Partnership Long-Term Care Policies
Chapter 2
Program Benefits
Partnership plans, while preserving assets also have many other components. Just like a non-partnership policy, the applicant must make decisions regarding the type and quantity of benefits they wish to purchase. Just like traditional LTC policies the applicant must medically qualify for the Partnership plans. Since insurers underwrite the policies, even asset protection models must be an acceptable risk.
Not every person will feel they need the same policy benefits in their long-term care insurance policy. While most states mandate some types of coverage, such as equality among the levels of care, there are other options that may be purchased or declined. A trained and caring agent can help the consumer understand those options and make wise choices.
Making Benefit Choices
Some choices are made for consumers by the insurers, such as the minimum daily benefit available. Other choices fall on the applicant, such as whether to purchase a $100 per day benefit or a $150 per day nursing home benefit. Regardless of the choices consumers make, all policies must follow federal and state guidelines. In fact, insurers will not offer a policy that does not meet minimum state and federal standards. For example, in some states insurers must offer no less than a $100 per day nursing home benefit and all three levels of care must be covered equally (skilled, intermediate and custodial, also called personal care). Policies following federal guidelines will be tax-qualified. Non-partnership polices following state guidelines might be non-tax qualified plans. Many states mandate specific agent education prior to being able to market or sell non-partnership LTC policies. Agents selling Partnership policies must certainly acquire additional education in order to market partnership plans. In both cases, the goal is to have educated field staff relaying correct information to consumers.
All policies offer some options, which may be purchased for additional premium. Of course, consumers may also refuse the optional coverage. When refusing some types of options, a rejection form must be signed and dated by the applicant. In some states, an existing policy may be modified; in others an entirely new policy would be required when changes are desired.
When a consumer decides to purchase an LTC policy, several buying decisions must be made. These could include:
1. Daily benefit amounts: this is the daily benefit that will be paid by the insurer if confinement in a nursing home occurs.
2. The length of time the policy will pay benefits: this could range from one year to the insured’s lifetime. Of course, the longer the length of policy benefits, the more expensive the policy will be.
3. Inclusion of an inflation guard: Non-partnership plans will not require this, while Partnership plans have inflation protection guidelines that must be followed. An inflation protection guards against the rising costs of long-term care by providing an increasing benefit according to contract terms. Partnership plans have two types: an increase based on a predetermined percentage and an offer at specific intervals allowing the insured to increase benefits without proof of insurability.
4. The waiting period, also called an elimination period, must be selected. This is the period of time that must pass while receiving care before the policy will pay for anything. It is a deductible expressed as days not covered. The option can range from zero days to 100 days. A few policies may have a choice of a longer time period.
5. Dollar-for-Dollar Partnership asset protection or Total Asset protection, if both are available. A Hybrid model may also be available. Not all states offer all options since DRA specifies all new LTC Partnership plans to offer only dollar-for-dollar models, in the hope of keeping premiums affordable for lower and medium income individuals.
As every field agent knows, clients often prefer to have the agent make selections for them, but this is not wise. Although the agent will be valued for the advice he or she gives, the actual benefit decisions need to be made by the consumer. This means the agent must fully explain each option so that the consumer can make informed choices. In a way, it is similar to the cafeteria insurance plans where employees have an array of choices in benefits. The difference is that the long-term care policies have no limits on the choices that the consumer can make. If he or she is willing to pay the price, absolutely everything available can be selected. Typically an agent will go from available benefit to available benefit, explaining each option, and getting a decision from the applicant before moving on to the next decision.
Benefit choices are primarily the same as for non-Partnership policies in that there is a daily or monthly benefit, elimination or waiting periods, a home health care and adult day care benefit level, an inflation feature, and a benefit period with a lifetime maximum generally offered. Those who choose the lifetime Partnership benefit have apparently decided that they never want to use Medicaid funding. This is not surprising since people often believe Medicaid funding leads to inferior care, although statistically that has not been validated.
There is something else about Partnership policies that mirror non-partnership contracts: underwriting. Just as insurers underwrite traditional long-term care policies, they also underwrite Partnership contracts. Therefore, the applicant must medically qualify in order to purchase such a plan. Perhaps that explains the younger ages that seem to be applying for and buying Partnership long-term care plans.
Daily Benefit Options
While there are many policy options, the daily benefit amount is usually the first policy decision, with the second one being the length of time the benefits will continue. Both of these strongly affect the cost of the policy, but they also affect something else that is very important: the amount of assets that will be protected from Medicaid spend-down requirements. The total benefit amount (daily benefit multiplied by the length of benefit payouts) determines the amount of assets protected in dollar-for-dollar Partnership plans.
The type of policy being purchased will affect how the daily benefit works; for example a non-partnership policy may be purchased that covers home health care only (not institutionalized care). The daily benefit is based upon the type of policy selected. Policies that cover institutional care in a nursing home will have options that may vary from policies that cover only home care benefits. Integrated policies will vary from those that pay a daily indemnity amount. Many states have mandatory minimum limitations ($100 per day benefits for example). Insurance companies will determine the upper possibilities. Obviously, the consumer cannot select a figure higher than that offered by the issuing company. Nor can an insurer offer a daily indemnity amount that is lower than those set by the state where issued. At one time insurers offered as low as a $40 per day benefit in the nursing home. By today’s standards, that would be extremely inadequate for nursing home care.
This daily benefit can have variations. Some policies will specify an amount (not to exceed actual cost) for each nursing home confinement day. Other policies (called integrated plans) offer a more relaxed benefit formula. These policies have a "pool" of money, which may be used however the policyholder sees fit, within the terms of the contract. As a result this pool of money could be spent for home care rather than a nursing home confinement, as long as the care met the contract requirements. Benefits will be paid as long as this maximum amount lasts regardless of the time period. The danger in having a pool of money, however, is that the funds may be used up by the time a nursing home confinement actually occurs. If the funds have been previously used up, there will be no more benefits payable. Since people prefer to stay at home, this may work out well, if benefits are appropriately used.
The amounts paid will usually vary depending upon whether they are going towards a nursing home confinement, home health care, adult day care, and so forth. The "pool of money" type is gaining popularity where offered, since consumers see it as a way to make health care choices more freely. Integrated policies are generally more expensive than indemnity contracts. As in all policy contacts, integrated plans have benefit qualification requirements, exclusions, and limitations; they do not simply hand the insured money to be used in any manner desired.
While sales can and do vary from state to state, California reported that the average daily amount purchased in Partnership plans was $150 (2003 GAO figure) with a lifetime benefit period. Indiana reported an average daily figure purchased as $130 per day, which may reflect the difference in state costs. Californians can expect to pay about $230 per day in a nursing home while Indianans will pay around $170. New Yorkers were buying an average of $200 per day benefit, but they also have some of the nation’s highest nursing home rates.
Expense-Incurred and Indemnity Methods of Payment
When benefits are paid from a specific dollar schedule for a specific time period, they are generally paid in one of two ways:
1. The expense-incurred method in which the insured submits claims that the insurance company then pays to either the insured or to the institution up to the limit set down in the policy.
2. The indemnity method in which the insurance company pays benefits directly to the insured in the amount specified in the policy without regard to the specific service that was received.
Of course, both methods require that eligibility for benefits first be met.
Determining Benefit Length
While the daily benefit is typically the first choice made, the second choice is just as important to the policyholder: the length of time for which benefits will be paid. This may apply to a single confinement or it can apply to the total amount of time spent in an institution. An indemnity contract offers benefits payable for a specified number of days, months or years (depending upon policy language). An integrated plan pays whatever the daily cost happens to be unless the contract specifies a maximum daily payout amount. When funds are depleted, the policy ends.
While statistics vary depending upon the source, most professionals feel a policy should provide benefits for no less than three years of continuous confinement. Some people will only be in a nursing home for three months while others may remain there for five years. While it does not make sense to over-insure, it is also important to have adequate coverage. Since the majority of consumers will not be willing to pay the price for a life-time benefit, three or four year policies are likely to do a good job for them and still be affordable.
Asset Protection in Partnership Policies
A primary reason for purchasing a Partnership long-term care policy is the asset protection it provides. There were initially two asset protection models, although a third variety developed:
1. Dollar-for-Dollar: Assets are protected up to the amount of the private insurance benefit purchased. If policy benefits equal $100,000, then $100,000 of private assets are protected from the required Medicaid spend-down once policy benefits are exhausted and Medicaid assistance is requested.
2. Total Asset Protection: All assets are protected when a state-defined minimum benefit package is purchased by the consumer. In this case, as long as the individual buys the minimum required benefits under the state plan, all his or her assets are protected from Medicaid spend-down requirements even if the assets exceed the total policy benefits purchased. Only New York and Indiana have this option. Total asset protection will not be offered in any of the new Partnership plans.
3. Hybrid: This Partnership program offers both dollar-for-dollar and total asset protection. The type of asset protection depends on the initial amount of coverage purchased. Total asset protection is available for policies with initial coverage amounts greater than or equal to a coverage level defined by the state.
Indiana introduced a hybrid model in 1998. Consumers have purchased more long-term care insurance coverage to get total asset protection than they have the less expensive coverage for the dollar-to-dollar program. This would indicate that consumers are willing to pay a higher premium for the better asset protection offered by the Total Asset model. To trigger total asset protection in 2005 policyholders had to buy a policy benefit valued at $196,994 or greater. Prior to 1998, only 29 percent of the policies purchased had total coverage amounts large enough to trigger total asset protection. When compared with just the first quarter of 2005, 87 percent of policies purchased had total coverage amounts large enough to trigger total asset protection.
As you know, under the Partnership program the state will disregard the policyholder’s personal assets equal to amounts paid out under a qualifying dollar-for-dollar model insurance policy or it will disregard all assets under the Total Asset Model.
Policy Structure
We have seen much legislation by the states directed at long-term care policies. Even the federal government has been involved in this with the tax-qualified plans. Since only the federal government can allow a federal tax deduction, tax-qualified plans always come under federal legislation whereas non-tax qualified plans come under state legislation. Each state will have specific policy requirements. Partnership plans come under federal requirements and will be tax-qualified. The states will assign descriptive names in an effort to identify policies in a way that consumers can comprehend. Such terms as Nursing Facility Only policy, Comprehensive policy or Home Care Only policy will be used. Each state will have their specific way of labeling policies. Long-term care policies often do not pay benefits for years after purchase. An error on the part of the agent can have devastating consequences.
Home Care Options
While it is very important to cover the catastrophic costs of institutionalization in a nursing home, most Americans would prefer to remain at home. It is often possible to obtain both nursing home benefits and home care benefits in the same policy. In such a case, home care is typically covered at 50 percent of the nursing home rate. Therefore, if the nursing home benefit is $100, the home care rate will be $50. This may not be adequate funding for home care. If home care is a primary concern, it may be best to purchase a separate policy for this if financially possible. Some home care policies carry additional benefits such as coverage for adult day care.
Inflation Protection
Industry professionals generally recommend inflation protection, but the cost can be high. Those who purchase at younger ages are especially encouraged to add this feature since the cost of long-term care is certain to increase over time. The cost of providing long-term care has been increasing faster than inflation. At older ages, the consumer will need to weigh the cost of the additional premium option with the amount of increase in benefits that will be produced.
The rising costs of institutional care surpass the increase in the Consumer Price Index. As of 2006 figures, a year of nursing home care in New York City costs approximately $146,000. While that is the high end of such care (Indiana residents pay around $62,000 per year) there is little doubt that costs are rising. Few retired people can afford to pay such high costs, so they turn to nursing home policies. Since such policies can be expensive, consumers may not purchase features that are designed to keep the coverage adequate. While traditional policies still give the applicant the choice of having or not having inflation protection, Partnership policies are structured differently.
Partnership policies have specific inflation protection requirements under the Deficit Reduction Act of 2005:
· Applicants under 61 years old must be given compound annual inflation protection,
· Applicants 61 to 76 years old must be given some level of inflation protection, and
· Applicants 76 years old or more must be offered inflation protection, but they do not have to accept it.
Traditional long-term care plans continue to make inflation protection an option, which may be rejected by the applicant. Many in the health care field state that the amount of increase offered is not adequate, but it will help to offset the rising costs of long-term care. The inflation protection, usually a 5 percent compound yearly increase, may eventually become part of all policies, but currently it is most likely to be just an option that the consumer must accept or reject. Some states require the consumer to sign a rejection form as proof that the agent offered the option.
Simple and Compound Protection
Inflation protection based on percentages is offered in one of two ways: simple increases in benefits or compound increases in benefits. Like interest earnings, the benefits increase based on only the original daily indemnity amount or on the total indemnity amount (base plus previous increases). Some states mandate that all inflation protection options offered must be compound protection; others allow the insurers to offer both types. Under a simple inflation benefit, a $100 daily benefit would increase by $5 each year. Under a compound inflation benefit the protection increases by 5 percent of the total daily benefit payment. This is called a compound inflation benefit because it uses the previous year's amount rather than the original daily benefit amount. This is the same basis used with interest earnings on investments. Compound interest earnings are always better than simple interest earnings. The following graph more clearly illustrates how compounding works with the inflation protection riders:
|
|
Year 1 |
Year 5 |
Year 10 |
Year 15 |
Year 20 |
|
Base Policy |
$100 |
$100 |
$100 |
$100 |
$100 |
|
Simple |
$100 |
$120 |
$145 |
$170 |
$195 |
|
Compound |
$100 |
$121 |
$155 |
$197 |
$252 |
Required Rejection Forms
The individual state insurance departments generally recommend inflation protection riders to their citizens. Inflation protection plans must continue even if the insured is confined to a nursing home or similar institution. Many states are now requiring a signed rejection form if the insured does not accept the inflation protection option. Although this is intended to be consumer protection, it is also agent protection. It assures that the family of the insured will not later try to sue the agent for failing to sell the inflation protection.
Elimination Periods in LTC Policies
In auto insurance and homeowner’s insurance, higher deductibles are recommended as a way of reducing premium cost. The point is catastrophic coverage – not coverage of the small day-to-day losses. The same is true when it comes to health insurance. In long-term care contracts, there are a variety of waiting or elimination periods available in policies. Basically, a waiting or elimination period is simply a deductible expressed as days not covered. The choice is made at the time of application. Policies that have no waiting period (called zero elimination days) will be more expensive than those that have a 100-day wait. Fifteen to thirty elimination days are most commonly seen, although the zero day elimination period has gained popularity.
As one might expect, the longer the elimination period, the less expensive the policy; the shorter the elimination period, the more expensive it is. Therefore:
Zero day elimination = higher cost.
100 day elimination = lower cost.
All the variables between the two extremes will have varying amounts of premium; 30 day elimination period will cost less than a 15 day elimination time period, and so on.
When considering which elimination period is appropriate, one should consider the consumer's ability to pay the initial confinement. For example, if a thirty-day elimination is being considered at $100 per day benefit, by multiplying $100 by 30 days, it is possible to see what the consumer would first pay: $3,000 before his or her policy began. If this is something the consumer is comfortable with, then it may be appropriate to choose a 30-day elimination period. Again, a larger elimination (deductible) period will mean lower yearly premium costs.
Policy Type
The specific type of policy to be purchased can be a harder question. Many of the nursing home policies are basically the same, with differences being hard to distinguish. It is very important that the agent fully understand what those differences are before presenting a policy. Some policies will offer coverage only in the nursing home while others offer a combination of possibilities. The insurer will mark their policy types in some specific way. The agent is responsible for understanding the differences.
Many policies offer extra benefits, which agents often refer to as "bells and whistles" since they give additional features, but those features are not vital to the effectiveness of the policy. Even so, consumers may find value in them.
Restoration of Policy Benefits
Some policies have a restoration benefit in their policy. This means that part or all of used benefits renew after a specific length of time and under specific circumstances. During this period of time, the policyholder must be claim free.
Preexisting Periods in Policies
Obviously as we age it is more likely that our health will not be perfect. High blood pressure, arthritis, or other ailments are likely to develop. It is possible that conditions existing at the time of application could present claims soon after the policy is issued. Because of this, companies have what is called a preexisting condition period.
A preexisting condition is one for which the policyholder received treatment or medical advice within a specified time period prior to policy issue. Under federal law, that period of time prior to application is six months. Failure to disclose conditions that were known to the applicant can result in claims being denied when benefits are applied for or result from that condition. Medication, it should be noted, constitutes treatment. In some cases, the insurance company will even rescind the policy due to failure to disclose all requested medical history. Some policies will cover all conditions that were disclosed but apply the preexisting period to any that were not listed as a means of encouraging full disclosure.
When the preexisting period has passed, all medical conditions are then covered. Not all policies will impose a preexisting period; as long as the condition was disclosed at the time of application, all claims will be honored in such policies. Other policies do impose preexisting periods, but usually no more than six months from the time of policy issue (which may be mandated by state statute). Policies tend to specifically list preexisting conditions in a separate paragraph in the policy.
Prior Hospitalization Requirements for Skilled Care
Under Medicare, hospitalization must have occurred for the same or related condition in order to receive Medicare’s skilled care benefits (additional criteria for skilled care also exists). With traditional LTC policies, sometimes prior hospitalization is required to collect nursing home benefits and sometimes it is not. Some states do not allow insurers to require prior hospitalization; other do allow it. In states that allow prior hospitalization, policies may still offer a non-hospitalization option for extra premium.
When prior hospitalization is required in a policy, typically the patient must have been there for three or more days. They must also have been admitted to the nursing home for the same or related condition for which they were hospitalized. The nursing home admittance may have to be anywhere from 15 to 30 days following discharge from the hospital.
Deciding Between Federal Tax-Qualified or State Non-Tax (Non-Partnership) Qualified Policies
For individuals who desire asset protection, there would be no consideration of non-tax qualified policies since all Partnership plans have tax-qualified status. The only reason an individual would be seeking a non-tax qualified plan would be for the additional ease of collecting benefits, based on use of additional ADLs in the policy.
One might easily assume that everyone would want a tax-qualified plan, but that is not necessarily the best choice for every individual. Of course, if asset protection is the goal, there is no choice available – it must be tax qualified. The major difference has to do with benefit triggers. Benefit triggers are the conditions that "trigger" benefit payment from the insurance company. If a person needs to enter a nursing home, but his or her policy will not pay because the policyholder has not met the criterion for collecting benefits, he or she will not be able to access their policy’s benefits. The difference directly relates to the activities of daily living (ADL). In the non-tax qualifies policy forms, ambulation tends to be the primary difference. Ambulation is the ability to move around without help from another individual. This daily activity is often the first to deteriorate as we age.
Tax-qualified plans come under federal legislation. Federally qualified long-term care policies providing coverage for long-term care services must base payment of benefits on certain criteria requirements:
1. All services must be prescribed under a plan of care by a licensed health care practitioner independent of the insurance company.
2. The insured must be chronically ill by virtue of either one of the two following conditions:
a. Being unable to perform two of the following activities of daily living (ADL): eating, toileting, transferring in and out of beds or chairs, bathing, dressing, and continence, or
b. Having a severe impairment in cognitive ability.
There are differences in the tax-qualified and non-tax-qualified long-term care plan ADLS. These differences are important because they relate to the benefit triggers. Tax-qualified plans have eliminated the ADL of ambulation (the ability to move around independently of others).
Nonforfeiture Values
State regulators are giving nonforfeiture values a hard look. With rising premiums, many long term clients are finding they can no longer afford to keep their policy. When a consumer has held a long-term care policy for many years, never claiming any benefits, a lapse of the policy means wasted premium dollars, which have been paid out over several years. It obviously means that insurers have benefited while consumers have merely wasted premium dollars. If they are forced, through rising costs, to abandon their policies as they approach the age of needing the benefits insurers have benefited unfairly. Federal law requires that companies at least offer a nonforfeiture provision to the prospective policyholder in tax-qualified plans. Non-tax qualified plans do not need to offer this additional benefit, unless state law requires it. The importance of Nonforfeiture values are often overlooked by consumers in favor of lower policy premiums. Even agents often fail to realize the importance of nonforfeiture values.
Waiver of Premium
Waiver of premium is offered in most policies. Some make this benefit part of the policy for no added premium while others view it as an option that must be purchased. Waiver of premiums occurs when the policyholder is in the nursing facility or other contractually covered facility, as a patient. At a given point, he or she no longer needs to pay premiums, but policy benefits continue. The point of time when the waiver kicks in will depend upon policy language. Some policies specify that the waiver starts counting only from the time the company is actually paying benefits; other policies let it begin from the first day of confinement. This is an important point unless the policyholder has selected a zero elimination period. If a zero elimination period were selected there would be no difference between the two types.
If the policy waiver of premium begins from the day the insurer actually pays benefits and the policy contains a 30-day elimination period, it would look like this:
30 days + benefit days = waiver of premium satisfaction.
While the period of time can vary, it is common to begin after 90 benefit days. Therefore, it would be 30 days plus an additional 90 benefit days before the waiver actually became effective. If the confinement stops, the premiums are reinstated, but the policyholder would not have to pay premiums for the previously waived time period.
If the policyholder is paid ahead, most companies will not refund premium, even though the waiver of premium has kicked in. The policyholder would have to wait until premiums were actually due to utilize this feature. Some of the newer policies will, however, make refunds on a quarterly basis for paid-ahead premiums during qualified waiver of premium periods.
Unintentional Lapse of Policy
As people age, forgetfulness is common. Many states now have provisions for unintentional lapses of policies. Both regulators and insurers have realized that this may especially be a problem in the older ages and especially when illness has developed. A long-time policyholder, without meaning to, can allow a policy to lapse for nonpayment of premiums. It can happen when coverage is most needed because illness or cognitive impairment has developed. Therefore, many states have provisions that allow the policyholder to reinstate without having to go through new underwriting. Of course, past premiums will need to be paid.
The length of time that may pass while still allowing reinstatement varies. Typically, insurance companies allow a 30-day grace period anyway, but some reinstatement periods can be as long as 180 days (again, past due premiums must be paid). It is the waiver of new underwriting that is most important since illness or cognitive impairment may be a factor in the lapse. Obviously, having to underwrite a new policy could mean rejection for the insured. The existing policy is simply reinstated as it was before the lapse.
Policy Renewal Features
It is now common for nursing home policies to be either guaranteed renewable or non-cancelable.
Guaranteed renewable means the insured has the right to continue coverage as long as they pay their premiums in a timely manner. The insurer may not unilaterally change the terms of the coverage or decline to renew. The premium rates can be changed.
Non-cancelable means the insured has the right to continue the coverage as long as they pay their premiums in a timely manner. Again, the insurer may not unilaterally change the terms of coverage, decline to renew, or change the premium rates. Please note non-cancelable policies may not change premium rates. Such LTC policies would be rare, if available at all.
Items Not Covered by the LTC Policy
All policies have exclusions (items that are not covered by policy benefits). While states will vary to some extent on what may be excluded, some items are fairly standard in the industry. These include, but may not be limited to:
1. Preexisting conditions, under certain circumstances;
2. Mental or nervous disorders, except for Alzheimer's and other progressive, degenerative and dementing illnesses;
3. Alcoholism and drug addition;
4. Treatment resulting from war or acts of war, participation in a felony, riot, or insurrection, service in the armed forces or auxiliary units, suicide, whether sane or insane, attempted suicide, or intentional injury, aviation in the capacity of a non-fare-paying passenger, and treatment provided in government or other facilities for which no payment is normally charged.
Extension of Benefits
If an insured is receiving benefits and for some reason the policy cancels, most states have provisions that require benefits to continue. This is called Extension of Benefits. It does not cover an individual whose benefits under the policy simply run out or are exhausted.
Affordability of Contracts
No matter how important asset protection might be, if the policies are not affordable they will not accomplish what was intended. The individuals who developed the Partnership programs recognized that the consumers most likely to buy long-term care Partnership coverage were also going to be sensitive to rate and premium increases. The goal was to give Partnership policies economic value to those insured, both when issued and at the time a claim occurs. Of course, they also wanted to encourage a competitive marketplace since that tends to keep prices down and values high. Low lapse rates were also a priority, since a policy that is purchased but not maintained does not benefit anyone. It is necessary to have a long-term commitment to LTC policies since they are typically purchased many years prior to need. Since Partnership plans were an experiment in the four states that initially offered them, Federal law actually discouraged other states from enacting them through restrictive language. That changed in 2005 (signed into law in 2006) with the Deficit Reduction Act of 2005.
Standardized Definitions
As is so often the case, definitions need to be standardized to avoid misunderstandings. No policy may be advertised, solicited or issued for delivery as a long-term care Partnership contract which uses definitions more restrictive or less favorable for the policyholder than that allowed by the state where issued.
Minimum Partnership Requirements
Long-term care Partnership policies do, of course, have minimum standards, which must be met. Standards are based on the state where issued. Since each state may have different state requirements, plans may vary from state to state. In all states, an agent would be acting illegally if he or she told a prospective client that the policy he or she was demonstrating for sale was a Partnership policy when, in fact, it did not meet partnership criteria.
The minimum standards set down by each state are just that: minimums. They do not prevent the inclusion of other provisions or benefits that are consumer favorable, as long as they are not inconsistent with the required standards of the state where issued.
Benefit Duplication
It is the responsibility of every insurance company and every agent to make reasonable efforts to determine whether the issuance of a long-term care Partnership policy might duplicate benefits being received under another long-term care policy, another policy paying similar benefits, or duplicate other sources of coverage such as a Medicare supplemental policy. The insurance company or agent must take reasonable steps to determine that the purchase of the coverage being applied for is suitable for the consumer's needs based on the financial circumstances of the applicant or insured.
Partnership Publication
Every applicant must be provided with a copy of the long-term care Partnership publication (which was developed jointly by the commissioner and the department of social and health services) no later than when the long-term care Partnership application is signed by the applicant.
On the first page of every Partnership contract, it must state that the plan is designed to qualify the owner for Medicaid asset protection. A similar statement must be included on every Partnership LTC application and on any outline or summary of coverage provided to applicants or insured.
Partnership Versus Traditional Policies
It appears that those who buy Partnership plans are first-time long-term care insurance buyers. Partnership policies are most likely to be purchased for their asset protection qualities, which traditional policies do not provide and never will provide. It is not the insurers that provide the asset protection; insurers provide the benefits within the policies, but the states provide the asset protection within them, which is why insurers may not charge additional premium for Partnership plans.
A report to Congressional Requesters by the United States Government Accountability Office (GAO) in May, 2007 came to many conclusions regarding the effectiveness of the Partnership plans and if and how they might save the states money by preventing use of Medicaid funds. According to their report, Partnership Programs include benefits that protect policyholders but are not likely to provide substantial Medicaid savings.
Partnership programs allow individuals who purchase Partnership long-term care insurance policies to exempt at least some of their personal assets from Medicaid eligibility requirements. In response to a congressional request, GAO examined three things:
1. The benefits and premium requirements of Partnership policies as compared with those of traditional long-term care insurance policies;
2. The demographics of Partnership policyholders, traditional long-term care insurance policyholders, and people without long-term care insurance; and
3. Whether the Partnership programs are likely to result in savings for Medicaid.
To examine benefits, premiums, and demographics, GAO used 2002 through 2005 data from the four states with Partnership programs—California, Connecticut, Indiana, and New York—and other data sources. To assess the likely impact on Medicaid savings, GAO (1) used data from surveys of Partnership policyholders to estimate how they would have financed their long-term care without the Partnership program, (2) constructed three scenarios illustrative of the options for financing long-term care to compare how long it would take for an individual to spend his or her assets on long-term care and become eligible for Medicaid, and (3) estimated the likelihood that Partnership policyholders would become eligible for Medicaid based on their wealth and insurance benefits.
California, Connecticut, Indiana, and New York require Partnership programs to include certain benefits, such as inflation protection and minimum daily benefit amounts. Traditional long-term care insurance policies are generally not required to include these benefits. From 2002 through 2005, Partnership policyholders purchased policies with more extensive coverage than traditional policyholders. According to state officials, insurance companies must charge traditional and Partnership policyholders the same premiums for comparable benefits, and they are not permitted to charge policyholders higher premiums for asset protection. Since it is the states rather than the insurers who provide this asset protection, there would be no reason for an insurer to charge higher rates for Partnership plans.
Partnership and traditional long-term care insurance policyholders tend to have higher incomes and more assets at the time they purchase their insurance, compared with those without insurance. In two of the four states, more than half of Partnership policyholders over 55 have a monthly income of at least $5,000 and more than half of all households have assets of at least $350,000 at the time they purchase a Partnership policy.
Available survey data and illustrative financing scenarios suggest that the Partnership programs are unlikely to result in savings for Medicaid, and may increase spending. The impact, however, is likely to be small. About 80 percent of surveyed Partnership policyholders would have purchased traditional long-term care insurance policies if Partnership policies were not available, representing a potential cost to Medicaid. About 20 percent of surveyed Partnership policyholders indicate they would have self-financed their care in the absence of the Partnership program, and data are not yet available to directly measure when or if those individuals will access Medicaid had they not purchased a Partnership policy. However, illustrative financing scenarios suggest that an individual could self-finance care, thus delaying Medicaid eligibility, for about the same amount of time as he or she would have using a Partnership policy, although the GAO identified some circumstances that could delay or accelerate Medicaid eligibility. While the majority of policyholders have the potential to increase spending, the impact on Medicaid is likely to be small, reported the GOA, because few policyholders are likely to exhaust their benefits and become eligible for Medicaid due to their wealth and having policies that will cover most of their long-term care needs.
Information from the four states may prove useful to other states considering Partnership programs. States may want to consider the benefits to policyholders, the likely impact on Medicaid expenditures, and the income and assets of those likely to afford long-term care insurance.
HHS disagreed with the Government Accountability Office’s (GAO) report; they commented that the study results should not be considered conclusive because they do not adequately account for the effects of estate planning efforts, such as asset transfers with the goal of Medicaid qualification. While some Medicaid savings could result from people who purchased Partnership policies rather than transferring their assets to others, they are unlikely to offset the costs associated with those who would have otherwise purchased traditional policies.
Abbreviations
As the student reads this course, he or she will see many abbreviations. To fully understand the long-term care program, it is necessary to understand the abbreviations commonly used:
ADL = Activities of daily living
ACS = American Community Survey
CBO = Congressional Budget Office
CMS = Centers for Medicare & Medicaid Services
DOI = Department of Insurance
DRA = Deficit Reduction Act of 2005
GAO = The United State’s Government Accountability Office
HHS = Department of Health and Human Services
HIPAA = Health Insurance Portability and Accountability Act of 1996
HRS = Health and Retirement Study
IADL = Instrumental activities of daily living
LTC = Long Term Care
NAIC = National Association of Insurance Commissioners
OBRA ‘93 = Omnibus Budget Reconciliation Act of 1993
RWJF = The Robert Wood Johnson Foundation
UDS = Uniform Data Set
The Cost of Long-Term Care in the United States
In 2004, national spending on long-term care, which includes care provided in nursing facilities, totaled $193 billion and nearly half of that was paid for by Medicaid, the joint federal-state program that finances medical services for certain low-income adults and children. In contrast, private insurance paid for about $14 billion worth of long-term care, which is about 7 percent of the total cost. The demand for this type of care is likely to increase as the proportion of those in the population age 65 and older (those most likely to need long-term care) increases. With Medicaid financing nearly half of the long-term care costs nationwide, policymakers are concerned that, without changes in how long-term care is financed, the growing demand for this type of care will continue to strain the resources of federal and state governments.
As we reported, in the late 1980s the Robert Wood Johnson Foundation (RWJF) provided start-up funds for programs in eight states. Those states included California, Connecticut, Indiana, Massachusetts, New Jersey, New York, Oregon, and Wisconsin. The goal was to encourage individuals to plan for their long term care needs and help shift some of the responsibility for financing long-term care from Medicaid to private long-term care insurance. Four of the states that received funds, California, Connecticut, Indiana, and New York, established the programs. These four state-run long-term care programs, known as Partnership programs, encouraged individuals to purchase long-term care insurance by providing an incentive to purchase the Partnership LTC policies. Specifically, they allow those who purchase long-term care insurance policies through the program to exempt some or all of their personal assets from Medicaid eligibility requirements should the policyholders exhaust their long-term care insurance benefits and still need to continue receiving long-term care services (which obviously must continue to be paid for).
Without the Partnership plan exemption, before individuals could receive Medicaid benefits they would typically have to spend their assets on their long-term care until the assets met or fell below certain Medicaid thresholds. The Partnership plans do not exempt income, which must continue to be contributed towards the individual’s long-term care costs.
Long-Term Care Partnership Program
The Partnership program is well named since it is exactly what it says it is: a partnership. The states have partnered with the private insurance sector to provide consumers with an incentive to purchase insurance coverage that will cover the costs of long-term care services. The goal is to ease Medicaid’s financial burden. Medicaid gets its funding from taxes, so every individual who pays taxes has a stake in the success of the Partnership program. This is especially true of the baby boomer’s children and grandchildren who will be shouldering a tremendous cost as this segment of the population ages and needs long-term care services.
Medicaid does not grant asset protection for long-term care insurance policies purchased outside of the Partnership programs. In order to implement their Partnership programs, the four participating states had to obtain approval from the Centers for Medicare & Medicaid Services (CMS), the agency within the Department of Health and Human Services (HHS) that oversees Medicaid, and amend their state Medicaid plans to allow them to exempt the assets of Partnership program participants from Medicaid eligibility requirements. Medicaid is jointly operated by the states and the federal government so both have a financial stake in the Partnership plans.
Since the early 1990s, the treatment of Partnership programs under federal law has changed. Although a number of states established, or were authorized to establish, programs prior to the enactment of the Omnibus Budget Reconciliation Act of 1993 (OBRA ‘93), OBRA ‘93 prohibited additional states from establishing similar programs. The legislation was enacted, in part, because of concerns about potential costs to Medicaid, but allowed California, Connecticut, Indiana, and New York to maintain their programs. More recently, the Deficit Reduction Act of 2005 (DRA) authorized all states to establish Partnership programs that meet certain criteria and required the original 4 participating states to maintain the existing consumer protections in their Medicaid plans. DRA provisions are intended, in part, to allow states to provide an incentive for individuals to take responsibility for their own long-term care needs rather than financially relying on the taxpayers.
The term “Partnership policies” refers to long-term care insurance policies purchased through Partnership programs.
The term “traditional long-term care insurance” refers to long-term care insurance policies that are not purchased through these programs.
When referring to both Partnership and traditional long-term care insurance policies, the phrase “long-term care insurance” is used.
A state plan describes the state’s Medicaid program and establishes guidelines for how the state’s Medicaid program will function.
While “assets” may be defined in various ways, this text uses the Partnership program’s definition of “assets.” Therefore, when referring to assets, we mean savings and investments, excluding income. For Medicaid eligibility purposes, the Medicaid program considers both income and assets.
Medicaid defines income as anything received during a calendar month that is used (or could be used) to meet food or shelter needs, including resources such as cash and anything owned, including but not necessarily limited to savings accounts, stocks, or property that can be converted to cash.
Another objective of OBRA ‘93, as expressed in the accompanying House of Representatives Budget Committee report, was to close a loophole permitting wealthy individuals to qualify for Medicaid through asset transfer and other financial moves.[1]
Prior to the enactment of OBRA ‘93, California, Connecticut, Indiana, and New York established Partnership programs. Iowa and Massachusetts also received permission from the Health Care Financing Administration (now CMS) to establish a Partnership program, but had not implemented one as of October 2006.
Partnerships Save Assets from Medicaid Qualification
According to the National Association of Health Underwriters, prior to the enactment of DRA, there was legislative activity in 19 additional states to begin development of a Partnership program. As of October 2006, the only states with active Partnership programs were the original 4 states: California, Connecticut, Indiana, and New York.
However, HHS indicated that as of February 2007, CMS had approved
Partnership program state plan amendments in 6 states: Florida, Georgia, Idaho, Minnesota, Nebraska, and Virginia. Although the program appears to be expanding beyond the original 4 states, concerns about the potential cost to Medicaid of expanding the program remain an issue. In 2005, the Congressional Budget Office (CBO) estimated that repealing the moratorium on new Partnership programs could increase Medicaid spending by $86 million between 2006 and 2015.
States are responsible for overseeing Partnership programs and regulating the Partnership programs as well as the traditional long-term care insurance policies sold in their states. As more states consider establishing Partnership programs, there is interest, on the part of Congress and others, in understanding how the four states with Partnership programs designed and regulate their Partnership programs, who purchases Partnership policies, and how these programs will impact Medicaid financially.
The GAO was asked to analyze the experience of the four states participating in the Partnership program. In August 2005, GAO provided a briefing, which summarized aspects of the design of these Partnership programs and included demographic information on Partnership policyholders.
In this report, the GAO updated their information and provided a more detailed analysis of the Partnership programs. Specifically, they examined:
1. The benefits and premium requirements of Partnership policies as compared with those of traditional long-term care insurance policies, including information on benefits purchased by policyholders;
2. The extent to which states oversee Partnership policies as compared with their oversight of traditional long-term care insurance policies;
3. The demographics, including asset and income levels, of Partnership policyholders, traditional long-term care insurance policyholders, and people without long-term care insurance; and
4. Whether the Partnership programs are likely to result in savings for Medicaid.
When the GAO report refers to the four states with Partnership programs or the four states, it is referring to California, Connecticut, Indiana, and New York. According to CMS officials, as of October 2006, no other states had active Partnership programs; that is, no insurance companies were issuing Partnership policies in any other states.
To compare the benefits and premium requirements of Partnership and traditional long-term care insurance policies, the GAO reviewed state regulations, and interviewed Partnership program officials and department of insurance (DOI) officials in each of the four states with Partnership programs. To compare the benefits purchased by Partnership policyholders and traditional long-term care insurance policyholders, the GAO obtained data from 2002 through 2005 from two sources. Their data source for benefits purchased by Partnership policyholders was the Uniform Data Set (UDS), a data set with information on Partnership policyholders compiled by officials in each of the four states with Partnership programs from data provided by participating insurers. The GAO data source for benefits purchased by traditional long-term care insurance policyholders was from a survey they conducted using five of the largest long-term care insurance companies in the individual long-term care insurance market.
To examine the extent to which states oversaw Partnership policies compared with state oversight of traditional long-term care insurance policies, the GAO reviewed state regulations and Partnership program documents, and interviewed officials from Partnership programs, long-term care insurance companies, and each Partnership state’s DOI, the entities that are responsible for regulating insurance policies, including long-term care insurance policies, that are sold in the states. The GAO also reviewed state regulations, Partnership program documents, and conducted interviews about how training requirements for insurance agents who sell Partnership policies compared with training requirements for agents who sell traditional long-term care insurance policies.
The UDS is a data set developed by the four states with Partnership programs, participating insurers, the National Program Office at the Center on Aging, University of Maryland, and the Program Evaluator, Laguna Research Associates. Data in the UDS are submitted by insurers to the Partnership program in the state in which they are participating and contain information on Partnership policyholders.
The GAO selected the five insurance companies on the basis of the total number of policies and amount of annualized premiums in effect in the individual market as of December 31, 2004.
To examine the demographics, including income and assets levels, of
Partnership policyholders, traditional long-term care insurance policyholders, and individuals without long-term care insurance, the GAO used data from three sources. First, to calculate the household income and assets of Partnership policyholders, they used available survey data from a sample of Partnership policyholders in California and Connecticut. The GAO restricted their analysis to the income and asset data from these two states because Indiana’s data was not sufficiently detailed to include in the analysis, and New York was not able to provide them with data from recent years. The GAO combined multiple years of such data in order to increase the sample size. To estimate the household income of individuals without insurance in California and Connecticut, the GAO used data from the American Community Survey (ACS) for 2004 published by the U.S. Census Bureau.[2]
Finally, GAO used national data from the Health and Retirement Study (HRS) for 2004, to compare household income and household assets for those individuals with traditional long-term care insurance and those without long-term care insurance.[3] The HRS is a national survey sponsored by the National Institute on Aging and conducted by the University of Michigan of individuals over the age of 50. The Health and Retirement Study (HRS) is a longitudinal national panel survey that collects information over time on individuals over age 50. The first survey was conducted in 1992, and subsequent surveys were conducted every 2 years. The most recent survey for which data were available was 2004. The HRS collected information about retirement, health insurance, savings, and other issues confronting the elderly. To examine the age, marital status, and gender of Partnership policyholders, traditional long-term care insurance policyholders, and individuals without long-term care insurance, the GAO used data from the UDS and the HRS.
To examine whether the Partnership programs in the four states are likely to result in savings for Medicaid, the GAO assessed:
1. Available state survey data of Partnership policyholders and
2. The options an individual has for financing long-term care and the time it would take for the individual to become eligible for Medicaid under three illustrative scenarios.
The GAO used illustrative scenarios since Partnership programs in the four states have only been operating since the early 1990s, and there is no available data describing when or if Partnership policyholders would have accessed Medicaid. As a result, there is insufficient data available to directly measure whether the Partnership programs have resulted in increased or decreased Medicaid spending. GAO used available survey data in California, Connecticut, and Indiana to determine what Partnership policyholders report they would have done to finance their long-term care needs if there had not been a Partnership program in their state. New York survey data was not available.
The GAO assessed three scenarios that represented the three main options an individual had for financing long-term care: financing using a Partnership policy, financing using a traditional long-term care policy, and self-financing without any long-term care insurance. The latter two scenarios described the financing options that a Partnership policyholder could use if the Partnership programs did not exist. The GAO used the three scenarios to explore how long it was likely to take before the individual depicted in their scenarios would have become eligible for Medicaid with a Partnership policy and, in the scenarios in which Partnership programs did not exist, with the other two financing options. In the scenarios if, in the absence of a Partnership program, an individual using a traditional long-term care insurance policy or relying on self-financing was likely to become eligible for Medicaid sooner than the same individual would have using a Partnership policy, they considered the Partnership programs to be a potential source of savings for Medicaid. In contrast, if the same individual delayed Medicaid eligibility using a traditional long-term care insurance policy or self-financing when compared with the time it would take the individual to become eligible for Medicaid using a Partnership policy, they considered the Partnership program to be a potential source of increased spending for Medicaid. To develop their scenarios, the GAO made several simplifying assumptions. These included the following:
· The individual depicted in the scenarios has $300,000 in assets, and in two of the scenarios a long-term care insurance policy worth $210,000—assets and benefits that are typical of many individuals with long-term care insurance—and the individual receives long-term care in a nursing facility with costs for a year of care of $70,000, about equal to average nursing facility costs nationwide in 2004.
· The individual has assets that are no less than the value of the individual’s Partnership policy—that is, the individual does not over-insure his or her assets.
· The individual is unmarried. While most Partnership policyholders are married at the time they purchase a Partnership policy, they are unlikely to require long-term care for many years, and their marital status can change. Most individuals who are admitted to a nursing facility are unmarried.
Where possible, the GAO used data from surveys of Partnership policyholders to support their assumptions. They also explored whether adjusting the assumptions changed the conclusions drawn. Although their scenarios represented the choices facing a single individual, the results of this analysis are applicable beyond one person. For example, the relative impact on Medicaid spending across the scenarios is independent of the amount of assets owned by the individual or the level of the individual’s insurance coverage.
As part of the GAO’s efforts to examine whether the Partnership programs were likely to result in savings for Medicaid, they also examined the likelihood that the population of Partnership policyholders might ever become eligible for Medicaid. To assess this likelihood, they examined the long-term care insurance benefits and income of Partnership policyholders. The GAO also assessed the number of people with Partnership policies who accessed Medicaid as of October 2006.
Based on discussions with state officials and reviewing documentation on uniformly collected insurer data and surveys of policyholders, the GAO determined that the information used was sufficiently reliable. They also examined reports on the Partnership program from the CBO, the Congressional Research Service, and other research organizations. They conducted their work from September 2005 through May 2007 in accordance with generally accepted government auditing standards.
In the four states with Partnership programs, Partnership policies must include certain benefits not generally required of traditional long-term care insurance policies. Insurance companies cannot charge higher premiums for asset protection in Partnership policies.
Partnership policies must include certain benefits, such as inflation protection and minimum daily benefit amounts, while traditional long-term care insurance policies may include these benefits but are generally not required to do so. Partnership policies include these benefits in order to increase the likelihood that Partnership policyholders will have sufficient long-term care insurance coverage to pay for a significant portion of their long-term care. For example, Partnership policies must include inflation protection, which increases the amount a policy pays over time to account for increases in the cost of care, and minimum daily benefit amounts, which are set at levels designed to cover a significant portion of the costs of an average day in a nursing facility.
Traditional long-term care insurance policyholders are able to purchase most of the same benefits as Partnership policyholders (asset protection is not available in traditional LTC policies), but they are not required to include them; the decision rests on the applicant. In comparing these two groups the GAO found that a higher percentage of Partnership policyholders purchased policies from 2002 through 2005 with more extensive coverage; for example, higher levels of inflation protection and coverage for care in both nursing facility and home and community-based care settings. Officials in states with Partnership programs do not allow companies selling long-term care insurance to charge Partnership policyholder’s higher premiums for the asset protection benefit. Partnership and traditional long-term care insurance policies with otherwise comparable benefits must have equivalent premiums. However, Partnership policies are likely to have higher premiums because they are required to have inflation protection and other benefits that are not required for traditional long-term care insurance policies.
Partnership policyholders in the four Partnership states are younger on average than traditional long-term care insurance policyholders. This may be a reflection of generally higher premiums in Partnership plans, discouraging older ages from applying. In addition, a higher percentage of Partnership and traditional long-term care insurance policyholders are married rather than unmarried, and female rather than male.
Available survey data from three Partnership states[4] and the GAO’s three illustrative financing scenarios together suggest, according to the GAO, that the Partnership programs are unlikely to result in savings for Medicaid and may result in increased Medicaid spending. Based on surveys of Partnership policyholders in California, Connecticut, and Indiana, it was estimated that, in the absence of Partnership programs, 80 percent of Partnership policyholders would have purchased traditional long-term care insurance policies. The GAO’s long-term care financing scenarios suggested it would take longer for an individual with a traditional long-term care insurance policy to become eligible for Medicaid than it would the same individual with a Partnership policy. This makes sense since the Partnership policyholder would have protection for assets that the traditional policy owner would not have. Therefore, the 80 percent of surveyed Partnership policyholders may represent a potential source of increased spending for Medicaid, as Medicaid may begin paying for the long-term care of these policyholders sooner. The survey data also indicated that the remaining 20 percent of those surveyed would not have purchased any long-term care insurance had the Partnership programs not existed. Data was not yet available to directly measure when or if these individuals would access Medicaid had they not purchased a Partnership policy. It should also be noted that the majority of Partnership policy purchasers had sufficient income and assets to fund their long-term care even without such a policy.
The GAO’s scenarios suggest that an individual who self-finances his or her long-term care without any long-term care insurance is likely to become eligible for Medicaid at about the same time as the individual would using a Partnership policy, though there were some circumstances that could accelerate or delay the individual’s time to Medicaid eligibility. While the majority of Partnership policyholders have the potential to increase spending, the GAO also anticipated that the impact of these programs was likely to be small since few policyholders would become eligible. Partnership policyholders tend to have incomes that exceed Medicaid eligibility thresholds and insurance benefits that cover most of their long-term care needs.
The states and HHS commented that the GAO report seemed flawed. In their opinion, important long-term care considerations were not included, such as asset relocation resulting in Medicaid qualification. The GAO felt evidence suggested the Partnership program was unlikely to result in savings for Medicaid, although the available data was limited since it is too soon to see how many people will deplete the policy benefits and seek access to Medicaid benefits. Some savings to Medicaid could be possible for reasons not currently recognized. However, the GAO felt Medicaid savings were unlikely to offset the potential costs associated with policyholders who would have purchased traditional long-term care insurance in the absence of the Partnership programs. If they purchased the traditional LTC policies they would not qualify for asset protection, resulting in self-funding once policy benefits were exhausted.
The GAO did not include a review of asset transfers because the evidence of such transfers is generally limited. It is not known how many people may have qualified for Medicaid benefits as a result of transfers, so it would be difficult for the GAO to include it in their study.[5] However, in response to HHS’ comments, they did amend their report to make the discussion of asset transfers more prominent and to include reference to the 2007 GAO study. They also maintained that their methodology for estimating the financial impact of the program on Medicaid is sound and disagreed with California and Connecticut regarding the appropriateness of using the two survey questions. Specifically, by relying on the responses from these questions, the method California, Connecticut, and Indiana used to evaluate Medicaid costs underestimated, they said, the percentage of people who would have purchased traditional policies in the absence of the Partnership program. GAO felt their method of evaluating Medicaid savings due to asset transfers overestimated the percentage of people who utilized this. Only time will tell the true story on asset transfers, but with the time period having been lengthened to five years, it may not be possible to know how accurate the GAO report was in respect to transfers.
Long-term care comprises services provided to individuals who, because of illness or disability, are generally unable to perform activities of daily living (ADL), such as bathing, dressing, and getting around the house. As people age, they typically experience a decline in their ability to perform basic physical functions, increasing the likelihood that they will need long-term care services. Individuals qualify for Medicaid coverage for long-term care services if they meet certain functional criteria. Medicaid assesses the person’s impairment by measuring the level of assistance an individual needs to perform six activities of daily living (ADL): eating, bathing, dressing, using the toilet, getting in and out of bed, and getting around the house, as well as the instrumental activities of daily living (IADL), which include preparing meals, shopping for groceries, and venturing outside of a home or facility. These ADLS are not the same ones used by the insurance industry when measuring their ADLs for benefit qualification. Medicaid allows these services to be provided in various settings, such as nursing facilities, an individual’s own home, or the community.
The typical 65-year-old has about a 70 percent chance of needing long-term care services in his or her life. Long-term care services, such as personal care, homemaker services, and respite care, are known as home care. Home care can also include services provided outside of policyholders’ homes, such as services provided in adult day care centers. Long-term care services provided in community-based facilities are generally designed to help people receive long-term care and remain living in their own homes. Known as community-based services, these long-term care services can be supplied in settings such as policyholders’ homes, adult day care facilities, or during visits to a physician’s office.
Long-term care is expensive, especially when provided in nursing facilities. In 2005, the average cost of a year of nursing facility care was about $70,000. In 1999, the most recent year for which data were available, the average length of stay in a nursing facility was between 2 and 3 years.
Long-term care insurance is used to help cover the cost associated with long-term care. Individuals can purchase long-term care insurance policies directly from insurance companies, or through employers or other groups. The number of long-term care insurance policies sold has been small–about 9 million as of 2002, the most recent year for which data was available. About 80 percent of these policies were sold through the individual insurance market and the remaining 20 percent were sold through the group market.[6]
Long-term care insurance companies generally structure their long-term care insurance policies around certain types of benefits and related options.
· A policy with comprehensive coverage pays for long-term care in nursing facilities as well as for care in home and community settings, while a policy with coverage for home and community-based settings pays for care only in these settings.
· A daily benefit amount specifies the amount a policy will pay on a daily basis toward the cost of care, while a benefit period specifies the overall length of time a policy will pay for care. Data from 2002 through 2005 show that the maximum daily benefit amounts can range from less than $100 to several hundred dollars per day, while benefit periods can range from one year to lifetime coverage.[7]
· A policy’s elimination period establishes the length of time a policyholder who has begun to receive long-term care has to wait before his or her insurance will begin making payments towards the cost of care. According to data from 2002 through 2005, elimination periods can range from zero days to at least 730 days.[8]
· Inflation protection increases the maximum daily benefit amount covered by a policy, and helps ensure that over time the daily benefit remains commensurate with the costs of care.
Accessing Policy Benefits
There can be a substantial gap between the time a long-term care insurance policy is purchased and the time when policyholders begin using their benefits, and the costs associated with long-term care can increase significantly during this time. A typical gap between the time of purchase and the use of benefits is 15 to 20 years: the average age of all long-term care insurance policyholders at the time of purchase is 63, and in general policyholders begin using their benefits when they are in their mid-70s to mid-80s. Usually, automatic inflation protection increases the benefit amount by 5 percent annually on a compounded basis. A policy with automatic 5 percent compound inflation protection and a $150 per day maximum daily benefit in 2008 would be worth approximately $400 per day 20 years later. Another means to protect against inflation is a future purchase option. This option allows the consumer to increase the dollar amount of coverage every few years at an extra cost. Some future purchase options do not allow consumers to purchase extra coverage once they begin receiving their insurance benefit and the opportunity to purchase extra coverage may be withdrawn should the consumer decline a predetermined number of premium increases. A policy with a future purchase option may be less expensive initially than a policy with compound inflation protection. However, over time the policy with a future purchase option may become more expensive than a policy with compound inflation.
Without inflation protection, policyholders might purchase a policy that covers the current cost of long-term care but find many years later, when they are most likely to need long-term care services, that the purchasing power of their coverage has been reduced by inflation and that their coverage is less than the cost of their care. For example, if the cost of a day in a nursing facility increases by 5 percent every year for 20 years, a nursing facility that costs $150 per day in 2006 would cost about $400 per day 20 years later in 2028. A policy purchased in 2008 with a daily benefit of $150 without inflation protection would pay $150 per day—or 38 percent—of the daily cost of about $400 in 2028. The remaining $250 of the daily cost of the nursing facility care would have to be paid by the policyholder.
Long-term care insurance policies may also include other benefits or options. For example, policies can offer coverage for home care at varying percentages of the maximum daily benefit amount. Some policies include features in which the policy returns a portion of the premium payments to a designated third party if the policyholder dies. Some policies provide coverage for long-term care provided outside of the United States or offer care-coordination services that, among other things, provide information about long-term care services to the policyholder and monitor the delivery of long-term care services.
Many factors impact the premiums individuals pay for long-term care insurance. Long-term care insurance companies charge higher premiums for policies with more extensive benefits. In general, policies with comprehensive coverage have higher premiums than policies without such coverage, and policyholders pay higher premiums the higher their maximum daily benefit amounts, the longer their benefit periods, the greater their inflation protection, and the shorter their elimination periods. For example, in Connecticut, if a 55-year-old man decided to buy a 1-year, $200 per day comprehensive coverage policy, in 2005 it would have cost him about $1,000 less per year than a comparable 3-year policy. Similarly, the age of an applicant also impacts the premium, as premiums typically are more expensive the older the policyholder at the time of purchase. For example, in Connecticut, a 55-year-old purchasing a 3-year, $200 per day comprehensive coverage policy in 2005 would pay about $2,500 per year, whereas a 70-year-old purchasing the same policy would pay about $5,900 per year. Health status may also affect premiums. Insurance companies take into account the health status of an applicant to evaluate their risk. If an applicant has a medical condition that increases the likelihood of the applicant using long-term care services, but does not automatically disqualify the applicant from purchasing insurance, the applicant may receive a substandard rating from an insurance company, if allowed by state statutes, which may result in a higher premium.
The process of reviewing medical and health-related information furnished by an applicant to determine if the applicant presents an acceptable level of risk and is insurable is known as underwriting. Examples of medical conditions that may not disqualify an individual from obtaining insurance but that can result in a substandard rating during the underwriting process include osteoporosis, emphysema, and diabetes. However, the severity and the ability to control and treat the medical condition are all factors that can also impact how a non-disqualifying medical condition impacts an underwriting rating.
Regulation of the insurance industry, including those companies selling long-term care insurance, is a state function. Those who sell long-term care insurance must be licensed by each state in which they sell policies, and the policies sold must be in compliance with state insurance laws and regulations. These laws and regulations can vary but their fundamental purpose is to establish consumer protections that are designed to ensure that the policies’ provisions comply with state law, are reasonable and fair, and do not contain major gaps in coverage that might be misunderstood by consumers and leave them unprotected.
Individuals who purchase policies that comply with HIPAA requirements, which are therefore “tax-qualified,” can itemize their long-term care insurance premiums as deductions from their taxable income along with other medical expenses, and can exclude from gross income insurance company proceeds used to pay for long-term care expenses. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) specified conditions under which long-term care insurance benefits and premiums would receive favorable federal income tax treatment. Under HIPAA, tax-qualified plans must begin coverage when a person is certified as:
· Needing substantial assistance with at least two of the six ADLs for at least 90 days due to a loss of functional capacity, having a similar level of disability, or
· Requiring substantial supervision because of a severe cognitive impairment.
HIPAA also requires that a policy comply with certain provisions of the National Association of Insurance Commissioners’ (NAIC) Long-Term Care Insurance Model Act and Regulation adopted in January 1993. This model act and regulation established certain consumer protections that are designed to prevent insurance companies from:
1. Not renewing a long-term care insurance policy because of a policyholder’s age or deteriorating health, and
2. Increasing the premium of an existing policy because of a policyholder’s age or claims history. In addition, in order for a long-term care insurance policy to be tax-qualified, HIPAA requires that a policy offer inflation protection. The NAIC, who represents insurance regulators from all states, reported in 2005 that 41 states based their long-term care insurance regulations on the NAIC model, 7 based their regulations partially on the model, and 3 did not follow the model.
Medicaid supplies health care financing for poor individuals of all ages, not just the elderly. Medicaid is the primary source of financing for long-term care services in the United States. In 2004, almost one-third of the total $296 billion in Medicaid spending was for long-term care. Some health care services, such as nursing facility care, must be covered in any state that participates in Medicaid. States may choose to offer other optional services in their Medicaid plans, such as personal care. Personal care includes long-term care services that help people meet personal needs such as assistance with personal hygiene, nutritional or support functions, and health-related tasks.
Medicaid coverage for long-term care services is most often provided to individuals who are aged or disabled. To qualify for Medicaid coverage for long-term care, these individuals must meet both functional and financial eligibility criteria. Functional eligibility criteria are established by each state and are generally based on an individual’s degree of impairment, which is measured in terms of the level of difficulty in performing the ADLs and IADLs. To meet the financial eligibility criteria, an individual cannot have assets or income that exceed thresholds established by the states and that are within standards set by the federal government.
Generally, the value of an individual’s primary residence and car, as well as a few other personal items, are not considered assets for the purpose of determining Medicaid eligibility. Those with assets that exceed state thresholds can “spend down” their assets on their long-term care. If their incomes are also high (though perhaps not high enough to fund the entire cost of long-term care) spending down their assets may bring their income qualification requirements below the state-determined income eligibility limit. In all four states with Partnership programs, for the purpose of obtaining Medicaid eligibility, individuals are allowed to deduct medical expenses, including those for long-term care, in order to bring their incomes below the state-determined thresholds.
Under DRA, certain individuals with an equity interest in their home of greater than $500,000 are not eligible for Medicaid coverage for nursing facility services or other long-term care services. However, states have the option to increase the home equity interest level to an amount that does not exceed $750,000. The home equity limitation would not apply to individuals with a spouse, child under age 21, or a child who is blind or disabled living in the home.
Medicaid
In order to meet Medicaid’s eligibility requirements, some individuals may choose to divest themselves of their assets. For example, by transferring assets to their spouses or other family members they may be able to qualify for Medicaid. For asset transfer purposes, Medicaid defines the term “assets” to include income and resources, such as bank accounts. However, those who transfer assets for less than fair market value during a specified “look-back” period (the period of time before an individual applies for Medicaid during which the program reviews asset transfers) may incur a transfer penalty. In this circumstance, that penalty is the period of time during which the individual is not eligible for Medicaid coverage for long-term care services. The DRA lengthened the “look-back” period from three to five years. The state will look at the value of the asset and refuse Medicaid coverage for the length of time the asset would have covered the cost of their care. However, GAO’s March 2007 report on asset transfers suggests that the incidence of asset transfers is low among nursing home residents covered by Medicaid.[9] Nationwide, about 12 percent of Medicaid-covered elderly nursing home residents reported transferring cash during the four years prior to nursing home entry, and the median amount transferred was very small ($1,239). The percentage of nursing home residents not covered by Medicaid who transferred cash was about twice that of Medicaid-covered nursing home residents.
The median amount of cash transferred as reported by non-Medicaid covered residents and Medicaid-covered residents did not vary greatly. The median amount of cash transferred by non-Medicaid-covered residents during the four years prior to nursing home entry was $1,859. During the two years prior to nursing home entry, the median amount transferred for both non-Medicaid-covered residents and Medicaid-covered residents was $2,194.
In addition to the nationwide analysis, the GAO report summarized an analysis of samples of approved Medicaid nursing home applicants in three states who generally applied to Medicaid in 2005 or before. They found that about 10 percent of applicants had transferred assets for less than the fair market value during the 3-year look-back period before Medicaid eligibility began. The median amount transferred was about $15,000. DRA tightened the requirements on Medicaid applicants transferring assets by extending the look-back period for all asset transfers from 3 to 5 years. In addition, DRA changed the beginning date of the penalty period. Prior to enactment of DRA, the penalty period started on the first day of the month during or after which assets were transferred. DRA changed this so that the penalty period now begins on the first day of the month when the asset transfer occurred, or the date on which the individual is eligible for medical assistance under the state plan, and is receiving institutional care services that would be covered by Medicaid were it not for the imposition of the penalty period, whichever is later. The extension of the look-back period and the redefinition of the penalty period may reduce transfers of assets.
The Partnership programs are public-private partnerships between states and private long-term care insurance companies. The programs are designed to encourage individuals, especially moderate income individuals, to purchase private long-term care insurance in an effort to reduce future reliance on Medicaid for the financing of long-term care.
Partnership programs attempt to encourage individuals to purchase private long-term care insurance by offering them the option to exempt some or all of their assets from Medicaid spend-down requirements. However, Partnership policyholders are still required to meet Medicaid income eligibility thresholds before they may receive Medicaid benefits. In the four states with Partnership programs, those who purchase long-term care insurance Partnership policies generally must first use those benefits to cover the costs of their long-term care before they begin accessing Medicaid. For the purposes of their report, the GAO used the term “accessing Medicaid” to describe the point at which long-term care policyholders first begin receiving Medicaid payments for their long-term care. In 2006 there were about 190,000 active Partnership policies, out of the approximately 218,000 Partnership policies that had been sold. Between September 2005 and August 2006, the number of Partnership policies in the four states combined increased by about 10 percent since the inception of the Partnership programs.
Partnership program offices reported that about 235,000 Partnership policies had been sold since the four Partnership programs began, but that number included people who subsequently dropped their policies within 30 days of purchasing the product. The four states with Partnership programs give Partnership policy purchasers a 30-day “free look” period during which they can decide whether to keep their policy or drop it and receive a full refund.
By state, the number of Partnership policies, excluding those that were dropped, was 73,811 in California and 33,040 in Connecticut, through March 2006; 31,750 in Indiana through June 2006; and 51,262 in New York through December 2005.
This rate of increase varied across the states: the sales of Partnership policies in California increased by 14 percent. That was the largest percentage increase among the Partnership states. It compared with increases of 7, 9, and 8 percent in Connecticut, Indiana, and New York, respectively.
Protecting Partnership Policyholder Assets
The four states with Partnership programs vary in how they protect policyholders’ assets. The Partnership programs in California, Connecticut, Indiana, and New York have dollar-for-dollar models, in which the dollar amount of protected assets is equivalent to the dollar value of the benefits paid by the long-term care insurance policy. For example, a person purchasing a long-term care dollar-for-dollar insurance policy with $300,000 in coverage would have $300,000 of assets protected if he or she were to exhaust the long-term care insurance benefits and apply for Medicaid. However, New York’s program also offers total protection. That is, those who purchase a comprehensive long-term care insurance policy, covering a minimum of three years of nursing facility care or six years of home care, or some combination of the two, can protect all their assets at the time of Medicaid eligibility determination. In Indiana, in addition to the dollar-for-dollar models, the Partnership program offers a hybrid model that allows purchasers to obtain dollar-for-dollar protection up to a certain benefit level as defined by the state; all policies with benefits above that threshold provide total asset protection for the purchaser.
Under DRA, any state that implements a Partnership program must ensure that the policies sold through that program contain certain benefits, such as inflation protection. DRA requires Partnership policies to provide compound inflation protection for individuals younger than 61. For individuals younger than 76, Partnership policies must provide policyholders with some level of inflation protection, although not necessarily compound inflation protection, while inflation protection is an optional feature for Partnership policyholders aged 76 or older.[10]
Some of the states that passed legislation prior to the passage of DRA to enable the creation of a Partnership program may need to make additional changes to meet DRA requirements.
DRA also requires that Partnership policies provide dollar-for-dollar asset protection. Insurers are not allowed to offer Partnership policies that provide the total asset protection feature found in Partnership policies in New York and Indiana. According to CMS officials, policies in New York and Indiana may continue to provide this type of coverage.
DRA also requires Partnership policies to include consumer protections contained in the NAIC Long-Term Care Insurance Model Act and Regulation as updated in October 2000. DRA established specific requirements for Partnership policies that do not apply to traditional long-term care insurance policies sold in the Partnership states, such as inflation protection and dollar-for-dollar asset protection. DRA prohibits states from creating other requirements for Partnership policies that do not also apply to traditional long-term care insurance policies in the four states with Partnership policies. The Partnership programs in California, Connecticut, Indiana, and New York, which were implemented before DRA, are not subject to these specific requirements, but in order for those programs to continue, they must maintain consumer protection standards that are no less stringent than those that applied as of December 31, 2005.
The four states with Partnership programs require Partnership policies to include certain benefits, such as inflation protection and minimum daily benefit amounts, while traditional long-term care insurance policies may include these benefits but are not generally required to do so. Compared with policyholders of traditional long-term care insurance policies, a higher percentage of Partnership policyholders purchased policies with more extensive coverage. In the four states, insurance companies are not allowed to charge policyholders higher premiums for policies with asset protection, and Partnership and traditional long-term care insurance policies with comparable benefits are required to have equivalent premiums.
In general, the four states with Partnership programs require that Partnership policies sold in their states include certain benefits that are not required for those states’ traditional long-term care insurance policies. A state DOI official told the GAO that they have these benefit requirements for Partnership policies in order to protect policyholders by helping to ensure that benefits are sufficient to cover a significant portion of their anticipated long-term care costs and to protect the Medicaid program by reducing the likelihood that policyholders will exhaust their benefits and become eligible for Medicaid.
In addition to asset protection, which by definition Partnership policies include, all four states require Partnership policies to include inflation protection. There are some exceptions to the inflation protection requirement. For example in New York insurance companies are allowed to sell Partnership policies to policyholders 80 years of age or older without inflation protection.
Three of the four original Partnership states - California, Connecticut, and New York - require that Partnership policies include inflation protection that automatically increases benefit amounts by 5 percent annually on a compounded basis. In Indiana, Partnership policies are required to include either automatic compound inflation protection at 5 percent annually or in accordance with the consumer price index, or an inflation protection option that covers at least 75 percent of the average daily private pay rate.
The four states do not require traditional long-term care insurance policies to include inflation protection, though insurance companies in these states are required to offer inflation protection as an optional benefit. While policies with inflation protection may include coverage that is more commensurate with expected future costs of care, these policies can be two or three times more expensive than policies without inflation protection. For example, in 2005 a long-term care insurance policy with a $200 daily benefit, a 3-year benefit period, and inflation protection cost about $3,000 per year for a 60-year-old male; the same policy cost about $1,350 per year without inflation protection. An insurance company official told the GAO that the additional cost of inflation protection is the primary reason individuals do not buy a Partnership policy.
The four partnership states also require minimum daily benefit amounts for all Partnership policies, while in three of the Partnership states, traditional long-term care insurance policies are not subject to this requirement. New York does have minimum daily benefit requirements for that state’s traditional long-term care insurance policies.
According to Partnership and DOI officials in California and Connecticut, minimum daily benefit amounts are required for Partnership policies in order to prevent consumers from purchasing coverage that would be insufficient to cover a substantial portion of the cost of their care. According to Partnership program materials from New York, for example, the average daily cost of long-term care in a nursing facility in New York was about $263 per day in 2004. Anything less than New York’s 2004 minimum daily benefit amount of $171 for nursing facility care would therefore have required out-of-pocket payments for policyholders of more than one-third of the cost of their nursing facility care. In 2006, the required minimum daily benefit amounts for nursing facility care in Partnership policies ranged from $110 per day in Indiana to $189 per day in New York.
In the four states with Partnership programs, Partnership policies are subject to minimum nursing facility benefit period requirements established by the states, but some traditional long-term care insurance policies are not subject to these same requirements. In California and Indiana, Partnership policies are required to have dollar coverage that provides for at least 1 year of care in a nursing facility, while traditional long-term care insurance policies are not subject to a minimum benefit period requirement. The minimum amount paid under a Partnership policy for this dollar coverage can be no less than 70 and 75 percent of the average daily private pay rate for nursing facilities in California and Indiana, respectively.
In New York, Partnership policies are required to have minimum nursing facility benefit periods ranging from 18 months to four years, depending on the type of coverage an individual purchases, while certain traditional long-term care insurance policies are required to have one-year minimum nursing facility benefit periods. In Connecticut, Partnership and traditional long-term care insurance policies are both required to have one-year minimum benefit periods for care provided in nursing facilities.
Partnership and traditional long-term care insurance policies both typically include elimination periods, which establish the length of time a policyholder who has begun to receive long-term care has to wait before receiving long-term care insurance benefits. The four states with Partnership programs limit the length of the elimination periods that can be included in Partnership policies. Two of the four states, Connecticut and New York, also generally limit the elimination period included in traditional long-term care insurance policies. In 2006, the elimination period for Partnership policies in California was no more than 90 days, while New York had a 100-day limit for their total asset protection policies. The maximum elimination period for New York’s dollar-for-dollar policies was 60 days. Indiana had a 180-day limit.
In Connecticut, the elimination period limit for both Partnership and traditional long-term care insurance policies was 100 days. According to a New York Partnership program staff member, in New York the elimination period for traditional policies was generally no more than 180 days. The effect of increasing the elimination period is to increase the out-of-pocket costs policyholders incur in paying for their long-term care. One official from an insurance company that sells long-term care insurance policies told the GAO that having long elimination periods could quickly deplete an individual’s assets, which might make the asset protection under the Partnership program less valuable.
Unlike traditional long-term care insurance policies, Partnership policies in the four states must cover or offer case management services. In Connecticut and Indiana, the case management provision for Partnership policies is specific to home and community-based services.
Case management services can include providing individual assessments of policyholders’ long-term care needs, approving the beginning of an episode of long-term care, developing plans of care, and monitoring policyholders’ medical needs. A Partnership program official said that, by helping policyholders assess their medical needs and develop a plan of care, case management services can help policyholders use their benefit dollars efficiently. Partnership program officials in California, Connecticut, and Indiana explained that their states require Partnership policies to cover case management services provided through state-approved intermediaries that are independent of insurance company control. Partnership program officials in New York reported that Partnership policyholders have the option to seek case management services from independent case management service providers, but they can also elect to receive case management services from their own insurance company. Traditional long-term care insurance policies are not required to cover case management services, though some may offer this service as an optional benefit. In addition, some insurance companies selling traditional long-term care insurance policies may directly provide case management services.
Insurance companies in the four states with Partnership programs are subject to restrictions on the types of coverage they can offer in Partnership policies, while they are allowed to offer traditional long-term care insurance policies with more coverage options. In California,
Connecticut, and Indiana, insurance companies can only offer Partnership policies with two types of coverage: an option that covers only nursing facility care, and a comprehensive option that covers nursing facility care as well as care provided in the home and in community-based facilities. In California, Indiana, and New York, nursing facility coverage also includes other settings that are similar to nursing facilities.
In New York, insurance companies may only offer Partnership policies that cover comprehensive care. The four states do not allow insurance companies to offer Partnership policies in their state that exclusively cover care provided in the home and in community-based facilities. However, in the four states, insurance companies can offer traditional long-term care insurance policies with nursing facility care only, home and community-based facility only, and comprehensive coverage options.
In the four states with Partnership programs, traditional long-term care insurance policies can include (and individuals can therefore choose to purchase) generally the same benefits found in Partnership policies. Traditional long-term care insurance policyholders cannot obtain asset protection through their policies.
However, Partnership policyholders tended to purchase benefits that are more extensive than those purchased by traditional long-term care insurance policyholders. The GAO found that from 2002 through 2005, a higher percentage of Partnership policyholders purchased policies with more extensive coverage compared with policyholders who purchased traditional long-term care insurance nationally. Specifically, more Partnership policyholders purchased policies with higher levels of inflation protection and coverage that includes care in both nursing facility and home and community-based care settings. See table 1 for a summary of the benefits purchased by Partnership and traditional long-term care insurance policyholders. For example, while all Partnership policyholders had policies from 2002 through 2005 with the required inflation protection that generally increases daily benefit amounts by 5 percent annually, about 76 percent of traditional long-term care insurance policyholders had policies with some form of inflation protection. Similarly, during this period, 64 percent of all Partnership policyholders had policies that included daily benefit amounts of $150 or greater, while 36 percent of traditional long-term care insurance policyholders nationwide had policies that provided daily benefit amounts at this level or greater. While these differences may reflect the benefit requirements found in Partnership policies, they may also reflect the incentive offered by the asset protection benefit of Partnership policies, which may influence consumers deciding whether to buy a Partnership or traditional long-term care insurance policy. The differences may also reflect the demographic and financial characteristics of the people living in the four states with Partnership programs relative to other states.
According to state officials, the four states with Partnership programs require Partnership and traditional long-term care insurance policies to have equivalent premiums if the benefits offered (except for asset protection) are otherwise comparable. According to information from one state’s Partnership program, one reason for this requirement is that, unlike other insurance company benefits, insurance companies do not provide asset protection to Partnership policyholders. Instead, the four states with Partnership programs provide the asset protection benefit by allowing Partnership policyholders to protect some or all of their assets from Medicaid spend-down requirements. However, because Partnership policies are required to have inflation protection and other benefits that traditional long-term care insurance policies are not required to have, Partnership policies are likely to have higher premiums. According to a Connecticut state official, in 1996, before the state required that Partnership and traditional long-term care insurance policies have equivalent premiums for the same benefits, Partnership policies were 25 to 30 percent more expensive than traditional long-term care insurance policies with comparable benefits. The official further explained that after the requirement was established, sales of Partnership policies in Connecticut more than tripled.
State officials reported that, while both Partnership and traditional long-term care insurance policies undergo reviews by the DOI in each of the four states with Partnership programs, Partnership policies in California and Connecticut also undergo another review by state Partnership program officials. The New York Partnership program does not conduct a review of Partnership policies. The New York DOI reviews all Partnership and traditional long-term care insurance policies.
Until recently, the Indiana Partnership program was housed in the Medicaid office and conducted an initial review of Partnership policies prior to the DOI review. As of September 2006, the Indiana Partnership program was housed in, and administered by, the DOI and there was only one review of Partnership policies, which was conducted by the DOI.
California and Connecticut Partnership program staff review Partnership policies to determine whether the policies include the benefits mandated by Partnership regulations, and whether the insurance companies can meet additional data reporting and other administrative requirements. The programs’ staff also tries to ensure that the policies can be easily understood and contain all of the required language. The Partnership program offices in California and Connecticut perform their review of policies first, and then pass the application on to the DOI for further review.
DOI officials in California and Connecticut reported that the Partnership office review of Partnership policies tends to be lengthier for insurance companies than the DOI review. A DOI official explained that when insurance companies add new benefit options to policies, the Partnership review can take longer. Other factors that may slow the Partnership review process include the time spent coordinating between the Partnership program and the state DOI, and the time it takes for insurance companies to learn how to complete the Partnership review process for the first time. State officials in Indiana and New York, where reviews of new Partnership policies are conducted by the DOI and not a separate Partnership program office, said it generally takes the same amount of time for Partnership and traditional long-term care insurance policies to pass through the review process.
Before they can sell Partnership policies, insurance agents must complete additional state training requirements compared with agents who sell only traditional long-term care insurance policies. Although each of the four states with Partnership programs has somewhat different requirements, in general the states require Partnership agents to undergo about a day of training specific to the Partnership program in addition to any training that the states require for those who sell traditional long-term care insurance. In order to continue to sell long-term care insurance in the four Partnership states, insurance agents must receive several hours of continuing education every 2 years. The required hours range from 5 hours every 2 years in Indiana to 24 hours every 2 years in Connecticut.[11]
In New York the continuing education credits from the required Partnership policy training can be used to meet the DOI requirements for agent recertification for traditional long-term care policies.
Partnership program training typically includes information on topics such as long-term care planning, Medicaid, Medicare, the specific benefits required by the Partnership program, and how Partnership policies differ from traditional long-term care insurance policies. According to some state officials, agents need training on the Partnership program and Medicaid in order to understand the program and provide appropriate advice to their clients. In 2006, in three of the four states all Partnership program training was conducted in person, rather than via correspondence or on the internet. In New York agents completed an online internet-based course as well as classroom training as part of the Partnership program training. According to state officials, all four Partnership states require that the provider of this specialized Partnership training be approved by the state DOI, and in Connecticut, the training is provided exclusively by Partnership program staff.
Despite the complexity of long-term care insurance products, DOI officials in three states with Partnership programs reported that long-term care insurance policies, including Partnership policies, garner few complaints from policyholders. For example, from 1998 to 2005 the New York Insurance Department received an average of two to three complaints about Partnership policies each year (there were 51,262 active Partnership policies in the fourth quarter of 2005 in New York). During this time period, according to data from the New York state DOI, complaints about all long-term care insurance policies in New York related to issues such as the interpretation of policy provisions, premium amounts, and refusals to issue policies.
Policyholders of both Partnership and traditional long-term care insurance are likely to have higher incomes and more assets than people without long-term care insurance. On average, Partnership policyholders are younger than traditional long-term care insurance policyholders. As previously reported they are also more likely to be female and married.
In examining Partnership policyholders in two states, traditional long-term care insurance policyholders nationwide, and those without long-term care insurance nationwide, the GAO found that Partnership and traditional long-term care policyholders are more likely to have higher incomes than those without such insurance, with 55 percent of them having monthly incomes of $5,000 or more. This compares to 43 percent for all households. Data from Indiana and New York are excluded from the GAO income and asset comparisons. New York did not collect income or asset data for its Partnership program, while Indiana income and asset data were not detailed enough to make comparisons with other states.
Income data for Partnership policyholders in Connecticut were from 2002 through 2005. Income data for Partnership policyholders in California were from 2003 to 2004. Data for all households in those two states were from 2004. The GAO combined multiple years of these data in order to increase the sample size.
Because the GAO did not have a direct measure of the population without long-term care insurance, they used the general population of all households as a proxy. Nationally, about 12 percent of the population over age 55 has long-term care insurance. Therefore they assumed that the income information from all households in two states with Partnership programs (California and Connecticut) largely reflected the income and asset patterns of people without long-term care insurance.
Similarly, at the national level, when surveyed, 46 percent of traditional long-term care policyholders over age 55 had monthly household income of $5000 or greater, whereas 29 percent of those individuals over age 55 without long-term care insurance had such incomes.[12] The GAO also found that more than half (53 percent) of Partnership policyholders had household assets of $350,000 or more in California and Connecticut. Data on the asset levels of all households in those states were not available for comparison. Nationwide, 36 percent of traditional long-term care insurance policyholders and 17 percent of people without long-term care insurance had household assets exceeding $350,000.
Approximately 12 percent of people nationwide over 55 have long-term care insurance so the report’s measure is likely to contain approximately 88 percent without long-term care insurance.
Approximately 2 percent of people nationwide with long-term care policies have Partnership policies. Thus, although the HRS data may include a small number of Partnership policyholders, about 98 percent of these people likely have traditional long-term care insurance.
In the GAO analyses, they found that Partnership policyholders in California, Connecticut, Indiana, and New York are younger on average than traditional long-term care insurance policyholders nationally and those without long-term care insurance nationally. They also found that those who purchase long-term insurance policies, whether traditional or Partnership, were more likely to be women than men, and married than unmarried.
Overall, the GAO’s scenarios suggested that in the aggregate the savings potential from the Partnership programs of the 20 percent of individuals who would have self-financed their care is outweighed by the 80 percent of individuals who will likely result in increased Medicaid spending. Few partnership policyholders are likely to become eligible for Medicaid, limiting the impact on Medicaid expenditures.
Although survey data and scenarios indicated that about 80 percent of Partnership policyholders who become eligible for Medicaid are likely to do so sooner than they otherwise would have without a Partnership program (since it was not necessary to spend down their assets), it is expected that few Partnership policyholders will actually become eligible for Medicaid and turn to the program to finance their long-term care. There are two reasons for this expectation. First, most Partnership policyholders purchase policies that are likely to cover all or most of their long-term care expenses during their lifetimes, thereby reducing the likelihood that the policyholders will require financing from Medicaid for their long-term care. It was found that 86 percent of Partnership policyholders had benefits covering three or more years, while the average nursing facility stay lasts between two and three years. One study of traditional long-term care insurance policyholders with lifetime benefits found that only about 14 percent of policyholders used their benefits for more than three years, and fewer than 5 percent of all policyholders used their benefits for more than five years. Such data suggests Partnership policyholders will continue to purchase policies with benefit periods that cover their long-term care needs, with the percentage of Partnership policyholders who exhaust their benefits and then become eligible for Medicaid is likely to be limited. While some experts have reported that there is a recent trend for traditional long-term care insurance policies to be sold with shorter benefit periods, the minimum benefit requirements that applied to Partnership policies could result in Partnership benefits remaining more stable over time.
Secondly, it was estimated that few Partnership policyholders are likely to turn to Medicaid for their long-term care financing since they have incomes that exceed Medicaid’s income eligibility thresholds. Although Partnership policyholders can purchase varying amounts of asset protection, they must still meet state Medicaid income thresholds in order to become eligible for Medicaid. In 2006, all states had a Medicaid monthly income eligibility threshold based upon the time they were admitted to the nursing facility. GAO’s study suggests that many Partnership policyholders will continue to be relatively wealthy and unlikely to meet these thresholds, even at the time they enter a nursing facility. For example, of all people who entered a nursing facility in 2004, the average asset value for the 25 percent of people with the highest assets was over $334,000 in 1992, and by 2004, 12 years later, their assets had grown to almost $430,000. Similarly, the average monthly income for the 25 percent of people with the highest incomes who were admitted to a nursing facility in 2004 was about $5,600 in 1992 and about $3,700 in 2004[13]—more than double the threshold for Medicaid eligibility in any of the four states with Partnership programs. Medicaid eligibility standards require income to be no higher than 300 percent of the Supplemental Security Income standard, which was $1,809 in 2006. However, only 1 percent of the Partnership policyholders in California and Connecticut had household incomes less than $1,000 per month at the time they purchased their long-term care insurance policies. The GAO analysis of HRS data also indicated that wealthy individuals continue to have a high level of assets. In 2006, the Medicaid eligibility thresholds in the four states with Partnership programs were $600 in California, $619 in Indiana, $1,809 in Connecticut, and $692 in New York. If individuals were in a nursing facility, they were permitted to keep a personal allowance amount to cover incidental purchases in the nursing facility. The personal allowances for individuals in nursing facilities in 2006 were $35 in California, $52 in Indiana, $61 in Connecticut, and $50 in New York.
The income levels of Partnership policyholders may reflect the fact that the cost of purchasing a long-term care insurance policy—including a Partnership policy—may exceed what most elderly households can afford. According to guidelines published by the NAIC, a person should spend no more than 7 percent of his or her income on long-term care insurance. A traditional long-term care insurance policy covering 3 years of care, with inflation protection, a $200 daily benefit allowance, and comprehensive coverage, costs about $3,000. In order to afford such a policy, an individual would need an annual income of about $43,000. However, data from the 2004 HRS show that about half of elderly households nationwide had annual incomes below $43,000. A survey of Connecticut Partnership policyholders suggested that cost was the most important factor in policyholders’ decision to let their policies lapse. Sixty-two percent of surveyed individuals in Connecticut who let their Partnership policy lapse said that they dropped their Partnership policy because it was too costly.
It is possible that Partnership policyholders with higher incomes could meet Medicaid income thresholds because the four states with Partnership programs allow individuals to deduct medical expenses from their income when determining Medicaid eligibility. However, the individuals would still need to contribute their income toward the cost of care. Therefore, this limits Medicaid’s liability for individuals with higher incomes.
As of 2006, few Partnership policyholders in the four Partnership states had accessed Medicaid to finance their long-term care. Of the approximately 218,000 Partnership policies sold since the program was first introduced in the late 1980s, approximately 190,000 were still active as of August 2006. In addition, as of that same date, a total of 3,454 Partnership policyholders - less than 2 percent of all Partnership policyholders - had accessed long-term care benefits since the Partnership programs began. Of that group, 292 Partnership policyholders exhausted their long-term care insurance benefits, and 159 policyholders, approximately 54 percent of those who exhausted their benefits, subsequently went on to access Medicaid benefits. The number of Partnership policyholders who access benefits and also access Medicaid is likely to grow since people typically use long-term care services 15 to 20 years after they purchase their policy. The first Partnership policies were established less than 20 years ago so future data will yield greater understanding of whether or not Partnership plans actually save Medicaid (and the taxpayers) money. We do not know why some of the 292 individuals who exhausted their long-term care insurance benefits did not access Medicaid. It is possible that their income was higher than Medicaid eligibility thresholds, or they may have had unprotected assets that they had to spend down. Alternatively, they may have preferred to self-finance their care, they may have died, or they may have stopped using long-term care services.
Concluding GAO Observations
With DRA authorizing all states to implement Partnership programs, information on existing Partnership policies and policyholders from the four Partnership states may prove useful to other states considering such programs. In particular, states may want to consider the trade-offs that come with implementing a Partnership program. First, a Partnership program’s potential impact on Medicaid expenditures should be considered. Based on their scenario comparison and survey data, the GAO anticipated that Partnership programs in California, Connecticut, Indiana, and New York are unlikely to result in savings for their state Medicaid programs and could result in increased Medicaid expenditures. This is largely due to the modifications of state Medicaid eligibility requirements states have to make in order to offer asset protection to Partnership policyholders and survey data showing that the majority of Partnership policyholders would have purchased traditional long-term care insurance had the Partnership program not existed. However, given the amount of long-term care insurance benefits and income and asset levels of current Partnership policyholders, the GAO also anticipated that relatively few policyholders will access Medicaid in the four Partnership states. Therefore, the impact of Partnership programs on state Medicaid programs will likely be small.
While Partnership programs are not likely to reduce states’ Medicaid expenditures, the programs do offer consumer benefits. The asset protection feature can benefit policyholders who exhaust their Partnership benefits and then access Medicaid. Even if individuals do not end up using their Partnership insurance or Medicaid, the availability of asset protection may provide peace of mind for those who fear the risk of having to spend their assets on their long-term care. However, states that implement Partnership programs should recognize that, because of their cost, Partnership policies generally do not benefit all consumers. The cost of annual premiums for long-term care insurance may not be affordable to individuals with moderate incomes, and as a result long-term care insurance policyholders, including Partnership policyholders, tend to be wealthier than those without such insurance.
Impact of Asset Transfers on Medicaid
The GAO acknowledged that some savings could result for Medicaid if, in the absence of a Partnership program, an individual would have self-financed his or her long-term care and transferred assets. They also acknowledged how a Partnership program could result in Medicaid savings if, in the absence of the Partnership program, an individual would have purchased a traditional long-term care insurance policy and transferred assets that were at least equal to the value of the traditional long-term care insurance policy. However, their analysis suggested that these savings would be limited to those individuals who, prior to requiring long-term care, would have transferred assets to become eligible for Medicaid in the absence of the Partnership program. Further, the larger percentages of policyholders who represent a potential cost to Medicaid are likely to offset savings attributable to asset transfers.
It is very difficult to know the number of people who have transferred assets in order to qualify for Medicaid benefits. Obviously, these individuals would want to keep a low profile. In March 2007, the GAO published a report that included an analysis of asset transfers by nursing home residents using HRS data. They complemented that analysis by examining a sample of Medicaid applications in three states to identify the extent of asset transfer activity.
Both of these analyses suggested that about 10 to 12 percent of individuals transferred assets prior to applying for Medicaid, and the median amount transferred based on analysis of the HRS data and state Medicaid applications was $1,239 and $15,152, respectively. Many industry professionals feel much higher amounts are transferred, but that it fails to show up in available data.
Methodology for Assessing Medicaid Savings
California, Connecticut, and New York raised concerns about GAO’s methodology for estimating the financial impact of the Partnership program on Medicaid. California and Connecticut noted that they had excluded two Partnership policyholder survey questions from their analysis that they considered in their own analysis of the Partnership program. These questions asked Partnership policyholders whether they would have transferred assets to become eligible for Medicaid in the absence of the program and whether the Partnership program influenced their decision to buy long-term care insurance. In many cases, the questions seem to center on the quantity of assets actually transferred (for which little data exists).
In the GAO analysis, they estimated that about 80 percent of Partnership policyholders would have purchased traditional long-term care insurance in the absence of the program, and they estimated that these individuals generally represented a potential cost to Medicaid. Their 80 percent estimate was based on analysis of the survey question about how Partnership policyholders would have financed their long-term care in the absence of the Partnership program.
It seems that there will continue to be differing views on the effectiveness of the Partnership policies until sufficient data becomes available. Will the program grow? Can those who need it most even afford the policies? Only time will tell, but with the passing of the DRA at least more states will be participating lending to new data that will hopefully reveal the full story.
End of Chapter Two
United Insurance Educators, Inc.
Updated 2010
[1] H.R. Rep. No. 103-111, at 536.
[2] For income and asset data in
California the GAO combined data for 2003 and 2004, and for Connecticut, they
combined data for 2002 through 2005.
[3] To make the income analysis
consistent across the different data sources, the GAO restricted their
calculations of household income to individuals aged 55 and over.
[4] New York data was not
available.
[5] GAO, Medicaid Long-Term Care: Few
Transferred Assets before Applying for Nursing Home Coverage; Impact of Deficit
Reduction Act on Eligibility Is Uncertain, GAO-07-280 (Washington, D.C.: Mar.
26, 2007).
[6] MetLife Mature Market Institute,
The MetLife Market Survey of Nursing Home & Home Care Costs (September
2005).
[7] Department of Health and Human
Services, Centers for Disease Control and Prevention, National Center for
Health Statistics, The National Nursing Home Survey: 1999 Summary, Series 13,
No. 152 (June 2002).
[8] GAO analysis of data provided by
five insurance companies selling traditional long-term care insurance: see GAO,
Long-Term Care Insurance: Federal Program Compared Favorably with Other
Products, and Analysis of Claims Trend Could Inform Future Decisions,
GAO-06-401 (Washington, D.C.: March 2006).
[9] GAO-07-280
[10] Pub. L. No. 109-171,
§ 6021(a)(1), 120 Stat. 68 (codified at 42 U.S.C. § 1396 p(b)(1)(c)(iii)(IV)).
[11] GAO Report to
Congressional Requesters
[12] The national-level
data are from 2004.
[13] In this particular example, GAO
criterion for being among the wealthiest people was those people whose assets
were in the highest 25 percent.