LTC Bullet: The Keystone Kops of LTC Insurance

Friday, October 9, 2020


LTC Comment: What happens when the Keystone Kops design a long-term care insurance plan? Details after the ***news.***

*** LONG-TERM CARE INSURANCE IN CHINA: Don’t miss this Society of Actuaries webcast on Oct. 20 as speakers discuss the history of long-term care insurance products in China, current government pilot programs and the opportunity for new products. Register here by October 18, 2020. What could be more timely as Genworth contemplates entering the Chinese market? ***

*** LTCI SURVEY: The deadline for responding to the survey has been extended to October 15th. Take the Who is Selling What? To Whom, How & Why Survey today! Even if you don’t ordinarily discuss long-term care planning with your prospects and clients, your thoughts are vitally important. This is the largest national effort of its kind, spearheaded by Oliver Wyman Actuarial and Ice Floe Consulting, and supported by NAIFA, NAILBA, Broker World Magazine, the Center for Long-Term Care Reform, and life and long-term care insurance companies. Take the survey and you’ll be first in line to receive its findings. ***



The "Keystone Kops" are fictional, humorously incompetent policemen featured in silent film slapstick comedies between 1912 and 1917. Play this video and you’ll have a pretty good idea what the Washington State Long-Term Services and Supports (LTSS) Trust Commission’s September 30, 2020 meeting was like. More on that below. It’s always a comedy when governments try to do long-term care insurance. Remember CalPERS? CLASS? Every public commission ever mandated to fix long-term care? This new adventure in state-based LTCI hubris is headed toward the same fate.

Washington State’s “Long-Term Services and Supports Trust Act (Trust Act),” enacted in 2019, created a long-term care insurance benefit for all eligible Washington employees that would cover some of the cost of their long-term services and supports. Specifically, a .58% mandatory payroll tax would fund benefits up to a lifetime total of $36,500 for people who paid premiums either (1) for 3 years within the past 6 years, or (2) for a total of 10 years, with at least 5 of those years paid without interruption. The state won’t collect the tax until January, 2022 and doesn’t pay benefits until 2025. Eligibility triggers at the need for help with three or more ADLs. Benefits are paid directly to service providers which may include sufficiently trained family members. There are more complications in the legislation, but this is enough to indicate what’s wrong.

The same Trust Act that created this program also created the Long-Term Services and Supports Trust Commission to figure out how to implement it. The Commission consists of legislators, administering agencies, and stakeholder representatives. It “makes recommendations regarding criteria for determining who is a qualified individual, minimum provider qualifications, service payment maximums, actions needed to maintain Trust solvency, and monitoring of agency expenses.” Now ask yourself, aren’t these basic questions that should have been analyzed before imposing a compulsory tax-supported program on citizens? Didn’t the Washington State Legislature put the cart in front of the horse?

What would happen to a private LTC insurance plan dreamed up by an insurance executive and offered to the public without first thinking through who qualifies, provider standards, payment maximums, solvency issues and expenses? Free markets are vicious. No caring person would wish the inevitable catastrophic consequences that would ensue on such a hapless entrepreneur. Yet politicians can wave a magic wand, create such a program, force it on their constituents, and then turn it over to be somehow fixed by a commission comprised of more clueless legislators, bureaucrats, and highly paid representatives of rent-seeking special interest groups … though with not a single representative from the one profession that could help … the private long-term care insurance business.

Now back to the LTSS Commission’s September 30, 2020 virtual meeting. I followed the three-hour session in jaw-dropped awe as one critical issue after another was raised, discussed, and tabled for future consideration. Premium rates? Gotta wait to set those because the law caps the maximum rate and who knows if premiums plus investment returns will cover costs. Qualified individuals? When does the clock start on the required period of employment; when does the look back period begin; how about people too near retirement who will be left out? People disabled before age 18? There ensued a long discussion on how to handle the under-18 who are excluded in the law but mandated to be considered for inclusion. No decisions. As one astute commenter exclaimed: “They don’t even know what they don’t know.”

I think the one thing Washington State has gotten right in this project was to hire Milliman to guide them through the actuarial thicket created by the state legislature’s carelessness. Anyone knowledgeable about insurance could not help but smile as Milliman’s Chris Giese patiently explained adverse selection to the committee. In paraphrase: “You need to set a rate that matches health risk. With no underwriting, the question of who can opt in or opt out creates challenges. Individuals will evaluate what’s best for them in their circumstances. Healthy individuals might opt out. When they opt out, you’re left with a pool of individuals using benefits who are at higher risk. If you adjust the premium rate up to compensate, then more healthy people won’t participate. You get more uncertainty and a spiral of higher and higher costs.” Wow! What an insight? Who could have imagined that adverse selection might be a problem before the program was carved in statutory stone?

Giese also explained the financial facts of life to the Commission. You see, the program must generate enough in premiums plus investment returns on reserves to cover costs. But Treasury yields are very low these days. Stocks have the potential to earn much more, but they’re riskier. How does that impact program income and long-term solvency? The pandemic is a monkey wrench further complicating this problem. Washington State revenues have plummeted as have the incomes of the citizens compelled to fund this program’s new tax. It’s probably not a great time to pile on more government at the expense of the productive private sector.

The LTSS Commission has hundreds of little definitional issues to straighten out. Giese talked about several. The issue of opting out by purchasing private LTC insurance, he explained, is “still relatively undefined.” What if top wage earners opt out? What if half of wage earners opt out by getting private coverage? Who gets to opt out? Only those who had private LTCI before? People who buy it later just to escape the government program? What qualifies for the escape hatch: hybrid policies too or just traditional LTCI. How to handle the self-employed? What if you opt out, can you opt back in? What about elimination periods? What about portability and divesting alternatives? There will be additional costs if people want to receive benefits outside Washington State. On and on and on. Repeatedly, the approach to issues like these was to create yet another “work group,” but (no surprise) volunteers were scarce.

People who monitored the meeting through Zoom had the opportunity to comment or ask questions at the end of the program. One very thoughtful auditor, Stephen D. Forman of LTC Associates posed this:

The Commission has referenced the stakeholder community several times, but I'm not seeing any private insurance industry representation, why is that? It's a 300 million dollar per year market that is being broadly remade by the Commission's decisions. The decisions have the potential to discourage responsible planning by those who have the means to do so, thereby protecting Medicaid, which is a point of the Trust Act. In February we proposed a number of blind spots and loopholes in the Act before the Legislature--including the lack of stakeholder representation--and the fact that these remain speaks to the fact that this institutional expertise is needed. Thank you for listening, and for your hard work!

So, that’s what happens when the Keystone Kops design a long-term care insurance program. It would be funny if it weren’t so sad.