Table of Contents
- The Issue
- Expert Witnesses
- Executive Summary
- Chapter 1: Background and Analysis
- Chapter 2: What is The Present Source of Long-Term Care Financing?
- Chapter 3: Long-Term Care Indemnification
- Chapter 4: Consumer Protection Issues Associated with Long-Term Care
- Chapter 5: Tax Issues Associated With Long-Term Care
- Chapter 6: Federal Policy Considerations on Initiatives to Expand Long-Term Care Indemnification
- Chapter 7: Corporate Response to Long-Term Care Indemnification
- Chapter 8: Concerns of the Long-Term Care Provider Industry
- Long Term Care Working Group Index
- Testimony Summaries
November 14, 2000
The Working Group Report, Findings, and Recommendations, submitted to the ERISA Advisory Council on November 14, 2000, was approved by the full body and subsequently forwarded to Alexis M. Herman, Secretary of Labor for the United States of America. The Advisory Council on Employee Welfare and Pension Benefit Plans, as it is formally known, was established by Section 512(a)(1) of the Employee Retirement Income Security Act of 1974 to advise the Secretary with respect to carrying out his/her duties under ERISA.
Members of the 2000 Working Group
- Chair: Michael Stapley, Deseret Mutual Benefit Administrators
- Vice Chair: Patrick N. McTeague, McTeague, Higbee, Case, Whitney & Toker, P.A.
- Rosemary Abelson, Council Vice-Chair, Northrup Grumman Corp.
- Eddie C. Brown, Brown Capital Management
- Judith Ann Calder, Abacus Financial Group, Inc.
- Carl Camden, Kelly Services, Inc.
- Michael J. Gulotta, Council Chair, Actuarial Sciences Associates, Inc.
- Catherine L. Heron, Capital Group Companies (CGC) of Los Angeles
- Judith F. Mazo, Segal Company
- Rebecca J. Miller, McGladrey & Pullen, LLP
- James S. Ray, The Law Offices of James S. Ray
- Richard Tani, Retired, William M. Mercer
“There are only four kinds of people in this world. Those who have been caregivers, those who are care givers, those who will be care givers, and those who will need care givers.”
Rosalynn Carter, Former First Lady, (Hardship into Hope – The Rewards of Caregiving; Connie Goldman Productions, Audiotape, 1999)
Joyce Ruddock, Vice President, MetLife, June 1, 2000 (Tr. pp 43)
“The prospects for individuals who will need different types of in-home or institutional care assistance is going to climb dramatically as a result of each and every life extension success from our medical research”
Dallas Salisbury, President and CEO, Employee Benefits Research Institute, May 8, 2000 (Tr., pp 68)
“I think that the fundamental problem we have with long-term care insurance in general now is that for the elderly population it is basically unaffordable.”
Joshua M. Wiener
Urban Institute, May 8, 2000 (Tr. pp 43)
“Long-term care is the greatest uninsured risk Americans face.”
Joyce Ruddock, Vice President, MetLife, June 1, 2000 (Tr. pp 46)
“This nation has no long-term care policy”
Donna Shalala, Secretary, U.S. Department of Health & Human Services, May 1, 2000 (Speaking at event hosted by Congressman Rush Holt, at Seabrook Village, Trinton Falls, New Jersey)
- Joshua M. Wiener, Ph.D., Principal Research Associate, The Urban Institute, May 8, 2000 & June 1, 2000
- Frank Titus, Assistant Director of Insurance Programs, Retirement and Insurance Service, U.S. Office of Personnel Management, July 17, 2000
- Dallas L. Salisbury, President & CEO, Employee Benefits Research Institute, May 8, 2000
- M. Keith Weikel, Senior Executive Vice President & COO, Manor Care, Inc., August 14, 2000
- Tom Foley, Director, Accident & Health Division, Kansas Department of Insurance, May 8, 2000
- Barbara Stucki, Special Consultant, American Council of Life Insurance, August 14, 2000
- Joyce Ruddock, Vice President of Long-Term Care, MetLife Insurance Company, June 1, 2000
- John Cutler, Office of Disability, Aging & LTC Policy,, Office of Assistant Secretary for Planning & Education, U.S. Dept. of Health & Human Services, August 14, 2000
- David S. Martin, General Director, Long-Term Care, John Hancock Life Insurance Company, July 17, 2000
- Marc A. Cohen, Ph.D., Vice President, LifePlans, Inc., September 11, 2000
- William Bortz, Associate Benefits Tax Counsel, U.S. Department of Treasury, July 17, 2000
- Brand Chvirko, Presidential Management Intern,, Centers for Disease Control, Staff Member, U.S. Senator Bob Graham, September 11, 2000
There is a potentially future serious long-term care (LTC) crisis in the United States. It is important that policy makers pay attention to this potential crisis and take specific preventive action to avoid it. Virtually every aspect of the LTC system is affected. Baby boomers and their parents are requiring LTC services in record numbers. At present LTC consumes approximately one-eighth of national health expenditures, about the same proportion as prescription drugs. The total amount of LTC costs is expected to increase significantly during the next 40 years. Conservative estimates are that the elderly population requiring LTC services will more than double in the next 30 years to more than 70 million. As America struggles with this unprecedented challenge to find ways to pay for these LTC services, it seems apparent that there will be a funding shortfall that will challenge the capacity of the public sector. Serious shortfalls in financing resources will occur that could potentially restrict access to needed LTC services.
While LTC is commonly associated with care provided to older people in nursing homes, in reality most LTC services are provided in the home informally by family members. Concerns arise when individuals require more intensive LTC services than family members or friends are trained to provide or which are clearly beyond the skills they can easily obtain. Many people are misinformed about where LTC financing will come from. They think that Medicare, Medicaid, group and individual medical insurance or disability insurance will fund their LTC needs. Medicare, the current foundation for protecting retired Americans, only provides for up to 120 days per illness of institutional LTC benefits which are only available after discharge from an acute care hospital. The federal Medicaid program does provide extensive coverage for LTC services, but is only available to those who meet certain income and resource requirements. Many American workers who have labored all of their lives to provide for a financially sound retirement end up spending themselves into poverty in order to qualify for Medicaid. Others are surprised, if not shocked, to learn that their employer-sponsored medical plans provide only very limited coverage for LTC services.
Long-term care is overwhelmingly a woman's issue. Women live longer than men. They become primary caregivers for LTC service and in the end they are the primary recipients of LTC. Women also have more financial barriers to LTC than men.
Long-term care insurance is one of the fastest growing private insurance products in the nation today. The growth in the number of policies has doubled in the last five years to 6 million. In the 10-year period from 1987 to 1997, the market grew an average of 21 percent per year. Nevertheless, overall coverage levels remain very low, and LTC is the greatest uninsured risk Americans face. More employers are offering LTC coverage, but most find that the pick-up rates are lower than anticipated. However, there is some indication that employers who positively and actively promote LTC insurance experience significantly higher enrollment than those who do not. Employment-based LTC insurance may provide the best opportunity for expansion in coverage. Expansion of coverage may be further increased through employer subsidies for employee LTC insurance. In order for LTC insurance coverage to expand, it may be necessary to provide additional tax incentives for employers and individuals. Such tax incentives and employer subsidies may be the catalyst that is necessary to cause individuals to take more responsibility for their LTC needs.
There are concerns about the stability of the private LTC insurance market. However, the experience of large insurance carriers, as well as recent initiatives by the National Association of Insurance Commissioners, demonstrate that there are viable methods for stabilizing the LTC insurance market and insuring its long-term viability.
There are also concerns in the LTC provider industry. Market capitalization of LTC providers has declined significantly since 1997. Many nursing homes are in a state of bankruptcy. There is also concern that government funding through Medicare and Medicaid is inadequate to support quality health care. There are questions about the current regulatory system and whether or not it is accomplishing its intended purpose. There is a belief that far more effective coordination between federal and state governments is needed in the regulatory process and that the process needs to become less adversarial and more cooperative. Finally, there is a projected shortage in skilled caregivers to support the LTC industry and to ensure a solid foundation for the provision of quality care.
The multifaceted problems discussed above require broad-based, well-coordinated policy initiatives that address all of the components of this very difficult problem. The Working Group's assignment was to improve understanding about LTC in general, the need for LTC service at the present and into the future, and identify the barriers to the improvement of LTC access to adequate LTC services, including indemnification. In the end, the Working Group unanimously recommends to the Secretary of Labor that:
- A national policy on LTC be developed which articulates a comprehensive and coordinated strategy responsive to all of the many dimensions of the LTC problem, carefully defining the roles of the federal government, state governments, and the private sector.
- Within the context of judicious tax policy consideration be given to the following:
- an above-the-line tax deduction for LTC insurance premiums for qualified plans,
- payment of LTC premiums (for qualified plans) through IRC Section 125,
- a tax credit for voluntary caregivers that provide LTC services to individuals who have at least two limitations in activities of daily living or who have severe cognitive impairment.
- A comprehensive and well focused educational program be developed to educate Americans about LTC and LTC financing, included but
- that public funding for LTC may expand but will likely be inadequate for LTC services for all Americans in the future;
- that Medicare was never intended to pay for extended LTC and should not be considered as a dependable resource to meet LTC needs;
- that while Medicaid may provide financial resources for certain people who can meet categorical eligibility, income, and resource requirements, it cannot be considered a reliable resource for meeting every American's LTC needs;
- that most employer-sponsored individual disability and medical plans do not cover LTC services; and,
- that LTC should become an integral part of retirement planning for all Americans.
- Employers should be encouraged to integrate LTC into
- A system be developed to allow individual Americans to purchase LTC insurance through the newly established program for federal workers.
- States be encouraged to adopt the model regulations developed by the National Association of Insurance Commissioners for LTC insurers.
- The current regulatory process for LTC providers be reviewed.
- Current reimbursement practices for Medicare and Medicaid be reviewed to make sure they are at appropriate levels and do not compromise quality care.
- The Medicare rules be appropriately modernized to balance the need for LTC services with budgetary constraints.
The purpose of the Working Group on Long-Term Care (LTC) is to improve understanding about LTC in general, the need for LTC services at the present and into the future, and identify barriers to the improvement of long-term access to adequate LTC services, including indemnification. This report summarizes the insight the group has gathered from testimony of expert witnesses called to share their experience and opinions on this subject.
Chapter One discusses the background and analysis of LTC, what it is, how it is measured, and how many people it impacts, as
Chapter Two analyzes the present sources of LTC financing, including Medicare, Medicaid, and other public and private funds. It identifies who provides care most often for those with LTC needs and the impact on the caregivers. It also discusses how LTC impacts women
Chapter Three reviews the history of private LTC indemnification, current trends, types of LTC policies, and factors
Chapter Four identifies the consumer protection issues associated with LTC including adequate disclosure, lapse rates of policies, premium stabilization, and the NAIC model rules on LTC insurance.
Chapter Five is devoted to a discussion on the current tax treatment of LTC insurance and expenses, the effects that HIPAA has had on LTC insurance pick up rates, the differences between tax deductions
Chapter Six analyzes federal policy considerations on initiatives to expand LTC indemnification. Included in this chapter is a review of the new Long-Term Care Security Act recently signed into law by President Clinton. Also discussed are proposals for tax credits and deductions from the administration, the two major presidential candidates, and Congress. This chapter also discusses the impact of initiatives on Private LTC Insurance and on public programs and retirement, including
Chapter Seven discusses the corporate response to LTC indemnification, and identifies the key role that employers play in
Chapter Eight discusses the problems with the LTC provider industry, including market capitalization, reduced Medicaid reimbursement, governmental regulations, and shortages of skilled providers.
The final section contains the Findings and Recommendations of the Working Group.
“If you look into the future, the changes in the population structure will have a very big impact on demand for long-term care services. Over the next 50 years or so,…the 85 and older population, that group that has a high level of disability,…is projected to increase by 355%….”
Joshua M. Wiener, Ph.D., Principal Research Associate, Urban Institute, Washington, D.C."
“No matter how many surveys we have looked at from different services, we find that people think that long-term care is long-term disability and that Medicare pays for long-term care.”
David S. Martin, General Director, Long-Term Care, John Hancock Life Insurance Company.
What Is Long-Term Care?
Long-term care (LTC) comprises a broad range of supportive and health services for persons of all ages who have lost the capacity to care for themselves because of physical or mental illness or impairments. While it is not easily defined, and it is often difficult to draw the boundaries between what is LTC and what is acute care, LTC encompasses a whole host of services, the most common of which are nursing home care, assisted living facilities, home care, home health, adult day health care, respite care, and personal care services.
How Is Long-Term Care Measured?
Typically, LTC is measured along two standards, activities of daily living (ADLs) and instrumental activities of daily living (IADLs). ADLs are those activities necessary to carry out basic functions, including bathing, dressing, eating, toileting, and transferring from a bed to a chair. IADLs are those tasks necessary for independent living including shopping, light housework, money management, meal preparation, and medication management. IADLs are sometimes used to measure mental or cognitive disabilities associated with strokes or Alzheimer’s disease.
Misunderstandings Concerning Long-Term Care
Broad-based misunderstanding exists in the American population about LTC indemnification. Many Americans believe that the current Medicare system substantially covers their LTC needs and/or that LTC is covered by their group or individual health or disability plans. Others believe that if all else fails, Medicaid will be there to protect them. Furthermore, younger Americans are not sensitive to the fact that they may need some form of LTC indemnification that may not be accessed for 30 to 40 years in the future. They are simply unaware that the lack of some form of indemnification can severely impact their retirement security because they may end up spending retirement resources for needed LTC services. Many Americans are unaware of, or choose to ignore the fact that LTC is a serious concern and that LTC services are very costly.
The Long-Term Care Population
When most people think about LTC and people with disabilities, they most often think of the older population. However, people of all ages including children and young adults with disabilities may need LTC. The LTC population includes people with a wide range of conditions such as birth defects, developmental disabilities, mental illness, AIDS, Alzheimer’s disease, spinal cord injury, stroke, muscular degeneration, broken bones, surgical recovery, or accident victims.
A very significant portion of the disabled population, approximately 45 percent, is under the age of 65. Even within the elderly population, there are different levels of disability. As a result, it is important to distinguish between the various age groups within the elderly population. According to a 1994 national LTC survey those age 65-74 had a relatively low disability rate. Only about 8.4 percent had a problem with an activity of daily living or lived in an institution. This rate increased for those age 75-84 to 21.4 percent and for those over 85 years of age, the disability rate skyrocketed to 52.7 percent. Those having problems with ADLs or IADLs often require LTC services for many, many years. For example, studies show that individuals suffering from Alzheimer’s disease require, on the average, 6+ years of LTC services.
In 1995 there were about 13.1 million Americans with disabilities, either problems with the ADLs or the IADLs, including cognitive impairment. Of this number, approximately 1.6 million were severely disabled and resided in nursing homes, while an additional 2.2 million, who were also quite disabled, resided in the community in their own homes or with someone else. Of the total 13.1 million Americans with disabilities, approximately 3.8 million had disabilities severe enough that they required some level of custodial care. This number is expected to significantly increase over the next 50 years. Because of continual medical advances resulting in the prolonging of life, the chances of having to deal with a disabled family member are much higher now than at any other time in history. In fact, LTC may become an issue that individuals are going to have to deal with as part of the normal course of life.
Quality of Care
The overall quality of nursing home care is better now than it ever has been. Nevertheless, as a Nation, we have had significant problems with quality of care in nursing homes, with a large portion of nursing home facilities having major deficiencies. Governmental entities have responded to these deficiencies by increasing the number and types of regulations relating to nursing homes, which some contend has actually resulted in reduced quality of care.
From a policy perspective, much of the interest in expanding home and community-based services is founded on the notion that quality of life and quality of care in the home setting would be better than in an institutional setting. However, from a research perspective, it is difficult to monitor the home and community-based services in order to determine the quality of services provided. On the home care side, a lot of what has motivated the expansion of home and community-based services is the notion that LTC patients fare better in their own home where they are in a familiar environment. There is a further belief that LTC patients receive better quality of care in their home through both formal and informal caregiving. However, because of the difficulty in identifying and measuring the quality of home care, particularly by informal caregivers, there is insufficient data on the quality of home care LTC patients receive.
"The [number of] individuals who will need different types of in-home or institutional care assistance, is going to climb dramatically as a result of each and every life extension success from our medical research”
Dallas L. Salisbury, President & CEO, Employee Benefits Research Institute, Washington, D.C.
In the current LTC system, the federal government is the primary source of financing. In 1998, it was estimated that between Medicare, Medicaid, and other programs, the federal government paid $74 billion, or 64 percent, of LTC expenditures in the United States. LTC spending ranks eighth in national health expenditures, about the same as prescription drugs. Presently, the vast bulk of the money spent on LTC is for institutional care, rather than home care, even though most people prefer to stay at home if at all possible. As medical advances continue to extend life, the cost of LTC services are expected to continue to rise.
Because of the competing demands for tax funds and the extensive resources required to stabilize the Social Security Trust Fund and the Medicare Trust Fund and to expand Medicare to cover prescription drugs, it is uncertain that the federal government alone will provide sufficient resources to support the expanded need for LTC services in the future.
Medicaid is presently the single largest source of funding for LTC services. Medicaid is the federal/state health care program for the low income/low resource population. Medicaid covers only those who have depleted most of their assets and have very low incomes. With the cost of nursing home care exceeding $50,000 a year on average, most people have great difficulty paying for that care over a long period of time. Medicaid provided 44 percent of nursing home spending in 1998 and supported, in part or in full, about two-thirds of all nursing home residents.
To qualify for Medicaid, individuals must meet its categorical income and asset requirements. Many individuals do not become Medicaid qualified until after they have been admitted to skilled nursing facilities and their assets have been depleted in paying for their care. Some individuals impoverish themselves in what is called “spend down”, where they sell or dispose of their assets to become Medicaid eligible. Despite the fact that Medicaid is the single largest source of public financing for LTC services, the fact is that millions of Americans simply do not qualify for Medicaid because their income and assets are not low enough to meet Medicaid’s requirements.
Approximately 10% of all LTC costs come through Medicare. While the Medicare program assures the elderly have access to short periods of LTC services associated with acute health conditions, Medicare was never intended to cover nonacute LTC needs.
Medicare covers nursing care, short-term care, and post-hospital care for up to 120 days, with an average length of coverage stay of 30 days. Medicare finances LTC only tangentially through its limited skilled nursing facility and home health benefits, and then only after the patient first meets the requirement of a minimum 3-day hospitalization. For homebound persons needing part-time skilled nursing care or physical or other therapy services, Medicare may pay for home health care, including personal services provided by home health aides.
Disabled persons under age 65 are only eligible to receive Medicare benefits after they have received Social Security disability benefits for at least two years. Once LTC needs become too substantial for informal care, individuals rely on their own assets, if any, to pay for formal care. And after these assets are exhausted, they rely on their Medicaid safety net to meet the cost of LTC. Medicare expenditures for LTC services have decreased about 45 percent since 1997 as a result of the passage of the Balanced Budget Act.
The nature of treating acute illnesses has shifted significantly during the past two decades from an inpatient to an outpatient setting. Unfortunately, the Medicare requirements for a minimum of a three-day stay in an acute care facility have not kept pace with current medical practice. Individuals who would have qualified for Medicare LTC services in the 1960s, 1970s, and 1980s no longer qualify simply because of the shift in surgery practice from an inpatient to an outpatient setting. For example, in 1980 outpatient surgeries represented 16 percent of total surgeries. By the 1990s, nearly 62 percent of all surgeries were done on an outpatient basis. This treatment pattern has reduced LTC expenditures for Medicare but has also limited access to LTC services.
Other Public Funds
Other programs pay only a limited amount of LTC expenses. For example, other public programs, including the Veterans Administration and Social Services Block Grant, account for only 2 percent of the total nursing home and home health expenditures.
Within nursing homes, approximately 25 percent of the residents have care financed directly out of pocket. Private health insurance pays only about 6 percent of the total expenditures for nursing home and home health care. As a practical matter, neither medical nor disability policies provide significant coverage for ongoing LTC needs. The fact that 25 percent of LTC costs are paid directly by patients reflects the problems associated with the present financing structure where LTC is provided only after people are impoverished.
Informal Caregivers (Family & Friends)
Over the last 10 years, the nursing home population ratio has dropped by about 10 percent. Relatively speaking, only a small portion of people with disabilities are in fact in nursing homes receiving formal LTC. The vast majority of people suffering from disabilities receive informal LTC in their homes by unpaid volunteers made up of family members, relatives and friends. Of the unpaid caregivers, 91 percent are family members (41 percent adult children, 24 percent of spouses, and 26 percent other relatives). Only 9 percent of the unpaid caregivers are non-relatives. According to a 1996 AARP survey, 73 percent of informal caregivers are women, and 12 percent of informal caregivers are over the age of 65.
In fact, it is estimated that the value of LTC services provided by family members exceeds the cost of nursing home care by about 170 percent. About 57 percent of disabled individuals in this country are cared for by unpaid caregivers. While 36 percent rely upon a combination of both paid and unpaid caregivers; 7 percent rely solely upon paid caregivers. Family members and close friends continue to be the primary caregivers for LTC services and will likely continue to be an important source of caregiving in the future. It is estimated that there were 25.8 million informal caregivers in the United States in 1997. The economic value of informal caregiving is enormous. In 1997, it was estimated to be $196 billion, or 18 percent of the total national spending for health care.
Women and Long-Term Care
LTC is overwhelmingly a women’s issue, since women are the majority of care recipients and caregivers. It is estimated that:
- about three-fourths of nursing home residents are women;
- two-thirds of home care consumers are women;
- more than seven in ten unpaid caregivers are women;
- the average woman can expect to spend 17 years caring for a child and 18 years caring for a parent.
Women have a longer life expectancy than men, outliving males by an average of seven years. Women who reach age 65 can expect to live an average of 19 more years to age 84. Among those who reach age 85 or older, 75 percent are women. With advancing age, disabilities are more prevalent and the need for LTC services increases. For women this is particularly significant since:
- women are 83 years old on average when admitted to a nursing home;
- at age 85 or older, women account for four out of five individuals receiving help for two or more disabling conditions.
Impact On Those Who Provide Informal Long-Term Care Services
The overwhelming majority of persons with disabilities live in their homes or in the home of a child or other family member. There is a heavy health and economic impact on caregivers, the vast majority of whom are women:
- four-fifths of those who give constant care are women;
- on average, caregivers provide 18 hours of LTC per week;
- one-fifth of the caregivers provide at least 40 hours of care per week;
- one-third of caregivers who provide more than 40 hours of care per week report suffering from physical or mental health problems as a result of their caregiving;
- more than one-half of employed caregivers have made changes at work to accommodate caregiving, such as flexible hours, or working fewer hours;
- one/half of all caregivers employed while involved in caregiving gave up work either temporarily or permanently by retiring early or quitting. Over one-half of these caregivers took a leave of absence from their employment.
Economic costs may include lost wages and benefits, loss of discretionary income and reduced leisure time. In a 1999 study by the National Alliance for Caregiving and the National Center for Women and Aging at Brandeis University, it was found that over their lifetimes, caregivers lost on the average $659,000 in lost wages, Social Security benefits, and pension benefits while providing LTC to a family member. A 1997 study estimated that employees who are caregivers cost U.S. employers between $11 to $29 billion annually in lost productivity, time off, etc. Non-economic costs may include stress and exhaustion, or the decrease in physical or mental health that may lead to increased health care resources being devoted to the caregiver as well as to the patients and may exacerbate family destabilization and impoverishment. The costs (both economic and non-economic) associated with informal caregiving are not insignificant.
Financial Barriers To Receiving Long-Term Care
Compared with the rest of the population, persons who need LTC have disproportionately low incomes, are very old, and live alone or with relatives other than a spouse. They also incur substantial costs for acute care services. Only 33 percent of the home-dwelling disabled population ages 18–64 with LTC needs qualify for Medicare coverage. About 50 percent have either private health insurance (28 percent) or Medicaid (25 percent). Ten percent of the LTC population between 18-64 have no health insurance whatsoever. Because many of the individuals with LTC needs are on low, fixed incomes and have trouble covering their own health care costs, they have little, if any, ability to pay for their LTC.
LTC services are costly. The average cost for a nursing home is about $56,000 per year. The average cost of a one-hour home care visit for nursing or physical therapy is about $78. Three visits a week for a year would total about $12,000. Home health care aide services cost, on average $55 per visit. Three visits a week would total more than $8,000 per year. Millions of individuals simply cannot afford these types of out-of-pocket expenses for LTC services because of their low income. Studies show that the median income for those over age 65 is $10,483 for unmarried women, $13,733 for unmarried men and $27,944 for married couples. This impacts elderly women more than men, since 58 percent of women over age 65 are not married, as opposed to only 25 percent of men. For many elderly individuals requiring LTC services, the simple fact is that they barely make enough to subsist and to pay for their own health and medical costs, let alone have funds left over to provide for their LTC needs. Thus individual income and financial limitations form significant barriers to receiving the proper LTC services that they require.
“If we look at the demographics, the graying of America is about to generate an unprecedented need for long term care services that will impact nearly every family in the nation. Many experts agree, elder care will be to the 21st Century what child care has been to the past few decades.”
Joyce Ruddock, Vice President, MetLife, Westport, CN.
History of Long-Term Care Indemnification
Just four or five decades ago, there were few if any nursing homes and home health care nurses and services were unheard of. When those in the elderly population became unable to care for themselves, they were cared for by family or friends. Those with the most serious disabilities, either physical or mental, were placed in mental institutions or state-run hospitals, where they stayed until they died. The 1960s and 1970s brought nursing homes as an alternative for care for the elderly disabled population. With these nursing homes came the advent of supplemental insurance to assist in defraying the cost of care. From this, LTC insurance has evolved to meet the changing manner in which the elderly and disabled receive care.
The history of private LTC insurance as we know it today is less than 25 years old. The first private LTC insurance or indemnification policies were written in the mid to late 1980s. As would be expected, the number of LTC policies initially issued was quite low. Despite the fact that nearly 50 percent of the disabled population requiring LTC of some kind is under age 65, LTC insurance is still thought of by most as a post-retirement issue. As public awareness has increased about the potentially devastating costs associated with LTC, the number of policies issued has grown.
From an insurance standpoint, private LTC insurance today is one of the fastest growing insurance products in the nation. The number of policies sold has doubled in the last 5½ years to approximately 6,000,000. Over the 10-year period from 1987 to 1997, the LTC insurance market grew on average 21 percent per year. A recent study by the Life Insurance Marketing Research Association showed that new sales in the employer LTC market jumped 120 percent in 1999. The total number of employers offering LTC plans increased by 36 percent in 1999 to 3,066 and the total number of participants under employer plans grew by 24 percent to 800,000. Despite these increases, the current levels of private LTC insurance in the United States are extremely low. In 1998, it is estimated that only 2 percent of the total population had any kind of LTC insurance. This could result in a serious funding shortfall for needed LTC services during the next several years.
Participant rates in employer plans average around 10%, but are influenced by employer support contributions, and promotion. For example if payroll deduction is available, participation is higher. If the employer pays a portion of the premium, the participation rate also rises. The higher the age, education or income level of the employee, the greater the rate of participation in LTC insurance.
Types of Long-Term Care Insurance Policies & Benefit Levels
There are several types of LTC policies that individuals can purchase. One type of policy covers nursing home expenses only. Other types of policies only cover certain types of home nursing, therapy or associated expenses. The most popular type of LTC policy being sold today is what is referred to as a comprehensive policy, covering qualified expenses associated with home health care, as well as those associated with institutional or nursing home care.
Most LTC insurance policies have a maximum benefit amount that will be paid out over the life of the policy. LTC insurance can be purchased to pay benefits anywhere from $50 to $300 per day for qualified services or expenses. However, the most popular types of LTC plans provide benefits of $100 to $150 per day for qualified services or expenses for up to 4 or 5 years. To calculate the maximum lifetime benefit available under an LTC insurance policy, you simply multiply the daily benefit times 365 days for one year and then multiply that number by either 4 or 5 years.
Because LTC insurance is not anticipated to be used for several years after its purchase, there is some concern that inflation will erode the value of the benefits purchased. To protect against inflation, most LTC policies offer an inflation protection provision which offers some guarantee toward the value of the benefits purchased. Presently inflation protection provides for an average of 5% compounded increase in the value of the daily benefits purchased. This inflation protection does not come cheap. In most instances it doubles the amount of the premium of LTC insurance.
Cost of Premiums
There are many variables affecting the cost of LTC insurance premiums including the amount of daily coverage purchased, the number of years of coverage, the length of the qualification or elimination period which can be anywhere from 20-90 days, the compounded rate of inflation protection, and whether there is some type of nonforfeiture benefit in the event an individual dies before using his/her LTC insurance.
Average annual LTC insurance premiums for leading LTC insurance sellers in 1997* were as follows:
|Age||Base||With 5% Compounded Inflation Protection (IP)||With a Nonforteiture Benefit (NFB)||With IP & NFP|
*Premiums are generally for a $100/day nursing home care, at least $80/day assisted living facility care and at least $50/day home care, four years of coverage, and a 20-day elimination period.
Source: HIAA LTC Survey, 1999.
However, the premiums are reduced somewhat (between 5 percent-15 percent) if the LTC insurance is purchased on a group basis through an employer as opposed to an individual policy only.
Who purchases Long-Term Care Insurance and What Do They Purchase?
On average, active employees who purchase LTC insurance through their work place, do so at age 43. Among retirees and individual LTC buyers, the average age of purchase is 64. Married couples comprise about 60 percent of all buyers. The male/female split is about 40 percent male and 60 percent female. The average annual income of the buyers before retirement is around $40,000. The median income of elderly post-retirement households is $21,729.
Of the plans being sold today, most people purchase between $100 and $150 a day worth of coverage. Seventy-five percent of those buying LTC insurance purchase comprehensive plans that would include coverage for both facility care and home health care. Furthermore, more than 50 percent of the people purchasing policies from a major LTC insurer are also purchasing inflation protection.
Some LTC policies have a non-forfeiture provision that will pay reduced benefits, even if the policy were to lapse. One large insurer reported that 65% of their group LTC certificate holders have a non-forfeiture benefit.
Most major companies offering LTC policies have a built-in portability provision, which allows an employee who purchased a group LTC policy to be able to keep the policy in place even after termination of employment. Often, the only difference to the employee is that he/she is now making a premium payment directly to the insurance company, instead of having the premium automatically deducted by their employer from their paycheck.
Presently, companies offering LTC insurance engage in some type of underwriting. The purpose of underwriting is to promote a stable premium by excluding individuals or increasing premiums for those most likely to need LTC services. Companies use demographics, including age, health and income to price their products. In some instances, underwriting for employer groups prevents an LTC product from being offered, resulting in workers having to purchase individual policies which are more expensive.
Factors Influencing Long-Term Care Coverage
There are tremendous barriers to the concept of indemnification for LTC. Knowledge is one of them. Individuals wrongly believe that Medicare will pay for long-term care and nursing home expense. The one thing that the government might do most quickly to help change the dynamics regarding LTC would be to begin telling the American public repeatedly that the United States Government does not and will not provide LTC or nursing home expenses, except for those few who become Medicaid eligible or otherwise qualify for Medicare coverage, which at best is very limited. LTC insurance can be deemed inheritance or asset protection. At the present time, most LTC insurance policies are being purchased by individuals to buy protection for their parents, as opposed to protection for themselves, in order to help protect their parents' assets. This is particularly true with higher income individuals.
For all practical purposes, many of the nation’s retirees have a single cash income source, Social Security. The median total financial resources for this group are just $10,125 annually. Thus this group has no financial resources to purchase LTC insurance. At best, only 5 – 7 percent of the retired population have the resources to purchase private LTC insurance.
Why People Purchase Long-Term Care Insurance
The primary reasons people purchase LTC insurance are:
- for financial or asset protection;
- to not be a burden on their families;
- to maintain independence and control over what happens to them later in life;
- the history and financial strength of the company selling the LTC insurance.
Why People Do Not Purchase Long-Term Care Insurance
Factors influencing people not buying LTC insurance include:
- lack of urgency – many people take two or more years to purchase LTC insurance after initially requesting information;
- misunderstanding or misconception that they have LTC coverage through their major medical plans or disability plans;
- belief that Medicare will pay for their LTC needs;
- belief that their LTC needs will be met by Medicaid;
- denial that they will need LTC insurance;
- misconception that it costs more than it actually does;
- competing financial obligations (mortgage, college, etc.);
- lack of planning – most people under age 50 have not seriously planned for their retirement, let alone their post-retirement health and LTC needs.
“I think rate increases for policies covering long-term care insurance are something that should be the very, very last resource.”
Tom Foley, Director, Accident and Health Division, Department of Insurance, State of Kansas, Topeka, KS.
One of the important consumer concerns associated with LTC care is proper disclosure of not only what services and expenses are covered, but what triggers the benefits, whether the premium is level, and whether any portion of the premium is non-forfeitable. Non-forfeiture basically means that if a consumer never uses all of his/her LTC insurance benefits, a portion of the premium paid for LTC insurance is returned. Other issues of disclosure should include the company’s history of claims, history of premiums, and any premium increases that have been made. Because of the relative newness of this market and associated products, it is somewhat difficult to predict whether premiums are or will be adequate.
Companies offering LTC insurance are focusing their marketing efforts on younger workers and individuals. By so doing, the companies are ensuring their long-term viability, presuming that the younger a buyer is, the longer it will be before he/she will make a claim for LTC insurance. On average, individuals purchase LTC insurance 12 years before they use it. Nevertheless, the premiums for LTC insurance are still fairly high, even for younger purchasers. While LTC companies report their lapse rate on policies purchased to be around 5 percent, regulators believe the rate is or could be much higher, thus impacting not only the stability of the rates but also the long-term solvency of the companies selling these products. Regulators actively support proactive measures, including consumer education to assist in reducing lapse rates for LTC
Premium Rate Stabilization
The large successful companies offering LTC insurance have had a good history of rate stabilization. One of the key components to rate stabilization is claim costs. Claim costs are determined by the average amount of the claim. This can be fairly easily calculated and estimated. However, what is more difficult is determining the frequency of the claims. There has not been a tremendously long history associated with LTC insurance, and therefore, the frequency with which claims are submitted is more difficult to ascertain. For life insurance, the claim curve is relatively flat until people get into their 70s. By the time people reach their 80s, this claim curve increases dramatically. However, with LTC insurance, the claim curve is not necessarily associated with age and it could increase at any time.
One of the key components to rate stabilization and affordable premiums is to ensure that only catastrophic coverage is purchased. Adding a lot of the “bells and whistles” to LTC policies to cover many of the IADLs could result in hard to predict premiums. Relying upon family members to provide assistance with IADLs and having consumers purchase catastrophic LTC coverage only would assist in keeping the premium affordable and stable for consumers and would also assist LTC companies in remaining solvent and viable. However, such coverage requires individuals to financially prepare for the non-catastrophic expenses excluded under such policies. While the insurance industry has faced some criticism because of rate increases from a few companies, the majority of insurance companies have not raised rates on LTC policies. Stability in group and individual premiums is essential to encourage purchase of private LTC insurance.
Model Rules On Long-Term Care Insurance
The National Association of Insurance Commissioners recently adopted amendments to their model regulations to address consumer concerns about premium stability in the LTC insurance market. The model rules:
- contain disclosure requirements aimed at informing LTC insurance applicants of the potential for future rate increases, including the rate increase history of the insurer on the particular policy;
- stipulate that insurers must reimburse rate increases that are later found to be unnecessary;
- provide for review of administration and claims practices;
- provide for an option to convert LTC policies experiencing rate hikes;
- require actuarial certifications for those who price policies; and
- authorize the state insurance commissioners to ban companies from the marketplace that frequently file for rate increases.
This proactive approach by NAIC, in conjunction with state regulators, should assist in promoting adequate consumer protection issues in the LTC insurance market.
Loss Ratio/Solvency Of Companies Selling Long-Term Care Insurance
Some concern exists that companies marketing LTC insurance will not be able to remain solvent, due to a potentially high volume of claims. To remain solvent, viable, and competitive, companies are required to set adequate premiums. Companies selling LTC insurance report spending an average of 60 percent of the collected premiums for individual policies and 70 percent of the collected premiums for group policies. In other words, the companies are retaining 30-40 percent of the premiums on the policies that have been sold for reserves, expenses, and profit. In time, it is expected that these retentions will become smaller as the market matures. It is also expected that group policies will have lower retentions than individual policies. It is important that these retentions be reduced in order for policy makers to justify further tax incentives for LTC products.
Consumers may have some concern that the company from which they purchase an LTC insurance product will be solvent when they require LTC services in 25-50 years. The large insurance companies offering LTC have priced their LTC products through actuarial analysis in such a manner that the premiums have been stable and the rate history is within acceptable margins. Furthermore, state regulators are heavily involved in the LTC market to help ensure the long-term viability of LTC plans and the solvency of the companies offering LTC insurance.
“Qualified long-term care is treated generally like medical care… under current law.”
Bill Bortz, Attorney Advisor, Associate Benefits Tax Counsel, Department of Treasury, Washington, D.C.
Individual Premiums and Expenses
For tax treatment, qualified LTC expenses that exceed 7.5 percent of a taxpayer’s adjusted gross income, including premiums for qualified LTC insurance policies, are deductible for income tax purposes. The deduction for the premiums is subject to an age-graded annual dollar cap that is adjusted periodically for inflation. The dollar cap constrains the tax subsidies so that they are limited to modestly priced policies. The dollar cap also has the effect of serving to keep policy costs down.
Effects of HIPAA
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) clarified that for federal income tax purposes, LTC insurance is to be treated essentially the same as major medical insurance. More specifically, HIPAA provided that:
- benefits from private LTC coverage generally are not taxable;
- employers can deduct the cost of establishing an LTC insurance plan for employees and contributions toward premiums;
- employer contributions to LTC premiums are excluded from the taxable income of employees; and
- LTC insurance premiums and out-of-pocket costs for LTC services can be applied toward meeting the 7.5 percent threshold in the federal tax code for medical expense deductions. (Limits, based on the policyholder’s age, are still placed on the total premium amount that can be applied toward the 7.5 percent threshold).
HIPAA clearly raised awareness of the value of private LTC insurance. While HIPAA seemed to have a positive impact on employers’ attitudes about LTC insurance, it had no significant impact on coverage growth rates or the reduction of future government financing of LTC services.
Tax Deductions vs. Tax Credits
Current tax law provides for an itemized deduction for qualified LTC premiums and expenses. This means that no tax benefit is realized until qualified medical expenses, including LTC premiums, exceed 7.5 percent of adjusted gross income. Historically, when a tax benefit is offered in the form of a deduction, it primarily benefits individuals who are in higher tax brackets. This is because of the very nature of America’s progressive tax system. In situations where Congress is concerned about a specific tax deduction, it has phased out the deduction for higher income-bracketed individuals, as is currently done for personal exemptions and itemized deductions. Of course, the purpose of tax subsidies is to advance the purchase of goods/services that serve a social objective to make them less expensive than other consumption goods that individuals might otherwise purchase. Deductions become more valuable as an individual’s income bracket raises. The present below-the-line deduction requires taxpayers to file itemized medical/dental schedules. Since less than 5 percent of taxpayers itemize their medical/dental claims, this deduction is available to very few individuals. By comparison, tax credits are of similar value to all taxpayers, as long as they pay taxes in an amount that is equal to or greater than the amount of the credit. Proponents of tax credits believe that they are a more fair way of providing incentives to taxpayers.
Through the use of tax incentives, Congress has advanced certain important social policy initiatives. Examples include expenses for medical coverage and payments for tax qualified retirement payments. The tax incentives approved by Congress have resulted in more Americans being able to afford and thereby purchase health insurance and the current voluntary retirement system was largely developed because of tax policy. Some believe that by comparison, the same social objectives exist for Congress to make LTC insurance more affordable by providing an incentive
Under current tax law, individuals must be chronically ill to receive benefits under a qualified LTC insurance contract and to have deductible qualified LTC expenses. Proponents of the above-the-line tax deduction would similarly limit the deduction currently proposed to premiums paid under a qualified LTC insurance contract or to qualified LTC expenses incurred on behalf of a chronically ill individual. Qualified LTC expenses are limited to certain types of expenses (i.e., necessary diagnostic, preventive, and therapeutic expenses) that are incurred on behalf of a chronically ill individual and included in a plan of care prescribed by a licensed care practitioner. Generally, living expenses do not qualify under this definition. Furthermore, proponents of an expanded tax deduction believe that LTC insurance does not have the inherent problems associated with health insurance such as adverse selection or exclusion, thus justifying enhanced tax subsidies.
Opponents of an enhanced tax deduction for LTC insurance have concerns about the relative newness and immaturity of the LTC market, the difficulty of predicting the LTC market, the possibility for rate increases, and the potential for policy lapses. The recent passage of the Long-Term Care Security Act (P.L. 106-265 ) allowing federal workers, retirees, and their families to purchase qualified LTC plans at discounted rates would seem to suggest that the government has confidence in the LTC market. Furthermore, recent information from the American Council of Life Insurers, “Long-Term Care Insurance,” The Life Insurance Fact Book, 1999, indicates that the termination or lapse rates for in-force and new LTC policies has reduced. In 1997, the LTC policy lapse rate was 5.4 percent, based upon actual experience. In recent years, the average termination rate for long-term care insurance has declined. In the individual market, 2 percent of policyholders voluntarily lapsed or replaced their policies in 1997 vs. 6 percent in 1992. Group terminations fell from 8.5 percent in 1995 to 7 percent in 1997. Some argue that allowing for an above-the-line deduction and for inclusion in Section 125 plans could have the result of reducing the lapse rate by making qualified LTC insurance more affordable to many individuals. Others stated they believe allowing LTC premiums to have an above-the-line deduction and be included in Section 125 plans is inherently regressive.
Cafeteria Plans And Flexible Spending Accounts
Some believe that HIPAA should be modified to allow for LTC insurance premiums to be made available to employees through cafeteria plans and flexible spending accounts, like health insurance. Cafeteria plans and flexible spending accounts are different than deductions in two ways. First, they do not benefit the population base as a whole, but rather only those individuals working for companies with qualified plans. Second, the benefit realized through a cafeteria plan or flexible spending account is slightly greater than a typical tax deduction, because there are no FICA or Medicare withholdings on monies placed in cafeteria plans or flexible spending accounts. Other advantages to Section 125 plans include:
- they are subject to income nondiscrimination standards;
- they target younger people – those still in the work force – for whom the purchase of LTC coverage is more affordable;
- the employer does the marketing; and,
- the employer does the administration and the payments are made automatically through payroll deduction.
Regardless of the way in which LTC costs or insurance premiums may be presently treated, changes are sure to be considered as the American population ages and LTC becomes a more important issue.
“This will by far be the largest employer sponsored long-term care offering that this nation, or I imagine, the world has ever seen.” (Referring to The Long-Term Care Security Act, H.R. 4040)
Frank Titus, Assistant Director of Insurance Programs, Office of Personnel Management, U.S. Government.
“The whole purpose of a tax deduction is to provide, to try and induce people to undertake what public policy makers or politicians believe is socially desirable behavior.”
Marc Cohen, Ph.D., LifePlans, Inc.
Politicians are focused on health and senior issues as never before. While the greatest attention has been paid to healthcare reform, Social Security, Medicare, and prescription drug benefits for seniors, some attention has also been focused on LTC caregivers. The reason for the focus on caregivers now is simple demographics. There are tremendous numbers of caregivers in America. Eighty-eight percent of all people who receive LTC are receiving services in the community. Sixty percent of seniors receiving help in the community rely exclusively on unpaid relatives. Seniors themselves make up more than 50 percent of all the current estimated 37 million caregivers in America today, with half of these senior caregivers describing their own health as fair to poor. To address the present and future needs of society, several proposals and recommendations have been made and one has been recently signed into law.
Long-Term Care Insurance For Federal Workers and Retirees
On September 19, 2000, President Clinton signed into law The Long-Term Care Security Act (P.L. 106-265). Under this Act, the Office of Personnel Management is authorized to negotiate discounted rates with private insurers for qualified LTC insurance plans, and to otherwise provide LTC insurance for federal workers, retirees, and their families. In referring to this new law, President Clinton said, “Our hope is that, by making high-quality private long-term care coverage available to the Federal family at negotiated group rates, we will continue to serve as a model to other employers across the Nation.” This new law will allow up to 13 million people to purchase LTC insurance at discounted rates, although it is estimated that only 300,000 will initially participate in the program. While the employees will be required to pay 100 percent of the premiums for the LTC insurance under this law, premiums will be deducted from their payroll. While far short of clear national policy on LTC, this new law is a positive first step.
Current Presidential Proposals
In conjunction with the signing of The Long-Term Care Security Act, President Clinton also urged Congress to pass a $3,000 tax credit for formal and informal LTC for people of all ages with three or more ADLs or a comparable cognitive impairment. This proposal is expected to help about 2 million people, including 1.2 million seniors. The administration estimates the costs for this proposal to be about $8.8 billion over 5 years. The President has also called for reauthorization of the Older Americans Act and funding for a caregivers program under the law. That proposal would cost $1.25 billion over 10 years and would support a nationwide program of support for families who care for elderly relatives with chronic illness. It is estimated that 150,000 families would receive help under this proposal. In addition to President Clinton’s proposals, Vice President Gore has proposed a caregiver tax credit, and Governor Bush has proposed an above-the-line deduction for LTC premiums.
Current Congressional Proposals
There are several pieces of proposed legislation in Congress that deal with the LTC issues. One of these is the National Family Caregiver Support Grant Program. Basically, this proposal would establish a state grant program to provide caregivers, particularly seniors, with information about services, assistance in gaining access to those services, individual counseling, support groups, training for special care needs, respite care, and then supplemental services to augment what caregivers are providing themselves. To qualify, individuals would need to be caring for a senior who required assistance with at least 2 activities of daily living (ADLs) and who also have some type of cognitive impairment. Priority for the program would go to low income and
Another proposal is to help caregivers by providing a $3,000 tax credit to cover LTC expenses. To qualify, a physician must certify that the individual needs help with at least three ADLs. Under the proposal, this credit would be phased in over four years and would be reduced for higher income individuals. The estimated cost is $35 billion over 10 years.
Another proposal before Congress calls for an above-the-line tax deduction for LTC expenses. An above-the-line 100 percent tax deduction for LTC insurance premiums would effectively reduce the net premium costs for policies. Since price is a major consideration in the purchase of LTC insurance, some believe that an above-the-line tax deduction which effectively reduces the cost of LTC insurance premiums should encourage growth in the market. Others believe an above-the-line deduction is regressive. In the first year in 2001, individuals would be able to deduct 60 percent of their premiums, with a 10 percent increase per year until it reaches 100 percent. An accelerated schedule would apply to those over age 55, who would be able to deduct 60 percent of the cost of their premiums the first year, with a 15 percent increase per year until they reach 100 percent. This deduction would be capped at base age deduction levels that are currently in the Tax Code which is $2,000 for individuals ages 61-70 and $2,500 for those over 70. This legislation would also allow employers to include the deduction provision for LTC policies in cafeteria plans and flexible spending accounts.
The most comprehensive proposed legislation by, among others, Senator Bob Graham of Florida (H.B. 3872 & S. 2225), includes all of the previous proposals, plus a few other things, including consumer protection issues and a public awareness campaign to educate people about what Medicare will and will not cover, patterned after HCFA’s present public awareness campaign.
Each of these bills has become stalled in Congress and it is unknown which, if any, of them will be passed in the remaining session. Based upon present public awareness, the bills that have been introduced this Congressional Session, and the enthusiasm expressed by the presidential candidates for some type of LTC tax incentive, the future prospects look promising for some type of LTC legislation providing a tax credit or a tax deduction.
Impact of LTC Insurance on Public Funds
Some believe that increased growth in the LTC insurance market would reduce Medicaid and Medicare expenditures since those with LTC insurance would be less likely to access or rely upon Medicare or Medicaid. Some estimate that every 100 individuals with LTC insurance saves Medicare $20,647 annually. If there was widespread employer-sponsored and either subsidized or paid LTC insurance for employees, the number of people dependent on Medicaid could drop by 16 percent and Medicaid expenditures could decline by 18 percent by 2018.
Some researchers estimate that an above-the-line tax deduction would result in an increase in the purchase of LTC insurance policies between 16 percent and 26 percent, resulting in Medicaid savings of $.80 to $.90 for every $1.00 in tax expenditures. Other researchers suggest that such a tax deduction would have no impact on the senior and retired population since many of them pay little, if any taxes. These researchers further suggest that the cost of such a tax deduction would be very significant, and that there would not be any corresponding reduction in Medicaid long-term care expenditures.
Other Social Policy Considerations
In addition to potential Medicaid savings and increased enrollment in LTC insurance, other social policy reasons exist for an above-the-line tax deduction. In addition to the peace of mind of knowing that there will be sufficient resources to pay for LTC, if needed, private LTC coverage can bring significant improvements in quality of life. Studies of policyholders, claimants, and informal caregivers suggest that the presence of LTC insurance can:
- allow individuals to live in their homes longer;
- provide more choice or control over their care;
- delay or prevent institutionalization;
- enable easier access to home care and/or assisted living;
- provide a greater choice of LTC services and providers;
- ease the financial, physical, and emotional burdens on families providing care in the home; and
- preserve assets for heirs.
“A prerequisite to widespread employee ownership of LTC insurance is widespread employer sponsorship of LTC Plans.”
Employer-Sponsored Long-Term Care Insurance: Best Practices for Increasing Sponsorship, Jeremy Pincus, EBRI Fellow, EBRI Issue Brief Number 220 page 5, April 2000.
"What affects participation? Certainly the endorsement of the employer is very important."
David S. Martin, General Director, Long-Term Care, John Hancock Life Insurance Company.
“What I would like to put before you is the time has come to incorporate long-term care planning as a crucial component of an overall sound retirement plan.”
Barbara Stucki, Consultant, American Council of Life Insurance, Washington, D.C.
Employment-based LTC insurance may offer the best mechanism for broad expansion of LTC indemnification at affordable rates. However, the data suggests that employer-based availability of LTC plans is relatively rare, especially among smaller employers. In addition, employer-based availability will not materially change without significant investments in employer education and new incentives.
Percentage of Companies Offering Long-Term Care Insurance
Relatively few U.S. employers currently sponsor group LTC plans for their employees. The United States Bureau of Labor Statistics estimates that 7 percent or less of all full-time employees in America were offered LTC plans by their employers. While the total number of employers offering LTC plans increased in 1999 to 3,099 employers, only 0.2 percent of employers with 10 or more employees sponsor LTC coverage. Large employer sponsorship of LTC coverage increases to 0.7 percent, but this figure is still very low. Because the market is so large and virtually untapped, smaller employers provide the greatest potential for expansion of LTC indemnification.
Different Types of Employer Participation
Most employers offering LTC plans to their employees do not contribute to the cost of the plans themselves. Rather, they negotiate a group premium rate and then make the plans available to the employees who must pay the entire cost of the premium. A limited number of companies pay the premium for a base level of coverage, allowing employees to purchase such additional coverage, as they desire. An even smaller number of companies pay a larger percentage of the premium for LTC policies for their employees, usually made up of key executives. Overall, less than 28 percent of employers who offer LTC insurance coverage to their employees contribute toward premiums.
Factors Affecting Employee Participation
Employers who positively and actively promote LTC insurance, and those who tailor plan design, education, marketing, and enrollment to the needs of their employee population experience a significantly higher enrollment rate than those who do not. Employers who agree to allow employees pay the LTC premium through payroll deductions also experience a higher enrollment rate. Proponents of LTC insurance suggest that LTC insurance enrollment rates for employees will remain low until employers start to contribute to coverage rather than offering it as a noncontributory benefit. While LTC insurance should be closely tied to employee retirement planning, studies strongly suggest that the increase in employee enrollment is closely related to employer involvement. Obviously the more active role an employer plays, the more likely it is that the employees will enroll in LTC insurance. As such, the benefits of employer participation cannot be overemphasized.
LTC As An Important Retirement Planning Component
LTC planning and insurance are integral components of an overall retirement plan, without which traditional retirement plans are incomplete. Over the last several years, we have seen very significant changes in our nation's retirement system. The time is passing when retirees can depend on their employers to provide defined benefit plans as the foundation for their retirement income. Instead, a lot more individuals these days are participating in defined contribution plans, which of course, means that they are having to take on a lot more of the risk of ensuring that their savings are adequate for retirement as well as protecting their savings against potential loss. The time has come when retirement planning includes not just accumulation, but also protection of their retirement savings.
The greatest risk to excess loss in retirement savings today is unanticipated LTC costs. Many people are unaware of the high cost of care, either in an institution or in their home, until such services are required for themselves or their family members. The cost of a part-time home health aide that today is between $12,000 to $16,000 annually, could increase to as much as $68,000 annually within thirty years. By comparison, nursing home costs could be as much as $190,000 annually in thirty years. These are very substantial costs that clearly represent a significant threat to an individual's retirement nest egg. Obviously, most workers are simply unable to save the amount required to cover their LTC expenses, in addition to the amounts they are already saving for retirement.
Although LTC costs pose a significant threat to the loss of retirement savings and the resulting diminishment of quality of life during retirement, LTC insurance could mitigate, if not eliminate this threatened loss. The cost of LTC insurance is significantly less than the amount of money an individual would have to save, in addition to any retirement savings, to cover the cost of post-retirement LTC services. Individuals can take more responsibility for their LTC needs by incorporating LTC insurance into a retirement plan. By so doing, workers can be assured that their retirement savings will be protected and will not be diverted from normal expenditures to pay for LTC services, should that need ever arise.
“Long-Term Care is one of the most regulated industries in America next to nuclear energy and nuclear waste.”
M. Keith Weikel, Senior Executive Vice President And Chief Operating Officer, Manor Care, Inc.
The Working Group on LTC was not able to comprehensively address the issues raised by the LTC provider industry. However, the Working Group believes there were issues raised that merit further analysis. The LTC provider industry identified several conditions which negatively impact the viability of the LTC provider industry and the quality of LTC services offered in America, thus raising questions about the future of LTC services, particularly in light of the huge anticipated increase of projected need. These issues are discussed below:
Market Capitalization And The Balanced Budget Act Of 1997
The market capitalization of the LTC provider industry has declined 80 percent since 1997, from $14 billion to $2 billion. The Balanced Budget Act of 1997 resulted in reductions in Medicare spending for skilled nursing facilities that will exceed estimates of the Congressional Budget Office by $15.8 billion by 2004. This unexpected and significant shortfall in Medicare reimbursement and the reduction in market capitalization has played a significant role in the bankruptcy filings of five of the largest national nursing home companies. Nearly 1,900 skilled nursing facilities that care for more than 225,000 patients are in some state of bankruptcy. This represents 11 percent of the total beds in the United States.
Reduced Medicaid Reimbursement
Present Medicaid reimbursement rates are low ($4 per patient hour for all services related to patient care). This rate must cover all services related to patient care including room, board, certain therapies, food, facility overhead, nursing care, linen, and caregiver salaries. This low reimbursement rate raises significant concern as to the quality of care and the financial viability of the LTC industry.
Over the years, the federal, state and local governments have implemented various regulatory and inspection requirements for nursing homes and other LTC provider facilities. Not surprisingly, LTC provider facilities now undergo numerous time-consuming and often duplicative inspections and surveys by these various governmental entities. Witnesses before the Working Group expressed concern that the lack of effective coordination between the governmental entities in the regulatory and inspection process has resulted in inefficiency and confusion. Witnesses also stated that even the number of deficiencies reported by inspection and survey teams varies significantly from state to state and even from team to team.
The regulatory and inspection process has increased in response to claims of poor patient quality care, resulting in what some believe to be over-regulation of this industry. The regulatory and inspection process has become so adversarial that it is counter-productive and demoralizing to the actual caregivers. Many of these regulatory processes, inspections and surveys appear to be outdated and do not improve the quality of care offered. Rather they increase costs and reduce the quality of care that is able to be provided. The caregivers and provider facilities have claimed to have dedicated so much time and resources to responding to the various regulations, inspections, and surveys that they cannot provide the quality of care they desire to give to those actually in need. These excessive regulations have affected the LTC provider facilities financially. Many are unable to pay their skilled nursing and assistant staff competitive wages. As a result, caregivers are becoming more and more discouraged with the regulations and leaving the field altogether, seeking higher paying employment in traditional medical facilities.
Shortages of Skilled Long-Term Care Providers
This Nation is presently suffering from a shortage of nurses and nursing assistants, which is only expected to get worse. A 1992 study by the Bureau of Health Profession within the Health Resources and Services Administration estimated that the need for registered nurses in the labor force to care for persons age 65 and older will increase from 110,000 in 1991 to 184,000 in 2020. The number of Licensed Practical Nurses needed would grow from 197,000 in 1991 to 338,000 in 2020, and the need for nurses aids will increase by 69 percent to 1.12 million.
Nevertheless, enrollment in college nursing programs has steadily declined over the past five years by more than 20 percent and the number of registered nurses in the workforce is expected to peak in 2007 and decline thereafter. In addition to a nursing shortage, there is also a shortage of gerontologists, geriatricians and nursing assistants. This shortage is exacerbated by LTC provider facilities' inability to pay competitive wages. It is estimated that certified nursing assistants are paid 16 percent less in nursing homes than in hospitals. Furthermore, the stringent and pervasive regulatory process in LTC facilities makes the work environment unattractive.
In addition to the expert witnesses, the Working Group, the Report, Findings and Recommendations also rely upon the following:
Adams, Stephanie, Heather Nawrocki and Barbara Coleman, Women and Long-Term Care, AARP Public Policy Institute (American Association of Retired Persons, 1999).
Arno, Peter S., Carol Levine and Margaret M. Memmott, “The Economic Value of Informal Caregiving”, Health Affairs Vol. 18, No. 2 (March/April 1999)
Cohen, Mark A., Ph.D. and Maurice Weinrobe, Ph.D., “Tax Deductibility of Long-Term Care Insurance Premiums: Implications for Market Growth and Public LTC Expenditures”, Health Insurance Association of America (March 2000)
Coronel, Susan A., “Research Findings: Long-Term Care Insurance In 1997-1998”, Health Insurance Association of America (March 2000)
Feder, Judith, Harriet L. Komisar, and Marlene Niefeld, “Long-Term Care in the United States: An Overview”, Health Affairs, Vol. 19. No. 3 (May/June 2000)
GAO, Long-Term Care Insurance: Better Information Critical to Prospective Purchasers (GAO/T-HEHS-00-196, Sept. 13, 2000)
GAO, Long-Term Care: Current Issues and Future Directions (GAO/HEHS-95-109, April 13, 1995)
Graves, Natalie R. Long-Term Care Fact Sheet, AARP Public Policy Institute, (American Association of Retired Persons, 1997)
Long-Term Care: The President’s FY2001 Budget Proposals and Related Legislation (CRS Report for Congress, March 28, 2000)
Long-Term Care Insurance Model Regulation
National Association of Insurance Commissioners, A Shopper’s Guide to Long-Term Care Insurance (1996)
National Association of Insurance Commissioners, Long-Term Care Insurance Model Regulation (2000)
Pincus, Jeremy, “Employer-Sponsored Long-Term Care Insurance: Best Practices forIncreasing Sponsorship,” EBRI Issue Brief no. 220 (Employee Benefit Research Institute, April 2000).
Pincus, Jeremy, “Voluntary Long-Term Care Insurance: Best Practices for Increasing Employee Participation,” EBRI Issue Brief no. 221 (Employee Benefit Research Institute, May 2000).
Working Group on Long-Term Care: Issues and Options Findings
An impending long-term care (LTC) crisis exists in the United States that requires serious public policy attention. The crisis is multi-faceted and relates to virtually every aspect of the LTC system. Clearly, the need exists for a broad-based, well-coordinated policy initiative that addresses all of the components of a difficult problem. Serious shortfalls in financing resources will occur that will severely restrict access to needed LTC. This could undermine the viability of the current system for providing LTC services.
Serious problems also exist in the LTC provider industry. Market capitalization of the LTC provider industry has experienced significant declines and there is projected to be a serious shortfall of properly credentialed gerontologists, geriatricians, nurses, nurse assistants, and other caregivers that will be needed to provide quality LTC services in the future.
The issues associated with LTC will only become aggravated in the future as the population continues to age and the demand for LTC services increases. Another major problem is that there are significant misunderstandings in the general population that need to be corrected about the availability of LTC support services in Medicare, Medicaid, and private health insurance policies. Finally, it is clear that the long-term care problem has a disproportionate impact on women, both in terms of their role as caregivers and as recipients.
The Working Group on LTC: Issues and Options has received testimony from expert witnesses, research groups, insurance regulators, the LTC insurance industry, LTC providers, professional associations, and the federal government. Based on this testimony, information submitted by witnesses, and relevant research, the Working Group makes the following specific findings:
General Findings: The Significance of the Long Term Care Problem
- The LTC problem has many dimensions, each of which individually constitutes a serious public policy concern. Taken collectively, the issues related to LTC affect virtually every aspect of the long-term care system and constitute a potentially serious public policy concern.
- In the future, the problem will get significantly more serious as the population continues to age. It is estimated that by the year 2050, the population older than 85 will increase 355 percent.
- Long-term care is not just a problem of the aged. A majority of the severely disabled are older than 65. However, it is estimated that 45 percent of the disabled population is younger than 65.
- A majority of the population age 85 and older (52.7 percent) have problems with activities of daily living or are institutionalized. Although disability rates have been falling during the last 10 years, and are expected to continue to drop in the future, the number of individuals who have problems with activities of daily living will increase substantially.
- Even though there appears to be cause for major concern, there is not a well- articulated comprehensive and coordinated
- A need also exists for more effective coordination within the various agencies of the federal government in the development and implementation of LTC policy.
- It will be extremely important for the federal government to send a strong message about the significance of the impending LTC crisis by promulgating well-articulated and coordinated public policy initiatives relating to all aspects of the LTC problem.
Long-term Care is a Significant Issue For Women
- Long-term care is overwhelmingly a women's issue. Because women have longer life expectancies than men, they become the primary caregivers for long-term care services. In addition, women are the primary recipients of LTC services. About 75 percent of nursing home residents are women, two-thirds of home care consumers are women, and more than seven in ten unpaid caregivers are women.
- Women have more significant financial barriers to LTC than men. Some 58 percent of women age 65 or older are widowed, divorced, or never married compared to only 25 percent of men. The median income level for women in this category is $10,483 compared to $13,733 for men and $27,944 for married couples.
The Federal Government's Role in Financing Long-term Care is Significant But Will be Inadequate. Additional Tax Incentives for the Private Sector and Individuals May be Necessary
- In the current LTC system, the federal government is the primary source of financing. In 1998, it is estimated that between Medicare, Medicaid, and other programs the federal government paid $74 billion, or 64 percent, of LTC expenditures in the United States.
- Because of the extensive resources required to stabilize the Social Security Trust Fund and the Medicare Trust Fund and to expand Medicare to cover prescription drugs, it is uncertain the federal government will provide sufficient resources to support the expanded need for LTC services in the future.
- Direct provision of LTC service by the federal government through Medicare, Medicaid, or some other mechanism may be the most efficient way to broadly deliver needed LTC services to the population. However, it is unlikely that the federal government will ever undertake such an initiative. Therefore, other options must be explored.
- Because the nature of treating acute illnesses has shifted significantly during the past several years from an inpatient to an outpatient setting, the current Medicare requirement for an inpatient stay before accessing long-term care services appears to be outdated. Individuals who would have qualified for Medicare LTC services in the 1960s, 1970s, and 1980s no longer qualify simply because of the shift in surgery practice from an inpatient to an outpatient setting. This treatment pattern has reduced LTC expenditures for Medicare.
- In 1980, outpatient surgeries represented 16 percent of total surgeries. By 1990 nearly 62 percent of total surgeries were done on an outpatient basis.
- Outpatient surgeries for the age cohort over 65 has increased similarly.
- The Health Insurance Portability and Accountability Act (HIPAA) clarified the tax treatment of LTC insurance premiums by allowing deductibility for premium costs that exceed 7.5 percent of adjusted gross income and tax-free receipt of pay-outs for qualified policies. According to an Employee Benefit Research Institute (EBRI) study, the HIPAA clarification did have an impact on employers' attitudes about long- term care, but it has not had any significant impact on coverage growth rates that will expand LTC indemnification or reduce future government financing of LTC services.
- The current tax system may not create adequate incentives for individuals to purchase LTC insurance. Without such a system of public tax expenditures, it is less likely that individuals will assume any responsibility for their own indemnification in a voluntary employer-sponsored system where the employer may pay nothing or only a small portion of the total cost.
Long-term Care Insurance Can be Affordable But Coverage Levels are Low
- Current levels of private LTC insurance in the United States are extremely low. In 1998, it is estimated that 2.0 percent of the total population had any kind of LTC insurance. This could result in a serious funding shortfall for needed LTC services during the next several years.
- Private LTC insurance can be affordable for many Americans if purchased at younger ages. By contrast, policies purchased by those age 65 and older are only affordable to those who have significant resources. A typical policy without inflation protection purchased at age 45 has a fixed annual base premium of $274. At age 50, this increases to $385, and at age 65, the annual cost is $1,007. With inflation protection, these rates about double at younger ages.
Employment-based Long-term Care Insurance is Rare, But May Provide the Best Opportunity for Expansion of Coverage
- Employment-based LTC insurance may offer the best mechanism for broad expansion of LTC indemnification at affordable rates. However, the data suggests that employer-based availability of LTC plans is relatively rare, especially among smaller employers. In addition, employer-based availability will not materially change without significant investments in employer education and new incentives.
- Only 0.2 percent of employers with 10 or more employees sponsor LTC coverage.
- Large employer sponsorship of LTC coverage is still low but significantly higher (0.7 percent).
- Because the market is so large and is virtually untapped, smaller employers provide the greatest potential for expansion
- Employers who positively and actively promote LTC insurance, and those who tailor plan design and enrollment to the needs of their employee population, experience significantly higher enrollment than those that do not.
- Employers who agree to pay a portion of the cost of LTC insurance experience even greater enrollment than those who do not.
- To help employees appreciate the value and the need for LTC indemnification, data strongly suggests that LTC should be closely tied to employee retirement planning.
- A study completed by UNUM suggests that working Americans are more likely to purchase LTC indemnification through their employer than to buy it on their own.
- Individuals who effectively prepare for retirement by optimizing participation in savings plans with other retirement resources are better positioned to finance needed LTC services than those who do not.
The Long-Term Care Security Act signed by President Clinton into law on September 19, 2000, allows the Office of Personnel Management to negotiate discounted rates for LTC insurance for federal workers. This initiative may inspire other employers to take similar
A Significant Misunderstanding Exists About Who is Covered by Long Term Care Insurance and the Need for Long Term Care Indemnification
- Broad-based misunderstanding exists in the population about LTC indemnification. Many Americans believe that the current Medicare system will meet their long-term care needs and/or that long-term care is covered in their group or individual health plan. Others believe that if all else fails, Medicaid will be there to protect them.
- In fact, the current structure of Medicare does not provide a source of long-term care benefits that will meet the needs of most of the population. Medicare provides only 120 days of institutional benefits that are available only immediately after an acute-care hospital stay of at least three days. In addition, Medicare benefits are not available to individuals who are deemed to be “custodial,” such as those with Alzheimer’s disease. In the current system, Medicare pays for only 13 percent of expenses related to LTC services.
- For many people, Medicaid as presently structured will not be a good solution to their long-term care needs. Categorical eligibility requirements, combined with stringent income and resource limitations, make qualifying for Medicaid highly disruptive for most Americans.
- Most employer-sponsored group disability and major medical plans have either very limited or no coverage for LTC services.
- Generally, younger Americans are not cognizant that they may need some form of LTC indemnification that will not be accessed for 30 or 40 years in the future. They are unaware that the lack of some form of indemnification can severely impact their retirement security because they may end up spending retirement resources for needed LTC services.
Stability of the Long-Term Care Insurance Market
- Several documented instances exist where LTC insurance carriers have not accurately anticipated the cost of LTC services for their insured population. This has resulted in rate instability and solvency concerns which have undermined consumer and insurance regulator confidence in LTC insurance products.
- Responsible private insurance carriers have demonstrated the ability to stabilize LTC premiums so they do not increase over time. If the long-term care market is to have the confidence of consumers and insurance regulators, it will be important to learn from the experience of these insurers so that all carriers stabilize their premium rates.
- The National Association of Insurance Commissioners, in conjunction with several states, has responsibly studied the LTC insurance market and has gained considerable insight into the regulation of LTC insurance and what is necessary to ensure rate stability and long-term viability of LTC insurance products.
Family Members Are A Significant Source of Long-term Care Giving, Sometimes at Significant Cost
- Family members and close friends continue to be the primary caregivers for LTC services and will continue to be an important source of caregiving into the future.
- Research by Peter Arno, Carol Levine and Margaret Memmott, published in Health Affairs, estimated that in 1997, there were about 25.8 million informal caregivers in the United States.
- The economic value of informal caregiving was estimated in this same study to be $196 billion annually, or 18 percent of the total national spending for health care.
- Many "voluntary" caregivers provide service at considerable personal sacrifice. There is a well-documented toll on many caregivers' physical and mental health. Impacts also exist in terms of family destabilization and impoverishment. Findings from a limited national study by the National Alliance for Caregiving and the National Center for Women and Aging at Brandeis University concluded that individuals who try to continue to work and also take care of elderly friends and relatives have experienced the following consequences:
- Lost wealth. Among those able to quantify monetary impact, the lifetime loss in total wealth from wages, Social Security, and pension benefits averaged $659,139.
- Limitations on job advancement. Forty percent of respondents reported that caregiving affected their ability to advance in their job.
- Employer cost in lost productivity. Employer also find that caregiving reduces worker productivity and boosts turnover, absenteeism, and early retirement. A MetLife study estimated that U.S. businesses lose $11 to $29 billion annually due to caregiving.
- In spite of the effort of family members to provide care, there will be an increasing need for resources to support services beyond the capacity of family and friends because of the aging of the population and the complexity of illnesses at extremely old ages.
Concerns of the Long-Term Care Provider Industry
- Several conditions may have a negative impact on the viability of the LTC provider industry and the quality of LTC services in the United States. In light of the projected increasing need for LTC services, this is a major public policy concern.
- The market capitalization of the LTC industry has declined 80 percent since 1997, from $14 billion to $2 billion. This raises serious concerns about the financial well-being of the LTC provider industry.
- The Balanced Budget Act of 1997 resulted in reductions in Medicare spending for skilled nursing facilities that will exceed estimates of the Congressional Budget Office by $15.8 billion by 2004. The unexpected shortfall in Medicare reimbursement has played a significant role in the bankruptcy filings of five of the largest national nursing home companies. Nearly 1,900 skilled nursing facilities that care for more than 225,000 patients nationwide are in some state of bankruptcy. This represents 11 percent of the total beds in the United States.
- When the new Medicare payment system was introduced in 1998, it was planned that Medicare spending for skilled nursing care would increase by $300 million in the year 2000. Instead of an increase, it is projected that Medicare spending will reduce by $2 billion in 2000 alone.
- Medicaid reimbursement rates are low ($4 per patient hour for all services related to patient care). This rate must cover room, board, certain therapies, nursing care, food, overhead, linens, and caregiver salaries. This level of reimbursement may compromise quality of care as well as financial viability of the LTC industry.
- There appears to be widespread frustration with the regulatory process which is designed to ensure that nursing home residents receive quality care in a safe and secure environment. The LTC provider industry believes that the current regulatory process is inefficient and inconsistent in accomplishing its intended purpose.
- A lack of effective coordination between state and federal governments in the regulatory process results in inefficiency, confusion, and a lack of clarity in terms of the regulatory standard.
- The regulatory process seems to be very adversarial which is counter-productive and demoralizing to caregivers who believe they work hard to provide quality care.
- The number of deficiencies reported by survey teams varies significantly from state to state and even from team to team.
Shortages of Skilled Providers to Support the Long-term
- There is a projected significant and increasing shortage of nurses, nurse assistants and other caregivers who will be needed to provide staff support for long term care services into the future.
- A 1992 study by the Bureau of Health Profession within the Health Resources and Services Administration estimated that the need for registered nurses in the labor force to care for persons age 65 and older will increase from 111,000 in 1991 to 184,000 in 2020. The number of Licensed Practical Nurses needed would grow from 197,000 in 1991 to 338,000 in 2020, and the need for nurses aides will increase by 69 percent to 1.12 million.
- Earlier this year, a study published in the Journal of the American Medical Association concluded that the number of RNs in the work force will peak in 2007 and decline thereafter as many RNs retire.
- Enrollment in bachelor degree nursing programs has declined consistently during the past five years. The total decline from 1995 to 1998 was 20.9 percent.
- Long-term care service providers face increasing challenges in recruiting qualified staffs. This will exacerbate the the projected workforce shortage in the future.
- Compensation levels in LTC facilities are typically well below what is paid by acute care facilities primarily because of government reimbursement. A 1998 Buck Consultant Survey concluded that RNs in nursing homes make 16 percent less than in hospitals, LPNs make 6 percent less, and certified nursing assistants make 16 percent less.
- The stringent and pervasive regulatory process in LTC facilities makes the work environment unattractive.
Working Group on Long-Term Care: Issues and Options Recommendations
The findings of the Working Group document several issues associated with long- term care (LTC) that should be of significant concern and must be proactively and aggressively addressed to avoid a major crisis. Consistent with these findings, the Working Group makes the following recommendations to the Secretary of Labor. These recommendations have a relationship to policy makers in the Executive and Legislative Branches of the Federal Government, to policy makers and other officials in state governments, and to affected parties in the private sector. As the Secretary determines appropriate, he/she may choose to relay these recommendations to affected parties outside of the Department of Labor.
Policy Development and Implementation
- A White House conference should be convened to develop a national policy on LTC that carefully articulates a comprehensive and coordinated strategy that is responsive to all of the many dimensions of the problem. The policy initiative should carefully define the roles of the federal government, state governments, and the private sector in managing the LTC problem.
- By executive order, the president of the United States should establish a Long- Term Care Interagency Coordinating Council that includes representation from the Department of Labor, the Department of Health and Human Services, the Department of the Treasury, and the Office of Personnel Management. The Veterans Administration and Social Security Administration should possibly be included as well. The council should have the responsibility to coordinate the development and implementation of LTC policy initiatives consistent with the structuring of a national policy on LTC.
Tax Incentives and Expenditures to Expand Long Term Care Insurance and to Compensate Voluntary Caregivers
- The Working Group recognizes tax policy as an acceptable vehicle to accomplish responsible social objectives. The Working Group is also aware of several congressional proposals, some of which have bipartisan support, that are being seriously considered at the present time. The Working Group did not have adequate time to thoroughly study the implications of different tax proposals that relate to LTC. Therefore, within the context of judicious tax policy that considers both the benefits and the cost, the Working Group recommends consideration of the following tax policy initiatives as deemed appropriate by the Secretary and other policy leaders in the Executive Branch of Government.
- Improve the deduction for LTC insurance premiums for qualified plans to an above-the-line deduction so premium dollars are not subject to a percentage of income. Qualified plans are those that include services for individuals who have at least two limitations in activities of daily living (ADLs) or severe cognitive impairment.
- The above-the-line deduction should only be available for policies that meet the rate stabilization and other consumer protection standards included in the NAIC model regulations.
- Permit LTC premiums (for qualified plans) to be paid through IRC Section 125 plans.
- Provide a tax credit for voluntary caregivers who provide LTC services to individuals who have at least two limitations in activities of daily living or who have severe cognitive impairment.
- State governments that have not already done so should be encouraged to provide similar incentives in their tax codes for purchasing LTC insurance.
Educating America About Long-Term Care
- As a follow-up to the pilot educational initiatives sponsored by the Health Care Financing Administration, a major comprehensive and well focused educational program should be developed and implemented to help individual Americans understand the potential LTC problem, how it may affect them, and the specific steps they can take to ensure their access to needed long-term care services. The educational program should be focused on specific subgroups of the total population that potentially can benefit most from the content of the education initiative (i.e., 70 year old retirees on Medicare are not likely to purchase LTC insurance). The educational program should be specifically designed to change the behavior of the American people in a positive way. Among other things, it should include the following:
- Information that will help the American people understand that public funding for LTC may expand but most assuredly will be inadequate to pay for LTC services for all Americans in the future.
- An explanation of the LTC services that Medicare covers, including its limitations. This explanation should point out that Medicare was never intended to pay for extended long-term care and should not be considered by the American people as a dependable resource that will meet their financial needs in the future.
- An explanation that Medicaid may provide financial resources for certain people who can meet categorical eligibility, income, and resource requirements. But for most Americans, this will not be a reliable resouce for meeting their needs.
- An explanation that most employer-sponsored and individual disability and medical plans do not cover LTC services or that coverage in these plans is extremely limited and will not be an adequate resource for financing needed LTC services.
- Easy-to-use information that will help individual Americans understand that in addition to Social Security, employer-sponsored retirement programs, and personal savings, LTC financing will be an important part of their retirement security.
- Simplified consumer information that will help individual Americans understand what constitutes a good LTC insurance policy, where such policies can be purchased, how policies can be compared to determine their value, and any pitfalls that should be avoided in purchasing LTC indemnification.
Employer-Sponsored Long-Term Care Insurance
- As a part of the educational program, the Department of Labor should take lead responsibility for providing information to employers and workers that would help them understand the importance of LTC financing and the importance of incorporating LTC financing into their retirement security planning. The Department of Labor should incorporate this theme into their Savings Matters and Health Education Campaigns. At a minimum, the Department of Labor educational program for American employers and employees should accomplish the following:
- Emphasize that LTC should become an integral part of retirement planning for all Americans.
- Encourage all employers to offer LTC coverage as an employer- sponsored voluntary benefit and, where possible, make resources available to fund the cost of such plans. This educational effort should further provide information based on research that is already available, or which may be developed, that will help employers understand how to optimize participation in voluntary LTC insurance coverage.
- Encourage employers to integrate LTC into their financial planning or retirement security education programs that they may make available to their employees.
- Help American workers understand the importance of LTC financing as one of the cornerstones to financial security.
- Work with the Social Security Administration to add a message about LTC and retirement security to all of their benefit communications, including the earnings statement.
- The Working Group strongly endorses the initiative that led to the Office of Personnel Management obtaining authorization to provide LTC insurance to federal workers. This may serve as a catalyst in helping other employers understand the importance of LTC insurance as a part of retirement security. The Working Group recommends that after the Office of Personnel Management completes implementation of the LTC program for federal workers in 2002, the following additional initiatives should
- A methodology that would allow state and local government workers to purchase LTC insurance through the newly established program for federal workers.
- A system that would allow individual Americans to purchase LTC insurance through the newly established program for federal workers.
Premium Stability and Solvency of Long Term Care Insurance Providers and Other Regulatory Initiatives
- All states should be encouraged to adopt the model regulations that have been developed by the National Association of Insurance Commissioners to address consumer concerns about premium stability and solvency in the LTC insurance market. The Interagency Coordinating Council should determine who should take the lead in this effort.
- The Department of Health and Human Services should lead in establishing a forum wherein the process for regulating nursing homes and other LTC providers in the United States can be rationalized to first, protect nursing home patients; second, ensure the provision of high quality care; third, optimize the use of available regulatory resources; and fourth, eliminate duplication in the regulatory process.
Stability of the Long-Term Care Provider Industry
- The Department of Labor and the Department of Health and Human Services should lead in developing and implementing initiatives that will improve the availability of needed nurses, gerontologists, geriatricians, and nurse assistants (including home health aides and other caregivers) to support providing LTC services into the future.
- The Department of Health should complete a thorough review of current reimbursement practices to make sure that reimbursement for Medicare and Medicaid is at appropriate levels to ensure adequate financing that does not compromise the provision of quality health care services or the viability of the LTC industry.
Improving Access to Long Term Care Services Through Medicare
- The Working Group recognizes there are conflicting policy objectives with respect to determining Medicare coverage. There is always a desire to expand the services that are covered competing against the need to manage the budget. Within this context the Working Group suggests that The Department of Health and Human Services consider modernization of Medicare rules and regulations to eliminate the requirement for a three-day hospital stay before accessing needed skilled nursing facility services. This change might be structured so the shift from inpatient to outpatient surgery does not result in an arbitrary and unintended access limitation to skilled nursing care. In developing the amendment to rules and regulations, a general standard might be applied so that medical eligibility for skilled nursing care would be consistent with what it was at the inception of the Medicare program.
Long Term Care Working Group Index - 2000
May 8, 2000: Long-Term Care: Issues and Solutions
- Chair: Michael J. Stapley
- Vice Chair: Patrick McTeague
- Official Transcript
- Executive Summary of Transcript
- Draft Outline of the Study to Be Completed
- Tentative Agenda for the Balance of the Year
- Fact Sheet on Long-Term Care prepared by AARP and the Public Policy Institute
- Copies of slides used in the testimony of Josh Wiener, Urban Institute
- “Voluntary Long-Term Care Insurance: Best Practices for Increasing Employee Participation” by Jeremy Pincus, EBRI Fellow, and “Employer-Sponsored Long-Term Care Insurance: Best Practices for Increasing Sponsorship", also by Jeremy Pincus. (Both provided the basis for Dallas Salisbury’s remarks as he testified before the Working Group.)
- “Secure Aging: The New Society” from the May 2000 issue of The Jewish Healthcare Foundation of Pittsburgh Publication Branches
- Long-Term Care Insurance in 1997-1998, Research Findings of the Health Insurance Association of America, March 2000.
June 1, 2000: Long-Term Care: Issues and Solutions
- Official Transcript
- Executive Summary of Transcript
- Revised Outline of Group’s Study and Potential Witness Listing
- “Long-Term Care in the United States: An Overview” by Judith Feder, Harriet L. Momisen and Marlene Niefield, Health Affairs 19(3): 40-56, 2000 Project Hope - The People-to-People Health Foundation, Inc.
- Long-Term Care: Current Issues and Future Directions, Report to the Chairman, Special Committee on Aging, U.S. Senate, Prepared by the General Accounting Office, April 1995.
- Written Testimony from Joyce Ruddock, Vice President of Met Life’s Long-Term Care Group as well as “The MetLife Juggling Act Study, Balancing Caregiving With Work and Costs Involved” provided by Metropolitan Life Insurance’s Mature Market Institute, November 1999 and “The MetLife Study of Employer Costs for Working Caregivers” prepared by MetLife in June 1997.
- “A Shopper’s Guide to Long-Term Care Insurance,” by the National Association of Insurance Commissions (NAIC).
- “How to Judge a Policy, Don’t Let an Agent Fit a Premium to Your Purse. A Cut-rate Policy May Not Pay as Much as You Need When You Need It.” Consumer Reports, October 1997 pp 44-46.
- “Caring for the Elderly: Is adequate long-term care available?” Congressional Quarterly, February 20, 1998, pp 145-167.
- “Long-Term Care: The President’s FY2001 Budget Proposals and Related Legislation” updated March 28, 2000, prepared by the Congressional Research Service: The Library of Congress.
- “Long-Term Care Insurance for Federal Personnel”, Congressional Research Service, May 14, 1999.
- “Long-term Care for the Elderly: Themes of Financing Reform” Congressional Research Report for Congress, January 15, 1999.
- Long Term Care Insurance - Consumer Protection Issues outline by Tom Foley, Kansas Insurance Department, for his talk before the working group, June 1, 2000.
- “The Potential Impact of Private LTC Insurance on Medicaid” slides by Joshua M. Wiener, Ph.D., the Urban Institute of Washington, DC on June 1, 2000
July 17, 2000: Long-Term Care: Issues and Solutions
- Official Transcript
- Executive Summary of Transcript
- Written Testimony (Copy of slides) of David Martin, General Director of Long-Term Care, John Hancock Financial Services as well as a 1999 Long-Term Care Survey, conducted jointly by John Hancock and the National Council on Aging.
- Materials provided by Bill Bortz, Attorney-Advisor, U.S. Department of Treasury, including a page from HIAA Survey, 1999, regarding average annual premiums for leading long-term care insurance sellers in 1997; and General Explanations of the Administration’s Fiscal Year 2001 Revenue Proposals, “Assisting Taxpayers with Long-Term Care Needs".
- “Promoting Long-Term Care for the Federal Family”, copies of slides/remarks made by Frank D. Titus, Assistant Director for Insurance Programs, Office of Personnel Management.
August 14, 2000: Long-Term Care: Issues and Solutions
- Official Transcript
- Executive Summary of Transcript
- A Survey of Employers Offering Group Long-Term Care Insurance to Their Employees Final Report, The Lewin Group, May 31, 2000, for the U.S. Department of Health and Human Services, Office of Disability, Aging and Long-Term Care Policy, presented by John Cutler of the latter office at this meeting.
- Written Statement from M. Keith Weikel, Ph.D., Senior Executive Vice President and Chief Operating Officer, Manor Care, Inc.
- Retirement Security and Quality Health Care: Our Pledge to America, 2000 GOP Platform, July 31, 2000.
September 11, 2000: Long-Term Care: Issues and Solutions
- Official Transcript
- Executive Summary of Transcript
- Written Testimony of Dr. Barbara Stucki’s August 15 appearance and a report, Expanding Retirement Strategies with Long-Term Care Insurance, she prepared for the American Council of Life Insurance
- The Impact of Private Long-Term Care Insurance on Public Program Expenditures, overview by Marc A. Cohen, Ph.D. LifePlans, Inc.
- NAIC hopes to end surprise long term care price hikes by Vicki Lankarge, insure.com, dated August 2000.
- Long-Term Care Financing Poses Questions for Policymakers by Elizabeth White for the Bureau of National Affairs Daily Tax Report, August 28, 2000
- Email from Dallas Salisbury with his personal recommendations for government action on the issue of Long Term Care
- Pending Long-Term Care Legislative Proposals, Provided by Brandt Chivrko from Sen. Bob Graham’s Staff
- Who Will Pay for the Baby Boomers’ Long-Term Care Needs, Expanding the Role of Long-Term Care Insurance, a report of the American Council of Life Insurance
- Can Aging Baby Boomers Avoid the Nursing Home? Long-Term Care Insurance for ?Aging in Place’, another study by the American Council of Life Insurance
October 12, 2000: Long-Term Care: Issues and Solutions
- Official Transcript
- Executive Summary of Transcript
- Response to LTC Tax Incentive Testimony Submitted by Philip Clarkson, Vice President and Counsel, John Hancock Life Insurance Company
- GAO Report of September 13, 2000: LTC Insurance - Better Information Critical to Prospective Purchasers
May 8, 2000
Dallas L. Salisbury, President and CEO, Employee Benefits Research Institute
(Summary prepared by James S. Ray)
Mr. Salisbury made the following significant points in this testimony:
There is a substantial need for long-term care services, and that need is growing. The portion of the population who are age 65 or older is now 13.5%. It will be 22.4% in the future. "If one looks at the median age of that future retiree population, plus sheer size, then the need for these services is going to be far greater than ever."
Much of that need is due to a fact that has not been given due consideration in the projections for long-term care needs and costs. That fact is that many people who would have had the opportunity to die in the past are being kept alive today through advances in medical technology and treatments. Further advances will prolong life for even more people in the future. It has been suggested by some demographers that, due to medical advances, the over-age 65 population forty years from now will be 70% larger than projected by the Social Security and Medicare programs.
"[The] prospects for individuals who will need different types of in-home or institutional care assistance is going to climb dramatically as a result of each and every life extension success from our medical research. And, I think that is one thing that has not yet been really factored into much of the discussion."
The development and maintenance of indemnification plans for long-term care is a difficult challenge, and will become even more challenging over time for various reasons.
One reason is that there is a trend of shifting responsibility for retirement income and health care to individuals. Employer-funded defined benefit plans providing annuity retirement income are on the decline in favor of individual account, defined contribution plans. Employer sponsored retiree medical plans are available to declining
A second reason is that individuals give other benefit needs a higher priority than long term care coverage. According to EBRI's recent benefits preference survey, the highest preference among individuals is coverage for current acute health care needs. The second preference is for defined contribution savings programs. Long term care insurance was mentioned as the first benefit choice by only 2% and the second choice by only 3% of a national random sample. When asked about tradin and increase in pay for long term care insurance, 4% said yes.
A third reason is lack of knowledge among the population. People overwhelming believe-wrongly-that Medicare will pay for long term care and nursing home expenses. The Federal Government could help by telling the American public repeatedly that the Government will not pay these expenses, except for Medicaid eligibles who are or are willing to become impoverished. Most of the private long term care insurance that is being bought, is being bought by higher income individuals for their parents as a means of preserving wealth or as inheritance protection.
A fourth reason is the cost of long term care insurance. The cost of this insurance is not guaranteed prospectively in most States. Insurers refuse to do business in States that do require them to guarantee the cost of policies. There is no sound actuarial experience basis for guaranteeing costs.
The vast majority of individuals do not have the resources to pay the cost of long term care insurance. Many workers cannot even afford to pay their share of employer provided health care coverage. Currently, two-thirds of retirees depend almost exclusively on Social Security for retirement income. At median, a retiree in this population has total financial resources of only $10,125.00. To be in the top 20% of retirees today, an individual needs to make only $22,000 per year from all income sources; $32,700 for a household.
"So, the concept of those individuals who are living on inadequate Social Security benefits, who have no financial resources, either having the capacity to pay long term care insurance premiums while working, or to contemplate payment of long term care insurance premiums once retired, is at best a wishful fantasy."
At best, only 5-7% of the population has the financial resources to afford long term care insurance. This is true even if the "baby boom" generation that has enjoyed the Nation's prosperity but which will not have the benefit of employer financed retiree health insurance.
Widespread coverage by long term care insurance would require 100% assumption of the premium costs by a third-party-an employer or the Government. That is unlikely to happen. Data shows that even where a subsidy is available, a de minimis portion of the affected individuals pick-up long term care coverage as compared with the portion of individuals who voluntarily enroll in a subsidized health plan or contribute to a 401(k) plan. The best subsidy case study is the State of Alaska where the pick-up rate is two-thirds of the working population. Another example is a long term care consortium of large, profitable, progressive corporations underwritten by Metropolitan Life Insurance Company. The highest pick-up rate among the corporations' employees was 11%. Small employers are unlikely to establish long term care plans considering that only 37% sponsor employee health care plans.
"And, again, given the economic structure and economic data, the presumption that I would reach, which is not proven, but I think is valid, is that it is principally a wealth preservation, family wealth preservation motivation. That makes it an extraordinarily difficult challenge to think about extending this and having either employers pay it or finding any set of motivations that would cause individuals to pay for it."
It is true that long term care is a benefit that an individual may need at any age, not only in his retirement years. But, that risk does not translate into a broad demand for long term care insurance. Most Americans do not believe that they will ever need long term care. Many do not pick-up subsidized employer health insurance or contribute to an available 401(k) plan even though they are likely to need health care and retirement income.
Generally, individuals will not be motivated to purchase long term care insurance.
"Tax credits won't do it in any substantial numbers. Tax deductions won't do it in any substantial numbers. And, education won't do it in any substantial numbers….Substantial numbers being sufficient to mitigate in essence what is a potential long term crisis."Given the growth in the population that will need long term care services, it is doubtful that anyone could create a program to rationally finance a long term care program.
"But,…long term care will be the least of the problems that we will be facing [in the future because of the growth of the post-age 65 population]. Since if those demographic projections are accurate, in order to finance the Medicare benefits currently in place, the Medicare payroll tax would have to go to 19.1 percent of payroll, compared to the current worst case number coming out of HCFA, just 8.3 percent of payroll, and compared to the current roughly 2.9 percent of payroll."There is a question about whether the financial structure of the insurance industry could support widespread long term care insurance.
Pension policy and long term care are interrelated, and the Advisory Council could help to make this point to policymakers. Ultimately, retirement income security and long term care are about the same issue-capital accumulation and economic security. Policies that favor defined contribution pension plans over defined benefit plans providing a stream of annuity income lead to less retiree income and less ability to pay for long term care.
"The prospect of Medicaid and Medicare being expanded to cover these in the absence of many years of 6% annualized growth, is de minimis. And, if anything vis- à-vis state budgets, the prospect is that Medicaid long term will pay less, not more."
Mr. Salisbury also provided to the Working Group two EBRI "Issue Briefs" on long-term care: "Employer-Sponsored Long Term Care Insurance: Best Practices for Increasing Sponsorship" (No. 220, April 2000); and "Voluntary Long-Term Care Insurance: Best Practices for Increasing Employee Participation" (No. 221, May 2000).
Joshua M. Wiener, Ph.D., Principal Research Associate, Urban Institute
(Summary prepared by Catherine L. Heron)
Mr. Wiener provided an extensive factual background on the issue of long-term care. He also provided significant insights to the problem of long-term care and the difficulties involved in reaching any comprehensive solution.
Mr. Wiener made the following points:
Although there is no established definition of long-term care, for these purposes, it can be defined as a range of health and social services for those who cannot care for themselves. Currently, the number of people needing long-term care is estimated to be 13.1 million, of whom 3.8 million have significant disabilities. Approximately 45% of those needing long-term care are under age 65. By 2050, the baby boom generation "bulge" will have moved into the over 85 age category, and there will be fewer people in the under age 65 category – the
The majority of people over age 65 who are receiving long-term care are not in nursing homes or similar facilities; they are receiving care from children, spouses, and other family members (primarily women). Of the population in nursing homes, the typical resident is an unmarried woman over age 85. The median income level of disabled women over age 85 is approximately between $12,000 and $15,000. The average annual cost of nursing home care is $56,000.
Public funding through state Medicaid programs is the most important source of financing for long-term care. Medicaid accounts for 44% and private insurance represents only 7.6% of long-term care financing. States have great flexibility in designing the Medicaid long-term care systems. Medicaid is jointly financed by state and federal governments. To qualify for Medicaid assistance, a disabled person generally must have exhausted all of his or her financial resources.
The problem: our current long-term care system is too expensive and is welfare-based, requiring impoverishment for coverage. Long-term care costs for older people are expected to increase to 2.14% of GDP by the year 2048 (as compared with 1.21% in 1993).
Although it is commonly thought that private insurance would be a better alternative to public funding for long-term care, this is not a practical or realistic goal for most people. There are currently only 3.5 million private long-term care policies in force. The majority of these policies are sold to the elderly. For most elderly, however, long- term care insurance is too expensive, and for most younger people "it's a tough sell." When offered by employers, long-term care insurance coverage typically is paid entirely by employee contributions. The "take-up" rate for this benefit is low, typically 5-10%.
HIPAA provided limited tax incentives for private health care insurance. Further tax incentives are not likely to substantially increase the use of private long-term care insurance. A tax deduction for the cost of such insurance will not affect its affordability for most elderly, who either pay no taxes or are in the 15% bracket. The $1 billion projected cost for an above-the-line-deduction for long-term care insurance would be better spend on direct services to the disabled.
Despite the modest growth in private insurance, long-term care is likely to continue to be financed with public funds. Overall, Medicaid is a relatively inexpensive system of financing.
The issue of long-term care is by itself not a huge financial crisis, but when combined with future social security insolvency, it raises serious concerns about future sources of funding. Long-term care is not likely to be an issue that is high on the U.S. political agenda until the baby boom generation reaches their 80s. However, the aging parents of the baby boom generation may make it an important issue within the next few years.
June 1, 2000
Thomas Foley, Director of Accident and Health Division, Department of Insurance, State of Kansas
(Summary prepared by Richard Tani)
"I am not sure that we are going to have enough skilled people to provide all the care that we are going to need."
"I feel very strongly and this is the social issue, that what we are going to have to do in this country is provide custodial care on a voluntary basis. It takes the pressure off of the insurance mechanism."
Mr. Foley is a regulatory actuary and is primarily concerned with the adequacy and soundness of long term care insurance policies. He gave a brief description of long term care policies, which included:
Policies have level premiums with significant reserves built up in early years, but no nonforfeiture values, since that would add 30% to 40% to the cost of policies. Basically gains due to policy lapses are used to pay benefits for policies which continue.
Claims are relatively low until people reach their mid 70's. Then claims escalate rapidly.
About 60% to 70% of claims are related to cognitive based disorders (e.g. dementia and Alzheimers). If there is a cure in these areas, claims would come down dramatically.
Policies may cover nursing home care only, home health care only, or comprehensive care. Comprehensive care is the most attractive, but also the most expensive. It covers skilled care in nursing homes, intermediate care, and some forms of custodial care.
Policies were usually priced with a minimum expected loss ratio (or benefits ratio) of 60%. If claims are higher than expected, an insurance company may request an increase in rates. Recently, some states have only allowed an 85% loss ratio on premium increases to encourage companies to set adequate premiums in the first place.
One of Mr. Foley's major concerns is premium increases. He noted that several major insurance companies who have been in the long term care business a long time have never requested a rate increase. However, some aggressive companies have had cumulative rate increases of several hundred percent. This obviously is unfair to policy holders who may not be able to afford such increases. Based on what he sees (expansion of services), he is concerned that there will be too many rate increases in the future.
Mr. Foley argued that long term care insurance should be focused on catastrophic care, rather than custodial or "convenience" care. He defined catastrophic care as skilled care in bonafide facilities with benefit triggers that are rigorous (tight benefit structure). He felt that otherwise, costs would be prohibitive and that there might not be enough skilled people to provide all of the care which will be needed. He felt that much of the custodial or "convenience" care needs to be done on a voluntary basis (by the family or community). When questioned on the implication that this forced people unnecessarily into nursing homes, he clarified that we need to find innovative ways to design policies so that people who really need care, can get it in appropriate places.
Mr. Foley commented that long term care insurance is not going to solve the great social need because a relatively small portion of the population can afford it. He felt that Americans need to be provided with accurate information about long term care and with all of the choices available, so people would be aware of the need and plan accordingly.
Joshua M. Wiener, Ph.D., Principal Research Associate, Urban Institute
(Summary prepared by Michael Stapley)
Mr. Wiener made the following significant points in his testimony:
Part of the dream of expanding credible LTC insurance is that we would create a win/win situation where we could both reduce Medicaid long-term spending, and prevent the middle class from impoverishing themselves as a result of needing LTC services. "The premise for that is that many people who use Medicaid LTC services, in fact, did not start out as being poor, but, in fact, became poor because of the very high cost of LTC services." On average, a year in a nursing home is about $45,000.
One of the barriers to the expansion of private LTC insurance has been the price of the products and the whole issue of affordability. Other barriers to the expansion of private LTC insurance include the lack of interest by individuals and denial that they will need LTC services or require LTC insurance.
We have studied the issue of affordability of LTC insurance and its impact on potential expenditures for Medicaid. The basic assumptions are that disability and utilization rates of our projections into the future for nursing home care and home care are going to stay constant. In our microsimulation model, we assume that LTC inflation is one and one-half percent greater than general inflation and mortality rates generally follow those in the midline Social Security Administration assumptions. The study and simulations were based on very generous assumptions about the willingness of people to dig into their pockets to pay for long-term care insurance and are the upper bound estimates of the best of all practical worlds.
Our study consisted of five different options or scenarios.
Option One - Five percent of income: Older people buy insurance if they can afford it for five percent of their income and have at least $10,000 in nonhousing assets.
Option Two - Partnership for LTC: Older people buy state-approved insurance which increases level of Medicaid protected assets by amount paid by insurance.
Option Three - Tax-Favored Insurance: Provides older people with a 20 percent income related tax credit.
Option Four - Employee-Paid, Employer-Sponsored Insurance: Group policies bought if two percent of income between ages 40-49; three percent of income between ages 50-59; four percent of income between ages 60-66; and five percent of income for age 67 and older with at least $10,000 in nonhousing assets.
The results of the study simulations are as follows for 2018:
The results of the study simulations are quite clear. If you look at the first three options which are basically geared towards the elderly population, there is very little projected Medicaid savings. However, if you look at the last options, the story does change fairly substantially if we had wide-spread employer-sponsored and either subsidized or employee paid products, assuming of course a generous willingness for people to pay for LTC insurance premiums. In such situations Medicaid expenditures could decline by 28-32 percent in 2018, and the number of people dependent on Medicaid could drop by 16-17 percent by the year 2018. Clearly employer-sponsored and employer-subsidized LTC insurance could have a dramatic effect on the number of the elderly with private LTC insurance.
The study simulations also analyze the impact of tax incentives for LTC insurance on Medicaid savings. Using generous assumptions, it was determined that even for employee-paid, employer-sponsored and employer subsidized insurance the tax loss in 2018 would be 3.9 times as great as any Medicaid savings that could be realized.
Studies that have been performed by others on this same subject include a study by Marc Cohen, Kumar and Wallach in 1994. This study looked at people who bought private LTC insurance in 1990 and then simulated what their future LTC use might be. This study concludes there could be as much as a 29 percent reduction in Medicaid expenditures with LTC insurance, although that rate falls substantially if there is a significant annual lapse rate. A second study performed by Marc Cohen and Tom McGuire in 2000 concluded that Medicaid savings for "above-the-line" tax deduction could exceed tax loss by six percent. However, there is insufficient methodological information to evaluate effectively this study. A third study that has been performed by Barbara Stucki and Mulvey in 1998 and 2000 has also done an analysis finding that private LTC insurance could reduce Medicaid expenditures by 30 percent in the year 2030. More optimistic assumptions about individuals' willingness to pay were used in the study than in the simulated studies by Josh Wiener, and adequate methodological information is lacking to evaluate the study and the results.
An above-the line tax deduction has serious policy flaws. First of all, tax deductions are regressive. People in upper income brackets get a higher tax break than those in lower income brackets. Second, half the elderly population pays no income tax at all so there would be no benefit to this group. Third, the above-the- line tax deduction would be very costly, resulting in a billion dollars a year in lost tax revenue.
Tax deductibility is already in place for employers under HIPAA. There has and continues to be a decline in retiree health insurance, resulting in an unfunded liability for retirees' health benefits making it unlikely that employers will want to contribute.
Allowing LTC insurance premiums to be paid through cafeteria plans would be inconsistent with current tax policy since cafeteria plans were designed for the purpose of providing benefits that are to be used within the calendar year, thus excluding LTC insurance which is a deferred benefit.
Long-term care insurance premium should not be paid through flexible spending accounts. Flexible spending accounts are equivalent to a tax deduction which are regressive, and there could be a concern with participants switching their preferences over time particularly in light of anticipated policy lapses. Again, like cafeteria plans flexible spending plans were not intended to provide deferred benefits.
Allowing 401(k) funds to be used to buy LTC insurance would certainly fit within the notion of retirement planning and it might be a way of getting some employer money as a contribution. However, this would reduce the amount of money that people would have through their 401(k) plans for their own retirement needs.
The conclusions reached through our study and analysis are that the current numbers of people with LTC insurance cannot have an impact on Medicaid.
Long-term care products geared to older people have a potential for a very small impact on Medicaid expenditures.
Products geared to younger people help solve affordability problems but face major marketing problems.
Long-term care insurance is not likely to have a significant impact on Medicaid expenses in the near future.
Full tax deductibility of private LTC insurance is likely to have a small impact on individuals and employers.
And other options such as the 401(k), the cafeteria plan option, or the flexible spending account option are likely to have an even less significant impact on Medicaid savings.
Joyce Ruddock, Vice President of Long-Term Care, MetLife
(Summary prepared by Michael Stapley
Joyce Ruddock is a gerontologist and is the Vice President in charge of MetLife's long term care insurance business. Ms. Ruddock joined MetLife in 1995 from Travelers where she managed the individual long term care business. Prior positions include Director of Marketing for the Visiting Nurses Association of Rhode Island, and manager of Brown University's Long Term Care Gerontology Center. She has an MPA, and an MED from Syracuse University and is the author of Care-giving and You: Resource Guide for Long Term Care. A well known professional in the field of aging/and long term care, Ruddock has been interviewed by CNN, ABC, and the New York Times, and other media including several trade publications. She has presented at national conferences for such organizations as the America Society on Aging, the National Association of Senior Living Industries and the Washington Business Group on Health.
Introduction. The graying of America is about to generate an unprecedented need for long-term care services that will impact nearly every family in the nation. Many experts agree elder care will be to the 21st century what childcare has been over the last few decades.
MetLife. MetLife is the largest provider of group long-term care insurance in the United States with fifteen years experience providing products to many of the nation's largest employers and associations. MetLife is the endorsed carrier for AARPs long-term care insurance program which is marketed on a direct basis to AARP members. In 1998 MetLife began providing individual long-term care insurance through MetLife agents.
MetLife and LTC Research. MetLife has conducted research to help increase public awareness of caregiving and long-term care. A 1999 Juggling Act Study was done in partnership with the National Alliance for Caregiving and Brandeis University. The study focused on the lifetime financial losses as in wages, Social Security Benefits, and pension benefits experienced by caregivers. A 1997 study conducted by MetLife focused on employer losses that are incurred because of caregiving responsibilities of employees.
Long-Term Care Insurance. Long-term care is one of the fastest growing insurance products in the nation today. This is not surprising since LTC is the greatest uninsured risk Americans face and market penetration is still low. There is good news about long- term care insurance. The number of policies sold is increasing steadily; with large numbers of baby boomers the potential for continuing growth is huge; market opportunities exist with small and medium-sized employers; and, more tax incentives may be on the way, including an above-the-line deduction for LTC premiums. There is also bad news. Long-term care is a complex product and sales do not come easy, and there is still low public awareness about long-term care risk.
What is covered by long-term care insurance policies? A recent HIAA report indicated that most long-term care policies cover nursing home care, home health care, assisted living facilities, hospice care, and respite care. Additionally, coverage is typically provided for Alzheimers disease and there are options for inflation protection. Standardization of policies has occurred largely due to HIPAA. An HIAA study indicated that average annual premiums for a policy with a $100-a-day benefit and a four year duration with a 20-day waiting period is $274 a year at age 40, $385 a year at age 50, $1,007 at age 65, and $4,100 at age 79. These rates do not include inflation protection.
Who purchases long-term care insurance and what do they purchase? For employer- sponsored coverage, the average purchase age is about 43. For individuals, the average purchase age is about 64. Married couples comprise about 60 percent of all buyers. The male and female split is about 40 percent male and 60 percent female. The average annual income of buyers is $40,000. The most common reason that individuals state for purchasing LTC insurance is to obtain financial protection and to maintain their independence and control over what happens to them in their later life.
What Types of Plans People Purchase and Why they Purchase Them?
What people purchase is strongly influenced by agents, financial advisors and/or employers. The most typical plans are those with 4 and 5 year duration with common daily benefit amounts of $100 to $150 although the range is often from $50 to $300 per day. Seventy-five percent of buyers purchase comprehensive plans as opposed to facility only plans. Most employer plans are voluntary where the employee pays the entire premium.
Common reasons for not purchasing long-term care insurance include a feeling of lack of urgency. There are also significant misunderstandings with respect to what is covered by major medical plans, disability plans, and Medicare. Finally, there are many people who believe they will never become disabled to the extent they will need long-term care services, and they believe LTC insurance costs are more than they actually are.
Experience in the employer market. A recent LIMRA study showed that new sales in the employer long-term care market jumped 120 percent in 1999, and the total number of employers offering long-term care plans increased 36 percent during the same period. The annual premium for a new participant was $379. Participation rates in employer plans average around 10 percent with the lows at less than 5 percent and highs up to around 26 percent. Participation is influenced by employer support, payroll deduction, demographic characteristics of the group, and the employer communication program. In large and middle size employer groups, policies are typically issued on a guarantee basis.
Claims experience. Leading causes for claims include dementia, Alzheimer's disease, followed by stroke, heart disease, fractures, and cancer. About 60 percent of the claims are for facility care. Most people who need benefits are in a crisis. To respond to this MetLife has developed a team of geriatric nurses who help people at this time in their lives.
Rate Stability. Rate stability is an important issue for the industry and has received considerable attention by the NAIC. Some companies have raised rates, many have not and in some cases companies have reduced rates. It is important that consumers be protected from companies that will low ball initial rates to gain market share.
What Can Be Done to Stimulate Growth for Long-Term Care Insurance? There needs to more tax incentives, including an above-the-line deduction and the inclusion of long-term care insurance in Section 125 plans. There is also a need to promote awareness and change cultural attitudes, develop simpler plan designs which focus on catastrophic coverage, expand accessibility to coverage through employers and the internet, and create urgency among young buyers, including strategies to make it easy for them to purchase. A new program for federal employees that is anticipated to be authorized by Congress will go a long way towards promoting the need for long-term care insurance.
Summary. The industry is generally pleased with how the market has evolved. However, increasing the number of people who are actually covered by long-term insurance will require the best thinking from everybody involved to initiate the next generation of long- term care insurance plans.
July 17, 2000
David Martin, General Director for Long-term Care at John Hancock Insurance
(Summary prepared by Judith Ann Calder)
David Martin is General Director for Long-Term Care at John Hancock, a large long-term care indemnification provider for employer groups. He also chairs the ACLI Long-Term Care Committee in Washington, which represents companies that write long-term care insurance, as well as accelerated death benefits.
Interest in long-term care insurance as an employee benefit has increased, including among smaller companies, driven by competitive pressure brought by large employers such as General Motors, and Chrysler now offering this benefit. At the end of 1998, 955,000 group certificates were in place. Further, there is now the prospect of the federal government putting in a federal long-term care plan.
Endorsement by the employer is very important in increasing enrollment. About 28 percent of group policies have some form of employer contribution. Where employers are in a competitive hiring market, they often pay the entire premium.
A recent National Council on Aging report says that 45 percent of Americans know someone who has needed long-term care. That's a big lead-in to making a decision to purchase long-term care. People who need care want to do "aging in place" – or staying in the home. More and more people in the mid-fifty age range are electing "early" retirement. That's when they typically will look at long-term care insurance options. The average employee "issue age" for long term care policies in the employer market is about 43 years. This is a younger age than is found in the individual market which may be due to increased awareness of the benefits of this kind of coverage, and the fact that it's much less expensive when you're younger. "issue age" in the individual market is about 63.
Because women are more likely to be the caregivers and are more likely to live longer, they have a higher interest in long-term care insurance. Having to care for a spouse can deplete the survivors' assets quickly. The longevity of women combined with the advanced age makes the need for this kind of coverage higher for them.
A typical long-term care insurance policy purchased by those in the group market might include these features:
- 5-year comprehensive plan
- Average benefit of $100 per day for nursing home care
- Benefit of at least $50 per day for home care
- Coverage in assisted living facilities
- Limited "informal care" so family members can provide incidental care such as sitting with an insured or running errands
- 90-day qualification period, meaning once diagnosed as cognitively impaired or dependent in activities of daily living, the insured's benefits won't begin until 90 days later.
People often choose not to have the total anticipated long-term care bill covered through insurance in order to keep premiums down. Premiums are also lower when purchased at a lower age. In addition, insureds can elect to buy inflation protection.
For a basic $100 per day benefit and depending on other plan attributes, annual premiums for people in these age ranges would be in the following ranges:
- For 40-44, $500-600 per year
- For 45-49, $600-700 per year
- For 50-54, $700-900 per year
- For 55-59, $900-1,200 per year
- For 60-64, $1,200-1,700 per year
People can buy a policy with inflation protection built in or can periodically purchase inflation protection. Policies with built in protection are more expensive and thus less popular. At least 50 percent of John Hancock's group long-term care population elects to take inflation protection on a voluntary basis. This is more popular option because it's more flexible. Hancock has been writing long-term coverage since 1962.
In the employer market, a partial return of premium at death benefit is common. If this benefit is purchased and the insured dies at age 65 or 70 without ever having received benefits, some portion of the premium would be returned.
A voluntary lapsed benefit is not common. It's expensive and companies; regulators and consumers don't like it. It allows policy owners to cash in the policy. As the expense of premiums continues into older age when income is decreased, the inducement to lapse and to receive a pot of money increases.
About 65 percent of Hancock's certificate holders purchase a non-forfeiture benefit. This means that if they were to let the policy lapse, depending on how long they've had the insurance, there would be some residual benefit. It keeps a percentage of the policy in force. The policy would pay based a reduced benefit.
Modified underwriting or "bona fide guaranteed issue" is done based on a series of questions that can be answered electronically or on a short form. This might be used for groups with a higher likelihood of claims initially, such as state and association groups.
Group long-term care insurance is portable so employees who move can take coverage with them as long as they continue to pay premiums. So far, premiums have been stable. However, potential purchasers should look at the ratings of insurance companies, the financial strength of the companies and the pattern of rate increases, if any. When employers send mailings and e-mails, no insurance agents or commissions are involved.
People want a policy to pay when it should pay. But if the underwriting isn't proper, if the pricing is too low, coverage may not be there when needed. Passage of the Health Insurance Affordability and Accountability Act required certain consumer protections be written into long-term care plans. Employers don't offer non-tax-qualified policies. They look at long-term care insurance as if it were an ERISA plan. They feel fiduciary responsibility to their employees. In a survey 92 percent of respondents through that further favorable tax treatment for long-term care premiums would be helpful. Although there has been lots of consolidation in the market, that should not be looked at as relevant to solvency, State regulators must approve insurance before it's transferred.
One way to keep premiums lower and stable is to limit long-term care insurance to catastrophic coverage, but that will be more attractive to people who can afford to wait a year or two years. However, such a plan instead of a broader policy with a 90-day waiting period could financially devastate some people. Catastrophic plans that would be cheaper and less likely to have as much claim activity, are not currently available in the market.
Tax-qualified plans permit two out of six activities of daily living to trigger eligibility. It is catastrophic when a period loses two activities of daily living. It is debilitating if a person can't bathe or dress himself, or is prone to wander, or has some type of dementia or Alzheimer's.
Insureds get to choose where they get benefits. They don't want someone from a managed care program to be able to put them in an assisted living facility or a nursing home. Federal law requires that a plan of care so be created. The plan of care could recommend home care visits each week, a mix of adult day care or nursing home care.
A person with no insurance who spends down his assets would qualify for Medicaid and have fewer choices for continuing care. Depending on the policy purchased, an insured person might have a flexible home and community based care benefit that might not be available through Medicaid.
There is a potential problem with some insurers having lax underwriting standards and offering low initial premium rates (low-balling) in order to sell policies and gain market share. This could cause them to have to raise rates to policyholders. So far most plans have been able to never raise rates to policyholders. For the 104 employer plans, there are no insurance salesmen or agents. Employers treat all of those as if they were ERISA plans. Lack of agents makes it harder to sell a product that is not good for the consumer. Also, there is a degree of oversight by employers in picking the plans they offer. There is no difference in terms of reliability of the premium between the employer group market and the individual market. Tom Foley and the NAIC are trying to pass legislation to make initial premiums more reliable, trustworthy and reasonable.
There is a low incidence of unfairly denied claims in the industry. For example, since 1988, John Hancock has had two appeals. One was upheld and one was ruled in favor of the insured.
There is an issue if, over time, state or federal government law changes cause policy benefits to be no longer usable, such as doing away with the asset forfeiture in Medicaid. In such a case, policyholders would want benefits to be increased or premiums to be reduced.
Bill Bortz, Attorney Advisor, U.S. Department of Treasury
(Summary prepared by Eddie C. Brown)
Bill's comments focused on the tax treatment of long-term care insurance and costs, issues people have raised in connection with long-term care insurance, and the Administration's proposal relating to long-term care. The aging of the baby boom generation has focused great attention on the challenge of caring for the frail elderly. Currently, once the long- term care needs become too great for informal care, people rely upon their own assets, if any, to pay for formal care, and once these assets are exhausted, they rely on the Medicare safety net. There is great interest in increasing the role of privately purchased long-term care insurance. Advocates for the government offering favorable tax treatment for long- term care insurance argue that by increasing the options available for those covered will reduce the cost to government of payments via Medicaid and Medicare programs.
With respect to tax treatment, qualified long-term care is treated generally like medical care. Qualified long-term care expenses that exceed 7.5% of a taxpayer's adjusted gross income, including premiums for qualified long-term care insurance, are deductible for income tax purposes. The deduction for the premiums is subject to an age-graded dollar cap, which constrains the tax subsidies but also serve to keep policy costs down. Other tax law aspects pertaining to long-term insurance are: (1) employer contributions are excludable from taxable income and employment taxes, (2) long-term care insurance may not be purchased through a cafeteria plan nor can expenses be reimbursed through a flexible spending account, (3) benefits are not included in taxable income when paid. Bill reviewed concerns, both tax and nontax, that people have raised about long-term care insurance. The tax concerns are: (1) the deduction favors high tax bracket individuals, (2) long-term care insurance doesn't have the kinds of problems that warrant tax subsidies (e.g., the adverse selection associated with health insurance. The average lapsed time between the time a person purchases long-term care insurance and actually need it is about 12 years.), and (3) expansion of tax subsidies is likely to cause individuals to consume long-term care services of less value than other consumption goods. The nontax concerns are: (1) considering the high lapse rates, a tax deduction might induce individuals to buy insurance they cannot afford, (2) Medicaid savings due to an above the line deduction is not likely to be enough to pay for the tax cost associated with the above the line deduction. The reasons have to do with the group of individuals that benefit the most or least from the tax benefits versus ability to afford long-term care insurance, versus Medicaid costs of the likely users without tax benefits, (3) companies have difficulty establishing sustainable premiums because the cost is hard to predict far in advance, (4) many people don't understand the value of Medicaid benefits, and think it is simply a program for poor people, (5) even though premiums for long-term care insurance are cheaper at a younger age, considering the time before they'll need the benefits, people often don't evaluate whether they'd be better off putting the money into an IRA. For many younger people having the tax-free compounding in an IRA would be a more secure way of protecting themselves for future long term care needs.
Lastly, the highlights of the administration's caregivers tax credit proposal regarding long term care were summarized as follows – A tax credit of $3,000 is allowed. The individual for whom care is given has to be a tax dependent (requirement, must have lived with person claiming the credit for at least half the year), care for individuals age six or younger would be eligible if they are unable, for at least six months, to perform at least three ADL's without substantial assistance, or require substantial supervision for at least six months due to severe cognitive impairment, or they are unable to perform one or more ADL's, or cannot engage in age appropriate activities. There would also be a special rule for children two to six and under the age of two.
In response to questions, Bill made the following points:
We need to understand that long-term care insurance is front-end loaded. It's level premium, so you're paying much more than the term cost in the initial years than you do later.
There is the problem of forfeiture, which is a major challenge. In the event of forfeiture, you may get a refund of premium, but that's it. Thus, a huge amount of money is potentially lost.
Sales costs for long-term care insurance are huge, and the take-up rate is low, numbers have been quoted in the 10% range. The result is agents end up overselling, and people may end up buying long term care insurance who shouldn't be buying it.
Tax policy that addresses the long term care issue by increasing the dollar amounts that can be contributed to retirement plans wouldn't be helpful in Bill's view. The problem isn't with people who are well off, but with people who aren't.
Frank Titus, Assistant Director of Insurance Programs, Retirement and Insurance Services
(Summary prepared by Catherine Heron)
Mr. Titus provided the background development of pending legislation that would establish a long-term care insurance program for employees of the federal government. He predicted a "very real probability" of enactment of this legislation during the current session of Congress.
The Administration's budget proposal for 2000 had a number of initiatives relating to long-term care, including a tax credit, an educational campaign to dispel the belief that either Medicare or Social Security provides long-term care coverage, a proposal to restructure Medicaid to focus more on community care, and a long-term care insurance program for federal employees.
OPM modeled the long term care insurance legislation after the Employees Group Life Insurance Program, which was underwritten with one lead underwriter, with many other insurers acting as re-insurers. It is anticipated that there will be a consortium of insurers, with one lead insurance company.
Under the draft legislation, OPM has flexible authority. There can be one or more carriers or a consortium of carriers. The population proposed to be covered will be in excess of 13 million people, including, adult children, spouses, parents and parents-in- law of government employees (including the military and retirees). Parents and parents-in-law of government employees would be able to buy the insurance for themselves.
This will be the largest long-term plan in the country, perhaps the world. The proposed plan will be tax-qualified, i.e., premium payments by employees can be deducted to the extent they exceed 7.5 percent of adjusted gross income. The program will include a nonforfeiture provision, meaning that if the premiums increase by a significant amount (perhaps as much as 75 percent), there would be a residual benefit payment if coverage lapses as the result of premium non-payment. An inflation guarantee will also be available. The program may provide only catastrophic coverage for those who currently have one or more ADLs.
It is anticipated that premiums will be as much as 15-20 percent below what is available in the private marketplace. However, the program will not be subsidized by the government. It is expected to be funded entirely with premiums, although the legislation provides the authority to borrow from the life insurance fund. It is also anticipated that the coverage will be flexible, adaptable and simple to understand, in order to meet the diverse needs of the population to which it will be offered.
The policy will offer the "pool of money" approach, under which a single structure level premium is charged. The benefits available are determined by multiplying the applicable rate of 365 days and then by the number of years that the rate is going to be paid. (The rate is usually determined by reference to the daily cost of nursing home care.) For example, if the rate is $100, $100 x 365 x 4 years=$146,000, the available pool of money to pay benefits. Once this money is used, no additional benefits will be paid.
The legislation proposes to offer coverage for a wide variety of types of care, such as home care, in addition to nursing home care.
OPM has projected a take-up rate of between 15 and 20 percent for the proposed coverage.
August 14, 2000
M. Keith Weikel, Ph.D., Senior Executive Vice President and Chief Operating Officer, Manor Care, Inc.
(Summary prepared by James S. Ray)
Mr. Weikel made the following significant points in this written statement and oral testimony:
His company is a large owner and operator of long-term care centers. It has about 52,000 employees, 300 skilled nursing centers, 45 assisted living facilities, 90 out- patient rehabilitation clinics, and about 40 home care offices.
Several interrelated actors are seriously challenging the company's ability to provide long-term care and sub-acute care services. Long-term care providers need an adequate revenue stream (including adequate Medicare and Medicaid funding), an adequate supply of skilled workers, an end to the erosion of leadership, and a more understanding regulatory scheme that is based on clinical care outcomes.
The first challenging factor is that Medicare is paying for fewer stays in skilled nursing centers. This is due in large part to the growth in out-patient surgery relative to in-patient surgery. Medicare will pay for a skilled center stay only if it is preceded by a minimum of three full, billable in-patient days in an acute care hospital, not counting any portion of the stay in an emergency room or observation area. Out- patient surgery patients do not qualify for Medicare paid stays, nor do patients whose three-day hospital stay includes time in the emergency room or observation area; nor do patients who are not transferred to a skilled nursing center until more than 30 days after discharge from the hospital. Medicare costs could be reduced dramatically by selectively waiving the three-day rule; even more could be saved by repealing the rule.
The second factor jeopardizing access to skilled nursing care is the reduction in Medicare reimbursement under the Prospective Payment System rolled-out in 1998- 99. Medicare spending for skilled nursing care in 2000 has been reduced by $2 billion rather than increased by the promised $300 million. The unexpected shortfall in Medicare funding has played a significant role in the bankruptcy of five large national nursing home facilities. Despite some recent relief from Congress and HCFA, still more needs to be done so that skilled nursing centers will have adequate resources.
The third challenging factor, which exacerbates the reduction in federal funding, is low Medicaid reimbursement rates (about $4 per hour for patient care).
The fourth challenging factor is the erosion of market capitalization of long-term care companies-80% decline (from $14 billion to $2 billion) over the past two years. This limits companies' access to working capital needed to maintain facilities and to invest in new technology.
The fifth challenging factor is the proliferation of frivolous litigation and related costs, especially in Florida and Texas.
The sixth challenging factor is excessive, adversarial, stringent government regulation of nursing homes, including a proliferation of burdensome surveys. Excessive scrutiny is driving skilled employees from the industry and discouraging qualified individuals from joining the industry.
The seventh challenging factor is the increasing acuity level of patients, which has increased the centers' need for qualified licensed nurses and the ancillary costs to provide more complex, expensive care.
The eighth challenging factor is that the long-term care industry is at a disadvantage in competing for nurses against acute care facilities, particularly with respect to wages.
The ninth challenging factor is the declining pool of nurses and nursing assistants available for employment in the industry. The nursing corps is aging and there are fewer nursing school graduates. This shortage could be eased by loosening immigration laws. The recruiting burden could also be eased by the States' adoption of a universal, cross-trainable employee.
Dr. Barbara Stucki, Special Consultant, The American Council on Life Insurers
(Summary prepared by Catherine Heron)
Ms. Stucki's testimony focused on the need to educate the public on the importance of preparing for the financial burden of long-term care in retirement. She emphasized the impact that long-term care costs can have on a retirement income adequacy.
Both nursing home and home health care costs are substantial and are likely to increase dramatically by the time the baby boom generation reaches old age. For example, it is estimated that it will cost $68,000 annually for help from a home health aid 30 years from now and $190,000 annually for nursing home care. For that reason, long-term care planning is an essential part of retirement planning.
Long-term care insurance is critical to protect retirement assets, and increasing numbers of employees are purchasing long-term care insurance in recognition of this conclusion.
Long-term care in an intergenerational issue. Of those families helping to care for aging relatives, 26% dip into their retirement saving. Twelve percent dip into college funds.
Federal and state sources combined account for only 37% of the costs of those receiving non-medical long-term care at home or in assisted living. Medicaid pays the care for only 7% of residents in assisted-living facilities.
Most Americans are unprepared for the costs of long-term care. Less than 10% of the elderly have long-term care insurance and the percentage is lower among younger people. As life expectancy continues to increase, it's difficult to know how much to save for retirement.
ACLI conducted a study of retirement planning by those who own long-term care insurance. The study showed that policyholders are beginning to obtain coverage at younger ages. Currently, 31% of those holding policies bought them before age 65. There is also an increasing trend to purchase comprehensive coverage that includes home care. Sales of long-term policies rose 11% between 1997 and 1998.
By using long-term care coverage, retirees and participants can keep their retirement savings invested in the market. To have $300,000 a year at age 85 (the estimated cost for 2 years in a nursing home in 30 years), a 55 year old today would have to save $4,400 each year. This assumes a 7% annual rate of return.
With the retirement system in transition, more and more Americans are taking responsibility for their own future. Long-term care insurance helps them take responsibility for their financial security and retirement.
John Cutler, Office of Disability Aging and LTC Policy, DHHS
(Summary prepared by Judith Ann Calder)
Mr. Cutler is with the Office of Disability, Aging and Health for Long Term Care Policy, US Department of Health and Human Services. For 3 1/2 years, he has been the lead HHS person for long term care issues. Previously, he handled compliance and regulatory issues for AARP.
People buy commercial long-term care insurance to:
- be independent of Medicare
- cover home care
- cover nursing home care and,
- protect against financial consequences of running through assets to pay for a long term care needs.
Long-term care insurance pays from the first dollar unlike major medical insurance, which has deductibles and co-payments.
Most coverage currently is paid solely by employees. Many buying long-term care insurance don't buy inflation protection. That means if they buy at age 42 and don't have inflation protection, by the time they use the policy at age 70 or 80, coverage will be inadequate.
Medicare does not pay most long-term care expenses. If Congress amends Medicare to pay for more coverage, prescriptions drugs will likely be a higher priority than adding long-term care benefits.
Unum offered a product that covered disability until you retired at 65 and then turned into long-term care insurance. Unfortunately, nobody bought it. Some carrier could offer long-term care insurance that was also disability coverage so that a younger person with long-term care insurance would have disability coverage as well.
Long-term care insurance is purchased:
- 80% by individuals at an average age of 67
- 10% via life insurance
- 10% via employers
After congressional cutbacks, 20,000 home health providers went out of business.
Hospitals could shift costs from Medicare, Medicaid and indigents to private pay patients and third party commercial insurance payers. This is more difficult for long-term care facilities. Some are totally Medicaid or totally Medicare. Those with several types of beds are not able to cost shift very easily, and it may be fraudulent to do so.
People shouldn't be self-insuring unless they have $800,000 or more in assets to withstand 12 years in a nursing home.
The private sector cannot solve this issue. The Government has to do it.
Future steps could be:
- Upping the percentage of employers offering this product and
- Increasing purchase rates by employees.
Deciding whether to spend more on Medicare or offering tax deductions for long-term care insurance purchase.
Because there will be a shortage of skilled care providers, something could be done to the number of long-term care and geriatric case managers.
Immigration rules could be loosened to solve the projected shortage of unskilled care. Unskilled care is as important as skilled care.
People could be allowed to pay for long-term care insurance premiums from their 401(k) funds.
The US Health Care Finance Administration (HCFA) is likely to begin educating those turning 55 about the fact that Medicare doesn't pay for long term care.
September 11, 2000
Marc A. Cohen, Ph.D., Vice President, LifePlans, Inc.
(Summary prepared by James S. Ray)
Dr. Cohen made the following significant points in his written and verbal testimony:
LifePlans provides risk management services to the long term care industry, and undertakes research and consulting. He has spent much of his career in the area of long term care financing. His company has conducted a number of consumer surveys concerning LTC.
He addressed three major points:
- the impact of a proposed above the line tax deduction on the private long term care (LTC) insurance market (average premium, demand for insurance, and projected increase in market);
- the impact of LTC insurance market growth on Medicaid; and
- the potential impact of market growth on Medicare home health expenditures.
Tax deductibility of LTC premiums affects the after-tax amount of the premiums, and the effect depends on the person's marginal tax rate and whether he itemizes.
The Health Insurance Portability & Accountability Act's (HIPAA) modest LTC tax deduction and consumer protections provisions had little effect on the LTC market because most taxpayers do not itemize and very few itemizers take medical deductions. The main impact of HIPAA was to raise the profile of LTC insurance among consumers and to give LTC a government endorsement.
An above the line tax deduction would have an impact in reducing the net price of LTC insurance. Higher income taxpayers would receive a greater benefit under the progressive tax system.
A price reduction due to the tax effect of an above the line deduction would increase demand for LTC insurance. A 21% price reduction resulting from the above the line tax deduction would increase demand for LTC insurance by 16- 26%.
There is a need to increase demand among middle class Americans for LTC insurance. The wealthy can self-insure and, in any event, get a larger tax benefit from deductibility. The poor have Medicaid long term care programs.
Marketing has a positive impact on LTC insurance pickup rates.
Medicaid is the largest public payor for LTC. It spent $35 billion (38% of all LTC expenditures) in 1998 on LTC. It pays for 68% of nursing home users to some extent. But, a person must be impoverished to qualify.
There are issues concerning the impact of increasing LTC insurance coverage on Medicaid costs, including whether there are people who would qualify for Medicaid but for their LTC insurance; Dr. Cohen recently completed a study of LTC insurance policyholders and claimants, and found that about 26% of claimants would qualify for Medicaid but for their insurance and that about 8% of all policyholders (including claimants) would qualify for Medicaid but for their insurance. He believes that the 8% figure is substantial. He also found.
- that LTC insurance policyholders have higher incomes than the Nation's average;
- that of policyholders, 35% have incomes below $35,000; 60% have incomes below $50,000; 70% are married; most have assets in excess of $100,000;
- that of claimants, the average income is $31,000; median liquid assets is about $100,000; 45% are married; they are spending an average of $125 a day in the nursing home; their insurance is paying about $81 per day;
- that for every dollar in tax expenditures to encourage LTC insurance coverage, Medicaid saves about 90 cents for persons who maintain their LTC policies;
- that for every new person induced to buy a LTC policy, the Medicaid savings are equal to roughly 80% of the expected costs; and
- that roughly half of claimants say that they would have to seek institutional care but for their LTC insurance; but for LTC insurance, there would be more demand on public programs.
The average age of purchasers of LTC insurance is falling according to recent research.
Medicare is the largest public payor for home and community based care services; services that are typically paid for under LTC policies. The rate of Medicare use among people with LTC insurance is about 50% of what would be expected given their characteristics. For every 100 LTC insured individuals, Medicare saves about $20,000 annually.
The pricing of LTC insurance has involved a lot of uncertainty in the past, and insurers were conservative. But, the insurers are now better able to price the policies based on disability triggers.
Brandt Chvirko, Congressional Fellow from Center for Disease Control and Presidential Management Intern
(Summary prepared by Rose Mary Abelson)
Summary of Comments
Described history and current status on National Long-Term Care proposals in helping caregivers and preparing for the baby boomers.
General statistics - care givers
88 percent of all people who receive long-term care rely on unpaid relations
Huge burden on baby boomers – 1/3 to 2/3 have
Rationale to get baby boomers to take LTC – higher divorce, less children – on one to take care and cost more to the
Can cause problems in giving access to services.
The following is a summary of the testimony by Brandt Chvirko:
Mr. Chvirko was asked to first describe both his current position as a congressional fellow and his background prior to his appointment as a presidential management intern.
Mr. Chvirko described the history and current status of major long-term care legislation proposals being considered by Congress. These proposals are primarily focused on helping caregivers and in preparing for the aging of the baby boomers. His testimony included general statistics on the tremendous number of caregivers providing long-term care in their community. He stated many of the caregivers themselves are hurting. Over 50 percent are seniors whose own health is fair to poor.
Long-term care is also a huge burden on baby boomers when they have to balance care giving with employment. Over 2/3 have conflicts requiring them to quit work or turn down promotions. Of significance is that these same baby boomers will not have the same support network Th today's retirees enjoy because many baby boomers have a higher divorce rate and fewer children. This will result in a significant increase in out-of-pocket costs and government costs to provide long-term care.
A summary of the long-term care proposal follows:
National Family Caregiver Support Grant Program - establish a state grant program to provide caregivers and caregivers of seniors with information about services, assistance in access to service and counseling. Priority for program goes to low income and minority seniors. This program is estimated to cost $1.25 billion over 10 years. Senate Bill 1203 now evolved into Senate Bill 707.
Long-Term Care Tax Credit - provides $3,000 tax credit to cover long-term care expenses to be phased in over four years. The estimated cost for this program is $35B over 10 years. This bill initially introduced by President Clinton in FY 2000. Proposal introduced by Senator Bieas Senate Bill 2096. This proposal adds Tax Credit for long-term care on the Child Care Tax Credit. Now evolved as Senate Bill 2225 and HR 3872 on the House side.
Long-Term Care Insurance to Federal Employees - cost is projected at $39 million over 10 years (House Resolution 4040) passed both Senate and House and is about to be signed by the President.
Long-Term Care Tax Deductions - current policies provide for above the line tax deduction for the cost of these policies. Deductions will be phased in over five years until it reaches 100 percent. Most recent proposal will allow employers to include reduction for long-term care insurance policies in cafeteria plans and in FSA accounts. There are variations of this bill in both the Senate and House. Only bill that includes Enhanced Consumer Protection Standards.
In general, the long-term potential for these bills looks good. Both presidential candidates have in different ways backed the proposals. There may be pressure to hold off on these issues this year because they impact very power constituents, women, seniors and baby boomers. It may be a good strategy to wait and campaign for these proposals next year.