Friday, December 30, 2016

The Rise and Fall of Long Term Care Insurance

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  

Saturday, December 24, 2016

Reversing Fifty Years of Progress in Life Expectancy

 Between 2014 and 2015 there was a sudden spike in death showing up in country reports. No one was expecting this increase.

People started dying earlier.  Not by much maybe 2 or 3 months earlier but it was significant. The first wave of national statistics was quickly followed by questions as to why. The first explanation related to local conditions, relating the upturn in death to local economic or weather conditions. Until it emerged this increase was not just a national event but an international phenomenon. Most industrialized countries showed a similar spike in death but for different population groups. This was global.

And the surprising detail that came out of all these countries mortality was that the increase in death seem to affect primarily older AND younger adult populations. With some exceptions, however, older people were dying earlier than at previous years. Small but significant increases in early death among older adults throughout industrialized countries.

For example, according to the Russian State Statistics Service (Rosstat), in the first quarter of 2015 they saw death grow by 5.2 percent compared to the same period last year, with a 22-percent rise in the death rate among those suffering from respiratory illnesses followed by diseases of the digestive system (10 percent), infectious diseases (6.5 percent), and blood circulation disorders (5 percent). While infant death, and death from murder and suicide, were falling. One of the clues for this increased death was that most of the deaths were brought about by respiratory diseases caused by common cold, flu and pneumonia.

In the United States, Anne Case and Angus Deaton wrote about the long-term increase specifically for one group of Americans, White adults. Although from 1978 to 1998, the mortality rate for US Whites aged 45–54 fell by 2% per year on average—which matched the average for other industrialized countries—after 1998, while the rest of the industrialized countries continued to show a 2% annual decline in mortality, in the USA the 45-54 age group showed half a percent annual increase. Reversing decades of progress in lowering mortality, there was a marked increase in death of middle-aged White men and women in the United States between 1999 and 2013. For three groups in particular those aged (with highest mortality first) 45-49, 56-59 and 50-54.  Among American older adults, mortality held constant or improved over this period. This increase for Whites was largely accounted for by increasing death from drug and alcohol poisonings, suicide, and chronic liver diseases including cirrhosis and was especially severe for those with less education.

Ill health in the United States remains an individual economic issue. Where for example maternal death is twice that of our neighbors in Canada despite the fact that we pay twice as much on health than Canadians. Americans get a very poor return for their health care contribution. The increase in death reflected an underlying decline in self-reported health, mental health and ability to conduct activities of daily living. Furthermore, there was an increases in reports of chronic pain and inability to work, as well as clinically measured deteriorations in liver function. All these indicators point to growing distress in this White population.  Although there are some methodological criticisms—age adjustment as populations change—the central thesis is solid, that in the USA middle-aged Whites have higher mortality increases than other populations. And surprisingly phenomenon is that this increase is still growing.

Across the Atlantic, in the United Kingdom, 2015 saw the largest rise in the number of recorded deaths in England and Wales in over a decade. Although the higher mortality peaked during winter it remained slightly above the five-year average for the rest of the year. By 2016 mortality was running at around 3.8% above the 5-year average, but again without accounting for population age changes. This increase was driven largely by increased mortality in over 75 year olds (83% of the increase). The cause being ascribed to dementia and respiratory diseases, including colds, flu and pneumonia.  A similar increase was experienced in many other European countries. It is normal for mortality to peak during winter season, especially for older populations—older adults are more prone to cold weather—but it is not only cold weather that was killing older adult. In Europe in July 2016 there has been observed a slight increased mortality among elderly in all countries, the most significant being in France and in Portugal since the beginning of July, increases which started during high temperatures.

Although we need to be cautious about extrapolating form single year data or using single methodologies as this might be an errant fluctuation. Something spikes in mortality occur naturally because of a convergence of many separate factors. Because this is a reversal of a trend—where other than increases in mortality due to wars, life expectancy has been improving for nearly a century—any reversal warrants attention.

Some researchers have argued for a social status/class causing the increase in deaths. Especially in the USA where the spike in deaths occurred among less educated White residents. The downturn in the economy after 2008—although it affected minorities more severely—for the White population the change was dramatic and unexpected. Minorities have had some time to become acclimatized to this depression. This is a good argument except that it does not explain all of the data, especially the U.K. data.

The U.K. mortality spike occurred in all areas of the country except for London. If the deaths were primarily driven by poverty then we should see poorer counties reporting higher deaths, which they do, but not consistently. Because of the inconsistency in deaths, there seem to be other variables at play. Since the increase in deaths is also a global phenomenon it could be the start of a growing trend and it might be worthwhile exploring other global factors other than economic—which is important but not a comprehensive answer.

Since these increased deaths are primarily caused by influenza and pneumonia—the main killers for older adults—there might be environmental factors at play. Although we should see a growing increase in deaths because our population is aging, these yearly fluctuations might be made worse by an increase in both the prevalence of bacteria and viruses and our reduced resilient to these new infections.

Global climate change and less effective anti-biotics together with a more vulnerable population—both older and perhaps less resilient because of poverty—might accelerate deaths.  Again, although these are small shifts in trends they are unique enough to warrant serious monitoring. The reversal of half a century of progress in life expectancy might herald a new way of looking at diseases that embraces a more central public health role. We might see that to address health we might have to look at the environment better. We shall have to wait and see how and when we continue to die.


Additional resources:
The role of excess winter mortality in recent years Stephen Richards (Longevitas)

Russian statistics from:

Case, A., & Deaton, A. (2015). Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century. Proceedings of the National Academy of Sciences, 112(49), 15078-15083.

Gelman, A., & Auerbach, J. (2016). Age-aggregation bias in mortality trends. Proceedings of the National Academy of Sciences, 113(7), E816-E817.

© USA Copyrighted 2016 Mario D. Garrett  

Thursday, November 24, 2016

The Fear of Aging in Trump’s New World

We cannot escape America’s rising nationalism. Ever- -distant Russia and China are marching further away to their own drumbeat, both headed by strong nationalist leaders. We’re seeing our close U.S. allies, Japan and Turkey becoming more independent and autocratic. Closer to home, the European Union continues to disintegrate in slow motion. Greece’s imploding bankruptcy will soon claim its financial membership to the EU. Followed by the freefall collapse of Italy’s banking. However, the coup de grĂ¢ce will come on May 7, when France selects one of two rightwing contenders—no way Brexit, no way Trump, take away Italy, take away France—the fate of the EU will be sealed. But we have our own problems here in the US.

A class war has erupted, pitting older adults against the young and the military-industrial complex. As dramatic as this sounds—picture flash mob with walking canes in the air in lieu of pitchforks—the facts are starkly sobering. With the election of Donald Trump, the crystal ball has long been broken. Little conjecture is required however, as we have been inching toward a class clash for more than five decades. On January, it will culminate with a refreshed zeal. And now there is a public acceptance that “there will be blood’—the economic blood of the poor and elderly.

Trump’s “Contract with the American Voter”1 will, if fully enacted, bring an end to the Affordable Care Act (Obamacare), replacing it with Health Savings Accounts (HSAs). Obviously, serious repercussions will ensue for Medicaid—a joint state and federal government program—the backbone of Obamacare. Medicaid will be radically changed by giving states unfettered authority to decide what services they need to offer. The stark inequities that exist today across states will become even more unequal for services to the poor and aged. An immediate concern becomes the shift of funding for health care through HSAs. Since HSAs are not available for seniors on Medicare or those who are claimed as dependents, the replacement program will not serve them. With a ceiling of tax deferred contribution of $6,750 per month, rich middle-aged adults become the sole beneficiaries.

Clutching onto the coat tail of his master, Paul Ryan, the Speaker of the House during a limited surge in popularity, reignited his war on Medicare. Ryan—himself the beneficiary of Social Security survivors benefit as a young adult—wants to “modernize” Medicare—the Federal Government’s single most expensive program.   Within this program, the largest part is Medicare Advantage (MA). MA—a type of privately run, subsidized managed health care—consumes more than a quarter of Medicare’s total budget. Through MA, with a public option, the new administration can easily privatize Medicare.

Let’s face it, the details all seem terribly boring. And that is the beauty of this type of war—it remains imperceptible to most people. The war America faces remains nuanced, hidden because most people are looking for binary answers. The fact that it is fought with the money generated by and for older adults makes it that more obscure.

The finances of the U.S. government come not from Apple, Google, Goldman Sachs, Chevron, and other US industries and services that generate an annual turnover of $18.5 trillion—but from your average Joe. The poorest residents (not all of them citizens) pay for our government—a trend that started with Ronald Reagan and that has continued even through four administrations.  Both parties have colluded against the poor.

In 2016, most of the federal budget comes from Income Taxes (45% of total budget) it is quickly being overtaken by payroll taxes (35%). At one point in 2008, at the peak of the most recent depression, our payroll taxes became the primary source of income for the federal government. Out of all the economic activity of the United States, the federal budget was primarily funded by people’s contributions to their Social Security and Medicare. We need to let that sink in.

In contrast to this increasing reliance on our insurance payments to run the government, corporate taxes have been virtually abolished (less than 10% of our total federal budget).  In addition, estate, excise and all other types of taxes make-up less than 10% of the federal budget.  Payroll taxes—which comprise 15.3% of earnings which is shared equally by the employee and the employer—are not meant to be taxes, but to contribute to our insurance funds (hence why it is called the Federal Insurance Contribution Act-FICA). But the rich do not pay FICA, as it is not imposed on investment income such as rental income, interest, or dividends. The rich are also protected from paying their fair share of FICA—payroll taxes.  Because in 2016 we only pay part of FICASocial Security taxes (OASDI)on income of less than $118,500 (the amount remains constant at this level) the more you earn the smaller the percentage becomes. As such, OASDI taxes are regressive. Rich people, when they do pay payroll taxes, pay a smaller percentage then US residents who earn less than $118,500.

This would not be all bad, except that FICA funds which are supposed to be saved in trusts for our old age (OASDI-Old Age, Survivors and Disability Insurance) and medical coverage (HI-Hospital Insurance funds Medicare) are instead all spent as part of the budget, every year.

Numerous attempts to stop this misappropriation have to date failed. Allen Smith, a professor of economics, emeritus, from Eastern Illinois University has waged a valiant fight to publicize the illegality of how these funds are misappropriated. Starting in 1969 in the Johnson Administration, payroll taxes were co-mingled in a unified federal budget. To stop this and assure that these payroll taxes would be invested in Baby Boomers’ (1946-1964) benefits,  a law was needed. In 1990 the Omnibus Budget Reconciliation Act (OBRA) stopped the use of payroll taxes in the unified budget—the funds were designated as off-budget. But whether payroll taxes are calculated as "on-budget" or "off-budget" remains real only for accounting purposes—in practice, Congress spends payroll taxes, all of the annual budget, and then some each and every year.

As I said, it’s nuanced, except for the large amount of money involved. Payroll taxes are worth $1.07 trillion every year.

The budget clash involves increasing Federal discretionary spending by reducing mandatory spending. The mandatory budget is 60% of the total budget with $4.1 trillion. It is mandatory because there are some obligations that the government has to pay such as, social security, Medicare and also some military personnel costs. Mandatory budget was created in 1935 by the Social Security Act. In contrast, then there is the discretionary budget with $1.15 trillion. This budget is dependent on congressional approval and mainly funds military costs with 54% of discretionary budget. The transformation is to decrease the funds in the mandatory budget and move it to the discretionary budget. Hence the clash between spending on older adult and replacing it with military spending.

By becoming increasingly reliant on payroll taxes—while at the same time reducing the solvency of Social Security and privatizing Medicare—the incoming administration will directly assault poor older adults. Especially with the privatization of Medicare. Health insurance companies are quickly aligning themselves for this bonanza. They are busy consolidating to gain a monopoly. For now, the Justice Department continues to opposing  the mergers between Anthem and Cigna and between Aetna and Humana.  WellCare Health Plans has also announced its intention to buy Universal American. In less than two months, these mergers are likely to be approved and Medicare Advantage will be their prize. Medicare will be sold to the highest bidder, who will then have a monopoly on our health.

Although we cannot change this policy--which has been evolving for more than five decades--we can, however, make the system more solvent. Congress might adopt a policy of greater equity in the system if it brings more money. Elimination the ceiling for taxing Social Security would represent one big step. Although previously, Medicare (HI) taxes had the same restriction as Social Security, Bill Clinton passed a 1993 law removing the taxable maximum for Medicare--thus making all earnings subject to these taxes. Health Insurance taxes are therefore progressive, but still only represent 2.9% of the income compared to 12.4% of OASDI. By removing the ceiling for OASDI taxes and making it more equitable so that all income—including rental income, interest, or dividends are taxed—then payroll taxes morph into a more equitable income tax.  Which is how it is used by the federal government.

Arguments involving pitting of one generation against another are for show. The attack is on the poor and across all generations, since this administration will be selling-out our civic structure of care and social insurance. Our federal insurance payments benefit future generations. Whether couched as an income tax or a payroll tax, we deserve assurances that we are investing in our future as one nation.

© USA Copyrighted 2016 Mario D. Garrett