Long-term solutions: can partnership policies boost the sales of long-term-care insurance and cut future Medicaid costs?

Since 1992, four states--Connecticut, California, New York and Indiana--have implemented long-term-care public and private partnership programs. More than 200,000 long-term-care partnership insurance policies are in force today, and, the recently enacted Deficit Reduction Act of 2005 authorizes expansion of similar programs to other states. At least 16 more states are in the legislative process to allow these policies to be sold.

The financial goal of the partnership is to lessen the Medicaid burden on future generations. Demographic projections show that as the number of elderly in the United States increases, fewer younger taxpayers will be supporting them. In 2000, there were 4.9 working-age persons per person age 65 or over. Based on Social Security's estimate, this ratio is projected to decline to 2.8 in 2030. Changes in long-term-care use, service costs, personal assets, as well as inflation, undoubtedly will affect outcomes. Insurance benefit limits and inflation protection can have an impact on the likelihood of success of the long-term care partnership insurance program.

Policy Benefit Limits

The basic premise of the partnership is to allow participants to keep a portion or all of their assets and still qualify for Medicaid payments. In exchange, participants must purchase an approved insurance policy and exhaust the policy benefits before Medicaid payments begin. Medicaid will benefit if the insurance benefits defer or eliminate access to the federal program. A simplistic example illustrates how the choice of the policy benefit limit can impact the effectiveness of the partnership programs. This example is based on the dollar-for-dollar model used in Connecticut and California (partially adopted in New York and Indiana). Under this model, the amount of assets disregarded in determining Medicaid eligibility is equal to the total benefits paid by insurance.

As presented in Figure 1, a person with $200,000 of assets requires long-term-care services for 2,000 days at $150 per day, resulting in $300,000 total cost. The assets will be spent down before Medicaid pays the balance of $100,000. Suppose this person had previously purchased a partnership policy that provides a $150 dally benefit and a $200,000 benefit limit. The policy pays the first $200,000 and, after waiving $200,000 of assets, Medicaid pays the $100,000 balance. There is no Medicaid savings, but the participant successfully protected his or her assets.

Now, suppose the policy purchased has a benefit limit of $250,000, instead of $200,000. After the policy pays its maximum, Medicaid pays the remaining $50,000 and realizes a $50,000 saving. Again, the participant protected all of the $200,000 of assets.

Finally, suppose the policy only has a benefit limit of $150,000. When the benefit limit is reached, $150,000 of assets will be protected. The other $50,000 of assets will presumably be used to pay for long-term care services until the person qualifies for Medicaid. This leaves Medicaid with $100,000 of payments. Again, there is no Medicaid savings.

This example suggests that the purchased policy benefit limit should exceed assets in order for Medicaid to realize a savings. This also is beneficial to the participant to protect the assets as intended. The partnership programs are potentially most effective with participants having fewer assets, provided the policy benefit limits cover their assets. Without partnership policies, they would be vulnerable to receive Medicaid. On the other extreme, the partnership programs have virtually no impact on Medicaid for participants with very large amounts of assets. Even after they exhausted their policy benefits and protected like amounts, they would still have substantial assets remaining.

The current average issue age of participants is approximately 60. It will take an average of about 15 years from issue to claim. This relatively long period is the main reason the foregoing example would be different from real-life situations. Actual daily expenses may not match the policy daily benefit. Inflation may erode the value of the insurance coverage. Assets will change over time. Finally, Medicaid eligibility criteria and payments may also change. Luckily, certain measures, such as the requirements on minimum daily benefit and inflation protection provision, can allay some of the uncertainties. Therefore, having the policy benefit limit greater than assets is still a worthwhile proposition for all concerned.

New Premium Option

In order for partnership policies to provide optimal value to both Medicaid and participants, inflation protection, the appropriate policy benefit limit and daily benefit amount are highly desirable. Unfortunately, these features make insurance premiums expensive. The expensive premiums make insurance less affordable for people with low assets, who are at risk for Medicaid. This tension poses the biggest challenge for the partnership programs.

A new policy design that will soon appear in the marketplace may address the affordability issue. This design, referred to as the Flexible Increasing Premium Option (patent pending), has an increasing premium schedule from issue age to a predetermined attained age after which future premiums are level. Current regulations in virtually every state require that premiums be level after attained age 65. This premium pattern is set at time of issue and is unrelated to future unscheduled rate increases due to worsening experience.

Figure 2 is an example of a FIPO premium schedule for issue age 50 of a policy with $150 dally benefit, five-year benefit period, 90-day elimination period and 5% compound inflation. For comparison, the annual premium for a level premium policy with identical benefits is $1,526.

[FIGURE 2 OMITTED]

With one exception, FIPO does not affect the underlying benefit provisions of the policy (which should include inflation protection). The exception is an additional feature that allows the policyholder to freeze future premium increases at anytime with a corresponding freeze in both the policy benefit limit and daily benefit. This feature provides flexibility to the policyholders in the event of financial hardship. For partnership policies, this feature may need to be modified in order to satisfy the minimum daily benefit requirement.

The FIPO design offers several advantages to the participants:

Affordable Premiums

FIPO enables individuals to purchase insurance now, rather than later when premiums will be higher and they may be declined for coverage due to deteriorated health.

Lower Premium Outlays for Some

FIPO reduces policyholders' premium commitment to the insurance plan. For policyholders who lapse and for those who claim in the early policy years, the total FIPO premiums for the provided coverage are less than the total corresponding level premiums.

Consistent with Ability to Pay

For individuals who are actively employed, an increasing premium schedule better matches their future earnings, which also are expected to increase. When they retire on a relatively fixed income, the ultimate FIPO premiums are level.

Maximize Federal Tax Incentive

A portion of long-term-care insurance premiums can be paid through a Health Savings Account, which is funded by pretax dollars. The allowable premium is subject to a prescribed limit that varies by attained age. FIPO maximizes the HSA tax advantage because a greater proportion of the premium is deductible than in a level premium policy. The combination of HSA and FIPO makes the premiums even more affordable.

A characteristic of a level premium long-term-care insurance policy is that the premiums far exceed the expected claims in the early policy years. Most of the excess-of-premiums-over-claims are earmarked to pay claims in later years, when claims exceed premiums. This "pre-funding" is an intrinsic characteristic of level premium policies. Similarly, the FIPO premium pattern also provides for pre-funding. It does so at a lower rate in the early years than a level premium policy, but gradually catches up later. This different approach to pre-funding provides the affordability advantage to FIPO premium structures.

Policy Benefit Limits vs. Assets

The Connecticut Partnership Evaluation Study, conducted from July 1, 2003, to June 30, 2004, shows the relationship between policy benefit limits and assets:

The survey suggests that approximately 30% of policies (i.e., under $200,000 assets) have benefit limits greater than the participants' assets. Unlimited benefit policies (19%), which undoubtedly belong to the higher asset categories, also can be added to this group and therefore raises the percentage to 49%. According to the benefit limit criteria described above, about half of the new Partnership cases can potentially reduce future Medicaid spending because the policy benefits exceed the assets to be protected. This difference is an amount that Medicaid would otherwise be funding.

A fact that this figure is only at 50% in no way diminishes the success of the partnership programs. However, they are programs today with the glass half full. The other half could be greatly impacted by targeting the benefit limits above the amounts of assets and by utilizing a FIPO type of premium structure. The affordable initial premiums under the FIPO design can help the partnership in two ways. It can attract more participants with low assets to the partnership programs. It also makes it possible for all participants to elect the proper benefit limit and daily benefit.

In recent years, long-term-care insurance's sales focus has been switching from a product primarily for seniors to an asset protection vehicle for pre-retirees. As the instigator of the asset protection concept, the partnership programs have already made significant contributions to the long-term-care insurance market in areas such as consumer awareness and agent training. By fine-tuning policy benefits and exploring new premium methods, the partnership may well tip the scale to achieve its financial goal.

Key Points

* Partnership programs currently are being sold in only four states-Connecticut, California, New York and Indiana.

* Buying long-term-care partnership insurance policies allows participants to keep assets and still qualify for Medicaid payments.

* A few refinements in the programs can increase potential Medicaid savings.

Inflation Protection

A with other health-care costs, the cost of long-term-care services has increased over time. The Congressional Budget Office reported a 6.7% annual increase in average Medicaid nursing home reimbursement rates between 1997 and 2001. Inflationary cost pressure merits special attention for the partnership programs.

Consider the scenario of a $250,000 benefit limit. Assuming a 5% annual rate of increase in future long-term-care service costs, the $150 daily cost today will approximately double in 15 years and the total service cost is now at $600,000. Assume that the $200,000 of assets also is growing at 5% per year to $400,000 at the end of 15 years. As well, the benefit limit for a policy with a provision for a 5% annual compound inflation protection on benefits will double to $500,000. The following compares the impact of inflation on a policy with the inflation protection provision and a policy without:

With inflation protection, the policy benefit limit, daily benefit, service costs and Medicaid payments all doubled. The $400,000 assets are protected. Without it, the policy daily benefit is insufficient to pay the daily expenses (now at $300). The amount of out-of-pocket payments eventually reaches $250,000 thus depleting more than half of the assets. For this scenario, the inflation protection provision appears to have no impact on Medicaid payments. Rather, the provision protects the participant's assets against daily benefit shortfalls, up to 5% annual growth. For this reason, all partnership policies are required to have a 5% compound inflation protection provision for most issue ages. It would be misleading to promise asset protection to the insured participants only to have inflation eroding the assets because of significant out-of-pocket payments.

Participants should select the daily benefit amount with care to avoid shortfalls in the insurance amounts. They may be better off purchasing higher daily benefits than higher benefit limits, whereas Medicaid is better off with benefit limits greater than assets.

At a Glance:
Partnership Policies

Average age at purchase 56
59% are between 54 and 75 years of age
57% are female
43% are male
72% are married
88% bought comprehensive policies
97% were first-time purchasers

Statistics from October to December 2005,
as reported to the California Partnership for
Long-Term-Care

Contributor Bob Yee is the director of consulting services for Senior Health Management Corp. He can be reached at [e-mail].