LTC Bullet: Hawaii's CarePlus Program

Friday, June 28, 2002

Washington, DC--

*** This Bullet is sponsored by the Standard Insurance Company of Portland, Oregon. Visit them online at http://www.standard.com/index.html. Contact Mike Skiens, Assistant Vice President for Marketing, at (503) 321-6215 or mailto:mskiens@standard.com for more information. Thanks so much to The Standard Insurance Company for their generous support of the Center and commitment to keeping LTC Bullets free to everyone. Won't you help too? Go to www.centerltc.org/support/sponsor_bullets.htm to sponsor an LTC Bullet. Find out how you can sponsor other Center activities (e.g., articles, speeches, conference exhibits) by contacting Amy Marohn at 425-377-9500 or amy@centerltc.org. ***

*** The National Chamber Foundation's conference on "Long-Term Care and Business: Creating and Paying for Choices," held in Washington, DC on June 27, 2002 was excellent. Some brief highlights: SENATOR JOHN BREAUX (D, LA), Chairman of the Senate Special Committee on Aging, came out in favor of mandatory long-term care insurance (as for auto insurance). On the other hand, he also favored dropping the waiver requirement for state Medicaid programs to offer home and community-based services (HCBS), a move that could make Medicaid (and Medicaid planning) more attractive and LTCI less so. ED FLYNN, second in command at the Office of Personnel Management, predicted the new federal LTCI program will at least meet, and possibly exceed, its sales goal of 10 percent. TOM SKULLY, CMS Administrator (who runs Medicaid), displayed a surprisingly accurate and frankly articulated understanding of the LTC problem. He bewailed the damage of Medicaid planning and favored reforms to curtail artificial impoverishment and to increase estate recoveries. He also warned that expanding Medicaid financing of HCBS would explode program costs. Skully strongly favors expanded private LTC insurance and above-the-line tax deductibility. Congratulations to the National Chamber Foundation for a fine meeting. ***

*** The 16th Private Long Term Care Insurance Conference, "Shaping the Future," is coming up February 12 - 14, 2003 at the Marriott Rivercenter in San Antonio, Texas. The Long-Term Care Education Foundation says "Join your colleagues and explore the latest trends in Long Term Care. For more information, visit http://www.ltcedfoundation.org/ or call Diane Fulton at 703-968-8863." The Center for Long-Term Care Financing may offer one of our LTC Graduate Seminars immediately before or after this major industry conference. If you'd like to attend the LTC Graduate Seminar, please drop a note to mailto:amy@centerltc.org to express your interest. For details on the LTC Graduate Seminar, jump to http://www.centerltc.com/ltc_grad_seminar.htm. ***

LTC BULLET: HAWAII'S CAREPLUS PROGRAM

Advocates of government-financed long-term care scored a near miss this year in the State of Hawaii. We offer the following critique of a politically popular, but severely flawed social insurance approach to financing long-term care. It almost passed in Hawaii, and approaches like it are being considered in many other states. Forewarned is forearmed, so please read our report and be ready if similar programs are proposed in your own states. 

"Report on Hawaii's Proposed CarePlus Mandatory LTC Insurance Program" by Stephen Moses, President, Center for Long-Term Care Financing

CarePlus is a compulsory social insurance program proposed to be mandated by the State of Hawaii to supplement long-term care funding. It did not pass the state legislature this year, but came very close. CarePlus would require every adult in the state who is 25 years of age or older, including retirees and homemakers, to pay $10 per month into a state-administered reserve fund for the remainder of their lives, or until they go on claim, whichever comes first. Participants would be vested at a rate of 10 percent per year to full benefits after 10 years. "De-vesting" at the same rate begins after a one year grace period for participants who fail to contribute. An independent medical evaluation would determine eligibility for benefits. Once eligible, participants would choose their services (which may include any level of care) and providers (which may include friends or relatives). The program would cover 365 days of care with a maximum daily benefit of $70 per day (gauged to inflation) after a 30-day deductible. CarePlus was scheduled to launch in 2003, but it would not have paid benefits for "at least" two years in order to build reserves. This program may re-emerge in the future as it had a lot of political support. Our critique of CarePlus follows.

Critique of CarePlus

1. CarePlus is social insurance, similar in design to Social Security and Medicare. Consequently, it is vulnerable to the same problems that beset the long-term solvency of those programs. For example, at the beginning of the program, a relatively large number of participants are paying into the system compared to the number of beneficiaries drawing benefits from it. Over time, with the aging of the population, that ratio will change radically so that the proportion of participants paying in to beneficiaries drawing out will decline significantly. Furthermore, the reserve fund into which all CarePlus tax revenues flow may be vulnerable to the same problems faced by the Social Security trust fund. If the State of Hawaii borrows from that fund as the federal government has borrowed from Social Security to cover day-to-day expenses, the CarePlus "trust" funds could come to contain only IOUs as is the case with Social Security's trust fund.

2. Like private insurance, social insurance spreads risk. Unlike private insurance, social insurance does not price risk. For example, CarePlus requires all participants to pay exactly the same amount into the reserve fund regardless of the level of risk each brings into the risk pool. Therefore, as social insurance, CarePlus does not reward low risk with a correspondingly lower premium nor does it charge high risk a correspondingly higher premium. Thus, because it is mandatory, CarePlus compels low-risk participants to subsidize high-risk participants. This has the effect of rewarding unhealthy lifestyles that may be more likely to lead to needing long-term care, while punishing healthy lifestyles that may delay or avoid long-term care utilization. By pricing risk based on objective underwriting, private insurance has the opposite effect of rewarding responsibility and punishing irresponsibility through actuarially equitable premiums.

3. The rationale for CarePlus is based on some false assumptions about Medicaid long-term care eligibility. According to the CarePlus brochure: "[Medicaid] eligibility is restricted to persons with very low income and assets …. Presently, the income eligibility requires that an individual have income beneath 100% of the Federal Poverty Level ($670) and have assets less than $2,000." This is very misleading. If it were true, Hawaii would not have to force people to buy long-term care insurance. They would voluntarily purchase private long-term care insurance to avoid such a draconian spend-down requirement. The truth is very different. Medicaid financial eligibility levels are only stringent for recipients needing acute care, usually poor women and children. Medicaid applicants who require a nursing home level of care come under Hawaii's "medically needy" program, which means their medical expenses not covered by Medicare, including the cost of private nursing home care, are deducted from their monthly income before their income eligibility is determined. Thus, a recipient can easily have several thousands of dollars of income each month and qualify for Medicaid long-term care benefits based on income. The rules are even more generous for married couples, because the spouse remaining at home is allowed to keep up to $2,232 per month of income. 

The asset limit cited in the CarePlus brochure is also very misleading. Non-exempt assets are limited to $2,000, but the recipient can retain additionally an exempt home and all contiguous property regardless of value, a business including the capital and cash flow of unlimited value, one automobile of unlimited value (if used for the benefit of the recipient), an irrevocable burial trust fund of unlimited value, term life insurance of unlimited value, and many other exempt assets. Medicaid applicants are routinely advised to purchase "exempt" assets with their otherwise "non-exempt" resources to avoid having to spend down for long-term care. Medicaid applicants with much larger assets can utilize a myriad of advanced "Medicaid planning" techniques including trusts, annuities, life care contracts, exempt transfers, and many other esoteric methods to qualify almost immediately regardless of how many non-exempt resources they own. A search of the website of the National Academy of Elder Law Attorneys (http://www.naela.org/) found nine attorneys in Honolulu alone who practice "elder law." NAELA is the trade association of attorneys who specialize in artificial impoverishment of the elderly to qualify them for Medicaid long-term care benefits without spending down. Four one-hour-and-fifteen-minute training seminars at a NAELA conference in Baltimore, Maryland in April 2002 were dedicated to qualifying a member of a family with $890,000 in resources for Medicaid while preserving all of the assets for the family and avoiding estate recovery.

Clearly, it is untrue that Medicaid long-term care "eligibility is restricted to persons with very low income and assets…." The CarePlus brochure's statement that CarePlus will "insure that the Medicaid program will still be there for the most needy" is mistaken. If Medicaid eligibility rules are not changed to target the program's benefits to the genuinely needy, the program will continue to bear the brunt of long-term care expenses for the needy, the middle-class, and the relatively affluent.

4. CarePlus's severely limited benefit of up to $70 per day for no more than 365 days is insufficient to provide significant protection against the cost of long-term custodial care, but it will further anesthetize the public to the real risk and cost of long-term care. It adds to the false sense of security about long-term care that has been created by nearly four decades of relatively easy eligibility for Medicaid-financed nursing home benefits, as described above. With Medicaid struggling, mostly unsuccessfully throughout the United States, to pay adequately for quality long-term care, public policy should be teaching the public not to rely on government-financed long-term care. CarePlus does exactly the opposite. It further desensitizes the public to long-term care risk and will undoubtedly impede the development of a market for private long-term care insurance significantly.

5. The CarePlus brochure describes the program as "consumer funded and directed long-term insurance plan" with "contributions" and "not a government-funded aid program," but rather an "investment." How does one distinguish CarePlus from any other compulsory, government-enforced tax? People who purchase a private insurance product have a contract (policy) enforceable in a court of law guaranteeing them certain benefits. CarePlus provides no legal recourse or protection against increases in premiums (payroll tax hikes), decreases in benefits (program cutbacks), or the imposition of means tests (welfarization). If the State of Hawaii decides it cannot afford CarePlus, the State Legislature and the Governor can change the terms of the agreement as easily as they established them in the first place. CarePlus beneficiaries have no legal recourse or protection.

6. The provision in CarePlus that "gives participants the flexibility to use their benefit to pay for the services of their choice, including care provided by family members" is an open invitation to fraud and abuse. Who will oversee the program to assure that friends or family members provide appropriate care? The single biggest cause of physical abuse of the elderly is caregiver burnout. Who will protect CarePlus beneficiaries from "caregivers" who just can't take it anymore and lash out at the frail or infirm elder in their care? Who will prevent "caregivers" from taking the elders' CarePlus benefits and locking them in the basement?

7. CarePlus must be submitted for independent actuarial review annually. Hopefully, this review will be truly independent and conducted by actuaries with no stake in Hawaii's program. The idea that one can contribute $10 per month for 40 years (totaling $16,000 at 5.4% interest) and receive "the maximum benefit of $211,000 or $469 per day" certainly sounds seductive. But does it really pencil out? What lapse ratio does this estimate assume? Is the expected claims experience realistic? How do CarePlus' actuarial assumptions compare to those of private long-term care insurance companies that have real-world experience paying claims? Won't the fact that beneficiaries can pay friends and relatives induce extra demand for services? Who's going to tell demanding beneficiaries "no" in a politically-motivated and politically-sensitive system like CarePlus? Will affluent people hire attorneys or use political connections to help them wiggle through eligibility loopholes as they do with Medicaid now? If cost overruns occur, will CarePlus limit access to services by raising its benefit triggers? 

8. There is little wonder that CarePlus is compulsory. No thoughtful consumer would voluntarily participate in such a program. Who would pay premiums for an insurance policy that stipulates "in order to insure financial stability, payments will not be made for at least two years after opening the fund"? Who would voluntarily purchase an insurance policy that does not allow one to drop the policy when and if it is no longer needed or wanted? Who would pay into insurance reserves when one's eligibility for benefits will be eliminated simply for moving one's residence out of state? Who would voluntarily purchase insurance that is guaranteed to pay out a larger proportion of benefits to beneficiaries who bring more risk to the risk pool for less cost than oneself? 

In summary, if CarePlus becomes law and is implemented, it will damage Hawaii's long-term care service delivery and financing system in several ways. It will further de-sensitize Hawaiians to the real risk and cost of long-term care by adding to the false sense of security created by generous Medicaid long-term care eligibility. It will not relieve the financial burden on Medicaid signifi-cantly for many years (if at all) because of the slow phase-in and extremely limited benefits of the program. It will impede the development of a private long-term care insurance market by reducing the public's sense of urgency regarding long-term care risk and cost. It will reward irresponsible health and lifestyle behaviors and punish healthy behaviors by charging all participants the same "premium" regardless of the level of risk they bring into the risk pool. It will encourage and subsidize financial and physical abuse of the elderly by allowing friends and relatives to tap into participants' program benefits. It will be highly vulnerable to manipulation and abuse by affluent or politically-connected participants who can retain legal and medical professionals able to influence benefit eligibility. It severely reduces consumer choice and cedes control of long-term care service delivery and financing even further than currently to state government functionaries. In our judgment, CarePlus as proposed will do far more damage than good and should be avoided.