Long-Term Care Policy Design
In the previous chapter we learned why personal savings and assets, Medicare, and Medicaid are for most people not good ways to fund long-term care. Let us review why:
• Savings and assets. Because of the high cost, it is not realistic for most Americans to expect to be able to save the amount of money they would need to pay for long-term care, especially while trying to buy a home, and save for their children's education, and fund their own retirement. And those who do rely on their own funds to pay for care must often deplete most or all of the assets they have spent a lifetime accumulating, leaving little or nothing for a comfortable retirement or for a surviving spouse or other heirs.
• Medicare and Medigap insurance. While Medicare provides some benefits for long-term care services, these are very limited. Benefits for both nursing home care and home care are provided only for a short time to those needing skilled care to recover from an acute illness or injury. Medicare does not cover ongoing personal or supervisory care needed to cope with a chronic impairment. And neither Medicare supplement (Medigap) insurance nor Medicare Advantage plans provide any significant additional coverage for long-term care.
• Medicaid. The Medicaid program does pay for long-term care services. However, those who are not indigent must generally deplete their life savings and assets before they can become eligible for Medicaid, and while receiving Medicaid benefits they must usually spend almost all their income on care. Moreover, because many state Medicaid programs focus on nursing home care and because Medicaid does not usually pay providers as much as they get from private patients, care options are often limited for Medicaid beneficiaries.
But there is another approach to funding long-term care, long-term care insurance. A person can buy a long-term care insurance (LTCI) policy, pay premiums of a set amount, and when she needs care, she will receive benefits to help cover the cost.
All LTCI policies work in essentially the same way and have many of the same provisions. But there is also a great deal of variation, resulting from different product designs and optional features. In this discussion we will look at product design -- we will examine the different types of LTCI products consumers may choose from and learn how they differ. In the following section we will look at purchaser options -- the choices a consumer makes when she buys a particular LTCI product (such as how much she wants to receive in benefits or whether she wants a feature designed to protect against inflation).
Our discussion of LTCI product design will address these questions:
• Is the policy federally tax-qualified?
• Does the policy qualify for a state long-term care partnership program?
• What conditions must be met for benefits to be paid?
• What long-term care settings and services does the policy cover?
• On what basis are benefits paid?
• What rights does the policyholder have regarding renewal of the policy and premium increases?
Tax-Qualification and LTC Partnership Programs
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) established a class of LTCI policies: federally tax qualified (TQ) policies. To be tax-qualified, a policy must meet certain requirements, and owners of TQ policies enjoy certain tax advantages. Thus, in terms of tax treatment, there are two categories of LTCI policies:
• federally tax-qualified (TQ) policies (around 90 percent of the total") and
• nonqualified (NQ) policies.
Some of the requirements of tax-qualified policies are mentioned in this section and the ones that follows.
In addition, for an individual to be eligible to participate in a state's long-term care partnership program, her policy must meet certain requirements. So LTCI products can also be divided into those that qualify for these programs and those that do not. The requirements of partnership programs and the benefits of participating in them will be covered in depth later in this course. But we will mention here that to be qualified for a partnership program a policy must be federally tax-qualified.
To receive benefits under an LTCI policy, a person covered by the policy (an insured) must meet at least one of certain conditions stipulated in the policy, known as benefit triggers. There are two common types:
• Physical (or functional) impairment -- the insured's physical condition prevents her from performing a specified number of activities of daily living.
• Cognitive impairment -- the insured suffers from a serious cognitive condition such that close supervision is necessary to protect her health and safety.
These benefit triggers are used because they are the most reliable indicators of when someone needs long-term care and because they can be measured in a relatively objective way that leads to a high degree of accuracy and consistency in determinations of eligibility for benefits.
For an LTCI policy to be deemed tax-qualified under HIPAA, it must meet certain requirements in relation to benefit triggers:
• Standardized ADLs. HIPAA establishes six standard ADLs (bathing, dressing, toileting, transferring, continence, and eating) and precisely defines them. Tax-qualified policies must include at least five of these six and must use the HIPAA definitions. Also, they must define a physical impairment as the inability to perform at least two of the standard ADLs without substantial assistance from another person.
• Substantial assistance. A TQ policy may define substantial assistance in two ways. Hands-on assistance is the physical assistance of another person without which the impaired individual would be unable to perform the ADL. Stand-by assistance is the presence of another person within arm's reach of the impaired individual that is necessary to prevent, by physical intervention, injury to the individual while she is performing the ADL. For example, if a person cannot wash herself and must be washed by another, she needs hands-on assistance with the ADL of bathing. If, on the other hand, she can take a bath without any help but needs someone there in case she falls getting into or out of the bathtub, she needs only stand-by assistance. A TQ policy may require an insured to need hands-on assistance, or it may require only a need for stand-by assistance, or it may accept either standard, or it may use a more rigorous standard, but it may not use a standard less rigorous than stand-by assistance.
• The 90-day certification requirement.
A licensed healthcare practitioner must certify that the insured's inability to perform ADLs is expected to last at least 90 days. This provision is required because LTCI benefits are not intended for those unable to bathe themselves or dress for a short time while they are recovering from an illness or injury. (Medicare or medical expense insurance generally covers the care of those with temporary conditions.) There is no such requirement for a cognitive impairment; as such impairments are not usually temporary.
• Severe cognitive impairment. To qualify for benefits on a cognitive basis, the insured must suffer a severe cognitive impairment such that substantial supervision is needed to protect her from threats to her health and safety. A TQ policy cannot pay benefits for mild disorders such as the increased forgetfulness that often accompanies aging. HIPAA defines a severe cognitive impairment as a loss of or deterioration in intellectual capacity that is comparable to and includes Alzheimer's disease and similar forms of irreversible dementia and that can be reliably measured by clinical evidence and standardized tests.
• Medical necessity. In the past "medical necessity" was a trigger in many LTCI policies. In the context of long-term care insurance, medical necessity means that a physician determines that a person has a need for long-term care. But this is no longer considered an appropriate way of determining need and may not be a benefit trigger of a TQ policy.
Variation in Benefit Triggers
To a great extent, benefit triggers have become standardized, as tax-qualified policies must adhere to the rules described above.
But the few policies that are nonqualified may base benefit eligibility on other criteria (such as medical necessity). And even among TQ policies, there is room for some variation: Although most TQ policies include all six standard ADLs, a few include only five. Some TQ policies require the inability to perform only two ADLs, while others require three (requiring more is permitted but rare). Finally, under some TQ policies the insured must need hands-on assistance to qualify for benefits, while under others the less rigorous standard of stand-by assistance is used.
It should also be noted that while in most policies the benefit triggers for home care coverage are the same as for nursing home coverage, a few policies use different triggers for each.
Finally, in most cases, after an insured has met a benefit trigger, she must satisfy an elimination period before she can receive benefits. Elimination periods are examined in the following section.
Even if benefit triggers are met, an LTCI policy does not pay benefits if the need for long-term care results from a cause excluded by the policy. Such causes may include alcohol and drug abuse as well as illnesses or medical conditions resulting from participation in a felony, attempted suicide, war or service in the armed forces, or aviation if the insured is a not a fare-paying passenger. Mental or nervous disorders (except cognitive disorders of an organic nature, such as Alzheimer's disease) were previously often excluded, but this exclusion has become less common and is not permitted in several states.
Some policies limit the payment of benefits for preexisting conditions. A preexisting condition is a medical condition for which treatment was received or recommended within a certain period before a policy was purchased. This period is normally six months or less, and typically benefits are not paid for a preexisting condition for the first six months that a policy is in force. It is becoming much less common for insurers to exclude preexisting conditions in individual LTCI policies. Instead, they simply require applicants to disclose such conditions and underwrite the policy accordingly. In group insurance, in which there may be no underwriting of individuals or only very limited underwriting, preexisting condition exclusions are still used.
Policies also generally exclude services for which no charges were incurred. For example, if Medicare or another government program covers a service and the insured pays nothing, she cannot receive benefits for the service.
Covered Settings and Services
In terms of the long-term care settings that are covered, there are three main types of LTCI policies:
• Comprehensive policies cover both nursing home care and home healthcare. Most also pay benefits for care provided in assisted living residences and other residential settings and for a variety of home-based and community-based services, such as adult day centers. This is the most common policy type.
• Facility-only policies pay benefits only for care in a nursing home or only for care in a nursing home or other facility (such as an assisted living residence).
• A few insurers offer policies that cover only home health care, or only home care and community-based care.
Some comprehensive policies pay the same benefit amount for facility care and home care, while others pay different amounts.
And as mentioned, while for most policies benefit triggers are the same for facility care and home care, a few use different triggers.
An LTCI policy may be designed to provide benefits for the following services:
• Homemaker services and transportation. A policy may pay for help with household chores and transportation to medical appointments and shopping. Some policies pay for these services only if other home healthcare services (such as those provided by a home health aide, nurse, or therapist) are needed. For other policies, the only requirement is that a benefit trigger be met.
• Informal caregiving. Some policies pay a benefit when a family member or other informal caregiver provides care to the insured. Others pay for the training of an informal caregiver.
• Respite care. Most policies cover paid services needed for a short period so that a family caregiver can take a break. For respite care benefits to be paid, the insured must meet a benefit trigger, even if she is being cared for by a relative or other unpaid person and has not filed a claim for paid services. A policy may cover a certain number of days of respite care per calendar year (typically from 14 to 30), or it may pay up to a certain dollar amount per year.
• Bed reservation. Because of the high demand for beds in nursing homes and rooms in assisted living residences, a person can lose his place while he is in the hospital or away for some other reason unless he continues to pay for it while he is gone. Many policies pay the facility to hold the insured's bed or room during his absence. Some policies pay this benefit only if the insured is away for a specified reason (such as medical care); others pay regardless of the reason for the absence. (An insured might want to spend time with his family, for example.) Benefits are usually limited to a specified number of days (such as 20 or 50) per calendar year.
• Care coordinator. A care coordinator is a person (typically a specially trained nurse or social worker) who works on behalf of the insured to see that she receives the best care possible and gets the most out of the benefits her policy provides. For example, a care coordinator can identify the best local providers of the services the insured needs. He may also send regular care reports to family members, and a policy that pays for a care coordinator is especially desirable when the insured has no relative who lives nearby and can look after her welfare. Some insurers maintain networks of contracted care coordinators and provide their services to insureds free of charge. In other cases, the insured hires a care coordinator himself, and the insurer pays benefits to cover the cost.
Some policies also pay benefits for such things as home modifications, durable medical equipment (such as wheelchairs), and medical alert systems. Many policies include an alternate plan of care provision (also called an alternative care benefit, supplementary care benefit, emerging trends benefit, and other names). Under this provision, the insurer may pay for a variety of goods and services not specifically covered by the policy. For example, an insurer might pay for home enhancements such as bathroom alterations, handrails, and ramps to enable a person to safely remain at home instead of going into a nursing home. Or an insurer might cover long-term care services that are not mentioned in the policy because they had not been developed when it was written. In this way an alternate plan of care provision makes a policy more flexible and helps keep it from becoming obsolete. Generally, for benefits to be paid for an item not specified as covered in the policy, three parties must agree -- the insured, the insured's physician, and the insurance company.
LTCI policies normally have a set dollar amount of benefit per day or month. (A few policies have a weekly benefit.) But there are three models in terms of how the daily or monthly benefit is paid:
• reimbursement (or expense-incurred),
• indemnity, and
• disability (or cash).
The reimbursement (or expense-incurred) model is the most common. In this model, the insured is reimbursed for the expenses he incurs that are covered by the policy, up to the daily or monthly benefit amount. In other words, the daily or monthly benefit amount serves as an upper limit on benefits, and for this reason it is sometimes referred to as the maximum daily (or monthly) benefit.
Marianne has a reimbursement LTCI policy with a daily benefit of $200. For several months she receives home healthcare services costing $80 daily, and the insurer pays her $80 per day Later she needs more home care, and her expenses total $125 per day The insurer now pays $125 per day Still later she enters a nursing home where care costs $220 per day, and the insurer pays the full daily benefit, $200.
In the other two models, the full daily or monthly benefit amount is paid regardless of the actual amount of covered expenses incurred. Under the disability (or cash) model the benefit is paid when the insured meets a benefit trigger whether he is actually incurring expenses for long-term care services or nor. Under the indemnity model the insured must both meet a benefit trigger and be receiving services covered by the policy for benefits to be paid. The indemnity model is most commonly used for facility care only, with the reimbursement model applied to other types of care. The disability model is often used for non-facility care only, with the reimbursement or indemnity models applied to assisted living or nursing home care.
Norma has an LTCl policy that covers facility care on an indemnity basis and has a daily benefit of $200. For several months she receives nursing home care costing $150 daily; later she needs more care, and the daily nursing home charge is $180; still later she receives care costing $220 per day. The insurer pays the daily benefit amount of $200 for all days on which Norma meets a benefit trigger and is receiving services covered by the policy, regardless of the cost of those services.
Oliver has an LTCI policy that pays for home care on a disability basis and has a daily benefit of$150. For a several months he meets the physical impairment benefit trigger of the policy, but instead of receiving paid services, he is cared for by his daughter. Later he receives paid home healthcare services costing $80 daily, and still later he receives home care costing $125 per day. The insurer pays the daily benefit amount of$150 for all days on which Oliver meets a benefit trigger, whether he is receiving paid services covered by the policy or not, and regardless of the cost of any services may he receive.
Daily, Monthly, and Weekly Benefits
Many policies (especially newer ones) pay a monthly benefit instead of a daily benefit, and some policies pay a weekly benefit. A monthly or weekly benefit allows for greater flexibility in meeting expenses.
Joyce has a reimbursement policy with a daily home care benefit of $100. Her family provides much of her care, so on Saturdays and Sundays she needs no paid services. On Mondays, Wednesdays, and Fridays a home health agency provides services costing $150, and on Tuesdays and Thursdays the agency provides services costing $75. Her total expenses for the week are $600, but because she can receive no more than her daily benefit of $100 for anyone day of care, she receives $450 in benefits ($100 for Monday, Wednesday, and Friday, and $75 for Tuesday and Thursday) and must pay the other $150 out of her own pocket.
Now let us assume Joyce has a reimbursement policy with a weekly benefit of $700. Her weekly expenses fall below this amount, so she receives $600 in benefits.
A monthly or weekly benefit may cost slightly more than an equal daily benefit, but it can enable an insured to cover more services with the same benefit amount.
Comparing Reimbursement and Fixed Rate Benefit Models
Policies that pay on an indemnity or disability basis are attractive to consumers for several reasons:
• These models are easy to understand -- the insured knows exactly how much he will receive for each day he qualifies for benefits.
• They allow the insured great flexibility in choosing how to spend benefit dollars. An insured with a disability policy can use the money he receives any way he wishes. He might, for instance, use it to pay a family member to provide care, to pay a neighbor to provide transportation and homemaker services, or to make home improvements enabling him to continue living independently. He could even use the money for purposes completely unrelated to long-term care, such as paying the rent or meeting household expenses. Likewise, if the actual long-term care expenses of an insured with an indemnity policy are less than the benefit amount, he will have excess money that he can use any way he wishes.
• The documentation required for a claim is limited. While to receive benefits under a reimbursement policy, an insured must submit bills and receipts documenting the exact amount of his expenses, for an indemnity policy the insured must show only that he is receiving covered services, not how much those services cost, and for a disability policy he does not even have to show that, only that he meets a benefit trigger.
On the other hand, reimbursement policies also offer advantages:
• They tend to be less expensive than comparable indemnity and disability policies.
• The benefits of reimbursement policies are entirely tax-free, while benefits paid on an indemnity or disability basis above a certain amount may be subject to taxation -- discussed later in this Chapter.
• Under a reimbursement policy, if the entire benefit amount is not always paid out, benefits last longer. This is because, as explained later in this Chapter, LTCI policies pay benefits only until a lifetime maximum is reached.
Peter has an indemnity policy with a daily benefit of $250 and a lifetime maximum benefit of$200,000. For several years he receives nursing home care costing $160 per day. His policy pays $250 for each day he receives care, so his benefits last 800 days.
Paul has a reimbursement policy with a daily benefit of$250 and a lifetime maximum benefit of $200,000. For several years he receives nursing home care costing $160 per day. His policy pays $160 for each day he receives care, and his benefits last 1,250 days, over a year longer than Peter's.
As the above example shows, an insured with a reimbursement policy does not lose the difference between his benefit amount and the amount of his incurred expenses. This money remains available, and if the insured needs care for a long time, it will eventually be paid out. However, in the meantime the insurer is able to earn investment income from this money (which is referred to as salvage). Also, it is possible the insured may not need care long enough to claim this money in benefits, in which case the insurer would keep it. For these reasons, insurers generally charge less for reimbursement policies than for comparable indemnity and disability policies.
In the examples above, Peter's insurer pays out $250 every day, while Paul's pays out $160, leaving it with $90 per day. The insurer may eventually pay this money to Paul but it may not (if Paul does not need care for a long time), and in any case in the meantime the company earns investment income from it. Consequently, Paul's insurer can charge him less for the same daily benefit amount than Peter's charges.
For the insurer as well, each model has advantages and disadvantages. For a reimbursement policy, the bills and receipts submitted by the insured have to be reviewed and the amount payable calculated. When the indemnity model is used, it is only necessary to ascertain that a service covered by the policy was provided, and in most cases this means simply confirming that the insured continued to be a patient in a nursing home. No bills or receipts are involved in the disability model. Consequently, for these models the claims process is streamlined considerably and administrative costs reduced. These administrative savings can counterbalance some, but not all, of the savings insurers realize from salvage in reimbursement policies.
However, under the disability model there is a greater potential for fraud. An insured with a reimbursement policy has little incentive to file a claim if he does not really need long-term care, because he will receive no more in benefits than he can document that he has paid for services. On the other hand, an insured with a disability policy has much to gain by filing a false claim -- he will receive benefits dollars that he can spend any way he wishes. And because he does not have to submit bills showing he is receiving long-term care services, it can be difficult for insurer personnel to know if he in fact continues to meet a benefit trigger. Therefore, insurers offering disability policies may need to take more steps to detect and prevent fraud, such as arranging for frequent reassessments of an insured's health condition.
By law, all LTCI policies must be either guaranteed renewable or noncancellable.
If a policy is guaranteed renewable, the insurer must renew the policy (that is, continue it year after year) as long as the insured pays the premiums. The insurer may not decline to renew because of the insured's age, health, claim history, or for any other reason. Furthermore, an insurer may not increase the premium on a single guaranteed renewable policy, only on a group of policies. Specifically, an insurer may increase premiums only when it makes the same increase on all the policies of a certain class or form number that have been issued in a state, and only with the approval of the state insurance department. Approval is generally granted only when the claims experience of the class has been worse than projected. In short, an insurer cannot raise an individual's premium; it can only raise the premiums of a group of people when state regulators approve an increase based on the claims experience of the entire group.
A noncancellable policy, like a guaranteed renewable policy, cannot be terminated by the insurer unless the insured stops paying premiums. But unlike with a guaranteed renewable policy, a noncancellable policy's premium can never be increased under any circumstances. Because of this lack of flexibility, insurers must charge higher premiums for these policies. Noncancellable LTCI policies are rare and disappearing.
Under what circumstances may the premium of a guaranteed renewable policy be increased?
Other Policy Provisions
Protection Against Lapse
A person suffering from a physical or cognitive impairment may neglect to pay premiums and unintentionally let her LTCI policy lapse. There are two policy provisions intended to prevent this:
• Under a policy with an impairment reinstatement provision, if an insured who has let her policy lapse can provide proof that she had an impairment at the time, the insurer will reinstate the policy without requiring medical underwriting. Reinstatement must be requested and the premium paid within a specified amount of time after a lapse notice (typically five months).
• A third-party notification of lapse provision allows an insured to designate another person, such as an adult child, to whom the insurer must send a copy of a lapse notice. The insured makes the designation when she applies and must be notified every two years of her right to change the person designated.
Waiver of Premium
Under a wavier of premium provision, the insured does not have to pay premiums while he is receiving benefits for nursing home care or assisted living and, for many policies, also while he is receiving home healthcare benefits. Some policies begin waiving the premium as soon as the insured has satisfied the elimination period (discussed later), while others require additional time after the end of the elimination period before the waiver goes into effect.
The NAIC Models
The National Association of Insurance Commissioners (NAIC) has developed models for the regulation of long-term care insurance. These are the Long-Term Care Insurance Model Act and the Long-Term Care Insurance Model Regulation. The act and the regulation have been adopted, in whole or in part, by most states. The key points related to policy provisions are the following:
• Certain terms may be used in an LTCI policy only if they are defined as specified by the NAIC act or regulation. Examples are "home healthcare services," "personal care," and "skilled nursing care."
• Eligibility for benefits cannot depend on the insured having been previously hospitalized or having previously received a higher level of long-term care.
• Only certain exclusions are allowed. These include preexisting conditions and the other exclusions listed above under "Exclusions. "
• If one policy replaces another, any exclusions of preexisting conditions must be waived to the extent that similar exclusions were satisfied in the earlier policy. For example, if the new policy excludes conditions for which treatment was received within six months before the policy goes in force, this exclusion cannot be enforced if the insured has already fulfilled a six-month period for the previous policy.
• A policy must offer an inflation protection option. An added premium charge for inflation protection is permitted.
• A policy can cover only nursing home care, but it cannot cover only skilled care in a nursing home. All levels of care must be covered. Nor may a policy provide significantly more benefits for skilled care than for other levels of care received in a nursing home.
• The only allowable renewal provisions are guaranteed renewable and noncancellable.
• A policy must have a third-party notification of lapse provision.
• A policy must offer a nonforfeiture optIon.
• A policy must have an incontestability clause. This clause limits the insurer's right to contest the policy based on misrepresentations made in the application.
As stated above, most states have adopted the NAlC models, but some have adopted them only in part and others not at all. And different states have adopted different versions. (Several versions have been developed over time by the NAlC.) Consequently, not all the rules listed above apply in every state. Also, in many regulatory areas the NAlC models provide only general guidelines within which each state must develop its own specific rules. Finally, some states have enacted additional laws and regulations governing long-term care insurance that are not based on the NAIC models. For example, some states require that certain types of care be covered (for example, home care as well as nursing home care), and some states mandate minimum benefit amounts and prohibit certain policy provisions. Thus, although the development of the NAIC models has created some degree of standardization among states in the regulation of long-term care insurance, there are nonetheless many differences.