A retirement home offers a painful reminder about monopolies’ negative effects on consumers

Yesterday, I attended a meeting at my mother’s retirement community and got a very good reminder about why monopolies are bad for consumers. Without breaching privacy, I can tell you this: the retirement community is one in which residents pay a significant buy-in fee, which they are told is applied to their tenancy for the first ten years. Thus, if they leave the community at any time within the first ten years, they are entitled to have refunded an increasingly small percentage of their original buy-in fee. If the resident dies within the first ten years, the fee is not refundable to the resident’s estate.  For current residents, depending when they bought in, these fees range from $150,000 to $250,000.

In addition to the buy-in fee, the residents pay a sizable monthly rental for room, food, amenities (such as a pool and small library), and services. These services include drivers to local malls and doctor’s appointments. Almost without exception, in order to fund the buy-in and rental, the residents sell the homes in which they lived. Unless the residents are quite wealthy, they are then locked in, because they no longer have the wherewithal to go anywhere else.

Unfortunately for the residents, their monthly rentals have been going up at a rate in excess of inflation. This is disturbing enough but, worse, the services and food they receive for this increased rent, rather than staying the same or even becoming better, are diminishing. Favored service employees are being squeezed out and either not replaced or replaced with less qualified people,* and the food is less appealing — something that’s a problem for elderly people who have aging taste buds and delicate appetites to begin with.

The home is also accepting primarily older and sicker residents who are more likely to die within a short time of moving in.  Doing this ensures a greater supply of those non-refundable buy-in fees.  A younger, healthier population, of course, results in lower turnover.  This admission policy diminishes the community’s vitality, which used to have a good spread of people ranging in age from 65 to 105, but now tends to an older, sicker demographic (something I’ve noticed when visiting my mother).

The non-profit organization that manages the home contends that the rising rates address inflation, increased operating costs, and the rising costs of medical care. The publicly available financial data, though, does not support these claims. As noted, the fee increases exceed inflation, the financial statements show that the non-profit’s operating costs have either flat-lined or been consistent with actual inflation (which is lower than the rent increase), and the medical costs are also the same. This same financial information shows that administration fees have gone up at a markedly higher rate than anything else.

Regarding the latter, in the absence of specific information, the residents, a large percentage of whom are sporting Bernie Sanders bumper stickers on their cars, think that the few people in charge are paying themselves huge salaries inconsistent with a non-profit. I have a different theory: Non-profit and not-for-profit organizations invariably bulk up on upper level management. It’s happened at the University of California campuses, which now have an administrative structure that equals (or exceeds?) the teaching staff, and it happened at all the non-profit institutions in which I’ve volunteered over the years in connection with my children’s activities.

The boards of these institutions — collections of well-meaning folks who want the organization to do well — are always told that if they agree to create “this” position or “that” position, all the institution’s problems will be over. It’s not mission creep; it’s management creep, and it’s incredibly costly. At one of my children’s schools, it resulted in tuition doubling over five years (which is how my kids ended up in public school).

It appears that what’s really happening in this retirement community is that the institution wants to expand into new markets. If it were a for-profit corporation, and the residents were shareholders, management would do this by saying “We see an exciting business opportunity here that, within X years, should yield a substantial return on your investment.” Of course, this would be a hard sell to a group of retirees, since many of them might not be around in X years to see that return on investment. At least, though, their heirs would benefit.

Here, though, the planned expansion into new markets offers no benefit whatsoever to the people who have bought into the current home. They are paying more money for fewer and worse services and getting nothing in return. Moreover, there’s little they can do to change that dynamic. They’re angry now and gathering information, but they are unable to do the single most important thing someone can do when a provider of goods and services suddenly charges too much for too little: they cannot walk away.

In the short term, the best that the residents can do is try to dissuade management from following its plan or shame management.  The organization, which is a charitable concern, might not like to see front page stories in local papers about its creating new administrative opportunities using old people’s lives and money. If those two options fail, though, the only thing left is litigation — and that’s a long, painful, expensive process that may not resolve for years, by which time all or most of the original plaintiffs may already have passed on.  To torture a Rolling Stones’ lyric, “Ti-i-i-me is on management’s side….”

If the past predicts the future, a similar lawsuit filed two years ago in Palo Alto does not bode well for the residents here:

Vi at Palo Alto residents — including a retired Nobel Prize winner — filed a class action lawsuit in federal court Wednesday alleging the continuing care retirement center funneled $190 million in refundable entrance fees to its corporate parent with no assurances they would be returned.

According to the 34-page complaint, CC-Palo Alto Inc., the entity that owns and operates the center at 600 and 620 Sand Hill Road, failed to obtain a repayment promise from Chicago-based CC-Development Group Inc., which maintains it has no obligation to give the money back.

But the fees were to be returned to the residents when they moved out or to their families when they died, the suit states.

CC-Palo Alto is now running a deficit of $300 million as a result of “up-streaming” the fees and owes more than $450 million to 500 residents, according to the complaint. A jury trial is being sought.

“These senior citizens were promised financial security,” said Niall McCarthy of San Francisco-based law firm Cotchett, Pitre and McCarthy LLP. “Instead, their money was funneled out of state.”

The complaint, which is believed to be the first of its kind challenging a continuing care retirement center’s financial practices, also accuses CC-Palo Alto of inflating monthly fees through bogus charges.

(Continued here.)

Although I can’t access the federal docket without paying a fee, I understand that the case is not going well for the plaintiffs (assuming it’s still going at all and hasn’t been dismissed entirely). The buy-in contracts give the corporate management a lot of room for maneuver and, as I said, the buyers are locked in and have no leverage at all.  In this case, the residents hope to pursue a smarter strategy than those in Palo Alto did, but the Palo Alto suit is a grim reminder about leverage, both inside and outside of the court system.

In writing this, I’m not suggesting that retirement homes be turned into for-profit enterprises. Indeed, I’m not suggesting anything at all about retirement homes, which are difficult places to manage, since they’re a combination condo, hotel, spa, cafeteria, health care provider, etc. I just tell this tale to illustrate how important the marketplace is in giving consumers power — and how little power they have when the marketplace is closed to them.

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*I don’t wish to malign the people who work on my mother’s home.  With a few unfortunately notable exceptions, these employees, whether old or new, are decent, kind people, who work hard to give a good quality of life to the residents.  The problems about which the residents complain are with management, not with the actual service providers.  Indeed, the service providers aren’t so happy either because, with management cutting their numbers, they’re spread too thin.