In the previous chapters, we examined long-term care costs, long-term care insurance and learned about the advantages insurance offers. But what if a person does not buy an LTCI policy? If she needs long-term care, she must use her income, savings, and assets to pay for it, and if she needs care for a long time, she could exhaust these resources. Then she may have no other recourse than to apply for Medicaid. We have discussed the disadvantages to the individual of this situation, but it also presents a problem for the government -- the more people who rely on Medicaid, the greater the financial burden on this already strained program.
Thus, state governments have much to gain from encouraging individuals to provide for their long-term care needs by means of LTCI coverage. States have sought to do this in several ways, including offering tax incentives, targeting education and awareness programs toward consumers and employers, and sponsoring LTCI coverage for state employees and retirees. Another approach is long-term care partnership programs, and this is the focus of this chapter.
What Is a Partnership Program?
A long-term care partnership program is a program under which a state government modifies its Medicaid eligibility rules to give a financial incentive for the purchase of LTCI policies that meet certain requirements. These are called “Partnership LTCI” policies and their goal is to increase the number of people covered by private long-term care insurance and reduce Medicaid expenditures. The word "partnership" refers to the collaboration between the public sector (state government) and the private sector (insurance companies) in funding long-term care needs.
A partnership program works in this way: An individual purchases an LTCI policy that meets his state’s requirements. If he needs eventually needs long-term care, the policy benefits pay for it, which relieves the state Medicaid program of that cost. If, however, he should need extended long-term care that exhausts his LTCI policy benefits and he is forced to apply to Medicaid, he is not obligated to spend all the assets he otherwise would under regular Medicaid rules. Under what is called the dollar-for-dollar approach, he may keep assets equal in amount to the benefits he received under his partnership policy (in addition to any other assets he would have been entitled to keep). Moreover, these assets are exempt from Medicaid estate recovery and so are preserved for his heirs.
Susan chooses to not purchase long-term care insurance. She develops a physical impairment and needs long-term care services. Before she can qualify for Medicaid, she must spend all her assets on care except for $2,000 (her state’s asset eligibility limit) and a few noncountable assets. And when she does receive Medicaid benefits, she must enter a nursing facility instead of staying at home because her state provides only very limited benefits for home care. Furthermore, the nursing home of her choice does not have any Medicaid beds available, so she must go to a less desirable facility far from her family. Finally, after she dies any remaining assets are taken by Medicaid under the estate recovery rules.
John purchases an LTCI policy meeting the requirements of his state’s long-term care partnership program. He becomes physically impaired and needs long-term care services., John uses his LTCI benefits to pay for most of his care. This is better for John, as he does not become impoverished, and he does not have to deal with the limitations of Medicaid coverage. (He can be cared for at home, and if he does eventually have to enter a nursing home, he has a wide choice of facilities.) This is also better for the state, as it does not have to pay for John's care.
Kevin also purchases a partnership LTCI policy, becomes impaired, and receives benefits from the policy. But he needs care for several years, and he eventually uses up his policy's $200,000 lifetime maximum benefit. He is now forced to apply for Medicaid. However, because he bought the partnership policy, he does not have to spend all the assets he otherwise would have. In addition to any noncountable assets and the $2,000 of countable assets his state allows him to keep, Kevin can retain $200,000, the amount he received in benefits from his partnership policy. Moreover, this $200,000 is protected from Medicaid estate recovery and preserved for Kevin's heirs.
Clearly, partnership policies offer significant advantages to consumers. They may be of particular value to those who are unable to afford a large amount of LTCI coverage but have significant assets they want to protect.
Emily has a limited income, but she has some assets she would like to pass on to her son Ted. She cannot afford an LTCI policy with a large lifetime maximum benefit that would cover all her likely long-term care needs, but for a fairly low premium she can buy a partnership policy with a $100,000 maximum. She might not need more than $100,000 in benefits, but if she does, she can apply for Medicaid, and $100,000 of her assets will be protected and preserved for Ted.
An individual in these circumstances can even tailor the lifetime maximum to the amount of assets he wants to protect -- if, for instance, he wants to protect $150,000, he buys a partnership policy with a $150,000 lifetime maximum. In this way partnership policies offer an incentive to those of modest means to buy at least a small amount of LTCI coverage -- and consequently lessen their potential burden on the state.
However, partnership policies have their limitations. To mention only two of the most important, if a person exhausts his insurance benefits, it is not guaranteed that he will qualify for Medicaid, and if he does qualify, although some assets are protected, he must generally spend his entire income on care. These and other disadvantages are discussed in detail later in this course.
The Original Partnership Programs
Partnership programs began in 1988, when the Robert Wood Johnson Foundation sponsored demonstration projects in four states, California, Connecticut, Indiana, and New York. Eventually, these projects became permanent, and other states expressed interest in establishing programs of their own. But the federal Omnibus Budget Reconciliation Act of 1993 (OBRA 93) effectively halted the expansion of partnership programs. Under OBRA 93 any new programs would be required to apply estate recovery to protected assets -- that is, an individual with a partnership policy could retain assets as long as he remained living, but those assets would have to be taken by Medicaid after his death and could not be preserved for heirs. (The four state programs already in place at that time were exempted from OBRA and could continue to offer protection of assets after death.)
This rule, of course, made participation in a partnership program much less attractive for consumers, and consequently no new state programs were established for many years. However, the Deficit Reduction Act (DRA) of 2005 lifted this restriction, and as a result many states are currently establishing partnership programs. We will examine in detail the DRA and the new partnership programs, but first we will look at the original programs, which have continued to operate.
The Four Original State Programs
All four of the original states require that their partnership policies be federally tax-qualified, include an automatic 5% annual compound inflation protection feature, and provide comprehensive benefits (coverage of both facility care and home care). The four states also require partnership policies to provide at least a minimum daily benefit (this minimum varies by state and is adjusted annually). Each state also imposes other unique requirements.
All four state programs offer the dollar-for-dollar approach to asset protection, as described above. Indiana and New York also offer an alternative -- total asset approach -- which allows an individual with a partnership policy to keep all his assets, not just an amount equivalent to the LTCI benefits he receives. However, for a person to qualify for total asset protection in these two states, his policy must provide a certain minimum level of benefits.
Connecticut and Indiana have a reciprocity agreement, under which a resident may buy a partnership policy in one state, move to the other state and apply for Medicaid there, and receive dollar-for-dollar asset protection (but not total asset protection). Otherwise, an insured is entitled to Medicaid asset protection only in the state where he bought his policy.
The Experience in the Four Original States
One measure of the success of long-term partnership programs is how they have been received in the marketplace. This varies widely from state to state, but a significant number of partnership plans have been sold in all four states. In Connecticut and Indiana, they represent a substantial percentage of all LTCI policies in force. The administrative and reporting requirement imposed by the state appears to have a direct impact on the availability of partnership policies. If insurers find these requirements too burdensome, many may decide not to market partnership policies, and as a result fewer products are available, fewer agents are selling them, and fewer consumers buy them. Other factors include demographics, agent training, and the existence of programs for state employees and retirees, as well as competing non-partnership LTCI products sold in the state.
Another measure of the success is whether insureds are diverted from reliance on Medicaid for long-term care funding. A very small number of those holding partnership policies have exhausted their LTCI benefits and received Medicaid benefits, less than of 1 percent of the total. While it is difficult to know how many of these people would have gone on Medicaid if they had not bought a partnership policy, the experience so far is that partnership policies are keeping insureds off of Medicaid rolls.
A New Expansion of Partnership Programs
The generally positive experience of the four original partnership programs and the states’ continuing need to hold down Medicaid expenditures have encouraged other states adopt state partnership programs. The newly adopted programs have learned from the original states and the new programs tend to promote simplified administrative procedures, greater uniformity among states in requirements for product design and reporting, less difference in the regulatory treatment of partnership and non-partnership policies, and reciprocity among state programs. It is hoped that simpler and more uniform state rules will make it easier for insurance companies to enter the partnership market. Broader reciprocity thus would make partnership policies much more attractive to consumers, increasing the number of people who buy them.