As mentioned, LTC insurance -- nursing home insurance -- has been selling in the marketplace for the better part of 30 years. Thus, it may still be considered a relatively new insurance product that continues to evolve. The implication is that one might reasonably expect "wrong turns" along the way, as the product and industry adapts to new information, changing market conditions, and accumulated actuarial experience. Through the 1970s and up to the late 1980s, the coverage was linked to the structure of Medicare coverage. Like many supplemental private health insurance policies, nursing home insurance focused on what Medicare "did not cover". Medicare paid for skilled nursing home care for up to 100 days and private insurance began coverage when Medicare ceased providing benefits. For this reason, early product configurations had elimination periods (i.e., deductibles) that were typically defined as 100 days -- the period of care that Medicare covered -- and the coverage was focused exclusively on skilled nursing home care resulting from a prior three day hospitalization -- precisely in line with Medicare policy. If care was initially considered to be "medically necessary", private insurance carriers would continue to pay benefits even when the need for skilled care ceased and only custodial (i.e., maintenance) care was required. Thus, while these early private policies "keyed off" of Medicare coverage, their innovation was that they paid for custodial care, where Medicare did not. In essence, this extended coverage from a limited amount of skilled nursing care (paid by Medicare) to a much more generous amount of skilled and custodial nursing home care (paid by private insurance and also by Medicaid for selected populations).
Early Medicaid policy also shaped the conception of LTC as synonymous with nursing home care.17 Over time, LTC -- and now long-term services and supports -- has come to reflect the reality that the need for care, which is based on functional limitations and/or cognitive impairment, requires a broader set of service responses. These include home and community-based care and a variety of residential care settings such as assisted living, adult day care and others.
Regarding the pricing of early policies, there was little basis on which to develop an estimate for future morbidity (i.e., the chance that someone would develop a condition that required use of LTC services) in the context of private insurance. In order to price these early policies actuaries relied on national data sources like the 1977 and 1985 National Nursing Home Surveys. As they considered home care coverage, they focused on the 1982, 1984, and 1994 National Long-Term Care Surveys for incidence and continuance data; again, such data was not directly transferrable to the private insurance context since it was neither insured data nor was the underlying population likely to reflect purchasers of insurance. For other pricing parameters, like voluntary lapse rates and mortality, there was a reliance on the experience of Medicare Supplement policies and standard mortality tables. For this reason, voluntary lapse rates priced into initial policies were much higher than what they ultimately turned out to be. (In fact, there is no other voluntary insurance product in the market that has experienced lower voluntary lapse rates than what is found in LTC insurance policies.)
Policies were always sold as guaranteed renewable -- they could only be cancelled for non-payment of premium -- and as level-funded. That is, while the premium charged varied by age at purchase, once an individual purchased a policy, the premium was designed to be level for life. Theoretically, an individual buying a policy at age 65 for a premium of $1,000 per year could be expected to pay that same annual premium throughout their lifetime, so long as the underlying pricing assumptions employed by the actuaries were accurate. The level-funded nature of the product persists to this day, and poses unique challenges to insurers. This will be discussed in a subsequent section. Finally, almost all policies reimbursed the actual costs of care up to a daily benefit maximum.
Relatively sluggish sales of LTC insurance policies in the 1980s suggested that the then current product design was not going to reach a broader part of the public. Selling insurance to cover something that no one wanted to access, except under the most extreme of circumstances, did not seem to be an attractive value proposition for fueling growth in the market. Moreover, Medicare, as well as certain Medicaid plans under special waivers, began to pay for support services in peoples' homes. Medicare covered such services primarily when they were deemed to be medically necessary. Medicaid also expanded its coverage for home and community-based care but still severely restricted access to these services.
As agents and brokers came to play a larger role in the LTC product development process, it was clear that for the coverage to sell, it needed to pay for custodial services where people desired them most -- in their own homes. This presented a dilemma for insurers because the primary risk management tool for managing claims was based on policyholder behavior: no policyholder really wanted to go into a nursing home, and this served as a brake on potential moral hazard and over-utilization of services. If policies began covering services in settings that people desired, like the home, this "brake" on moral hazard would disappear with the potential for making the underlying economics of the product unsustainable.
It became clear that in order for the market to grow, the product would have to cover home and community-based services in a manner that enabled insurers to effectively manage what were viewed to be the primary risks of the product: adverse selection and moral hazard. This was accomplished in part by changing the basis on which benefits were paid from a medical necessity model to a functional and cognitive impairment model. There had been a growing realization, encouraged by professionals with geriatric experience who entered the industry or consulted with it, that measures of functional abilities were most closely related to the need for covered services -- including home care.
In the mid to late 1980s and early 1990s, carriers began to provide limited coverage for home and community-based care -- either through riders or as part of the underlying basic policy design. They felt comfortable doing so because access to insurance benefits was made contingent on an insuredsinability to perform a certain number of ADLs or the need for assistance due to a severe cognitive impairment. These were more easily measurable and predictable benefit eligibility criteria. Also, a number of third party assessment companies entered the market to assist insurers in evaluating whether such deficits existed. It is not surprising, therefore, that consumer demand, coupled with the sense that companies could manage the underlying risk, fueled rapid growth in market share of comprehensive policies. This is clearly displayed in Table 2, which highlights the changes in product design over the past 20 years.
Coverage limited to nursing home or institutional alternatives only has virtually disappeared from the market. Deductible periods have increased and are roughly equal to three months of care. Moreover, the percentage of individuals purchasing some level of protection for increasing LTC costs is about three-in-four with roughly half buying compound inflation protection.
The average daily nursing home benefit has increased significantly over the period -- by an annual rate of roughly 4%. Given the mix of home care and nursing home service use, this is roughly in line with the rate of inflation in these services over the period; the $153 daily benefit amount in 2010 would cover 70% of the average daily cost of nursing home, 155% of the daily cost of assisted living, and roughly eight hours of home care a day seven days a week.18 Over the period, there has been a decline in the number of policies with unlimited benefits, a particularly risky policy design, given the uncapped liability faced by the insurer. The desire of companies to move away from this policy design stems in part from pressure by ratings agencies and fewer reinsurance options.19 It represents one of a number of actions insurers have taken to "de-risk" the product.
Finally, annual premiums have increased significantly over the period, as policy value has increased and as insurers have a body of credible experience on which to make changes to a number of key underlying pricing assumptions. Clearly new policies reflect a more conservative set of pricing assumptions, especially with respect to interest rates and voluntary lapses. This will be discussed in more detail in a subsequent section.