BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 475|
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THIRD READING
Bill No: SB 475
Author: Monning (D)
Amended: 5/5/15
Vote: 21
SENATE HUMAN SERVICES COMMITTEE: 4-0, 4/28/15
AYES: McGuire, Hancock, Liu, Nguyen
NO VOTE RECORDED: Berryhill
SUBJECT: Continuing care contracts: cancellation: payments
SOURCE: California Continuing Care Residents Association
DIGEST: This bill requires that continuing care contracts which
condition lump sum contract termination payments on resale of
the unit provide at least 20 percent of the lump sum payment to
the resident, or the resident's estate, no later than 90 days
after the unit is vacated. This bill also provides that any
payment balance not paid to the resident within 90 days be
subject to an annual interest rate of two percent plus the
United States prime lending rate, and any payment balance not
paid to the resident within 180 days be subject to an annual
interest rate of five percent plus the United States prime
lending rate. It further prohibits the provider from making
further charges for maintenance or housekeeping to the resident,
the resident's estate, or against the lump sum payment on a
vacated unit, and requires the continuing care contract to
include specified disclosures.
ANALYSIS:
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Existing law:
1)Provides for the licensure and regulation of Continuing Care
Retirement Communities (CCRCs) by the California Department of
Social Services (CDSS) to enact minimum requirements to
protect the wellbeing and financial security of residents of
CCRCs. (HSC 1770 et seq.)
2)Requires a CCRC provider to hold a certificate of authority
from CDSS permitting the provider to contract for the
provision of continuing care, including medical care, in which
a resident over the age of 60 has paid in advance for more
than one year for that care. (HSC 1771.2)
3)Provides that the components of care provided by the facility
must be separately licensed as otherwise required by state
law, including Residential Care Facilities for the Elderly and
Skilled Nursing care. (HSC 1771.5)
4)Requires a CCRC to pay a lump-sum payment to a resident after
termination of a continuing care contract that is conditioned
upon resale of a unit within 14 calendar days after resale of
the unit. (HSC 1788.4 (e))
This bill:
1)Provides that, for a continuing care contract signed after
January 1, 2016, and for which a lump sum payment following
termination of the contract is conditioned upon resale of the
unit, at least 20 percent of the lump sum payment shall be
paid in no event later than 90 days after the formerly
occupied unit has been vacated.
2)Provides that a payment balance that has not been paid to the
resident within 90 days will accrue interest at the rate no
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lower than two percent plus the United States prime lending
rate. Applies this provision to current and prospective
contracts.
3)Provides that a payment balance that has not been paid to the
resident within 180 days will accrue interest at the rate no
lower than five percent plus the United States prime lending
rate. Applies this provision to current and prospective
contracts.
4)Prohibits a CCRC provider from making further charges to the
resident or his or her estate, or against the lump sum payment
for purposes of continued monthly payments to the provider, or
for maintenance or housekeeping of the vacated unit.
5)Requires continuing care contracts to disclose that a provider
is prohibited from charging the resident or his or her
descendants a monthly fee once a unit has been permanently
vacated by the resident.
6)Requires continuing care contracts to disclose that a provider
shall make a good faith effort to reoccupy or resell a unit
for which a lump sum payment is conditioned upon resale of the
unit, and requires a provider to provide notice to all current
residents regarding this disclosure as a clarification of the
resident's existing contract.
Comments
Purpose of the bill. According to the author, CCRC residents
and their heirs have experienced long delays in receiving
termination of contract payments from CCRC providers after the
resident terminates a contract or passes away. The author states
that providers often have little incentive to re-occupy a unit
that has an outstanding entrance fee in a timely manner, instead
preferring to first sell and occupy units that do not have
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outstanding entrance fees (as in the case of facility
expansions). The author additionally states that while the unit
is unoccupied, some contracts permit the provider to charge
monthly maintenance fees that are deducted from the entrance
fees.
Further, the author cites the example of two constituents who
claim that a CCRC provider has not repaid two terminations of
contract lump sum payments of $250,000 and $562,000 to the
estates of the individuals after the apartments failed to sell
following the residents death. Additionally, a Sacramento
resident writes that one provider continued to charge his
father's estate $4,161 per month in fees after his father passed
away while the unit remained unsold. He writes that, while his
father's unit accrued monthly fees to the provider, other units
which did not accrue fees were sold first. He writes that this
provider is empowered to "drain his father's estate down to
nothing," with no recourse.
Another individual writes that a CCRC provider refused to
provide the 80 percent lump sum termination of contract payment
after his aunt's unit failed to sell for more than two years,
despite a desirable ocean view from a high level floor. The
individual states that this provider had recently developed a
new large tower of units and had failed to provide the older
units with any of the updates common when a unit becomes
unoccupied (such as new carpets and paint), including his
aunt's, and apparently was directing new sales toward the new
tower which required no entrance fee repayments. More than two
years later, following extensive letters and complaints, and
after reaching out the Attorney General of California, the unit
was updated and quickly purchased.
Continuing Care Retirement Contract Model. Continuing care
retirement contracts have been likened to long-term care
insurance, with seniors paying large entry fees ranging from
$50,000 to more than $2 million, in exchange for access to a
range of levels of care services, including independent living,
assisted living and skilled nursing care intended to meet the
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care needs of residents over a specified period of time as they
age. There are a wide variety of contractual models available
across the state. Some provide for a lump sum termination of
contract payment, based on a portion of the entrance fees
(typically ranging from 90 and 50 percent) upon the death of the
resident. If the resident opts to leave the community, repayment
is conditioned upon the resale of the unit. Other models provide
for a refund of a portion of the entrance fees, regardless of
resale, at percentage rates that decrease the longer the
resident remains in the community. Some facilities offer life
care contracts through which a facility agrees to care for the
resident for the remainder of the resident's life, regardless of
whether the resident outlives his or her financial resources.
In addition to entrance fees, residents pay monthly fees, which
may be held constant as the resident ages and needs increase, or
may increase as the resident needs increasing levels of care.
Such monthly fees range widely from $500 to $9,000 a month for
independent living, between $3,000 and $7,000 for assisted
living, and upwards from $7,000 to $17,000 per month for skilled
nursing.
There are currently 105 facilities certified as CCRCs in
California, 75 of which are nonprofit, and frequently operated
by religious or philanthropic organizations. Thirty CCRCs are
for-profit. There are eight nonprofit multiple-facility
providers and one for-profit multiple-facility provider.
According to Leading Age, there are more than 20,000 residents
of CCRCs in California.
Regulatory Structure. Current regulations pertaining to CCRCs
largely ensure the financial solvency of facilities, considering
that the substantial investments made by residents often
comprise a resident's life savings. In addition, CCRCs that
operate an independent or assisted living level of care are
required to have those facilities licensed by CDSS as
Residential Care Facilities for the Elderly. Facilities
operating a skilled nursing level of care must have those
facilities licensed by the Department of Public Health.
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Furthermore, CDSS is required to review and approve the overall
resident contract used by a facility with each resident, however
there are few statutory requirements placed on the content of
those contracts. Additionally, CCRCs must file an application
for a "Permit to Accept Deposits/Certificate of Authority" with
the Continuing Care Contracts Branch of CDSS.
Providers are additionally required to submit an annual report
to CDSS describing the facility's financial condition within
four months after their fiscal year end and a "Key Indicators
Report" disclosing key financial ratios and other key indicators
within 30 days following the submission of each annual report.
Additionally, CCRCs that have contracts promising to provide
care without substantially increasing monthly fees as needs
increase must submit an actuarial study to CDSS every five years
regarding the actuarial financial position of the facility.
Required Reserves. CCRC providers are required to maintain a
liquid reserve for long-term debt obligations that must be equal
to the sum of the prior fiscal year payments for the following:
1)All regular principal and interest payments paid by the
provider for fully amortizing long-term debt. If a provider
has incurred new long-term debt during the immediately
preceding fiscal year, the required reserve is 12 times the
provider's most recent monthly payment on the debt.
2)Facility rental or leasehold payments, and any related
payments such as lease insurance.
3)Any debt that provides for a balloon payment. If the balloon
payment debt was incurred within the immediately preceding
fiscal year, the required reserve is 12 times the provider's
most recent monthly payment on the debt.
Additionally, CCRCs are required to maintain a liquid reserve
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for operating expenses in an amount that equals or exceeds 75
days net operating expenses, as defined.
CCRCs offering a "refundable contract" are required to maintain
a reserve for refunds, held in a trust fund, however this bill
addresses a different form of contract in which a lump sum
payment is conditioned upon resale of the unit. Such contracts
allow providers to avoid those reserve requirements pertaining
to the entrance fee repayment since repayment is conditioned
upon resale.
Other States. Similar CCRC entrance fee repayment issues have
been litigated in other states. In one similar case last year in
Michigan (Mildred A Steward v Henry Ford Village Inc.), the
court stated:
"It appears in any event that defendant [the facility] maintains
complete control, under the Agreement, of when and how the unit
comes to be re-occupied, and therefore of when and how the
condition precedent to defendant's obligation to refund
plaintiff's entrance deposit is satisfied. Such broad discretion
implies a duty to exercise good faith. Burkhardt, 57 Mich App at
652; Ferrell 137 Mich App at 243."
The concept of good faith is a common legal standard that
applies generally to all contracts under the Uniform Commercial
Code Section 1304. This law also states that, "[e]very contract
imposes upon each party a duty of good faith and fair dealing in
the performance of the contract such that neither party can do
anything that will have the effect of destroying or injuring the
right of the other party to receive the fruits of the
contract."(1 Witkin Sum. Cal. Law Contracts Sec. 797(a).)
Many residents of CCRCs are dependent on the good faith of the
facility to obtain their conditional lump-sum payment. As
amended, this bill requires the contract to include a statement
that the provider shall make a good faith effort to resell a
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unit, however it does not define a "good faith effort", nor does
it require a provider to disclose the good faith efforts the
facility commits to making.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified5/6/15)
California Continuing Care Residents Association (source)
California Long Term Care Ombudsman Association
California Advocates for Nursing Home Reform
California Commission on Aging
Cardinal Point Residents Association
Consumer Federation of California
National Association of Social Workers, California Chapter
Eskaton Village, Carmichael Chapter of CALCRA
162 individual residents
OPPOSITION: (Verified5/6/15)
American Baptist Home of the West
Atherton Baptist Homes
Atterdag Village of Solvang
be.group
be.royal oaks
California Association of Continuing Care Retirement Communities
Casa de las Campanas
Channing House
Continuing Life
Episcopal Communities & Services
Episcopal Senior Communities
Eskaton
Front Porch Communities and Services
Forest Hill
Fountaingrove Lodge
Fredericka Manor
Grand Lake Gardens Retirement Community
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Hillcrest
La Costa Glen, Carlsbad
Lake Park, Community Care Retirement Community
Leading Age
Los Angeles Jewish Home
Meadows of Napa Valley
Monte Cedro
O'Connor Woods
Palm Village Retirement Community
Pilgrim Place
Plymouth Village
Pacific Retirement Services
Rosewood Senior Living
Terraces of Los Gatos
The Canterbury
The Covington
The Tamalpais, Marin
Saratoga Retirement Community
Sierra View Homes
Spring Lake Village
St. John's Retirement Village, Inc.
Stoneridge Creek Pleasanton
58 individual residents
ARGUMENTS IN SUPPORT: The California Continuing Care
Residents Association (CALCRA) writes in support that a number
of seniors and their families have waited years to receive their
refund payments from CCRCs. CALCRA states that current law
leaves families without recourse to demand the return of an
entrance fee within a reasonable time and there is no way to
ensure that CCRC providers are making a good faith effort to
resell these vacant unit.
CALCRA further states that, although the provider is responsible
for reselling the unit, there is often no incentive to sell
units subject to an entrance fee repayment because the provider
has no obligation to pay interest on the outstanding payment. In
many cases other vacant units which don't have a repayment
obligation are sold while those awaiting a repayment remain on
the market. CALCRA states that this bill protects the
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investments seniors make in their long-term care and ensures
that CCRC providers remain accountable for returning payments
within a reasonable time.
ARGUMENTS IN OPPOSITION: Leading Age and the California
Association of Continuing Care Retirement Communities (CACCRC),
and numerous individual providers, write in opposition that
repayment upon resale provisions are a popular contract model
for residents, that the incidents identified by the author
represent a small minority of the 20,000 existing contracts and
that this bill will limit consumer choice for future residents.
Additionally, they write that there are no provisions to stop a
"run" on a facility if there were multiple vacancies at one
time, and that even a small percentage of move-outs would put
the CCRC and all other residents at financial risk.
Leading Age further states that the interest rates provided for
in this bill are excessive and could jeopardize the financial
stability of communities in the event of another real estate
slow-down. Further, both organizations state that the bill could
cause providers with debt to default on their bond covenants
that stipulate the CCRC's entrance fee repayment liabilities as
a condition of financing and that the bill would likely trigger
refund reserve requirements which could cause CCRCs to fail
liquidity requirements, deteriorate their credit ratings, and
affect their future ability to borrow.
Finally, Leading Age states that because the interest components
are applied to existing contracts, instead of only to
prospective contracts, the bill unconstitutionally impairs the
financial terms of existing contracts.
Prepared by: Sara Rogers / HUMAN S. / (916) 651-1524
5/6/15 16:49:48
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