A Report on the Actuarial, Marketing, and Legal Analyses of the CLASS Program. Notes

10/14/2011

  1. Kellogg School of Management, Northwestern University, Evanston, IL

  2. Bates White Economic Consulting, Washington, DC

  3. Summaries are available at http://www.classactprovisions.com/PDF/CRS_Class%20Act_May_2010.pdf, http://www.cahealthadvocates.org/advocacy/2010/class.html and http://www.ncoa.org/independence-dignity/class-act-summary.html.

  4. Much of the information about the industry is taken from Brokers World magazine’s 2009 survey of the individual market and 2008 survey of the group market. (These are the most recent surveys available.) Most surveyed sellers are life or health insurance companies selling LTCI as riders to health insurance or as stand-alone products. The group survey covers 6 carriers who account for approximately 80 percent of annual sales in the group market. The individual survey covers 19 carriers that account for 90 percent of sales. We account for the incompleteness of the surveys when reporting on market size and structure; our analysis of concentration assumes that firms excluded from the survey are of negligible size. We acknowledge that market share data derived from such surveys can be inaccurate. We therefore rely on these data for qualitative inferences only.

  5. Anne Tergesen and Leslie Scism, “Long-Term-Care Premiums Soar,” Wall Street Journal, October 16, 2010; U.S. Census Bureau 2009 population estimates, http://quickfacts.census.gov/qfd/states/00000.html. See also, Paula span, “A New Long-Term Care Insurance Program,” New York Times, March 24, 2010.

  6. Jeffrey Brown and Amy Finkelstein, “Why is the market for long-term care insurance so small?” Journal of Public Economics 91 (2007): 1967-1991.

  7. It is not clear if these figures include life insurance policies that permit the beneficiary to convert some of the insurance benefit to cash to pay for long term care. At death, the beneficiaries receive the balance of the insured amount less the long term care payout. Such policies seem to have been widely publicized about ten years ago.

  8. In 2008, nursing home expenditures were $138.4 billion and home health care expenditures were $64.7 billion. CMS, 2008 National Health Expenditures, Table 2. http://www.cms.gov/NationalHealthExpendData/downloads/tables.pdf.

  9. In 2008, healthcare expenditures excluding nursing and home health care amounted to $2.136 trillion. Total premiums for private health insurance were $783.2 billion. CMS, 2008 National Health Expenditures, Tables 2 and 12.

  10. We obtained this information through a combination of Internet search and interviews with a life insurance salesperson. See http://www.lifeinsuranceadvisorsinc.com/articles/individuals/HowToReduceCommissions.pdf; http://www.ehow.com/about_6509638_kind-do-insurance-agents-get_.html; http://www.insure.com/articles/generalinsurance/agent-commissions-2.html; http://insurance.hirby.com/what-is-the-average-life-insurance-commission/; Interview with Barry Finkelstein, 11/4/2010.

  11. See http://personalinsure.about.com/od/life/f/lifefaq3.htm. These figures do not include “expense allowances,” which companies grant to larger sellers (called “general agents” and can add 10% or more to the total commissions paid).

  12. See http://blog.empowerltci.com/2010/08/17/7-facts-benefit-brokers-need-to-know-about-selling-ltci/

  13. Source: Interview with Barry Finkelstein, 11/4/2010

  14. Broker World does not separately report the percentage of policies with $50 daily benefits.

  15. The HHI equals 10,000 times the sum of the squared market shares of each firm. For example, if the market consists of three firms with market shares of 0.5, 0.3, and 0.2, the HHI = 10,000 x (.25 + .09 + .04) = 3800.

  16. FTC and DOJ, Horizontal Merger Guidelines, issued August 19, 2010, § 5.3. http://www.ftc.gov/os/2010/08/100819hmg.pdf. Under the guidelines in effect prior to August of 2010, both the group market and the individual market would have been deemed moderately concentrated.

  17. National market shares will accurately describe the competitive conditions in local markets under either of the following conditions. The first is that the market for the sale of LTCI is national, which would mean that most consumers are able to purchase policies from most LTCI insurers. The second is that, even if most of these firms do not compete in most markets, they could readily do so.

  18. MetLife recently announced that it would stop selling new LTCI policies, though it will continue servicing existing enrollees. Erik Holm and Anne Tergeson, “MetLife Discontinues Sales Of Long-Term Care Coverage,” Wall Street Journal, November 11, 2010.

  19. http://www.longtermcarelink.net/a9insurance.htm#overview.

  20. As we note above, differences in the expected growth rate of LTC costs will drive differences in the premiums firms quote today. Sellers of LTCI are likely to have more consistent projections over a shorter time horizon than a longer time horizon, which could explain why dispersion is lower for older enrollees.

  21. While it is discontinuing sales of new LTCI policies, MetLife is apparently planning to continue servicing existing enrollees. Erik Holm and Anne Tergesen, “MetLife Discontinues Sales OfLong-Term Care Coverage,” Wall Street Journal, November 11, 2010.

  22. Viatical settlements can allow individuals with life insurance to access funds prior to death. However, the value of life insurance policies do not affect Medicaid eligibility whereas the income from a viatical settlement could. See, e.g., http://www.kantrowitz.com/cancerpoints/ftcviatical.html.

  23. The initial Partnership states are California, Connecticut, Indiana, and New York. Provisions in Deficit Reduction Act of 2005 allow any state to implement LTC Partnership programs and more than 30 states now offer such a program.

  24. Mark Meiners, “Medicaid Eligibility Issues for Long-Term Care Insurance Partnership Programs,” Center for Health Care Strategies, Inc., Issue Brief, March 2008.

  25. This refers solely to actual competition. Private LTC insurers are likely to lobby Congress to change various aspects of the CLTCI plan.

  26. For example, consider that Medicare Part B uptake is nearly universal.

  27. In fact, 2011 Medicare and You booklet includes sections titled “Plan for Long-Term Care” and “Paying for Long-Term Care.” The former section directly warns seniors: “At least 70% of people over 65 will need long-term care services at some point. Medicare and most health insurance plans, including Medigap (Medicare Supplement Insurance) policies don’t pay for this type of care. . .” (Emphasis in original.) See http://www.medicare.gov/publications/pubs/pdf/10050.pdf. The section on paying for LTC includes a “Coming soon” section that describes the CLASS program. However, LTC information does not begin until page 110.

  28. Medicaid funded 49% of LTC costs in 2005; while the percentage varies by state, the federal government provides half or more of state Medicaid funding. Long-Term Care Financing Project, “National Spending for Long-Term Care,” February 2007, http://ltc.georgetown.edu/pdfs/natspendfeb07.pdf.

  29. Note that this incentive is not limited to current Medicaid enrollees. Many LTC recipients end up on the Medicaid rolls because of the costs of LTC, so slowing the arrival rate of such enrollees would generate savings to the states.

  30. Mulvey and Colello (2010), p. 12.

  31. Mulvey and Colello (2010), p. 5.

  32. Iceland and Bauman (2004), “Income Poverty and Material Hardship: How Strong Is the Association?” National Poverty Center Working Paper Series, #04-17, at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=648341. Based on a review of the literature on poverty dynamics, the authors conclude that “longitudinal data show that a majority of poor individuals in the U.S. actually remain poor for only short periods of time and relatively high proportion of people have experienced poverty at one point or another.” However, cycling in and out of poverty status is also common. Whether this is a desired property or not, such cycling could improve the solvency of the CLTCI plan if it causes disenrollment and reenrollment in the plan.

  33. JDPower.com reports that 60% of adult Americans have at least some life insurance. http://www.jdpower.com/insurance/articles/Lack-of-Life-Insurance-Coverage/.

  34. AARP, “The Costs of Long-Term Care: Public Perceptions Versus Reality in 2006,” December 2006, http://assets.aarp.org/rgcenter/health/ltc_costs_2006.pdf, at 32.

  35. Thomas, L. (1999) “Incumbent Firms’ Response to Entry: Price, Advertising, and New Product Introduction” International Journal of Industrial Organization 17: 527-55.

  36. Simon, D. (2005), “Incumbent Pricing Responses to Entry”, Strategic Management Journal, 26: 1229-48.

  37. This theory is attributed to Sutton (1991).

  38. Mulvey and Colello, pp. 5-7. The CBO and CMS have both estimated the average premiums necessary to provide a $50/day average benefit level, with the CBO estimating premiums of $123 per month and CMS estimating $240. The difference is attributable to more pessimistic projections of adverse selection by CMS.

  39. In particular, the Congressional Research Service estimates that the “monthly premium for a $50 per day policy in the private LTC insurance market for a five-year policy would be about $94 a month.” This is $29 per month below the CBO-estimated CLASS premium. In exchange for the additional $29 per month, the CLASS plan offers benefits of unlimited duration. Under the CMS estimates, the additional cost is much greater, $146 per month. Id.

  40. In a recent report, Milliman recommends a structure that would have a tontine-like element: “Individuals could be encouraged to preserve their benefits by offering them a faster benefit growth rate if they do not access their benefits until a certain age.” Bob Darnell et al., “Perspectives on the Community Living Assistance Services and Support (CLASS) Act,” Milliman Research Report, September 2010.

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