Insuring an independent lifestyle: Consumer needs and government regulations have expanded long-term-care insurance to cover myriad services, but the evolution isn't complete. (Life/Health).

From its beginnings as "nursinghome insurance" in the 1960s, long-term-care insurance has been transformed into something very different. Today it might be called "lifestyle insurance," protection from the sort of helpless dependence that people endure when they must spend all of their assets on long-term care. The transformation has come about in a series of dance-like steps, as insurers followed the lead of consumer needs and preferences and responded to the changing tempo of government regulation.

Early Policies

Insurance to pay for long-term care began with nursing-home insurance, which appeared soon after passage of the legislation creating Medicare in 1965. These early policies were designed to supplement Medicare by paying the cost of receiving skilled care in a nursing home during the coinsurance period, when Medicare pays only 20%.

Eventually, nursing-home insurance expanded to cover periods longer than the Medicare coinsurance period, but otherwise it remained fundamentally the same throughout the 1960s and '70s and into the '80s. It paid benefits in the same circumstances as Medicare. The underlying assumption was that people needed insurance to pay for skilled care, not custodial care. When people needed custodial care, their families took care of them at home, or they moved to residential facilities for the elderly, often called "board-and-care" homes.

In the middle to late '80s, insurers started paying for custodial care and offering home care as an additional feature. The plans became what we call today long-term-care policies or comprehensive long-term-care policies. But the home care for which these original long-term-care policies paid benefits was limited to skilled care and personal care. For example, some policies had a schedule that stipulated a certain amount for a visit from a nurse, a different amount for a visit from a home-health aide and no benefits for housekeeping services. Others required home care to include at least one skilled visit per week.

The early home-care plans were difficult to adjudicate, because they were based on concepts that were unrealistic. For example, home-health aides performed housekeeping activities, which, according to the plan, were covered only if they were incidental to personal care. How could the insurer know how much of the four hours was actually spent on personal care?

To make long-term-care insurance better fit reality, insurers gradually changed the policies to cover a more comprehensive list of services, including skilled home care, home-health aides and housekeeping services. They limited the exposure by limiting the provider to a licensed home-health agency

Recognizing the Need

During the 1980s, stories in the media drew attention to how the family has changed so people cannot depend on family members to provide long-term care if they become disabled. Combined with the fact that people are living longer and are more likely to need long-term care eventually, these changes created a need for insurance to pay for long-term-care services.

The addition of home-care benefits and, later, adult day-care benefits, to the long-term-care policies made it easier for agents and financial planners to sell long-term-care insurance. During that same time, the Alternate Plan of Care provision was introduced, allowing plans to pay benefits for services that are not usually covered, if a qualified health-care provider has specified them as part of a plan of care.

One of the new care options that appeared during this time was assisted living, which provides custodial care in a less institutional, home-like setting. Another care option was to use independent care providers, who work through a registry and are not employees of a home-health agency. Paying for assisted living and independent providers were common early uses of the Alternate Plan of Care.

Employers Get Into the Act

The first employer group long-term-care insurance plans appeared in the late 1980s. By 1990, most of the players who currently offer group plans were in the marketplace.

Employer group marketing had some fundamental differences from individual marketing. The end buyer of group insurance is younger, at an average age of 43, than the buyer of individual insurance, whose average age is 66 (Health Insurance Association of America Research Findings, "Long-Term Care Insurance in 1997-1998," March 2000,) While individual buyers are retired people and those on the verge of retirement, group insurance buyers are working people. They are old enough to have begun planning for retirement, but young enough to view the insurance as another employee-benefit opportunity Contrary to initial expectations, employees and spouses--not retirees, parents and grandparents--make up about 90% of employer group business.

Group plans offer fewer choices than individual plans, because they are communicated through a different process. Instead of a one-on-one discussion between the agent and an individual buyer, group plans must be explained through mass communications. Too many choices--of plan design, features, waking period and so on--would make the plan too complicated for the employer to communicate and the buying decisions too difficult for employees to make.

Another difference between group and individual long-term-care insurance is that underwriting is usually more relaxed for group, making it easier for buyers to get insurance.

Changes in the '90s

In the 1990s, there was more interest in product differentiation, and relatively small things became differentiators. For example, individual products were differentiated by such things as benefits for transportation to and from the doctor. Group products distinguished themselves with variations such as a transition benefit that helps cover costs incurred during the waiting period.

The 1990s also saw the introduction of care management into group plans first, and then into individual plans. Originally, care management was supposed to help control costs by defining, early on, the services that a person really needed. For example, the plans assumed that if housekeeping services weren't necessary for a person receiving care in a family situation, they wouldn't be included in the care plan. This was supposed to keep people from using unnecessary services.

In reality care management did not produce the anticipated cost savings, probably because the way people use services is a matter of personal preference. Care management is still very popular, but the focus is no longer on the cost savings it might provide. Today, care management is seen as a service that helps people find the right services and the right providers to fill their care needs.

Tax Advantage

In 1996, the Health Insurance Portability and Accountability Act made premiums that businesses pay to provide long-term-care insurance for their employees a tax-deductible business expense. This tax advantage helped to make offering long-term-care insurance as an employee benefit more attractive to employers.

HIPAA, however, requires that a plan of care be developed by a licensed practitioner, making care management almost obligatory. The licensed practitioner can be the care recipient's physician, or a care manager. The care recipient needs to have that person develop a plan of care, which can specify services covered by the insurance plan, as well as any services not ordinarily covered by the insurance plan.

Growth in Employer Group Plans

While sales of individual long-term-care insurance have grown steadily, group products started out fairly strong, then waned during the years of the Clinton health-plan proposal. Employers were preoccupied with the changes they might have to make to their health plans, and they didn't have time and resources to spend on long-term care. There also was a widely held belief that the Clinton plan might pay for long-term care, making long-term-care insurance unnecessary.

But when employers saw that the Clinton plan would not be enacted, sales of group long-term-care insurance plans rebounded. For the first time, many midsize employers offered long-term-care insurance plans, indicating that this was no longer an employee benefit only for very large and very small employers.

Not only is the size of the employer group changing, the techniques that employers use to market long-term-care insurance to employees are changing. Instead of sending enrollment kits to all eligible employees, employers are focusing more on communicating the need for long-term-care insurance. They send out enrollment kits only when people request them. Typically, the employer sends out a letter and a brochure describing the need for long-term-care insurance, then follows up with meetings where the need is stressed again. A toll-free telephone number is available throughout the enrollment period for people to call with specific questions.

Employer marketing is expanding to other media, particularly the Internet. E-mail messages are a convenient way to communicate with employees. It also is becoming more common for employers who have their benefits on a Web site to link to the insurer's site. Insurer sites have been used primarily to provide information and applications that people can download. But with the use of electronic signatures, it will become more common for people to enroll online.

Long-term care and long-term-care insurance are being transformed by the needs of the large baby-boom generation. Some nursing facilities are changing to assisted-living facilities in response to consumer preferences, and the number of nursing homes is declining. This is happening just when the demand for care is increasing. The biggest concern is that there won't be enough care providers to meet the needs of the baby boomers, at any cost.

As a result, one of the likely trends is an increased use of a variety of care providers who are neither facilities nor home-care workers affiliated with a home-health agency. These providers might be affiliated with an agency that is not licensed as a home-health agency. They also might be associated with a volunteer program where people pay according to their means. Independent providers might work through a registry, which identifies people who are licensed to perform certain services, have the necessary bonding and insurance, and so forth.

As these independent providers become more prevalent, care management will take on an even bigger role, because the care recipient will need help to supervise the activities of the care provider and make sure the provider has the training he or she needs.

Another pattern emerging from concerns about the ability to meet the care needs of the baby boomers is increasing government pressure to find alternative funding for long-term care. The federal government currently has a program to inform the public that Medicare does not pay for long-term care and people cannot count on Medicaid, not only because it requires people to use up their assets but because it may not be available. Demand for care is increasing, and so is the strain on Medicaid budgets. At the same time, Medicaid is provided for those with the greatest functional need for services or with the least ability to obtain help or pay for services. The convergence of these trends means that Medicaid will be less likely to be available to people with modest income and/or care needs.

Creative Packaging

With the government putting more resources into educating people on the lack of funding for long-term care from government programs there is more pressure on people to find alternative funding, such as insurance. In turn, there will be more demand for changes in the tax regulations to allow insurers to mix tax-qualified long-term-care plans with other insurance products. For example, today the regulations allow life insurance and long-term-care insurance to be mixed together. If the tax laws continue to change, we could see more creative packaging, such as combining long-term-care insurance and 401(k) plans.

Many trends--more employers of diverse sizes offering long-term-care insurance plans, increasing rates of participation in group plans and increasing government efforts to promote reliance on insurance instead of government programs--are converging to suggest a future of growth in individual and employer group long-term-care insurance.

Other trends, such as increased use of independent care providers and declining availability of long-term-care facilities, suggest a need for long-term-care insurance with innovative features.

Cheryl McNamara is vice president and product manager of CNA group long-term care. Mary Madigan is in marketing communications at CNA Group Benefits.