Long-Term Care is Poised for Growth
Long–Term Care is Poised for Growth
Actuaries involved with long–term care are looking at the possibility of rapid growth in their industry due to a bill that was recently signed into law.
By Ty Wooldridge and Dawn Helwig
A new piece of legislation with the potential to accelerate the growth of one of our newest practice areas made its way through Congress late last year and was signed into law by President Bush on February 8, 2006. The Deficit Reduction Act of 2005 establishes nationwide expansion of a Long–Term Care Partnership program into which any state can choose to participate.
State partnership programs, formerly available only in California, New York, Indiana and Connecticut, allow consumers to purchase qualifying private Long–Term Care Insurance (LTCI) with benefits that must be fully utilized prior to receipt of any Medicaid assistance. In return, the insureds are able to protect and preserve a larger amount of personal wealth, which otherwise would have to be exhausted before Medicaid would cover any long–term care expenses.
Reliance on Medicaid as a funding vehicle for long–term care expenses has been a relatively common strategy for Americans managing the substantial financial risk that they might need care in the final stages of their lives. However, because Medicaid was a program established to provide healthcare for the truly impoverished, complicated sets of rules and regulations governing eligibility for the program were developed in an attempt to prevent more affluent people from diverting scarce federal and state funds from those who genuinely need them. Chief among those rules are those that define the amount of personal wealth a prospective claimant can own and still qualify for assistance.
A typical Medicaid strategy might involve the systematic transfer of personal assets to other people and/or a "spending down" of personal wealth to the point where the claimant could meet the qualifications for benefits. Under the rules, assets fall into one of three classes. Countable assets are included in the determination of Medicaid eligibility and generally include cash, investments, second homes, etc. Certain other assets, like the primary residence of the applicant, are not countable for eligibility purposes, but may be subject to government liens securing the recovery of any Medicaid benefits paid out. Finally, assets that have been legally transferred to other people are classified as inaccessible and are ex– cluded from the eligibility equation. How–ever, these transfers must have occurred far enough in the past to satisfy the Medicaid look–back provisions, which if not met, expose the assets to government liens.
In recent years, efforts to control the spiraling cost of the Medicaid program (over $300 billion in 2004, of which $110 billion went toward the cost of providing long–term care) have prompted revisions designed to close perceived qualification loopholes. The Deficit Reduction Act itself includes measures that lengthen the look–back period and which prevent the sheltering of wealth in primary residences by denying benefits to persons with more than $500,000 of equity in their homes. Rule changes such as these not only tighten the eligibility standards for the some 75 million Americans who will approach retirement in the next 10 to 20 years, but also expose greater and greater amounts of personal wealth to government recovery.
Under partnership, if the insured outlives the coverage provided by the LTCI policy, assets equal to the amount of any benefits paid out by the policy are exempted for purposes of qualification and government recovery. All of this serves to make expansion of a partnership program an attractive proposition for those considering the purchase of LTCI. In fact, surveys have shown that between 15 percent and 30 percent of consumers in the four existing partnership states report that the single most important factor in their decision to purchase LTCI coverage was the partnership feature. Even more telling is the fact that while total industry sales of LTCI have slumped in recent years, partnership sales have grown by some 7 percent during the same time period.
But Do I Really Need It?
It is widely accepted, especially within the actuarial community, that Americans are living much longer lives than ever before. Statisticians at the U.S. Census Bureau estimate that two–thirds of all persons who have ever reached the age of 65 are alive today. With knowledge like that comes the responsibility to provide for what will likely be a much longer retirement than previous generations enjoyed, a good portion of which could be spent requiring the assistance of others. In fact, a study conducted by the Agency for Healthcare Policy and Research concluded that 42 percent of Americans who reach the age of 70 will require some form of long–term care during their remaining lifetime.
Despite the fact that most people have a strong family support system, oftentimes eldercare can be complicated and best provided by trained professionals. This sort of care requires financial resources that otherwise would be used for retirement or left to future generations. The financial implications of this relatively common eventuality can be so catastrophic to a family that no financial plan should be considered complete until it at least contemplates this exposure. Considering that the oldest member of the baby boomers, the largest demographic group in recorded history, turned 60 on January 1 of this year, it is clear that for literally millions of Americans, long–term care will become an expensive reality.
In their 2005 benchmark survey of over 7,000 nursing homes, assisted living facilities and home healthcare agencies across the country, Genworth Financial reported an average annual cost of a nursing home stay to be almost $70,000, up 6 percent over a similar study conducted in 2004. The final report also showed a marked difference in costs by region with average annual costs topping $200,000 in the most expensive areas of the country. The study showed similar increases in costs and cost differentials by region for Assisted Living Facilities as well. (see charts 1, 2, 3 and 4)
What Do I Need To Know?
The first long–term care policies were offered just 31 years ago and generally protected the insured against the cost of requiring a nursing home stay. More recently, companies began to offer more comprehensive coverage, providing for care in assisted living facilities, in adult day care programs and even in the policyholder's own home. Depending on the company, 30 percent to as high as 70 percent of claims are homecare claims, where typically Medicaid and Medicare will not cover expenses. Today, about 4 million Americans own an LTCI policy.
The vast majority of contracts in the market are unisex, level–premium policies sold in either an individual or group context. Virtually all contracts sold today are tax–qualified, permitting a very limited deductibility of premiums paid and tax–free receipt of benefits. This comes at a substantial cost to the policyholder in that one of the requirements for tax qualification is that the contract must not provide cash surrender value. The combination of a level premium structure and the absence of a cash value, greatly leverage the product's sensitivity to the selection of accurate termination assumptions in the pricing. Early product generations are sometimes characterized by industry critics as having been substantially under–priced, owing in large part to an almost industry–wide overestimation of policyholder lapsation. As the chart below indicates, missing an expected ultimate lapse rate of 2 percent per year by 50 basis points produces worse financial results during the first 20 years of the product's lifetime than missing the benefit claim costs by 50 percent.
Because of the age of the industry, credibility of the experience, and general uncertainty of the risk, LTCI premiums are generally not guaranteed, but to levy substantial price increases (often many years after issue) can be controversial and may serve only to alienate the by then largely retired policyholder population. Not only are retirees often on a fixed income and financially unequipped to cope with the increases, but they find themselves unable to recoup any of their prior premium outlay should they desire to terminate the coverage. Because most LTCI carriers at one time or another have exercised their right to increase the price on in–force contracts, industry critics will most often cite the guaranteed renewable aspect of the premium as the major drawback to prospective buyers.
Recently, a few companies have begun to offer policies that feature other forms of contract value designed to simulate a cash surrender value or limit exposure to future price increases. Various return of premium riders have become popular product offerings as have limited–pay contracts that generate substantial paid–up benefits. Some companies have begun to offer hybrid contracts, most often consisting of a single premium cash value life insurance or an annuity base plan with an LTCI rider. The periodic cost of insurance charges for the rider are paid out of the cash value of the base plan and are taxable above the cost basis. The combination acts like an LTCI policy with an available cash value and protection from the opportunity cost of never needing care. Should the policyholder file a claim, these products typically pay first from any remaining cash value or acceleration of death benefit, and then from LTCI benefits in the rider that extend the coverage.
Proof of loss will generally be demonstrated by the insured as a medically documented inability to independently perform at least two defined activities of daily living (ADLs) or certification that the insured has a significant deterioration of intellectual capacity for judgment, memory or orientation. Benefits are usually defined in the contract to be a maximum amount payable per day or per month, for a maximum number of years. However, if the claimant uses less than the maximum amount permissible in a given period, the unused excess typically serves to lengthen the maximum number of years under what is known as the "pool of money" clause. Benefits commence after satisfaction of an elimination period and continue until the recovery or death of the claimant, or until the pool of money has been exhausted.
LTCI is also underwritten very differently than life insurance. Issue decisions and preferred discounts are not based solely on issues of physical health and lifestyle, but also on cognitive health. Therefore a prospective buyer should not only expect the usual medical questionnaires, requests for attending physician's statements, etc., but also a professional assessment of cognitive impairment. About 40 percent of the industry's claims are directly due to the debilitating effects of Alzheimer's disease. Some carriers also offer more favorable pricing on the basis of marital status, driven by the somewhat better claim experience they have observed for married couples relative to singles.
Because premiums tend to increase dramatically by issue age, deciding when to buy is a key consideration. The typical purchaser of LTCI today is between 55 and 60 years of age, although the average issue age has been rapidly declining in recent years, with many companies targeting buyers as young as 40. Because most claims commence many years after the purchase of the product (some 70 percent occur between ages 70 and 80), another key concern to the insurance program is inflation. Virtually all carriers offer either a Guaranteed Purchase Option, allowing the policyholder to periodically buy additional coverage, or a Benefit Inflation Option that annually increases the periodic maximums on a compound or simple interest basis.
At the end of the day though, partnership and LTCI is really about protecting a lifetime of savings, preserving an over–burdened Medicaid program, and shielding your loved ones from the financial and emotional burden that your care could impose on them. For many people, LTCI has proven to be a very effective way to ensure that you are able to spend your final days as you see fit.
Ty Wooldridge is senior vice president and chief actuary for Genworth Financial. He can be contacted at firstname.lastname@example.org.
Dawn Helwig is a consulting actuary for Milliman, Inc. She can be contacted at dawn.helwig@milliman. com.