Distressing report on the life-care industry

Aging, June-July, 1985

Life-care communities, often called continuing care homes, are a fairly recent entry on the American housing scene. Originally sponsored by nonprofit organizations such as churches and fraternal groups, life-care communities have increasingly been recognized by private developers for their market potential.

Aware that the lure of profits has drawn some overeager developers as well as some unscrupulous persons into the industry, Money magazine conducted a 3-month investigation of life-care complexes last Spring. The results were published in an article, "The Broken Promise of Life-Care Communities" by Denise M. Topolnicki, which appeared in the magazine's April issue. The article says the investigation identified 40 life-care communities that had gone bankrupt since the 1970's and adds that due to lack of federal and state laws regulating 300 such communities in the U.S., it is difficult to tell how many more might be in financial trouble.

In many cases, Ms. Topolnicki points out, the precarious financial condition of a life-care complex is not the result of an unscrupulous operator but of poor planning and overly optimistic projections of occupancy rates. If units are undersold, if monthly fees are set too low to meet expenses, or if demand for nursing care is underestimated, reserve funds may be inadequate to provide medical or nursing care to residents over the years.

Money recommends that life-care providers be required to hire actuaries before selling contracts and then keep them on retainer after the community has opened. Actuaries could improve the accuracy of projections on the demand for nursing care and predict the longevity of residents, thereby helping operators to set realistic fees to meet current and future expenses.

While poor planning is the culprit in some life-care failures, the Money article doesn't ignore the scoundrels and con men who appear to have no intention of making good on their promises and have wiped out the savings of older people. The article spends three pages documenting fraud and failure at Alabama Meadows, a life-care community started in 1975 by a Baptist minister, Rev. Jimmy Ballard, and later managed by a Presbyterian minister, Kenneth Berg--both of whom ended up in jail.

Failure isn't confined to "fly-by-night" operations headed by unscrupulous people. The article reports on three $30-million plus complexes in Alabama and Florida for the affluent elderly that have had to declare bankruptcy.

Money notes that while all states inspect nursing care facilities located in life-care complexes, only 11 states (Ariz., Calif., Colo., Fla., Ill., Ind., Md., Mich., Minn., Mo., and Pa.) have broad statutes regulating life-care communities and even these laws are sometimes too weak to protect residents' investments.

Ms. Topolnicki does mention a new effort underway to have the industry police itself through a national accreditation program being developed by the American Association of Homes for the Aging. Under the program, communities applying for accreditation would be visited by a committee of experts on life-care who would examine the project's finances. Those communites accredited would be reviewed every three years.

Money presents other recommendations for reform. Among the suggestions: provide a strong incentive for developers to make sure communities will be viable by delaying return on their investments until after 80% of the community's units are sold; increase chances for success by getting financial backing from hospitals, nursing homes and churches; and pass federal or state laws requiring life-care providers to hire actuaries.

Money also suggests a role for new and experimental insurance policies covering nursing home care that are currently being test marketed by several insurance companies. The article says it is possible that these policies could be made available to life-care residents for reasonable monthly premiums.

Finally, Ms. Topolnicki proposes "a rating service . . . like Moody's in the bond business, that could assess the financial strength of life-care communities" for consumers.

A pension firm consultant quoted in the article comments: "Purchasers tend to look at the size of the apartment and the thickness of its carpeting. They need to look more carefully at the community's financial stability."