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The Long-Term Care Trifecta
by
Stephen A. Moses
You don’t need
me to tell you that the long-term care insurance business has faced some
pretty strong headwinds lately … so I won’t dwell on that.
Let’s forget
about bad publicity over premium increases, carriers leaving the market,
consumer indifference to planning, damaging public policy, and so on.
Set all that
aside and think positively with me today. Let’s try to understand what
happened, why it happened, and what’s most likely to happen in the future.
Believe me, the
view through the windshield is much more encouraging than the one through
the rear-view mirror.
My goal today
is to tell you some things that, when you think about them and apply them
to selling LTC insurance, you will be more successful, help more people,
and feel great about yourselves. In fact, it will be much easier than you
ever thought possible. Sound good?
OK, when you
face a challenge in life, and selling long-term care insurance certainly
qualifies, the best way to begin is to review and understand what you’re
up against.
Let me tell you
a little story.
In 1968 … yeah
half a century ago, hardly seems possible … my late wife and I joined the
Peace Corps. We were assigned to a tiny town in the Venezuelan grasslands
called Carmen de Cura, three hours south of Caracas by bus.
Our site sat
behind a river with no bridge that flooded in the rainy season. We had
electricity four hours at night if the generator was working. The house
they gave us flooded from rain run off but also from the septic tank
because of the high water table. How charming was that? Still, we loved
the people and enjoyed the work.
Part of our job
was to meet with visiting doctors and nurses and back them up by
supporting good health care practices when they left town and we remained.
Unfortunately, they rarely showed up, never when scheduled, and did very
little to promote good health habits.
The Venezuelan
constitution promises health care to all citizens, but the government
didn’t deliver. That was a bitter early lesson that political entitlements
guarantee nothing.
Nowadays,
everyone knows what a tragedy Venezuela has become by pursuing public
policies that promise everything but deliver nothing.
What concerns
me is that we seem to be following a similar path here at home. We promise
American citizens retirement income security, senior health care and even
long-term care. But Social Security, Medicare and Medicaid come with no
guarantees. A future Congress and President can, and may have to, cut
those programs radically or even eliminate them entirely and they can do
it with the stroke of a pen.
Where did we
get the idea that government programs can take care of us? What has
confidence in that idea done to our sense of personal responsibility? I
think answering those questions will explain why long-term care insurance
faces the challenges it does today.
In the 19th
century as the United States was evolving from an economic backwater to an
industrial super power, people had to fend for themselves. There was no
public safety net of any kind, only private charity.
Free-market
capitalism prevailed. Waves of creative destruction disrupted markets.
Competition compelled improvement. Sink or swim was the order of the day.
That environment got the most out of everyone. People had a positive
incentive to achieve and prosper, backed up by a negative incentive to
avoid the poor house.
Rough and
tumble? Of course. Most people prospered but some didn’t either by dint of
bad luck or through their own irresponsibility. Life punished the
irresponsible and provided strong lessons on how to turn their lives
around.
But good,
hard-working people were also vulnerable to ill fortune. Private insurance
evolved as a way to protect responsible individuals and families from the
bad luck of unforeseeable events. Insurance allowed them to replace the
small risk of catastrophic financial loss with the certainty of an
affordable premium.
In the absence
of government programs to lean on, responsible individuals worked hard to
succeed and they bought insurance to mitigate unpredictable risks. Such a
system works well if you believe most people are good, capable,
self-interested and hence motivated.
That’s what our
country’s founders believed and that’s what they counted on when they gave
us a government based on protecting life, liberty and property, AKA the
pursuit of happiness.
So Americans
did great for many decades after our founding, but no system is perfect.
The more prosperity we achieved, the harder it became to accept misfortune
or poverty of any kind in any amount for anyone.
The Great
Depression shook our country to its foundations. Arguably government
interference in previously freer markets caused that economic catastrophe,
but whatever the cause, people were having a very hard time. The
government wanted to help. Franklyn Delano Roosevelt and his
Administration pushed hard for the idea of “social insurance” as the
solution.
They said
“social insurance” would improve on “private insurance” because it would
have the widest possible risk pool, inasmuch as everyone would be required
to participate. Social insurance would also be better than private
insurance, they argued, because it would treat everyone the same, giving
equal benefits to everyone.
Therein lie the
two fatal flaws of social insurance. It is compulsory and therefore
violates the fundamental principle of freedom on which our nation’s
earlier success depended. And it spreads, but does not price risk, thus
rewarding irresponsible behavior at the expense of more responsible
people. Let me explain what I mean.
Ted Marmor is a
Yale professor emeritus of some influence. He recently explained the
difference between social and private insurance this way: “In commercial
insurance,” he said, “price must reflect risk. Social insurance, by
contrast, operates on the premise that contributions are calculated
according to one’s income and benefits are related to one’s needs.”
Does that idea
ring a bell? Ever heard the motto “From each according to his ability to
each according to his need.” Yes, that’s the Marxist creed, the
fundamental principle of communism. That’s exactly where Venezuela … not
to mention Cuba and the Soviet Union … went astray.
This is a
fundamental difference between social insurance and private insurance.
Both spread risk but only private insurance prices risk. Social insurance
pays benefits to everyone the same regardless of the level of risk they
bring into the risk pool. Consequently, social insurance rewards risky
behavior. You can be lazy, smoke, drink, take drugs, no matter, social
insurance pays everyone the same.
Private
insurance spreads risk, but it also prices risk. Your premium is based on
underwriting which measures the amount of risk you bring into the risk
pool and charges you accordingly. That’s why smokers pay more for life
insurance. And it’s why people already demented or dependent on walkers
can’t purchase long-term care insurance at any price.
Pricing risk is
fair to everyone. It is justice. It rewards good health care behavior and
early planning, punishes poor behavior or failure to plan, and hence
promotes social good. This is a critical point. Keep it in mind.
Its other main
difference from social insurance is that private insurance is voluntary.
You’re free to participate or pass, but social insurance is mandatory. It
violates deeply held American values of freedom and personal
responsibility.
Now, what does
this have to do with long-term care insurance?
Since 1935, the
government has told Americans work hard, contribute to Social Security,
and it will take care of you financially in your old age.
Since 1965, the
government has told Americans, pay your Medicare premiums and you won’t
need to worry about health care in your senior years.
Since 1965, the
government has told Americans, whether or not you work or pay taxes,
Medicaid will cover your long-term care if you ever need it and can’t
afford it.
Americans
believed those promises. Look what it got them.
All three of
the major programs Americans were invited to rely on are now on a slippery
slope to insolvency.
Social Security
and Medicare are already consuming the IOUs in their so-called “trust
funds,” funds that the rest of government borrowed, spent and is having to
pay back with interest, crippling our economy. Even those borrowed funds
run out in the 2030s, only a little more than a decade away.
Medicaid
doesn’t even have a phony trust fund to pretend to spend. It’s a direct
drain on general funds and hence on private investment capital, further
debilitating the economy.
Do you get
angry complaints because private long-term care insurance premiums have
increased? Don’t take it lying down. Stand tall. LTC insurance carriers
raised premiums to ensure that contractual benefit promises would be met.
The government has done nothing similar to ensure it will be able to pay
for promised benefits that it cannot possibly provide.
Never forget
that you occupy the moral high ground on the issue of premium increases.
Claim it!
So social
insurance has done tremendous damage by making promises it can’t keep. But
that’s not the worst of its impact, not by a long shot.
The greatest
negative impact of Social Security, Medicare and Medicaid is the effect
those programs have had on Americans’ work ethic, saving behavior, and
attitude toward private insurance protection.
Nowadays, fewer
people work; more rely on Disability or welfare; life spans are
shortening; waistlines are widening; we have an epidemic of obesity.
Private companies no longer offer retiree health benefits. Why duplicate
Medicare, they figure? Who needs long-term care insurance when the
government pays for most expensive extended care costs anyway?
Do you see the
fix we’re in? We’ve inhaled the social insurance drug for so long that
we’ve lost the drive and incentive to take care of ourselves. This is
happening when reality is about to force us to go cold turkey, by
curtailing, if not eliminating entirely the safety net on which we’ve come
to rely.
Let me give you
a few examples.
Americans think
the government should take care of everyone and they don’t care how much
it costs. Here are a couple quotes from the Wall Street Journal:
“A Pew study …
found majorities endorsing the view that government does too little to
help young people, the elderly, the middle class and the poor.”
Too little to
help? Most of the federal government’s budget goes to help those exact
groups.
Nor do we care
how much it costs.
“[S]urveys also
register a steep decline in public concern about the federal budget
deficit. In 2013 … 72% of Americans regarded deficit reduction as a top
priority. By the beginning of this year the figure had fallen to 48%.”
We are so
concerned about the poor that we think deficits and debt no longer matter.
But, here’s the
irony with that view. Most of the poor, aren’t!
According to a
study published by the Cato Institute: “Improved estimates of
poverty show that only about 2 percent of today’s population lives in
poverty, well below the 11 percent to 15 percent that has been reported
during the past five decades.”
How can that
be?
Government
poverty statistics make the poor look poorer and the rich look richer by
ignoring most forms of public benefits paid to the poor and by ignoring
taxes paid by the rich.
Here’s the net
impact:
It’s a wash for
the middle class: “On average, [middle class] households with $63,136 in
earned market income get to keep it all. They pay taxes averaging
approximately $17,000 per year, but on average they also get an equal
amount of government transfers.”
But the
affluent have to make up the difference: “The top 47.5 percent of
households were taxed to do the following:
- Transfer
enough money to the bottom 52.5 percent of households, to give them
average spendable incomes close to the median income
- Pay for the
many activities of government that require 40 percent of all government
spending
- Pay the
interest on the national debt, which constitutes 12 percent of
government expenditures”
Cato concluded
“More than 50 years after the United States declared the War on Poverty,
poverty is almost entirely gone.”
I conclude:
Government should declare success in the War on Poverty and start
eliminating policies that discourage personal responsibility and work.
Besides, what
is poverty in America anyway?
According to
the Heritage Foundation: “The typical poor household, as
defined by the government, has a car and air conditioning, two color
televisions, cable or satellite TV, a DVD player, and a VCR. By its own
report, the typical poor family was not hungry, was able to obtain medical
care when needed. The typical average poor American has more living space
in his home than the average (non-poor) European has.” From Heritage
Foundation, 2011: “Air
Conditioning, Cable TV, and an Xbox: What is Poverty in the United States
Today?”
Ladies and
gentlemen, I have seen poverty up close in Venezuela, South America and
Asia. And that is not it!
The anomalies
and contradictions in government entitlements are unending. Conventional
wisdom states that only poor people get Medicaid but research shows that
“at the top of the income distribution. Medicaid covers 21 percent of
lifetime costs at age 70, with the fraction rising to nearly 30 percent at
age 100. … While most high-income households do not receive Medicaid,
those that do [mostly the ones who end up needing long-term care] … tend
to have high medical expenses and tend to receive large Medicaid benefits
(De Nardi et al., 2016a).” (p. 24)
What impact on
demand for long-term care insurance do you think Medicaid’s offsetting
about a quarter of rich people’s high medical expenses has had?
Of course,
tremendous. Government tells the poor explicitly “don’t worry about
long-term care, we’ll pay” but government tells the rich exactly the same
thing implicitly by actually paying for most expensive long-term care if
and when the wealthy need it.
Nor does the
government honestly report Medicaid’s impact on the LTC financing market.
The Centers for
Medicare and Medicaid Services (CMS) reports that Medicaid is the “primary
payer” for 62 percent of nursing facilities’ residents. Don’t you think
that would mean Medicaid pays most of the cost of the care for such
residents?
You’d be wrong.
If a nursing facility resident is on Medicaid, Medicaid is counted as the
“primary payer” even if it pays nothing toward that resident’s cost of
care.
How can that
be? People on Medicaid have to contribute most of their income,
principally their Social Security income but also private pensions and
other sources, to offset Medicaid’s cost. In some cases, the private
income suffices to pay the entire cost of their care … at the low Medicaid
rate.
This is the
critical point: even if Medicaid pays nothing and the entire cost of the
care comes from the Medicaid recipient’s private income contribution, the
nursing home receives the low rate of Medicaid reimbursement, often less
than the cost of providing the care. That’s why Medicaid has such a poor
reputation for quality of care.
Now, why on
earth would Medicaid operate this way? Claiming that Medicaid is the
“primary payer” for nearly two-thirds of nursing home residents gives the
appearance that Medicaid does more for more people than it really does. It
makes public officials, senior advocates, and politicians look good. It
wins votes.
There’s still
more to this deception, however. CMS reports out-of-pocket costs for
nursing facility residents to be over 25 percent, but the reality is that
half of all out-of-pocket costs are really just spend-through of private
income by people already on Medicaid. That makes it look like Medicaid
costs less than it really does.
Bottom line:
Medicaid takes credit it doesn’t deserve and then misrepresents its cost
to the downside.
In the
meantime, the damage to consumers is incalculable. Over 80 years of
believing in government promises that social insurance entitlements will
take care of us have desensitized consumers to all kinds of insurable
risks.
But that’s all
about to change. I call what lies immediately ahead “The Long-Term Care
Trifecta.”
A trifecta is
a bet in which the person betting forecasts the first
three finishers in a race in the correct order. Here they are.
The first finisher is Medicare. Its trust fund runs out,
not that there’s anything in it anyway,
by 2026, only seven years away,
three years sooner than previously projected.
The second finisher is the baby boomer generation. It
starts turning 85, the age at which health and long-term care costs spike
upwards in 2031, only 12 years from now.
The third
finisher is Social Security. Its, literally empty, trust fund “runs out”
in 2034.
Unfortunately,
we may not make it to the first finisher in 2026. As I prepared these
remarks, the bottom was falling out of the stock market and a recession in
2019 was looking more and more likely.
Since the Great
Recession of 2007-2009, we’ve been living in an economic fantasy land with
artificially low interest rates and profligate government spending
enabling us to live far beyond our means on funds we’ve borrowed from
ourselves and from foreign countries.
When the asset
bubble created by those policies bursts, all bets are off. Markets are
predictive so collapsing equity and real estate values combined with
higher interest rates on private and public debt could plunge our public
finances and the entitlement programs they mostly support into crisis much
earlier.
We may face the
Long-Term Care Trifecta at any time.
So what does
this mean for you and for long-term care insurance?
LTC risk and
cost are greater than ever. Oncoming demographic challenges, the so-called
age-wave, is cresting and will crash soon. The need for private LTC
insurance protection is greater than ever. Consumers need to plan for this
risk.
Yet, although
consumers are smarter about LTC risk and cost than they used to be, thanks
to our decades of work waking them up, most still don’t operationalize
their knowledge enough to take concrete action by insuring for the risk.
That’s where
you come in. You’re the last line of defense against the idea that people
can ignore the risk, avoid the premiums, and wait for the government to
take care of them.
That headwind
holding back private LTC insurance is disappearing as the LTC Trifecta
nears and arrives.
You should
redouble your efforts in the knowledge that you can save people from the
awful fate of relying on public programs as those programs are collapsing.
Do you read Ron
Hagelman’s columns in Broker World? If not, I think you should. He
argues that in the past we pushed too hard to get full LTCI coverage for
every client resulting in too few people being able to afford the
protection.
Going forward,
he suggests, the challenge is to help people mobilize all of their
financial resources, supplemented by whatever LTCI they can afford, with
the primary goal to stay off Medicaid.
That’s good
advice, makes protection affordable for more people, and ensures that
fewer will be stuck in welfare nursing homes as their major funding
source, Medicaid, dries up.
One of the
biggest problems for LTC insurance lately has been the necessity of
companies to raise premiums on in-place business. But actuaries’ concerns
about future premium increases are abating.
New policies’
premiums are based on longer and better experience and the huge damage
done by government’s forcing interest rates artificially to near zero is
reduced as interest rates normalize. You should muster and deploy the
verifiable evidence of this development in your meetings with prospects
and clients.
Did premium
increases and the widely publicized Penn Treaty insolvency hurt
traditional insurance? Of course, but asset based products evolved to
provide guaranteed premiums and benefits. Both kinds of products have
critical roles to play in the market, but one or the other may prevail
temporarily as the headwinds, largely caused by poor government policy,
shift in direction and intensity.
If I’m right
about the plummeting direction public programs are likely to take, all
forms of private insurance, including traditional LTCI, hybrids, products
modeled on a health insurance chassis, term life that converts to LTC
protection as proposed by the Society of Actuaries and designs yet
uncontemplated will thrive in the new, challenging economic world.
I’m
tremendously encouraged by the amazing creativity and resilience of the
LTC insurance industry, including the carriers who are sticking it out,
the exceptional distributors of the product, and you, the producers, the
AMGs (altruistic, masochistic, geniuses) who manage to carry on in spite
of the challenges.
So many of you
are driven by a passion for this work because of a personal experience of
LTC with a loved one, a parent, grandparent or spouse. You’ve proved over
and over again that nothing can stop you.
Many carriers
were less persistent. They abandoned the LTCI market when utilization
increased beyond actuarial expectations, the Federal Reserve destroyed
returns on their reserves, and the media attacked the industry for doing
the right thing, that is, increasing premiums to ensure benefits would be
paid.
Here’s what I
predict. Those same companies and new ones will come rushing back into the
business as those problems disappear.
We now have
better and longer experience data on which to base premiums and they’ve
already increased for new products. So as interest rates and hence returns
on reserves return to normal levels, the business will become highly
profitable, leveraged by the fact that premiums have already increased.
As the pressure
I’ve predicted on public programs hits over the next decade, the public
will lose confidence in Medicaid, which is propped up by Social Security
and Medicare, in which they’ll also lose confidence.
When that
happens, Katie bar the door. The rush to find insurance protection against
LTC risk and cost will explode. Consumers will prospect for you!
In the
meantime, we’re all in this together. I want to thank you for your
dedication, hard work, collegiality and friendship in our common mission
to improve long-term care for all Americans.
Before I
conclude, I’d like to tell you a little bit about how we pursue that
mission at the Center for Long-Term Care Reform.
We conduct
state-level and national studies of long-term care financing with a focus
on the problems created by government interference in that market.
You can find
and read dozens of our reports at our website,
www.centerltc.com, and on the handout you’ve been given for today’s
presentation.
We publish
periodic essays called the LTC Bullets. The Bullets discuss
and analyze current topics related to long-term care service delivery and
financing. We’ve done over 1240 of them in the Center’s 21 years and you
can find them archived chronologically and by topic on our website.
We publish a
weekly compendium of long-term care news called the LTC E-Alerts
designed to keep members abreast of everything they need to know to remain
on the forefront of professional knowledge and expertise.
Our daily
LTC Clippings give premium members access in real time to the latest
stories, articles, reports and data as these are released along with our
“take” on what they mean in a sentence or two.
Our
Members-Only website, AKA “The Zone,” is full of invaluable resource
material including our voluminous “Almanac of Long-Term Care,” where we
archive all important news about long-term care organized within 11
sub-topics.
Finally, I want
to thank our sponsors for this opportunity to share some ideas with you
today and for their long and invaluable support for our work at the Center
for Long-Term Care Reform.
I’ll be glad to
take questions now. |
