Why Should You Buy Long-Term Care Insurance?
A nursing home is not the most desirable place to finish out one's life. For many, a terminal stay in a nursing facility robs them of a purpose in life and strips away their dignity. As an example, have you ever thought of the indignity of being bathed, toiletted or diapered in a nursing home environment? No wonder many people express the desire to die before ever having to go into a nursing home.
For some conditions a nursing home is the only alternative, but for many long-term care patients there are more options than nursing homes. A good long term-care insurance policy covers those options and when all else fails, it pays for nursing homes too.
2. If you are married and you have a need for long-term care, your spouse may be forced to pay for an outside care giver. The cost is likely to come from your combined income and assets. If the need for paid care drags on too long, your spouse may be left with minimal cash assets for future needs. Insurance solves this problem and allows your spouse to keep the assets.
3. Many healthy care-giving spouses won't spend their money and choose to "tough it out" on their own without help. If care of a disabled spouse drags on too long, this can have a devastating effect on the physical and emotion health of the caregiver. Surveys reveal that even though healthy caregivers often don't spend their money for help, they will use insurance if available. Insurance allows the healthy caregiver to buy much-needed respite from paid professionals, while at the same time, retaining the assets and possibly avoiding an early death from the mental and physical stress of caregiving.
4. If your children or extended family promise to take care of you when the time comes, insurance will help them do that. Probably you nor your children have thought of the prospects of moving you from place to place, changing your dirty diapers, cleaning up after "accidents" in the bathroom or helping you with bathing and dressing. Insurance will pay for aides to help with these tasks.
5. If you are single and a need for long-term care arises, insurance can pay for and coordinate that care. With insurance you won't have to feel you would be a burden for family or friends.
6. If you have the desire to leave assets behind when you die, insurance will help preserve those assets from the cost of long term care.
Why Not Buy This Insurance When You're Older?
2. Roughly every two years insurance companies come out with new policies. Although these policies contain many new benefits and features, they are also more expensive for new people signing up than the previous policy. Estimates are, because of this rate creep, new applicants for long-term care insurance are paying about 5% more each year than applicants at the same age would be paying with older policies. At this rate of increase, ten years from now, a policy for a 50 year old would cost 50% more than an equivalent policy for a 50 year old would cost today.
3. To get long term care insurance you must answer questions relating to your health. If you wait, you may develop a condition that would prevent you from obtaining coverage.
4. The cost of coverage increases with age. For younger ages you can get a rate that is relatively inexpensive. At older ages the rate becomes very expensive.
5. It costs less, over time, buying now than buying equivalent coverage in the future. The 20 year total cost of buying now is less than the 19 year total cost of buying next year, or the 18 year cost of the next year, and so on.
Why Not Invest the Premiums Instead of Buying Insurance?
Why Waste Money on Insurance if You Have Assets to Cover the Cost Directly?
Why Don't You Get Your Money Back if You Don't Use the Insurance?
OVERVIEW OF THE LONG-TERM CARE INSURANCE INDUSTRY
The first long-term care policies were offered about 30 years ago. These were primarily nursing home-only policies designed to take over when Medicare rehabilitation ran out. They were not the comprehensive benefit policies we see today. It took until 1987 for the total number of policies nationwide to reach 800,000, a literal drop in the sea of traditional US health insurance policies. Since 1987, the number LTCi policies has increased annually at an average annual rate of 21%. It is estimated that at the end of 2000 there were approximately 6,000,000 LTCi policies in the US generating about $4.8 billion in annual premiums; about 80% of these policies were individual and 20% were employer sponsored group plans. (However, group premiums are only 7.9% of total premiums). Over 2,500 US employers now offer LTCi group plans.
The number of companies selling LTCi peaked in 1989 at 143 and has been declining since then. About 1/3 of these companies are Blue Cross/Blue Shield organizations selling in only a few states. Ten or so of these companies offer LTC cash benefits as riders to life insurance or annuity contracts. There are about 60 or 70 Life/Health companies licensed to sell LTCi stand-alone policies in more than 40 states, but their numbers are decreasing year to year.
Companies selling LTCi as a new product require additional capital to build distribution channels and staff administrative and claims departments. Many of these companies report , year after year underwriting losses on their long-term care business. This is not a business for small, poorly rated, or undercapitalized companies. Nor is it an endeavor for companies not committed to years of loss in order to build an eventual profitable book of business. Companies that play the middle ground and sell few policies will eventually exit the market due to high overhead and adverse selection from stagnant sales of LTCi.
In the past 5 years, 18 major companies have sold out their long term care insurance business , may sell out or are gone from the market. Transamerica was bought by Aegon and recently Transamerica and four other Aegon companies, selling long term care insurance, have pulled out of the market. The long-term care business of Time/John Alden/Fortis was acquired by John Hancock. Travelers sold it's LTCi business to GE Capital. Conseco and Bankers United are also gone. CNA put it's individual life and LTCi business on the block in 2002, but withdrew the sale because of inadequate offers. CNA now offers only group. American Travelers was bought by Conseco. Lincoln Benefit, Farmer's, IDS, TIAA/CREF and AFLAC are also gone. And finally, Penn Treaty Network America, a leading producer selling only LTCi-- but a small company asset-wise-- has run out of capital. It has no deep-pocketed parent company so may be up for sale. Probably no one has kept track of the number of smaller companies selling long term insurance that have pulled out of the market as well.
When the dust settles, if it ever does, 6 companies may represent over 80% of the market: Genworth (formerly GE Capital), Banker's Life, John Hancock and MetLife with Aetna and UNUM/Provident leading producers of group plans.
On the other hand, the future may hold an entirely different scenario. There are a number of large, well-respected and well-funded companies like Prudential, New York Life, Northwestern Mutual, Mass Mutual, Allianz and State Farm who are currently in the market and they are determined to build market share. These companies have proven in the past they can be successful latecomers to new markets. Their sheer size and financial resources make it possible to carve out significant market niches if they choose to focus those resources directly on long-term care insurance.
TYPES OF LONG-TERM CARE INSURANCE POLICIES
Stand-alone, comprehensive coverage policies represent the bulk of policies sold. These plans strive to cover all long-term care services and are usually purchased with monthly, quarterly, semiannual or annual premiums which are paid for the life of the insured. Abbreviated payment options are also available with policies fully paid up after 20 years, 10 years or 1 year of payments. Comprehensive stand-alone policies are very much like the typical modern group or individual health insurance policy. They try to cover as many different care alternatives as possible.
There are other ways to package long-term care insurance as well. One is as a rider to a cash value life insurance policy. The policy represents 2 separate coverages and the premium is split up to pay for both. This LTC rider should not be confused with the "accelerated death benefit" which is a popular feature of many modern life policies. Accelerated death pays part of the death benefit for terminal illness or doctor-certified, terminal, long-term care confinement while the insured is alive. Since very little long-term care could be certified as terminal, this policy feature is a poor substitute for "real" long-term care insurance.
Another way to package LTC insurance is as an "either/or" feature in life insurance. When the insured dies, a death benefit results. If the insured needs long-term care before death, stipulated benefits are paid instead of life insurance. If all benefits are paid before death, the policy expires. Any benefits not used result in a reduced pay-out at death. These policies can be purchased with periodic premiums for the life of the insured or with a single premium of $50,000 or more. These policies offer the advantage that the insured is guaranteed a benefit since everyone eventually dies. A disadvantage is that many people who purchase LTC insurance don't need life insurance, but because the policy needs to cover the mortality risk of death as well as the morbidity risk of LTC, premiums are much higher than an equivalent stand-alone LTC policy. Another disadvantage is that underwriting standards for life insurance are more strict than standards for LTC insurance. Many who qualify for LTC insurance would be denied coverage for life insurance.
A third way to package LTC insurance is to integrate it into a single premium deferred annuity. Again, this usually requires a lump sum of $50,000 or more. Part of the earnings on the annuity pay for the morbidity risk of the LTC insurance. Thus an annuity that would normally yield 6% might only yield 4% when combined with LTC insurance. One advantage of this arrangement is that LTC premiums are paid with tax deferred earnings but since they are expensed inside the policy, premiums become tax free. Another advantage is the perception that no money is lost to an LTC policy that may never be used. In fact the lump sum even grows larger. A major disadvantage is that the money is tied up. Removing money will kill the LTC coverage, yet few people have $50,000 lying around that they're willing to tie up and never use. In most cases it's better to fund a stand-alone LTC policy with earnings from a separate investment account. This leaves the account unencumbered. Pending federal legislation will also make investment income used for LTC insurance premiums tax free.
A fourth way to package LTC insurance is combined with a disability income policy. Prior to age 65, the policy can only be used for disability income. Premiums paid after age 65 provide long-term care coverage. Premiums for such a policy will be higher than a stand-alone disability policy since long-term care coverage requires a portion of every premium be set aside as reserve for future claims.
CHOOSING THE RIGHT CARRIER--YOUR MOST IMPORTANT DECISION
But rather than despair, I believe LTCi insurance is a product whose time has come. It just may take more time. I also believe employers have a vested interest in promoting long-term care insurance. A survey from the National Family Caregivers Association, released in October, 2000, reported that 54 million Americans are involved in family care giving. Many of these are full time employees. Estimates of the cost to employers for employees involved in long-term care range from $20 billion to $50 billion per year. It makes sense economically for employers to promote the product. If you believe as I do that insurance can and will make a difference, then you as an employer can help by designing and implementing a good plan from a strong, committed carrier. Or if you already offer a plan, you can add enhancements to improve employee participation.
Company Financial Strength and Size.
Most employees buying LTCi will probably not make claims until age 78, which is the average claims age nationally. In 1999, the average purchaser of group long-term care insurance was aged 43. Thus, the average worker may not make claims for 35 years. (Don't forget that unlike all other group insurance, employees will keep their group LTCi for life. To buy a new policy at retirement age would result in new premiums 6 to 10 times higher). You can see that it is extremely important to pick a company financially strong enough and large enough to be around 35 years from now.
Small poorly rated companies selling only 2 or 3 lines of insurance, including LTCi are particularly vulnerable for the long-term. This is because few companies have more than 10 years of claims experience. With such limited experience most companies don't have definite actuarial guidelines for the premium reserving required for claims 20 to 30 years from now. If claims experience turns unfavorable, it will take a large company with deep pockets to continue to service claimants. Small, poorly rated companies will have little chance of surviving a bad claims experience.
The second reason for picking strength and size is because of the current market environment. The current market is not large enough for all the players. In 2000, 13 companies controlled about 90% of the market and these carriers continue to consolidate and grow market share by buying out discouraged carrier's business. The other 10% of the market belongs to over 100 companies. It takes a lot of money to introduce a new product, build market share and reach a critical mass of premium income that eventually starts producing profits. Only large, successful companies have the resources to stay the course and build market share. A good example of this problem is Penn Treaty Network America, a $400 million insurer, selling primarily LTCi. By insurance company standards Penn Treaty is considered small, yet in 2000 this company produced substantial new LTCi premiums. Penn Treaty is not large enough to have enough excess capital to fund it's growing sales and has relied heavily on new equity issue to fund growth. With equities gone south the company can't find additional capital. It must either find a potential buyer or go out of business. Other examples are CNA and Conseco which have been downgraded by the rating agencies due to financial problems. It is likely that part of a management fix from both companies would be a purging of unprofitable lines of business such as long-term care insurance.
Company Commitment to Long-term Care Insurance.
A good indicator of the commitment level is to observe the level of resources devoted to a company's long-term care business. For instance Allianz is serious because it dumped its third party administrator and acquired LifeUSA which has an established LTCi administration department. This was an expensive move but one that signals commitment. Northwestern Mutual is serious because it formed a separate company that only sells long-term care. These are but a few examples.
Another indicator of commitment is the amount of market share a company has. Obviously a larger market share is going to commit a company to staying with long-term care insurance because of a substantial financial obligation.
The current intent of insurance regulators is to promote rate stability in the LTCi industry, much like the stability we see in life insurance. This is primarily to protect older policyholders on fixed incomes from losing their policies if rates go up. But even the regulators know that a lack of long-term claims experience makes it difficult to predict future claims. Still, companies have been eager to favor public confidence by keeping increases under control. Rates industry-wide have been reasonably stable over the past 10 years. We occasionally read about 70% increases causing a spate of retaliatory law suits, but this is the exception rather than the rule.
It's difficult to identify companies that may have to file for premium increases sometime in the future. Ironically, the companies with the lowest premiums may not be the ones in trouble. There are two tools to use that can give us clues to which companies have adequate premiums and which don't. The first is the "Long-term Care Experience Reports" published annually by the NAIC. The most recent edition shows actual claims loss ratios from 1992 to 2000. Companies with high loss ratios may be more likely to need future rate increases. However, for various reasons, this is not always an accurate predictor.
The second and more useful indicator is the company's underwriting philosophy. Since many group plans are not medically underwritten we can still determine underwriting from the company's approach to obtaining bid information, benefits offered and how aggressively the company tries to increase participation rates. With individually underwritten policies, a recent study by consulting actuaries Millman & Robertson Inc., reports that companies with "loose" underwriting procedures have about 3 times the claims loss ratio in the first three years than those companies with "tight" underwriting.
As a rule, underwriting philosophy combined with loss ratio is a more accurate predictor for rate increases. For policies in-force 5 to 9 years, the average loss ratio for "loose" underwriters was still about 45% higher than "tight" underwriters. It appears that underwriting will have the greatest effect on rate stability.
What Happens if Your Carrier Sells Out or Goes Out of Business?
In the event of an insurance company failure, insureds will not lose coverage. The insurance commissioner for the state in which the company is registered, almost always finds a buyer for the defunct company's policies. But even if no buyer is found, then the state guaranty fund still keeps coverage going. All insurance companies doing business in the state are assessed by the fund to continue coverage and pay claims for the defunct company's policies.
You might question why your initial carrier selection is so important with this amount of default protection available. The answer is, if the coverage was to blame for the defaulted company failure, then it won't benefit an acquiring company either. Chances are the new company may follow with a rate increase for existing insureds.
In the case where no buyers are found and the guaranty association gets stuck with coverage, Insureds would be in limbo. No new enrollees could sign on. With no claims department available, getting claims paid would be a nightmare and switching coverage to a new carrier would probably be impossible. Finally, many guaranty associations limit coverage, for example $300,000 total claims per claimant may be imposed.
Bottom line: pick a strong carrier.
TYPES OF GROUP COVERAGE--A DISCRIMINATION ISSUE
True or Large Group Plans.
The advantage of true group to carriers is that company representatives do not have to be licensed agents in every state to represent the plan and enroll participants. One major disadvantage of true group plans is, at the insistence of employers, they are almost always voluntary plans-the employer does not make contributions. Nationally, participation rates on voluntary plans are less than 10%. Carriers must charge higher rates as compared with individual plans to compensate for the fixed cost of installing and maintaining the plan. Administrative costs are high because true group premium income is small compared with the total number of participants . Higher rates are also necessary to guard against adverse selection caused by low participation. (sick or disabled employees are more likely to enroll). This is confirmed by the following: The average purchase age for group coverage is 43 while the average age for individual coverage is 67. One would expect claims for individual policies to be much higher because older buyers would be expected to have poorer health. This is not the case. Industry-average loss ratios of 35.3% for group policies are about 35% higher than the 27.1% average loss ratio for individual policies. These higher group rates can be as much as double the rates for equivalent coverage with individually-purchased, medically underwritten policies. On the other hand, employer groups with a high proportion of young employees and with 20% or better participation, can often get premiums that are much cheaper than individually underwritten policies. By law, true group plans can be converted, at the same prevailing group cost, to an identical individual plan when the employee leaves the group.
Modified Guaranteed Issue, Individual Plans.
Modified guaranteed issue means no medical underwriting is used but one or more disqualifying questions are asked to eliminate very sick or disabled employees. Here are some typical questions: Transamerica: "During the past 6 months, have you missed 5 or fewer days of work due to your accident, sickness or other physical or cognitive infirmity?" A "Yes" to this question requires medical underwriting and based on the findings results in acceptance or denial of coverage. Another example from Monumental Life: 1. "Have you been diagnosed with Acquired Immune Deficiency Syndrome (AIDS) or AIDS Related Complex?" 2. "Do you need assistance (mechanical or personal) or supervision of any kind to perform everyday living activities; dressing, eating, walking, bathing, transferring, toilet activities or taking medication?" 3. "In the past 3 years, have you been declined long-term care insurance?" Answering "Yes" to any of these questions results in denial of coverage. Some carriers will offer individual group with true guaranteed issue to very large employer groups, but the rates are usually closer to true group rates. In general, for groups with poor participation, rates for modified guarantee issue plans are less than true group rates. Because the policies are individual, the employee can keep the policy and rates when he or she leaves the group.
Individual Plans With Group Discounts.
TAX QUALIFIED POLICIES-A HOTLY DEBATED ISSUE
Congress defined tax qualified policies in the HIPAA (Health Insurance Portability & Accountability Act) legislation of 1996. The intent was to create an objective test for determining benefit eligibility. There is a great deal of debate in the industry over the merits of qualified versus non-qualified. Advocates of non-qualified argue that the government made it more difficult to qualify for benefits by defining the benefit triggers too narrowly. Most non-qualified contracts are more liberal in defining benefit eligibility. However, what is always missing from this debate is that tax qualified moved the certification of benefit eligibility from claims people at the insurance company to an impartial third party. Tax qualified requires any licensed health care practitioner to certify eligibility. Opponents of qualified assume insurance companies are going to be as impartial as a third party certification. Personally, I'm not as trusting.
The other issue with qualified is taxability. Only qualified policies sold after January 1, 1997 allow for income tax exemption on benefits received up to a certain limit. Also limited itemized deductions are allowed on qualified policies. If Congress passes long-anticipated legislation allowing above-the-line deductions for LTCi and the pass-through of premiums in a cafeteria plan, it will only pertain to qualified policies. For these reasons I think it's important that you select a carrier offering tax qualified policies. (For a more thorough discussion of tax issues, see the chapter on taxation of long-term care insurance)
If you ask the carrier how well it pays claims, you'll get the same response: "We pay 90% or more of our claims in a timely manner." There is really no way of knowing which company is most reliable with claims except by reputation. My observation after 18 years in the insurance business is that companies with a long-standing image or reputation to maintain are best with claims. Some of these companies or their parent companies have been in business over 100 years. They didn't survive that long by not paying claims. I have observed that some of the smaller, more aggressive companies don't care that much about image and are more likely to dispute claims.
One way to avoid the claims hassle is to choose a carrier that offers "indemnity" or "cash" benefits. Let me explain. There are two ways to pay benefits under a long-term care policy--Claims-based, sometimes called expense-based, and indemnity-based. Claims-based or expense-based means that every expense must be submitted for reimbursement. Since a number of LTC related expenses (see understanding benefits section) are excluded under all policies, some claims may be denied. Also, the expense reimbursement method only pays up to expenses actually incurred-It may not pay the maximum allowable policy benefit. Under the indemnity-based method, once you qualify for benefits, you don't submit claims. The insurance company will send you or your representative a check once a month for the maximum allowable daily, weekly or monthly benefit in the policy. Some companies with built in cash or indemnity pay a lesser amount under that option than under a claims option. You can use the money to pay your costs and if any is left over, pay for items not covered under the policy, such as personal need items, diapers, medications, doctor visits, transportation, etc. Or you can stick the extra in the bank to pay future costs if the policy runs out.
With indemnity, you are more likely to receive the full benefit in the policy before you recover or die. Under both plans, you are, however, only reimbursed for the actual number of days you receive care. Both plans also require periodic proof that you're still eligible for benefits. Not all carriers offer indemnity. For those that do, it might be part of the policy provision or it might be a separate rider.
UNDERWRITING AND PRICING
Underwriting Individual Policies
Companies are protected from fraud by being able to deny claims if an applicant deliberately withheld information that would have affected whether the policy would have been issued or not. If an applicant in good faith did not reveal information that would not have significantly affected the issuing of a policy, then the insurance company cannot challenge any future claims after the policy has been in force two years or longer. If an applicant did not state his or her age properly, the policy benefits will be altered to reflect the amount of benefit the premium would have bought at the correct age.
Unlike life insurance companies which often rely heavily on medical exams and current health to issue a policy, long-term care companies rely heavily on medical records and the history of past medical conditions. For older ages, companies also use a phone interview or schedule a personal interview with a nurse. In the interview the company is looking for lifestyles, activities and hobbies or pursuits to indicate whether a person is already partially disabled or not. The phone interview also helps keep agents honest who for the sake of trying to get a policy issued may have deliberately downplayed or excluded information on the application that could affect whether a policy is issued or not. Finally, the insurance company is extremely interested in whether a person is struggling with short term memory problems. The phone interview is designed to uncover this and if it is suspected a person has cognitive impairment of any kind, the interviewer will conduct a cognitive impairment survey.
In the past, companies have been more liberal in issuing policies than they are today. This change of attitude has probably come from the companies misjudging the amount of current claims resulting from more liberal, past underwriting assumptions. Because of this change, if you are thinking about buying long-term care insurance and are in good health, but you are delaying buying it for whatever reason, you should not wait until your health changes because it may be too late at that point to buy it. You should buy it now.
The new code-mandated application process also requires companies to disclose in writing to the applicant, whether there have been any rate increases on existing policyholders and the details of these rate increases. Because of these pressures to not raise existing rates, I believe companies can only cover increased costs by having new policyholders subsidize the policies of previous insureds. This is certainly an advantage to existing policyholders who are concerned about future rate increases, but new policyholders are paying higher rates at the same age than existing policyholders would have paid on the old policy at that same age. This is all the more reason to buy insurance now instead of delaying the purchase. The combination of higher rates at an older age as well as higher premiums due to rate creep, could make the delayed purchase of insurance a very expensive decision.
Underwriting and Pricing Group Policies
On the other hand, the participation of younger employees is encouraged by keeping their rates very low. Since younger employees are less likely to have health problems, this helps reduce the risk of future claims for the insurance company. Also the enrollment of healthy younger employees has another benefit. These people are more likely to leave their jobs for another company and will probably not take their insurance with them. This means the insurance company will never have to make a payment for claim with younger employees who leave and the insurance company has made some additional profit that it normally would not have made with older policyholders who tend to keep their coverage for life.
The second way that an insurance company controls its future costs with group policies is to limit the benefits that are available to employees. This is done by providing only three or four choices for employees and limiting the amount of home care and downplaying the availability of inflation protection. By skimping on benefits the company will have a better handle on future claims. Limited benefits also make the policies less expensive and this helps encourage more people to sign on thus increasing the participation rate.
But limited benefits pose a huge future risk for existing group policies. By not offering automatic inflation protection and limiting home care benefits, group policies will be woefully lacking 30 years from now when claims are made. Since it is not in the best interest of the insurance company to explain this problem with group policies, employees who buy group policies think that they have adequate coverage when in reality they don't.
LONG TERM CARE--FUNDING AND PROVIDERS
What Is Long Term Care?
The need for long-term care help might be due to a terminal condition, disability, illness, injury or the infirmity of old age. Estimates by experts are that at least 60% of all individuals will need extended help in one or more of the areas above during their lifetime. The need for long-term care may only last for a few weeks or months or it may go on for years. It all depends on the underlying reasons for needing care.
Custodial Care versus Skilled Care
According to the American College of Medical Quality:
Writers and advisers who are not part of the medical community often confuse custodial care and skilled care with specific care activities. For example help with the activities of daily living and many of the items on the list in the previous section are care activities thought to be by definition custodial care. Whereas the monitoring of vital signs, ordering medical tests, diagnosing medical problems, administering of intravenous injections, prescribing and dispensing medicine, drawing blood, giving shots, dressing wounds, providing therapy and counseling are all activities normally associated with skilled care. But many non-medical advisers and writers don't know that skilled and custodial refer to the people who deliver the care not the actual care given.
A skilled care provider can also provide services normally thought to be provided by custodial caregivers. Such things as help with activities of daily living and so-called instrumental activities of daily living are often furnished by skilled providers in the course of their treatment. Or a skilled care plan may call for services that can be delivered by a custodial caregiver but it would still be under the skilled plan of care for that individual. On the other hand people who deliver custodial services may from time to time perform those activities supposedly reserved for skilled providers. Such things as taking blood pressure, administering medicines, giving shots or changing wounds might be provided under certain circumstances by a custodial provider.
Please remember that the terms skilled and custodial do not refer to specific types of long-term care services but rather who delivers those services. Also the delivery of skilled services must be done under a written plan of care which often includes custodial care services.
Does Medicare Cover Custodial Care?
Medicare covered nursing home stay
Medicare covered home care
Medicare hospice care
Please note that there is no such thing as a custodial nursing home. All nursing homes are by definition skilled care facilities because they have nurses who are skilled care providers. Also be aware that not all states license intermediate care facilities which might provide less than 24 hour registered nursing care. "Skilled care patients" in nursing homes are referred to as such because they are receiving payment from Medicare or sometimes payment from private health insurance plans. Practically all nursing home residents have medical needs but Medicare and other insurance plans will only pay for patients that have certain acute medical needs where recovery is anticipated. Patients with chronic medical problems are typically not covered by Medicare but would be covered by Medicaid.
The confusion with understanding the term "skilled nursing care" probably comes from Medicare itself. To be a certified Medicare nursing home and receive payments from Medicare a nursing home must meet the Medicare definition of a "skilled nursing facility". This means there must be registered nurses on duty 24 hours a day, there must be a doctor on call at all times and there must be ambulance service to a local hospital. Medicare may also require additional staffing and facility arrangements to receive certification. It is unfortunate that the word "skilled" is used in this definition. All nursing homes whether they meet the definition of a "skilled nursing facility" or not provide services from a nurse, doctor or therapist and this meets the medical definition of skilled care. Many states have adopted the same federal criteria for licensing their nursing homes. In some states the "skilled" definition is the only option for a nursing home. But in some states facilities with lesser services can receive different licensing classes. These might be called intermediate care facilities or "small nursing homes".
Formal Care versus Informal Care
During 1998, in the U.S. , 9.5 million patients were served by home health agencies and 576,000 by hospice care. This care was provided by approximately 13,000 agencies, nationwide. The percent distribution of disorders requiring home care were: diseases of circulatory system-25.2%, injuries and poisoning-9.9%, muscle and skeletal disease-8.8%, respiratory-8.4%, cancer-7.3%, endocrine, nutrition, metabolic, immune-5.4%, nervous system- 4.3%, others-balance of distribution. Of the patients served by hospice, about 76% had cancer or heart disease.
In 1997, there were about 17,000 skilled and intermediate term nursing homes in the US serving 1,609,000 residents. About 1,465,000, or 91% of residents, were age 65 and older. Out of those 1.5 million elderly patients in nursing homes in 1997, as a percent of the total, help was provided with 1 or more activities in the following categories: bathing or showering-96.2%, dressing-87.2%, using toilet room-56.2%, eating--45%, transferring to chair or bed-25.4%.
As of the year 2000, an estimate by NatWest Securities places the total number of assisted living beds nationwide at 1,387,836 beds with total revenue of $33.1 billion.
Some ALFs have found a niche in providing care to Alzheimer's patients and many ALFs are exclusively dedicated only to Alzheimer's residents. This disorder requires constant supervision but not necessarily from the more costly skilled medical staff found in nursing homes. And since at least 5% of those over 65 and 46% of those over 85 suffer from mental impairment, this provides a potentially large market for ALF Alzheimer's facilities
Not all residents of ALFs need care or assistance. Many are there because they want a simpler lifestyle without the worry of maintaining a home and they seek the companionship of other people their own age. They have chosen assisted living because they may need some minor help with IADLs but they anticipate a time when they may need the more intensive care available with an ALF.
As of 1996, ALF residents who were independent with ADLs (needing no assistance) were as follows: eating--88%, transferring--84%, toiletting--78%, dressing--58%, bathing--49%. A recent survey of assisted living administrators estimated that 24% of their residents received assistance with 3 or more activities of daily living, such as bathing dressing and mobility. They estimated that about one-third of residents had moderate to severe cognitive impairment.
Depending on the definition of caregiving, estimates of the number of informal caregivers range from 20 million to 50 million people. This could represent about 20% of the total population providing part-time or full-time care for loved ones.
The typical caregiver is a daughter, age 46, with a full-time job, providing an average of 18 hours per week to one or more of her parents.
Among adults aged 20 to 75, providing informal care to a family or friend of any age, 38% care for aging parents and 11% care for their spouse. About two-thirds of those caregivers for people over age 50 are employed full-time or part-time and two-thirds of those-about 45% of working caregivers-report having to rearrange their work schedule, decrease their hours or take an unpaid leave in order to meet their caregiving responsibilities.
A recent study estimates these people lose about $660,000 in wage wealth over their lifetime because of work sacrifices. And estimates of productivity losses to businesses because of time off for caregiving range from $11 billion to $29 billion yearly. The average amount of time informal caregivers provide assistance is 4.5 years but 20% will provide care for 5 years or longer.
Understanding the Progression of Care Commitment
The chart below illustrates the relationship of informal care to formal care. As care needs increase, both in the number of hours required and in the number or intensity of activities requiring help, there is a greater need for the services of formal caregivers. Unfortunately, many informal caregivers become so focused on their task they don't realize they are getting in over their heads and they have reached the point where some or complete formal caregiving is necessary. Or the informal caregiver may recognize the need for paid, professional help but does not have the money to pay for it.
It is the job of a care manager or a financial adviser or an attorney to recognize this need with the client caregiver and provide the necessary counsel to protect the caregiver from overload. An overloaded caregiver is likely to develop depression and/or physical ailments and could end up needing long-term care as well. Or the consequences of not being able to cope with caregiving might even result in an early death for the caregiver.
There is, however, a growing trend where the only family caregivers may be living hundreds or thousands of miles away from their loved one. In this case, a care manager would be hired to provide the intermittent care for the loved one.
Part Time Care
Depending on what causes the need for long-term care, a care-recipient could start out at any point on the curve below. For instance a stroke, injury or sudden illness may result in the immediate need for part time or fulltime care. On the other hand the slowly progressing infirmity of old age, the slow onset of dementia or a progressively deteriorating medical condition may only require occasional help; beginning with intermittent care from an informal caregiver but gradually progressing to the need for fulltime, formal care.
Understanding Who Is Receiving Care and For What Reason
The following was taken from a presentation for the congressional hearing below:
Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on Health of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on long term care. The hearing will take place on Tuesday, April 19, 2005, in the main Committee hearing room, 1100 Longworth House Office Building , beginning at 4:30 p.m.
"As our society ages, the question of how we finance long term care services will become even more pressing. About 9 million adults currently receive long term care assistance, either in community settings or in nursing homes. Over 80 percent of those adults reside in the community, not in institutions. Among those 85 and older, about 55 percent require long term care assistance. Nearly 60 percent of elderly persons receiving long term care assistance rely exclusively on unpaid caregivers, primarily children and spouses. Only 7 percent of the elderly rely exclusively on paid services".
The chart below indicates that as much as 22% of the population over age 65 could be receiving long-term care services. It should be noted however, that care for some of these people might only consist of a moderate amount of supervision or help that can be handled easily by an informal caregiver. But at least 7% or more of the aging population is receiving care from formal caregivers in assisted living or in a nursing home. In addition, with the current proliferation of non-medical, paid home care services, probably a high percentage of those receiving care in the home are paying for the fulltime or occasional services of a formal caregiver.
Explanation of the data: The literature is replete with estimates of adults receiving care in nursing homes ranging from 15% to 25% of the total. We have chosen a figure of 20%. In 1999, according to the CDC nursing home survey, 1.47 million elderly were residing in nursing homes. Since the number of elderly nursing home residents has only been increasing slightly over the last 6 years, we used a 10% increase for 2005 arriving at the figure of 1.62 million who are elderly nursing home residents. Using this number we have extrapolated the number of elderly receiving care in the community. To determine the number of elderly receiving care in community housing with care we looked at estimates from assisted living organizations varying from 1.0 million residents to 2.0 million residents. The reason for such a wide range is that many community care housing arrangements are in single owner homes where the owners are providing care for fewer than five people. Most of these small care providers don't advertise and there is some concern they don't license. It is therefore difficult to track the number of people receiving community care but not living in their own homes or in the homes of family members. We chose a number halfway between the two at 1.5 million residents receiving community care. But the national long-term care survey in 1999 indicated only about 70% of residents living in community housing with care are actually receiving care services. Thus the number of 1.05 million residents. All other numbers and percentages were extrapolated from actual census data and from the numbers already mentioned. Since a large number of care recipients are under the age of 65 we don't come up with as many people receiving long-term care as indicated in the excerpt from the house committee report above.
The data for the chart below were taken from an AARP research article and represent the year 1995. It should be noted that long-term care-recipients below the age of 65 are not typically part of the workforce or ever were. For the most part these are people who were born with developmental disabilities or mental retardation or developed these conditions early in life. They are healthy otherwise and may live a normal life span which could be scores and scores of years. Most long-term care-recipients over the age of 65 were healthy and functioning prior to developing a need for care. For these people the need for care seldom lasts longer than three to five years after which many will die. Since care-recipients under age 65 may live six to ten times longer than the elderly care-recipients, the younger folks tend to accumulate in numbers and skew the statistics. This often leads to misinterpretation of data describing the age populations receiving care.
If statistics were available comparing the number of people needing long-term care for the first time in any given year, the incidence rate for the elderly population would be significantly higher than that for the younger population.
It should also be noted that the younger care-recipients are typically covered by Medicaid and receive payments from SSI. They don't struggle with the same lack of funding issues as the older generation. The reason for a low percentage reporting under age eighteen is because reporting methods for long-term care don't apply to this younger age group.
The chart below reveals significant proportions of the population under age 65 may need physical or emotional help from other people. But, as has already been pointed out above, there are some in the population who have developmental disability or mental retardation and this may explain the high number of disabled under age 65. Of particular interest is the fact that close to half of the population over age 75 is disabled. Since more and more people are surviving to age 75 and beyond we can only expect an increased demand for long-term care services in coming years.
Source: 2005 Statistical Abstract Of The United States , Health And Nutrition
The chart below shows a general classification of the types of disabilities people age 65 and older are dealing with. Note that a little over four out of ten of all elderly are dealing with some form of disability. Also note the large number of elderly who are afraid to leave their homes by themselves. About one in five elderly can't leave home alone.
Source: 2005 Statistical Abstract Of The United States , Health And Nutrition
The 2 following charts were taken from a presentation for the congressional hearing cited below:
Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on Health of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on long term care. The hearing will take place on Tuesday, April 19, 2005, in the main Committee hearing room, 1100 Longworth House Office Building , beginning at 4:30 p.m.
The Big Picture--How Much Does It Cost and Who Pays?
The following was taken from the same presentation from the congressional hearing cited earlier:
"In 2004, according to CBO, approximately $135 billion was spent on long term care for the elderly. Sixty percent of this amount was financed through Medicaid and Medicare, one third through out-of-pocket payments, and the remainder by other programs and private insurance. This funding excludes the significant resources devoted to long term care by informal caregivers (primarily spouses and children). The CBO estimates that informal care is the largest single component of long term care".
Estimates of the equivalent cost of informal care provided by family or friends run as high as $300 billion or more a year. If the Federal government were providing this care instead of unpaid caregivers, the combination of funds already expended and the potential costs would be the third largest single budget item exceeded only by Social Security and defense spending.
Source: 2005 Statistical Abstract Of The United States , Health And Nutrition
The chart below was taken from the same presentation from the congressional hearing cited earlier:
The chart below tracks all categories of health care costs for the elderly. There are four categories that pertain to long-term care services.
The first of these bars is titled "hospice". Hospice care is paid exclusively 100% by Medicare. This typically covers an hour or less a day for palliative care for a terminal condition. Additional hospice coverage could be covered out of pocket or by long-term care insurance.
The second category is called "home healthcare". This is the kind of care covered on a temporary basis and under prescription from a doctor and normally paid by Medicare. Of note is the fact that 15% of this care is not covered by Medicare. The other costs may be covered by the veterans administration, the national institutes of health, the bureau of Indian affairs or private insurance. This care is provided by companies called Home Health Agencies. These companies provide the skilled and custodial care as part of a plan of care prescribed by the doctor and limited to a certain period of time (money is usually provided for a 60 day period). Home care from Medicare does not cover long-term care needs beyond a few months.
The Veteran's Administration will also pay for home care for qualifying veterans on a basis similar to Medicare: however, it is probably paid more liberally without a definite cut off of services. VA home care must be approved by a medical staff at the local veteran's hospital.
In the last ten years we have seen an astounding growth of companies providing non-medical home care which is not typically covered by government programs but must be paid directly by the family. Costs are also covered if the recipient has long-term care insurance. Many home health agencies are also offering this care as a separate service. There is no plan of care unless these services are sub-contacted under a plan of care by a hospice or home health agency which is sometimes the case. In some states Medicaid will also pay for this kind of care under certain conditions. There is also no limitation on how long Medicaid services can be offered. The data for these services are not represented in the chart below.
The third category is entitled "short term institution". This is a misleading title that refers to Medicare nursing home coverage after a three day hospital stay. Note that not all of this care is covered by Medicare. This is because a short term nursing home stay may not have met the three day rule, or did not originate from a hospital or require skilled care, which are all prerequisites for Medicare to pay. The services may also have been covered by other government agencies such as the VA, the bureau of Indian affairs, private insurance or Medicaid.
The fourth category is "nursing home/long-term institution". Note the reversal of who pays the bill. In this case it is shared by the family and Medicaid. The other" category might include payments by the veterans administration and the bureau of Indian affairs or private insurance. Many of those paying out of pocket are going through a spend-down process to deplete their assets in order to qualify for Medicaid. People with too much income or assets will not qualify for these government, means tested programs and must pay for long-term care institution costs out of their own pockets.
How Reliable Are National Cost Surveys?
Nursing Home Phone Sample, Cost Surveys
We believe that it is not possible to do a reliable sample phone survey of nursing home costs because all nursing homes in a given state are not the same in structure and operation and marketing philosophy. Because of a lack of uniformity, all nursing homes in the state will not follow a standard statistical distribution on costs and therefore a random sample survey will not give reliable results.
We could probably use up six or seven pages describing in detail the factors that affect private-pay bed rates for nursing homes. Also the application of these factors and different state approaches on regulating nursing homes affect the private-pay bed rates from state to state. Here are some of the factors:
Assisted Living Cost Surveys
The term "assisted living" is a marketing tool that refers to a large number of different community living arrangements that also offer care. There is no uniform regulation of these services from state to state. Some states regulate on the basis of number of residents while other states regulate on the basis of services offered. Not all states use the term assisted living for these living arrangements. In the states that control services, some of those states allow very little in the type of services offered and residents in those states must go to a nursing home to receive more extended services. On the other hand, some states even allow assisted living to offer nursing home skilled services under certain conditions. Obviously the services offered will affect the cost of care and the cost of an assisted living arrangement. Also in some cases assisted living cost includes the cost of long term care services and in other cases the cost is charged in addition to room and board.
A large number of operations offering community living with care are invisible to the public. They are small operations that don't advertise and probably fail to register with their state health department. Their residents come to them via referrals from others. For purposes of classification we will call these "board and care " facilities.
These are operations using a residential home and housing residents in bedrooms in the home, sometimes shared with another person. Dining facilities, living room and bathrooms are shared. Some of these operations are employer and employee companies but the vast majority are run by the people who own the home and have taken in aged boarders to supplement their income. Long term care services are usually limited to what the owner operators can handle themselves. To augment services, a number of these operations will bring in home health agencies to help with medical conditions.
Board and care operations naturally have a lower cost of operation and will charge their residents typically much less than the apartment-based assisted living facilities included in national surveys. The surveys will not include these providers because they don't advertise, they don't list in the phone book and many have failed to license with their health department.
Home Health Agency Cost Surveys
What would be very useful is if surveys were to include the cost of non-medical home health services. These costs are borne by the public and it would be useful for planning purposes to know what the cost is in a given area. Perhaps the national surveys will add this information in the future.
GOVERNMENT PROGRAMS ONLY PAY FOR ABOUT 16% OF LONG TERM CARE
Government programs such as Medicare, Medicaid and the Veterans Administration will cover the cost of long-term care under certain conditions. Medicare will cover rehabilitation from a hospital stay or limited care at home if there is a skilled (medical) need. The Veterans Administration will cover the cost of nursing home care indefinitely if the veteran is at least 70% service-connected disabled. The VA will also cover other forms of home-based or community-based care if there is a medical need.
Medicaid will cover both medical and non-medical related long-term care but in order to qualify for Medicaid a person has to have less than $2,000 in assets and income that is insufficient to pay the cost of care. In other words a person must be impoverished. Otherwise Medicaid will not pay.
Based on our analysis of yearly, one-on-one care hours, we estimate that about 84% of all long-term care is not covered by government programs. This is primarily family-provided home care to help with activities of daily living, or help with maintaining a home, providing meals and support, or care services providing supervision or companionship or providing transportation and shopping services. Care not covered by the government is also care provided from family out-of-pocket payments in nursing homes and assisted living facilities. Families are also hiring more and more aide services to help with care at home.
Estimating the equivalent cost of home care
Based on the chart below about 71% of all long-term care hours are provided in the home by family. (We have excluded home care hours from Medicaid and Medicare programs.) Most of this care is provided free of charge by family members, friends or volunteers. However some is provided by professionals or aides paid from family funds or from insurance. If we were to multiply the total number of home care hours we derived for the chart below times the average hourly cost for home health aides, we would have an equivalent yearly cost of home care in this country. We estimated about 16,556,400,000 hours per year of home care in 2000. The number of elderly has grown about 1% per year since then. This gives us roughly 17,400,943,000 hours in 2005. The MetLife annual survey estimates the cost of home health aides is $18 an hour.
Multiplying the two figures together gives us $313.2 billion of equivalent home care cost.
This is roughly 3 times the total current amount the state and federal government pays yearly for all long-term care services. If the federal government had to pay all home care costs in this country combined with what it already pays for long-term care, the cost would be the third largest single expenditure in the federal budget exceeded only by Social Security and defense. Many people are pushing the government to do just that.
Source: Thomas Day at longtermcarelink.net
The chart was derived and extrapolated from a number of sources. Also a number of educated guesses were made in order to complete the data. These were estimates of daily care hours including services such as homemaker and housekeeping services for various care systems. Some of the estimates were based on examples of acuity standards and personal experience. We feel that although the data may contain some error, you can get an appreciation of the amount of care in terms of hours yearly that is provided by the major care systems in this country. The number for home care hours provided comes from the 1999 National Long-Term Care Survey where the respondents indicated the average number of weekly hours provided for care was 42 hours. The hours per patient in nursing homes were estimated from the 2000 survey of nursing home staffing done for Congress. Hours and length of stay for Medicare home care, Medicare nursing home and hospice were taken from CMS sources.
The analysis is for the year 2000. The most complete data set is from surveys and statistics published in 1999 and 2000. There is not a current complete data set available to do this analysis for a more current period.
Source: Thomas Day at longtermcarelink.net
The average length of stay for long-term care nursing home residents is 2.43 years. Source: CDC, National Nursing Homes Survey, 1999
The estimated average length of stay for home care is 3 to 5 years depending on the care setting. Source: 1999 National Long Term Care Survey
A 1999 survey done by the National Council for Assisted Living e stimates the average length of stay in an assisted living facility ranges from approximately 2.5 to 3 years.
Long Term Care For The Elderly, Supervised or Provided By Family or Others at Home (Informal Care Givers)
The supervision of care or hands-on care from informal caregivers, who are usually family and friends, is limited to activities that don't require a skilled background. Lifting , bathing, dressing, diapering, toileting and helping with walking can be a challenge to family caregivers because they don't have the proper tools or are not trained in this area. Or the children of elderly care-recipients may have difficulty dealing with cleaning messy bottoms or bathing their parents. Another problem may be handling errant behaviour from dementia. Because of this, some caregivers bring in paid providers to help with lifting, walking, bathing, incontinence, toileting, dressing and dementia supervision. Another home care arrangement is for family members, who are not living close by or who are employed fulltime, to become supervisors and coordinators of care but to offer only limited, personal, hands-on care.
Home care is almost always provided in the home of the recipient or the home of a family member or friend. Home care may under certain circumstances be offered in other settings such as group homes or independent retirement communities. Estimates are that 67% of all long term care for the elderly is provided by caregivers in the home. Below is a restatement of the activities provided by or supervised by family caregivers and listed at the beginning of this article.
Source for all charts: 1999 National Long-Term Care Survey
Because it is not typically covered by the government, inclusive statistics for how long home care can last are lacking. The 1999 national long-term care survey did ask how long caregivers have been offering care. We do not have the data for length of stay for particular types of conditions but reports from the survey indicate home care can last 3 to 5 years.
There is usually little ongoing cost for services with this type of care since services are mostly furnished free of charge by informal caregivers. However, there is a growing trend for out-of-state or fulltime employed caregivers to bring in paid provider services for home care. There can also be significant costs for supplies, medications, hospital equipment and home modification.
Supplies could include diapers, wipes, pads and personal hygiene supplies. These are paid typically out-of-pocket and surprisingly could cost as much as $200.00 to $400.00 a month.
Medications are currently not covered by Medicare and must be covered by the care-recipients, although Medicare prescription drug coverage is coming next year. The savings from Medicare part D may be useful to help the elderly pay for other long-term care costs. Currently drugs could be costing an older individual $300.00 to $600.00 a month. Those requiring long term care are probably taking more medications than their peers in the community who are relatively more healthy.
Hospital equipment includes such things as special air beds, walkers, wheelchairs, scooters, stools, oxygen equipment, crutches and hospital beds. Generally these costs are covered by Medicare but co-pay must be made unless the recipient has a Medicare supplement policy which should pick up the additional cost.
Home modification could include building ramps, widening doorways, installing special showers and toilets, installing lifts and handrails. These costs are borne by the care-recipient or her family.
If the family finds it necessary to bring in a homecare agency to help with lifting, bathing, walking, incontinence, toileting, dressing or supervision the cost could be anywhere from $12.00 to $25.00 an hour depending on the area of the country and whether there is a contract for extended weekly services.
As has been mentioned, this care is typically provided free of charge by informal caregivers who are family or friends. But increasingly, Medicaid is also paying for these home services for those who are Medicaid qualified. In order to receive Medicaid home care a person must qualify for Medicaid and spend at least 90 days in a nursing home. Local area agencies on aging sometimes in conjunction with Medicaid will often pay for home repairs, transportation and snow removal for low income recipients. In addition, many low-income people can receive rent subsidies and help with utility bills from Federal and local governments. The local area agency on aging can furnish information on these programs.
Medicare will also pay for home care services on a limited basis to help a person who is homebound recover from an injury or medical condition. Medicare provides a home health agency about 60 days worth of payment to help with the recovery. If the recipient fails to respond, deteriorates or is not improving in any way Medicare will no longer cover the cost of care.
For people with low incomes, area agencies on aging provide some free help. There are volunteers who will sit with a care-recipient to give some free time to the caregiver. There is meals on wheels at no cost or very low cost. Senior centers are usually sponsored by area agencies on aging and they sometimes provide transportation for a disabled person at home. If the person requires no medical attention, the caregiver can allow her care-recipient to spend some time at a senior center and she can get some rest. About three years ago Congress appropriated some money for caregiver respite. This should be available to all caregivers regardless of income level. Area agencies also provide legal help, counseling, caregiver support groups and a whole raft of other benefits. And of course the local agency is a great resource for other senior support programs that are available in the area.
LONG TERM CARE INSURANCE FOR HOME CARE
For those who have the foresight to buy it, long-term care insurance will cover the cost of home care either for help with activities of daily living, with supervision for dementia and, if it is a newer policy, for help with many of the other activities listed at the beginning of this section. These activities are called "homemaker services". Most policies will pay in addition, for home modification and other necessary training and support to help a person remain in the home.
Providing informal long term care services at home is changing significantly for the American public. Traditional caregivers are now employed full time or are living away from their loved ones and cannot provide the care directly. It is becoming increasingly difficult for caregivers to provide the level of care offered in the previous century. The time for long-term care insurance to play a significant role in paying the cost of home care has come.
A recent survey by LifePlans, Inc. (see table below) indicates that people with long term care insurance will purchase services with the insurance they normally would have furnished for free themselves. This is an extremely important issue because caregivers may often have money to pay for these services but will not spend it because, as they reason, they may need the money after their loved one is gone. By not seeking help, many caregivers destroy their own emotional and physical health struggling to provide countless hours of care for a loved one.
The insurance survey specifically pinpointed the fact that with insurance to help, the stress from caregiving was substantially reduced, especially for caregivers who were employed and working outside of the home. Caregivers were given a needed rest. And unlike the tendency to avoid using personal funds, people with insurance will almost always use it and make claims to help with care.
Source: LifePlans, Inc
UNDERSTANDING LONG TERM CARE INSURANCE BENEFITS
In an effort to keep it simple, group plans will preselect 3 or 4 different benefit combinations for employees along with a few additional riders such as shortened pay, inflation protection and non-forfeiture. This cuts the number of options to 10 or 15. It also serves another purpose. By forcing everyone to buy predefined benefits, employees who are sick or disabled are prevented from selecting very generous benefits for themselves. Since these people are more likely to make claims, the size of their claims are held in check and they cause less negative impact on the risk pool.
But restricting benefits, causes the healthy employees to miss the advantages of richer and better plans. And in many cases restricted benefits force them to buy inadequate coverage. The danger here is that employees think they're covered when they're really not. For instance, in order to make policies look like a bargain so as to increase participation rates, many carriers don't require inflation protection. Or they offer incomplete protection. They don't even stress it's importance. Employees think they're buying adequate coverage, but 35 years from now, without proper inflation protection, their insurance may not even buy the sheets on their hospital bed. (Perhaps this is an exaggeration to make my point, who knows?) In fact, as I mentioned in a previous chapter, a recent survey of people currently using insurance benefits for care, reveals they have inadequate coverage for their actual LTC needs. Another bad idea, resulting in poor future coverage, is a carrier recommending a plan that is cheap at first but allows periodic bump-ups in benefits with corresponding premium increases. I'll explain the problems with this strategy later.
This is why I usually recommend that you choose a plan that allows the selection of additional benefits. These extra options are always medically underwritten, but at least employees have the opportunity to get better coverage. Probably 90% to 95% of actively working employees will qualify for preferred rates under a medically underwritten plan. Or you may want to offer an additional individual plan some time after having met the initial participation goals with enrollment of your primary plan. If it were an individual plan, you could offer it as a supplement with no enrollment period. People could sign up at any time during the year.
One other observation. Because it's so complicated and because the wrong choice of benefits now may not have implications for 30 or 40 years, it's important you deal with an advisor who only specializes in long term care insurance. This is a recommendation often repeated in numerous public awareness articles over the past 10 years.
Receiving Benefits-Qualified and Non-qualified Policies
Qualified Long Care Services
1) Necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services, and 2) Required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.
Chronically ill individual
You are chronically ill if you have been certified by a licensed health care practitioner within the previous 12 months as one of the following:
1) You are unable for at least 90 days, to perform at least two activities of daily living without substantial assistance from another individual due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing and continence, or
2) You require substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Non qualified policies use similar benefit triggers but usually add a third trigger: "If deemed medically necessary" Which might make qualification easier. These policies also leave out the restrictive language such as: "substantial supervision", and "for at least 90 days". On the other hand this more liberal approach is offset by the fact that the insurance company often determines eligibility with non-qualified; whereas, a third-party, impartial, licensed health care practitioner certifies eligibility under qualified policies. Cognitive impairment covers Alzheimer's, stroke, dementia and other organic nervous disorders with both policy forms.
Some policies include an IRS definition waiver that also lessens the advantage of the "medical necessity" clause of non-qualified contracts. These waivered qualified contracts allow either as a policy rider or by contract language the "substantial assistance" (which is interpreted as hands-on assistance) to be redefined as "substantial or standby assistance". Standby assistance does not require "hands-on" and may be nothing more than verbal encouragement or an assuring presence. This added dimension under some circumstances might make it easier to certify for benefits under a qualified contract. Read your policy carefully, not all contracts offer this more liberal provision.
Understanding Facilities Care Daily Benefit Amounts
Daily policy benefits cover primarily room and board and skilled or custodial care which are usually included in the whole package price from an institution. Anything payable by Medicare is not covered by the policy but Medicaid can pay in addition to insurance. All levels of licensed facilities are covered to include Alzheimer's facilities, skilled care, intermediate care and custodial care facilities. Assisted living facilities (ALF) or alternative care facilities (which in many states means assisted living) are covered under all modern integrated policies. ALF may be covered under the facilities part or it may be covered under the home and communities care part of the policy. The best policies cover it under facilities. When covered under home care it often pays at the 50%, 75% or 80% of facilities reduced benefit imposed on home care. Bear in mind that it's possible to be in a facility especially an ALF and not qualify for insurance to pay the bill.
More recent long-term care policies pay benefits incurred during a monthly or weekly period instead of benefits incurred daily. As an example one policy may pay benefits incurred up to $100.00 per day and another policy may pay benefits incurred up $3,000.00 per month. Total benefits paid may be the same under either policy as long as no combination of claims in any given day exceeds $100.00. But what if, for example,a claim for $500.00 is made on a particular day. The $3,000.00 a month policy will pay the full $500.00. The $100.00 a day policy will only pay $100.00 and the other $400.00 will have to be paid out of personal funds. Obviously the policy paying weekly or monthly is more likely to cover all of the eligible long-term care costs when compared with the policy paying daily. This extended benefit may be an integral part of the policy or it may be purchased as an additional rider. It may only apply to home care or nursing home care or it may apply to all benefits offered under the policy.
Determining the amount of daily benefit is a financial planning exercise. Since LTCi is primarily a product for old age, the amount of daily benefit is determined by sources of retirement income and how much of that income can be used to supplement insurance to pay LTC costs.
I have found that individuals with higher incomes and for whom premiums are more affordable, prefer to buy the average daily benefit cost of coverage for their region and protect it with a compound inflation rider.
More insurance funding for home health care will reverse the current trend towards institutionalization. I know from personal experience that had home care insurance been available to my parents, they would have used every dime of it for home care services. No one wants to die in a nursing home. Adequate home care coverage keeps people out of nursing homes. This is why I recommend choosing a plan that covers 100% home and community care.
Home care typically covers the services of licensed nurses, aides and therapists. Some companies will cover certain activities of non-licensed providers and even your own children as providers as well. Also it is important to remember that home care is usually limited to the five or six activities of daily living defined in the policy or for supervision required for someone with cognitive impairment. Additional services such as so-called homemaker services are not covered unless specifically mentioned in the policy.
The options of what is covered and under what circumstances, vary so much from policy to policy that I could take up 5 pages of type trying to describe it. The only way to address this complicated but very important area of coverage is to go over each policy and compare it with the next.
Selecting a Benefit Period
It perplexes me that literature and sales material recommend using nursing home stay statistics to determine the length of time a policy should last. Nowhere do I find statistics using the homecare stay or assisted living stay as the basis for buying a policy. And nursing homes and home care are not mutually exclusive. A home care stay could progress to assisted living and then to a nursing home. Almost without exception, literature and sales material cite a 2 1/2 year nursing home stay as an example of the length of time one would need long term care. But yet a combination of home care, assisted living and nursing home could easily add up to a five or six year period of time.
You should never use a nursing home stay as the basis for how long your policy should last.
Here's the way I approach it...Many people have the assets and a healthy spouse usually has the stamina to survive 1 to 2 years of long term care. It's the long term care that drags on forever that's devastating not only to assets but also to the well being and health of loved ones. I recommend that even if there's only a 10% chance that long term care will last more than 5 years, you should buy the longest benefit period you can afford-but definitely 5 years as a minimum.
The chart below shows that 22% of the population over age 65 is receiving long term care either at home, in a community living arrangement such as assisted living or in a nursing home. Note that the nursing home stay is the shortest period of time for care. Also note that only 20% of all long term care is in a nursing home.
Why then, if it is the most unlikely place for care and has the shortest length of stay , would anyone use the nursing home as a basis for determining the length of benefit?
Understanding Inflation Protection
The question is, what inflation rate for long-term care services should we anticipate over the next twenty or 30 years? At the end of this section I have included a chart which I derived from the bureau of labor statistics for the historical cost increase in urban nursing homes and adult day care costs. During the 1970's and 1980's these costs increased close to 10% a year. For the past ten or so years these costs have increased a little less than 5% a year. I understand the Centers for Medicare and Medicaid Services are projecting per capita costs for Medicaid long-term care to increase about five and a half percent a year over the next ten years.
As we look back over the previous century, the core inflation rate for all goods and services has been closer to 3% a year increase. The reason for the higher inflation rate for long-term care services is because these services have a high medical component and medical costs and services have been increasing year over year at a much faster rate than the core inflation rate.
Modern long-term care policies increasingly offer benefits for so-called homemaker services. These would include services from nonmedical aides to help not only with activities of daily living but also with such things as shopping, transportation, light housekeeping, laundry, cooking , and companionship. Since these services have no medical complement, they should increase in cost closer to the core inflation rate of about 3% a year. What this means to the policyholder is that a policy with a 5% yearly, automatic inflation increase should buy more homemaker services in the future than it does today.
One strategy often recommended by agents is to buy more benefit than needed and over time the larger benefit will compensate for the loss in buying power. This also helps with group policy enrollment since many employees don't understand the significance of inflation. For example, a $150 per day benefit without inflation protection, that costs $40 per month looks a look better to an employee than a $90 per day benefit with inflation protection that costs $49 a month. But which plan is better for the employee? Let's take a closer look. I ran rate comparisons for a 60-year old buying a 5 year benefit from 22 different companies then took an average rate for all 22 plans. First, I ran rates for a $160 daily benefit with no inflation protection. The average premium was $93.69 a month. Next, I ran rates for an $80 daily benefit with an automatic inflation protection rider that increases the benefit by 5% every year. The average premium was $88.95 a month. Surely, doubling the benefit at only about $4 more per month looks like a better deal and it should be more than enough to handle inflation. This is true if a claim is made in the next 14 years as the benefit with inflation protection has grown to exactly $160 a day when the insured is 74 years 2 months and 3 days old. But remember, the average claims age is 78. And what if the insured doesn't make claim until 83? At age 83, the no-inflation option is still stuck at $160 a day with a total lifetime benefit of $292,000 whereas the inflation protected benefit has grown to $246 a day with a total lifetime benefit of $448,442. I think this example shows it's wiser to buy inflation protection than to ignore it.
There are 3 types of inflation protection. The first, automatic 5% annually compounded, has been discussed above. The second is automatic 5% simple interest. Compounding means taking 5% of the previous year's amount and adding it on. Simple adds 5% of the original amount. For instance, 5% simple on a $100 daily benefit adds $5 per year. In 10 years the simple increase has pushed $100 to $150. In 20 years, $100 becomes $200. On the other hand, 5% compound has pushed $100 to $163 in 10 years and to $265 in 20 years. Beware of hidden limits on the increase. Some policies only allow the increase to double at which time it is frozen. Others put a time limit such as 20 years on increases. Still others have an age limit on increases. A good policy will not have limits.
The third type of inflation protection is an option to buy more coverage at periodic intervals without reapplying and without evidence of insurability. Most plans offer a 15% increase every 3 years. The addition to coverage is charged at the attained age rate and added to the existing premium. So if an employee elects this option every 3 years, his or her premium takes a corresponding jump. Many representatives tout this concept as a good way to get someone into a policy cheaply, then as the person's income goes up, the future premium increases are more affordable and at the same time the insured is keeping up with inflation. In theory it sounds good, in practice it's a bad idea.
First of all, most people forget or don't bother to elect the increases (I've seen this happen, firsthand, in numerous cases). And if they fail over the years to elect a certain number of consecutive options, the policy increase feature is rescinded. Thus individuals with this kind of inflation protection usually fail to have adequate protection when they're older. Second, if they do elect increases, they'll pay twice as much over the life of the policy than had they elected the automatic protection. I did a study of a 55-year old buying a policy with automatic inflation for $48.07 per month versus buying the 3-year periodic increase option for $29.33 per month. By the time of the second increase, in 6 years, the insured will be paying $63.75 a month. To age 75 the insured will pay a total of $32,592 with the periodic increase inflation option versus $14,421 with automatic inflation protection and end up with the same benefit at more than twice the cost.
What is difficult about elimination is that every company defines it differently. I'm convinced that some companies have designed elimination as a way to avoid claims. Again, as with home care, it would take pages to explain the nuances of elimination. But as an example here are some of the differing definitions: 1) Most policies define a day of elimination as meaning a day of care, but a few define elimination as a calendar day with no care required. 2) Some policies (2 pool) have 2 mutually exclusive elimination periods. Both have to be met. 3) Some policies only require a once-in-a-lifetime elimination, others require it for each new incident. 4) Some policies, under certain conditions waive elimination for home care but require it to be met for facilities care, but some will allow waived days to count towards facility elimination. 5) Some policies require elimination to be met in a certain calendar period, i.e.. 6 months, otherwise you start over. 6) Some companies recognize that paid home care might only be for a few days a week and meeting a 90 day elimination could actually take 6 months or longer. These companies credit a certain minimum number of home care days (as an example 3 or more days a week) with a full 7 days of elimination credit, even though actual care days were less. 7) At least one policy requires elimination to be consecutive days of care. If you didn't get care at least 7 days a week, you'd never get paid under that policy. The list goes on and on.
Before you decide on a plan, I suggest you consult with someone who has access to the insurance contract or understands the differences. Or you should demand a contract and go over the elimination section yourself. With some contracts and under some circumstances, a 90 day elimination could result in an actual waiting period of 6 months or a year before claims are covered. Under some conditions, the elimination with some policies could never result in a benefit being paid. Some companies have good elimination definitions and some don't.
Is it a "Stated Period" Policy or a "Pool of Money"?
The misconception probably occurs because all contracts, whether money pools or not, list a total dollar amount of benefit on the contract declaration page. For instance a $100 per day policy that pays 5 years would list a total benefit of $182,000 on the declaration page. ($100 X 365 days X 5 years) Now if the policy paid only $50 per day for home care-which is often the case--then the policy would pay 10 years instead of 5, right? ($50 X 365 days X 10 years = $182,000). Wrong! It would only pay longer if it were a pool of money. If the policy is a "stated period" policy then it will only pay for the specified period of years, whether you take out $100 per day or $20 dollars per day. You only get the full $182,500 if you take out the full $100 per day for 5 years. If you end up using 5 years of home care you only get $91,250 out of the policy before it expires.
Obviously a pool of money is superior to a stated period. A pool of money might let you stretch a 3 year benefit to 4, 6 or even 8 years if you didn't take out the maximum daily amount. A stated period policy has no stretch. So how do you know which is which? You will find it in the contract language somewhere in the body of the contract. Rarely do insurance carriers disclose the benefit type in their brochures. A pool of money uses language that refers to the maximum lifetime benefit amount. A stated period uses language that refers to benefits being paid for a period of time.
This doesn't mean you shouldn't buy the 2-pool policy. I recommend buying a richer 2-pool plan to compensate. For example, I consider a 5-year nursing home, 3-year community care (8 years total), 2-pool plan to be fairly equivalent to a 5-year integrated plan. Many 2-pool plans are very competitive when bought with a lifetime benefit--it never runs out. If it lasts a lifetime, it doesn't matter if it's integrated or 2-pool. Some states such as California, don't allow the sale of 2-pool policies.
Cost Containment Provisions
In addition to the above, some policies require that a "plan of care" from a licensed party--the contract could specify a doctor, social worker, home health agency, company employee or not specify anyone--be submitted and approved by the insurance carrier before any claims are paid. Qualified plans require a plan of care under HIPAA language and Medicare or Medicaid also require care plans but there is no requirement for an insurance company to approve a plan for payment of benefits. Again it appears that some carriers are nervous about unecessary claims.
Managed Care Administration of Claims
Some of the more restrictive insurance policies require care coordination before any benefits are paid. Some plans don't require care coordination. Other plans will pay for it but don't require it for benefits. Some policies will reward claimants by enhancing home health benefits if the claimant elects a care coordination plan. These policies use one or more of a combination of the following four enhancements: 1) Home health care normally paid at 50%, 75% or 80% of nursing home care will be increased to 100% of nursing home care. 2) Benefits normally paid as if they were incurred daily will be paid as if incurred weekly (some policies) or monthly (other policies). As an example, assume the policy paid up to $120 per day for eligible claims, but the beneficiary incurred a one-time claim of $250. Without care coordination enhancement, the insurance company would only pay $120 of the $250 claim. With enhancement the entire $250 would be paid. 3) The eliminated period will be reduced or waived. For example a 90 day elimination for home care might be reduced to 20 days, 10 days or 0 days. Depending on the policy, the 90 day elimination may still be required for assisted living or nursing home. 4) If the policy normally restricted care to that furnished by licensed home health agencies--this is a typical provision to avoid fraudulent claims--then with care coordination, non-licensed services, and with some policies, even children of the beneficiary will be paid.
Alternative Care Benefits
So what about existing modern policies which seem to cover all aspects of long-term care including: home care, adult day care, hospice, assisted living and nursing home? What if some new long-term care service comes into being in the future? Will it be covered? Most policies have a provision that allows new services to be covered. The typical provision requires that it be cost effective, agreed to by the company and agreed to by the policy recipient. This is often called the alternative care provision. But not all policies have this provision. It is important for you to review your policy and understand whether you have this provision or not and what it covers.
Long-term care insurance companies have recognized the growth of this industry and most have added these covered services to their policies. These services are called homemaker services in the policy. Unfortunately, many policies do not cover all homemaker services and exclude many or homemaker services are not covered at all or the policy is vague on what is covered and what is not. Read your policy carefully.
Indemnity Claims Payment
With indemnity, you are more likely to receive the full benefit in the policy before you recover or die. Under both plans, you are, however, only reimbursed for the actual number of days you receive care. (At least 2 carriers pay indemnity whether you are receiving care or not) Both plans also require periodic proof that you're still eligible for benefits. Not all carriers offer indemnity. For those that do, it might be part of the policy provision or it might be a separate rider. Some carriers include indemnity for nursing home but not home care, and some include it for both as part of the policy provision or with a separate home care rider. Some carriers pay so-called cash benefits in lieu of claims benefits at a lesser payout rate . For instance a policy paying $3,000.00 a month in claims benefits might pay $1,000.00 a month in cash benefits. The advantage is without proof of claim the cash can be used for anything maybe even benefits not covered by the policy.
Additional Premium Discounts
As a general rule, true group policies are generally more expensive than individual policies for the same benefits. This may seem like a paradox since group plans are supposed to be less expensive. But group plans being less expensive for any kind of insurance is generally a public misconception. Group life insurance is cheaper for younger ages but for older ages, when a person has good health, individual term life is cheaper. Individual health insurance is always cheaper than group health insurance but a person wanting individual health insurance has to be in perfect health in order to get it. The concept of group auto insurance was tried several years ago and did not work because group auto insurance could not offer any cheaper prices than individual auto insurance could.
For nonsmokers in good health, individual long-term care insurance will offer discounts over group health plans. In addition, the initial enrollment of true group long-term care insurance usually involves not asking any health questions during the initial enrollment. Participation rates for group plans are about 6% nationally. With such a low participation a larger proportion of people in poor health are usually attracted to the group plan during the initial enrollment where no health questions are asked. The insurance companies have to charge higher premiums to compensate for the fact that enrollees with poorer health will result in a higher future claims rate.
In The Event One of The Couple Dies
Extended Family Coverage
Shortened Pay Periods
What Does That Strange Word Non-Forfeiture Mean?
Waiver of Premium
A Boatload of Additional Benefits--Adding Sizzle to the Sale
I give these features less weight when I assess long-term care policies, yet from some of the literature I see from various companies, you would think the value of the purchase of a particular plan lives or dies on the quality and quantity of these features. Below are some of the more common additional benefits.
Restoration of Benefits
The probability of actually restoring benefits is low (as evidenced by rider costs of only 3% or 4% of additional premium increase) because most nursing home stays longer than 90 days usually don't result in recovery. Even if the person is discharged, he or she is probably receiving treatment for the condition in the form of medications or doctor visits and thus would not qualify for ROB.
Special payments may be made for: prescriptions, caregiver training, home modification, alarms and alerts, remote monitoring, homemaker services, ambulance, transportation costs and many more care related expenses not mentioned or still germinating in the minds of aggressive marketing departments.
TAXATION OF LONG-TERM CARE
Long-term Care Expenses
Long-term Care Insurance Premiums
The deductible/tax free feature of employer-paid premiums is particularly attractive to employers who want to carve-out tax free fringe benefits for key employees. Group-filed plans must define certain management classes to receive the benefits and a certain minimum participation is required. Individual and individual group plans have no class or participation requirements. For example, a company of 1000 employees could select just one employee and purchase an individual long-term care policy for that individual and his spouse. The premiums would still be tax deductible to the employer and tax free to both policy holders. (for more detailed information, download the Prudential's Long-term Care Insurance Tax Guide pdf file found under the tax links on this site.
DESIGNING A GROUP LONG-TERM CARE INSURANCE PLAN
Enhancing a Current Plan
Designing a True Group Plan
These benefits are based on previous discussions in the chapter on benefits. This would be the minimum plan. The 80%/day would not cover the full cost of a nursing home and would have to be subsidized by other income. It would cover assisted living and may be barely adequate for home care. The 3 year benefit period is really inadequate but it may make the plan more affordable to more employees.
Designing an Individual Group Plan
Group Plan With an Executive Carve-Out
The carve-out has the advantage of offering hundreds or thousands of benefit options thus allowing key employees to design policies to individual needs. And the cost could be half as much as the cost of equivalent group coverage. As I mentioned above, The carve-out has no discrimination rules and no minimum participation requirement. Premiums paid by the employer are tax deductible to the employer and tax free to the employee and spouse. This is an excellent way to offer tax free fringe benefits. A 10 year paid-up policy premium option makes this even more appealing to employers. You have to use individual plans for a carve-out since true-group plans have to conform to anti-discrimination and participation rules imposed on all group insurance plans. Individual plans are exempt. The minimum participation for a carve-out is 1 employee regardless of the size of the group.