to be accepted for coverage without underwriting (in the case of
an annuity/LTC hybrid), or with lower underwriting standards
(in the case of a life/LTC hybrid).
However, hybrids as designed today—with the daily benefit
achieved via a rider to the base policy—are simply not able to
generate as much coverage per dollar of premium as stand-alone
LTCI, and few carry such provisions as care coordination services
or international benefits, the desirability of which could increase
as baby boomers consider lower-cost retirement venues abroad.
Moreover, they usually require a substantial payment up front,
giving the insurer a large amount of capital with which to work.
It is no accident that hybrids are being marketed aggressively at
this time, given the repositioning of the industry, as they help the
insurer to hedge unwanted LTCI risk. Some who buy hybrids may
discover that the benefits offered under hybrid policies do not
match the levels of care and special provisions stand-alone policyholders enjoy. And the price tag would be prohibitive for many.
My own preference, as set forth in “Fresh Thinking on
Long-Term Care,” in the January/February 2014 issue of
Contingencies, is for the creation of a new private LTC insurance
exchange (the American Long Term Care Insurance Program,
ALTCIP) that would be sponsored and regulated by the federal
government under federal law but underwritten and administered by private insurance companies.
This exchange would feature a powerful website and decision tools with automated application processing to expedite a
large enrollment. However, it would go beyond the consumer’s
initial buying decision to ensure ongoing satisfaction by aligning premiums with emerging experience via a separate account
mechanism. A portion of profits would be awarded to insurers
and program administrators on the basis of performance metrics
evaluated and audited by federal regulators. Select features—
national brand promotion, ease of administration, and reinsurance
to reduce volatility and therefore capital strain—would help
make the exchange attractive to insurers.
Unlike the scene today—which is dominated by insurers using
professional distributors who are largely oriented to high-net-worth individuals—the ALTCIP would aim for the broad middle
market, reducing sales and administrative costs via an electronic
approach and bringing basic coverage to millions of baby boomers ahead of the LTC service demand curve without placing an
additional burden on taxpayers or increasing government debt.
The quest for products that offer real value and search for
effective ways of convincing individuals of their LTC needs will
continue. Insurers must adequately price the risks involved in
LTCI. At the same time, they must decide whether the volatility
they are facing is part of the business itself, with results that
may be spread, or the result of random variables that lie too far
outside the circle of known risks and therefore merit special
consideration from regulators.
Self-funding strategies based on new, more flexible rules for
taxation and withdrawals from IRAs, 401(k)s, and other popular
investment vehicles, will also certainly be welcome. Whether
viewed as a means of self-insurance or as a mechanism for pay-
ing LTCI premiums, these accounts could fill in some of the
gap in protection caused by LTC risk. However, most Americans
are under-saved as well as under-insured, and to ask savings ac-
counts to do more than generate retirement income—namely, to
finance the biggest impediment to a secure retirement short of
job loss or a catastrophic medical event—seems a stretch.
As a result, state governments will continue to face signifi-
cant pressure. Medicaid financing is unsustainable, and the
better part of Medicaid spending is based on federal revenue.
That many states are prepared to make changes is evidenced
by the decision of several to sell the liability of current Med-
icaid beneficiaries to private-equity firms that cap the risk via
managed care. This shift may help to balance budgets, but it
has proved problematic in Tennessee, Illinois, New York, and
elsewhere, where new scoring that raises the disability thresh-
old required to qualify for certain types of care has resulted in
some applicants being denied or cut off from care.
21 It is hard to
reconcile such facts with the conclusions of a recent study by
the Center for Retirement Research at Boston College, where it
is argued that the use of “corrected care status transition prob-
abilities” of those 65 and older going into nursing homes reduces
the value of private insurance, and that “given the availability of
Medicaid,” most single individuals should not buy insurance.
Finally, there is the federal government itself, which may
not see the economic growth it needs to reverse a longstanding trend toward greater and greater sovereign national debt.
We can expect to hear more on this as we head into the 2016
election. Indeed, 2016 may be a watershed year: Aging baby
boomers, increasingly worried about retirement security, could
create pressure for action such that cobbling together even a
flawed arrangement for financing LTC soon will trump a “
perfect” solution years out.
LTC finance will be driven by still another factor: rising
health care costs. A disproportionate percentage of total health
care costs is incurred at end of life. Steve Holland and others
have shown in a recent study that private LTCI “measurably
reduces” such expenses because it pays for hands-on assistance with personal care, resulting in improved medication
LTC finance will be driven by still another factor:
rising health care costs. A disproportionate percentage
of total health care costs is incurred at end of life.