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.
References
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
