Hope for a healthy marketplace: The nation's financially stressed long-term-care system needs an environment more friendly to private payors and private providers. (Life/Health).

Insurers have trumpeted for years the potential of long-term-care insurance and the fact that federal law does not intend for Medicare or Medicaid to pay long-term-care bills, except for those of the poor.

So why does the product remain such a hard sell? Clearly, it is a product that could help solve the significant funding problem facing the United States as baby boomers begin to head into old age about 10 years from now. The problem, however, appears to go beyond the products themselves and how they are sold. At the heart is the political and social environment in which insurers must operate, an environment that has eroded the financial viability of the nation's long-term-care system. Insurers and other stakeholders m the industry, both public and private, will have to find a way to turn the system into a healthy marketplace.

In the current environment, government continues to expand its funding of long-term care, providers and insurers cannot earn adequate profits, and public officials and politicians send mixed messages about the importance of individual responsibility and private funding of long-term care in the future.

Government began to fund nursing home benefits on a large scale in the 1960s under the then-new Medicare program. Initially government funding spawned nursing-home construction. But when providers took advantage of the funding pipeline, government capped nursing-home construction and reimbursement rates. When quality of care began to decline, government further squeezed nursing homes by mandating higher care standards without offering financial help.

On the patient side, government limited Medicaid eligibility to the poor, but it left loopholes in the restrictions. Today, attorneys help middle-class and wealthy patients to shift their assets, usually to children, so they can qualify for Medicaid subsidies, in effect forcing taxpayers to subsidize inheritances and subvert the intent of federal law. In 2000, only 27% of nursing-home revenues came from private, out-of-pocket payments, and only three-tenths of that amount originated from private insurance, according to the federal Centers for Medicare and Medicaid Services.

These strains tear at the fabric of the nursing-home business and retard development of assisted-living and home-care infrastructures, said Stephen Moses, president of the Center for Long-Term Care Financing, a Seattle-based nonprofit think tank and advocacy organization.

"We're almost there in crash and burn now," said Moses, who is attempting to build a coalition of long-term-care providers, insurers and financiers to address the national problems of paying for long-term care. "Eight major nursing-home chains are bankrupt, assisted-living facilities aren't filling fast enough to be profitable, and nursing-home stocks are in the tank since a 1997 law cut Medicare payments;' he said. Meanwhile, providers are unable to attract the quantity or the quality of the staff they need, and quality-of-care problems have led to tort liability suits. In turn, the litigation has put a crunch on the affordability and availability of liability insurance, said Moses.

Insurers acknowledge the problems in the system and the urgent need to address them. "It really is time for a rational approach across the segments of the entire long-term-care industry," said Ken Grubb, senior vice president of New York Life Insurance Co.'s Long-Term Care Division. "Absent that, the federal and state governments will be faced with a problem of enormous magnitude. Long-term care is the largest unfunded liability facing the nation today."

"The scary part is that by the time the boomers need it, you're going to be dealing with such bigger numbers and there might not be good solutions available then," said Loida Abraham, second vice president at John Hancock Long Term Care. "If by force of necessity in the future, the government limits funding to only the ones who need it the most, and the public is not ready for that, then it would be too late for the public to do anything."

Sharing the Cost

The Centers for Medicare and Medicaid Services reports that nursing homes in 2000 derived about 60.6% of their revenues from public sources, up from 49.2% 10 years earlier. In 2000, Medicaid paid 48.1% and Medicare 10.3%. (Medicare pays for the first 100 days in a nursing home following hospitalization, and at a much higher rate than Medicaid.) But Moses said these statistics are misleading, in that Medicaid recipients also must contribute most of their income--most of which comes from Social Security payments--toward their cost of care. Those out-of-pocket payments are also at the low Medicaid rate, regardless of how much Medicaid actually pays. Thus, nearly 70% of all nursing-home residents are on Medicaid, said Moses, even though Medicaid itself pays less than half of nursing-home costs. And because these patients on Medicaid tend to stay longer than other patients, nearly 80% of all nursing-home patient days are paid at least in part by Medicaid, Moses said.

Nursing homes are hard-pressed to earn a profit out of Medicaid reimbursements. To offset those low revenues, nursing homes raise the rates for private payors. On March 4, the Long Term Care Division of GE Financial released a survey reporting that the national annual average cost of nursing-home care has reached $54,900. Previous surveys by other organizations conducted only three or four years ago reported that average annual costs were about $35,000. GE reported that in the 10 most expensive areas of the country, the average has topped $80,000.

Shifting the cost to private payors is likely the reason for the explosive rise in average costs, said Joyce Ruddock, vice president of MetLife Inc.'s Long Term Care Group and a gerontologist. "It's a matter of balancing the equation," she said.

Another reason may be that prior to the advent of assisted-living facilities, which are populated by healthier private payors, nursing homes had many levels of care, said John Hancock's Abraham. "Now they have the more disabled group," she said. "I'm not totally confident Medicaid is the only reason for the increase."

Long-term-care insurance can ease he pressure on the government-financed system, an important goal as baby boomers begin to turn 65 in 2011 and increase the demand for services. But growth in sales has been mediocre it best, and consumers will continue to resist buying the coverage if they perceive the government is giving care away, Moses said.

Insurers introduced the first long-term-care policies in 1972, but by 2000, total net premiums for all policies in force was only about $4.45 billion, according to the American Council of Life Insurers. Premiums on new policies rose 11.2% from 1999 to 2000, but net premiums on the new policies were only $883 million. By comparison, annual premiums on equity-indexed annuities, introduced in the United States in 1995, already have reached nearly $6.5 billion. According to the ACLI, insurers collected $21.6 billion in life insurance premiums in 2000.

Fewer than 10% of the elderly in the United States have bought long-term-care insurance, and coverage is "less extensive" among working-age adults, according to ACLI. The good news is that despite the slow progress in sales, the pool of potential buyers remains huge. But to make the product move forward, the industry will have to make it more appealing to working adults in their 40s and 50s, said Stephen Wood, a principal with Tillinghast-Towers Perrin and practice leader in long-term care and Medicare in Chicago.

Wood is skeptical that private financing of long-term care will ever be able to reduce the demand for government financing. "Here's the problem...Long-term-care insurance inserts itself into a narrow space between traditional health coverage and custodial care," he said. "It only kicks in after your health insurance stops paying, between when Medicare stops paying and Medicaid starts paying. It's designed to fit in between what government already covers."

What insurers need to do--"and it's very hard"--is to promote a better understanding of what long-term-care policies are to make them attractive to populations not in immediate need, Wood said. WellPoint Health Networks n California, for example, has bundled long-term-care coverage into its Medicare Supplement policy. Insurers already have bundled long-term-care coverage into life insurance policies and even into annuities, but those bundled products haven't been big sellers. Wood cited many possible reasons for slow sales: distribution channels, the wrong target population, inability to create a sense of need. Or, it could simply be the idea that a 40-year-old may not need benefits for more than 30 years and stands a better-than-50% chance of never needing them at all.

Carl Austin, managing senior financial analyst at A.M. Best Co., said insurers face problems of establishing distribution, lack of critical mass and the mispricing of older blocks of business. He predicted more consolidation in the industry. Austin said many insurers have learned that general insurance agents lack the expertise to sell the complicated products, and he suggested that larger insurers emphasize financial planners or long-term-care specialists. Many smaller long-term-care insurers have had a difficult time building capital, as the business is very capital-intensive. Exacerbating problems are the high commissions that insurers must pay on first-year business and increasingly punitive reserve requirements. Insurers with the strongest positions in the industry are GE Capital Assurance, John Hancock, Aegon, CNA, UnumProvident and MetLife, according to consulting firm LifePlans Inc., Waltham, Mass.

Deep-Seated Problems

Moses sees the problems going much deeper. He talks about an array of forces from the government to advocacy groups that fight to maintain or expand government financing. "Advocacy groups almost never encourage personal responsibility and almost always champion publicly financed programs," Moses wrote in his report, "The LTC Triathlon: Long-Term Care's Race for Survival."

"Their dependent populations usually include genuinely and innocently needy people who deserve everyone's concern and compassion. Unfortunately, the advocacy groups also promote the interests of a much wider and non-needy clientele who merely want something for nothing at others' expense," he wrote.

To counter these well-organized and well-financed forces, Moses' center is trying to organize a coalition that sees private financing, including insurance, as the basic element to long-term solutions in long-term care. Despite the common interests of insurers, financiers and long-term-care providers, however, Moses has found that they barely understand each others' business and hardly communicate, based on interviews with 119 of them for his report. To bring them together, the center held two one-day "summit conferences," the first in August in Miami and the second in October in Boston. Each was attended by 20 to 25 people, and Moses said he did not make much progress.

Insurers offered a range of opinions about Moses and his center's work. Ruddock said Moses and the center "are right on the mark" and a voice about the real issues. "They are being very bold and courageous by putting it out there in the matter-of-fact way they do," Ruddock said. "They're challenging government, insurers, providers and consumers to wake up and improve the situation. We have to work together?."

Ruddock also predicted that eldercare in the future will be what child care was in the 1980s and 1990s. "We used to look at child care as one reason women hit the glass ceiling," she said. "I look at long-term care as the next glass ceiling. We've come a long way in the workplace, but we're not going to not care for our parents. From an employer's perspective, long-term-care insurance is one of the best assurances against the loss of productivity?."

New York Life's Grubb said he supports the center, including Moses' efforts to bring private-sector stakeholders together. "The long-term-care insurance business is not only a wonderful opportunity for insurers, but it's a social issue," Grubb said. "It's critical we get the message out about what the exposure is and what the risks are, and to reach out to our partners in business is a worthy cause."

Over a long haul, he is optimistic about long-term care, but he said the short-term issues are "thorny."

Liz Georgakopoulos, president of Conseco Insurance Group, said Moses and his team are "purists fighting for their ideology." They have been "very pure advocates for the industry, and for a while, they made a difference" she said. "The 'but' is that the process they undertook is very long and lacking in fruit. In the meantime, the industry needs some attention."

Georgakopoulos said all of the three major stakeholders in Moses' Triathlon report--insurers, providers and financiers--are struggling to make money "None of us are making enough money now to continue to pour money into the industry as a goodwill gesture," she said. "So we're pulling away from Steve and looking for a much quicker-return sort of approach?."

Moses' experience is in federal government (he was a state representative for the Health Care Financing Administration and a senior analyst for the inspector general of the U.S. Department of Health and Human Services), and his focus is on the big-picture issues, Georgakopoulos said. But insurers and their trade associations-- the American Council of Life Insurers and the Health Insurance Association of America--are more focused on regulatory and legislative issues at the state level and the National Association of Insurance Commissioners, she said. The NAIC proposes and makes changes to model regulations that affect insurers every year. Meanwhile, attorneys have brought a series of class-action lawsuits over rate increases on old policies (some held by 90-year-olds) that were not adequately priced, which cause adverse local publicity that generates issues at the state level.

"The lawsuits have caused many insurers to exit the business and caused many others to slow down writing new business," Georgakopoulos said. "That kind of fight is mostly a state issue, a hot political topic for people running for office and fighting big, evil insurance companies. We're adopting a defensive posture at the state level to try to hold the economics."

Need for Action

Moses himself admits to being frustrated about his inability to prod private-sector stakeholders into unified action. Based on the two summits he has held, he said insurers are "scared to death" of providers, especially the assisted-living operators, because the providers tend to look at insurers as just another payor. They also don't expect much from insurers, because it will be 20 or 30 years before the bulk of policyholders go on claim. The early policies, meanwhile, which were restrictive in their range of benefits by today's standards, have fostered distrust, he said.

Insurers worry about adverse selection and induced demand. "They have completely unrealistic expectations of providers," Moses said, "They see greedy nursing-home owners that won't spend on staff."

The financiers knew little about long-term-care insurance. Moses said they have been focused on Medicare and Medicaid financing and on whether any given project can generate enough cash flow to pay the financing. "They weren't looking at the gradual deterioration over time in Medicare and Medicaid," said Moses of financiers at a National Investment Center meeting he attended three years ago. "That's why they got caught with their buildings up and their pants down when the 1997 Balanced Budget Act cut funding."

Looking for Handouts

Lacking a unified front and common purpose, trade associations of the private-sector groups go to Congress "with hat in hand for handouts;' said Moses. Providers want higher reimbursements from Medicare and Medicaid, which is not likely in this era of tighter budgets. The insurers' "whole focus" is on above-the-line tax deductibility for long-term-care insurance premiums.

"I'm in favor, but it costs government money," said Moses. "The bottom line is the same; government fails to collect, or it spends. It had a chance last year, but it's a whole different ball game this year."

The center's solution is LTC Choice, a proposal that gives middle-income families a way to be private payors. LTC Choice would require the government to set up a line of credit to pay for long-term care secured by the patient's estate, including the home. Eighty percent of seniors own their homes, and 80% of those own them free and clear, for a total of about $1.5 trillion in home equity, said Moses. Government or government-backed securitized private investments would then pay the bills, and upon the death of the patient, enough of the estate would be liquidated in order to be reimbursed. The choice part is that more people probably would buy long-term-care insurance to avoid the line of credit. Moses views LTC Choice as a "soft landing."

Wood of Tillinghast-Towers Perrin had some doubts about LTC Choice, calling it "another version of spend-down," which the government already technically requires. "People already pay for long-term care by tapping into their estates and assets," he said. "The question is whether you should formalize this to encourage purchases of LTC policies. The only way to change the current system is to force people not in need of long-term care to participate in the pool."

Wood suggested it would be more politically feasible to entice insurance prospects with tax deductions or credits or to let them use their medical savings accounts to pay premiums. "You need to try to lend an air of legitimacy to the product," he said. "It suffers from image issues and the likes of late-night television ads."

Helping to legitimize long-term-care insurance has been an optional program begun a few years ago by CalPERS, the California Public Employees Retirement System, said Wood. Similarly, the federal government is beginning a program this spring to offer federal employees the option of buying long-term-care insurance supplied by John Hancock and MetLife Inc. at group rates. "Add some tax-code incentives, and there's no telling how this might take off," he said.

Wood also isn't sure LTC Choice would stop the Medicaid estate planners. "They are highly motivated, and they would only be more active with a line of credit in effect on estates," he said. "Government has tried to close the loopholes, but it's really hard to do.

"People really clever at this spend 20 years disbursing their assets. They sell the house to their children, and then the children lease it back to them. Government might be pretty good going back 36 months [from the time a person is institutionalized], but it's tough to go back further than that. There are legitimate reasons people give their assets away," Wood said.

Wood agrees that there is general distrust among private-sector long-term-care stakeholders, but he said "they are all over the map" when it comes to the issue of government financing. Some providers, for example, don't take any government money. He said another group--the purchasers--have a very high but misplaced trust level--a misguided expectation--that government will step in and take care of them.

No Managed Care

Perhaps the most glaring aspect of the lack of communication between insurers and providers is the lack of managed care. "LTC insurers don't even have a network, no preferred providers," said Wood. "All they pay is a dollar rate per qualified day. There's almost no communication with providers, and the only communication government has with providers is that it doesn't want to double-pay what the patient has already paid privately."

Abraham, however, said John Han-cock has negotiated discounts with about 7,000 nursing homes nationwide. Its newer products also help put insureds in touch with long-term-care advisers.

The long tail of long-term-care policies discourages a managed-care approach, Wood said. It's hard to design a network for 20 years from now, he said, and insureds could be living thousands of miles from where they now reside. He noted that some insurers are beginning to provide benefits through Medicare Plus Choice to people already in nursing homes.

John Fitzgibbons, partner in charge of managed care at KPMG LLP, said insurers will begin to use managed-care techniques in nursing homes "as soon as they have a larger percentage of the market. They'll try to negotiate the best rates and channel people to the appropriate facilities," he said.

Gary Corliss, president of AUL LTC Solutions (formerly Duncanson & Holt), a reinsurance manager that serves as the back-room operation for 20 insurers and pays claims on behalf of 40 insurers, said insurers can help solve long-term-care problems by expanding the kinds of coverages under which long-term-care benefits become available. "Most are stand-alone policies," he said. "We're working on putting together combinations with life policies, disability and annuities. He also said that expanding on care coordination would be useful, including disease management, but that some regulators are opposed to these efforts.

Personal Health Spending in the United States

Out of the $1.02 trillion spent on U.S. personal health in 1998, $117
billion was spent on long-term-care services.


Hospital                   37.6%
Long-Term Care             11.5%
Prescription drugs/        12.0%
Other medical nondurables
Other                      16.5%
Physician services         22.5%

Note: Percentage do not total 100 due to rounding. Although the data
capture most long-term-care spending, some expenditures, such as those
on Medicaid home and community-based services waivers, are not included.

Source: Urban Institute, 2001

Note: Table made from pie chart
Nursing Home Care Expenditures

Figures show percent of total distribution by source of funds.

                                                Third-Party Payments
                                                                  Public
                                                                Payments
                               Total    Private        Other       Total
          Out-of-Pocket  Third-Party     Health      Private      Public
Year           Payments     Payments  Insurance        Funds    Payments

1980              40.0%        60.0%       1.2%         4.5%       54.2%
1988              38.5         61.5        5.3          6.7        49.6
1990              37.5         62.5        5.8          7.5        49.2
1993              29.8         70.2        5.2          7.4        57.6
1994              27.0         73.0        6.3          6.0        60.8
1995              26.9         73.1        7.5          6.4        59.1
1996              25.5         74.5        8.4          6.3        59.9
1997              25.5         74.5        8.3          6.1        60.0
1998              27.7         72.3        8.3          5.2        58.7
1999              27.9         72.1        8.4          5.1        58.5
2000              27.0         73.0        8.1          4.3        60.6


                Public Payments

                       State and
Year      Federal (1)      Local (1)  Medicare (2)  Medicaid (3)

1980        32.0%          22.2%          1.7%         50.2%
1988        29.6           19.9           1.8          45.3
1990        30.0           19.3           3.2          43.9
1993        36.6           21.0           6.1          49.3
1994        39.0           21.8           8.5          49.9
1995        38.3           20.8           9.3          47.5
1996        39.7           20.2          10.4          47.2
1997        40.1           20.0          11.4          46.5
1998        39.4           19.4          11.6          45.0
1999        38.4           20.1           9.4          46.9
2000        40.9           19.7          10.3          48.1

(1)Includes Medicaid SCHIP Expansion & SCHIP

(2)Subset of Federal funds

(3)Subset of Federal and State and Local funds.

Source: Centers for Medicare and Medicaid Services

RELATED ARTICLE: Building a System That Works

Claude Thau says the Medicaid system "does two things wonderfully" for people who need long-term care. It pays for care for the poor, and it gives others a free loan so they won't have to sell illiquid assets, such as their homes. The interest-free loans last until their deaths or the deaths of their spouses or disabled children, and they allow patients to retain their homes and return to them should they no longer need institutional care.

Unfortunately, the free loan is not enough for some, who want government to pay for their long-term care and want to pass an inheritance to their children. And the free-loan system is not enforced by officials in some states, said Thau, president of Thau Inc., a consulting, wholesaling and advocacy firm dedicated to building a sound long-term-care insurance industry. Thau is also a veteran of more than 28 years with Transamerica Occidental Life Insurance Co., where he specialized in long-term care.

"You have a very unequal situation in the country," said Thau. "Some people--the attorneys--are distorting the laws, and some states are not doing the reimbursement under some circumstances. And if they don't, they're in violation of federal law."

Regulators in some states are actually advising people to take action necessary to qualify for Medicaid and are sending them to Medicaid estate planners, Thau said. The media, meanwhile, spotlight stories about "poor Sarah" not being able to leave her house to her kids because the government has a lien on it. "They don't look at the whole picture of Sarah having a 20-year free loan," he said.

The system has also bred some unanticipated dislocations. According to HCIA-Sachs LLC and Arthur Andersen LLP in a 2000 report on the nursing-home industry, traditional nursing homes are increasingly filled with patients who are more expensive to treat, even in the face of dwindling reimbursement, as younger and healthier citizens opt for adult day care, home care or assisted-living facilities. Stephen Wood, a principal with Tillinghast-Towers Perrin in Chicago, also points out that there are many people in nursing homes who no longer need to be there, but they no longer own their homes and they have nowhere else to go. Either they shifted assets to their beneficiaries or they lost their means to pay property taxes, he said. "The problem with the system now is that it encourages weird behavior," Wood said.

Thau said future public policy should reflect three guiding principles: that Medicaid and government in general cannot afford the potential long-term-care drain on their budgets, that private insurance is a key to solving the problem and that government financing of long-term care should not apply to the affluent.

Thau attended both of the "summit conferences" of private-sector financiers, providers and insurers sponsored by the Seattle-based Center for Long-Term Care Financing, and he currently serves as chairman of the center's board of directors. He suggests a "thought pattern" that private-sector stakeholders can all accept:

* Since people are still engaging in Medicaid planning and states are failing to perform asset recovery, a new approach to financing is needed. It can incorporate what long-term-care partnerships in Connecticut, New York, Indiana and California already provide: People who buy long-term-care insurance and then exhaust their benefits receive protection from having to spend down their assets in order to qualify for Medicaid.

* The benefits of long-term-care insurance are valuable enough to justify, from a financial perspective, an incentive from the government. The incentive could be important in "selling" the program politically. The center's position, however, is that an incentive should not be necessary.

* It is desirable to expand the use of government funding for the indigent to alternative living facilities and home care. But any such expansion before getting Medicaid planning and asset recovery under control would result in seriously higher Medicaid costs.

* A key goal should be that asset recovery is actually conducted by the states.

* Educating people at a young enough age about long-term-care insurance is important, so they will buy it when annual premiums are relatively inexpensive, such as at age 55.

* If people do not buy insurance, they would be eligible for a fully collateralized, privately funded, interest-bearing consumer long-term-care account once they have spent down all but their illiquid assets, and estate recovery would apply.

* If people buy insurance, they could qualify for asset protection potentially up to the claims paid from their policy. Depending on the circumstances, estate recovery could still apply.

* People who wish to maintain their privacy by not disclosing assets could simply choose not to set up their line of credit.

Asked about the political palatability of the proposals, Thau said: "Personal responsibility and providing care for the indigent are noble themes, which should be endorsed." He added that moving the financing out of Medicaid and increasing the flexibility of public spending on the poor should both be very attractive proposals.

Head of N.Y. Nursing Homes Champions Reform

Times are tough for nursing homes in New York State. Some 72% lost money last year on Medicaid patients, according to the head of the New York Association of Homes & Services for the Aging. Medicaid accounted for 78% of the patient days and 70% of the revenues. As homes report their financial woes, people choose to avoid careers in the field; the number of licensures for nursing-home administrators in New York dropped to 46 in 2000 from 151 in 1997.

"The LTC system is gradually crumbling," said association President Carl Young. "It won't collapse in a heap all at once, but it is being eroded by underfunding and the inability to attract quality staff. The status quo cannot possibly be sustained and still afford people the dignified care they deserve."

Young said the association's 560 members representing the spectrum of long-term-care facilities rely on Medicare and private-pay residents to make up for the Medicaid losses. They charge private-pay residents up to $75,000 a year, but the higher rates usually cause those patients to spend down their assets faster. "It's extremely frustrating to deal with some of the policymakers," said Young. "On the one hand, they become apoplectic about Medicaid, but they don't do anything to help private pay. And hardly a week goes by when there isn't a Medicaid estate-planning seminar in Albany. It's disgraceful for the middle class and well-to-do to use Medicaid, but when it comes time to push legislation to address the problem, the policymakers disappear."

Young attended one of the recent summit conferences sponsored by the Seattle-based Center for Long-Term Care Financing, and he supports the center's efforts to reform the long-term-care system. "Intuitively, we have to have a lot of common interests with the insurance community and the banking/reverse-mortgage community," he said. "We need to identify those areas of common interest. Then we have to pool our resources, financial and others, to find other ways to pay for long-term care."

The battle for financing reform will have to be fought on two fronts, Young said. One is educational. Providers and insurers will have to do a better job of presenting the issues to the public and the news media, particularly the electronic media, which Young said "has been in the dark" about long-term-care issues, costs and options. At the legislative level, he would like to see tax incentives for the purchase of long-term-care insurance along with a tightening of the law's loopholes "exploited by the various manipulators.

"You can't do it all with sticks as long as there are attorneys, accountants and other manipulators," he said. "But if we create enough positive incentives to cause the behaviors we want, for people to pay their own way, then the pursuit of loopholes becomes less attractive and feels less urgent for people. Right now, the fact LTC premiums are deductible above a threshold of 7.5% of adjusted gross income does not provide an incentive."

Young estimates that the country has a four- or five-year window of opportunity to fix the long-term-care problems. "In New York, the over-age-65 demographic is flat for five years, but then it's up for the next 30 years," he said. "This is not a problem that lends itself to Band-Aid fixes, but it's a resolvable problem. It's not as daunting as rooting out terrorism."