Significant Financial Benefits Locked in LTCi Policies In Force Today
Why State Support for the Long-Term Care Insurance Industry Makes Good Financial Sense
Our nation’s long-term care system relies heavily on personal savings and Medicaid to fund services such as home care, assisted living, and nursing homes. Private long-term care insurance, as a financing option for LTSS, developed and evolved in the 1970-80s as life expectancy increased, and with it, a recognition that longevity increases the likelihood of needing LTSS before death. Yet, while the market experienced significant early growth, it has been on a twenty year downward spiral, as a result of an unfavorable (i.e., declining) interest rate environment, higher than expected benefit costs, and lower than expected voluntary lapse rates. Some carriers have exited the industry entirely, whether voluntarily or via insolvency. Those carriers who have remained in the market sell policies at much higher premium levels, thus putting policies out of the reach of most middle-income Americans. As well, to deal with policies that were sold long ago, many companies have turned to premium increases to remain viable.
Policy value is vulnerable to erosion in both instances.
To begin to understand the magnitude of the potential implications of benefit erosion, ATI Advisory and LeadingAge LTSS Center @UMass Boston analyzed roughly 19,000 long-term care insurance policies representative of policies sold in 1995, 2000, and 2005. For a subset of 6,000 of these policies, policyholders completed detailed surveys capturing socio-demographic and attitudinal information linked to the specific policies that they purchased in these years. Our analysis shows that, not only is the potential for lost benefit value quite large, the individuals affected may be more financially vulnerable and at risk of having to rely on Medicaid than previously expected.
We found that among those who bought their policies in 1995, 2000, and 2005, by 2020 there remained $28, $72, and $117 billion in benefit value available to these policyholders, should they need LTSS. Given that roughly half of them will likely need such care and services, this is a significant amount of value. (These estimates take into account individuals who may have died over the period or dropped (voluntarily lapsed) their policy).
Further, we found that the financial risk profile of policyholders has shifted quite significantly over time. The individuals buying policies in the 1990s are more likely to be financially vulnerable than purchasers in the mid-2000s. They are also at greater risk of spend-down to Medicaid in the absence of the long-term care insurance coverage.
These findings point to an important opportunity for state policymakers to adopt policy and regulatory approaches to support the retention of benefit value in current policies. Doing so would help to protect states’ and individuals’ financial resources.
Medicaid programs face risks ahead that they can ill afford, if private policies in force today, particularly policies sold in the 1990s to middle-income buyers, are reduced or canceled through carrier insolvency. In such instances, there may be significant unfunded liabilities, which the state guaranty funds will have to manage. While state guaranty funds serve an important backstop, in the current model, it is not clear that reserves are strong enough to withstand the requirements needed to support these policyholders. This suggests a potentially significant risk to Medicaid budgets. In the face of this, states should move proactively to protect their budgets and residents.
The good news is that the National Association of Insurance Commissioners (NAIC) has recognized the financial risks associated with the in-force policies and formed a task force focused on improving protections and options for consumers, with several subgroups forming in the summer of this year to address reduced benefits options, multi-state rate review, and financial solvency. States need to also consider alternative ways to finance long-term care outside of private insurance and the Medicaid program.
Like so many things, COVID-19 heightens the need for intense focus on addressing our regulatory system’s ability to ensure that policyholders retain as much private long-term care insurance benefit value as possible. As this analysis shows, there’s too much money on the table to let it slip and too much at stake both for individuals and the largest public payer of care – Medicaid.