Trends in LTCI or Trains?
(written for Life Insurance Selling, November 2010 issue)
The long-term care insurance industry is hanging between the Medicaid expansion on one side making people think the state will pay, the CLASS Act on the other side making people think the federal government will pay, and rate increases hanging over us like a Damocles sword from even major carriers. Are these trends which will make the long-term care insurance market stronger…or trains that will run it down?
Let’s examine each trend:
1) Medicaid expansion: We in the long-term care insurance industry have historically worried about the baby boomers accessing Medicaid for long-term care and bankrupting the states, but I never dreamed there would be pressure from younger people hitting it at the same time.
High unemployment is putting more young families on Medicaid today as states typically allow adults with income below the poverty level to access Medicaid for health insurance if they have dependent children. Beginning January 1, 2014, health care reform expands health insurance under Medicaid to 16 million childless adults with a higher income (133% of the poverty level – $1200 a month in 2010).1 Many of these people are childless and low income because they are in very poor health – mentally and/or physically, and are likely to claim Medicaid benefits immediately.
Medicaid averages 20% of the state budgets today2 and that is expected to grow to 35% by 2030.3 To this point, long-term care has driven the explosive growth in Medicaid. It makes up a third of Medicaid budgets today and will be half by 2030.4 We’re adding all these young people to Medicaid in the face of 80 million baby boomers facing their long-term care years, 95 percent of them with no coverage for long-term care.5 Further, health care reform is expanding the Medicaid home care benefits for long-term care beginning in 2011, which will bring people out of the woodwork to claim these benefits.6 These changes plus the additional 16 million adults create a perfect storm to drive the states into bankruptcy…and it may not take much. Forty-six states are facing budget shortfalls for FY 2011 and economic stimulus funding to help make up budget shortfalls ends June 30, 2011.7,8
States are fighting back. At least twenty are suing the federal government over the Medicaid expansion.9 For example, health care reform legislation will increase Medicaid enrollment in Florida by 50 percent! To quote Bill McCollum, Florida Attorney General, from p. 5 of the lawsuit:
This onerous encroachment occurs at a time when Florida faces having to make severe budget cuts to offset shortfalls in its already-strained budget, which the state constitution requires to be balanced each fiscal year (unlike the federal budget), and at a time when Florida’s Medicaid program already consumes more than a quarter of the State’s financial outlays.10
Unlike the federal government, states are required to balance their budget, which means cutting services and jobs. The Center on Budget and Policy Priorities (CBPP) says that states are making choices between funding Medicaid and funding education.11 The 2010 Fiscal Survey of the States makes it really clear where the priority lies: In 2010, 35 states made total education cuts of $7.8 billion vs. only $1.5 million in Medicaid.12 So the questions become: do families want to pay higher tuition costs? Increased property tax? Higher sales tax to cover the escalating Medicaid costs?
2) The CLASS Act: The Community Living Assistance Services and Supports (CLASS) Act is a provision in the new health care reform bill (Public Law 111-148) that is supposed to provide an average benefit of $50 per day with a lifetime benefit period depending on the level of impairment. A CPI inflation benefit is included. The anticipated implementation year is 2013 because the Secretary of Health and Human Services has until October 2012 to announce benefits and premiums. Employees are guaranteed acceptance, including employees who already need help with activities of daily living; i.e. wheelchair-bound employees. Non-working spouses and family members do not appear to be eligible at all. Premium must be paid for at least five years before benefits can be claimed. Employers do not have to offer it, but if they do, employees can opt out. There will be alternate enrollment methods for self-employed or those employees whose employer does not offer it.
The concerns are two-fold: that it will cost much more than is projected and that the daily benefit is small vs. current costs of $150+ per day for 8 hours of home care, the cost of which could triple in the next 20 years due to the extreme shortage of caregivers.13,14
The positive side of this program is that as it is implemented, the government will educate Americans about the essential need to plan for long-term care. Remember the lift from the Federal program in 2002? That was a really good plan and producers rode the wave of awareness and competed against it effectively. This plan should pose no problem.
3) Rate increases: As states have adopted the NAIC Model Regulation of 2000 that actuaries have to certify that rates can’t go up in “moderately adverse” situations, carriers have introduced new products with higher premiums. But now we are seeing rate increases on existing policies. Carriers list valid reasons of low investment earnings, higher utilization of the benefits, and a low lapse rate as many more people keep the policies than anyone thought. But I believe the biggest reason for rate increases is because we haven’t sold the masses. Market penetration for all ages is still less than four percent. The ratio of eight million policies inforce vs. 230 million Americans over age 18 simply isn’t enough to spread the risk enough for affordable pricing.15
But let’s keep this in perspective. We are flipping out over one or two rate increases to existing LTC insurance policies. How many rate increases have we had with homeowners and automobile policies, Medicare Advantage plans, and Medicare supplements? Look at the tremendous rate increases in health insurance! LTCI plans introduced today have to abide by very strict regulations about pricing and should be much more stable.
4) Tighter underwriting: As more claims experience has become available, carriers are backing away from conditions that can easily lead to LTCI claims like diabetes and stroke history, even on simplified underwriting available through worksite LTCI plans. This means a higher decline rate at older ages. My own survey of the carriers revealed a 30% decline rate at age 65 and about 50% at age 75. This combined with higher premium has moved the average individual purchaser to 56 years old (46 in worksite LTCI).16
Long-term care insurance is no longer a senior product.
The 2010 Kaiser Foundation Medicare Primer says that 44% of Medicare beneficiaries have three or more chronic conditions, 29% have severe cognitive impairment and 15% have 2 or more ADL limitations. Almost half have an income below 200% of poverty level so LTCI isn’t a financially suitable purchase. In worksite, not only is guaranteed acceptance now rare even with true group offerings, but we are starting to see the height & weight question on simplified underwriting as obesity causes so many progressive health conditions that lead to LTCI claims.
5) Product design is influenced by three major trends:*
- About half of LTCI policies are sold at work17
- The Long-Term Care Partnership (about 40 states have adopted);
- Better claims information. The result is the “short and fat” model to make coverage affordable to employees, while giving them the security they can protect assets equal to benefits paid out if the insurance isn’t enough and they have to turn to Medicaid.
Here’s what we are seeing: shorter benefit periods, creative inflation options while still meeting the Partnership requirement for compound under age 61, and better ways to structure premium payments to make the premium affordable at younger ages. The most popular benefit period is three years,18 and some exciting developments are:19
- a plan that pays 80% of the charge has the inflation coverage built in. Every five years, the benefit pool increases 25% which means premium will about triple over 30 years
- flex-pay which allows the policyholder to start paying premium at 70% with gradual increases to age 65, at which time it levels and is paid up at age 85. At age 50, the starting premium is about $500 less and the ending premium is about $850 more.
- policyholders have the ability to create guaranteed rates by choosing a limited pay plan of 20 years or less and a matching rate guarantee.
With younger purchasers comes a desire to make the policies meaningful in the future to pay for new services, and that has resulted in a number of plans with a cash component that can be used however needed with no justification as to how it is spent. A plan can be all cash or allow the decision on a monthly basis to take 40 percent of the benefit as cash in lieu of the entire benefit. The remainder stays in the pool and stretches out the benefit period.
*These new benefit enhancements and alternate payment structures are subject to state approval and are not available in every state.
So here’s where we are with paying for long-term care in our nation. Medicaid is destroying state budgets like a computer virus and it’s only going to get worse unless we STEP UP and sell long-term care insurance fast enough to build a reserve of private-pay dollars for long-term care that will take the burden off the states.
This means producers have to equip themselves to sell long-term care insurance in the workplace. Selling LTCI one at a time to individuals won’t get the job done. If most employers offered voluntary LTCI as an employee benefit, we would have a chance to reach the masses quickly with lower premium and underwriting concessions so most Americans can get it. Some carriers extend the abbreviated underwriting to spouses as well.) No employer contribution is required, so that gets rid of the cost objection.
Most employees can afford at least a small policy as premium is so much lower at younger ages…at age 25, long-term care insurance is less than a Starbucks a day! And with the right kind of education, younger employees realize that anyone could need long-term care due to an accident, stroke or other disabling illness like a brain tumor or MS. An Age Wave/Harris Interactive Survey earlier this year said the biggest concern Americans have when asked about long-term care is not to be a burden on their children.20 All we have to do is show them that the way to prevent that from happening is by buying long-term care insurance.
The other big win from the educational process is that extended family members are eligible, which decreases the time employees have to miss work to be caregivers, and that’s the big deal for employers.
The program that makes all this possible is the Partnership for Long-Term Care. By providing asset protection equal to the benefits paid out when one applies for Medicaid, these plans pave the way for younger enrollees who can’t afford long benefit periods but understand that it is essential to start a long-term care insurance plan as young as possible. The Partnership is a home run in saving Medicaid budgets. All you have to do is look at the original four Partnership states to see this. Since they were implemented in the early 1990’s, less than 500 out of over 325,000 Partnership policyholders have had to turn to Medicaid for help.21
Combo products have fantastic potential for the older buyer, especially with less stringent underwriting and the ability to take gain out of non-qualified annuities tax-free when it’s spent for qualified long-term care.22
Education brings it all together for lead generation:
- send series of educational articles to employees with a call to action to request a simple booklet about planning for long-term care; and
- engage media to educate residents about how the Partnership can take the burden off state budgets while giving consumers private-pay choices. States don’t have the money to educate residents about it, so we as the private sector have to do it
Phyllis Shelton is President of LTC Consultants, a Nashville-based firm that produces long-term care insurance sales training and sales aids and of LTCiTraining.com, an online training company that provides the mandatory training required to sell long-term care insurance in most states. She can be contacted at firstname.lastname@example.org.
Sources used in this report:
Medicaid expanding to 16 million childless adults beginning 1/1/14: Congressional Budget Office, “H.R. 4872, Reconciliation Act of 2010 (Final Health Care Legislation)”, 3/20/10
Percentage of state budget dollars that go to Medicaid today: “FY 2008 State Expenditures Report”, National Association of State Budget Officers, Fall 2009
Percentage of Medicaid consumed by LTC today; 2030 projection for percentage of state budgets consumed by Medicaid and percentage of Medicaid consumed by long-term care: “Medicaid Long-Term Care: The Ticking Time Bomb”, Deloitte Center for Health Solutions, June 21, 2010
5% of people over age 45 have LTCI: “Economic Downturn Impacting Women’s Ability to Plan for Long-Term Care Costs, New Survey Finds”, AHIP, 1/9/09
Health care reform is expanding Medicaid home care benefits: CMS HHS Letter to State Medicaid Directors, August 6, 2010 re: Improving Access to Home and Community-Based Services, SMDL #10-015, ACA #6;
Forty-six states are facing budget shortfalls for FY 2011: McNichol, Oliff, Johnson. “Recession Continues to Batter State Budgets; State Responses Could Slow Recovery”, Center on Budget and Policy Priorities, Updated July 15, 2010
Economic stimulus funding for budget shortfalls ends 6/30/11: AHCA Capitol Connection 8/10/06 At least 20 states are suing the federal government over Medicaid expansion: Schmitt, Rick. “Health Reform Facing Early Legal Tests”, Kaiser Health News, 10/6/10
Lawsuit: Florida Case # Case No. 3:10-cv-91
States are cutting Medicaid, education and other essential services: Johnson, Nicholas, Phil Oliff and Erica Williams. “An Update on State Budget Cuts”, Center on Budget and Policy Priorities, Updated August 4, 2010
States are cutting education more than Medicaid: “2010 Fiscal Survey of the States”, National Association of State Budget Officers
Average cost of LTC: Long-term care insurance carriers cost of care surveys, 2009-2010
Cost of care expected to triple in 20 years: Based on an average 6% compound growth rate between $56 daily cost in 1987 compared to $198 in 2009. Source for 1987 costs: Medical Expenditure Panel Survey (MEPS) Chartbook #6 “Nursing Home Expenses 1987-1996”, Agency for Research and Quality. Source for 2009 cost of care: MetLife Cost of Care Survey, October 2009
About eight million LTCI policies inforce vs 230 million people over age 18: NAIC LTCI Experience Reports and industry stats through 6/30/10 and Census Bureau
Average purchasing age for individual and worksite: LIMRA, 3/10
Half of LTCI purchased at work: “Multi-Life in the Large Group Market”, Session 09-19, 9th Annual ILTCI Conference, Reno, NV, 3/30/09 and industry stats for 2010
Three year benefit period is most popular: 2010 Sourcebook for LTCI Information, AALTCI
New benefit and payment structures: Shelton, Phyllis. 2010 LTCI Worksite and Combo Products Fall Tour Workbook
Biggest concern of Americans is not to be a burden on children: “America Talks: Protecting Our Families’ Financial Futures”, a national survey conducted by Age Wave/Harris Interactive, sponsored by Genworth Financial, March 2010
Less than 500 original Partnership policyholders have had to access Medicaid: Reports from CT, NY, IN, CA LTC Partnership Directors as of 9/30/10.
Ability to take gain out of non-qualified annuities tax-free when spent for qualified LTC: Pension Protection Act of 2006 Public Law 109-280, Sec. 844 (a) (11) (B)