Types of Life Care Contracts

If you are considering moving into a Continuing Care Retirement Community (CCRC), you will find there are a variety of contract types.  This week, we hope to help you understand the different contracts associated with these communities.  A key feature of the different contract types is the degree of risk each one imposes on the resident and requires of the community. The highest level of risk is assumed by communities with the Type A contract and the lowest with Type D. The different levels of risk have different fee structures.

Most Continuing Care Retirement Communities are owned and operated by non-profit organizations. The variety of contracts satisfies two basic requirements: the needs, goals and risk levels of the different segments of the senior marketplace and the mission of the organization. The contract types are:

Type A (Extensive or Full Life Care)

Type B (Modified Life Care), and

Type C (Fee-for-Service)

Type A (Extensive or Full Life Care) Contracts 

These contracts offer residents housing options, services, amenities, and most importantly, unlimited access to healthcare with no substantial increase in monthly payments other than normal inflationary increases.

• Most charge an entry fee upon move-in as well as an on-going monthly fee.
• Residents are guaranteed unlimited access to a range of healthcare services regardless of their living accommodations.
• The continuum of care may be provided completely on site within the community. This is the advantage of this type of contract as one can go from independent living to assisted care to nursing home care all at one place. 
• Residents are required to maintain a minimum level of Medicare co-insurance.
• These features often make for a system of care that is capable of attending to the various healthcare needs of its residents smoothly and easily within the various levels of care.
• The future costs of residing in the community will not escalate significantly as the health care requirements of a resident increase over time.

The residents collectively share in the healthcare risk of the community. For paying these higher fees, residents receive tax benefits related to the prepayment of future healthcare costs. These deductions can be substantial. In addition, certain amenities may be included in the monthly fee.

Type B (Modified) Contracts

In many ways, the Type B contract is very similar to Type A. The key difference is in the amount of health care risk the community is willing to absorb.

• Type B contracts limit the number of days a resident may reside in either assisted living or skilled nursing care during a year before a change in fee is applied. 
• Because the Type B contract includes some healthcare prefunding, the entry and monthly fees charged make the resident eligible for the IRS medical deduction. These costs will be less than one received under a Type A contract.

Residents who favor a Type B contract are hedging that their financial assets will be sufficient to absorb the cost of uncovered healthcare costs, or that their need for healthcare services in the future will not be significantly different than they are currently.

Type C (Fee-for-Service) Contracts

Under the Type C contract, a resident receives housing, residential services, and amenities as defined in the contract.

• The entry and monthly fees are typically much less than a Type A or B. 
• Some communities only charge a monthly fee.
• The monthly fee covers only the cost of maintaining the living accommodation.
• Although health care services are guaranteed, the resident pays the full cost of any time spent in the health center.
• Some communities with Type C contracts may charge an entry fee and designate this payment as a source of partial funding whenever a resident must reside in assisted living or skilled nursing care.
• Under this scenario the resident may pay a rate that is less than the full cost with the difference being drawn from the entry fee payment. Once the entry fee is fully depleted, the resident is charged the full cost of services.
• Type C contract unbundles many of its services allowing the resident to be selective about types and levels of services. Services are at full cost.
• The resident does not receive a medical deduction, but accumulates actual out-of-­pocket costs that are eligible for deduction.

Residents who prefer the Type C contract like to have the option of choices, and are more selective about the type and extent of the services they consume. It is important to note that those who choose a type C contract take on the full risk of health care costs. Custodial care in a nursing home can cost over $9,000 per month, and without long term care insurance or significant personal financial resources, this amount would be a significant financial burden for many.

Type D (Rental) Contracts

The Type D, or Rental Contract, provides residents with a living accommodation and some basic amenities.

• With this type of contract, there is no guaranteed access to healthcare services. 
• This type of contract has no entry fee, and the monthly fees cover the cost of maintaining the rental unit.

Residents who prefer the type D contract are risk takers. They feel that they can assume the full risk of the cost of their future health care needs as well as the coordination of their care.

What about Refundable Contracts

As outlined, many CCRC contracts require the payment of an entry fee. Type A contracts tend to have higher entry fees than the others. Entry fees are typically graduated according to the size of the living accommodations.

The entry fee payment is an important financial resource for CCRCs. These funds may be used for a variety of purposes. These include the payment of debt service on outstanding loans that were used to construct or renovate the community, to provide funding for capital improvements ensuring that the community’s building and infrastructure remain sound and up­-to-date, and/or to provide a reserve source for the payment of future health care costs of all residents.

Refund options may range from no refund after an initial adjustment period, a refund amount that declines over time, or a stated percentage refund. CCRC contracts with attractive refund provisions must require entry fee payments that are significantly higher than non­refundable contracts. These communities plan to invest the entry fee payments over the resident’s lifetime to earn enough to make the required refund. For many CCRC contracts, refunds are paid once a new contract on the unit vacated has been signed.

It is important for residents to understand completely the contract provisions under which a refund is paid. Refundable entry fee contracts may also be subject to imputed interest.

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