State Long-Term Care Partnership Programs
In the last several chapters, we have examined long-term care insurance and learned about the advantages it 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 and those that follow.
What Is a Partnership Program?
In the course introduction , we briefly described the basic concept of partnership programs. A state long-term care partnership program is a program under which a state government modifies its Medicaid eligibility rules give a financial incentive for the purchase of LTC I policies that meet certain requirements, called partnership LTCI policies. The purpose is to increase the number of people covered by private long-term care insurance and so reduce the number who end up relying on Medicaid. 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 meeting the requirements of his state's program. Usually, if he needs long-term care the benefits of the policy pay for it and the state Medicaid program does not have to cover the cost. However, in the event that he needs long-term care for such a long time that he uses up the benefits of his LTCI policy and is forced to apply to Medicaid, he is not obligated to spend all the assets he otherwise would. Generally, 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 does 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 states 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 states Long-term care partnership program. He becomes physically impaired and needs Long-term care services. Instead of spending his savings and assets on care until he has very Little Left in order to qualify for Medicaid, 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 LTC I 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.
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 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. These projects received financial grants from the foundation to foster the growth of long-term care insurance in general and to develop partnership programs in particular. The participating states were also granted approval by the U.S. Department of Health and Human Services (HHS) to modify their Medicaid eligibility rules to make such programs possible.
These four demonstration projects became permanent programs, and other states became interested 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 this rule 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
We offer here a brief overview of the four original state partnership programs. For complete information, the reader should check with each state program.
All four of the original states require that partnership policies:
• be federally tax-qualified,
• include automatic 5 percent annual compound inflation protection (in New York there is an exception for purchasers over 80 years old), and
• provide comprehensive benefits (coverage of both facility care and home care).
The four states also require partnership policies to have a daily benefit of at least a certain amount; this minimum varies by state and is adjusted annually. Each state also has various other requirements.
All four state programs offer the dollar-for-dollar approach to asset protection, as described above and illustrated in the example of Kevin. Indiana and New York also offer as an alternative the 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 at least a certain amount 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
Have long-term care partnership programs been successful in the states where they have been operating for a number of years? One measure of success is how many partnership policies have been sold. This varies widely from state to state, but there are a significant number in all four states, and they represent a substantial percentage of all LTCI policies in force in Connecticut and Indiana. A major factor in the variation among states appears to be the administrative and reporting requirements a state imposes on insurers seeking to participate in the program. 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, the existence of programs for state employees and retirees, and the non-partnership LTCI products sold in the state.
A second important measure of the success of state partnership programs is whether those who participate are diverted from reliance on Medicaid for long-term care funding. In fact, an extremely small number of those holding partnership policies have exhausted their LTCI benefits and received Medicaid benefits, a fraction 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, this statistic is nonetheless a strong indication that the existing state programs are meeting their objectives in this regard.
A New Expansion of Partnership Programs
The generally positive experience of the original partnership programs and the continuing and growing need to hold down Medicaid expenditures have led to a movement to expand state partnership programs beyond the original four states. At the same time, there has been a desire to learn from the experience of the original states and promote some changes that it is hoped will enhance the success of any new programs. Specifically, the goals have been more simplified administrative procedures, greater uniformity among states in requirements for product design and reporting, less difference in the regulatory treatment of partnership and nonpartnership policies, and reciprocity among state programs. What are the reasons for these goals?
• Simpler rules and requirements that are the same or very similar across state lines and for both partnership and non partnership policies would make it easier for insurance companies to enter the partnership market. This would result in more partnership products available to consumers and a more extensive marketing effort, which should lead to many more people covered by partnership policies.
• Without reciprocity among state programs, the purchasers of partnership policies must be concerned that if they move to another state, they will lose one of the main advantages of their policy, Medicaid asset protection. Broad reciprocity thus would make partnership policies much more attractive to consumers, increasing the number of people who buy them.
The Deficit Reduction Act
The federal Deficit Reduction Act (DRA) of2005 (effective February 8, 2006) includes provisions intended to facilitate the nationwide expansion of state partnership programs and meet some of the other goals cited above.
These provisions can be summarized as follows:
• The requirement that any new state partnership program must apply the Medicaid estate recovery rules to assets protected under the program is lifted. All states may now establish new programs that allow participants to preserve assets after death.
• However, the DRA sets requirements for any new state program and for the partnership policies of these programs. This is intended to impose a degree of uniformity across states.
• The DRA promotes but does not require reciprocity among the new state programs. Specifically, reciprocity applies unless a state explicitly opts out. However, the degree of uniformity of programs and policies from state to state should facilitate reciprocity.
• New programs can protect assets on a dollar-for-dollar basis only. Total asset protection is not permitted.
• The four existing partnership programs are exempt from these new rules and may continue to operate as before.
In short, under the DRA each state can establish its own program under its own rules, but a certain amount of uniformity in programs and policies from state to state is imposed, and reciprocity is encouraged. The DRA presents states and the insurance industry with a tremendous opportunity to increase the number of people with LTCI coverage throughout the nation. .
Establishing State Programs
Programs that meet the DRA requirements are called qualified state long-term care insurance partnership (QSLTCIP) programs. If a state wants to create a QSLTCIP program, it must file a State Plan Amendment (SPA) with the Centers for Medicare and Medicaid Services (CMS), a part of the Department of Health and Human Services. An SPA is the vehicle by which a state seeks federal approval of changes in its Medicaid program. In an SPA establishing a QSLTCIP program, the state sets forth the proposed rules and requirements for its program as well as the date on which the program will become effective. CMS reviews an SPA and either approves it, denies it, or requests modification and resubmission.
The response of state governments to the changes enacted by the DRA and the opportunity they present has generally been enthusiastic. Idaho was the first state to have its SPA approved, and it formally launched its QSLTCIP program effective November 1, 2006. Several other states are expected to have programs in operation by mid-2007, and many more are taking active steps to develop a program or at least studying the issue.
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. The treatment of exchanges of non-PQ policies for PQ policies is discussed later in this Chapter.
• 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. Consumer protection and inflation protection are discussed in the sections that follow.
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 Six.
• 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 Seven.)
• 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.
Sales conduct is discussed in the following Chapter.
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 LTCI 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.
As we have seen, the Deficit Reduction Act establishes the framework for new state partnership programs, setting requirements that partnership-qualified policies must QSLTCIP programs-states have a good deal of leeway to develop their own programs as they see fit. States may impose requirements on PQ policies in addition to those of the DRA, as long as they apply the same requirements to non-PQ policies. And some of the provisions of the DRA leave room for interpretation and variation in how they are implemented.
In this chapter we will elaborate on and clarify some of the DRA requirements mentioned in Chapter 11, and we will look at how states are implementing these requirements. As more states move further along in the process of developing QSLTCIP programs, more information will be available. For the most current information for a particular state, the reader should visit the website of the state partnership program or the state Medicaid program.
A PQ policy must provide "annual compound inflation protection" to insureds who are 60 years old or younger when they buy the policy. But the DRA does not clarify what is meant by this term or stipulate what types of inflation protection qualify, so the states are setting their own standards that they believe comply with this provision.
The DRA does not specifically mandate the 5 percent compound rate that is required by the original partnership programs. Therefore, some states are likely to accept other compound rates (such as 3 percent) as well as inflation protection based on a consumer price index that increases annually on a compound basis.
Some states may accept a guaranteed purchase option (GPO) (described in Chapter Seven). However, for a GPO to qualify as "annual compound inflation protection," the offers of additional coverage would have to be made annually, and the amounts would have to be based on compounded increases in the benefit amounts.
Furthermore, states that allow GPOs may need to set rules for them. For instance, must increase offers continue for the life of the policy? (Under most but not all GPOs today, offers generally end if the insured becomes eligible for benefits or if he declines a certain number of offers.) And will a state require an insured to accept every increase offer that is made to maintain the PQ status of his policy? Or can he decline some offers as long as he does not decline so many that he forfeits his right to future offers?
States will also have to decide if they will require an insured to maintain the level of inflation protection required at the time of purchase through the life of the policy, or if they will allow him to downgrade inflation protection when he moves into an older age group, based on the purchase requirements for that age.
Jim buys a PQ policy at age 55, and to fulfill the requirement for annual compound inflation protection that applies at his age, he chooses an automatic 5 percent compound option. After he turns 61, can he switch to a less costly form of inflation protection, such as a 5 percent simple rate, as is permitted for those who purchase after 60? And when he turns 76, can he drop inflation protection altogether, since those who buy at that age are not required to have any?
Can an existing LTCI policy be exchanged for a PQ policy? Under the DRA, if an individual owns an LTCI policy that does not qualify for PQ status, she may exchange it for a PQ policy. But only benefits received under the new policy, and no benefits that may have been received under the old policy, are counted toward Medicaid asset protection. (However, this rule will probably come into play only rarely, as an insured who is receiving or has received benefits is unlikely to be accepted for a new policy.)
Many existing policies meet all the requirements for PQ status except that they were issued before the effective date of the state partnership program. In such cases, an insured making an exchange is simply switching his old policy for an identical new one. Many other existing policies meet the PQ requirements except for issue date and inflation protection, in which case the new policy is essentially the same with the addition of an inflation feature.
States will likely facilitate exchanges by allowing insurers to simply issue an endorsement or rider to an existing policy stating that it has PQ status. However, it is possible that some states may require insureds to lapse their existing policy and purchase a new one.
Insureds sometimes want to make a change in their policy after it has been in force for some time. They may want to decrease their benefits, perhaps to make their premium more affordable. They might, for instance, want to change comprehensive coverage to facility-only coverage because they believe they have sufficient family support to handle any home care needs. Alternatively, an insured may want to increase her benefits. Such changes are not unusual, given that people generally buy LTCI coverage many years before they are likely to need benefits, and needs and circumstances can change over time. But the question arises, if a person buys a PQ policy and later makes a change in her coverage, will the PQ status of the policy be affected?
The DRA states that changes in a policy after it is issued will not affect its PQ status as long as all PQ requirements continue to be met. As we have seen, the great majority of DRA PQ requirements pertain to consumer protection provisions, and these are unlikely to be affected by any coverage change requested by an insured. However, if an insured downgrades or eliminates an inflation protection feature, this could violate the DRA inflation protection requirements, depending on how the state interprets those requirements. It is also possible that a coverage change could violate a state-imposed PQ requirement.
As they develop their programs, states will need to define what coverage changes would violate their PQ requirements, and insurers will then take steps to prevent consumers from inadvertently losing the PQ status of their policies. Some in the insurance industry have proposed including the following notice as part of the consumer disclosures made when someone purchases a PQ policy: "If you make any changes to your policy or certificate, such changes could affect whether your policy or certificate continues to qualify as a partnership policy. Before you make any changes, you should consult with the issuer of your policy to determine the effect of a proposed change."
If a person buys a PQ policy in State A and later moves to State B and applies for Medicaid, will he be entitled to asset protection in State B? If State B has a partnership program and there is reciprocity between the two states, the answer is yes. Otherwise, the person will have to forgo asset protection, or move back to State A, or move to another state that does have a program and reciprocity with State A.
As we learned, the DRA is intended to promote reciprocity among states. Under the DRA, reciprocity is the rule unless a state explicitly opts out, and the degree of uniformity among QSLTCIP programs imposed by the DRA is intended to facilitate reciprocity. And reciprocity is generally advantageous for a state. If a person with a PQ policy moves in, the state gains a resident with good LTCI coverage who is less likely to need Medicaid benefits than someone without such coverage. It is true that, under reciprocity, if the new resident does end up going on Medicaid, the state will not be able to take assets it otherwise would have been entitled to. But this is not a common occurrence, so the gains to the state would appear to outweigh the losses.
However, the DRA does not require reciprocity, and of course it does not require a state to establish a partnership program some states will probably not create programs, and the owners of PQ policies moving to those states will not be entitled to any asset protection there.
Must an insured wait until his LTCI benefits are completely exhausted before applying for Medicaid? Or can he apply before he has received all benefits payable by his policy? Under the DRA, an insured does not have to wait until the exhaustion of benefits, but the amount of assets that will be protected is based on the amount of insurance benefits paid as of the time of application. In other words, an insured may apply for Medicaid before he has used up his LTCI benefits, but if he does so, he will receive credit only for the benefits paid up to that time, even if benefits continue to be paid afterwards. If, on the other hand, he waits until all benefits due under the policy have been paid, he will receive credit for the full lifetime maximum benefit of the policy.
Joanne has a PQ policy with a lifetime maximum benefit of $200,000. After she has received $150,000 in benefits, she applies for Medicaid. She may apply at this time, but she will be entitled to only $150,000 in asset protection, even if the remaining $50,000 of benefits is eventually paid out.
Sylvia also has a PQ policy with a lifetime maximum benefit of $200,000. She waits until she has received the entire $200,000 before she applies for Medicaid. She will be entitled to $200,000 in asset protection.
Thus, waiting is often advantageous, but not always. For instance, if a person has only $100,000 in assets to protect and has already received that amount in insurance benefits, there may be no reason to wait, even if he is entitled to additional benefits. Also, some individuals who are under a financial hardship as they near the end of their insurance benefits may want to apply early.
Finally, it should be kept in mind that the process of applying for Medicaid can take several months, so those who wait until their insurance benefits have completely run out before starting this process may have to pay for their care out of their own pocket for a time.
If an insured does qualify for Medicaid before he exhausts his LTCI benefits, the Medicaid program will generally require that the insurance remain the "first payer"-that is, the LTCI policy must continue to pay benefits, with Medicaid providing additional benefits for any expenses not covered by the insurance but covered by Medicaid. This also must be weighed in determining whether it is advantageous to apply for Medicaid early.
An important objective of the DRA was establishing some degree of nationwide uniformity among partnership policies and between partnership and nonpartnership policies. If each state established widely varying requirements for partnership policies and these differed significantly from their requirements for nonpartnership policies, insurers would have to develop and maintain many different products, PQ and non-PQ, for different states. As a result, insurers would be less likely to enter the partnership market, and the growth in the number of people covered by partnership policies would likely be diminished. The DRA seeks to avoid this problem in three ways:
• It establishes standard requirements for all PQ policies in all participating states.
• It bases those requirements on the NAIC LTCI Model Act and Model Regulation, which already apply to most LTCI policies, so that PQ policies will be very similar to most non-PQ policies.
• It prohibits a state from imposing any additional requirements on PQ policies that it does not also impose on non-PQ policies, further minimizing the difference between the two types.
As a result, there will generally be little difference between PQ and non- PQ policies in a state, so that an insurer should be able to develop (and in fact probably already has) an LTCI product that can be used both as a PQ and a non- PQ product. The main difference between the PQ and non-PQ versions would be that a purchaser who wants his policy to have PQ status would need to purchase an inflation protection option that meets PQ requirements for his age.
However, while there will generally be a high degree of uniformity between PQ and non-PQ products within a state, PQ products may differ significantly from state to state. This is because states are free to impose requirements on PQ policies in addition to those of the DRA (although they must impose these requirements on non-PQ policies as well). However, the fact that most states have adopted, at least in part, the NAIC models tends to limit diversity, and in any case this diversity will likely be no greater than that which already prevails for non-PQ products.
Certification and Disclosure of PQ Status
If a product developed by an insurance company meets all the requirements of the DRA and of a state partnership program, how does it become a partnership-qualified policy?
• The state insurance department reviews the product and certifies that it meets all requirements. Alternatively, an insurance department could establish a process for self-certification, such as a checklist.
• The insurer must prominently disclose to consumers whether or not a policy is partnership-qualified. This disclosure will most likely be made in a form provided by the state or developed by the insurer and included with the policy when it is delivered. This approach will facilitate the process for policies already in force that meet the PQ requirements-instead of having to revise such policies simply to add the disclosure statement and re-file them, the insurer can simply issue the form to policyholders.
Insurance companies will have to report certain data on their PQ policies. There are two reasons for this requirement:
• A state Medicaid program needs to know whether an individual is covered by a PQ policy, and if so, how much (if any) she has received in benefits, so that this information can be taken into account if she applies for Medicaid.
• The states and the federal government need data for use in evaluating partnership programs and setting policy for them. Government agencies will want to know whether the asset protection offered by PQ policies does in fact lead consumers to buy them, what type of PQ policies consumers are buying, and what impact the program is having on Medicaid finances.
The Department of Health and Human Services will issue reporting regulations, which will specify the type and format of data and information that all insurers issuing PQ policies will be required to include in reports to the Secretary of HHS. These reports will be made available to all participating states.
The DRA does not prohibit states from imposing reporting requirements in addition to those of HHS. But the Centers for Medicare and Medicaid Services (CMS) are seeking to minimize the need for state-specific requirements by working with the states to identify their needs and ensure that the HHS requirements meet them.
RECAP 0For what two main purposes will insurers be required to report information on PO policies?
The DRA and CMS directives require each state insurance department to provide assurance to the state Medicaid program that any person who sells, solicits, or negotiates a PQ policy has received training in these policies and demonstrated an understanding of them and the part they play in the public and private financing of long-term care.
What will this mean in practice for insurance agents? In addition to the requirements they must meet to sell long-term care insurance in their states, there will be new training requirements for selling partnership LTCI policies. There may also be an examination to satisfy the requirement to demonstrate understanding.
States will of course vary in their exact requirements, but at its September 2006 meeting, the NAIC adopted a Model Bulletin that will likely be adopted (perhaps with some modifications) by many states. The requirements of the Model Bulletin are as follows:
• All LTCI agents in the state will receive training in PQ policies.
• There will be an initial training course of no less than eight hours. In addition, agents will be required to receive no less than four hours of ongoing training (continuing education) every 24 months thereafter.
• Topics covered in the training must include long-term care services, long-term care insurance, PQ policies, and the relationship between PQ policies and other public and private coverage of long-term care. All types of LTC I policies must be covered, with the advantages and disadvantages of PQ and non-PQ policies discussed. State or federal law may require the use of certain materials.
• The training cannot include any training that is specific to an insurance company or its products. It cannot include any sales or marketing information, materials, or training.
• The state's requirements for continuing education (such as those related to class attendance, the conduct and monitoring of examinations, self-study courses, and web-based training) must be adhered to.
• When a state establishes a partnership program, it will set a date at least one year after the effective date of the program, by which time all agents selling LTCI must have received the training. Until that date, any licensed and qualified LTCI agent may sell PQ policies.
• Insurance companies issuing PQ policies must require agents selling these policies to provide them with verification that they have received this training. The companies must maintain this verification on file and be able to provide it to the state insurance commissioner upon request.
It should be kept in mind that some states may not adopt this model, and their training requirements may differ. And of course the four original state partnership programs will continue to operate differently.
It is the intention of the NAIC Model Bulletin that satisfaction of the training requirement in any state will be deemed to satisfy it in any other state. However, agents are advised not to assume reciprocity with any state but to seek confirmation with the state insurance department. In particular, states that do not adopt the NAIC training model might not be granted reciprocity by states that do.
Long-term care partnership programs are a way for state governments to give individuals an incentive to provide for their own long-term care needs by purchasing LTCI policies, thus reducing the number of people who end up relying on the Medicaid program.
The advantage to the individual of a partnership LTCI policy is that if he needs long-term care for such a long time that he uses up the benefits of his policy and is forced to apply to Medicaid, some of his assets are protected from Medicaid spend-down rules and estate recovery.
Four states created the first partnership programs in the late 1980s, but OBRA 93 required any new state programs to apply estate recovery to protected assets, effectively halting expansion. However, the four original state programs have continued to operate.
The Deficit Reduction Act of 2005 lifted the estate recovery requirement, and as a result many states are establishing partnership programs. The DRA imposes a degree of uniformity on state programs and partnership policies and promotes reciprocity among states.
To qualify for a state long-term care partnership program, an LTCI policy must meet requirements set forth in the Deficit Reduction Act. States can also impose additional requirements on partnership-qualified policies, but they must apply the same requirements to non- PQ policies as well.
A PQ policy must be federally tax-qualified, issued after the state program became effective, and sold to a resident of the state. It must contain certain consumer protection provisions in the areas of documentation and disclosure; benefits; exclusions and limitations; renewal, replacement, and termination of coverage; claims; and sales and marketing. However, these provisions are drawn from the NAIC LTCI Model Act and Model Regulation, so they are in fact included in most LTCI policies. On the other hand, PQ policies can differ from other policies in the area of inflation protection, where the DRA imposes age-based requirements.
The Deficit Reduction Act establishes the framework for new state partnership programs, but its provisions leave room for interpretation and variation by the states. States can also set their own requirements for PQ policies, as long as they apply these requirements to non-PQ policies as well.
PQ policies must provide "annual compound inflation protection" to insureds who are 60 years old or younger at purchase, but states may differ in how they interpret and implement this language. A state mayor may not allow less than a 5 percent annual rate or a guaranteed purchase option, and it mayor may not permit insureds to downgrade their inflation protection as they age.
An insured can exchange an existing non-PQ LTCI policy for a PQ policy, but only benefits received under the PQ policy are counted toward Medicaid asset protection.
Changes made to a policy after it is issued do not affect its PQ status as long as all PQ requirements continue to be met. States will need to define what coverage changes would violate their PQ requirements, and insurers will then take steps to prevent consumers from inadvertently losing the PQ status of their policies.
If an insured with a PQ policy moves to another state, he will be entitled to Medicaid asset protection in the new state only if it has a partnership program and also has reciprocity with the old state. Reciprocity is promoted but not required by the DRA.
An insured does not have to wait until the benefits of his partnership LTCI policy are exhausted to apply for Medicaid, but the amount of assets that will be protected is based on the amount of insurance benefits he has received when he applies, even if more benefits are paid under the policy. Waiting until all insurance benefits have been paid is often but not always advantageous.
As a result of the DRA requirements, there will generally be little difference between PQ and non-PQ policies in a state. The main difference between the PQ and non-PQ versions of a product would be that a purchaser who wants his policy to have PQ status would need to purchase an inflation protection option that meets PQ requirements for his age.
For an insurance product that meets all PQ requirements to be a PQ policy, the state insurance department must review and certify it, and the insurer must prominently disclose its PQ status to consumers.
Insurance companies will have to report information on their PQ policies so that state Medicaid programs can grant asset protection when applicable, and so that the states and the federal government can evaluate partnership programs and set policy for them.
For insurance agents, there will be new training requirements for selling partnership LTCI policies.