ASOP 3
(CONTINUING CARE RETIREMENT COMMUNITIES AND AT HOME PROGRAMS)
SECTION 3
(ANALYSIS OF ISSUES AND RECOMMENDED PRACTICES)

Section 3
Analysis of Issues and Recommended Practices

ASOP 3 | §3.1 | INTRODUCTION

When providing actuarial services related to CCRCs or At Home Programs, the actuary should take into account the relevant financial items associated with the organizations, current contractual residents or members, new contractual residents or members, and levels of care provided, as well as relevant residency agreement or membership agreement provisions and applicable law. The actuary should use methods and assumptions that are, in the actuary’s professional judgment, appropriate considering the scope and purpose of the assignment.

ASOP 3 | §3.2 | DETERMINATION OF SATISFACTORY ACTUARIAL BALANCE

In determining whether the CCRC or At Home Program is in satisfactory actuarial balance as of the valuation date, the actuary should evaluate whether the CCRC or At Home Program meets all of the following three conditions:

3.2.1 Condition 1: Adequate Resources for Current Contractual Residents or Members

The resources available to current contractual residents or members include any existing net assets plus the actuarial present value of future revenues, such as periodic fees, additional fees, and third-party payments (for example, Medicare, Medicaid, and long-term care insurance).

Condition 1 would be met if the resources are greater than or equal to any existing liabilities for the current contractual residents or members plus the actuarial present value of the expected costs associated with the contractual obligations to current contractual residents or members. The actuary should determine if this condition is satisfied using the actuarial balance sheet (see section 3.3).

3.2.2 Condition 2: Adequate Fee Structure for a Cohort of New Contractual Residents or New Members

For a cohort of new contractual residents or new members, the expected fees are the sum of the advance fees paid plus the actuarial present value of the new contractual residents’ or new members’ expected future revenues, such as periodic fees, additional fees, and third-party payments (for example, Medicare, Medicaid, and long-term care insurance).

Condition 2 would be met if the expected fees are greater than or equal to the actuarial present value of the costs associated with the contractual obligations determined at an appropriate occupancy or membership date for the cohort. The actuary should determine if this condition is satisfied using the cohort pricing analysis (see section 3.4).

3.2.3 Condition 3: Positive Projected Cash and Investment Balances

The projection of cash and investment balances over the projection period should include revenue and expenses from all known sources, including current contractual residents or members, new contractual residents or members, and any non-contractual residents. The actuary should choose a projection period that extends to a point at which, in the actuary’s professional judgment, the use of a longer period would not materially affect the results and conclusions.

Condition 3 would be met if the cash and investment balances are positive in each projection year. The actuary should determine whether this condition is satisfied using the cash flow projection (see section 3.5).

In the event the CCRC or At Home Program fails to meet any of the three conditions as specified above, the actuary should consult with the organization to address possible corrective actions to achieve satisfactory actuarial balance.

For a proposed or start-up CCRC or At Home Program, the actuary should evaluate conditions 1 and 2 using a future valuation date and should begin evaluating condition 3 as of a future date. The actuary should select such future dates that are consistent with the end of the start-up period. For example, the actuary may evaluate these conditions using the earlier of a short-term period (such as three to five years) after opening or when the CCRC or At Home Program reaches the targeted number of contractual residents or members.

ASOP 3 | §3.3 | ACTUARIAL BALANCE SHEET

The actuary should develop the actuarial balance sheet according to the following:

3.3.1 Closed-Group Projection of Current Contractual Residents or Members

The actuary should use a population projection that is performed solely with respect to current contractual residents or members on the valuation date. The actuary should project the surviving contractual residents’ or members’ movements through various levels of care until contract termination. This projection excludes new contractual residents, new members, and any non-contractual residents.

3.3.2 Assets

The actuary should estimate the actuarial present value of each of the following: the future periodic fees (described in section 3.6.1), the future additional fees and third-party payments (described in section 3.6.2), and the physical property for assets currently in service (described in section 3.6.3).

The actuary should reflect in the actuarial balance sheet other assets from the accounting balance sheet as appropriate, in the actuary’s professional judgment. These assets generally include such items as cash and investment balances, current receivables, and other items not specifically reflected in the above guidance.

3.3.3 Liabilities

The actuary should estimate the actuarial present value of each of the following: the future use of physical property (described in section 3.6.4), the future operating expenses (described in section 3.6.5), the future refunds due to refund guarantees (described in section 3.6.6), and the long-term debt (described in section 3.6.7).

The actuary should reflect in the actuarial balance sheet other liabilities from the accounting balance sheet as appropriate, in the actuary’s professional judgment. These liabilities generally include such items as current payables, prepaid contractual resident or member deposits, fees paid in advance, short-term debt obligations, and other items not specifically reflected in the above guidance.

ASOP 3 | §3.4 | COHORT PRICING ANALYSIS

The actuary should develop the cohort pricing analysis based on the actuarial present value of revenues and expenses associated with a cohort of new contractual residents or new members.

The actuary should use a population projection that is performed solely with respect to a cohort of new contractual residents or new members. The actuary should project surviving contractual resident or member movements through various levels of care until contract termination. This population projection excludes any non-contractual residents.

The revenues include the advance fees, the actuarial present value of future periodic fees (described in section 3.6.1), and the actuarial present value of future additional fees and third-party payments (described in section 3.6.2).

The expenses include the actuarial present value of each of the following: the future use of physical property (described in section 3.6.4), the future operating expenses (described in section 3.6.5), and the future refunds due to refund guarantees (described in section 3.6.6).

The actuary may consider, subject to disclosure, the use of expense levels consistent with the targeted number of contractual residents or members when a material change in the population, such as growth resulting from new construction or expansion, is expected.

ASOP 3 | §3.5 | CASH FLOW PROJECTIONS

The actuary should perform cash flow projections using an open group population projection that includes existing contractual residents or members on the valuation date together with expected future contractual residents or members consistent with assumed occupancy rates and membership levels. For CCRCs, the actuary should include non-contractual residents in this population projection that use unoccupied units or beds in various levels of care consistent with assumed occupancy rates.

The actuary should select assumptions in the cash flow projections that are consistent with those used in the development of the actuarial balance sheet and cohort pricing analysis (see sections 3.3 and 3.4).

The actuary should reflect revenues from all known sources (such as advance fees, periodic fees, additional fees, payments from non-contractual residents, third-party payments, and investment income). The actuary should reflect expenses from all known sources (such as operating expenses, capital expenditures, debt interest and principal payments, any cost of using an offsite health facility, and refunds due to refund guarantees).

In the cash flow projection, the actuary should develop the cash and investment balances at the beginning and end of each projection year.

ASOP 3 | §3.6 | ACTUARIAL ASSET AND LIABILITY VALUES

When developing the actuarial balance sheet or the cohort pricing analysis, the actuary should develop the following actuarial present value items.

3.6.1 Future Periodic Fees

The actuary should estimate the actuarial present value of future periodic fees by projecting the fees payable by the surviving contractual residents or members of the appropriate closed-group population in each level of care in each future year, and discounted to the valuation date. In the estimate of future fees, the actuary should reflect current rates adjusted for projected future fee increases.

3.6.2 Future Additional Fees and Third-Party Payments

The actuary should estimate the actuarial present value of future additional fees (such as guest meals and additional meals) and third-party payments. When projecting future payments, the actuary should project the additional revenue payable by, or on behalf of, the surviving contractual residents or members attributable to the appropriate closed-group population in each level of care in each future year. In the estimate of these future payments, the actuary should reflect current experience adjusted for projected future increases.

3.6.3 Physical Property for Assets Currently in Service

The actuary should estimate the actuarial present value of physical property for assets currently in service as the actuarial present value of the projected remaining annual capital expense charges associated with assets in service as of the valuation date.

The actuary should estimate the annual capital expense charge for the use of an asset for each year using its useful lifetime. The projected annual capital expense charge consists of the imputed interest charge for the use of the asset plus the change in asset value from one year to the next. In calculating the capital expense charges, the actuary should use a rate consistent with the cost of capital at the time the asset was originally put into service or the cost of capital in the current economic environment.

3.6.4 Future Use of Physical Property

The actuary should estimate the actuarial present value of the future use of physical property by taking the projected annual capital expense charges for both the current and replacement fixed assets allocated to the surviving contractual residents of the appropriate closed-group population in each future year and discounting the result back to the valuation date. The actuary should consider developing the actuarial present value estimates for each level of care.

The actuary should use a methodology to estimate the annual capital expense charges that is consistent with the methodology used to estimate the annual capital expense charges of physical property for assets currently in service (see section 3.6.3).

3.6.5 Future Operating Expenses

The actuary should estimate the actuarial present value of future operating expenses by taking the operating expenses allocated to the contractual residents or members of the appropriate closed-group population in each future year and discounting the result back to the valuation date. The actuary should exclude from future operating expenses

(a) future capital expenditures, which are discussed in section 3.6.4; and

(b) the future long-term debt interest and principal payments, which are discussed in section 3.6.7.

When estimating future operating expenses, the actuary should reflect future cost trends and reflect underlying expense consumption patterns in the allocation. The actuary should allocate expenses across the various levels of care and within each level of care on an appropriate basis such as per person, per unit, or per square foot.

3.6.6 Future Refunds Due to Refund Guarantees

The actuary should estimate the actuarial present value of future refunds due to refund guarantees by estimating the amount of refund due to each terminating contractual resident or member of the appropriate closed-group population in each future year and discounting the amounts back to the valuation date. The refund calculation is for the contractual amount of the advance fee refund. The actuary should calculate the estimate of the advance fee refund based on the contractual liability for each future year on the terms of the residency agreement or membership agreement assumed to be applicable to that contractual resident or member and the organization’s actual practice, if any, with regard to payment of refunds.

3.6.7 Long-Term Debt

The actuary should estimate the present value of long-term debt as the discounted value of the projected remaining principal and interest payments as of the valuation date. The present value of long-term debt may be different than the amount on the accounting balance sheet depending on the relationship between the discount rate and the actual or expected interest rate on the debt.

ASOP 3 | §3.7 | SELECTION OF ACTUARIAL ASSUMPTIONS

The actuary should take into account the following when selecting assumptions.

3.7.1 Actuarial Assumptions

In selecting actuarial assumptions for mortality, morbidity, withdrawal, and occupancy rates, the actuary should reflect each of the following as appropriate:

a. age and gender;

b. health characteristics;

c. permanent transfer and temporary transfer patterns;

d. level of care status and expected differences in experience between contractual residents or members in different levels of care;

e. time elapsed since the last change in the level of care;

f. single or joint contracts;

g. demographic profile and number of new contractual residents or members;

h. time elapsed since the contractual resident or member entered the CCRC or At Home Program;

i. actual experience of the CCRC or At Home Program, and the credibility of the experience;

j. contractual guarantees, such as health care guarantees and refund guarantees; and

k. operational policies and practices of the organization, such as transfer policies.

The actuary should select trend assumptions to project mortality (sometimes referred to as “mortality improvement,” which can be positive or negative), morbidity, withdrawal, and occupancy rates that are reasonable, in the actuary’s professional judgment. In selecting trend assumptions, the actuary should consider and review appropriate data. The data may include trend experience studies, appropriate industry studies, and management occupancy rate projections.

3.7.2 Trend Assumptions for Fees and Expenses

The actuary should set trend assumptions for periodic fees, advance fees, additional fees, and other revenue items. The actuary should also set trend assumptions for operating expenses, capital expenditures, and other expense items. The actuary may use different trend assumptions, as appropriate, for various categories of revenues and expenses. In setting trend assumptions for periodic fees, the actuary should also take into account practical, competitive, and contractual considerations.

The actuary should select assumptions for future trends in periodic fees that are consistent with the trend assumptions that are used in projecting future expenses. If the actuary uses different trend assumptions for periodic fees and operating expenses, the actuary should disclose this difference.

3.7.3 Investment Rate and Discount Rate Assumptions

The actuary should select investment rate and discount rate assumptions that are individually reasonable, mutually consistent, and reflective of the long-term nature of the residency agreement or membership agreement as follows:

a. short- and long-term market expectations, and the future investment strategy of the organization to estimate investment income for the cash flow projection; and

b. a discount rate to estimate actuarial present values that, in the actuary’s professional judgment, is reasonable and appropriate, and is consistent with the investment rate.

3.7.4 Revenue and Expense Allocation Assumptions

The actuary should assume an allocation of general revenues and expenses to the various levels of care, and to current and new contractual residents or members. The actuary should determine whether the sum of all allocated expenses reconciles to the total projected expenses of the CCRC or At Home Program.

3.7.5 Going-Concern Assumption

The actuarial balance sheet, the cohort pricing analysis, and the cash flow projection rely on assumptions predicated on the ongoing financial viability and continuation of the CCRC or At Home Program. This implies that the organization will be able to maintain appropriate occupancy rates or membership levels by attracting new contractual residents or members to replace existing contractual residents or members. The actuary should assess the ability of the organization to attract new contractual residents or members or any other known, significant circumstances that, in the actuary’s professional judgment, may affect the organization’s ability to remain a going concern.

3.7.6 Reasonableness of Assumptions

The actuary should review the assumptions for reasonableness. The assumptions should be reasonable, in the actuary’s professional judgment, in the aggregate and for each assumption individually. The actuary should identify material changes in assumptions, and methods relating to the use of those assumptions, compared to the most recent prior analysis if applicable.

In reviewing the assumptions for reasonableness, the actuary should take into account the following:

a. the intended purpose of the measurement;

b. the frequency with which the projections are expected to be updated;

c. the length of the projection period;

d. the sensitivity of the projections to the effect of variations in key actuarial assumptions;

e. the potential variability of the assumption;

f. consistency among related assumptions;

g. the size of the CCRC’s contractual resident population or At Home Program membership;

h. the ability to increase fees or decrease expenses in future periods;

i. the level of capital available to provide for adverse fluctuation;

j. any significant margins for uncertainty that have been included in the actuarial assumptions; and

k. the expectation of no material bias (i.e., it is not materially optimistic or pessimistic) relative to the purpose of the measurement, excluding the effect of a margin.

ASOP 3 | §3.8 | BENEVOLENCE FUNDS AND FINANCIAL ASSISTANCE SUBSIDIES

The actuary should determine the benevolence funds or financial assistance subsidies available as well as the potential future liabilities for contractual residents or members who do not pay the contractual fees. For example, some organizations may set aside assets or funds from charitable contributions to assist contractual residents or members, while other organizations may include the costs of any assistance in the basic fee structure.

ASOP 3 | §3.9 | FOR-PROFIT CCRCS OR AT HOME PROGRAMS

When performing actuarial services with respect to for-profit organizations, the actuary should determine the nature and financial implications of the ownership arrangement, including owner’s equity, past and possible future equity distributions, potential income tax liability, and historical and future capital expenditures funded by the owner.

ASOP 3 | §3.10 | EQUITY OR COOPERATIVE CCRCS OR AT HOME PROGRAMS

When performing actuarial services with respect to equity or cooperative CCRCs or At Home Programs, the actuary should determine the nature and financial implications of any contractual resident or member ownership arrangement, including advance fee payments and refunds due to refund guarantees, and the value of assets invested in the physical property and the replacement costs of these fixed assets.

ASOP 3 | §3.11 | ADDITIONAL CONSIDERATIONS AFFECTING CCRC OR AT HOME PROGRAM FINANCES

The actuary should determine the scope of the organization’s commitments to current and prospective contractual residents or members and the nature of its fee structure. The actuary may obtain this information from the applicable residency agreements or membership agreements and any other reasonable source of information about the organization. When interpreting these documents, the actuary should determine the following:

a. the admission and underwriting criteria and how they are applied;

b. the terms of the residency agreement or membership agreement and any limitations on the period for which commitments are made;

c. any known, significant limitations on the organization’s ability to change future periodic fees;

d. any refund guarantees;

e. any limitation on the services provided and any collectability risk for services limited under the contract or requiring additional payment;

f. any contract provisions for prepaid health care or for additional charges if a contractual resident or member receives health care;

g. any affiliation with another entity and the extent to which any such entity would assume responsibility for the organization’s obligations; and

h. any other matter that, in the actuary’s professional judgment, is expected to have a material effect on the organization’s current or future financial statements.

ASOP 3 | §3.12 | EXTERNAL RESTRICTIONS

The actuary should take into account restrictions on the CCRC or At Home Program from external sources, such as applicable law, regulation, or other binding authority. Examples include a state’s Medicaid reimbursement policy, regulations restricting the use of health center beds by non-contractual residents, and any relevant lender-imposed restrictions.

ASOP 3 | §3.13 | RELIANCE ON DATA OR OTHER INFORMATION SUPPLIED BY OTHERS

When relying on data or other information supplied by others, the actuary should refer to ASOP No. 23, Data Quality, and ASOP No. 41, Actuarial Communications, for guidance.

ASOP 3 | §3.14 | DOCUMENTATION

The actuary should consider preparing and retaining documentation to support compliance with the requirements of section 3 and the disclosure requirements of section 4. When preparing documentation, the actuary should prepare documentation in a form such that another actuary qualified in the same practice area could assess the reasonableness of the actuary’s work. The degree of such documentation should be based on the professional judgment of the actuary and may vary with the complexity and purpose of the actuarial services. In addition, the actuary should refer to ASOP No. 41 for guidance related to the retention of file material other than that which is to be disclosed under section 4.