LTC Bullet: Another LTCI Hit Job?
Friday, October 9, 2015
LTC Comment: What shall we make of this new attack on private long-term
care insurance? Answers after the ***news.***
LTC BULLET: ANOTHER LTCI HIT JOB?
LTC Comment: Boston College’s Center for Retirement Research (BC/CRR) really has it in for private long-term care insurance.
Last November, BC/CRR published “Long-Term Care: How Big a Risk?” This report concluded that “previous research understates the risk of going into care but overstates the average duration of stay of those ever institutionalized” and that “most single individuals should not buy insurance given the availability of Medicaid.” (p. 1) The national media popularized these dubious findings by saying long-term care is not as big a risk as previously thought and that people should plan for Medicaid instead of getting private LTC insurance.
We refuted BC/CRR’s findings and recommendations in “LTC Bullet: How Careless Economists Boosted LTC Risk” on December 12, 2014. We also lambasted the national media in the same LTC Bullet for uncritically accepting and promulgating the think tank’s erroneous findings and bad advice.
Now, the Boston College economists are at it again. In “Why Do People Lapse Their Long-Term Care Insurance?” (October 2015), authors Wenliang Hou, Wei Sun, and Anthony Webb (all three of whom also bylined the earlier report) conclude:
First, low-wealth and low-income individuals are more likely to lapse their insurance policies. Second, the study finds no evidence that individuals are lapsing strategically, i.e., because they believe they have a low probability of needing care. Third, and importantly, the study finds that lapses are common among the cognitively impaired, perhaps reflecting poor financial decision-making. (p. 4)
Time magazine saw BC/CRR’s latest report and ran with “Seniors Dump Long-Term Care Insurance Just When They Need It Most,” by Dan Kadlec last Tuesday (October 6, 2015):
Buying long-term care insurance has always been a dicey proposition. It’s expensive. You may never need it. Insurers may later jack up the premiums. And new research shows that a third of those who buy the coverage let it lapse—forfeiting benefits they had paid for, often just as they are about to be eligible to collect.
If the national media’s response to BC/CRR’s earlier report is any indication, we’ll see much more of such unfair, unwarranted and inaccurate coverage in the weeks and months ahead.
Critique of “Why Do People Lapse Their Long-Term Care Insurance?”
What exactly is wrong with this latest salvo from BC/CRR?
(1) Data and Interpretation: The data on which these analysts base their conclusion that LTCI “lapse rates”—the term as they use it is a misnomer—are high comes from a now-outdated 2011 Society of Actuaries report. They conclude that
At current lapse rates, men and women age 65 have, respectively, a 32- and 38-percent chance of lapsing prior to death, assuming that lapse rates remain at the same levels observed for recent cohorts. (p. 1)
We queried highly regarded LTC insurance actuary Roger Loomis regarding this data. He explained:
Three thoughts on lapse rates. First, whether the lapse rates in the industry are “very high” as they claim is subjective. Perhaps without exception, LTC lapse rates are the very lowest lapse rates in any type of private insurance. LTC lapse rates are much lower than what we thought they’d be 20 years ago . . .
Second, the lifetime lapse rates they mention in the article are based upon an old industry study. Lapse rates have continued to go down since then. According to the most current data, if somebody purchases a policy at age 65, less than 27% will eventually lapse—the rest of the policies will end either because of benefit exhaustion or death. If somebody purchases a policy at age 50 and still has it at age 65, there is less than a 15% chance they will ever lapse.
Third, whether lapse rates being “high” is a good thing or a bad thing is somewhat complicated. If lapse rates are high, that causes lower premiums, no rate increases, and higher profits—all good things (and a predominant focus in the insurance industry). However, if lapse rates are “high,” that also means fewer people who once purchased insurance will still have that insurance in force when they need it—that’s something you, me, and the folks at Boston College can all agree is a bad thing.
“Wait,” I replied, “I thought LTCI lapse rates turned out to be much lower than previously expected, down around 1% instead of the 5% to 8% originally anticipated.” Loomis explained:
Yes, ultimate lapse rates are now less than 1% per year. That is an annual rate. With new issues, lapse rates might be in the 5% range for the first few policy years, and then quickly drop to less than 1% per year thereafter.
The Boston folks are aggregating the numbers differently. When they say a policy has a 32% “lapse rate”, what they mean is that if a company sells 100 policies, 32 of the policies will eventually end due to voluntary lapsation, with the other 68 policies eventually ending due to policyholder death (the other option is policies ending due to benefit exhaustion, but I can’t tell whether they included that in their calculations). I think this is an important number to look at—especially when your concern is private LTC as a solution for financing actual LTC care. But it is confusing to call this a lapse rate—lapse rates being expressed annually is a well-established standard and is based on actual data. The number of people who will eventually lapse is based upon projections that use assumed future mortality and lapse rates.
It’s important to understand that most lapses happen in the first few policy years before the policyholder is really committed to the policy and before they have invested very much into it. Somebody changing their mind about a policy in the first few policy years is very different than somebody lapsing after 20 years because they become too poor and sick to pay the premiums. The authors didn’t discuss this distinction.
(2) Post hoc, ergo propter hoc fallacy: Fine, let’s give the Boston College authors this much: it’s unfortunate that so many people who originally purchase private long-term care insurance end up dropping their policies before they can collect on them. Let’s even accept for the purpose of argument that people tend to be more likely to lapse their LTCI policies when they are less prosperous economically (“Financial Lapsers”) or cognitively impaired (“Forgetful Lapsers”) rather than “strategically” because they conclude they are unlikely to need care after all (“Strategic Lapsers”).
What these authors miss is that an entirely different reason may explain why Financial and Forgetful Lapsers drop their LTCI policies. The authors commit the post hoc, ergo propter hoc fallacy by assuming that poor economic status or cognitive impairment cause lapses because these conditions precede the action to drop the policy. But what if these conditions are merely symptoms and not the actual cause?
What might such an actual cause be? The closer people come to needing long-term care, the more they learn about the available LTC funding sources. The media drums into everyone’s heads that Medicaid pays for long-term care but only after people become totally impoverished first. Some people buy LTC insurance to avoid just such a financial disaster. They may pay LTCI premiums for many years under this assumption.
But the closer they come to actually needing care, the more they and their relatives (potential heirs) begin to worry and to research all available funding sources for LTC. They read magazines, listen to radio ads, consult elder law attorneys, or see reports by the Boston College Center for Retirement Research, all of which sources tell them they’re suckers to pay for their own LTC or LTCI premiums when the government will pick up the tab. They quickly learn that Medicaid financial eligibility rules allow people with high incomes and practically unlimited exempt assets to qualify and that even wealthier people can easily self-impoverish artificially to become eligible. We’ve explained how this works and documented how commonplace it is in many articles, speeches and reports here.
Easy access to Medicaid after the insurable event occurs is a double whammy for private LTC insurance. It deflates original demand for the product and it clearly inflates later lapses. The BC/CRR authors do not choose to understand how Medicaid actually works, so they miss and consequently underestimate the welfare program’s disproportionate impact on LTC financing, consumer behavior and the long-term care insurance market.
(3) Ideological Bias: Why would accomplished professional economists fail so egregiously to see an obvious alternative explanation for their findings? Why would they ignore Medicaid, the elephant in the room of long-term care financing? What makes them attack private LTC insurance for high lapses and overlook the real culprit? I think the answer is ideological bias. Too many academics wear intellectual blinders that prevent them from seeing the shortcomings of public LTC financing and the benefits of private LTC financing.
Consider Social Security and Medicare for example. These mandatory public “social insurance” programs do not allow non-participation or lapses. Like private long-term care insurance, Social Security and Medicare failed to set aside enough reserves to meet future benefit promises. But unlike private LTCI, which has responsibly adjusted premiums to provide adequately for paying future claims, Social Security and Medicare have done nothing to offset their tens of trillions of dollars of unfunded liabilities.
Generations X, Y, and the Millennials look at Social Security and Medicare and realistically conclude that they can expect to receive from those programs, if anything, only a paltry return. The smart thing for them to do would be to lapse these worthless social insurance policies and save, invest or insure privately. But that is not an option because these programs are compulsory, enforced by the threat of government force.
Do you begin to see why analysts who prefer to compel people to participate in self-destructive financial boondoggles are prone to miss the perverse incentives in public programs like Medicaid? Is their onus toward private long-term care insurance more understandable now?
Thanks to the national media, which share the same ideological bias, and because of this report from BC/CRR, millions of people around the country will learn one more reason not to plan responsibly for long-term care risk and cost. We conclude as we did after these authors’ earlier foray into LTCI bashing:
Facts have consequences. By focusing only on technical economic analysis and ignoring the substantive reality of how Medicaid actually works, these authors, this work, and the misbegotten reporting it engendered increased consumers’ LTC risk, swelled Medicaid’s liability for future LTC costs, and further damaged the struggling LTC insurance industry’s prospects.
Unfortunately, only a handful of you faithful readers will see our rebuttal of this report. But we hope we’ve armed you with some ammunition to counteract its damage with the prospects and clients whose lives you touch.