LTC Bullet:  How to Fix LTCI in California

Friday, April 4, 2014

Seattle—

LTC Comment:  Private long-term care insurance in California is hurting.  Center corporate member Louis Brownstone provides a diagnosis and prescription after the ***news.***

*** GENWORTH published its widely cited “Cost of Care Survey” for 2014 this week.  The median annual cost of a private nursing home room in the United States increased 4.4% since last year to $87,600.  Cost of a semi-private nursing home room went up 2.6% to $77,380 per year.  Assisted living monthly costs increased somewhat less, up 1.45% to $3,500.  Homemaker services surged 4.11% to $19 per hour, up substantially from an average 1.20% five-year growth rate.  Home health aide services increased 1.59%; 1.32% per year over the past five years.  Click
here for the full 2014 report; here for the “cost of care map”; and here for “key findings.”  As always, we’ve posted the Genworth report here in “The Zone,” the Center's special compendium of key data and information for members. ***

*** THE AMERICAN ENTERPRISE INSTITUTE hosted another forum on long-term care services and financing this week.  Watch the full proceedings
here.  This video is well worth a two-hour investment of your time.  Six of the most thoughtful analysts in the field comprise the panel including the chairman, vice-chairman and one member of last year’s Long-Term Care Commission.  Besides summarizing the Commission’s work and report, the panelists cited much of the most important recent research on LTC financing.  A couple thoughts to keep in mind as you watch this program, however.  First, not one of the presenters addressed the question of how long-term care came to be so dysfunctional.  (Nor did the LTC Commission address that question.)  It’s very dangerous to propose solutions to a problem when you don’t know what caused the problem in the first place.  You run the risk of exacerbating the problem by administering more of what caused the problem in the first place.  Second, note that the panel recognizes that Medicaid is important but can’t quite pin down why and how.  For example, even though it’s well substantiated that the program helps middle class and affluent people as well as the poor, how can Medicaid crowd out private LTC insurance if most people don’t know who pays for long-term care?  Simple:  Medicaid has paid for most expensive LTC since 1965, so the public doesn’t know who pays, but Medicaid does pay, and that fact has anesthetized the public to LTC risk and cost.  Little progress in solving the LTC financing problem will be made until experts like these diagnose the real cause (government interference in the LTC market) and propose solutions that address that problem (targeting Medicaid to the poor and using some of the savings to incentivize responsible private LTC planning.) ***

*** READ OUR REPORT on long-term care financing in California--Medi-Cal LTC: Safety Net or Hammock? here or on the
Pacific Research Institute’s website here--together with today’s LTC Bullet for a fuller understanding of the big picture in “The Golden State.” ***

LTC BULLET:  HOW TO FIX LTCI IN CALIFORNIA

LTC Comment:  From time to time we turn over the Center’s weekly LTC Bullet op-ed to an expert in a field of interest to our readers.  Today, we invited Louis Brownstone to share his analysis of the long-term care insurance market in California. 

Mr. Brownstone is Chairman of
California Long-Term Care Services, NorthStar Network, Inc. and past chairman of the National LTC Network (also a longtime corporate member of the Center for Long-Term Care Reform).  Get to know Louis here.

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The following is Louis Brownstone’s “A Proposal for Long Term Care for California,” as edited and condensed by LTC Bullets.

From what I can see, and from what others tell me, the long term care insurance industry in the State of California is in gridlock.  The stakeholders are not speaking constructively to each other.  The industry is in danger of losing its viability.  I want to stimulate a conversation that can fix this mess.
 
What's at stake?  Absent a solution, long term care services needs will grow in the next twenty years to consume more than one half of all Medi-Cal expenditures, costing hundreds of millions of dollars, that will drain funds from a myriad of other public needs.  Thousands of citizens will be unable to afford or receive long term care services, will not be able to care for themselves and will age poorly in place.  Alternatively, we can all come together and resume leadership in long term care planning.

Here are the problems as I see them with proposed solutions. 

Problem #1:  The Department of Insurance (DOI) fails to protect the interests of the insurance carriers.  It distrusts insurance carriers and is either unwilling or unable to approve new policy filings.  Maybe the DOI has become ossified and the carriers are correct in saying that the people in the DOI don't care.  I suspect that's not true.  Maybe it's a question of an inadequate budget.  Whatever the cause, I hear of many instances where the DOI’s responses to carrier's requests are sympathetic to their needs . . . and then nothing happens.  That has to change. 

It takes three to five months for carriers to get new policy filings approved in other states, but two to three years in California.  Many carriers have adjusted their pricing in their filings to reflect this time delay.  The result is that citizens in California pay more than citizens in other states for the same or lesser benefits.  Timely approvals will help everyone.

Long term care insurance policies sold in the 1990's gave policyholders terrific value and cost about a third of what policies cost today.  The insurance carriers priced the policies incorrectly, and need price relief so that they can come close to a breakeven on these older policies.  They're asking for huge rate increases.

They need some help . . . maybe not all that they are asking for, but some help.  It's not well known, but it also takes two to three years in California for the DOI to approve a rate increase.  This only creates further delay and larger rate increase requests later on.  Timely approvals will help everyone in the end.

California has a history of top insurance carriers either suspending sales or ceasing sales altogether.  Allianz, Transamerica, Prudential, MetLife, John Hancock, Mutual of Omaha, Genworth Financial . . . all large and well-funded carriers.  We need them.  My greatest concern is that Genworth will once again suspend or cease sales in California.  Genworth represents roughly half of all long term care insurance policies sold in California in the last six months.  It would be catastrophic if Genworth left.  Everyone would lose.  Six months ago, Tom McInerney, Genworth's Chairman, met with DOI Commissioner Jones.  They had a meeting of minds.  To my knowledge, nothing has happened since.

Problem #2:  The Department of Insurance is failing to protect the interests of California citizens.  The DOI has evolved from being a strong protector of the interests of consumers to watching other states provide better long term care solutions to their citizens.  The main problem here is failure to adjust to a change in the philosophy of long term care planning and to accept the structure of new policies.

People are living longer, and when they get old, they get sick.  Adverse morbidity trends and other factors have made long term care insurance policies far more expensive than before.  Compromises have to be made to make policies affordable to more than the very rich. The DOI has resisted many of these compromises.  The result is that people in other states are utilizing novel inflation riders and are often paying far less in premium than Californians.  We allow our citizens to buy $25,000 life insurance death benefits, which afford little family protection, because that's better than nothing.  Why not the same rationale for long term care insurance?  Bad regulations are hindering needed change.

An important price factor has been inflation riders.  The old standard of 5% compound inflation is often unaffordable.  But is it necessary?  Most folks are going to be cared for either at home or in a residential care facility.  Nursing facilities are becoming a last stop, and average time spent in them is shrinking.  If home health care inflation has been 1% to 2% and residential care facility inflation has been 3%, why should a person need 5% compound inflation, as required by California Partnership plans? 

The industry standard for inflation riders has become 3% compound . . . or less.  We sell life insurance with small death benefits and even term insurance which produces very few claims.  Short and fat long term care benefits can be a great help in many situations.  Allow the consumer to decide what he or she can afford.

Problem #3:  Long term care insurance in California is badly in need of new enabling legislation.  The laws of the 1990's are outdated and are not appropriate for the 21st century.  They were in many ways visionary when they were enacted, especially in consumer protections.  But they now inhibit change and prevent Californians from having choice in long term care planning.

The theory has been that California should not adopt laws prevalent elsewhere because California is different from any other state.  California is different, but if you look at California's six major regions, each region has strong similarities with other regions of the United States.  We are Americans, and can learn from other Americans and even embrace some of their laws.  Our citizens are similar, and our long term care problems are similar.

Many of the consumer protections in our laws have been adopted by other states.  They have not caught up to us, but they're close.  Some thirty-seven states have banded together to create an “interstate compact.”  Is it time to change our laws sufficiently to enable us to join them?  This would be a far simpler solution than beginning from a zero base, and should be considered.

The National Association of Insurance Commissioners has adopted long term care insurance standards and is presently working on a set of even newer standards.  We are engaged with this process.  Again, the reasons for us to be different have decreased.  The Legislature needs to immediately review and possibly adopt these new standards when they have been completed.

The Legislature should enact new legislation which will change the laws to give insurance carriers the product flexibility they enjoy elsewhere.  This will give consumers more choice and, importantly, more affordable long term care insurance options.  Policies in California are now primarily being sold to the wealthy.  Future Medi-Cal costs are going to go through the roof if policies are not sold to the middle class.
 
Rich Californians now utilize elder law attorneys to shield their assets in order to qualify for long term care services and supports through Medi-Cal.  The list of exempt assets is far too generous and the look-back period needs to be extended.  Medi-Cal should be for the needy, not the rich.  These lax standards need to change.

There is a new Assembly bill (AB 1553) which would prohibit gender-based pricing for long term care insurance.  Women pay lower rates than men for life insurance and this is as it should be.  Women live longer than men and the insurance carriers price life insurance policies appropriate to the risk.  It should be the same with long term care insurance.  This bill is unwise and should be defeated. 

I hope that the Insurance Committees of the Assembly and Senate will consider these thoughts and will engage in meaningful discussions with all stakeholders.  It's their responsibility to do so, and much needs attention.

Problem #4:  The California Partnership for Long Term Care needs a total overhaul.
California was one of the original four Partnership states in 1994.  Its purpose was to provide long term care protection for Californians with moderate income and assets.  This concept has now been adopted by most other states and Partnership policies are being sold in quantity almost everywhere.  But the California Partnership is now in such bad shape that it is really on life support.

This product is no longer saleable to its intended buyers . . . people with moderate income and assets.  Partnership policies used to constitute about 75% of all my brokerage's sales, but I doubt if we sell 20% Partnership policies today.  Long term care insurance rates are triple what they were in 1994.  The 5% compound inflation requirements are too stringent.  Federal legislation accepts almost any kind of inflation rider as a part of a Partnership policy.  We need new Partnership legislation so that the Partnership can be sold to a far greater audience.  Otherwise, it's of little value, and may even be a negative factor on future Medi-Cal expense.

The Partnership program is currently a part of the Department of Health Services.  It is severely underfunded and understaffed.  It seems almost as if DHS doesn't recognize its existence.  The Partnership has the potential to save the state hundreds of millions of dollars.  It needs to be recognized as a future producer of revenue for the state, not as an expense.  It needs to be given the tools to do its job.

The Partnership was originally put under DHS because the program needs to be coordinated with Medi-Cal.  In fact, Medi-Cal has inhibited change by insisting on the robust inflation riders discussed above.  Maybe the Partnership is in the wrong department and should be moved over to the Department of Insurance.  I would be in favor of this because it would create fresh thinking.

The
Interstate Compact could be a starting point for new legislation. A simple approach, accepting the Compact, could get a major change done quickly.  If its regulations were unacceptable, it could at least be built upon to conform with some of the unique California standards.
 
The Partnership needs additional funding in order to educate Californians and disseminate its message.  It needs to ally with other outreach programs, such as the
3in4 Need More campaign, and increase its public relations efforts.  These PR efforts are currently restricted by budgetary considerations.  Again, the proper promotion of long term care insurance will save the state of California hundreds of millions of dollars. 

As I said at the top, I want to stimulate a conversation that can fix this mess.  I am available to assist in any way that I can.

Sincerely,

Louis H. Brownstone
Louis@cltcinsurance.com