by J. Tim Query, Ph.D., CPA

While the earliest reference to long-term care insurance can be traced back to at least the 1970s, the prototype design for LTCI policies in their current form was first introduced in 1983. This paper examines the opportunities and challenges remaining in the long-term care insurance market some 20 years later.¹ It explores the influence of regulatory and legislative changes during that time, as well as forthcoming proposals that financial planners need to be informed about to better serve their clients.

In addition to assisting clients with current financial objectives, sound financial counseling also includes meeting needs for the entire life cycle. With the gradual aging of the U.S. population, most notably the baby boomer generation, the public is increasingly acknowledging the reality of financial uncertainty that can accompany old age.² As a result, momentum is slowly building for financial risk-transfer products such as long-term care insurance to become a mainstream aspect of the financial planning and estate preserving process. The recent growth of this insurance line is admittedly impressive, yet the penetration of LTCI, even among seniors, remains quite small.

Dramatic advances in medical technology and pharmacology continue to increase life expectancies. Unfortunately, an accompanying result of these advances is the probability that more people will require some form of assistance with daily activities at some point in their lives. The cost of this assistance, especially when it involves nursing home care, is well documented. A 2003 survey by the GE Financial Long Term Care Insurance division found that the national average cost for a year in a nursing home is $57,700—a seven percent increase from the 2001 survey. The average hourly rate for home health aides provided by a home care agency is $18.12 an hour, according to a market survey by the MetLife Mature Market Institute. These figures can be disconcerting to clients, yet also provide the motivation to investigate LTCI while they are still healthy enough to qualify. Those financial planners who view LTCI as a necessity for young adults argue that increases have been rare in the relatively short history of the coverage, and that a measure of protection is offered by state regulators who need to approve any rate changes.

Overview of the Current and Future Regulatory Environment

There are a number of federal and state programs that have bearing on the delivery and financing of long-term care. Recent financial services and health care reforms enacted by Congress also have influenced the industry. In addition, the National Association of Insurance Commissioners (NAIC) has weighed in with extensive model regulations, many of which have been adopted by a number of states.

Medicare, Medicaid, and nursing homes are all experiencing financial strain resulting from design shortcomings. For example, even though Medicaid pays about 70 percent of private-pay rates and Medicaid patients are rarely in private rooms, the program pays about half of all dollars to nursing homes while covering two-thirds of residents. If Medicaid pays any portion of a patient's bill, the nursing home cannot charge the patient more than the Medicaid rate. Because those who are on Medicaid tend to stay longer, Medicaid pays nearly 80 percent of patient days.³ According to the CMS Office of the Actuary, while freestanding nursing home expenditures grew at an annual rate of 9.7 percent from 1980 to 1997, Medicare freestanding nursing home expenditures for the same period grew 30 percent. An increase in payment per stay, combined with increased use, contributed to the rapid rise in Medicare expenditures during the 1990s.⁴ 

Government subsidies will continue to significantly influence the use and financial future of long term care. An overview of the various payors of nursing home expenditures can be found in Table 1. While the dollar amounts paid by private health insurance have steadily increased, the percent as a source of funds has decreased slightly from the level during the mid- to late '90s.⁵ 

The passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) created a new category of long-term care insurance called qualified long-term care insurance. This regulation is intended to provide requirements for all long-term care insurance contracts, including qualified long-term care insurance contracts, as defined in the NAIC Long-Term Care Insurance Model Act and by Section 7702B(b) of the Internal Revenue Code of 1986, as amended.

NAIC Model Act

Long-term care insurance has been closely observed by the NAIC since the product's introduction. The NAIC developed its Long-Term Care Insurance Model Act and Regulation in the 1980s with the intent of promoting the availability of coverage, protecting applicants from unfair or deceptive sales or enrollment practices, facilitating public understanding and comparison of coverages, and facilitating flexibility and innovation in the development of long-term care insurance. Generally, the NAIC Model Act and Regulation establish

• Policy requirements: (a) requiring a standard format outline of coverage; (b) requiring specific elements for application forms and replacement coverage; (c) preventing cancellation of coverage upon unintentional lapse in paying premiums; (d) prohibiting post-claims underwriting; (e) prohibiting preexisting conditions and probationary periods in replacement policies or certificates; and (f) establishing minimum standards for home health and community care benefits in long-term care insurance policies.
• Benefit requirements: (a) requiring the offer of inflation protection; (b) requiring an offer of nonforfeiture benefits; (c) requiring contingent benefit upon lapse if the nonforfeiture benefit offer is rejected; and (d) establishing benefit triggers for nonqualified and qualified long-term care insurance contracts.
• Suitability requirements: (a) explaining and reviewing a personal worksheet with applicants; and (b) requiring that insurers deliver a shopper's guide to buying long-term care insurance to applicants.
• Insurer requirements: (a) reporting requirements; (b) licensing requirements; (c) reserve standards; (d) loss ratios standards where applicable; (e) filing and actuarial certification requirements; and (f) standards for marketing.
• Penalties and disclosure requirements.

The NAIC models have been used as guides in most states in developing legislation and regulations, and these models have been developed with the combined efforts of state regulators, the insurance industry, and consumers. These models undergo periodic revisions, and the NAIC reconstituted the Long-Term Care Working Group in 2003; its duties will be handled by the Senior Issues (B) Task Force in 2004. The task force is reviewing various state laws to determine if they have better consumer protections. Specifically, the group is examining language that (1) allows upgrades (with underwriting) and downgrades upon request by the insured, versus the current policy which allows that right only upon a substantial rate increase; (2) provides mandatory agent training; and (3) addresses cross-border issues.

Currently, when a policy is bought in a particular state, benefits would be paid in that state. But if a policyholder moves to a state with a different provider-licensing scheme, benefits would likely be denied. The NAIC is working to correct this circumstance.

A general shift of responsibility from the government to individuals and their insurance companies resulted from HIPPA. Tax-related provisions of the act included deductibility of LTCI premiums as medical expense for individual taxpayers.⁶ LTCI premiums paid by an employer on behalf of an employee are not considered income for the employee, and can be deducted as a business expense for employers—including the self-employed, C corporations, S corporations, partnerships, and LLCs. Benefits received under a tax qualified long-term care plan generally are not taxable as income subject to an annual limitation indexed for inflation.⁷ 

Impact of Prescription Drug Act

H. R. 1, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 signed into law a few months ago by President Bush, may have some potential ramifications for long-term care. The implementation of the Medicare drug benefit has the prospect for disturbing current arrangements among Medicare, Medicaid, nursing facilities, and pharmacies. An estimated 1.6 million Americans who are dually eligible for Medicare and full Medicaid reside in a nursing facility. On average, nursing home residents receive 6.7 routine prescription medications per day.⁸ The NAIC is in the process of updating the Medicare Supplement Insurance Minimum Standards model regulation to reflect the MPDIMA changes.

In addition, the new Medicare law continues the reduced federal funding for in-home care for that program's recipients. Adjusted for inflation, funding increases have been reduced from 3.3 percent to 2.5 percent. The number of people receiving home-care funding since 1997 has already dropped from 3.5 million to 2.2 million. To offset this somewhat, two years ago the National Family Caregiver Support Program provides money to states for services such as respite care and home-care training.⁹ 

Some Washington observers are forecasting that long-term care will be front and center in the debate over health care reform in Congress, now that the Medicare drug issue has been addressed. A number of bills concerning long-term care have already been introduced into House and Senate committees. For example, Senate and House versions of the Long-Term Care and Retirement Security Act of 2003 have been introduced in both houses of Congress. This act would amend the Internal Revenue Code of 1986 to allow individuals a deduction for qualified long-term care insurance premiums, use of such insurance under cafeteria plans and flexible spending arrangements, and allow a credit for individuals with long-term care needs.

Implication for Financial Planners

The necessity of private long-term care insurance is as vital now as at any time in its 20-year modern history. Improvements in the economic efficiency of LTCI policy pricing should continue as more experience and data are added. With evolving health care legislation and continued support for health care quality and financing reform, the challenges and opportunities associated with LTCI will continue. Financial planners familiar with LTCI are well positioned to help clients avoid the potentially devastating financial consequences of extended required assistance with daily living activities.

Why haven't we seen a broad initiative by financial planning professionals in general to educate clients on caregiving alternatives and associated costs? One rationale is that financial planning professionals require a better understanding of the impact of LTC on the family finances, complete comprehension of the LTCI products and other alternatives, and adequate knowledge to properly discern how to integrate LTCI into the existing financial plan.¹⁰ 

To address these concerns, one needs to consider LTCI in a similar vein as other insurance tools. Automobile, homeowners, disability, and life insurance are used to protect assets during the client's working years. LTCI can be viewed as protecting income-producing assets during the retirement years. In addition, recognition that LTCI has evolved beyond the "nursing home insurance" products of its early years is the first step toward understanding the benefits of this risk-transfer mechanism.

Several noteworthy points come out of this analysis. First, various components defining the worsening health care crisis are forcing legislators to place a higher priority on resolving this issue. Many regulations resulting from this discussion will directly or indirectly affect the long-term care industry. It is the responsibility of financial planners to remain abreast of these changing developments to ensure maximum affordable coverage alternatives for clientele.

In general, NAIC model regulations place greater responsibility on insurers to make initial premiums adequate, rather than relying on experience after policies are issued to adjust premiums to corrected levels. Part of this shift is due to increased data available to the industry that makes it relatively easier to actuarially forecast future expenditures than during the early years of LTCI. Prior model regulations issued by the NAIC addressed replacement policies, specification of minimum benefit triggers, assessment of suitability, and the prohibition of post-claims underwriting.¹¹ 

Second, demographic trends suggest that increased longevity may be accompanied by longer and more frequent periods of disability. But the appropriateness of this risk-transfer tool for many scenarios is still under considerable debate. Increased education about this line of insurance by professional financial advisors will put them in a position to provide sound, objective counseling regarding their own clients' personal situation.

Third, there is a significant increase among younger adults (under age 50) for the security provided by long-term care insurance. Awareness of their own mortality, along with the reality of caring for aging parents, has increased interest in various strategies to address the financial consequences of long-term care. Most members of this group who already own LTCI policies obtained them through their employer's plan. By remaining abreast of the current regulatory changes affecting employers, employees, and other individuals and their LTCI, financial consultants can serve as partners in their clients' efforts to increase peace of mind by providing for the financial security that would otherwise be at risk.

J. Tim Query, Ph.D., C.P.A., A.R.M., is assistant professor of risk management, insurance, and finance at Illinois Wesleyan University in Bloomington, Illinois. He worked in the securities brokerage industry for ten years before earning his doctorate in risk management from the University of Georgia in 1999. He would like to thank Kay Tyrrell of the National Association of Insurance Commissioners Research Library for providing research assistance. 

Endnotes

1. While much of this paper is focused on nursing home care and costs, as most readers of this publication are aware, today's LTCI policy provides much broader coverage—including home health care, assisted living, hospice care, respite care, and alternate care services. Assistance can range from care associated with activities of daily living to 24-hour skilled care.
2. According to the most recent U.S. Census, people over the age of 65 will make up more than 20 percent of the nation's population by the year 2030, compared with 13 percent in 1990. Individuals aged 85 and over will be the fastest-growing segment of the senior population.
3. Ron Panko, "Spiking Nursing Home Costs May Hurt LTC Insurance Sales," Best's Review 104 (2003): 98.
4. Center for Medicare and Medicaid Services, Health Care Industry Market Update, "Nursing Facilities" May 20, 2003.
5. For a discussion on the financial pressures resulting from litigation involving nursing homes, see William Warfel, "Nursing Home Litigation—A Case for Reform," CPCU Journal, 4 (2001): 233–248.
6. For those taxpayers who itemize their deductions when they exceed 7.5 percent of adjusted gross income. The maximum LTCI premium that can be added to other deductible medical expense is based on the taxpayer's age at the end of the year.
7. A policy is treated as tax-qualified if it is in compliance with specified 1993 model standards, meets specified benefit triggers, and offers inflation protection and nonforfeiture benefits.
8. Andy Schneider, "The Kaiser Commission on Medicaid and the Uninsured," Kaiser Family Foundation, 2002.
9. Sue Snellenbarger, "Little-Known Program Offers Help to People Caring for Aging Relatives," Wall Street Journal , December 11, 2003: C1.
10. Skip Liddell, "It's Time for Advisors to Address LTC's Place in a Financial Plan," National Underwriter, February 2, 2004:
11. For greater detail on the historical background of the NAIC Long-Term Care Model, see www.naic.org.