The actuarial pricing analysis will develop, using insurance industry standards, the expected financial position based on the demographics and contractual guarantees including healthcare and entrance fee refundability. In developing actuarially based fee structures, it is important in this type of analysis to compare these fees to the current marketplace.
The pricing structure analysis will evaluate for single males, single females and couples the entrance and monthly fees compared to the expected future liability for providing care to prospective residents under the current contracts. The pricing analysis is prepared for each independent living unit type. The projected surplus is calculated as the difference between the present value of the fees charged less the present value of services provided. Expenses are allocated to each level of care: independent living assisted living and skilled nursing by the nature of each expense. For example, food service costs are allocated by the expected number of meals originating from each level of care. Interest expenses, if it was incurred as a result of capital expenditures, are allocated by the square footage of each unit. Under actuarial pricing theory, residential contracts are to be charged for the capital depletion of their respective use of independent living, assisted living and skilled nursing.
The actuarial pricing methodology is based on developing the present value of contractual revenues, offset by the present value of contractual expenses, for each independent living unit and entrant type. The difference between contingent revenues and contractual expenses is the expected contractual surplus at the time of entry. The methodology is based on the expected cash flows associated with the residential contract. Accordingly, the calculation includes only expected cash flows and ignores non-cash items such as depreciation and amortization. In the calculation, depreciation is primarily replaced by an actuarial charge to fund the replacement of capital assets depleted during a residency at the community.
We will separately develop the expected surplus for single and couple entrants and examine any existing cross-subsidies for each combination of independent living type and entrant type. This analysis will provide management with the tools and understanding to move forward in the possible repricing of contracts, as determined by the actuarial analysis and constrained by market pressures.
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