BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 475| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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: SB 475 Page 2 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 SB 475 Page 3 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 SB 475 Page 4 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 SB 475 Page 5 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. SB 475 Page 6 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 SB 475 Page 7 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 SB 475 Page 8 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 SB 475 Page 9 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 SB 475 Page 10 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 **** SB 475 Page 11