A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. History of Cash Benefits

10/14/2011

Cash benefits first emerged largely because of the flexibility they provided for both insurers and the insured and for the enhanced market appeal of a broadly flexible benefit. It is important to keep in mind that, at the time cash benefits emerged, most long term care policies did not include benefits beyond the basic home health care (sometimes even limited to skilled home care) and nursing home care. In contrast, today’s coverage includes a vast array of alternative care settings and providers (discussed in greater detail below).

The use of a pure cash benefit began in the late 1980’s to early 1990’s primarily with two insurers. Aetna -- exclusively in the group market -- initiated a pure disability benefit model which, at that time, paid for loss in 2 of 5 Activities of Daily Living, with bathing being the ADL not counted. The net impact of that, given the highly predictable order of ADL loss, with bathing and dressing most typically the first two losses, is that an insured would in effect need to have a deficit in 3 ADLs (bathing, dressing and toileting) in order to satisfy the benefit trigger and receive benefits. At the time that Aetna offered this product, it was not entirely uncommon for insurers to have a variety of benefit triggers with some using the same approach of excluding bathing as a countable ADL. Fortunately, this is no longer the case and all six of the basic ADLs are almost exclusively used today as the basis on which loss is determined.

At about the same time, UNUM began development of a retirement community-based insurance product with a cash benefit payment. One reason for this model for this specific market was that Continuing Care Retirement Communities (CCRCs) usually do not employ agency staff or have care facilities that would have satisfied prevailing policy definitions. Since CCRC services and facilities are often exclusively used by residents, they may not be traditionally licensed. The cash benefit was relatively small because it was meant to “gap fill” the differential in costs when residents in a CCRC move out of independent living to a higher (more costly) level of care; they would continue to pay their independent living fee but would use the insurance to pay the additional costs of assisted living or nursing home care. UNUM then expanded the cash benefit model to the individual and group markets. Nursing home care, with both Aetna and UNUM, was paid for on either an indemnity or a reimbursement basis.

Both companies subsequently moved to a hybrid approach. In about late 1990’s, Aetna developed a service-based (reimbursement) policy in part for competitive reasons and also because they were not satisfied with the experience on their disability-based model. Interestingly, Aetna continued to use the 2/5 ADL loss requirement for its cash benefit but used the more generous and more prevailing 2/6 ADL loss requirement for the service reimbursement model. The choice of which benefit model to offer was typically made at the employer level. Similarly, UNUM began with just a disability model and shortly thereafter added what they call the professional services option (reimbursement payment).

Today, cash as a component of coverage is prevalent. There is also a great deal of diversity with respect to the number of carriers offering a cash benefit component as well as with the ways in which the benefit is fashioned.

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