m generally supportive of life-plan communities, often called CCRCs (continuing care retirement communities). Recently I spoke with a CCRC resident who has lived in her community for 16 years and called it “the best thing she had ever done.” “This is my home,” she said.
For many older adults, CCRCs can provide an excellent combination of health care access, social connection, and peace of mind. That said, this model is not a perfect fit for everyone, and there are legitimate areas for improvement.
Entry fees and CCRC financial obligations
One common concern involves entry fees and how communities fund long-term obligations. The central question is whether a CCRC depends on future entry-fee revenue from new residents to meet current commitments to longer-term residents.
To clarify these issues, I spoke with my colleague A.V. Powell of A.V. Powell & Associates, an actuarial and pricing advisory firm that has worked with CCRCs for nearly 40 years.
Brad: Let’s begin with the origin of the entry-fee model. My understanding is that it evolved from a much older practice in which seniors turned assets over to churches or charities in exchange for lifetime housing and care. What drove the development of the entry-fee approach, and how does it serve residents over the long term?
A.V.: Historically, the asset-turnover model made sense when many seniors simply didn’t have enough resources to cover expected lifetime costs. Over time, more people accumulated sufficient assets, and the old model began to seem unfair. As consumers pushed for fairer arrangements, organizations developed fee structures tied to anticipated costs: a combination of entry and monthly fees that vary by unit type and the number of residents. Actuarially, entry fees are essentially a prepayment of future monthly fees, designed to cover the gap between current monthly fees and the expected cost of care as those costs occur, plus a reasonable contingency reserve.
Brad: How were entry fees priced originally?
A.V.: Early pricing tended to reference local housing market values, since many residents sold homes to fund entry fees. But properly designed entry fees are set to cover expected future obligations—monthly fee shortfalls, potential long-term care needs, and contingencies—so they are more than just a reflection of market prices.
Brad: Today consumers can choose among several refund options: fully refundable, partially refundable, or nonrefundable entry fees. Are those choices beneficial?
A.V.: Choice is generally good, but it’s important that refundable features be supported by actuarial funding. In my view, refund provisions should be funded at the time the contract is sold—not left to be paid from future residents’ fees in a pay-as-you-go arrangement. Actuarial funding protects current and future residents by ensuring reserves are set aside for promised refunds.
Brad: The pay-as-you-go approach is still common. For example, a resident’s refund might not be paid until a new resident pays an entry fee for the same unit. Are you saying all entry fees should be set so that, combined with monthly fees, they are sufficient to meet future obligations?
A.V.: Exactly. Pricing should consider the lifecycle of a resident’s expected costs. The sum of entry fees and monthly fees over an individual’s lifetime should be designed to cover all obligations, including healthcare services and any contractual refunds.
Brad: Entry fees can cause sticker shock. What advantages of the entry-fee model might not be obvious?
A.V.: From an actuarial standpoint, entry fees are prepaid monthly fees. For lifecare (Type A) contracts, entry fees can enable a lower monthly fee while allowing residents to prefund much of their long-term care risk. In short, entry fees can reduce monthly cost pressure and provide a mechanism to prefund care liabilities.
Brad: But refundable contracts make some consumers uneasy because refunds may depend on future resales. How can the industry address that concern?
A.V.: When refunds depend on future resales, the refund risk is borne by the consumer, which understandably causes concern. Providers can use those funds until a refund is due, which may create timing and liquidity issues if a unit is resold into a nonrefundable contract. Clear contract language is critical, but public policy and best practices could encourage or require actuarial reserves for refundable contracts so obligations aren’t contingent on future sales alone.
A secure future for residents and the industry
Having witnessed the benefits CCRCs provide, I want the industry to thrive. As communities innovate in technology, design, and more affordable models for middle-market seniors, the potential is significant.
Still, greater consumer confidence in the financial logic behind entry fees would likely increase demand. Financial soundness matters for sales and marketing, and harmonizing those conversations with actuarial and finance teams would improve consumer trust. Residents want assurance their money is safe and that promises—both explicit and implied—will be honored, including care services and entry-fee refunds.
A financial model that relies too heavily on future residents’ fees to meet obligations to current residents undermines that confidence. Communities that use actuarial funding and transparent reserve policies provide stronger protection for residents and a more sustainable model for the future.