Federal Requirements for Partnership Policies
The Deficit Reduction Act established requirements that an LTCI policy must meet to qualify for a qualified state long-term care insurance partnership (QSLTCIP) program. This discussion will examine these requirements. A few notes before we begin:
• Policies that meet the DRA requirements and any other requirements of a state partnership program are called qualified state long-term care insurance partnership (QSLTCIP) policies, or simply partnership-qualified (PQ) policies or qualified partnership (QP) policies. We will use the term "partnership-qualified" and refer to policies that do not meet the requirements as non-partnership-qualified (non-PQ) policies. We will also sometimes refer to QSLTCIP programs simply as partnership programs.
• The DRA requirements apply to both individual policies and group coverage. For simplicity's sake, in most cases we will use only the word "policy," but it should be understood that this also refers to certificates of insurance issued to individuals covered by a group policy.
• These requirements apply to states that are establishing new programs. They do not apply to the four original state partnership programs.
• We offer here only a summary of the DRA requirements. Not all of the DRA provisions related to partnerships are included, and not all details are covered. For the actual DRA text, see the appendix, "DRA Partnership Provisions."
All PQ policies nationwide must meet the requirements of the DRA. In addition, individual states may impose on PQ policies benefit mandates or other requirements beyond those of the DRA. However, if a state imposes such requirements on PQ policies, it must impose them on non-PQ policies as well. This provision is intended to minimize the differences between the two types of policies, making partnership policies easier for consumers to understand and facilitating their marketing. (However, differences are not completely eliminated, as non-PQ policies may not meet all the DRA requirements for PQ policies.)
To be a partnership-qualified policy, an LTCI policy must meet these general requirements:
• Tax qualification. A PQ policy must be a federally tax-qualified LTCI policy. This means that, in addition to the requirements outlined in this chapter, a PQ policy must also adhere to the requirements of HIPAA, described in Chapter Three. As noted, the large majority of LTC I policies today are tax-qualified.
• Issue date. To have PQ status, a policy must be issued after the date on which the state partnership program goes into effect (specifically, the effective date of the approved State Plan Amendment). Unlike HIPAA, which extended grandfathered status to LTCI policies already in force when the law went into effect, the DRA does not extend PQ status to policies already in force when a partnership program is established.
• State of residence. The insured must be a resident of the state sponsoring the partnership program when coverage first becomes effective. This does not mean that an insured could not later move to another state with a partnership program and enjoy Medicaid asset protection. Reciprocity is also discussed later in this chapter.
In addition, PQ policies must include certain consumer protection provisions, and they must meet certain age-based requirements for inflation protection.
Although the list of consumer protection provisions that a PQ policy must contain is long, it should be understood that these provisions are in fact included in most LTCI policies today. This is because they are drawn from the NAIC LTCI Model Act and Model Regulation, and as we learned in Chapter Three, most states have incorporated these models, in whole or in part, into their requirements for LTCI policies. In addition, many insurance companies, in order to maintain product uniformity across the various states they operate in, include these provisions even in states where they are not required.
Documentation and Disclosure
• Outline of coverage and guide to LTCI. An outline of coverage is a description of the benefits, exclusions, and provisions of a policy. It must be provided to each prospective insured at the time of application. The insurance laws of most states specify the format and content of the outline of coverage. Prospective applicants must also receive a copy of A Shopper's Guide to Long- Term Care Insurance, published by the NAIC, or the state's own LTCI guide if it has one.
• Certificates for group coverage. Insurance certificates issued to individual insureds covered by a group policy must include a description of the principal benefits and coverage provided; a statement of the principal exclusions, reductions, and limitations; and a statement that the group master policy determines the governing contractual provisions.
• General disclosure. The policy must include disclosure provisions regarding renewability, the payment of benefits, limitations, conditions on eligibility for benefits, tax consequences, and benefit triggers.
• Disclosure of rate increases. The policy must disclose whether the insurer has ever had any premium rate increases on this or other related policy forms. A5 we have learned, under a guaranteed renewable policy, the insurer can increase the premium for a group of insureds based on claims experience with the approval of the state insurance department. This requirement allows the consumer to know whether the insurer she is applying to has done this in the past.
• Replacement coverage. The application must contain certain questions designed to ascertain whether the applicant has any other long-term care insurance in force and whether the policy being applied for is intended to replace other coverage.
• Home and community care benefits. If a policy provides benefits for home and community care, these benefits must be at least equivalent to one half of one year's nursing home coverage. For instance, if the nursing home daily benefit of a policy is $180 and the policy covers home and community care, the total benefits available for home and community care must be at least $32,850 ($180 times 365, divided by half, equals $32,850).
• No hospitalization requirement. The policy may not require that an insured have a hospital stay before he can receive benefits. (Some older LTCI policies, reflecting Medicare benefit eligibility rules, did not pay for nursing home care unless the insured had a prior stay in a hospital.)
• Extension of benefits. The policy must include an extension of benefits provision that requires that nursing home benefits be paid even if the policy lapses provided the insured began receiving benefits prior to lapse and the nursing home stay continues. (In other words, if an insured enters a nursing home and begins receiving benefits, she must continue to receive benefits as long as they last, even if she lets her policy lapse, unless she leaves the nursing home.) Note that since most policies today have a waiver of premium provision and so do not require an insured who is receiving nursing home benefits to pay premiums, this consumer protection provision is rarely necessary, but it is required nonetheless.
Exclusions and Limitations
• Permitted exclusions and limitations. The policy may include only certain exclusions and limitations, as specified in the NAIC Model Regulation and listed in Chapter Three.
• Preexisting condition exclusions. If the policy contains a preexisting condition exclusion, this must be clearly indicated. The insurer may exclude only conditions existing six months or less before the policy's effective date, and it may not deny benefits for the condition for more than six months after the effective date.
Renewal, Replacement, and Termination of Coverage
• Renewability. The policy must be guaranteed renewable or noncancellable.
• Replacement of group coverage. If an employer replaces one group policy with another, the new coverage must be offered on a guaranteed issue basis (without underwriting) to everyone covered by the old coverage. The replacing policy may include a preexisting condition exclusion only if the old policy did, and it may not be more restrictive than that of the old policy. Also, if insureds satisfied a preexisting condition exclusion under the old policy, they may not be required to do so again under the new policy.
• Continuation or conversion of group coverage. An employee covered by an employer's group policy whose employment status changes has the right to either continue his group coverage or convert it to an individual policy providing the same coverage.
• Unintentional lapse. The policy must include a provision (such as impairment reinstatement) protecting the consumer against the lapse of her policy if she unintentionally neglects to pay premiums.
• Nonforfeiture. The purchaser must be offered the shortened benefit period nonforfeiture option. If the purchaser declines this option, the policy must provide contingent nonforfeiture benefits. (Both of these features are described in Chapter Three.)
• Post-claims underwriting. The policy must include provisions explicitly prohibiting post-claims underwriting. This is the practice of accepting an applicant for insurance without obtaining adequate information about her health status and health history, and later, when she files a claim, finding a reason to rescind her coverage based on information she neglected to provide in the application.
• Incontestability. An insurer has the right to rescind (annul) coverage or deny a claim by contesting the validity of the policy if the insured made misrepresentations in the insurance application. (For instance, if a person did not disclose in her application that she already suffered from Parkinson's disease, and a year after coverage began filed a claim, the insurer might be able to contest the policy.) However, an incontestability clause must be included in a PQ policy. This clause places restrictions on the insurer's right to contest, and these restrictions become more stringent over time:
If a policy has been in force for less than six months, the insurer must show that the insured made a misrepresentation that was material to her acceptance for coverage. (That is, if the correct information had been supplied, the insurer would have declined the application or offered coverage on a different basis.)
If a policy has been in force for at least six months but less than two years, the insurer must show that the insured made a misrepresentation that was both material to her acceptance for coverage and pertains to the condition for which benefits are sought. (If the insured files a claim based on arthritis, the misrepresentation must pertain to arthritis.)
If a policy has been in force for two years or longer, the insurer must show that the individual knowingly and intentionally misrepresented facts relating to her health. (This can be very hard to prove.)
The purpose of the incontestability clause is to give consumers confidence that a policy that they have been paying premiums on for some time will not be contested by the insurer when they apply for benefits.
Sales and Marketing
• Sales practices. The insurer and its agents must comply with training requirements and other safeguards designed to prevent abusive practices that could harm consumers, such as making unfair policy comparisons, selling excessive insurance, misleading consumers, and using high-pressure tactics.
• Advertising. The insurer must submit any advertisement (written, radio, or television) intended for use in a state to the state insurance commissioner for review or approval, as required by state law.
• Suitability. The insurer must assist the applicant in determining whether the purchase of long-term care insurance is appropriate for her, based on her financial situation and preferences. The applicant must sign certain forms attesting that this has occurred and return them to the insurer.
• Thirty-day free look. The policy must include the 30-day free-look period described in Chapter Three.
Sales conduct is discussed in Chapter 5
As mentioned, the consumer protection provisions listed in the preceding section are already required by most states and included in most LTCI policies. And the great majority of LTC I policies today are federally tax-qualified. Thus, so far, partnership LTCI policies do not differ from most other LTCI policies.
But in the area of inflation protection, PQ policies can differ significantly, as the DRA requirements go beyond those of HIPAA or the NAIC models. These requirements vary according to age at purchase (defined as the insured's age when the policy becomes effective).
• Individuals age 60 or younger must have "annual compound inflation protection."
• Individuals at least 61 but younger than 76 must have some type of inflation protection. This need not be automatic annual compounded increases; it could be simple rate increases, a guaranteed purchase option, or some other form of inflation protection.
• Individuals age 76 or older must be offered an inflation protection option, but they are not required to purchase that option.
The reason the requirements for PQ policies are particularly stringent in this area is that, if there is no adequate inflation protection for insureds who will likely need benefits years after they buy their policy, the purpose of the partnership program will be defeated. From the point of view of the state, if an insured's benefit amounts are not increased to cover increases in the cost of care, he is more likely to use up his benefits and qualify for Medicaid. And from the point of view of the insured, if his benefit amounts fall behind rising costs, he will pay more out of his own pocket even while he is insured, depleting the assets that he is trying to protect by participating in the program.
However, while inflation protection requirements are the main difference between PQ and non-PQ policies, this difference should not be exaggerated. Most LTCI policies today make available an automatic compound option or other type of inflation protection, and PQ policies are no different from non- PQ policies that include these features.
Indemnity and Disability Payments
The four original state partnership programs accept only reimbursement LTCI policies. Under the DRA, however, policies that pay on a reimbursement, disability (cash), or indemnity basis, or some combination of these, can qualify for PQ status. Specifically, the DRA states that benefits received on a disability or indemnity basis count in determining the assets that are protected from spend-down requirements. The DRA also states that policies that do not exclude benefits for a service to the extent that Medicare pays benefits for the same service, as disability and indemnity policies are permitted to do under HIPAA, are not disqualified.