How the growth in LTC insurance impacts providers.

An overview of what today's developments mean for tomorrow

The question among long-term care providers over the most recent years has not been whether the government will reduce its reimbursement rates, but how drastic and where the reductions will be. In the interest of survival, long-term care providers have focused on maximizing revenues for Medicaid and Medicare patients. Increasingly, though, this game has been stacked against providers and has literally become a losing proposition. For what seem to be political considerations, the government apparently has a much greater inclination and ability to reduce long-term care benefits than hospital and medical benefits.

In the face of this gloomy outlook for the industry, there appears to be some hope on the horizon. With the decline in Medicaid and Medicare reimbursement rates, administrators have increasingly coveted private pay patients. Revenues for the average private pay patient generally average 30% to 80% higher than governmental reimbursement rates, with tremendous variance by state and facility type. A relatively easy conclusion to make is that a strategic goal of management must be to maximize the private pay occupancy. The growth of long-term care (LTC) insurance, as well as the accelerating trend toward more favorable tax treatment, provides some cause for optimism toward this end.

From 1991 to 1994, the number of LTC insurance policies doubled to 1.4 million, according to one study. In 1995, according to the Health Insurance Association of America, 517,000 new policies were sold. Overall, as an insurance product, LTC insurance is viewed as "immature." That is, there is a general belief in insurance circles that there is tremendous potential for further growth of the marketplace. A natural question a nursing home administrator may ask is, "When will this transformation of the insurance market impact the distribution of private pay and Medicaid patients?"

Unfortunately, the nursing home industry can expect changes in the distribution to be gradual. The average age of issue for individual LTC policies is approximately 68 years, while the average age of entry into skilled nursing is approximately 85 years. If the growth rates observed in the 1991-1995 period can be assumed to continue, we could expect the number of LTC policies held by the elderly to increase to 3 to 5 million policies over the next ten years. Much growth will depend on the results of the Kennedy/Kassebaum legislation Congress adopted last year, which included tax deductibility of LTC insurance premiums for insureds and employers, 401(K) special withdrawals for LTC insurance premiums and Medicaid spend-down exemptions.

Basically, in my view, there are two segments of the population who, under any scenario, will not purchase LTC insurance policies:

* The lower economic class of the elderly simply cannot afford the additional expense; we estimate that this segment represents approximately 20-25% of the elderly.

* The upper economic class of the elderly have sufficient income and wealth to preempt the financial security needs met by LTC insurance; these individuals will self-insure their potential long-term care needs. We estimate that this segment represents approximately 15-20% of the elderly.

Therefore, the maximum LTC coverage of the elderly can be expected to be approximately 60%.

Expectations of further growth in the number of covered individuals under LTC policies is based on several factors, including projected demographics, growing acceptance of LTC policies, the financial resources of the elderly, fear of Medicare/Medicaid plan changes and product evolution.

With respect to projected demographics, it is clear the United States is aging and, in terms of percentage growth, the over age-85 population is the fastest growing segment. Further, by the year 2020, up to 15 million senior citizens in the US are expected to be disabled, up from 8 million just two years ago. As for financial resources, the current percentage of elderly who are covered under LTC policies, compared with those who have the resources to afford them, pales in comparison to other insurance products, such as Medicare Supplemental insurance. Medicare/Medicaid fears speak for themselves these days, and product acceptance is reflected in a growing recognition of LTC policies as a valid instrument to provide financial security for the contingency of long-term care needs.

In some ways, this last is a "chicken or the egg?" situation: As the market grows, the product becomes more familiar and more acceptable. The LTC product will also become more affordable and improve as a benefit to the consumer. While most current LTC policies are expected to pay out 60% to 70% of premiums in medical benefits, as distribution expenses are lowered in a larger market, future policies can be expected to have a greater portion of premiums paid out as benefits (as insurers reduce acquisition costs). Insurance growth will also be triggered by a public seeking to avoid the bottom tier of long-term care.

It seems very possible that further reductions in government-sponsored long-term care programs will essentially create a two-tiered delivery system, consisting of the "haves" and "have nots" (and some experts would argue that this system has already emerged). The "have nots" will receive inferior care in the further-decimated government programs of today. The "haves" will be financially positioned to receive a higher level of care at their preferred skilled nursing facilities. This group will include policy holders of long-term care policies. Changes in Medicaid eligibility and spenddown rules could also trigger LTC insurance growth.

Further product innovations are and will be taking place in the long-term care insurance marketplace. These will include the introduction of managed care and preferred provider concepts commonly found in acute care. Several national nursing home chains and insurers probably will partner to develop long-term care policies similar to point-of-service (POS) products currently available for acute medical needs; Vencor, the nation's second largest nursing home operator, and the CNA insurance company recently announced a joint venture, for example. These policies will pay greater benefits to insureds who use in-network providers compared to insureds who opt for an out-of-network provider. Managed care policies have had a drastic impact on the delivery of basic medical care and can be expected to have an equally drastic impact on the delivery of long-term care. It will become important for providers to become part of these delivery systems as their portion of the marketplace grows.

LTC Insurance Impact: A Sample Facility

Let's look at a simple example of an 84-bed skilled nursing facility that can reasonably expect, in today's market, to have average occupancy of 10 private pay patients and 70 Medicaid patients. Average bed cost is $100 per day and Medicaid reimbursement is $96 per day. Assuming a corporate profit target of 3%, this would require a private pay rate of $152 per day.

Forecasting based on the trends we have discussed, the expansion of the elderly covered by LTC insurance has allowed the facility to replace 10 Medicaid patients with 10 private pay patients. If we assume everything else remains the same, the facility's profit margin increases from 3% to 10%. On the other hand, if management decides that a 3% profit margin is reasonable, then the private pay per diem can be reduced from $152 to $124, thus further promoting the likelihood of the nursing home broadening its marketing base and attracting additional private pay patients.

Conclusion

Clearly the nursing home industry has a vested interest in the growth of long-term care insurance. We can no longer count on the government to reimburse long-term care providers at a reasonable level. It is equally clear that LTC insurance will not be a short-term fix for the industry. LTC insurance does, however, offer some hope in addressing the industry's dependence on governmental reimbursement.

All in all, I would urge state and national nursing groups to be more active in their support of legislative efforts to expand the affordability of long-term care insurance.

David Bond, FSA, MAAA, is a Fellow of the Society of Actuaries and a healthcare consultant specializing in long-term care for Ernst & Young LLP, Baltimore, MD. For further information, [phone].