BILL ANALYSIS
SENATE HUMAN
SERVICES COMMITTEE
Senator Carol Liu, Chair
BILL NO: AB 1044
A
AUTHOR: Jones
B
VERSION: June 24, 2009
HEARING DATE: July 14, 2009
1
FISCAL: To Banking, Finance & Insurance and to
Appropriations 0
4
CONSULTANT:
4
Hailey
SUBJECT
Continuing care retirement communities: contracts
SUMMARY
Transfers the oversight and regulation of the finances and
contracts of continuing care retirement communities from
the Department of Social Services to the California
Department of Insurance; leaves with Social Services the
oversight and regulation of programs and services provided
directly to residents.
ABSTRACT
Current law
1)Requires a community care retirement community (CCRC) to
hold a currently valid provisional certificate of
authority or certificate of authority from the State
Department of Social Services (DSS) before it may enter
into a continuing care contract.
2)Requires DSS to enter and review each CCRC in the state
Continued---
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at least once every three years to augment an assessment
of the provider's financial soundness.
3)Requires DSS, during its facility visits, to consider the
condition of the facility, whether the facility is
operating in compliance with applicable state law, and
whether the provider is performing the services it has
specified in its continuing care contracts.
4)Requires a continuing care contract to include a copy of
the current audited financial statement of the provider
attached to every continuing care contract.
5)Requires, for a provider whose current audited financial
statement does not accurately reflect the financial
ability of the provider to fulfill the continuing care
contract obligations, the financial statement attached to
the continuing care contract to include all of the
following:
a) A disclosure that the reserve requirement has not
yet been determined or met, and that entrance fees
will not be held in escrow;
b) A disclosure that the ability to provide the
services promised in the continuing care contract will
depend on successful compliance with the approved
financial plan;
c) A copy of the approved financial plan for meeting
the reserve requirements; and,
d) Any other supplemental statements or attachments
necessary to accurately represent the provider's
financial ability to fulfill its continuing care
contract obligations.
6)Requires each continuing care provider that has obtained
a provisional or final certificate of authority and each
provider that possesses an inactive certificate of
authority to submit an annual report of its financial
condition, consisting of audited financial statements and
required reserve calculations, with accompanying
certified public accountants' opinions, specified reserve
information, a continuing care provider fee and
calculation sheet, evidence of fidelity bond and
certification that the continuing care contract in use
for new residents has been approved by DSS, all in a
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format provided by DSS, and requires it to include
specified information, including information on reserves,
details on any increase in monthly care fees and any
other information DSS may require.
7)Requires all providers to file with DSS an annual
financial report disclosing key financial ratios and
other key indicators in a form determined by DSS.
This bill
1)Makes findings and declarations regarding continuing care
retirement communities and their regulation by state
government.
2)Requires the California Department of Insurance (CDI) to
succeed to and be vested with all the duties, powers,
purposes, functions, responsibilities, and jurisdiction
of DSS over CCRC, except for oversight and regulation of
programs and services provided directly to residents of
the CCRC.
3)Requires all regulations, orders, and guidelines adopted
by DSS relating to CCRCs to remain in effect and be fully
enforceable unless and until readopted, amended, or
repealed, or until they expire by their own terms.
4)Prohibits any action by or against DSS pertaining to
matters vested in DSS from being abated, requires these
actions to continue in the name of CDI, and requires CDI
to be substituted for DSS and any of its predecessors by
the court where the action is pending, and prohibits the
substitution from affecting the rights of the parties to
the action.
5)Prohibits this substitution from being construed to
affect the continuing responsibility of DSS to provide
oversight and regulation of programs and services
provided directly to residents of the CCRC.
6)Requires all books, documents, records, and property of
DSS pertaining to functions transferred to CDI pursuant
to this bill to be transferred to CDI.
7)Requires all unexpended balances of appropriations and
other funds available for use in connection with any
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function or the administration of any law transferred to
CDI under this bill to be transferred to CDI for use for
the purpose for which the appropriation was originally
made or the funds were originally available. Requires
the Department of Finance, if there is any doubt as to
where those balances and funds are transferred, to
determine where the balances and funds are transferred.
8)Prohibits a contract, lease, license, or any other
agreement to which DSS is a party to from being void or
voidable by reason of this bill, but requires the
contract, lease or license or other agreement to continue
in full force and effect, with CDI assuming all of the
rights, obligations, and duties of DSS.
9)Prohibits the assumption by CDI from in any way affecting
the rights of the parties to the contract, lease,
license, or agreement.
10) Requires every officer and employee of DSS who is
performing a function transferred to CDI under this bill
and who is serving in the state civil service, other than
as a temporary employee, to be transferred to CDI.
Prohibits the status, position, and rights of these
officers and employees from being affected by the
transfer and requires these persons be retained by the
person as an officer or employee of CDI, as the case may
be, pursuant to the state civil service act, except as to
a position that is exempt from civil service.
11) Requires the commissioner of CDI to review the
requirements of the CCRC body of law and make
recommendations to the Legislature as he or she deems
necessary to improve the oversight and regulation of the
financial management of CCRCs to protect consumers who
enter into continuing care contracts.
12) Requires, by January 1, 2011, the insurance
commissioner, the state public health officer, and the
director of DSS jointly to develop and adopt regulations
regarding standards, staff training, policies, and
procedures to ensure maximum coordination and consistency
of implementation of the transfers required by this bill.
13) Adds to the definition of "control" of a CCRC that
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any person who owns 10 percent of the voting securities
directly or indirectly shall be presumed to have a
controlling interest, and this presumption may be
rebutted by a showing that control does not exist in
fact.
14) Defines "Person" as an individual, a corporation, a
partnership, an association, a joint stock company, a
business trust, an unincorporated organization, or any
similar entity, or any combination thereof acting in
concert.
15) Requires DSS to notify the CDI of any violations of
the contracting process.
16) Requires that any increase in a monthly care fee on
or after January 1, 2010, or any increase in the price or
scope of care or other services shall be approved by the
insurance commissioner, shall be subject to regulations
adopted by the commissioner, and may be subject to
actuarial assessment.
17) Gives authority to both DSS and the insurance
commissioner, in consultation with each other, to adopt
regulations needed to administer this act.
18) Provides that complaints regarding residents' rights
and services be filed with DSS, and all financially
related complaints be filed with the insurance
commissioner.
19) Provides that CDI shall give greater weight in its
consultations with DSS than when the continuing care
advisory committee.
20) Requires providers to notify residents at least 60
days prior to making any changes based on obtaining
financing, selling or transferring the CCRC, any
expansion, and any change in structure.
21) Requires that an application to operate a CCRC, if
may by an entity other than an individual, shall include
a description of the capital structure, general financial
condition, ownership, and management of the provider and
any person controlling the provider; a description of the
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identity and relationship of every member of the entity;
information about various agreements in force among the
provider and affiliates, a pledge of the provider's stock
for a loan made to a member of the provider holding
company system, and any other matters required by the
commissioner.
22) Makes various requirements and limitations on
dividends including allowing them only from earned
surplus as defined and requiring providers to report to
CDI all intentions to pay dividends and other
distributions to shareholders.
23) Requires every person who is directly or indirectly
the beneficial owner of more than 10 percent of any class
of stock of a provider -- or who is a director or officer
of a provider -- to file in the office of the
commissioner on or before January 10, 2010, or within 10
days after he or she becomes that beneficial owner,
director, or officer, a statement of the amount of all
stock of the provider of which he or she is the
beneficial owner and, within 10 days after the close of
each calendar month thereafter, if there has been a
change in that ownership during that month, a statement
indicating his or her ownership at the close of the
calendar month and the changes in his or her ownership as
have occurred during that calendar month.
24) Gives CDI the authority to suspend or revoke a
certificate of authority of a provider who knowingly
files a false financial statement and makes the signing
of a false statement a felony.
25) Requires providers to maintain, at all times,
adequate reserves as defined by law and by regulations
promulgated by the insurance commissioner.
26) Requires that the provider maintain in reserve
sufficient funds to cover bonded indebtedness due and
payable during the next 12 months.
27) Requires the provider to maintain in reserve
sufficient funds to provide for the continued operation
of its continuing care retirement communities per
regulations to be promulgated by the insurance
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commissioner and modeled on regulations applicable to
insurers under article 3.5 (commencing with Section 2310)
of subchapter 3 of chapter 5 of title 10 of the
California Code of Regulations.
28) Requires that reserves for refundable contracts be
actuarially sound, that providers who have entered into
refundable contracts submit those to the insurance
commissioner by January 1, 2010, for review, that those
providers submit a plan of reorganization to the
commissioner by April 1, 2010, and that any refundable
contract entered into after December 31, 2009 shall not
make the refund contingent upon resale of the residential
unit.
29) Strikes from code a life-expectancy table.
30) Adds to the requirements of the actuarial study
required of providers, adding that the actuary must
include an option as to whether the reserves and related
actuarial items held in support of the continuing care
contracts and all provider liabilities and debt
obligations specified by the commissioner by regulation
are computed appropriately, are based on assumptions that
satisfy contractual provisions, are consistent with prior
reported amounts, and comply with applicable laws of this
state - and whether reserves made adequate provisions for
liabilities and obligations.
31) Provides that the actuary performing the study shall
be liable for his or her negligence or other tortious
conduct.
32) Allows the insurance commissioner to define in
regulation disciplinary action against the provider or
the actuary.
33) Establishes a three-year timetable for submission of
actuarial reports.
34)Provides that DSS can recommend that providers be cited
by CDI if DSS discovers that the provider lacks a current
and valid permit to accept deposits, CDI can issue an
abatement order based on the report from DSS, and civil
penalties can be assessed at $200 per day for violation
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of the abatement order.
35) Prohibits officers, directors, and others with a
financial stake in the CCRC from receiving payment for
certain services and from buying assets from or selling
assets to the CCRC (except stock).
36) Requires certain disclosures related to stock
purchases and sales by directors, trustees, and others
with a financial interest in the CCRC.
37) Prohibits a provider from making any loan to an
officer, director, trustee, or others with a financial
interest in the CCRC.
38) Requires the continuing care provider fee fund to
consist of two accounts: a) the insurance account; and,
b) the state DSS account, and requires 95 percent of fees
received to be deposited in the insurance account and 5
percent in the DSS account.
39) Repeals existing law provisions on the use of money
in the fund, including provisions requiring a continuing
care contracts program manager, supervising technical
staff, full-time legal counsel, a financial analyst and
other appropriate analytical and technical support
positions, provisions requiring contracts with
technically qualified persons including financial,
actuarial and marketing consultants to provide advice on
the feasibility or viability of CCRCs and providers, a
cap on using no more than 5 percent in fees collected for
overhead costs, including facilities operation and
indirect costs, and a requirement that if the balance in
the fund is projected to exceed $500,000 for the next
budget year, the application fee and annual fees must be
adjusted to reduce the amounts collected.
FISCAL IMPACT
According to the Assembly Appropriations Committee, annual
increased fee-supported special fund costs of $1 million to
the California Department of Insurance to provide a higher
level of oversight with respect to financial surveillance,
legal analysis, information technology, and overhead;
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actual costs may be lower to the extent CDI is able to
provide new regulatory infrastructure and scrutiny of
continuing care retirement communities in the early years
following enactment of this legislation and permanent
workload is less.
BACKGROUND AND DISCUSSION
CCRCs: purpose and licensure
CCRCs offer a long-term continuing care contract that
provides housing, residential services, and nursing care,
usually in one location, and usually for a resident's
lifetime. Most CCRCs provide three levels of care:
independent living, assisted living, and skilled nursing.
A resident may begin in the independent living setting and
move to a higher level of care as his or her care needs
change.
DSS licenses each continuing care retirement community as a
residential care facility for the elderly. Two branches at
DSS participate in the regulation of CCRCs: the senior care
program branch monitors CCRCs for compliance with licensing
laws and regulations regarding buildings and grounds,
accommodations, care and supervision of residents, and
quality of service. The continuing care community branch
is responsible for reviewing and approving applications to
operate a CCRC, and it monitors the ongoing financial
condition of CCRC providers. If a skilled nursing facility
is operating on the CCRC campus, it must be licensed by the
Department of Public Health.
Once a provider is issued a certificate of authority to
enter into continuing care contracts, the provider must
submit audited financial statements and reserve reports
annually to the continuing care branch. Statutes mandate
various financial reserve requirements that ensure
sufficient financial liquidity to meet ongoing business
expenses, upgrades, and unanticipated events such as fire
or flood, increased costs, or reduced revenues. CCRCs must
comply with the reserve requirements each year and submit
reports to the continuing care branch with their annual
audited financial statements.
California currently has nearly 80 CCRCs serving
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approximately 20,000 older adults. In most cases, CCRCs
offer services to persons who have the means to invest a
significant sum in an entrance or admission fee. These
fees commonly range into the hundreds of thousands of
dollars. According to DSS, there are 15 CCRCs that serve
persons in lower income levels; industry growth is in the
higher cost CCRCs.
Before accepting a deposit from a prospective resident,
CCRCs must provide a disclosure statement that includes
their operating income, operating expense, net income,
interest expense, unrestricted contributions, non-operating
income or expense, net income or loss, net cash flow, the
average monthly service fees, the percentage changes in the
average fee from year to year, and financial ratios for the
three most recent years including the debt-to-asset ratio,
operating ratio, debit service coverage ratio, and days'
cash-on-hand.
In the event that DSS determines that a provider is in
unsound financial condition, DSS has the statutory
authority to require the provider to submit a financial
plan. When a provider fails to comply with the specified
statutory requirements, DSS may levy administrative fines,
file liens on the property, or seek a court-appointed
administrator to take over operation of an ailing
community.
The author's case
According to the author, California's CCRC residents are
increasingly at risk and existing California law does too
little to protect them. Too often cash is removed from
facility-operator holding companies and sent to unregulated
out-of-state parent companies. The author states the CCRC
industry is now facing the possibility of major revenue
shortfalls. The CCRC industry, particularly the recent
growth in the for-profit sector, is dependent on a supply
of new residents, a supply which is uncertain, especially
given the woes of the current real estate market.
The author states this bill addresses these problems at
their root. The author argues that CCRC operators promise
future benefits in return for up-front and recurring fees,
and that this is an insurance promise. The author believes
the CCRC industry should be regulated as an insurance
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product by the California Department of Insurance, because
CDI already regulates financial arrangements similar to
those found in the CCRC industry. The author contends that
the financial oversight that CCRCs require differs
considerably from the kind of regulation that the State
Department of Social Services engages; financial analysis
is not a typical role for state social services agencies to
play.
The author believes that DSS relies on key indicator
projections calculated by regulated facilities as opposed
to third party certifications of the actuarial soundness of
an entire operator. While DSS does require some CCRC
providers to file an actuarial report, it occurs once every
five years, with the first actuarial report due after the
first fiscal year. The author believes that this snapshot
during initial occupancy, the period of a facility's
highest revenue, may not provide an accurate guide to the
licensee's fiscal health. The author states that CDI has a
regulatory regime that would improve the oversight of CCRC
finances, including reserve requirements, holding company
systems, dividend limits, and self-dealing limits.
The author points out that several states, including
Arizona, Florida, Iowa, North Carolina, and New York
require some level of oversight of CCRC financing from
their state departments of insurance. In addition, the
author argues that CDI brings actuarial expertise and
trained financial personnel who are not found at DSS,
making CDI better suited to guide CCRC operators toward
fulfillment of the "continuing care promise." The author
concludes that, under this bill, CDI regulates CCRC
finances, and DSS continues to pursue its mission "to
promote the health, safety, and quality of life of each
person in community care."
Arguments in support
The California Alliance for Retired Americans believes the
bill will protect residents of CCRCs by ensuring that these
facilities have the financial resources to provide for
residents' future needs. The Alliance writes that CCRC
residents typically use the proceeds from the sale of their
home to pay the entrance fee to the CCRC, but the entrance
fee rarely provides any financial stake in the facility and
is paid with the understanding that residents' future needs
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will be met as they age. The Alliance believes after
spending their life savings to enter CCRCs, seniors should
not have to worry whether their facilities will have the
resources to provide care. The Gray Panthers write that
DSS lacks the resources and expertise to ensure that
providers are financially sound. Gray Panthers argues CDI
has the experience, the resources, and the appropriate
regulatory structure to take on that responsibility.
Arguments in opposition
Aging Services of California opposes the bill on the
grounds that comprehensive oversight by one department is
preferable to dividing oversight duties. The organization
finds it unclear how this bill would result in cost
savings, efficiencies, or better oversight. The
organization disputes that CCRCs should be overseen in the
same manner as large insurance companies, arguing that
CCRCs are unique in the senior living and long-term care
arena. Opponents believe that specialists at DSS have
detailed knowledge of all aspects of CCRC operations and
remain better suited for the task of comprehensive
oversight. Lastly, the organization objects to a bill that
is not the result of stakeholder input and that makes
extensive changes to the regulation of complex entities
without the discussion and analysis that a stakeholder
process can bring.
Assembly votes
Floor 49-30
Appropriations 12-5
Health 13-6
Aging and Long Term Care 4-2
COMMENTS AND QUESTIONS
Authority of DSS
The bill in its current form directs providers to report
any changes in scope or services to the Department of
Insurance, rather than to DSS. The author and the
committee may want to consider amending the bill to retain
the authority if DSS to review changes in a CCRC's scope
and services. [See page 28, line 10 of the bill, Health
and Safety Code (HSC) Section 1771.8(f).]
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In addition, the author and the committee may want to
consider adding a subsection to HSC 1793.6 making it clear
that nothing in this chapter precludes DSS from citing
providers directly and assessing civil penalties, as DSS
does now, when it finds a violation of a law or regulation
pertaining to a CCRC's license to operate a residential
care facility for the elderly. It is not the intent of AB
1044 to change current law in that regard, but a
stipulation may be in order to avoid unintended
consequences.
Bifurcated authority and regulation
AB 1044 proposes a regulatory approach distinct from most
of the state's regulatory arrangements and unique in
community care licensing: regulatory responsibility divided
between two departments and two constitutional officers.
In the case of CCRCs, the division may be a relatively
simple one given that DSS currently regulates CCRCs with
two internal branches: one for the fiscal side of CCRCs and
one for CCRCs' provision of care and supervision to the
elderly providing regulatory oversight and how those
difficulties might be mitigated. The committee may want to
ask the author to speak to potential difficulties providers
might face in have two departments.
Comments by Department of Insurance
The California Department of Insurance provided the
committee and the author with questions based on an earlier
draft of the legislation. The department's questions
include a focus on:
shortfalls in current fees to cover new
responsibilities,
the timing of transfer of authority from DSS,
housing the new unit, and
differences between regulating a CCRC and
regulating an insurance company.
The committee may want the author to take each of these
issues and provide a response. In addition, the Department
of Insurance should be asked to provide testimony on the
extensive amendments adopted on June 24 - and any issues or
questions raised by those amendments.
POSITIONS
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Support: California Alliance for Retired Americans
Gray Panthers Association of California
Networks
Oppose: Aging Services of California
American Baptist Homes of the West
California Association of Continuing Care
Retirement
Communities
Continuing Life Communities
Masonic Homes of California
Northern California Presbyterian Homes &
Services
University Retirement Community/Davis
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