BILL ANALYSIS                                                                                                                                                                                                    Ó




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          |SENATE RULES COMMITTEE            |                        SB 475|
          |Office of Senate Floor Analyses   |                              |
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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
                                   ****  END  ****










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