Long-term care refers to the medical resources, personal care and support services needed by people when they lose their physical and mental capacity for self-care because of a chronic illness or condition. [1]   The demand for long-term care services – whether in someone’s home, an assisted living facility or a nursing home – will increase significantly as the number of older people in Massachusetts grows. [2]  

 

People age 85 and older constitute the fastest growing portion of the population in the United States and are expected to increase from 4 million in the year 2000 to 19 million by 2050. [3]   People over the age of 85 are also the fastest growing segment of our state’s population. [4]   This group is most likely to need costly long-term care.  Massachusetts has a larger proportion of older residents than the nation as a whole.  Currently, 13.9 percent of the population, more than 850,000 individuals, is over the age of 65 in Massachusetts. [5]   By 2025, this population is expected to grow to roughly 18.1 percent of the state’s population, which will be more than 1.25 million people. [6]  

 

                                   
Figure 1. Source: www.census.gov/population/projections/state/stpjage.txt

 

 

While only one in three seniors ages 65 and over will require nursing home admission of three months or longer, many more will need some care at home or in other assisted settings. [7]   For nursing home patients, the stay for those with long-term debilitating diseases like Parkinson’s and Alzheimer’s can be very long, while the stay for others can be as short as 90 days. [8]   The average length of stay (from admission to exit interview) is 870 days (approximately 2.4 years). [9]   According to experts, most seniors prefer to remain in their homes or communities, to “age in place,” rather than being institutionalized. [10]

 

 

Long-term care services are expensive.  In the year 2000, the average cost for nursing homes in Massachusetts was $76,000 per year. [14]   In the next 30 years, these costs are expected to quadruple, bringing Massachusetts’ average nursing home costs to approximately $304,000 per year. [15] ^, [16]   The nursing home population is expected to double during this same time period. [17]   Massachusetts residents spent $3.5 billion in 1998 on nursing home care. [18]   The average cost for assisted living facilities is $36,000 per year in Massachusetts. [19]   By comparison, home care can be less expensive. [20]   However, long-term care costs can fluctuate dramatically based on the needs of the patient, which makes financial planning for this type of care difficult. [21]  

 

 

A Middle-Class Problem

 

Individuals who are either wealthy or poor are in a relatively good position to pay for their long-term care needs.  Some individuals are wealthy enough to pay for their long-term care costs out-of-pocket. [22]   In Massachusetts, individuals pay out-of-pocket for approximately 32 percent of the costs of long-term care. [23]  

 

Our country’s poorest seniors can rely on Medicaid, the government healthcare safety net for low-income Americans, to pay for long-term care costs. [24]   Medicaid covers about 40 percent of long-term care costs overall. [25]

 

However, most Massachusetts residents cannot afford to pay for years of long-term care out-of-pocket or qualify for Medicaid coverage.  Middle-class individuals are left with few options for covering expensive long-term care needs.  These individuals may be unaware that their current healthcare policies, Medicare (the government’s health insurance program for elders) or supplemental Medicare policies that individuals purchase on their own will not cover long-term care costs. [26] ^{, [27]}  

 

When faced with the dilemma of paying for long-term care needs, too often elderly middle-income individuals spend down their assets to become eligible for Medicaid. [28]   When residents make this choice, limited government resources are further stretched as the number of individuals on Medicaid grows.  Long-term care insurance is one option that is now available to middle-income individuals who can afford it.  

 

 

Long-Term Care Insurance

 

Long-term care insurance is an insurance plan that typically provides a daily, fixed dollar amount toward the costs of nursing home, assisted living or home health care costs for a number of years when policy owners can no longer live at home without assistance. [29]   This type of insurance was first offered by a small number of insurance companies in the mid-1980s. [30]   These policies provide individuals with an option to plan ahead by purchasing an insurance policy that covers their long-term care needs.  Since the premiums on these policies can be expensive, it is often middle-income to upper-income individuals who purchase them.  Individuals typically purchase their policies well before they need them (usually in their mid-50s to mid-60s) in order to take advantage of a lower, age-based premium. [31]   

 

Types of Plans

Long-term care insurance plans may be sold as individual policies or group policies. 

 

·         Individual Policies: Consumers typically purchase individual long-term care insurance policies through an agent or by direct mail or phone solicitations.  These policies are guaranteed renewable, which means that policyholders have the right to renew the policy each year. [32]   The insurance company may not change the coverage or refuse to renew it unless policyholders fail to pay their premiums.  Massachusetts regulates individual policies through the Division of Insurance (DOI).  However, these regulations were relaxed significantly in January 2000 and now provide less protection for consumers. [33]  

 

·           Group Policies:  In 1996, group policies accounted for more than half of the policies sold in the Commonwealth. [34]   Unlike individual policies, group policies are not required to meet any minimum standards and insurers do not have to submit policy information for approval on these plans to the DOI in Massachusetts. [35]   Employers (e.g., the federal government), organizations (e.g., AARP) or specialty associations (e.g., the Massachusetts Medical Society) may offer group plans to their employees or members. These policies typically provide quality products because an educated member of the agency or association is charged with assessing, selecting and monitoring the product on behalf of its members. [36]   However, not all group policies are sold this way.  Insurers also establish groups for marketing purposes where a purchaser will nominally join a “group” at the time the policy is purchased.  Some consumer advocates report that group policies have been sold to individuals who are unaware that these policies are not required to meet any minimum standards. [37]  

 

Lapse Rates

The policy lapse rate reflects the number of individuals who stopped payment on their policies, switched policies, exhausted their payments, or died before using their policy. [38]   The lapse rate is a good indicator for determining whether or not policyholders are able to sustain the coverage they originally purchased.  The most current information available dates back to 1996 when the policy lapse rates for individual policies in Massachusetts was 23.3 percent. [39]   The group policy lapse rate for Massachusetts policies in 1996 was 25.7 percent. [40]   This means that approximately one-fourth of all individual and group long-term care insurance policyholders let their policies lapse.

 

 

 

Policy Features

Like all insurance plans, long-term care insurance policies differ greatly in what they offer the consumer and how much they cost.  Some of the ways in which coverage can differ include: 

 

·         Type of Coverage: Policies differ in the type of coverage they provide.  Some offer “nursing home only” care, while other plans cover assisted living facilities and in-home care.  As more elders choose to stay at home or enter assisted living facilities, “nursing home only” coverage becomes significantly less valuable.

 

·         Amount of Coverage: The amount of coverage may also differ from policy to policy.  Some plans offer lifetime benefits, others provide two to five years of coverage and others offer significantly shorter periods of coverage.  Plans also differ in the amount of daily or monthly benefit allowed by the plan (e.g., some plans may provide $100 for nursing home care per day, while others may provide $300 per day).

 

·         Start of Coverage: “Benefit triggers” are used to determine if and when benefits are payable to the policyholder.  These triggers, called Activities of Daily Living (ADLs), include needing assistance with eating, dressing, bathing, toileting, moving from bed to table to bath, etc. [43] Depending on the terms of the policy, help with two or more ADLs may be needed before a claim can be filed. [44]  

 

·         Elimination Period: Once a claim is filed, policyholders may not receive benefits immediately.  Policyholders must wait for the “elimination period” to end before they receive any funds.  The elimination period is similar to a deductible for automobile or homeowners insurance policies in that the policyholder pays some costs out-of-pocket before the insurer begins paying.  Elimination periods can vary significantly in length.  For example, some plans have a 90-day elimination period.  This means the insurer will not provide any coverage for long-term care services for the first 90 days after a policyholder has filed a claim.  Other policies have a 365-day elimination period, which means the policyholder must wait for an entire year before they receive payments from their insurer.  The policyholder is responsible for any costs incurred during the elimination period. 

 

·         Inflation Coverage: Some plans have a cost-of-living adjustment while others do not adjust for inflation.  Without inflation coverage, the value of a policy decreases over time.  If a consumer purchased a policy without inflation protection that pays $125 a day for nursing home care, it would have covered close to 60 percent of nursing home costs in 2000, yet it will only cover 15 percent of estimated costs in the year 2030. [45]

 

 

 

Increasing Sales of Long-Term Care Insurance Policies

 

The pace of sales of long-term care insurance policies has increased significantly in the last few years.  Nationally, the number of long-term care insurance policies sold has grown at an average rate of about 21 percent annually between 1987 and 1998, with more than 5.8 million policies sold as of June 30, 1998. [47]   Massachusetts saw an annual increase of 18 percent in the number of long-term care policies sold from 1994 to 1996, with 18,467 individual and 22,868 group policies sold as of December 1996. [48]

 

National Sales Figures of Long-Term Care Insurance Policies

Figure 2.  Source:  http://www.ltcg.com/ltcindustry.asp

 

 

The number of policyholders in the nation and in Massachusetts still remains a tiny fraction of the market despite the increases in the aging population. [49]   Nationally, 2.5 percent of long-term care costs are financed by long-term care insurance. [50]   In Massachusetts, 4 percent of long-term care costs are financed with these policies. [51]   As of December 1996, 41,335 people in the Commonwealth were long-term care policyholders. [52]   This represents a 51 percent increase in the number of policies held since 1994. [53]   In 1996, the most current information available, the average annual premium for individual and group policies in the Commonwealth was $1,785 and $808, respectively. [54]   

 

Long-term care insurers typically blame lack of market penetration on the cost of their products, the ignorance of the public and competition with Medicaid. [55]   While it is unclear whether long-term care insurance will ever play a major role in financing long-term care in the United States, federal and state officials have recognized the governmental savings that can result from increasing utilization rates of these policies. [56] ^, [57]  

 

 

Historic Pricing Problems with Long-Term Care Insurance

 

Some insurance companies have been known to engage in inappropriate pricing practices that lead to significant problems for policyholders trying to file claims. 

 

“Low-balling” occurs when policies are sold to all applicants, both healthy and unhealthy alike, at a very low price.  These pricing practices often lead to a significant increase in market share for the insurer.  When the unhealthy policyholders start to file claims, the insurer pleads that it has to pay out more money in claims than its actuaries initially forecast.  To compensate for this actuarial error, the insurer increases the premiums on a whole policy class. [58]   A class is determined by any single variable that is used by the insurance company to group people. [59]

 

Premium increases often force some policy owners to let their policies lapse.  Insurers can actually benefit from higher lapse rates because the number of policyholders filing claims decreases.  Consumers who are forced to let their policies lapse usually do not get back the premium payments that they already contributed to their policy.  Since these individuals do not get their premium payments back and will not be filing claims, this money then can be used to fund claims submitted by policyholders who maintained their policies over time.  This situation improves the insurer’s bottom line. [60]  

 

 

Policyholders can also face problems when it comes time to file a claim.  Most long-term care insurance providers require applicants to provide specific medical information and authorization to obtain medical and hospital records.  In theory, an underwriter would review this information, which can take several weeks or more, and the insurer would then either decline to issue the policy or issue it with an appropriate premium rate that reflects the insurer's risk.  According to some industry employees, underwriters do not actually review the medical records of many applicants. [66]

 

“Post-claims underwriting” is the technical term for an insurer's failure to do its risk assessment homework and set a premium that will support the policy before issuing it.  More specifically, an insurer accepts insurance applications without review of the applicants’ health or medical records, issues the policies and collects the same annual premium from the healthy and unhealthy applicants alike.  Years later, after the policyholders submit claims, the insurance company finally reviews the consumers’ medical records and denies coverage by finding a disqualifying medical condition.  It is essentially an attempt to rescind policies after claims have been made, rather than eliminating high-risk applicants in the underwriting process by refusal or by quoting a premium that reflects the actual risk. 

 

Policyholders are hurt by this practice because they have paid their premiums for a number of years, essentially diverting long-term care funds into an unusable policy.  Even if the insurance company refunds the premiums, the consumer has already filed a claim, is in need of long-term care services and is, in all likelihood, no longer eligible to buy a replacement policy. 

 

The current DOI long-term care insurance regulations have a section entitled “Prohibition Against Post Claims Underwriting.” [67]   This section of the regulations requires insurers to ask clear and unambiguous questions on the application regarding an individual’s health status and mandates that the consumer answer all questions truthfully.  However, the regulation does not require that this information be reviewed by the insurer.  It is unclear whether this provision prevents the type of possible abuses that can occur from post-claims underwriting.   

 

 

 

Currently, forty-six states have laws that regulate long-term care insurance.  Many of these laws are based on a model developed by the National Association of Insurance Commissioners (NAIC).  Massachusetts is one of the four states that has failed to pass such a law.  However, long-term care insurance is not entirely unregulated by the Commonwealth.  DOI, the state agency charged with regulating insurance products, currently regulates individual long-term care insurance policies.  DOI takes the position that it has the authority to regulate individual long-term care insurance policies as “sickness and accident” insurance under the broad state law that pertains to individual insurance policies. [78]    

 

The lack of a specific Massachusetts law that pertains directly to long-term care insurance is troubling for several reasons.  It is questionable whether the broad state law for individual insurance policies actually applies to long-term care insurance.  DOI’s interpretation of this law has never been challenged and, therefore, has never been decided by the courts.  As a result, DOI’s authority, or lack of authority, to regulate long-term care policies remains an open-ended question.  In addition, laws that set minimum policy standards and provide consumer protections are much more immune to changes by the administration or political influence.  Without such a law, a state agency can elect whether or not to develop, change or enforce regulations. [79]   Although this flexibility is useful and necessary in some situations, it can create significant inconsistencies from one administration to the next.  Finally, group long-term care insurance policies are not required to meet any minimum standards and are essentially unregulated. [80]   DOI takes the position that it does not have the statutory authority to regulate group long-term care insurance policies. [81] This leaves thousands of Massachusetts consumers vulnerable to unregulated group long-term care insurance products.  

                     

 

National Association of Insurance Commissioners Model Standards

 

The National Association of Insurance Commissioners (NAIC) is a non-profit organization made up of insurance regulators from the 50 states, the District of Columbia and the four United States territories. [82]   “The mission of the NAIC is to assist state insurance regulators, individually and collectively, in protecting the public interest, promoting competitive markets and facilitating the fair and equitable treatment of insurance consumers.” [83]   NAIC also promotes the “reliability, solvency and financial solidity of insurance institutions and supports and improves state regulations on insurance.” [84]   

 

For fifteen years, NAIC worked in conjunction with regulators, legislators, insurance industry representatives, and consumers to create a comprehensive uniform model law (referred to as the NAIC Act) and related regulations for long-term care insurance. [85]   The act and regulations, which are continually updated and amended, do the following:

 

·         define minimum benefits for policies offering home health and community health benefits;

·         outline guidelines for policies with minimum benefit requirements;

·         establish reporting requirements for insurers detailing lapse rates, number of replacement policies sold, records on agents, etc.;

·         regulate insurance marketing practices and advertising guidelines;

·         develop and distributes suitability standards for all policies sold in each state; and

·         require insurers to offer at least one plan with built-in inflation coverage. [86]

 

The insurance industry has long supported nationwide adoption of the NAIC model act and regulations.