And
California Code
The Health Insurance Portability and Accountability Act of 1996 (HIPAA),
also called the Kassebaum-Kennedy Act, was a major accomplishment of the
104th Congress. The
intent was to improve the portability of health insurance coverage in the group
and individual markets, reduce health care fraud, promote the use of medical
savings accounts, improve access to long-term care services and insurance
coverage, and simplify the administration of health
insurance.
HIPAA
impacts even employers, although the rule does not specifically apply to
them. HHS uses group health plans
and plan sponsors to indirectly regulate employer use of protected health
information.
All
health plans, health care providers, and health care clearinghouses are
considered covered entities under the rule. A health plan is defined as a group
health plan, a health insurance issuer, an HMO, an employee welfare benefit
plan, or another arrangement that provides health benefits to the employees of
two or more employers. Plan Sponsors are defined by the rule as the
employer, in the case of an employee benefit plan established or maintained by a
single employer, the employee organization, in the case of a plan established or
maintained by an employee organization or the representatives of the parties,
when the plan is established or maintained by two or more
employers.
For
purposes of this course, we will only be considering how HIPAA affected
long-term care insurance. Although
the act was not exclusively aimed at nursing home insurance, section 321 did
make specific changes in that marketplace.
With the passage of HIPAA, tax qualified long-term care
insurance policies were created.
Any policy not covered by HIPAA is considered to be a non-tax qualified
plan. Policies issued prior to the
passage of HIPAA in 1996 were grand-fathered in as tax qualified policies as
long as no material changes were made in them.
Specific
Statements
Regarding
Long-Term Care Contracts
Some
specific statements in HIPAA affected long-term care nursing home
contracts:
1.
Long-term care
insurance contracts will be treated as accident and health insurance
policies.
2.
Except for
policyholder dividends or premium refunds, benefit payments received under a
qualified long-term care policy will be treated as amounts received for personal
injuries or sickness and will be treated as reimbursement for expenses that were
actually incurred for medical care.
3.
Employer provided
plans will also be considered to be accident and health care
insurance.
4.
Qualified policies
must be guaranteed renewable contracts.
Under
HIPAA, a qualified long-term care policy must meet specific
criteria:
1.
The policy only pays
for long-term care costs and services.
2.
It does not duplicate
any payments made under Title XVIII of the Social Security Act
(Medicare).
3.
The contract is
guaranteed renewable.
4.
There is no cash
surrender value, as in life insurance policies, or any other ability to assign
or pledge as collateral any aspect of the policy.
5.
Any policy refunds or
dividends must be applied towards future policy premiums or used for additional
benefits.
Under
HIPAA, qualified long-term care services mean necessary diagnostic, preventive,
therapeutic, curing, treating, mitigating, rehabilitative services, and personal
care which are required by a chronically ill person and are provided according
to a plan of care prescribed by a licensed health care
practitioner.
HIPAA
specified six activities of daily living as previously stated in this
text. They include eating,
toileting, transferring, bathing, dressing, and continence. HIPAA excluded ambulating. 10232.8 (f)
The
most widely known aspect of HIPAA is the portability it provided for health care
policies. This legislation
limited the ability of group insurers to prevent enrollment on the basis
of pre-existing medical conditions.
Some conditions could no longer be considered pre-existing, such as
pregnancy. Newborns or newly
adopted children cannot be excluded if they are enrolled within 30 days of birth
or adoption. Where pre-existing
conditions may be used, the maximum amount of time a group health insurance
plan, HMO, or self-insured plan may exclude someone is 12 months. This period of time is reduced by the
amount of time a person previously had continuous coverage through other
insurance or previously satisfied pre-existing conditions. The IRS can actually penalize health
plans $100 per day for each enrollee affected by failure to comply with the
laws new portability, anti-discrimination or guaranteed renewability
provisions.
HIPAA
is a massive piece of legislation, but as we stated, this course will only focus
on the long-term care aspects.
HIPAA contained changes in the tax law for long-term care contracts that
meet specific standards. It treats
qualified long-term contracts the same as health insurance for tax
purposes. The premiums are
deductible in part or whole from the insureds personal income if they meet
specific conditions. This also
applies to life insurance riders designed to provide long-term care
benefits. The un-reimbursed cost of
qualified long-term care services are deductible as a medical
expense.
How
Much Can Be Deducted?
Currently taxpayers can deduct regular medical expenses if they exceed
7.5% of their adjusted gross income (AGI).
For long-term care insurance, the maximum deduction a taxpayer can take
for premiums is limited according to their age:
|
AGE: |
Maximum
Deduction Allowed: | |
|
Individual: |
Couple
both the same age: | |
|
40
or less |
$260 |
$520 |
|
41
50 |
$490 |
$980 |
|
51
60 |
$980 |
$1,960 |
|
61
70 |
$2,600 |
$5,200 |
|
71
or older |
$3,250 |
$6,500 |
These amounts represent 2004
figures.
Although these deductions are available, they may only be used if the
policyholder itemizes their medical expenses on an itemized income tax report
and if the total medical expenses exceed 7.5 percent of the adjusted gross
income (AGI).
It is
important to note that qualified tax breaks must meet federal guidelines that
have been set up to protect consumers.
Some of the important guidelines include (but are not limited
to):
Guaranteed renewable
policy
No duplication of
Medicare benefits
Unintentional lapse
protection
The offering of
inflation protection
A required 30-day
free look
Self-Employed
The
1998 Omnibus Appropriations Conference Agreement signed by President Clinton
accelerated the phase-in of a 100% deduction for small business owners and
increased the percentage of premiums that may be deducted.
If an
employer contributes to the premium cost of QLTC insurance for eligible
employees and dependents pursuant to a plan, the contributions will generally be
excludable from the employees income[1]
and generally deductible for the business.[2]
As of
2003, a person who is self-employed (as defined by Section 162(1) of the
Internal Revenue Code) may apply the 100% to any premium he or she pays on a
long-term care insurance policy for: self, spouse, dependents, and employees,
not to exceed the yearly premium limits.
It is important for each person to consult with a qualified tax advisor
to determine what is tax deductible in each persons
situation.
What
is the difference between a HIPAA
Tax-qualified
plan and a non-tax qualified plan?
While a tax benefit is always a nice
extra, the real importance of a long-term care insurance policy is the
benefits and the availability of them.
A policy that will not cover a term of illness or disability accomplishes
nothing. Non-tax qualified policies
are not eligible for tax deductions and do not have to adhere to the rules set
down by HIPAA, although they must still follow state requirements. Those that are tax-qualified must meet
the guidelines established by HIPAA.
So, consumers often ask, which plan is best? Since each type of plan has its own
strengths the important question is: Which plan best suits my personal
needs? Since each person is
different, no specific plan may be labeled best.
Because differences do exist between tax
qualified and non-tax qualified long-term care insurance policies, California
has mandated that agents must represent both types equally if the company they
represent offers both types. Both
tax qualified and non-tax qualified plans have their strengths and weaknesses
and hopefully agents will explain the differences in a manner that allows
consumers to then make an educated choice between them.
Benefit
Triggers:
On a gun, the trigger is the mechanism
that is pressed to release the bullet.
In a medical sense, the trigger is the mechanism that causes a
resulting medical event. For
example, Jennifer has become weak with age. She falls, breaking her hip. The fall is the event that triggers the
need for a nursing home while her hip heals. If she has a nursing home policy, the
fall resulting in a broken hip is the benefit trigger for her policy. A benefit trigger allows payment of
policy benefits. In effect, the
event triggers benefit payment.
The triggers are different for tax-qualified and non-tax qualified
long-term care policies. The
triggers for tax-qualified plans must meet the federal
requirements (HIPPA), while the triggers for non-tax qualified plans must meet
state requirements.
In the benefit triggers, ADLs are
discussed. ADL stands for activity
of daily living. Non-qualified
plans list seven ADLs: eating, bathing, continence, dressing, toileting,
transferring, and ambulating.
Tax-qualified plans list six ADLs: eating, bathing, continence, dressing,
toileting, and transferring.
Ambulating is not included in the HIPAA tax-qualified plans. It is easier to qualify for home care
benefits when ambulating is included.
Therefore, non-tax qualified plans often allow for home care that would
not be covered under a federally tax qualified plan.
How important are these listed
activities of daily living? An
article titled Home or Nursing Home? by Karen Stevenson Brown states the
following:
|
Activity of Daily
Living: |
Accomplished to age
74: |
Accomplished to age
84: |
|
Bathing
safely |
90
percent |
85
percent |
|
Dressing
adequately |
76
percent |
70
percent |
|
Toileting
effectively |
60
percent |
57
percent |
|
Transferring
adequately |
60
percent |
52
percent |
|
Continence |
55
percent |
42
percent |
|
Eating with
Utensils |
39 percent
|
33
percent |
Tax-qualified benefit
triggers require a
certification from a medical practitioner that care is expected to last no less
than 90 days. In addition the
individual must need help as defined in the chart that follows. Non-tax qualified
plans are not
required to meet the same requirements, although they must meet the requirements
of their approved state.
|
Non-Tax
Qualified LTC Policy: |
HIPAA
Tax Qualified LTC Policy: |
|
Medical
necessity CAN
be a benefit trigger. |
Medical
necessity
CANNOT be a benefit trigger. |
|
Activities of Daily
Living:
2
of 7 ADLs trigger benefits
No 90 day
requirement
Defined as needing regular
human assistance or supervision. |
Activities of Daily
Living:
2
of 6 ADLs trigger benefits
Must certify inability to
perform ADLs for at least 90 days
Defined as Unable to perform
without substantial assistance from another
individual. |
|
Cognitive
Impairment
Not described as severe
cognitive impairment.
Definition does not apply
substantial supervision test. |
Cognitive
Impairment
Described as severe cognitive
impairment.
Definition applies substantial
supervision test. |
In California, prior to the payment of
policy benefits for a covered term under the policy, the insurer may obtain a
written declaration by the physician, independent needs assessment agency, or
any other source of independent judgment suitable to the insurer that services
are actually necessary.
Out
of State or Group Policies
As we have stated, each state has
requirements for non-tax qualified long-term care policies. Out of state policies must also adhere
to specific requirements. Out of
state plans usually mean group policies.
The coverage, if it is called group insurance, must be
for:
1.
One or
more employers or labor organizations.
2.
A
professional group, trade group, or occupational association for its members,
former members, retired members, or any combination of these. The association must meet both of the
following:
a.
Be
composed of individuals who were actively engaged in the same profession, trade
or occupation.
b.
Have a
purpose other than obtaining insurance.
3.
An
association, trust, or the trustees of a fund established, created, or
maintained for the benefits of their members of one or more associations. Before any type of insurance may be
advertised or offered, evidence must be filed with the California Commissioner
that the association has a minimum of 100 members and was organized for some
purpose other than insurance. It
must also have been in existence for at least one year, have a constitution and
bylaws, which provide all of the following, and prove that the following has
been consistently implemented:
a.
Regular
meetings are held at least once each year for the purposes that established the
group or association.
b.
Except
for credit unions, the group or association must collect dues or solicit
contributions of some type from its members.
c. Each
member must have voting privileges and representation on the governing board and
any committees that are established.
Unless otherwise stated by the
commissioner, thirty days after filing these statements the group or
organization may offer the insurance for sale to its members. 10232 (b)
Other groups may offer insurance but
they are subject to all of the following:
1.
The
issuance of the group insurance may not be contrary to the best interest of the
public.
2.
The
issuance of the group insurance must result in economies of acquisition or
administration.
3.
The
premium charged for the insurance must be reasonable for the benefits that are
provided.
4.
The
names used to sell the insurance contracts must fairly represent who the seller
or promoter is.
5.
The
groups primary revenue source cannot be related to the marketing of the
insurance. This means that the
insurance cannot be necessary for the existence of the group to
continue.
6.
Membership must be solicited for the
purpose of the groups existence not solely for marketing insurance
products. In other words, if the
group was created to protect the environment, then new members must be solicited
for that reason; not simply to obtain group insurance benefits.
7.
The
group must provide benefits or services of significant value to their members
(other than group insurance). The
Commissioner will investigate the percentage of members using the other services
and the monetary value of those services.
The point of Californias Code is to
make sure that groups and organizations offering insurance products to their
members were not formed primarily for the purpose of obtaining group insurance
coverage.
When a group or organization meets
Californias requirements and begins to issue insurance policies for long-term
care benefits, the certificate of insurability must
include:
1.
A
description of the primary benefits and coverage provided.
2.
A list
of the exclusions, reductions, and limitations contained in the
policy.
3.
A
statement of the terms under which the contract may be continued in force or
canceled, including any ability the policy has to change
premiums.
4.
A
statement that the group master policy determines governing contractual
provisions.
5.
An
explanation of the certificate holders rights regarding policy continuation,
conversion, or replacement.
10233.6
No policy may be advertised, marketed,
or offered as long-term care insurance in California unless it complies with the
previous requirements.
10233.7
When applying for approval, insurers
must provide certain items to the department of insurance, for the
commissioners conveyance to the Department of Aging. These items
include:
Specimen individual policy form or
group master policy and certificate forms.
Corresponding outline of
coverage.
Representative advertising materials
to be used in California.
10233.9
What
Are the Activities of Daily Living?
There are either six or seven
activities, depending upon whether or not the policy is federally tax qualified
or not. If the policy is a
federally tax-qualified plan, only six activities will be listed with ambulation
being eliminated. Lets examine the
listed activities of daily living, which is the basis of benefit
triggers:
1.
Eating: reaching for, picking up and
grasping a utensil and cup; getting food on the utensil and bringing the food,
utensil or cup to the mouth; manipulating food on a plate; cleaning ones face
and hands following the meal.
2.
Bathing: cleaning the body using a tub,
shower, or sponge bath, including getting a basin of water, managing faucets,
getting in and out of the tub or shower, and reaching ones head and other body
parts for soaping, rinsing, and drying.
3.
Continence: the ability to control ones bladder
and bowels or using ostomy or catheter receptacles, and applying the use of
diapers or disposable barrier pads, if necessary.
4.
Dressing: putting on, taking off, fastening
and unfastening garments and undergarments and special devices such as back or
leg braces, corsets, elastic stockings, or garments and artificial limbs or
splints.
5.
Toileting: getting on and off a toilet or
commode including emptying a commode, managing clothing and wiping and cleaning
the body after toileting, and using and emptying a bedpan or
urinal.
6.
Transferring: moving from one sitting or lying
position to another sitting or lying position. This would include moving from a bed to
a chair or from a conventional chair to a wheelchair. It would also include the ability to
reposition oneself to promote circulation and prevent skin
breakdowns.
7.
Ambulating: walking or moving around inside or
outside the home regardless of the use of a cane, crutches, brace, or
walker.
10232.8(g)
The non-tax qualified long-term
care policies require that the insured not be able to adequately perform two out
of the previous seven ADLs or have cognitive impairment in order to qualify for
policy benefits. The federally
tax-qualified plans under HIPAA requires the inability to perform two ADSs as
well, but qualifying on the basis of an inability to perform two out of six is
mathematically harder to do than two out of seven.
The ADL definitions for tax qualified
are essentially the same, with the omission of ambulating.
What
Is a Cognitive Impairment?
A cognitive impairment means the person
needs substantial supervision due to his or her loss of mental functional
ability. It is a loss or
deterioration in intellectual capacity that is (a) comparable to Alzheimers
disease and similar forms of irreversible dementia and (b) measured by clinical
evidence and standardized tests that reliably measure impairment in the
individuals short-term or long-term memory, or orientation as to people, places
or time, or deductive or abstract reasoning.
Like the non-tax qualified plans,
cognitive impairment would allow benefits to be paid under a federal tax
qualified long-term care policy.
The plans would also pay if the insured were unable to perform adequately
2 out of the 6 ADLs. Chronically
ill individuals may also receive benefits under tax-qualified
plans.
If the HIPAA federal plans were to
expand the benefit triggers for tax qualified plans, then California would need
to issue emergency regulations corresponding to federal changes. 10232.8 (a)
What
Does Chronically Ill Mean?
HR 3103 defines the chronically ill
person as someone who has been certified by a licensed health care practitioner
as being unable to perform, without substantial assistance from another person,
at least 2 activities of daily living for a period of at least 90 days due to a
loss of functional capacity. The
chronically ill person might require supervision due to a cognitive
impairment.
The activities of daily living do not
enter into the determination of whether a person is chronically ill due to
severe cognitive impairment. Even
so, many who are suffering from cognitive impairment also cannot perform many of
the ADLs without assistance from others.
A licensed health care practitioner,
independent of the insurer, must certify that the insured meets the definition
of chronically ill individual as defined under Public Law 104-91. In the event the health care
practitioner, without personally examining the applicant, determines the insured
does not meet the definition of chronically ill, the insurance company must
notify the insured that he or she is entitled to a second assessment that will
include a personal examination. The
assessments must be conducted as quickly as possible to ensure that the
patients benefits are not unnecessarily delayed. The written certification will be
reviewed every 12 months.
10232.8(c)
Third
Criterion
While federal regulation stipulates two
current benefit criteria (2 out of 6 ADLs or cognitive impairment), a third
possibility also exists. If federal
law or regulations were to allow other types of disability to be used, then
Californias commissioner would pass emergency regulations to add those other
criteria as a third threshold to establish eligibility for long-term care
benefits. Any policies issued after
one year past that date would have to include the third criterion. If a third criterion were developed,
benefits would be payable (if it met this criterion) whether or not the previous
two criteria existed. 10232.8
(b)
Plan of Care
All tax qualified insurance plans must
develop a plan of care for those receiving benefits that use several elements in
their formulas. A plan of care is a
written description of the insureds medical needs with a specification of the
type, frequency, servicing providers, and the cost involved. Those elements cone together like
this:
A Plan of Care = needs + type,
frequency, providers, and cost.
The plan of care must be reviewed and
renewed no less often than every 12 months. The cost of writing the original plan
and subsequent plans may not be deducted from the policy maximums. This requirement applies only to
tax-qualified long-term care plans.
10232.8 (d)
Who qualifies as a health care
practitioner?
HIPPA defines Licensed Health Care
Practitioner as any
physician or any registered professional nurse, licensed social worker, or other
individual who meets such requirements as may be prescribed by the Secretary.
What
does the disclosure statement say
regarding
tax qualification?
Each long-term care policy must state
whether or not it qualifies under HIPAA for tax benefits. Because California felt there were
significant differences between their non-tax qualified plans and HIPAAs tax
qualified plans, they required that consumers be given a choice if the company
offered both types. Each policy
must state clearly which type it is: qualified or non-qualified. It must be stated on both the outline of
coverage (OOC) and in the application.
Tax Qualified
Plans
Tax qualified long-term care policies
are required to state: This contract for long-term care
insurance is intended to be a federally qualified long-term care insurance
contract and may qualify you for federal and state tax
benefits.
Non-Tax Qualified
Plans
Non-tax qualified long-term care
policies are required to state on both page one of the policy form and the
outline of coverage (OOC): This contract for long-term care
insurance is not intended to be a federally qualified long-term care insurance
contract. 10232. (d)
Consumer
Notification
California has mandated a consumer
notification regarding the two available options, which must
read:
Important
Notice
This
company offers two types of long-term care policies in
California.
(1)
Long-term care policies (or certificates) intended to qualify for federal and
state of California tax benefits.
And
(2)
Long-term care policies (or certificates) that meet California standards and are
not intended to qualify for federal or state of California tax benefits but
which may make it easier to qualify for home care
benefits.
This notice may not be any smaller than
12-point font (which is the size we used) and it must be signed and dated by
both the applicant and the agent or insurer. A copy must be provided to the
applicant. With group plans the
employer must make this notice available to both their employees and dependents
of the employees who are offered a choice between the two types of
coverage.
What
is the Outline of Coverage (OOC)?
All policies issued in California must
contain what is called the Outline of Coverage or OOC. This document must be printed in at
least 10-point type or larger (this
is 10-point type). Text that would normally be capitalized
or underscored may be emphasized in other ways as long as the prominence is the
same. The outline of coverage must
be delivered to the applicant for long-term care insurance at the time of the
initial solicitation. The selling
agent must prominently display the outline so that the potential buyer will be
able to read it and ask appropriate questions. In the case of mail solicitation, the
outline of coverage must be presented in conjunction with any application or
enrollment form. Both the state
of California and the NAIC Model in the federal law require an outline of
coverage.
10233.5(a)
California
Policy Types
There are various types of policies
available in California. They
are:
1.
Nursing Facility
Only coverage, which
includes institutional care as well as assisted living and ancillary supplies
and services.
2.
Home Care Only coverage, which includes home health
care, homemaker services, adult day care, personal care, hospice services, and
respite care.
3.
Comprehensive coverage, which includes both
nursing facility and home care coverage.
10232.1
Nursing Facility and Residential Care
Facility
A nursing facility and residential care
facility policy would either pay the selected daily indemnity amount, not to
exceed actual charges or it might pay the daily indemnity even if it exceeds the
actual charges, depending upon the policy language.
Home Care
Only
A home care only policy sets daily,
weekly, or monthly benefit payment maximums, again depending upon the specific
policy language. Every policy must
be read to determine precisely what is covered, no matter what type of policy it
happens to be.
Comprehensive
Comprehensive long-term care policies
provide coverage both in the nursing facility and at home. As the name implies, it is the most
comprehensive insurance coverage. Comprehensive policies that provide for both
institutional and home care and that sets a daily, weekly, or monthly benefit
payment maximum must also pay a home care
benefit that is no less than 50 percent of the nursing facility
benefit. Therefore, if $200 per day
is paid in the nursing home, then no less than $100 per day must be paid for
home care. At least $50 per day
must be paid for home care, so that means that at least $100 per day must be
paid in the nursing facility.
The law states it this way: every
comprehensive plan of this type that sets a durational maximum for institutional
care, limiting the length of time that benefits may be received during the life
of the policy or certificate, must allow a similar durational maximum for home
care that is at least one-half of the length of time allowed for institutional
care. 10232.9
(d)
California requires policies to offer
applicants the opportunity to purchase a long-term care insurance policy that
covers assisted living in a licensed residential care facility for the
elderly, called
RCFE. If RCFE coverage is purchased, the
policy must pay a minimum benefit of no less than 70 percent of the maximum
benefit for the nursing facility, which means no less than $70 per day. The option to purchase an assisted
living benefit does not have to be made if coverage for it is already included
and pays at least 70% of the nursing facility benefit. 10232.92(b)
Understandably, any policies or
certificates of insurability that are intended to be federally qualified
long-term care contracts must comply with all applicable laws. That would include riders on life
contracts. All contracts must offer
both tax qualified and non-tax qualified certificates, policies, and
riders. Any form of long-term care
insurance approved after the effective date of 10/5/1997 must meet all
requirements.
If a group policy were issued prior to
January 1st, 1997 it automatically became tax qualified. They were not required to meet the
requirements of SB527, as amended during the 1997 portion of the 1997-1998
Regular Session, unless the policies ceased to be treated as federally qualified
under the grandfather rules. If
this happened, the insurer must offer the policy or certificate holders the
option to convert, on a guaranteed-issue basis, to a tax qualified plan, if the
insurer sells such a plan. Group
policies must state if the policy is qualified or not, using verbatim language
just as individual policies must. 10232.2
(d)
What
if the insured wants to exchange privileges?
Consumers may change from a non-tax
qualified plan to a qualified plan and vice versa. When exchanged, the following would
apply:
1.
Exchange must be made on a guaranteed
issue basis at the original issue age of the policyholder. That means that the new policy has to be
based on the age of the insured at the time he or she purchased the original
contract. This is very important
since premium costs rise with age.
2.
Insurers are allowed to adjust
premiums if there is a disparity.
Disparity means lack of equality.
Therefore, if the new premium offers greater benefits, the insurer is
allowed to charge for that additional protection.
3.
Exchange is allowed to be facilitated
by a rider or through a new policy, whichever is preferred and
available.
4.
Exchange will not be made if the
policyholder is in the process of receiving benefits under their existing
contract (policy). Obviously, it
would be nearly impossible to exchange a policy when benefits are already being
paid out.
Underwriting
Long-Term Care Contracts
Each type of insurance contract is
underwritten based on risk. The
insurance industry keeps statistics on the different types of policies so that
they may measure the risk involved.
Life insurance policies suffer different types of risk than would a
casualty policy. Therefore,
underwriting is based on the type of risk that each particular policy would be
subjected to.
The terms loss and ratio are used
when calculating risk. In the
insurance market companies calculate expected loss and expected expense
ratios. This helps the companies to
know whether they are experiencing financial loss or gain. These ratios are calculated individually
for each line of insurance. Loss
and expense ratios may also be separated by what is called books of
business. This might include such
things as individual agencies or even by individual agents writing
business. If an agents
applications often seem to contain discrepancies, a company might audit
applications submitted by an individual agent to detect
problems.
In California, benefits provided under
individual policies are expected to have a loss ratio of at least 60
percent. This means that over a
specified period of time, insurance companies are expected to pay out in claims
no less than 60 percent of the overall premiums they collected. The overhead costs must be paid out of
the remaining 40 percent.
Calculating loss ratios is not a precise
science but those who specialize in it are very good at estimating future costs
based on past experiences. Many
elements are considered including expected losses, incurred claims experience,
earned premiums, projected trends, expected claims fluctuations, expense
factors, interest and inflation, and the uncertainty of any new products being
introduced.
In the early years of underwriting
long-term care insurance contracts, underwriters were only able to estimate
their risks. There were no actual
statistics at that time to guide them.
Today, there are many statistics that enable insurers to have a stable
view of the risks involved. At one
time, a few insurers did no underwriting prior to issuance of the long-term care
insurance policy. Rather, they
waited to underwrite when a claim was submitted to them for payment. The theory was that the insurer saved
money since many policies would never need underwriting. For the consumer, however, this was a
dangerous position. The insured
needed to know they were protected by their policy. Post-claim underwriting (waiting until a
claim occurred before underwriting) gave the insured no security. Many claims under these policies were
denied on the basis of underwriting.
Understandably, many complaints were lodged with the insurance
departments of all the states where this was happening. This prompted several states, including
California, to prohibit post-claim underwriting. If an insurer does not complete medical
underwriting prior to issuing the contract and clear up any issues or concerns
at that time, then the insurer may only rescind (take back) the policy upon
clear and convincing evidence of fraud or material misrepresentation of the risk
by the applicant.
What does this mean? The insurance company must cover
benefits according to the terms of the policy once they have issued the contract
to the insured. The only way they
can avoid paying covered benefits is if the insured gave false statements on the
application and knew they were doing so.
If those false statements covered up the risk that actually existed then
the insurer may rescind, or take back, the policy without paying benefits. In most cases, they would have to return
any premium paid. Obviously, the
insurer would have to have convincing and clear evidence that the applicant had
knowingly lied on the insurance application. The contestability period for a policy,
as defined in Section 10350.2, for long-term care insurance policies is two
years. 10232.3(d)
(f)
Field Issued policies are also
prohibited in California. A field
issued policy typically relied upon a few specific questions to determine an
applicants eligibility. They might
also use post-claim underwriting.
10232.3(e)
Todays applications have clear
questions that require a yes or no answer. How the questions are worded is mandated
by California. Each question must
be clear, unambiguous, short, and simple.
The application may ask for additional information, such as a list of
medications being taken and names and addresses of attending physicians for any
medical condition.
10232.3(a)
Every application for long-term care
insurance must have the following warning:
Caution:
If your answers on this application are misstated or untrue, the insurer may
have the right to deny benefits or rescind your
coverage.
This statement must be printed
conspicuously and in close conjunction with the applicants signature
block. While no agent wants to
offend a new applicant, it would be wise to point out the statement prior to
obtaining the consumers signature.
A simple statement may be used: Please review how you have answered
the medical information just in case there has been an error. Then read this statement prior to
signing the application.
10232.3(b)
Each application for long-term care
insurance must include a checklist that lists each of the specific documents
that the applicant must receive at the time of solicitation. These include:
1.
Important Notice Regarding Policies
Available
2.
The
Outline of Coverage (OOC)
3.
The
HICAP notice
4.
The
long-term care insurance California Shoppers Guide
5.
The
Long-Term Care Insurance Personal Worksheet
6.
The
Notice to Applicant Regarding Replacement of Accident and Sickness or Long-Term
Care Insurance. 10232.3(c)
Every issued policy must have a copy of
the completed application included with it. This gives the insured the chance to
review it once again for accuracy.
Upon delivery the agent would be wise to request the insured review it to
prevent any unintentional errors.
10232.3(g).
Insurers must report to the commissioner
specifically formatted information regarding any policies that have been
rescinded. The information must
include statistics for both California and nationally. Cancellations initiated by the consumer
would not be applicable.
10232.3(h)
What is the definition of a
pre-existing medical condition?
There was a time when each insurer
determined what was considered a pre-existing medical or mental condition. Senate Bill 870 established the
definition of pre-existing condition as:
No
long-term care insurance policy or certificate, other than a group policy or
certificate, shall use a definition of pre-existing condition which is more
restrictive than a condition for which medical advice or treatment was
recommended by, or received from a provider of health care services, within six
months preceding the effective date of coverage of an insured
person.
It goes on to say that LTC policies must
cover pre-existing conditions that are disclosed on the application no later
than six months following the policy effective date regardless of the date when
the loss or confinement actually begins.
The insurer may use an application form designed to disclose the entire
health history of the applicant if they wish, but only the six months prior to
issue may determine the pre-existing conditions that apply. 10232.4.
Is prior hospitalization
required?
In California long-term care policies
may not impose a prior hospitalization requirement. In other words, the policies may not
require the insured to be in a hospital prior to entering the nursing home or
claiming benefits under a long-term care policy. 10232.5
On individual policies, an LTC policy
applicant has the right to return the policy or certificate by first-class
United States mail within 30 days of its delivery and receive a full refund of
any premium paid. When the policy
is delivered it is important that the consumer examine it for accuracy and
desired benefits. If the policy
does not meet the standards desired, it may be returned within that 30-day
period. This would not apply to
group policies where the employer is the insured.
Returning the policy does void all
benefits it contained. Therefore,
once returned, the consumer could not expect to receive any benefits and cannot
submit any valid claims.
This 30-day right to return the policy
for a refund must be prominently printed on the first page of the policy or
certificate, or attached to the first page. 10232.7
IRS
Notice 97-31 for Tax Qualified Definitions
Until
definitions are changed by federal law or regulation, the terms "substantial
assistance," "hands-on assistance," "standby assistance," "severe cognitive
impairment," and "substantial supervision" are defined according to the
safe-harbor definitions contained in the Internal Revenue Service Notice 97-31,
issued May 6th, 1997. This
definition states that substantial assistance must be necessary in a "hands-on"
manner due to a loss of functional capacity.
Anther criteria used is the impairment of cognitive ability. This means the beneficiary needs
substantial supervision due to his or her loss of mental functional
ability.
10232.8 (c)
IRS
Notice 97-31 has established guidance for these terms. They are:
Substantial
Assistance: as it applies to the
activities of daily living, hands-on assistance and standby
assistance.
Hands-on
Assistance: the physical
assistance of another person without which the individual would be unable to
perform the activities of daily living.
Standby
Assistance: the presence of
another person within arms reach of the individual that is necessary to prevent,
by physical intervention, injury to the individual while the individual is
performing the activities of daily living.
The IRS notice gives the examples of being ready to catch the individual
if he or she falls while getting into or out of the bathtub or shower as part of
bathing or being ready to remove food from the patient's throat if the
individual chokes while eating.
Severe
Cognitive Impairment: a loss or
deterioration in intellectual capacity that is (a) comparable to Alzheimer's
disease and similar forms of irreversible dementia and (b) measured by clinical
evidence and standardized tests that reliably measure impairment in the
individuals short-term or long-term memory, or orientation as to people, places
or time, and lastly deductive or abstract reasoning.
Substantial
Supervision: relates to cognitive
impairment. It means continual supervision by another person that is necessary
for the protection of the impaired individual or others around them. This would often include protecting them
from wandering off and becoming lost.
End of Chapter
Three