U.S. Department of Health and Human Services

The Federal Role in Consumer Protection and Regulation of Long-Term Care Insurance

Executive Summary

Lisa Alecxih and David Kennell

Lewin/ICF

June 1991

This report was prepared under contract between HHS's Office of Family, Community and Long-Term Care Policy (now DALTCP) and Lewin/ICF. For additional information about this subject, you can visit the DALTCP home page at http://aspe.hhs.gov/_/office_specific/daltcp.cfm or contact the office at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, S.W., Washington, D.C. 20201. The e-mail address is: webmaster.DALTCP@hhs.gov.

PREFACE

In November 1990, the Office of the Assistant Secretary for Planning and Evaluation (ASPE) assembled a panel of experts of varying backgrounds to discuss the potential goals and roles of the federal government in the long term care insurance market. The panel included representatives from the insurance industry, consumer groups, the National Association of Insurance Commissioners (NAIC), the Health Insurance of America (HIAA), and government, as well as persons with expert knowledge of long term care insurance, The participants included the following:

Mary Harahan, Director of the Division of Disability, Aging and Long Term Care, ASPE, DHHS
John Drabek, Economist, ASPE, DHHS
Pam Doty, Program Analyst, ASPE, DHHS
Paul Gayer, Economist, ASPE, DHHS
Lou Rossiter, Special Assistant to the Administrator, HCFA, DHHS
Steve Clauser, Director of the Division of Long Term Care, ORD, HCFA, DHHS
Judy Sangl, Research Analyst, ORD, HCFA, DHHS
Jim Firman, President, United Seniors Health Cooperative
Susan Polniaszek, United Seniors Health Cooperative
Robert Friedland, Director of the Public Policy Institute, American Association for Retired Persons (AARP)
Earl Pomeroy, Commissioner of Insurance, State of North Dakota
Susan Gallinger, Director of Insurance, Arizona Department of Insurance
Gary Claxton, Senior Analyst, National Association of Insurance Commissioners (NAIC)
Ron Hagen, Senior Vice President, American Express Life Assurance Company (AMEX)
Gail Schaeffer, Second Vice President, John Hancock Mutual Life Insurance Co.
Susan Van Gelder, Associate Director, Health Insurance Association of America (HIAA)
Gordon Trapnell, President, Actuarial Research Corporation
Brian Burwell, Deputy Division Manager, Systemetrics
Stan Wallack, Chairman and CEO, LifePlans
Dave Kennell, Vice President, Lewin/ICF
Lisa Alecxih, Senior Associate, Lewin/ICF

This paper was prepared by Lisa Alecxih and Dave Kennell of Lewin/ICF. The paper which follows was originally the background piece to stimulate discussion among the participants and has since been revised to reflect input from members of the panel and the conclusions of the group, as well as more recent available data.

EXECUTIVE SUMMARY

Background

The risks of needing long term care are significant: nearly one- third of all persons who turned age 65 in 1990 will spend at least three months in a nursing home before they die, and over 20 percent will spend one year or longer in a nursing home.¹ At an annual cost of $30,000, a year in a nursing home can be a catastrophic expense.

Long term care insurance provides the elderly with an opportunity to reduce the risk of the potentially catastrophic costs of long term care. It reduces the risk by spreading the costs of long term care among all purchasers of insurance. Spreading the costs of long term care across all insurance purchasers reduces the financial risk of long term care to any single individual. As a result, the well being of both purchasers who incur the risk and those who do not incur the risk is increased. Purchasers who incur long term care costs pay less than they would have because they have insurance. The well being of purchasers who do not incur the risk is also increased because they know that if the risk does occur they will be protected by insurance.

There is a sharp contrast between the elderly's lack of insurance for long term care and their protection against the risks of acute care. As of the end of 1990, over 1.9 million long term care insurance policies had been purchased.² Although analysts estimate that between 10 and 40 percent of the elderly could afford to purchase long term care insurance, less than five percent have done so. In contrast, almost all elderly persons are protected from high acute care costs by Medicare insurance and most elderly have private Medigap insurance.

Barriers to Insurance Coverage

Both supply and demand barriers help explain the disparity between the number of persons who could afford long term care insurance and the number who have actually purchased it. Key factors limiting consumer demand for long term care insurance include (see Figure 1):

• Lack of Information -- Many elderly underestimate the likelihood of requiring long term care services and the potential cost of those services.

• Misperception of Public and Private Programs -- Many people believe that the Medicare program covers long term care services, when in fact Medicare accounts for less than two percent of nursing home expenditures. There is also a misperception that retiree health plans or Medicare supplemental insurance covers long term care services.

• Delayed Preparation for/Denial of Long Term Care Needs -- Many persons do not think about preparing for long term care needs until they are too old or disabled to purchase insurance.

• Complexity of Product and Lack of Standard Terminology -- Long term care insurance is a complex product that is rapidly changing as it matures. Due to this evolution of the product and the absence of standard terms it is often unclear how a particular product compares to other products.

• Uncertainty Concerning the Value of Products -- Some consumers are reluctant to purchase long term care insurance because they are not sure if the products will cover the types of care they may need in the future. In addition, a general misunderstanding and mistrust toward all insurance products inhibits demand.

• Lack of Clarity of Benefit Triggers/Premium Increase Provisions - - Many policies contain vague language that make the circumstances under which benefits will be paid unclear, as well as when and how much premiums may increase over time.

• Consumer Confusion/Dissatisfaction -- Consumer confusion and dissatisfaction caused by misperceptions, the complexity of the product, rapidly changing product lines, unclear benefit triggers, and uncertainty concerning the value of the product, increases indecision among those considering long term care insurance and also increases the likelihood that purchase decisions will be delayed in order to wait for future products to be developed.

• Long Lag Time Between Purchase and Benefit Payment -- The substantial amount of time between the purchase of long term care insurance and when benefits are likely to be paid means that consumers may want to spend their current dollars on items with a more rapid benefit, such as Medigap policies.

• Misleading Marketing Practices -- Consumers have reported problems with the marketing, sale, and payment of benefits of long term care insurance. Misleading and fraudulent marketing practices, denial of claims, premium increases, and policy cancellations by a few insurance companies have resulted in some long term care insurance purchasers failing to receive benefits.

• Affordability -- Many of today's elderly have low incomes and therefore cannot afford long term care insurance premiums that average almost $100 per month at age 65. However, most elderly do spend comparable amounts on Medigap insurance.

• Perception of Need -- Some consumers with adequate information and without confusion decide they do not need long term care insurance because they have too few assets to protect or have family and friends available to provide care.

On the supply side, the following factors constrict the number of long term care insurance policies available on the market:

• Lack of Interest from Large Group Markets - Unlike most major health/life products sold, long term care insurance has yet to capture the interest of many large group markets. These large markets would allow insurers to spread risks and reduce advertising and overhead costs.

• Lack of Data -- Most insurers do not have the claims experience necessary to confidently price long term care insurance, which leads to coverage limitations and conservative pricing.

• Uncertainty of Tax Status -- The uncertain tax status of benefit payments and premiums has inhibited the marketing of long term care insurance products.

• Inconsistent/Inappropriate and Rapidly Changing Regulatory Standards -- Regulatory standards vary across states, and insurers must tailor their products to the regulatory provisions of each state. With the many changes in regulatory standards in the past five years, insurers' cost of developing products has increased. Also, some regulation modeled after Medicare supplemental policies regulation may be inappropriate for long term care insurance.

Current Regulation

In order to address the barriers to demand, some states have undertaken consumer education efforts to address the lack of information on the risk of using long term care and the misperception of public programs. Some have also instituted counseling programs to reduce consumer confusion.

Most states have concentrated their efforts on regulation of long term care insurance products. Virtually all states have regulations against fraudulent and misleading marketing practices, guidelines for standardized language to reduce confusion, and reporting requirements for determining the equitability of premiums. In addition to these standards, every state has an insurance department that enforces these regulations.

Some argue that current regulation and consumer education efforts related to long term care insurance do not adequately protect consumers. Others contend that once the market matures and a large proportion of states institute the National Association of Insurance Commissioners (NAIC) model standards (which are discussed in this report) that many of the current problems will be addressed.

Potential Government Role

Given the state role, what role, if any, should the federal government play in consumer protection and the regulation of long term care insurance? How should the federal government address the supply and demand barriers to the purchase of long term care insurance? By reducing or eliminating barriers to the long term care insurance market, the federal government could contribute to increasing the economic security of those who purchase long term care insurance and, to some extent, reduce public expenditures for long term care in the long run.

There are at least four major goals the federal government might pursue if the current regulatory and incentive structures are judged inadequate. These four goals, and possible courses of action, for the federal government in the long term care insurance market are described below (see Figure 2).

Increase Consumer Awareness -- By increasing consumer awareness regarding the risk of long term care use, the lack of third party coverage for the costs of such care and the availability of mechanisms, such as long term care insurance, to cover the cost of such care, the government could assist individuals to reach more informed decisions about how to plan for their future long term care needs. Increased consumer awareness would address the lack of information, misperception of public and private programs, delayed preparation for and denial of long term care needs, and some of the confusion experienced by consumers when considering long term care insurance purchase. The federal government could increase consumer awareness through:

• Information provided through current consumer education programs (e.g., by funding state counseling programs and/or disseminating information through Area Agencies on Aging);

• Expanded beneficiary assistance programs and new information campaigns; and/or

• Nominal tax subsidies for the purchase of long term care insurance that would help educate consumers as well as reduce the after-tax cost of insurance.

Increase Insurance Coverage -- Similar to the consensus developing concerning health insurance, the government may determine that Americans should have protection against the cost of long term care services and that the best mechanism for ensuring that protection is long term care insurance. Establishing a goal of increased long term care insurance purchase implies efforts to eliminate most of the barriers to the growth of the market discussed above. If the government determines that the purchase of long term care insurance by Americans is desirable, the federal government could increase the number of individuals who purchase long term care insurance by:

• Increasing consumer confidence in the market through mandated and/or encouraged requirements for policies;

• Assisting states in enforcement of regulations, data collection, monitoring, and consumer education efforts;

• Assisting insurers by providing a reinsurance pool (a mechanism to protect any one insurer from unusually high claims) or data;

• Launching a consumer education campaign; and/or

• Clarifying the federal tax code that applies to long term care insurance and/or offering tax subsidies for the purchase of long term care insurance.

Protect Consumers -- By protecting consumers who purchase long term care insurance, the government could reduce many consumer demand barriers and increase the confidence level of prospective purchasers. The government could protect consumers by ensuring:

• The Financial Strength of Insurers -- Many experts recommend that one of the foremost factors to consider when purchasing long term care insurance is the financial status of the insurer. Financially strong insurers are more likely to be able to pay future product benefits. The federal government could ensure that insurers are financially strong through: 1) additional and uniform mandated and/or encouraged solvency requirements for insurers; 2) assistance to states in enforcement of regulations and technical expertise; and/or 3) assistance for, insurers by providing a reinsurance pool to reduce the risk of offering products and product features where there is little known about the risk.

• Benefit Payments -- One concern of consumers is that insurers may not provide promised benefits. The federal government could ensure the payment of benefits through: 1) efforts to maintain the solvency of insurers through reporting requirements or other regulations, 2) mandated and/or encouraged requirements, such as loss ratios; and/or 3) assistance to states in preventing fraud, particularly in the enforcement of regulations.

• Consistent Enforcement -- Consistent enforcement of regulations in all states would guarantee all purchasers of long term care insurance a minimum level of protection, possibly increasing consumer confidence and minimizing abuses. The government could ensure consistent enforcement of regulations for long term care insurance through: 1) federally mandated and/or encouraged requirements to which states must adhere; and/or 2) assistance to states through funding or technical expertise.

• The Sale of Only "High Quality" Products -- By guaranteeing that only "high quality" long term care insurance products are marketed by insurers the federal government could protect consumers. This could be accomplished by requiring that long term care insurance products meet rigorous minimum standards or by providing a government seal of approval for those products that meet certain standards.

• Informed Consumers -- Informed consumers are more likely to be able to make decisions concerning long term care insurance products that are in their best interest, as well as recognize misleading or inappropriate marketing practices.

Establish Consistent Regulations - Consistent regulatory requirements in all states would assist insurers in the marketing and development of long term care insurance products, as well as serve to increase insurance coverage and protect consumers. The government could establish consistent regulation for long term care insurance through federally mandated requirements or by encouraging states to adopt minimum standards similar to the approach used for Medicare supplemental insurance.

These goals and their corresponding roles are not necessarily mutually exclusive. However, some goals are conflicting. For example, if the goal of protecting consumers by ensuring that only "high quality" products are sold were adopted, increasing insurance purchase may be difficult because the products are likely to become more expensive as a result of these regulatory requirements. Also, some of the roles may bring about unwanted consequences. For example, establishing minimum regulatory requirements to boost consumer confidence and in turn increase insurance purchase could also have the effect of stifling product innovation and make premiums unaffordable for many. Any contemplated federal role must have goals and intentions weighed against likely outcomes and adverse consequences.

NOTES

1. Lewin/ICF estimate from the Brookings/ICF Long Term Care Financing Model 1990 and Peter Kemper and Christopher Murtaugh, "Lifetime Use of Nursing Home Care," The New England Journal of Medicine, Vol. 324, No. 9, 1991.

2. Health Insurance Association of America (HIAA). News Release, May 30, 1991.