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Long-Term Care Is Hot Topic in Insurance

The Clinton administration's ill-fated health care reform plan may not have accomplished much, but for the year or so it was under discussion it stopped the long-term care insurance market dead in its tracks.

With the possibility that the government might step in with a program for the middle class, tens of thousands of potential buyers of private coverage decided to put away their checkbooks and wait.

Now, with the Clinton plan dead and government leaders debating whether they will continue public coverage for the poor, buyers are returning to the private insurance market in growing numbers. And as they do, many of the regulatory and economic issues that attended the product in earlier years are returning.

The subject is getting renewed attention for demographic reasons as well. This is the year the oldest baby boomers turn 50, and somewhere between 20 percent and half of them, studies say, will spend some time in a nursing home before they die. These facilities often charge more than $100 a day and that figure is likely to climb in the coming years.

Private insurance currently covers only a tiny fraction of the potential market. In 1994, according to the National Association of Insurance Commissioners, 3.7 million Americans had long-term care insurance. So insurers see a vast new market out there if they can just figure out how to reach it in an affordable, profitable way. NAIC is an umbrella group for state regulators.

"It's probably the topic du jour in health care," said George Sherman of LTC Inc., a long-term care insurance marketing and consulting firm based in Seattle.

Republican plans to improve the tax treatment of long-term care insurance, including special medical spending accounts similar to IRAs, were vetoed by President Clinton late last year. GOP lawmakers have added them to another bill this year. That would likely boost sales as well.

The two key issues confronting insurers, policy buyers and regulators are, first, whether the policies on the market will provide adequate coverage in an arena where costs have historically risen much faster than general inflation, and, second, whether people who buy the coverage will be able to keep up with the premiums.

There is wide agreement that many of the policies sold a decade or so ago were badly designed, failing to keep up with inflation and requiring elaborate and sometimes highly subjective evaluations of the beneficiary before paying benefits. These policies typically covered only skilled nursing home care, paying nothing for cheaper assisted living arrangements or in-home care.

They were often underpriced, either deliberately to get business or inadvertently because so little was known about the future costs of nursing care; in the ensuing years, the policyholder was compelled to pay sharply higher premiums or drop the policy.

For example, a Raleigh, N.C., couple who bought long-term care coverage for themselves four years ago saw their premium jump 18.5 percent in two years to just under $2,000 a year.

He is 70 and she is 67, and while they can afford the higher premiums now, future increases of that magnitude would force them to drop the insurance, he said.

"There's not very much an individual can do except voice a complaint," the husband said. "There's really a sense of powerlessness because of the nature of the whole medical care situation. . . . I can accept [the higher premium] or not. We'll accept it as long as we can afford it." He said he has complained, but he asked that his name not be used because he is afraid the insurer will cancel his policy.

Critics of the industry contend that large and unexpected premium increases are responsible for the very high lapse rate for long-term care policies. From the mid-1980s, when long-term care insurance first became popular, into the early '90s, more than half the policies sold lapsed -- that is, were dropped by the policyholder, according to a General Accounting Office study.

In 1993, the National Association of Insurance Commissioners adopted a model statute requiring insurers to include provisions that would keep the policy in force, although with reduced benefits, for policyholders who stop paying premiums. The model is a guide and becomes binding on insurers only when states write it into their laws. Maryland and Virginia have adopted the statute, according to NAIC. The District has not. The industry has resisted the provision, arguing that it would make policies still more expensive.

Industry critics, including Consumers Union and Families USA, doubt that private insurance will ever fill the long-term care need, and argue that only comprehensive government-driven reform is likely to offer widespread protection to the middle class.

"The United States of America has done a very poor job of examining the problems of long-term care and trying to be creative and to develop new ways of providing it," said Greg Marshall of Families USA.

Today's private long-term care insurance "is really unaffordable for nearly all Americans, and our recommendation is not to buy it unless you have a lot of money," he said. But unless the political climate reflected in the 1994 elections is reversed this fall, the private market is likely to be the main source of protection for the foreseeable future.

The government's Medicare program covers only a few weeks of nursing home care and only under limited circumstances. The combined federal-state Medicaid program does cover long-term care, and in fact provides about half the dollars spent on long-term care in the United States annually, but is meant for people with low incomes and few assets.

This coverage "is the middle-class piece" of Medicaid, said Marshall, because it does allow preservation of some assets, more than $70,000 in some states. Nonetheless, its requirements are relatively harsh, requiring beneficiaries to "spend down" most of their wealth before they can receive benefits. There are strategies for preserving assets -- trusts, shifting ownership to one's spouse and other devices -- but as costs continue to rise, the rules have gotten tighter and tighter.

The good news, several experts said, is that the pause brought on by the Clinton health plan and the regulatory attention from the NAIC has led to better policies and to an exit from the market of some carriers that were unable or unwilling to price their policies accurately.

"I think there are definitely good-quality products out there," said Mark R. Meiners of the University of Maryland's Center on Aging. "The market has been improving on a steady basis, the number of policies being sold is still increasing at a decent rate, and the number of companies [selling long-term-care insurance] has gone from about 160 to 130, which is probably an appropriate shakeout."

The industry, of course, agrees. Officials of some companies and trade groups concede that there were problems with policies in the past but contend that newer offerings are greatly improved. They say critics have exaggerated the flaws of the earlier ones.

In fact, said Marc Aaron Cohen of LifePlans Inc., a Waltham, Mass., long-term care consulting and product development company that often does studies for the industry, the high lapse rates are due in part to policyholders upgrading to newer and better products.

A LifePlans survey of long-term care policyholders, done in 1994 on behalf of the Health Insurance Association of America, a Washington-based trade group, found that a majority of buyers had incomes of less than $35,000 a year, and nearly a third had assets of less than $35,000. On average, purchasers were spending 6 percent of their annual income on their coverage, the study found.

Cohen said attitudes seems to play as big a role as economics in the decision to buy, with non-buyers expressing far more confidence that "the government will pay for most of the cost of long-term care if services are ever needed."

About a quarter of those surveyed said they didn't know how they would pay for long-term care if they needed it. Many said they thought they were already covered by a government program or their medical insurance.

The survey did find that the average premium had increased 41 percent in four years -- to $1,500 from about $1,100 in 1990. But Cohen attributed much of that increase to newer policies with better benefits. He said it appears buyers are now convinced that government help is unlikely and want the additional benefits.

Some states are looking at a combination of Medicaid and private insurance as a way of keeping public costs down while allowing individuals to protect some of their assets, a program advocated by Maryland's Meiners. Under this partnership, the person who needs care gets to keep assets equal to the amount paid out by insurance and still qualify for Medicaid.

Currently, New York, Connecticut, Indiana and California have such programs, Meiners said, but federal Medicaid rules have made it difficult to expand the plan to other states.

Buying Long-Term Care Insurance

Deciding whether to buy insurance for long-term care is much more than choosing a policy. It is "a basic financial planning decision" and should be approached as such, according to Priscilla Itscoitz of United Seniors Health Cooperative, a consumer advisory group here.

If you are considering this insurance, United Seniors recommends a three-step process in which picking the actual policy comes last. "Most people start backward," which can lead to bad choices, Itscoitz said.

First, ask yourself, "Is this an appropriate and suitable product for me?" This means assessing your financial and medical condition and your family situation. If you can afford to pay your own way or are likely to qualify for Medicaid you may not need private insurance.

Nursing homes in this area currently charge around $150 a day, Itscoitz said, but buying full coverage may be too expensive for many people. Look at how much you could afford on your own, allowing for inflation, and look for a policy that will fill in the gap.

Also, long-term care today means not only nursing homes, but assisted living arrangements, home care and something called "respite care," which provides temporary care for a person while the regular caregiver, usually a family member, takes a break. Thus family situation is important.

People who may be able to rely on family members for some help should make flexibility a major priority in their policy. They can't be sure at this point how much help the family will be so they want a policy that is likely to pay benefits under a variety of care arrangements. Single persons with no dependents probably need less flexibility because they will probably go into assisted living or a nursing home if they need care.

Second, review the companies with which you might want to do business. You may be using this product many years after you buy it, so you want a company that will still be there. Stick to big, well-known companies, and review their ratings. A.M. Best and Standard & Poor's are among the companies that evaluate insurers for financial soundness, and their publications are usually available in public libraries. However, Itscoitz said, "I wouldn't make the decision solely based on rating. It should be treated as one piece of information," and combined with policy price and benefits.

Third, choose a policy. Features it should have include:

* Coverage of all levels of care -- skilled, custodial and intermediate. And prior hospitalization should not be a requirement for obtaining benefits.

* Flexibility. It should cover various forms of care, including adult day care, respite care and home health care. "Everyone doesn't need that much flexibility," but many do, Itscoitz said.

* Inflation protection. If you are 75 or younger, you should get a policy with benefits that rise at a 5 percent compound annual rate. This will add to the cost, but "if you cannot afford inflation protection, you should think about whether you can afford long-term care insurance," she said. You can think about cutting back the benefit period, the number of days you would get benefits, but that increases your risk.

* Reasonable eligibility benefits. Policies usually require certain impairments before paying benefits. You must show such circumstances as medical necessity, cognitive impairment, problems with activities of daily living and the like. United Seniors recommends policies that treat these impairments separately rather than requiring several combined to obtain benefits.

"The policy's wording is extremely important," Itscoitz said. "It's well worth taking your time, not rushing into this purchase and getting objective advice from someone who is not selling you anything," such as a counseling service or an elder-law attorney.

United Seniors advises buying long-term care insurance only if:

* Annual income exceeds $30,000 per person in your household.

* Assets exceed $75,000 per person.

* You could still pay the premiums if they rose 20 or 30 percent.

* Paying the premiums doesn't crowd other things out of your budget.

Help in Checking Out the Options

There are a number of publications available to help people evaluate long-term care insurance. Included among them are:

* "A Shoppers Guide to Long-Term Care Insurance," published by the National Association of Insurance Commissioners. It contains worksheets designed to guide the consumer through the decision-making process. It's available free from state insurance regulators or by writing: NAIC Publications Department, Box 263, Kansas City, Mo. 64193.

* "Long-Term Care Insurance: To Buy or Not to Buy" is one of three publications by United Seniors Health Cooperative, a non-profit consumer group here. This one, four pages, gives pros and cons of buying coverage. It costs $2.

The others are:

* "Long-Term Care: A Dollars and Sense Guide," an elementary guide with general information. It costs $11.50.

* "Long-Term-Care Insurance, a Professional's Guide," aimed at planners and other professionals, but understandable by most educated consumers. It also addresses the relationship between public programs (Medicare and Medicaid) and private insurance. It costs $41.

The United Seniors' guides are available from United Seniors Health Cooperative, 1331 H St. NW, Suite 500, Washington, D.C. 20005.