This year two small insurance units of Penn Treaty American Corporation—with combined assets of about $600 million but with liabilities topping $4 billion—will go bankrupt. This is unlikely to affect many of the largest insurance companies in the country that sell long-term care insurance including (in order of market share) Genworth Financial, John Hancock, Metropolitan, CONSECO, UNUM, AEGON, Prudential of America, Northwestern Mutual, Ameriprise and New York Life.
Long-term care (LTC) insurance policies cover services and may cover custodial care, home health care, hospice care, assisted living care, adult day care and skilled nursing care. These are services not eligible to individuals through Medicare or Medicaid. Although Medicaid, a federal and state program does pay for nursing homes, it is available only to the poor or if you can “spend down” your assets to show that you are destitute and therefore eligible.
The two Penn Treaty insurers had about 79,000 long-term-care policyholders. Each state has a guaranty fund. For now, and this will likely change, policyholders will retain coverage through such a guarantee association funded by other insurers and tax payers. However, in most states, their claims will be capped at $300,000, which for nursing home residency optimistically covers about 5 years of service.
Regulators knew that Penn Treaty’s plan were trying to undercut the market by unrealistic premiums and wrong market assumptions. It was impossible for Penn Treaty to cover their liabilities from the start. They were designed to default. While the insurers walk away with their profits and bonuses, the public, state and other insurance companies are left to cover the cost. Eugene Woznicki, chairman of the board at parent company Penn Treaty American Corp remains busy selling insurance across many states under the Affordable Care Act.
The private insurance is only a small player—less than 8%—in the National Long Term Insurance market. Medicaid covers half of the market and is the largest player, followed by out of pocket (19%) and other public insurance (21%). The interest in long term care insurance is that it is likely to grow under the incoming administration. With Medicaid and Medicare in line to being pared down, private insurance might see a resurgence. Long Term Services and Support have changed over the last twenty years. Older adults have been using more home and community-based services (HCBS). This is partly the preference for older adults to remain in their home, partly due to costs, and partly due to states’ obligations under the Supreme Court’s Olmstead decision which requires states to support people in the community in order to limit unnecessary institutionalization.
On the other side of the coin, potential long-term care expenditures represent a significant source of financial uncertainty for most older adults. Although only about one-third of current 65 year olds will ever enter a nursing home, and that most nursing home stays will last less than a year, there is a great fear that personal accumulated reserves to cover such costs will be insufficient. We see this psychological fear with those older adults that spend down their assets in order to become eligible for Medicaid.
In order to be eligible for Medicaid applicants must have no more than $2,000 in "countable" assets, an amount that varies by state. Applicants may protect their joint savings by spending them on non-countable assets such as a new home, prepaying funeral expenses, paying off a mortgage and other costs allowed by the state. The SCAN Foundation did a study in 2013 of who these older adults are, why did they spend down? SCAN Foundation found that they made up almost 10 percent of the 50 years and older Medicaid eligibility population. About half of the people who spend down to Medicaid eligibility did not use any Long Term Services and Supports (LTSS) but stayed in the community using personal care services. Most have disproportionately lower income and have substantially fewer assets than people who do not spend down. What this tells us is that these were worried older adults. They did not want to be a burden on their children and did not have enough capital—or incentive—to buy long term care insurance. Being eligible for Medicaid was their long-term insurance. This is a psychological strategy to address their fear, rather than an economic strategy to gain from the system. These people are what the market calls the “middle mass,” the 55‐64 age group with an average annual income of $75,000, and total average assets (excluding home value) of just over $100,000. Representing 83 percent of the target market for LTC insurance.
Without any changes in policy, we can see that Medicaid will continue to bear the cost of long term care for an increasing number of “middle mass” Americans. But we know that the new Republican Congress is forecasted to chop down Medicaid’s budget and allow States to have more control. Promoting more home and community-based services is one option, but that will not be nearly enough as already more than half of Medicaid’s budget is devoted to these services. The reality is that nursing homes are already perceived as a last resort for older adults. But the rise in dementia will see this unattractive and unwanted option becoming the only perceived option. A 1998 study estimated that nearly half of all LTC claims were related to dementia, and it is not cheap. According to a 2015 Cost of Care Survey, the nationwide average daily rate for a private room is $250 and in a semiprivate room is $220, which equals $91,250 and $80,300 per year respectively.
Promoting voluntary enrollment into private or public insurance is unlikely to attract enough people to reduce the nation’s dependence on Medicaid. We have tried that before. LTC insurance which started in 1974 got a bad rap from the start. Low‐income individuals were sold policies with premiums they ultimately could not afford; agents could convince people to cancel their current policy and replace it with a new one in order for them to gain additional commission; insurers that previously did not review health status when they issued the policy could later cancel policies on the grounds of pre‐existing conditions. Some of these irregularities were later addressed under two acts, the Long‐Term Care Insurance Model Act (1987) and Long‐Term Care Insurance Model Regulation (1988) when the market began to be better regulated.
At this time, when there is going to be a greater reliance on LTC insurance, the bankruptcy of Penn Treaty and the seeming culpability of the regulators in allowing this to happen, despite early warnings, does not bode well.
Making LTC insurance more attractive will mean mandatory insurance options with lower premiums in order to cover more older adults. Private insurance will need to pay for a higher proportion of LTSS spending, and reduce the number of people who spend down to become eligible for Medicaid. This is “ultimately the nation’s central long‐term challenge in setting federal fiscal policy.” In 2008, the Congressional Budget Office (CBO) wrote that “future growth in spending per beneficiary for Medicare and Medicaid ... will be the most important determinant of long‐term trends in federal spending.”
We have been here before. In March 2010, the controversial “CLASS Act” was signed into law by President Obama, which was designed to attract higher enrollment from lower middle class, but it was quickly repealed in 2013 as it was found to be untenable—referred to a “Ponzi scheme”. Unfortunately, LTC insurance still has a bad rap. LTC policies from the early 1980s and 1990s were underpriced, promised too much, designed contracts that were too loose, and assumptions about potential costs that were knowingly optimistic. Unfortunately, in order to compete, all other companies were as optimistic about the capacity to cover their liabilities as the most adventurous of companies. It as a race to the bottom. In the end the mathematics did not add up and for some, like Penn Treaty, they had to fold, while for the rest of the insurance companies they had to raise their rates. For example, in 2010, John Hancock requested a 40 percent rate increase for the majority of its LTC policyholders, while AIG, MetLife and Lincoln National (LNC) all requested increases between 10 and 40 percent.
The solutions are not straightforward. A 2014 Society of Actuaries report by the industry, delves into some of the complexity of fixing the LTC insurance market, but it is nuanced. Whether the new Republican Congress will address non-binary solutions remains to be seen. Especially when there is great fear out there about long term care and the industry remains sullied. The bankruptcy of a small LTC insurance company does not bode well for financing of long term care for older Americans.
2014 An Overview of the U.S. LTC Insurance Market - Society of Actuaries
2008 CBO Chapter 2 The Long-Term Outlook for Medicare, Medicaid, and Total Health Care Spending
2013 SCAN Foundation spend down study
Macdonald, A., & Pritchard, D. (2001). Genetics, Alzheimer’s Disease, and Long‐Term Care Insurance. North American Actuarial Journal, 5 (2); 54‐78.
© USA Copyrighted 2016 Mario D. Garrett