LTC Bullet: KFF Misfires on LTCI

Tuesday, June 9, 2009


LTC Comment: A new study of private long-term care insurance published by the Kaiser Family Foundation fails in the usual, predictable ways. Details follow.


LTC Comment: The Kaiser Family Foundation (KFF) examines government programs through a glass darkly. See no evil, hear no evil, speak no evil. But when KFF inspects the private sector, it uses an electron microscope. The richly endowed Foundation always finds a log in LTCI's eye, but never a speck in Medicaid's.

Their latest broadside . . . uh . . . I mean study . . . is a case in point.

Citation: Anne Tumlinson and Christine Aguiar of Avalere Health, LLC and Molly O'Malley Watts, of Kaiser Family Foundation, "Closing the Long-Term Care Funding Gap: The Challenge of Private Long-Term Care Insurance," The Kaiser Commission on Medicaid and the Uninsured, June 2009,

Read the "Overview" and "Key Findings" below after our review. Or check out the full report here.

The report's argument in a nutshell is this: Long-term care costs are wiping out families' savings all across America plunging frail and infirm seniors into total impoverishment and leaving them dependent on a financially overburdened Medicaid program. But private long-term care insurance isn't a solution because people don't buy it, it's too complicated, expensive, and, besides, who knows what long-term care will be like in the future and whether LTCi will pay.

But if this "Welfare Paradigm" is true, how do you explain consumer behavior? If long-term care costs are wiping out the savings of millions of Americans, why is the public in denial about LTC? Why isn't there a strong home and community-based services infrastructure fueled by the billions of dollars families are allegedly spending down for LTC? How come we have an institutional bias in the system when most people would rather avoid nursing homes? Shouldn't private long-term care insurance be a bargain at any price? It enables the insured to purchase red-carpet access to top-quality care at the most appropriate level for nickel-dollars now instead of dollar-dollars later. If the "Welfare Paradigm" is true, consumer behavior is totally irrational.

Now consider another explanation of the long-term care system. Call it the "Entitlement Paradigm." It goes like this: In America today, people are living longer, dying slower, and are often in need of high-cost long-term care. But they can ignore this risk, avoid the premiums for private insurance, and, if they ever do need expensive extended care, somebody else pays. If that's true, then consumer behavior makes perfect sense. No wonder the public's in denial about LTC risks and costs. No wonder they end up in nursing homes mostly, because that's what Medicaid finances. No wonder home and community-based care options are severely limited because people have to pay for them privately. And no wonder LTC insurance remains stunted. You can't sell apples on one side of the street when they're giving them away on the other.

Here's the basic problem with the new KFF report. It assumes the "Welfare Paradigm" is true without any evidence and doesn't consider the "Entitlement Paradigm" at all despite overwhelming proof readily available in the literature. Let me give you a few examples.

The KFF report says "American families today are struggling to pay for long-term care, caught in the crosshairs of an economic meltdown dramatically reducing the personal resources that have fueled over 25 percent of the nation's long-term care spending until now." (p. i) Also: "Such an [LTC] event can devastate family members who, after exhausting their assets, may have very little choice of care setting other than a Medicaid nursing home." (p. 14)

So, out-of-pocket expenses (OOPs) account for 25 percent of LTC spending and devastate families? Doesn't sound like that much, does it? OOPs were over half of LTC costs 30 years ago. But the explosion in LTC funding from Medicaid and Medicare has replaced most of the private liability for long-term care.

Furthermore, of the 25 percent of LTC costs that are still out-of-pocket, half is just the spend-through of Social Security income by people already on Medicaid! If you add in the VA's contribution to LTC costs, other federal and state funding sources, and other private income, you account for 85 percent to 90 percent of total LTC expenses without touching a penny of anyone's assets. No wonder people aren't worrying about protecting assets from LTC costs. They've been anesthetized to the risk by the dominance of publicly financed care.

The new KFF report acknowledges none of this, nor do any other KFF reports discuss the facts of LTC government financing instead of the myths of Medicaid spend down. For details on the impact of public funding on the LTC service delivery and financing system, see "LTC Bullet: So What if the Government Pays for Most Long-Term Care, 2007 Data Update" here.

These are some more critical points the KFF routinely ignores:

o Medicaid alone (never mind Medicare, the VA, etc.) crowds out 2/3 to 90 percent of the potential market for private LTC insurance. (Brown and Finkelstein,

o Three dozen "Medicaid spend-down" studies from the late 1980s and early 1990s revealed that most people (upwards of 80 percent) are already Medicaid eligible at the time of nursing home admission. No evidence of widespread, catastrophic LTC spend-down exists.

o Social Security (income spend-through) and Medicare (generous reimbursement levels), two federal programs with unfunded liabilities totaling $105 trillion, prop up Medicaid's ability to fund LTC (and crowd out LTCI). But they can't continue doing so much longer. When Social Security and Medicare cut back as they inevitably have to, it will devastate publicly financed LTC and ruin nursing homes, home health agencies, state Medicaid programs, and the poor who depend so heavily on Medicaid.

o Medicaid LTC eligibility is not strict as Diane Rowland, Executive V.P. of KFF, claims in her June 3, 2009 testimony on the new KFF report before Senate Aging. She says "Medicaid's strict eligibility rules require people who need long-term care to spend-down all of their assets . . .." (p.5, read Rowland's testimony here) If that were true, everyone who is medically and financially eligible would be buying LTC insurance. The truth is that Medicaid LTC exempts unlimited assets: a home and all contiguous property up to $500,000, one business including unlimited capital and cash flow, one auto of unlimited value, prepaid burial plans for the Medicaid recipient and family members (no limit), and unlimited term life insurance. On top of that, community spouses may retain up to nearly $110,000 in assets and Medicaid planners can make hundreds of thousands of dollars disappear with sophisticated legal techniques including trusts, annuities and life care contracts.

Once you grasp that KFF's understanding of the big picture is grossly distorted by evasion of facts like these and ideological bias (a preference for public over private funding), it's easy to see through the fallacies in this report's analysis of private long-term care insurance. So, I'll leave it to the reader to analyze the report's specific findings about LTCI. I see that part of the report as the meanderings of lost explorers with a bad map and no compass to guide them.


Excerpts (footnotes omitted) from Anne Tumlinson and Christine Aguiar of Avalere Health, LLC and Molly O'Malley Watts, of Kaiser Family Foundation, "Closing the Long-Term Care Funding Gap: The Challenge of Private Long-Term Care Insurance," The Kaiser Commission on Medicaid and the Uninsured, June 2009,


"American families today are struggling to pay for long-term care, caught in the crosshairs of an economic meltdown dramatically reducing the personal resources that have fueled over 25 percent of the nation's long-term care spending until now. These sources of out-of-pocket financing, which include home equity, personal savings, and income from adult children, have provided critical private funding for a long-term care system in which insurance has played a very small role, covering only about 10 percent of all seniors.

"The decline in personal financial resources comes at a time when states are facing negative growth in revenue collections and unprecedented budgetary shortfalls, forcing them to reduce spending growth in Medicaid, the nation's long-term care safety net and major financing engine. Medicaid pays for approximately 70 percent of nursing home patients, 12 percent of assisted living residents, and nearly all people with developmental disabilities. However, many states are cutting back on Medicaid and long-term care services to help balance their budgets. According to the Center on Budget and Policy Priorities, at least 21 states and the District of Columbia have cut or are considering cuts to medical, long-term care, or other services for the elderly and disabled. These reductions combined with a diminishing pool of private resources will serve to further worsen the long-standing funding gap between long-term care need and available financing.

"At the same time, federal policymakers are grappling with two policy imperatives that could diminish their ability to seek publicly funded solutions to the growing financing gap for long-term care. These imperatives include the desire to control growth in national spending on entitlement programs for the elderly and the need to finance healthcare coverage for the uninsured. Some policymakers may consider these policy goals to conflict with adding federal funds to the longterm care system through new programs or other public solutions.

"In grappling with multiple priorities and scarce public dollars, policymakers may be interested in exploring whether private long-term care insurance could play a larger role in financing America's long-term care needs. In doing so, they must carefully examine the private long-term care insurance market and consider whether this financial product could fill the long-term care financing gap and what policy changes would be necessary to achieve such a goal.

"This policy brief examines, in depth, the fundamentals of long-term care insurance, a product designed, purchased, and used much differently from health insurance. It describes the results of a study exploring how consumers buy policies, what they are buying, how much the insurance costs, how policies cover services, and how regulations work to protect consumers. This study relies on expert interviews, collection of 2008 premium data from three major carriers, and a literature review. The brief explores some of the key challenges policymakers face in enlarging the role of private long-term care insurance in financing long-term care." (p. i)


"Key Findings [charts and footnotes omitted]:

"Cost remains a key barrier to expanding the role of private insurance. People who shop for, but do not buy, long-term care insurance cite cost as the most important reason for their decision. Premium amounts vary by age of purchase. For individuals age 60 with no partner, the annual premiums for a typical policy averaged $2,329 across three products offered by three major carriers (Figure 1). For a couple the same age, premiums for the same policy design averaged $3,096 combined for the two people. If purchased at age 70, premiums would cost, on average across these products, $4,515 per year for an individual and $6,010 for a married couple. Policymakers seeking to increase the purchase of long-term care insurance will have to address its cost and the ability of consumers to pay premiums.

"Health risk can deny consumers coverage. Before purchasing insurance, many consumers must undergo a detailed health screening and evaluation to determine their insurability and risk rating. Industry experts estimate that 15 to 20 percent of those who apply do not get coverage. Policymakers interested in promoting the role of private long-term care insurance will need to seek ways to reduce coverage denial rates or provide private financing alternatives for individuals denied coverage.

"Buyers face complex product design issues. The complexity of today's long-term care insurance products reflects a market in which consumers traditionally have worked with individual agents to tailor products along multiple dimensions such as how much they will receive in daily benefits, how long the coverage will last, and how their benefits will be protected from inflation. Even policies with the same design elements can differ from one insurance carrier to another in even more subtle ways such as the definition of certain services. Any policy effort to expand the marketing and appeal of long-term care insurance to a broader group will require product simplification and consumer education.

"Time lag between purchase and use of benefits creates problems in service use. One of the major challenges of long-term care insurance is the time lag element, since it can be 20 to 30 years before the purchased insurance is used. Changing service definitions and the evolution of new forms of residential care as well as the advent of assistive technologies test the flexibility of long-term care insurance products. Policymakers must consider how to ensure the product flexibility that will provide today's purchaser with tomorrow's services and technology.

"Employer-based market offers promise but adequacy of coverage is a concern. At the same time that private long-term care insurance policies sold individually by agents have been declining, insurers have been selling a growing number of long-term care insurance policies through employers or other groups. Product options sold in this manner are often simpler than the individual market and underwriting is more limited. However, buyers in the group market tend to earn less than buyers in the individual market and therefore opt for less expensive policies in which benefits do not automatically grow with inflation. Policymakers interested in boosting the employerbased market must carefully consider how to balance growth among younger consumers with the need to ensure that inflation does not erode their coverage over time.

"Medicaid Partnership Program will shape products and the market. At least 30 states have approved state plan amendments to participate in a long-term care insurance partnership program with Medicaid that allows long-term care insurance policyholders to qualify for a Medicaid asset disregard. This disregard allows policyholders to retain a certain portion of their assets and qualify for Medicaid coverage. A policyholder who receives $150,000 in benefits from his or her long-term care insurance policy, for example, and meets all other program requirements can qualify for Medicaid using an asset test that is $150,000 higher than the ordinary Medicaid asset test (which is typically $2,000). One potential outcome of this program is that, going forward, nearly every policy sold in the 30 or more partnership states will likely qualify for the program and therefore include a Medicaid asset disregard. This makes Medicaid an integral component of many private long-term care insurance policies. Any policy effort to expand the role of private insurance should consider explicitly how the Medicaid partnership program can complement and work in tandem with other efforts to attract long-term care insurance purchasers.

"Long-term care insurance can serve as an important source of financing for policyholders in need of long-term care. Policyholders typically use their insurance benefits to pay for care at home or in an assisted living facility and report that they would likely use less paid care in the absence of their policies. At the same time, product cost, complexity, and changes in technology are among the many challenges policymakers face in creating a larger role for private insurance in financing America's long-term care system." (pps. ii-iii)