BILL NUMBER: AB 2550 CHAPTERED 07/09/04 CHAPTER 129 FILED WITH SECRETARY OF STATE JULY 9, 2004 APPROVED BY GOVERNOR JULY 8, 2004 PASSED THE SENATE JUNE 24, 2004 PASSED THE ASSEMBLY MAY 10, 2004 AMENDED IN ASSEMBLY APRIL 15, 2004 INTRODUCED BY Assembly Member Steinberg FEBRUARY 20, 2004 An act to amend Sections 1790, 1792, 1792.4, and 1792.5 of, to add Sections 1792.7, 1792.8, 1792.9, and 1792.10 to, and to repeal Section 1792.1 of, the Health and Safety Code, relating to continuing care contracts. LEGISLATIVE COUNSEL'S DIGEST AB 2550, Steinberg. Continuing care contracts. (1) Existing law provides for the regulation by the State Department of Social Services of activities relating to continuing care contracts that govern care provided to an elderly resident in a continuing care retirement community for the duration of the resident' s life or a term in excess of one year. Existing law requires each provider to compute its liquid reserve requirement as of the end of the provider's most recent fiscal yearend based on its audited financial statements for that period and, at the time it files its annual report, to file a form certifying certain financial information. Existing law also requires each provider to complete the same form and file it with the department within 45 days following the conclusion of each quarter during the provider's fiscal year, and requires that for each quarterly report, the amount the provider is required to designate for its debt reserve and operating expense reserve shall be based on the provider's audited financial statements for its most recently completed fiscal year. This bill would repeal the requirement for a quarterly report, and would make conforming changes to asset valuation requirements. (2) Existing law requires each provider to include in its liquid reserve a reserve for its operating expenses in an amount that equals or exceeds 45 days' net operating expenses. This bill would extend that period to 75 days. (3) Existing law, until January 1, 2005, establishes requirements for the department to implement a trial program and report to the Legislature on assessing long-term care provider solvency, and requires each provider to obtain an actuarial study and file it with the department, except under specified circumstances. This bill would, commencing January 1, 2005, require each provider to file annually with the department a financial report disclosing key financial ratios and other key indicators in a form determined by the department. The bill would also require any provider that has entered into a continuing care contract that has certain features to submit to the department, at least once every 5 years, an actuary's opinion as to the provider's actuarial financial condition. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 1790 of the Health and Safety Code is amended to read: 1790. (a) Each provider, that has obtained a provisional or final certificate of authority, and each provider that possesses an inactive certificate of authority, shall submit an annual report of its financial condition. The report shall consist of audited financial statements and required reserve calculations, with accompanying certified public accountants' opinions thereon, Continuing Care Provider Fee and Calculation Sheet, evidence of fidelity bond as required by Section 1789.8, and certification that the continuing care contract in use for new residents has been approved by the department, all in a format provided by the department, and shall include all of the following information: (1) A certification, if applicable, that the entity is maintaining reserves for prepaid continuing care contracts, statutory reserves, and refund reserves. (2) Full details on the status of reserves and on per capita costs of operation for each continuing care retirement community operated. (3) Full details on any increase in monthly care fees, the basis for determining the increase, and the data used to calculate the increase. (4) The required reserve calculation schedules shall be accompanied by the auditor's opinion as to compliance with applicable statutes. (5) Any other information as the department may require. (b) Each provider shall file the annual report with the department within four months after the provider's fiscal yearend. If the complete annual report is not received by the due date, a one thousand dollar ($1,000) late fee shall accompany submission of the reports. If the reports are more than 30 days past due, an additional fee of thirty-three dollars ($33) for each day over the first 30 days shall accompany submission of the report. The department may, at its discretion, waive the late fee for good cause. (c) The annual report and any amendments thereto shall be signed and certified by the chief executive officer of the provider, stating that, to the best of his or her knowledge and belief, the items are correct. (d) A copy of the most recent annual audited financial statement shall be transmitted by the provider to each transferor requesting the statement. (e) A provider shall amend its annual report on file with the department at any time, without the payment of any additional fee, if an amendment is necessary to prevent the report from containing a material misstatement of fact or omitting a material fact. (f) If a provider is no longer entering into continuing care contracts, and currently is caring for 10 or fewer continuing care residents, the provider may request permission from the department, in lieu of filing the annual report, to establish a trust fund or to secure a performance bond to ensure fulfillment of continuing care contract obligations. The request shall be made each year within 30 days after the provider's fiscal year end. The request shall include the amount of the trust fund or performance bond determined by calculating the projected life costs, less the projected life revenue, for the remaining continuing care residents in the year the provider requests the waiver. If the department approves the request, the following shall be submitted to the department annually: (1) Evidence of trust fund or performance bond and its amount. (2) A list of continuing care contract residents. If the number of continuing care residents exceeds 10 at any time, the provider shall comply with the requirements of this section. (3) A provider fee as required by subdivision (c) of Section 1791. (g) If the department determines a provider's annual audited report needs further analysis and investigation, as a result of incomplete and inaccurate financial statements, significant financial deficiencies, development of work out plans to stabilize financial solvency, or for any other reason, the provider shall reimburse the department for reasonable actual costs incurred by the department or its representative. The reimbursed funds shall be deposited in the Continuing Care Contract Provider Fee Fund. SEC. 2. Section 1792 of the Health and Safety Code is amended to read: 1792. (a) A provider shall maintain at all times qualifying assets as a liquid reserve in an amount that equals or exceeds the sum of the following: (1) The amount the provider is required to hold as a debt service reserve under Section 1792.3. (2) The amount the provider must hold as an operating expense reserve under Section 1792.4. (b) The liquid reserve requirement described in this section is satisfied when a provider holds qualifying assets in the amount required. Except as may be required under subdivision (d), a provider is not required to set aside, deposit into an escrow, or otherwise restrict the assets it holds as its liquid reserve. (c) A provider shall not allow the amount it holds as its liquid reserve to fall below the amount required by this section. In the event the amount of a provider's liquid reserve is insufficient, the provider shall prudently eliminate the deficiency by increasing its assets qualifying under Section 1792.2. (d) The department may increase the amount a provider is required to hold as its liquid reserve or require that a provider immediately place its liquid reserve into an escrow account meeting the requirements of Section 1781 if the department has reason to believe the provider is any of the following: (1) Insolvent. (2) In imminent danger of becoming insolvent. (3) In a financially unsound or unsafe condition. (4) In a condition such that it may otherwise be unable to fully perform its obligations pursuant to continuing care contracts. (e) For providers that have voluntarily and permanently discontinued entering into continuing care contracts, the department may allow a reduced liquid reserve amount if the department finds that the reduction is consistent with the financial protections imposed by this article. The reduced liquid reserve amount shall be based upon the percentage of residents at the continuing care retirement community who have continuing care contracts. SEC. 3. Section 1792.1 of the Health and Safety Code is repealed. SEC. 4. Section 1792.4 of the Health and Safety Code is amended to read: 1792.4. (a) Each provider shall include in its liquid reserve a reserve for its operating expenses in an amount that equals or exceeds 75 days' net operating expenses. For purposes of this section: (1) Seventy-five days net operating expenses shall be calculated by dividing the provider's operating expenses during the immediately preceding fiscal year by 365, and multiplying that quotient by 75. (2) "Net operating expenses" includes all expenses except the following: (A) The interest and credit enhancement expenses factored into the provider's calculation of its long-term debt reserve obligation described in Section 1792.3. (B) Depreciation or amortization expenses. (C) An amount equal to the reimbursement paid to the provider during the past 12 months for services to residents other than residents holding continuing care contracts. (D) Extraordinary expenses that the department determines may be excluded by the provider. A provider shall apply in writing for a determination by the department and shall provide supporting documentation prepared in accordance with generally accepted accounting principles. (b) A provider that has been in operation for less than 12 months shall calculate its net operating expenses by using its actual expenses for the months it has operated and, for the remaining months, the projected net operating expense amounts it submitted to the department as part of its application for a certificate of authority. SEC. 5. Section 1792.5 of the Health and Safety Code is amended to read: 1792.5. (a) The provider shall compute its liquid reserve requirement as of the end of the provider's most recent fiscal yearend based on its audited financial statements for that period and, at the time it files its annual report, shall file a form acceptable to the department certifying all of the following: (1) The amount the provider is required to hold as a liquid reserve, including the amounts required for the debt service reserve and the operating expense reserve. (2) The qualifying assets, and their respective values, the provider has designated for its debt service reserve and for its operating expense reserve. (3) The amount of any deficiency or surplus for the provider's debt service reserve and the provider's operating expense reserve. (b) For the purpose of calculating the amount held by the provider to satisfy its liquid reserve requirement, all qualifying assets used to satisfy the liquid reserve requirements shall be valued at their fair market value as of the end of the provider's most recently completed fiscal year. Restricted assets that have guaranteed values and are designated as qualifying assets under paragraph (6) or (7) of subdivision (a) of Section 1792.2 may be valued at their guaranteed values. SEC. 6. Section 1792.7 is added to the Health and Safety Code, to read: 1792.7. (a) The Legislature finds and declares all of the following: (1) In continuing care contracts, providers offer a wide variety of living accommodations and care programs for an indefinite or extended number of years in exchange for substantial payments by residents. (2) The annual reporting and reserve requirements for each continuing care provider should include a report that summarizes the provider's recent and projected performance in a form useful to residents, prospective residents, and the department. (3) Certain providers enter into "life care contracts" or similar contracts with their residents. Periodic actuarial studies that examine the actuarial financial condition of these providers will help to assure their long-term financial soundness. (b) Each provider shall annually file with the department a report that shows certain key financial indicators for the provider's past five years, based on the provider's actual experience, and for the upcoming five years, based on the provider's projections. Providers shall file their key indicator reports in the manner required by Section 1792.9 and in a form prescribed by the department. (c) Each provider that has entered into Type A contracts shall file with the department an actuary's opinion as to the actuarial financial condition of the provider's continuing care operations in the manner required by Section 1792.10. SEC. 7. Section 1792.8 is added to the Health and Safety Code, to read: 1792.8. (a) For purposes of this article, "actuarial study" means an analysis that addresses the current actuarial financial condition of a provider that is performed by an actuary in accordance with accepted actuarial principles and the standards of practice adopted by the Actuarial Standards Board. An actuarial study shall include all of the following: (1) An actuarial report. (2) A statement of actuarial opinion. (3) An actuarial balance sheet. (4) A cohort pricing analysis. (5) A cashflow projection. (6) A description of the actuarial methodology, formulae, and assumptions. (b) "Actuary" means a member in good standing of the American Academy of Actuaries who is qualified to sign a statement of actuarial opinion. (c) "Type A contract" means a continuing care contract that has an up-front entrance fee and includes provision for housing, residential services, amenities, and unlimited specific health-related services with little or no substantial increases in monthly charges, except for normal operating costs and inflation adjustments. SEC. 7. Section 1792.9 is added to the Health and Safety Code, to read: 1792.9. (a) All providers shall file annually with the department a financial report disclosing key financial ratios and other key indicators in a form determined by the department. (b) The department shall issue a "Key Indicators Report" form to providers that shall be used to satisfy the requirements of subdivision (a). The Key Indicators Report shall require providers to disclose the following information: (1) Operational data indicating the provider's average annual occupancy by facility. (2) Margin ratios indicating the provider's net operating margin and net operating margin adjusted to reflect net proceeds from entrance fees. (3) Liquidity indicators stating both the provider's total cash and investments available for operational expenses and the provider's days cash on hand. (4) Capital structure indicators stating the provider's dollar figures for deferred revenue from entrance fees, net annual entrance fee proceeds, unrestricted net assets, and annual capital expenditure. (5) Capital structure ratios indicating the provider's annual debt service coverage, annual debt service coverage adjusted to reflect net proceeds from entrance fees, annual debt service over revenue percentage, and unrestricted cash over long-term debt percentage. (6) Capital structure indicators stating the provider's average age of facility calculation based on accumulated depreciation and the provider's average annual effective interest rate. (c) The department shall determine the appropriate formula for calculating each of the key indicators included in the Key Indicator Report. The department shall base each formula on generally accepted standards and practices related to the financial analysis of continuing care providers and entities engaged in similar enterprises. (d) Each provider shall file its annual Key Indicators Report within 30 days following the due date for the provider's annual report. If the Key Indicators Report is not received by the department by the date it is due, the provider shall pay a one thousand dollar ($1,000) late fee at the time the report is submitted. The provider shall pay an additional late fee of thirty-three dollars ($33) for each day the report is late beyond 30 days. For purposes of this section, a provider's Key Indicators Report is not submitted to the department until the provider has paid all accrued late fees. SEC. 8. Section 1792.10 is added to the Health and Safety Code, to read: 1792.10. (a) Each provider that has entered into Type A contracts shall submit to the department, at least once every five years, an actuary's opinion as to the provider's actuarial financial condition. The actuary's opinion shall be based on an actuarial study completed by the opining actuary in a manner that meets the requirements described in Section 1792.8. The actuary's opinion, and supporting actuarial study, shall examine, refer to, and opine on the provider's actuarial financial condition as of a specified date that is within four months of the date the opinion is provided to the department. (b) Each provider required to file an actuary's opinion under subdivision (a) that held a certificate of authority on December 31, 2003, shall file its actuary's opinion before the expiration of five years following the date it last filed an actuarial study or opinion with the department. Thereafter, the provider shall file its required actuary's opinion before the expiration of five years following the date it last filed an actuary's opinion with the department. (c) Each provider required to file an actuary's opinion under subdivision (a) that did not hold a certificate of authority on December 31, 2003, shall file its first actuary's opinion within 45 days following the due date for the provider's annual report for the fiscal year in which the provider obtained its certificate of authority. Thereafter, the provider shall file its required actuary' s opinion before the expiration of five years following the date it last filed an actuary's opinion with the department. (d) The actuary's opinion required by subdivision (a) shall comply with generally accepted actuarial principles and the standards of practice adopted by the Actuarial Standards Board. The actuary's opinion shall also include statements that the data and assumptions used in the underlying actuarial study are appropriate and that the methods employed in the actuarial study are consistent with sound actuarial principles and practices. The actuary's opinion must state whether the provider has adequate resources to meet all its actuarial liabilities and related statement items, including an appropriate surplus, and whether the provider's financial condition is actuarially sound.