LTC Bullet:  Long-Term Care Insurance Under the Microscope

Monday, August 29, 2005 


LTC Comment:  What is the current state of the private long-term care insurance market and what should public policy makers learn from it?  Answers after the ***news.*** 

*** NEW MONOGRAPH.  Steve Moses's "policy analysis" paper titled "Aging America's Achilles' Heel:  Medicaid Long-Term Care" will be published September 1, 2005 by the Cato Institute.  It documents the Medicaid long-term care hemorrhage and proposes a solution we sincerely hope Congress will adopt.  As soon as the paper is available online, we will give you some excerpts, a link to the full piece, and information on how to obtain hard copies. *** 

*** THE GREAT DEBATE on Medicaid and long-term care.  If you will be in Washington, DC at the time, please consider attending my debate with Vincent Russo, a major New York Medicaid planner and former president of the National Academy of Elder Law Attorneys.  The debate will take place at the Cato Institute on Wednesday, September 7 at noon.  Free lunch is included.  Details and a registration form (required as seating is limited) are available online at  Ceci Connolly has been invited to moderate the debate and Cato's Michael Cannon, whose book on health policy will be released September 19, will offer comments. *** 

*** CAPITOL HILL BRIEFING on Medicaid and long-term care financing.   On Friday, September 9 at noon (free lunch to follow), Steve Moses will give a briefing titled "The Trouble with Medicaid" in Room B-354 of the Rayburn House Office Building.  Details, an online registration form and special instructions for news media may be found at  Cato's Jagadeesh Gokhale, Senior Fellow and Michael Cannon, Director of Health Policy Studies will also speak at this event, which is open to the public. *** 

*** REGISTER NOW.  If you plan to attend either of these presentations, please make it a point to register immediately.  Cato already has 75 pre-registrations for 150 available seats at the debate.  "That's the most I've ever had for an event," says my Cato contact.  There will be some "overflow" capacity, but if you want a ringside seat, register now. 

If you are able to attend either or both the debate and the Hill briefing, please make it a point to say hello to Steve.  If you can't be there in person, be sure to catch the webcast live or in the Cato media archives at ***



LTC Comment:  The long-term care insurance market is in a world of hurt as the article that follows this comment documents.  Prices (premiums) are up; sales are down; and attrition has whittled away many of the companies formerly in the business. 

What's going on?  Readers of these "LTC Bullets" know the fundamental problem.  LTC insurers can't sell a product profitably that the government has been giving away (through Medicaid and Medicare) for forty years.  Nothing significant will change for LTC insurers until that problem is fixed. 

But there is more to it than that.  Technical problems have beset the LTCi industry.  LTCi companies overestimated lapse and interest rates.  Consequently, they under priced their products.  All have had to raise premiums on new sales and many have raised premiums on in-place business. 

Why do we say there is a lesson for public policy makers in the experience of private LTC insurers?  

Long-term care has a "long tail."  To be able to pay benefits 20 or 30 years later, insurers (whether private companies or government programs) must build reserves that appreciate adequately.  They have to spread and price risk, collect sufficient premiums or taxes, and invest them wisely if they are to have any hope to meet the needs of their policy holders or constituents when beneficiaries need benefits decades later. 

Now, here's the lesson for government policy makers.  Private LTC insurers may have charged too little initially and set aside insufficient reserves to pay benefits without premium increases.  But public insurers, such as Medicare and Medicaid, have charged and set aside nothing! 

Sure, Medicare has a trust fund, but there is nothing in it except IOU's that the federal government will have to make good in the future by pulling more taxes out of the productive economy.  Medicare's unfunded liability is over $60 trillion.  When that bill comes due as baby boomers age, watch out!  The crippling economic consequences are likely to be catastrophic. 

Unlike Medicare, however, Medicaid doesn't even have a phony "trust fund" to rely on.  And yet, Medicaid is now and will likely remain indefinitely the primary payor of long-term care.  The program is already stretching state and federal fiscal resources beyond reasonable limits even as it pays providers too little to ensure quality care in nursing homes or home and community-based settings. 

Ironically, there is nothing safe about the Medicaid "safety net."  By covering people who would have, could have and should have paid for their own long-term care, Medicaid has chilled the market for private insurance, locked in an "institutional bias," dragged down long-term care quality for everyone, and guaranteed a dismal future for boomers as they age toward senescence. 

So, as you read the following article that documents the current state of the private LTC insurance market, ask yourself this question:  What is the government doing right about funding long-term care that the insurance industry has done wrong?  I think you'll find that the answer is:  Nothing! 

Government has under priced long-term care by giving away Medicaid to people who had substantial income and assets before they confronted a long-term care crisis.  Government has set aside zero reserves to prepare for the gargantuan demands boomers will place on the long-term care service delivery system.  Consequently, when it comes time for America's biggest generation to need long-term care, government will have no choice but to do what private insurers have been forced to do. 

To wit, government will have to increase premiums, i.e. taxes, and cut benefits.  And by then, it will be too late to build long-term care reserves responsibly.  The inevitable result will be that boomers will have to use their home equity to pay for long-term care while their heirs lose inheritances and shrug under the weight of a vastly increased tax burden. 

That's where we're headed.  Thoughtful public policy makers will learn the bitter lesson of LTC insurance before it is too late, re-target Medicaid to the genuinely needy, and use the savings to encourage private insurance, so that LTC risk will be properly spread and priced, and reserves will build adequately to meet the crisis when it comes. 


Our thanks to Claude Thau of Thau, Inc. for providing the following synopsis of a previously published article and to "Broker World" magazine for permission to publish it. 

The annual Tillinghast Broker World LTCi Survey was published in the July 2005 issue of Broker World.  Information on how to obtain copies of the full article follow this summary. 

The survey was performed by Claude Thau of Thau Inc. and Steve Pummer of Tillinghast Towers-Perrin.  It displayed detailed features of 42 stand-alone LTCi products from 30 different insurers, including some information not available in policy forms or sales materials.  For the integrated policies that were listed, premium comparisons were also included.  Company financial information and LTCi history were shown.  Companies offering combination products and group voluntary products were also identified. 

The accompanying article provided insight regarding the state of the LTCi industry.  Here are some of the points made: 

  1. When policyholders discontinue their policies, their policy reserves become available to pay claims for continuing policyholders.  Relying on such release of reserves, insurers charged lower premiums for LTCi.  While it is very encouraging that people are determined to keep LTCi policies, the low lapse rates have forced insurers to increase LTCi premiums substantially.
  1. Similarly, insurers charged lower premiums because they anticipated much higher interest rates than have occurred.  Because LTCi builds huge reserves, the low interest rates have been devastating to insurers.
  1. The higher premiums have had a dramatic impact on sales.  Because sales have held up better in states with slow product approval and because of “fire sales”, the full brunt of the decreased sales has not yet been apparent.  Nearly half of the carriers reported selling more premium in 2004 than in 2003, perhaps because they were slower to increase prices.
  1. Tighter underwriting standards have also depressed LTCi sales.  19% of the applications are declined, but probably noticeably more than 81% of applicants were successful in buying a policy.  Only 37.9% of applicants were placed in the most favorable rating classification (down from 47.2% in 2002).
  1. Both insurers and distributors have turned attention away from LTCi.
  1. In 2006, insurer unit profitability should be healthy.  So existing LTCi insurers will increase budgets in order to boost sales.  Other insurers and reinsurers may enter the market.
  1. Following 2006, LTCi sales will rise.  Distributors and buyers will have adapted to the higher pricing.  Partnership restrictions may be lifted, which should be particularly helpful because premiums for lifetime benefit periods have risen more than for shorter benefit periods.  People may be allowed to withdraw retirement funds on a penalty-free basis if used to purchase LTCi.  In the employee benefit market, IRC [Internal Revenue Code] Section 125 treatment may be accorded to premiums.  Over time, HSAs may help build the LTCi market as well.
  1. Ignoring the Federal LTCi program, 35 insurers reported individual LTCi annualized premium sales of $667.7 million in 2004 vs. $809.4 million in 2003, a decrease of 17.5%.  The average premium per policy increased nearly 9%, from $1771 to $1929, but the number of people newly insured dropped nearly 25%, from 457,000 to 346,000.  Total LTCi year-to-year results were probably less favorable.  (Note:  some carriers re-stated 2003 sales to remove single premium sales, which may have depressed the increase in average premium.)
  1. Nearly all sales are now integrated products, as most insurers have concluded that they cannot sell Home Care Only and Facility Only coverage profitably.
  1. The average purchase age was 61 in 2004.  The large price increases at younger ages may have more than negated additional attention paid to those ages.
  1. 82.5% of the 2004 policies included benefit increase features (BIFs), with most companies issuing a higher percentage of policies with BIFs than in 2003.  The percentage issued with a compound BIF increased from just under 50% to just over 51%.  However, the increase is probably attributable to capped and other compound features that provide less long-term protection than 5% compound increases for life.  12.2% of policies (vs. less than 8% in 2003) were issued with Future Purchase Options, which, unfortunately, are unlikely to provide desired protection against inflation.
  1. Only 4.25% of sales had an elimination period longer than 100 days, however, one company reported a policy form on which 20% of the sales had an EP [elimination period] longer than 100 days.  Calendar day EP definitions are becoming more available.
  1. Between 1993 and 2004, the percentage of policies that were sold in Partnership states (CA, CT, IN and NY) rose steadily from 13.2% to 19.0%.  Although the data seems to confirm that Partnership programs are stimulating accelerating growth of LTCi, the 2004 percentage may be a temporary peak because the Partnership states tend to be slow in approving new products.  If more states adopt Partnerships, insurers and multi-state general agents will promote Partnerships more aggressively and Partnerships will be more readily utilized in group programs that cross state lines.  Hence, sales in existing Partnership states should be boosted, as well as sales in the new states having Partnerships, if Partnerships are unveiled in other jurisdictions.
  1. “Shared Care” sales, which accounted for 8% of LTCi policies, should increase with higher lifetime BP pricing and if permitted in Partnership programs.
  1. Weekly or monthly home care determination of benefits is becoming more common.  Ten policies use such a calculation; 17 make it available for additional cost; and thirteen policies still are based on daily calculations.
  1.   Approximately 40% of the insurers co-ordinate with other LTCi policies on their paper, whereas only about 7% co-ordinate with competitors’ LTCi policies.
  1. More than 97% of the policies are TQ [tax-qualified] policies.

The annual Tillinghast Broker World LTCi Survey was published in the July 2005 issue of Broker World.  Up to 500 reprints can be ordered from "Broker World" magazine's website--   Complete the online order and pay with a credit card via Verisign online.  Or, print the order form and mail with payment to Broker World Orders, P.O. Box 11310, Overland Park, KS 66207.  Orders will be processed within three to five business days of receipt of payment.  For over 500 copies, call 800-762-3387. 

Claude Thau is President of Thau, Inc. and formerly the director of a major long-term care insurance carrier and Chairman of the Board of the Center for Long-Term Care Financing.