Modern face of senior living: Residents with a cause

My work is in "law and aging," which has proven to be a hot field, sometimes a little too hot, as demonstrated by the recent news stories about Rogue Valley Manor (RVM), a continuing care retirement community (CCRC) in southwestern Oregon.

During a sabbatical in 2009 from Pennsylvania State University's Dickinson School of Law, I served as a research scholar at Oregon State University. I toured senior care communities in Oregon. I know RVM to be historically successful and a very attractive example of continuing care.

At first I was not surprised to hear about accountability issues raised by residents at RVM. Residents throughout the rest of the country are also asking CCRC operators tough questions. To paraphrase an old movie title, they are "residents with a cause." Residents at the Manor asked the RVM Board appropriate questions about real estate transactions occurring in the last seven years — and about increasing fees imposed on residents.

In 2010, I wrote a short article about changes made by the Oregon Legislature to laws that govern CCRCs. The changes were intended to give residents greater rights to financial information and a stronger voice in governance. For example, state law allows for at least one resident to serve as a non-voting member of the CCRC's governing board and the law permits CCRCs to give residents voting rights. However, I worried in the article that residents might find the changes to be more cosmetic than real.

As it turns out, the concerns are not with RVM's board, but with Pacific Retirement Services Inc. (PRS). Following a restructuring in 1991, PRS became the "sole member" of the Manor, a label that made PRS a "parent" organization for RVM. The two corporations shared interlocking boards, with voting membership on both boards determined by PRS. PRS charged the Manor for its management services and, using the Manor as its flagship, developed other properties.

During the 1990s, easy credit and a booming real estate market contributed to the growth of many senior-living facilities. However, interlocking structures pose the potential for the parent corporation to influence financial decisions, including how much to pay a parent for services or whether to commit resources to the parent's pet projects. Great care is necessary to avoid conflicts of interest — or subtle pressures to do a parent company's bidding, regardless of questions.

And in my opinion, a parent company for a continuing care community should be viewed as owing at least a limited fiduciary duty to the controlled company. Further, under laws governing tax-exempt nonprofits, a nonprofit entity cannot transmit any "profits" to other individuals. Any payments made to service providers, such as PRS, must be for real services, at market rates.

What happens next can affect the future of both RVM and PRS, including their obligations as tax-exempt organizations under state and federal law. Plus, the future of any CCRC depends on the confidence of future residents. Older adults considering CCRCs want reassurance that (1) they will be able to afford monthly fees, (2) any increases will be those necessary to service "their" facility, and (3) entrance fees and monthly fees will not be affected by undue risk — or non-transparent corporate priorities.

Residents must also understand that hindsight is not 20-20 when judging investment transactions that may have occurred as early as 2005. The so-called "business judgment" rule of corporate law often prevents a past decision from being second-guessed. In addition, the right of residents to a voice in CCRC governance does not give the residents the right to control the corporation. For example, residents may prefer to defer renovations, but such preferences may not be in the best interest of the CCRC as an on-going operation.

The CCRC relationship between operators and residents is like a giant marriage, with Type-A personalities on all sides. Residents, boards of CCRCs, and parent corporations can work through deadlocks, but it is not easy when essential trust is missing. One possibility would be the use of skilled mediators or facilitators with unquestionable credentials.

I have seen situations where unresolved questions are the first step to financial instability — or worse, lawsuits alleging breach of fiduciary duties and violations of state law including "elder protection" laws. For example, concerned residents at another CCRC, a for-profit enterprise in Southern California, filed a class action in 2006. The case eventually settled, but the claims cost the company credibility, plus millions of dollars and several years of maximum caps on any increases to monthly fees.

There are pressing national priorities in regulation of health care, banking and Wall Street, topics that may dwarf the concerns of the comparatively small but important CCRC industry. In the meantime, it is certainly possible for states — and operators of individual CCRCs — to take steps to better ensure that "resident rights" are not idle words.

Katherine Pearson is a professor of law and served as the director of Penn State University's Elder Law and Consumer Protection Clinic for more than 10 years. She is the author of a treatise on "The Laws of Financial Abuse and Exploitation" and teaches courses on nonprofit organizations, trusts and estates, and contracts.

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