    Long-Term Care Insurance: Partnership Programs Include Benefits
    That Protect Policyholders and Are Unlikely to Result in Medicaid
    Savings (11-MAY-07, GAO-07-231).

    Partnership programs allow individuals who purchase Partnership
    long-term care insurance policies to exempt at least some of
    their personal assets from Medicaid eligibility requirements. In
    response to a congressional request, GAO examined (1) the
    benefits and premium requirements of Partnership policies as
    compared with those of traditional long-term care insurance
    policies; (2) the demographics of Partnership policyholders,
    traditional long-term care insurance policyholders, and people
    without long-term care insurance; and (3) whether the Partnership
    programs are likely to result in savings for Medicaid. To examine
    benefits, premiums, and demographics, GAO used 2002 through 2005
    data from the four states with Partnership programs--California,
    Connecticut, Indiana, and New York--and other data sources. To
    assess the likely impact on Medicaid savings, GAO (1) used data
    from surveys of Partnership policyholders to estimate how they
    would have financed their long-term care without the Partnership
    program, (2) constructed three scenarios illustrative of the
    options for financing long-term care to compare how long it would
    take for an individual to spend his or her assets on long-term
    care and become eligible for Medicaid, and (3) estimated the
    likelihood that Partnership policyholders would become eligible
    for Medicaid based on their wealth and insurance benefits.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-231
        ACCNO:   A69491
      TITLE:     Long-Term Care Insurance: Partnership Programs Include
    Benefits That Protect Policyholders and Are Unlikely to Result in
    Medicaid Savings
         DATE:   05/11/2007
      SUBJECT:   Comparative analysis
    	     Financial analysis
    	     Health care programs
    	     Health policy
    	     Long-term care
    	     Long-term care insurance
    	     Medicaid
    	     Population statistics
    	     Program evaluation
    	     Surveys
    	     California
    	     Connecticut
    	     Indiana
    	     Long-Term Care Partnership Program
    	     New York

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    GAO-07-231

         * [1]Results in Brief
         * [2]Background

              * [3]Long-Term Care Insurance
              * [4]Long-Term Care Insurance Regulation
              * [5]Medicaid
              * [6]Long-Term Care Partnership Programs

         * [7]Partnership Policies Must Include Certain Benefits Not Requi

              * [8]The Four States Require Partnership Policies to Include Cert
              * [9]Partnership Policyholders Purchased Policies with Benefits T
              * [10]Insurance Companies Cannot Charge Partnership Policyholders

         * [11]Compared with Traditional Long-Term Care Insurance Policies,
         * [12]Long-Term Care Insurance Policyholders Are Generally Wealthi

              * [13]Long-Term Care Insurance Policyholders Generally Have Higher
              * [14]Partnership Policyholders Are Younger on Average than Tradit

         * [15]Partnership Programs Unlikely to Result in Savings for Medic

              * [16]Most Partnership Policyholders Would Have Purchased Traditio
              * [17]Few Partnership Policyholders Are Likely to Become Eligible

         * [18]Concluding Observations
         * [19]Agency and State Comments and Our Evaluation

              * [20]Impact of Asset Transfers on Medicaid

                   * [21]Methodology for Assessing Medicaid Savings
                   * [22]Impact on Medicaid Savings of Purchasing Different
                     Levels of

         * [23]Appendix I: Data and Methods for Analysis of Long-Term Care

              * [24]Examining Long-Term Care Insurance Benefits Purchased by Par

                   * [25]Examining Income and Asset Distributions Among
                     Partnership P
                   * [26]Examining Demographic Characteristics--Age, Gender, and
                     Marit
                   * [27]Data Reliability

         * [28]Appendix II: Explanation of the Simplifying Assumptions Used

              * [29]Illustrative Scenarios for Time Taken to Become Eligible for

                   * [30]Evaluating the Effects of Adjusting the Assumptions
                     Underlyi

         * [31]Appendix III: Comments from the Department of Health & Human
         * [32]Appendix IV: Comments from the Four States with Partnership
         * [33]Appendix V: GAO Contact and Staff Acknowledgments

              * [34]GAO Contact
              * [35]Acknowledgments

                   * [36]Order by Mail or Phone

    Report to Congressional Requesters

    United States Government Accountability Office

    GAO

    May 2007

    LONG-TERM CARE INSURANCE

    Partnership Programs Include Benefits That Protect Policyholders and Are
    Unlikely to Result in Medicaid Savings

    GAO-07-231

    Contents

    Letter 1

    Results in Brief 7
    Background 11
    Partnership Policies Must Include Certain Benefits Not Required of
    Traditional Policies, and Insurance Companies Cannot Charge Higher
    Premiums for Asset Protection in Partnership Policies 21
    Compared with Traditional Long-Term Care Insurance Policies, Two of Four
    States Subject Partnership Policies to Additional Review, and All Four
    States Require Additional Agent Training 28
    Long-Term Care Insurance Policyholders Are Generally Wealthier than Those
    Without Such Insurance, and Partnership Policyholders Are Typically
    Younger than Traditional Long-Term Care Insurance Policyholders 30
    Partnership Programs Unlikely to Result in Savings for Medicaid Largely
    Because of the Asset Protection Benefit of Partnership Policies 34
    Concluding Observations 42
    Agency and State Comments and Our Evaluation 43
    Appendix I Data and Methods for Analysis of Long-Term Care Insurance
    Benefits and Demographics 51
    Appendix II Explanation of the Simplifying Assumptions Used in the
    Illustrative Scenarios 55
    Appendix III Comments from the Department of Health & Human Services 62
    Appendix IV Comments from the Four States with Partnership Programs,
    California, Connecticut, Indiana, and New York 63
    Appendix V GAO Contact and Staff Acknowledgments 79

    Tables

    Table 1: Percentage of Partnership and Traditional Long-Term Care
    Insurance Policyholders Purchasing Benefits from 2002 through 2005 26
    Table 2: Household Income and Household Asset Distribution among
    Partnership Policyholders and Comparison Populations in Partnership States
    and Nationally 32
    Table 3: Demographic Characteristics of Partnership Policyholders and
    Comparison Populations in Partnership States and Nationally 33

    Figure

    Figure 1: Financing of Long-Term Care Nursing Facility Stays Under Three
    Scenarios 37

    Abbreviations

    ADL activities of daily living
    ACS American Community Survey
    CBO Congressional Budget Office
    CMS Centers for Medicare & Medicaid Services
    DOI Department of Insurance
    DRA Deficit Reduction Act of 2005
    HHS Department of Health and Human Services
    HIPAA Health Insurance Portability
    and Accountability Act of 1996
    HRS Health and Retirement Study
    IADL instrumental activities of daily living
    NAIC National Association of Insurance Commissioners
    OBRA `93 Omnibus Budget Reconciliation Act of 1993
    UDS Uniform Data Set

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    United States Government Accountability Office
    Washington, DC 20548

    May 11, 2007

    The Honorable Max Baucus
    Chairman
    The Honorable Charles E. Grassley
    Ranking Member
    Committee on Finance
    United States Senate

    The Honorable John D. Rockefeller, IV
    United States Senate

    In 2004, national spending on long-term care, which includes care provided
    in nursing facilities, totaled $193 billion and nearly half of that was
    paid for by Medicaid, the joint federal-state program that finances
    medical services for certain low-income adults and children. In contrast,
    private insurance paid for about $14 billion worth of long-term
    care--about 7 percent of the total cost. The demand for this type of care
    is likely to increase as the proportion of those in the population age 65
    and older--those most likely to need long-term care--increases. With
    Medicaid financing nearly half of the long-term care costs nationwide,
    policymakers are concerned that, without changes in how long-term care is
    financed, the growing demand for this type of care will continue to strain
    the resources of federal and state governments. In 2004, national spending
    on long-term care, which includes care provided in nursing facilities,
    totaled $193 billion and nearly half of that was paid for by Medicaid, the
    joint federal-state program that finances medical services for certain
    low-income adults and children. In contrast, private insurance paid for
    about $14 billion worth of long-term care--about 7 percent of the total
    cost. The demand for this type of care is likely to increase as the
    proportion of those in the population age 65 and older--those most likely
    to need long-term care--increases. With Medicaid financing nearly half of
    the long-term care costs nationwide, policymakers are concerned that,
    without changes in how long-term care is financed, the growing demand for
    this type of care will continue to strain the resources of federal and
    state governments.

    In the late 1980s the Robert Wood Johnson Foundation provided start-up
    funds for programs in eight states--California, Connecticut, Indiana,
    Massachusetts, New Jersey, New York, Oregon, and Wisconsin--aimed at
    helping to shift some of the responsibility for financing long-term care
    from Medicaid to private long-term care insurance. Four of the states that
    received funds--California, Connecticut, Indiana, and New
    York--established the programs. These four state-run long-term care
    programs, which are known as Partnership programs, encourage individuals
    to purchase long-term care insurance by providing an
    incentive--specifically, allowing those who purchase long-term care
    insurance policies through the program to exempt some or all of their
    personal assets from Medicaid eligibility requirements should the
    policyholders exhaust their long-term care insurance benefits and need to
    continue financing their long-term care. Without the exemption, before
    individuals could receive Medicaid benefits they would typically have to
    spend their assets on their long-term care until the assets met or fell
    below certain Medicaid thresholds. In the late 1980s the Robert Wood
    Johnson Foundation provided start-up funds for programs in eight
    states--California, Connecticut, Indiana, Massachusetts, New Jersey, New
    York, Oregon, and Wisconsin--aimed at helping to shift some of the
    responsibility for financing long-term care from Medicaid to private
    long-term care insurance. Four of the states that received
    funds--California, Connecticut, Indiana, and New York--established the
    programs. These four state-run long-term care programs, which are known as
    Partnership programs, encourage individuals to purchase long-term care
    insurance by providing an incentive--specifically, allowing those who
    purchase long-term care insurance policies through the program to exempt
    some or all of their personal assets from Medicaid eligibility
    requirements should the policyholders exhaust their long-term care
    insurance benefits and need to continue financing their long-term care.
    Without the exemption, before individuals could receive Medicaid benefits
    they would typically have to spend their assets on their long-term care
    until the assets met or fell below certain Medicaid thresholds. Medicaid
    does not allow for asset protection for long-term care insurance policies
    purchased outside of Partnership programs.^1 In order to implement their
    Partnership programs, the four states with Partnership programs had to
    obtain approval from the Centers for Medicare & Medicaid Services (CMS),
    the agency within the Department of Health and Human Services (HHS) that
    oversees Medicaid, and amend their state Medicaid plans to allow them to
    exempt the assets of Partnership program participants from Medicaid
    eligibility requirements.^2,3

    Since the early 1990s, the treatment of Partnership programs under federal
    law has changed. Although a number of states established, or were
    authorized to establish, programs prior to the enactment of the Omnibus
    Budget Reconciliation Act of 1993 (OBRA `93), OBRA `93 prohibited
    additional states from establishing similar programs. The legislation was
    enacted, in part, because of concerns about potential costs to Medicaid,
    but allowed California, Connecticut, Indiana, and New York to maintain
    their programs.^4,5 More recently, the Deficit Reduction Act of 2005 (DRA)
    authorized all states to establish Partnership programs that meet certain
    criteria and required the original 4 participating states to maintain the
    existing consumer protections in their Medicaid plans. DRA provisions are
    intended, in part, to allow states to provide an incentive for individuals
    to take responsibility for their own long-term care needs rather than
    relying on Medicaid. According to the National Association of Health
    Underwriters, prior to the enactment of DRA, there was legislative
    activity in 19 additional states to begin development of a Partnership
    program. As of October 2006, the only states with active Partnership
    programs were the original 4 states: California, Connecticut, Indiana, and
    New York.^6 However, HHS indicated that as of February 2007, CMS had
    approved Partnership program state plan amendments in 6 states: Florida,
    Georgia, Idaho, Minnesota, Nebraska, and Virginia. Although the program
    appears to be expanding beyond the original 4 states, concerns about the
    potential cost to Medicaid of expanding the program remain an issue. In
    2005, the Congressional Budget Office (CBO) estimated that repealing the
    moratorium on new Partnership programs could increase Medicaid spending by
    $86 million between 2006 and 2015.^7

    ^1For the purposes of this report, we use the term "Partnership policies"
    to refer to long-term care insurance policies purchased through
    Partnership programs and the term "traditional long-term care insurance"
    to refer to long-term care insurance policies that are not purchased
    through these programs. To refer to both Partnership and traditional
    long-term care insurance policies, we use the term "long-term care
    insurance."

    ^2A state plan describes the state's Medicaid program and establishes
    guidelines for how the state's Medicaid program will function.

    ^3For our purposes we use the Partnership program's definition of
    "assets," that is, when we refer to assets, we mean savings and
    investments, while excluding income. For eligibility purposes, the
    Medicaid program considers both income--which is anything received during
    a calendar month that is used or could be used to meet food or shelter
    needs--and resources, which are cash or anything owned, such as savings
    accounts, stocks, or property that can be converted to cash.

    ^4Another objective of OBRA `93, as expressed in the accompanying House of
    Representatives Budget Committee report, was to close a loophole
    permitting wealthy individuals to qualify for Medicaid. H.R. Rep. No.
    103-111, at 536.

    ^5Prior to the enactment of OBRA `93, California, Connecticut, Indiana,
    and New York established Partnership programs. Iowa and Massachusetts also
    received permission from the Health Care Financing Administration (now
    CMS) to establish a Partnership program, but had not implemented one as of
    October 2006.

    States are responsible for overseeing Partnership programs and regulating
    the Partnership programs as well as the traditional long-term care
    insurance policies sold in their states. As more states consider
    establishing Partnership programs, there is interest, on the part of
    Congress and others, in understanding how the four states with Partnership
    programs designed and regulate their Partnership programs, who purchases
    Partnership policies, and how these programs will impact Medicaid
    financially.

    You asked us to analyze the experience of the four states with Partnership
    programs. In August 2005, we provided you with a briefing, which
    summarized aspects of the design of these Partnership programs and
    included demographic information on Partnership policyholders.^8 In this
    report, we updated our briefing information and provided a more detailed
    analysis of the Partnership programs. Specifically, we examined (1) the
    benefits and premium requirements of Partnership policies as compared with
    those of traditional long-term care insurance policies, including
    information on benefits purchased by policyholders; (2) the extent to
    which states oversee Partnership policies as compared with their oversight
    of traditional long-term care insurance policies; (3) the demographics,
    including asset and income levels, of Partnership policyholders,
    traditional long-term care insurance policyholders, and people without
    long-term care insurance; and (4) whether the Partnership programs are
    likely to result in savings for Medicaid.

    ^6When we refer to the four states with Partnership programs or the four
    states, we are referring to California, Connecticut, Indiana, and New
    York. According to CMS officials, as of October 2006, no other states had
    active Partnership programs; that is, no insurance companies were issuing
    Partnership policies in any other states.

    ^7Congressional Budget Office Cost Estimate: S. 1932 Deficit Reduction Act
    of 2005, at 36-39, January 27, 2006.

    ^8GAO, Overview of the Long-Term Care Partnership Program,
    [37]GAO-05-1021R (Washington, D.C.: Sept. 9, 2005).

    To compare the benefits and premium requirements of Partnership and
    traditional long-term care insurance policies, we reviewed state
    regulations, and interviewed Partnership program officials and department
    of insurance (DOI) officials in each of the four states with Partnership
    programs-California, Connecticut, Indiana, and New York. To compare the
    benefits purchased by Partnership policyholders and traditional long-term
    care insurance policyholders, we obtained data from 2002 through 2005 from
    two sources. Our data source for benefits purchased by Partnership
    policyholders was the Uniform Data Set (UDS)--a data set with information
    on Partnership policyholders compiled by officials in each of the four
    states with Partnership programs from data provided by participating
    insurers.^9 Our data source for benefits purchased by traditional
    long-term care insurance policyholders was from a survey we conducted of
    five of the largest long-term care insurance companies in the individual
    long-term care insurance market.^10

    To examine the extent to which states oversaw Partnership policies
    compared with state oversight of traditional long-term care insurance
    policies, we reviewed state regulations and Partnership program documents,
    and interviewed officials from Partnership programs, long-term care
    insurance companies, and each Partnership state's DOI, the entities that
    are responsible for regulating insurance policies, including long-term
    care insurance policies, that are sold in the states. We reviewed state
    regulations, Partnership program documents, and conducted interviews about
    how training requirements for insurance agents who sell Partnership
    policies compared with training requirements for agents who sell
    traditional long-term care insurance policies.

    ^9The UDS is a data set developed by the four states with Partnership
    programs; participating insurers; the National Program Office at the
    Center on Aging, University of Maryland; and the Program Evaluator, Laguna
    Research Associates. Data in the UDS are submitted by insurers to the
    Partnership program in the state in which they are participating and
    contain information on Partnership policyholders.

    ^10We selected the five insurance companies on the basis of the total
    number of policies and amount of annualized premiums in effect in the
    individual market as of December 31, 2004.

    To examine the demographics, including income and assets levels, of
    Partnership policyholders, traditional long-term care insurance
    policyholders, and individuals without long-term care insurance, we used
    data from three sources. First, to calculate the household income and
    assets of Partnership policyholders, we used available survey data from a
    sample of Partnership policyholders in California and Connecticut. We
    restricted our analysis to the income and asset data from these two states
    because Indiana's data were not sufficiently detailed to include in our
    analysis, and New York was not able to provide us with data from recent
    years. We combined multiple years of these data in order to increase the
    sample size.^11 To estimate the household income of individuals without
    insurance in California and Connecticut, we used data from the American
    Community Survey (ACS) for 2004 published by the U.S. Census Bureau.
    Finally, we used national data from the Health and Retirement Study (HRS)
    for 2004, to compare household income and household assets for those
    individuals with traditional long-term care insurance and those without
    long-term care insurance.^12 The HRS is a national survey sponsored by the
    National Institute on Aging and conducted by the University of Michigan of
    individuals over the age of 50.^13 The HRS collected information about
    retirement, health insurance, savings, and other issues confronting the
    elderly. To examine the age, marital status, and gender of Partnership
    policyholders, traditional long-term care insurance policyholders, and
    individuals without long-term care insurance, we used data from the UDS
    and the HRS.

    To examine whether the Partnership programs in the four states are likely
    to result in savings for Medicaid, we assessed (1) available state survey
    data of Partnership policyholders and (2) the options an individual has
    for financing long-term care and the time it would take for the individual
    to become eligible for Medicaid under three illustrative scenarios. We
    used the illustrative scenarios because the Partnership programs in the
    four states have only been operating since the early 1990s, and as yet
    there are no available data describing when or if Partnership
    policyholders would have accessed Medicaid. As a result, there are
    insufficient data available to directly measure whether the Partnership
    programs are associated with increased or decreased Medicaid spending. We
    used available survey data in California, Connecticut, and Indiana to
    determine what Partnership policyholders report they would have done to
    finance their long-term care needs if there had not been a Partnership
    program in their state.^14 In addition, we assessed three scenarios that
    represent the three main options an individual has for financing long-term
    care: financing using a Partnership policy, financing using a traditional
    long-term care policy, and self-financing without any long-term care
    insurance. The latter two scenarios describe the financing options that a
    Partnership policyholder could use if the Partnership programs did not
    exist. We used the three scenarios to explore how long it would likely
    take before the individual depicted in our scenarios would become eligible
    for Medicaid with a Partnership policy and--in the scenarios in which
    Partnership programs did not exist--with the other two financing options.
    In the scenarios, if, in the absence of a Partnership program, an
    individual using a traditional long-term care insurance policy or relying
    on self-financing is likely to become eligible for Medicaid sooner than
    the same individual would have using a Partnership policy, we consider the
    Partnership programs to be a potential source of savings for Medicaid. In
    contrast, if the same individual delays Medicaid eligibility using a
    traditional long-term care insurance policy or self-financing, when
    compared with the time it would take the individual to become eligible for
    Medicaid using a Partnership policy, we consider the Partnership program
    to be a potential source of increased spending for Medicaid. To develop
    our scenarios, we made several simplifying assumptions. These include the
    following:

    ^11For income and asset data in California we combined data for 2003 and
    2004, and for Connecticut, we combined data for 2002 through 2005.

    ^12To make our income analysis consistent across the different data
    sources, we restricted our calculations of household income to individuals
    aged 55 and over.

    ^13The Health and Retirement Study (HRS) is a longitudinal national panel
    survey that collects information over time on individuals over age 50. The
    first survey was conducted in 1992, and subsequent surveys were conducted
    every 2 years. The most recent survey for which data were available was
    2004.

               o The individual depicted in the scenarios has $300,000 in assets,
               and in two of our scenarios a long-term care insurance policy
               worth $210,000--assets and benefits that are typical of many
               individuals with long-term care insurance--and the individual
               receives long-term care in a nursing facility with costs for a
               year of care of $70,000, about equal to average nursing facility
               costs nationwide in 2004.

               o The individual has assets that are no less than the value of the
               individual's Partnership policy--that is, the individual does not
               overinsure his or her assets.

    		   ^14New York State survey data were unavailable.

               o The individual is unmarried. While most Partnership
               policyholders are married at the time they purchase a Partnership
               policy, they are unlikely to require long-term care for many
               years, and their marital status can change. Most individuals who
               are admitted to a nursing facility are unmarried.

               Where possible, we use data from surveys of Partnership
               policyholders to support our assumptions. We also explored whether
               adjusting the assumptions changed the conclusions we could draw.
               Although our scenarios represent the choices facing a single
               individual, the results of this analysis are applicable beyond
               this individual. For example, the relative impact on Medicaid
               spending across the scenarios is independent of the amount of
               assets owned by the individual or the level of the individual's
               insurance coverage.

               As part of our efforts to examine whether the Partnership programs
               are likely to result in savings for Medicaid, we also examined the
               likelihood that the population of Partnership policyholders will
               ever become eligible for Medicaid. To assess this likelihood, we
               examined the long-term care insurance benefits and income of
               Partnership policyholders. We also assessed the number of people
               with Partnership policies who accessed Medicaid as of October
               2006.

               Based on discussions with state officials and reviewing
               documentation on uniformly collected insurer data and surveys of
               policyholders, we determined that the information we used was
               sufficiently reliable for our purposes. We also examined reports
               on the Partnership program from the CBO, the Congressional
               Research Service, and other research organizations. Appendix I
               provides information on the data and methods used for our analyses
               of long-term care insurance benefits, policyholder income, assets,
               age, gender, and marital status. Appendix II provides more
               information about the illustrative scenarios, the simplifying
               assumptions underlying the scenarios, and the effect on our
               analysis of adjusting these assumptions. We conducted our work
               from September 2005 through May 2007 in accordance with generally
               accepted government auditing standards.

    		   Results in Brief

               In the four states with Partnership programs, Partnership policies
               must include certain benefits not generally required of
               traditional long-term care insurance policies, and insurance
               companies cannot charge higher premiums for asset protection in
               Partnership policies. Partnership policies must include certain
               benefits, such as inflation protection and minimum daily benefit
               amounts, while traditional long-term care insurance policies may
               include these benefits but are generally not required to do so.
               Partnership policies include these benefits in order to increase
               the likelihood that Partnership policyholders will have sufficient
               long-term care insurance coverage to pay for a significant portion
               of their long-term care. For example, Partnership policies must
               include inflation protection, which increases the amount a policy
               pays over time to account for increases in the cost of care, and
               minimum daily benefit amounts, which are set at levels designed to
               cover a significant portion of the costs of an average day in a
               nursing facility. Though traditional long-term care insurance
               policyholders are able to purchase most of the same benefits as
               Partnership policyholders, in comparing these two groups we found
               that a higher percentage of Partnership policyholders purchased
               policies from 2002 through 2005 with more extensive coverage--for
               example, higher levels of inflation protection and coverage for
               care in both nursing facility and home and community-based care
               settings. Officials in states with Partnership programs told us
               that companies selling long-term care insurance are not permitted
               to charge Partnership policyholders higher premiums for the asset
               protection benefit--Partnership and traditional long-term care
               insurance policies with otherwise comparable benefits must have
               equivalent premiums. However, Partnership policies are likely to
               have higher premiums because they are required to have inflation
               protection and other benefits that are not required for
               traditional long-term care insurance policies.

               According to state officials, compared with traditional long-term
               care insurance policies, Partnership policies in two Partnership
               states are subject to additional review, and in all four
               Partnership states, insurance agents who sell Partnership policies
               are subject to additional state training requirements compared
               with agents who sell only traditional long-term care policies.
               While all long-term care insurance policies are reviewed by the
               DOI in each state, Partnership policies in California and
               Connecticut are also reviewed by Partnership program offices. This
               additional review is designed by these states to ensure that the
               Partnership policies that are issued meet all specific Partnership
               regulatory requirements, and the insurance companies issuing these
               policies meet the data reporting and other administrative
               requirements. Before they can sell Partnership policies, long-term
               care insurance agents are required by each of the four Partnership
               states to undergo training specific to the state's Partnership
               program, in addition to the training that is required for those
               who sell traditional long-term care insurance. This specialized
               training typically provides information on long-term care
               planning, Medicaid, Medicare, the specific benefits required by
               the state's Partnership program, and how policies sold through the
               program differ from traditional long-term care insurance policies.

               Partnership and traditional long-term care insurance policyholders
               tend to be relatively wealthy with higher incomes and more assets,
               compared with those without insurance. At the time they purchased
               their Partnership policies, more than half of Partnership
               policyholders over 55 in California and Connecticut had monthly
               household incomes of $5,000 or greater, and more than half of all
               households had assets of $350,000 or greater. Partnership
               policyholders in the four states with Partnership programs are
               also younger on average than traditional long-term care insurance
               policyholders. In addition, a higher percentage of Partnership and
               traditional long-term care insurance policyholders are married
               rather than unmarried, and female rather than male.

               Available survey data from three states with Partnership programs
               and our three illustrative financing scenarios together suggest
               that the Partnership programs are unlikely to result in savings
               for Medicaid and may result in increased Medicaid spending. Based
               on surveys of Partnership policyholders in California,
               Connecticut, and Indiana, we estimate that, in the absence of a
               Partnership program in their state, 80 percent of Partnership
               policyholders would have purchased a traditional long-term care
               insurance policy. Our long-term care financing scenarios suggest
               that it takes longer for an individual with a traditional
               long-term care insurance policy to become eligible for Medicaid
               than it would take the same individual to become eligible for
               Medicaid if he or she owned a Partnership policy. Therefore, the
               80 percent of surveyed Partnership policyholders may represent a
               potential source of increased spending for Medicaid, as Medicaid
               is likely to begin paying for the long-term care of these
               policyholders sooner than if they had held traditional long-term
               care insurance policies instead. The survey data also indicate
               that the remaining 20 percent of surveyed policyholders would not
               have purchased any long-term care insurance if Partnership
               programs did not exist. Data are not yet available to directly
               measure when or if these individuals will access Medicaid had they
               not purchased a Partnership policy. However, our scenarios suggest
               that an individual who self-finances his or her long-term care
               without any long-term care insurance is likely to become eligible
               for Medicaid at about the same time as the individual would using
               a Partnership policy, though there were some circumstances that
               could accelerate or delay the individual's time to Medicaid
               eligibility. While the majority of Partnership policyholders have
               the potential to increase spending, we also anticipate that the
               impact of these programs is likely to be small because few
               policyholders will become eligible. Partnership policyholders tend
               to have incomes that exceed Medicaid eligibility thresholds and
               insurance benefits that cover most of their long-term care needs.

               With DRA authorizing all states to implement Partnership programs,
               information on the Partnership policies and policyholders from the
               four states with Partnership programs may prove useful to other
               states considering implementing such programs. States may want to
               consider the benefits to Partnership policyholders, the likely
               impact on Medicaid expenditures, and the incomes and assets of
               those likely to be able to afford long-term care insurance.

               We received comments on a draft of this report from HHS and state
               officials from California, Connecticut, Indiana, and New York. HHS
               commented that our study results should not be considered
               conclusive and the simplified scenarios were flawed because they
               did not adequately account for the effect of asset transfers. HHS
               also noted that our data sources were unlikely to yield accurate
               data on asset transfers and criticized the report for not
               incorporating a review of the literature on this issue and the
               analyses conducted by the four states with Partnership programs.
               The four states disagreed with our conclusion that the Partnership
               programs are unlikely to result in Medicaid savings, and like HHS,
               commented that our scenarios did not adequately account for the
               impact of asset transfers. California, Connecticut, and New York
               objected to our methodology for estimating the financial impact of
               the program on Medicaid. California and Connecticut suggested that
               our analysis should have included results from two Partnership
               policyholder survey questions that they consider in their own
               analysis of the Partnership program.

               We maintain that the evidence suggests that the Partnership
               program is unlikely to result in savings for Medicaid, despite
               limited data and program experience. As discussed in our draft
               report, some savings to Medicaid could be associated with
               individuals who would have transferred their assets and become
               eligible for Medicaid sooner in the absence of the Partnership
               program. However, we noted that these savings are unlikely to
               offset the potential costs associated with policyholders who would
               have purchased traditional long-term care insurance in the absence
               of the Partnership programs. We did not provide a review of the
               literature on asset transfers because--as we previously noted in
               our March 2007 report on the subject--the evidence on the transfer
               of assets to become eligible for Medicaid coverage for long-term
               care is generally limited.^15 However, in response to HHS'
               comments, we have amended our draft report to make the discussion
               of asset transfers more prominent in the body of our report and to
               include reference to the 2007 GAO study. We also maintain that our
               methodology for estimating the financial impact of the program on
               Medicaid is sound and disagree with California and Connecticut
               regarding the appropriateness of using the two survey questions.
               Specifically, by relying on the responses from these questions,
               the method California, Connecticut, and Indiana use to evaluate
               Medicaid costs underestimates the percentage of people who would
               have purchased traditional policies in the absence of the
               Partnership program, while their method of evaluating Medicaid
               savings overestimates the percentage of people who would transfer
               assets.

    		   Background

               Long-term care comprises services provided to individuals who,
               because of illness or disability, are generally unable to perform
               activities of daily living (ADL)--such as bathing, dressing, and
               getting around the house--for an extended period of time.^16 These
               services can be provided in various settings, such as nursing
               facilities, an individual's own home, or the community.^17 The
               typical 65-year-old has about a 70 percent chance of needing
               long-term care services in his or her life.^18 Long-term care can
               be expensive, especially when provided in nursing facilities. In
               2005, the average cost of a year of nursing facility care was
               about $70,000.^19 In 1999, the most recent year for which data
               were available, the average length of stay in a nursing facility
               was between 2 and 3 years.^20

    ^15GAO, Medicaid Long-Term Care: Few Transferred Assets before Applying
    for Nursing Home Coverage; Impact of Deficit Reduction Act on Eligibility
    Is Uncertain, [38]GAO-07-280 (Washington, D.C.: Mar. 26, 2007).

    ^16As people age, they typically experience a decline in their ability to
    perform basic physical functions, increasing the likelihood that they will
    need long-term care services. Individuals qualify for Medicaid coverage
    for long-term care services if they meet certain functional criteria that
    in general involve a degree of impairment measured by the level of
    assistance an individual needs to perform six activities of daily living
    (ADL): eating, bathing, dressing, using the toilet, getting in and out of
    bed, and getting around the house, as well as the instrumental activities
    of daily living (IADL), which include preparing meals, shopping for
    groceries, and venturing outside of a home or facility.

    ^17Long-term care services, such as personal care, homemaker services, and
    respite care, are known as home care. Home care can also include services
    provided outside of policyholders' homes, such as services provided in
    adult day care centers. Long-term care services provided in
    community-based facilities are generally designed to help people receive
    long-term care and remain living in their own homes. Known as
    community-based services, these long-term care services can be supplied in
    settings such as policyholders' homes, adult day care facilities, or
    during visits to a physician's office.

    ^18P. Kemper, H.L. Komisar, and L. Alecxih, Long-Term Care Over an
    Uncertain Future: What Can Current Retirees Expect? Inquiry, vol. 42, no.
    4 (Winter 2005/2006) pp. 335-350.

    ^19MetLife Mature Market Institute, The MetLife Market Survey of Nursing
    Home & Home Care Costs (September 2005).

    ^20Department of Health and Human Services, Centers for Disease Control
    and Prevention, National Center for Health Statistics, The National
    Nursing Home Survey: 1999 Summary, Series 13, No. 152 (June 2002).

               Long-Term Care Insurance

               Long-term care insurance is used to help cover the cost associated
               with long-term care. Individuals can purchase long-term care
               insurance policies directly from insurance companies, or through
               employers or other groups. The number of long-term care insurance
               policies sold has been small-about 9 million as of 2002, the most
               recent year for which data were available. About 80 percent of
               these policies were sold through the individual insurance market
               and the remaining 20 percent were sold through the group market.

               Long-term care insurance companies generally structure their
               long-term care insurance policies around certain types of benefits
               and related options.

               o A policy with comprehensive coverage pays for long-term care in
               nursing facilities as well as for care in home and community
               settings, while a policy with coverage for home and
               community-based settings pays for care only in these settings.

               o A daily benefit amount specifies the amount a policy will pay on
               a daily basis toward the cost of care, while a benefit period
               specifies the overall length of time a policy will pay for care.
               Data from 2002 through 2005 show that the maximum daily benefit
               amounts can range from less than $100 to several hundred dollars
               per day, while benefit periods can range from 1 year to lifetime
               coverage.^21

    ^21GAO analysis of data provided by five insurance companies selling
    traditional long-term care insurance: see GAO, Long-Term Care Insurance:
    Federal Program Compared Favorably with Other Products, and Analysis of
    Claims Trend Could Inform Future Decisions, [39]GAO-06-401 (Washington,
    D.C.: March 2006).

               o A policy's elimination period establishes the length of time a
               policyholder who has begun to receive long-term care has to wait
               before his or her insurance will begin making payments towards the
               cost of care. According to data from 2002 through 2005,
               elimination periods can range from 0 to at least 730 days.^22

               o Inflation protection increases the maximum daily benefit amount
               covered by a policy, and helps ensure that over time the daily
               benefit remains commensurate with the costs of care.

               There can be a substantial gap between the time a long-term care
               insurance policy is purchased and the time when policyholders
               begin using their benefits, and the costs associated with
               long-term care can increase significantly during this time. A
               typical gap between the time of purchase and the use of benefits
               is 15 to 20 years: the average age of all long-term care insurance
               policyholders at the time of purchase is 63, and in general
               policyholders begin using their benefits when they are in their
               mid-70s to mid-80s. Usually, automatic inflation protection
               increases the benefit amount by 5 percent annually on a compounded
               basis. A policy with automatic 5 percent compound inflation
               protection and a $150 per day maximum daily benefit in 2006 would
               be worth approximately $400 per day 20 years later. Another means
               to protect against inflation is a future purchase option. This
               option allows the consumer to increase the dollar amount of
               coverage every few years at an extra cost. Some future purchase
               options do not allow consumers to purchase extra coverage once
               they begin receiving their insurance benefit and the opportunity
               to purchase extra coverage may be withdrawn should the consumer
               decline a predetermined number of premium increases. A policy with
               a future purchase option may be less expensive initially than a
               policy with compound inflation protection. However, over time the
               policy with a future purchase option may become more expensive
               than a policy with compound inflation.

               Without inflation protection, policyholders might purchase a
               policy that covers the current cost of long-term care but find,
               many years later, when they are most likely to need long-term care
               services, that the purchasing power of their coverage has been
               reduced by inflation and that their coverage is less than the cost
               of their care. For example, if the cost of a day in a nursing
               facility increases by 5 percent every year for 20 years, a nursing
               facility that costs $150 per day in 2006 would cost about $400 per
               day 20 years later in 2026. A policy purchased in 2006 with a
               daily benefit of $150 without inflation protection would pay $150
               per day--or 38 percent--of the daily cost of about $400 in 2026.
               The remaining $250 of the daily cost of the nursing facility care
               would have to be paid by the policyholder.

    ^22See [40]GAO-06-401 .

               Long-term care insurance policies may also include other benefits
               or options. For example, policies can offer coverage for home care
               at varying percentages of the maximum daily benefit amount. Some
               policies include features in which the policy returns a portion of
               the premium payments to a designated third party if the
               policyholder dies. Some policies provide coverage for long-term
               care provided outside of the United States or offer
               care-coordination services that, among other things, provide
               information about long-term care services to the policyholder and
               monitor the delivery of long-term care services.

               Many factors impact the premiums individuals pay for long-term
               care insurance. Notably, long-term care insurance companies
               typically charge higher premiums for policies with more extensive
               benefits. In general, policies with comprehensive coverage have
               higher premiums than policies without such coverage, and
               policyholders pay higher premiums the higher their maximum daily
               benefit amounts, the longer their benefit periods, the greater
               their inflation protection, and the shorter their elimination
               periods. For example, in Connecticut, if a 55-year-old man decided
               to buy a 1-year, $200 per day comprehensive coverage policy, in
               2005 it would have cost him about $1,000 less per year than a
               comparable 3-year policy. Similarly, the age of an applicant also
               impacts the premium, as premiums typically are more expensive the
               older the policyholder at the time of purchase. For example, in
               Connecticut, a 55-year-old purchasing a 3-year, $200 per day
               comprehensive coverage policy in 2005 would pay about $2,500 per
               year, whereas a 70-year-old purchasing the same policy would pay
               about $5,900 per year. Health status may also affect premiums.
               Insurance companies take into account the health status of an
               applicant to evaluate the risk that he or she will access
               long-term care services. If an applicant has a medical condition
               that increases the likelihood of the applicant using long-term
               care services, but does not automatically disqualify the applicant
               from purchasing insurance, the applicant may receive a substandard
               rating from an insurance company, which may result in a higher
               premium.^23

    		   Long-Term Care Insurance Regulation

               Regulation of the insurance industry, including those companies
               selling long-term care insurance, is a state function. Those who
               sell long-term care insurance must be licensed by each state in
               which they sell policies, and the policies sold must be in
               compliance with state insurance laws and regulations. These laws
               and regulations can vary but their fundamental purpose is to
               establish consumer protections that are designed to ensure that
               the policies' provisions comply with state law, are reasonable and
               fair, and do not contain major gaps in coverage that might be
               misunderstood by consumers and leave them unprotected.

               The Health Insurance Portability and Accountability Act of 1996
               (HIPAA) specified conditions under which long-term care insurance
               benefits and premiums would receive favorable federal income tax
               treatment.^24 Individuals who purchase policies that comply with
               HIPAA requirements, which are therefore "tax-qualified," can
               itemize their long-term care insurance premiums as deductions from
               their taxable income along with other medical expenses, and can
               exclude from gross income insurance company proceeds used to pay
               for long-term care expenses. Under HIPAA, tax-qualified plans must
               begin coverage when a person is certified as: needing substantial
               assistance with at least two of the six ADLs for at least 90 days
               due to a loss of functional capacity, having a similar level of
               disability, or requiring substantial supervision because of a
               severe cognitive impairment. HIPAA also requires that a policy
               comply with certain provisions of the National Association of
               Insurance Commissioners' (NAIC) Long-Term Care Insurance Model Act
               and Regulation adopted in January 1993. This model act and
               regulation established certain consumer protections that are
               designed to prevent insurance companies from (1) not renewing a
               long-term care insurance policy because of a policyholder's age or
               deteriorating health, and (2) increasing the premium of an
               existing policy because of a policyholder's age or claims history.
               In addition, in order for a long-term care insurance policy to be
               tax-qualified, HIPAA requires that a policy offer inflation
               protection. The NAIC, which represents insurance regulators from
               all states, reported in 2005 that 41 states based their long-term
               care insurance regulations on the NAIC model, 7 based their
               regulations partially on the model, and 3 did not follow the
               model.

    ^23The process of reviewing medical and health-related information
    furnished by an applicant to determine if the applicant presents an
    acceptable level of risk and is insurable is known as underwriting.
    Examples of medical conditions that may not disqualify an individual from
    obtaining insurance but that can result in a substandard rating during the
    underwriting process include osteoporosis, emphysema, and diabetes.
    However, the severity and the ability to control and treat the medical
    condition are all factors that can also impact how a nondisqualifying
    medical condition impacts an underwriting rating.

    ^24Pub. L. No. 104-191, SS 321-327, 110 Stat. 1936, 2054-2067.

               Medicaid

               Medicaid is the primary source of financing for long-term care
               services in the United States. In 2004, almost one-third of the
               total $296 billion in Medicaid spending was for long-term care.
               Some health care services, such as nursing facility care, must be
               covered in any state that participates in Medicaid. States may
               choose to offer other optional services in their Medicaid plans,
               such as personal care.^25

               Medicaid coverage for long-term care services is most often
               provided to individuals who are aged or disabled. To qualify for
               Medicaid coverage for long-term care, these individuals must meet
               both functional and financial eligibility criteria. Functional
               eligibility criteria are established by each state and are
               generally based on an individual's degree of impairment, which is
               measured in terms of the level of difficulty in performing the
               ADLs and IADLs. To meet the financial eligibility criteria, an
               individual cannot have assets or income that exceed thresholds
               established by the states and that are within standards set by the
               federal government. Generally, the value of an individual's
               primary residence and car, as well as a few other personal items,
               are not considered assets for the purpose of determining Medicaid
               eligibility.^26 Individuals with high medical costs and whose
               income exceeds state thresholds can "spend down" their income on
               their long-term care, which may bring their income below the
               state-determined income eligibility limit. In all four states with
               Partnership programs, for the purpose of obtaining Medicaid
               eligibility, individuals are allowed to deduct medical expenses,
               including those for long-term care, in order to bring their
               incomes below the state-determined thresholds.

    ^25Personal care includes long-term care services that help people meet
    personal needs such as assistance with personal hygiene, nutritional or
    support functions, and health-related tasks.

    ^26Under DRA, certain individuals with an equity interest in their home of
    greater than $500,000 are not eligible for Medicaid coverage for nursing
    facility services or other long-term care services. However, states have
    the option to increase the home equity interest level to an amount that
    does not exceed $750,000. This home equity limitation does not apply to
    individuals if they have a spouse, a child under age 21, or a child who is
    blind or disabled living in the home.

               In order to meet Medicaid's eligibility requirements, some
               individuals may choose to divest themselves of their assets--for
               example, by transferring assets to their spouses or other family
               members.^27 However, those who transfer assets for less than fair
               market value during a specified "look-back" period--a period of
               time before an individual applies for Medicaid during which the
               program reviews asset transfers--may incur a penalty, that is, a
               period during which they are ineligible for Medicaid coverage for
               long-term care services. Evidence of the extent to which
               individuals transfer assets for less than fair market value to
               become financially eligible for Medicaid coverage for long-term
               care is generally limited and often based on anecdote. However,
               our March 2007 report on asset transfers suggests that the
               incidence of asset transfers is low among nursing home residents
               covered by Medicaid.^28 Nationwide, about 12 percent of
               Medicaid-covered elderly nursing home residents reported
               transferring cash during the 4 years prior to nursing home entry,
               and the median amount transferred was very small ($1,239). The
               percentage of nursing home residents not covered by Medicaid who
               transferred cash was about twice that of Medicaid-covered nursing
               home residents. However, the median amount of cash transferred as
               reported by non-Medicaid covered residents and Medicaid-covered
               residents did not vary greatly.^29 In addition to the nationwide
               analysis, our report summarized an analysis of a sample of
               approved Medicaid nursing home applicants in three states who
               generally applied to Medicaid in 2005 or before, and found that
               about 10 percent of applicants had transferred assets for less
               than the fair market value during the 3-year look-back period
               before Medicaid eligibility began. The median amount transferred
               was about $15,000. DRA tightened the requirements on Medicaid
               applicants transferring assets by extending the look-back period
               for all asset transfers from 3 to 5 years. In addition, DRA
               changed the beginning date of the penalty period. Prior to
               enactment of DRA, the penalty period started on the first day of
               the month during or after which assets were transferred. DRA
               changed this so that the penalty period now begins on the first
               day of the month when the asset transfer occurred, or the date on
               which the individual is eligible for medical assistance under the
               state plan, and is receiving institutional care services that
               would be covered by Medicaid were it not for the imposition of the
               penalty period, whichever is later. The extension of the look-back
               period and the redefinition of the penalty period may reduce
               transfers of assets.

    ^27For asset transfer purposes, Medicaid defines the term "assets" to
    include income and resources, such as bank accounts.

    ^28See [41]GAO-07-280 .

    ^29The median amount of cash transferred by non-Medicaid-covered residents
    during the 4 years prior to nursing home entry was $1,859. During the 2
    years prior to nursing home entry, the median amount transferred for both
    non-Medicaid-covered residents and Medicaid-covered residents was $2,194.

               Long-Term Care Partnership Programs

               The Partnership programs are public-private partnerships between
               states and private long-term care insurance companies. Established
               in 1987 as programs funded through the Robert Wood Johnson
               Foundation, the programs are designed to encourage individuals,
               especially moderate income individuals, to purchase private
               long-term care insurance in an effort to reduce future reliance on
               Medicaid for the financing of long-term care. As of October 2006,
               the original four Partnership programs in California, Connecticut,
               Indiana, and New York remained the only active Partnership
               programs.^30

               Partnership programs attempt to encourage individuals to purchase
               private long-term care insurance by offering them the option to
               exempt some or all of their assets from Medicaid spend-down
               requirements. However, Partnership policyholders are still
               required to meet Medicaid income eligibility thresholds before
               they may receive Medicaid benefits. In the four states with
               Partnership programs, those who purchase long-term care insurance
               Partnership policies generally must first use those benefits to
               cover the costs of their long-term care before they begin
               accessing Medicaid.^31 In 2006, there were about 190,000 active
               Partnership policies, out of the approximately 218,000 Partnership
               policies that had been sold since the inception of the Partnership
               programs.^32,33 Between September 2005 when we last reported on
               the Partnership programs, and August 2006, the number of
               Partnership policies in the four states combined increased by
               about 10 percent.^34

    ^30Iowa and Massachusetts received approval from the Health Care Financing
    Administration (now CMS) to establish Partnership programs, but programs
    were not functioning in these states as of October 2006. Since enactment
    of DRA, a Partnership program in Idaho was approved by CMS, though the
    program was not functioning as of October 2006. Also, as of that date,
    amendments to state Medicaid plans allowing Partnership programs in
    Florida, Georgia, Minnesota, and Nebraska were under review at CMS.

    ^31For the purposes of this report, we use the term "accessing Medicaid"
    to describe the point at which long-term care policyholders first begin
    receiving Medicaid payments for their long-term care.

    ^32Partnership program offices reported that about 235,000 Partnership
    policies had been sold since the four Partnership programs began, but that
    number included people who subsequently dropped their policies within 30
    days of purchasing the product. The four states with Partnership programs
    give Partnership policy purchasers a 30-day "free look" period during
    which they can decide whether to keep their policy or drop it and receive
    a full refund.

    ^33By state, the number of Partnership policies, excluding those that were
    dropped, was 73,811 in California and 33,040 in Connecticut, through March
    2006; 31,750 in Indiana through June 2006; and 51,262 in New York through
    December 2005.

    ^34This rate of increase varied across the states: the sales of
    Partnership policies in California increased by 14 percent--the largest
    percentage increase among the Partnership states--compared with increases
    of 7, 9, and 8 percent in Connecticut, Indiana, and New York,
    respectively.

               The four states with Partnership programs vary in how they protect
               policyholders' assets. The Partnership programs in California,
               Connecticut, Indiana, and New York have dollar-for-dollar models,
               in which the dollar amount of protected assets is equivalent to
               the dollar value of the benefits paid by the long-term care
               insurance policy. For example, a person purchasing a long-term
               care dollar-for-dollar insurance policy with $300,000 in coverage
               would have $300,000 of assets protected if he or she were to
               exhaust the long-term care insurance benefits and apply for
               Medicaid. However, New York's program also offers total
               protection. That is, those who purchase a comprehensive long-term
               care insurance policy, covering a minimum of 3 years of nursing
               facility care or 6 years of home care, or some combination of the
               two, can protect all their assets at the time of Medicaid
               eligibility determination. In Indiana, in addition to the
               dollar-for-dollar models, the Partnership program offers a hybrid
               model that allows purchasers to obtain dollar-for-dollar
               protection up to a certain benefit level as defined by the state;
               all policies with benefits above that threshold provide total
               asset protection for the purchaser.

               Under DRA, any state that implements a Partnership program must
               ensure that the policies sold through that program contain certain
               benefits, such as inflation protection.^35,36 DRA also requires
               that Partnership policies provide dollar-for-dollar asset
               protection. Insurers are not allowed to offer Partnership policies
               that provide the total asset protection feature found in
               Partnership policies in New York and Indiana.^37 DRA also requires
               Partnership policies to include consumer protections contained in
               the NAIC Long-Term Care Insurance Model Act and Regulation as
               updated in October 2000. DRA established specific requirements for
               Partnership policies that do not apply to traditional long-term
               care insurance policies sold in the Partnership states, such as
               inflation protection and dollar-for-dollar asset protection. DRA
               prohibits states from creating other requirements for Partnership
               policies that do not also apply to traditional long-term care
               insurance policies in the four states with Partnership policies.
               The Partnership programs in California, Connecticut, Indiana, and
               New York, which were implemented before DRA, are not subject to
               these specific requirements, but in order for those programs to
               continue, they must maintain consumer protection standards that
               are no less stringent than those that applied as of December 31,
               2005.

    ^35DRA requires Partnership policies to provide compound inflation
    protection for individuals younger than 61. For individuals younger than
    76, Partnership policies must provide policyholders with some level of
    inflation protection, although not necessarily compound inflation
    protection, while inflation protection is an optional feature for
    Partnership policyholders aged 76 or older. Pub. L. No. 109-171, S
    6021(a)(1), 120 Stat. 68 (codified at 42 U.S.C. S 1396
    p(b)(1)(c)(iii)(IV)).

    ^36Some of the states that passed legislation prior to the passage of DRA
    to enable the creation of a Partnership program may need to make
    additional changes to meet DRA requirements.

    ^37According to CMS officials, policies in New York and Indiana may
    continue to provide this type of coverage.

               Partnership Policies Must Include Certain Benefits Not Required
    		   of Traditional Policies, and Insurance Companies Cannot Charge
    		   Higher Premiums for Asset Protection in Partnership Policies

               The four states with Partnership programs require that Partnership
               policies include certain benefits--such as inflation protection
               and minimum daily benefit amounts--while traditional long-term
               care insurance policies may include these benefits but are not
               generally required to do so. Compared with policyholders of
               traditional long-term care insurance policies, a higher percentage
               of Partnership policyholders purchased policies with more
               extensive coverage. In the four states, insurance companies are
               not allowed to charge policyholders higher premiums for policies
               with asset protection, and Partnership and traditional long-term
               care insurance policies with comparable benefits are required to
               have equivalent premiums.

    		   The Four States Require Partnership Policies to Include Certain
    		   Benefits Not Required for Traditional Long-Term Care Insurance
    		   Policies

               In general, the four states with Partnership programs require that
               Partnership policies sold in their states include certain benefits
               that are not required for those states' traditional long-term care
               insurance policies. A state DOI official told us that they have
               these benefit requirements for Partnership policies in order to
               protect policyholders by helping to ensure that benefits are
               sufficient to cover a significant portion of their anticipated
               long-term care costs and to protect the Medicaid program by
               reducing the likelihood that policyholders will exhaust their
               benefits and become eligible for Medicaid.

               In addition to asset protection, which by definition Partnership
               policies include, all four states require Partnership policies to
               include inflation protection.^38 Three of the four Partnership
               states--California, Connecticut, and New York--require that
               Partnership policies include inflation protection that
               automatically increases benefit amounts by 5 percent annually on a
               compounded basis.^39 The four states do not require traditional
               long-term care insurance policies to include inflation protection,
               though insurance companies in these states are required to offer
               inflation protection as an optional benefit. While policies with
               inflation protection may include coverage that is more
               commensurate with expected future costs of care, these policies
               can be two or three times as expensive as policies without
               inflation protection. For example, in 2005 a long-term care
               insurance policy with a $200 daily benefit, a 3-year benefit
               period, and inflation protection cost about $3,000 per year for a
               60-year-old male; the same policy cost about $1,350 per year
               without inflation protection. An insurance company official told
               us that the additional cost of inflation protection is the primary
               reason individuals do not buy a Partnership policy.

    ^38There are some exceptions to the inflation protection requirement. For
    example, in New York, insurance companies are allowed to sell Partnership
    policies to policyholders 80 years of age or older without inflation
    protection.

    39In Indiana, Partnership policies are required to include either
    automatic compound inflation protection at 5 percent annually or in
    accordance with the consumer price index, or an inflation protection
    option that covers at least 75 percent of the average daily private pay
    rate.

               The four states with Partnership programs also require minimum
               daily benefit amounts for all Partnership policies, while in three
               of the Partnership states, traditional long-term care insurance
               policies are not subject to this requirement.^40 According to
               Partnership and DOI officials in California and Connecticut,
               minimum daily benefit amounts are required for Partnership
               policies in order to prevent consumers from purchasing coverage
               that would be insufficient to cover a substantial portion of the
               cost of their care. According to Partnership program materials
               from New York, for example, the average daily cost of long-term
               care in a nursing facility in New York was about $263 per day in
               2004. Anything less than New York's 2004 minimum daily benefit
               amount of $171 for nursing facility care would therefore have
               required out-of-pocket payments for policyholders of more than
               one-third of the cost of their nursing facility care. In 2006, the
               required minimum daily benefit amounts for nursing facility care
               in Partnership policies ranged from $110 per day in Indiana to
               $189 per day in New York.

               In the four states with Partnership programs, Partnership policies
               are subject to minimum nursing facility benefit period
               requirements established by the states, but some traditional
               long-term care insurance policies are not subject to these same
               requirements. In California and Indiana, Partnership policies are
               required to have dollar coverage that provides for at least 1 year
               of care in a nursing facility, while traditional long-term care
               insurance policies are not subject to a minimum benefit period
               requirement.^41 In New York, Partnership policies are required to
               have minimum nursing facility benefit periods ranging from 18
               months to 4 years, depending on the type of coverage an individual
               purchases, while certain traditional long-term care insurance
               policies are required to have 1-year minimum nursing facility
               benefit periods. In Connecticut, Partnership and traditional
               long-term care insurance policies are both required to have 1-year
               minimum benefit periods for care provided in nursing facilities.

    40New York requires minimum daily benefit amounts for traditional
    long-term care insurance policies.

    41The minimum amount paid under a Partnership policy for this dollar
    coverage can be no less than 70 and 75 percent of the average daily
    private pay rate for nursing facilities in California and Indiana,
    respectively.

               Partnership and traditional long-term care insurance policies both
               typically include elimination periods, which establish the length
               of time a policyholder who has begun to receive long-term care has
               to wait before receiving long-term care insurance benefits. The
               four states with Partnership programs limit the length of the
               elimination periods that can be included in Partnership policies.
               Two of the four states, Connecticut and New York, also generally
               limit the elimination period included in traditional long-term
               care insurance policies. In 2006, the elimination period for
               Partnership policies in California was no more than 90 days, while
               New York had a 100-day limit^42 and Indiana had a 180-day limit.
               In Connecticut, the elimination period limit for both Partnership
               and traditional long-term care insurance policies was 100 days.
               According to a New York Partnership program staff member, in New
               York the elimination period for traditional policies was generally
               no more than 180 days. The effect of increasing the elimination
               period is to increase the out-of-pocket costs policyholders incur
               in paying for their long-term care. One official from an insurance
               company that sells long-term care insurance policies told us that
               having long elimination periods could quickly deplete an
               individual's assets, which might make the asset protection under
               the Partnership program less valuable.

               Unlike traditional long-term care insurance policies, Partnership
               policies in the four states must cover or offer case management
               services.^43 Case management services can include providing
               individual assessments of policyholders' long-term care needs,
               approving the beginning of an episode of long-term care,
               developing plans of care, and monitoring policyholders' medical
               needs. According to a Partnership program official, by helping
               policyholders assess their medical needs and develop a plan of
               care, case management services can help policyholders use their
               benefit dollars efficiently. Partnership program officials in
               California, Connecticut, and Indiana explained that their states
               require that Partnership policies cover case management services
               provided through state-approved intermediaries that are
               independent of insurance company control. Partnership program
               officials in New York told us that Partnership policyholders have
               the option to seek case management services from independent case
               management service providers, but they can also elect to receive
               case management services from their own insurance company.
               Traditional long-term care insurance policies are not required to
               cover case management services, though some may offer them as an
               optional benefit. In addition, some insurance companies that sell
               traditional long-term care insurance policies may directly provide
               case management services.

    42This was for New York's total asset protection policies. The maximum
    elimination period for New York's dollar-for-dollar policies was 60 days.

    43In Connecticut and Indiana, the case management provision for
    Partnership policies is specific to home and community-based services.

               Insurance companies in the four states with Partnership programs
               are subject to restrictions on the types of coverage they can
               offer in Partnership policies, while they are allowed to offer
               traditional long-term care insurance policies with more coverage
               options. In California, Connecticut, and Indiana, insurance
               companies can only offer Partnership policies with two types of
               coverage: an option that covers only nursing facility care, and a
               comprehensive option that covers nursing facility care as well as
               care provided in the home and in community-based facilities.^44 In
               New York, insurance companies may only offer Partnership policies
               that cover comprehensive care. The four states do not allow
               insurance companies to offer Partnership policies in their state
               that exclusively cover care provided in the home and in
               community-based facilities. However, in the four states, insurance
               companies can offer traditional long-term care insurance policies
               with nursing facility care only, home and community-based facility
               only, and comprehensive coverage options.

    44In California, Indiana, and New York, nursing facility coverage also
    includes other settings that are similar to nursing facilities.

    		   Partnership Policyholders Purchased Policies with Benefits That
    		   Were More Extensive Than Those Purchased by Traditional
    		   Policyholders Nationwide

               In the four states with Partnership programs, traditional
               long-term care insurance policies can include--and individuals can
               therefore choose to purchase--generally the same benefits found in
               Partnership policies.^45 However, Partnership policyholders tended
               to purchase benefits that are more extensive than those purchased
               by traditional long-term care insurance policyholders. We found
               that from 2002 through 2005, a higher percentage of Partnership
               policyholders purchased policies with more extensive coverage
               compared with policyholders who purchased traditional long-term
               care insurance nationally. Specifically, more Partnership
               policyholders purchased policies with higher levels of inflation
               protection and coverage that includes care in both nursing
               facility and home and community-based care settings. See table 1
               for a summary of the benefits purchased by Partnership and
               traditional long-term care insurance policyholders. For example,
               while all Partnership policyholders had policies from 2002 through
               2005 with the required inflation protection that generally
               increases daily benefit amounts by 5 percent annually, about 76
               percent of traditional long-term care insurance policyholders had
               policies with some form of inflation protection. Similarly, during
               this period, 64 percent of all Partnership policyholders had
               policies that included daily benefit amounts of $150 or greater,
               while 36 percent of traditional long-term care insurance
               policyholders nationwide had policies that provided daily benefit
               amounts at this level or greater. While these differences may
               reflect the benefit requirements found in Partnership policies,
               they may also reflect the incentive offered by the asset
               protection benefit of Partnership policies, which may influence
               consumers deciding whether to buy a Partnership or traditional
               long-term care insurance policy. The differences may also reflect
               the demographic and financial characteristics of the people living
               in the four states with Partnership programs relative to other
               states.

    45Traditional long-term care insurance policyholders cannot obtain asset
    protection through their policies.

               Table 1: Percentage of Partnership and Traditional Long-Term Care
               Insurance Policyholders Purchasing Benefits from 2002 through 2005

                                                       Traditional long-term care
                                   Partnership^a        insurance policyholders^b
    Inflation protection
    Yes                                  100%                              76%
    No                                      0                               16
    Other^c                                 0                                8
    Daily benefit amount
    Less than $100                          0                               11
    $100 to $149                           35                               53
    $150 to $199                           40                               25
    $200 and greater                       24                               11
    Benefit period
    1 year                                  3                                3
    More than 1 and less than 3            13                               11
    years
    3 years                                37                               23
    More than 3 years but not              30                               37
    unlimited
    Lifetime/unlimited benefit             19                               26
    Elimination period
    Less than 30 days                       3                                8
    30 days to 89 days                     23                               21
    90 days                                47                               60
    More than 90 days                      27                               11
    Coverage type
    Comprehensive^d                        99                               91
    Nursing facility-only                   1                                3
    Other^e                                 0                                6

               Sources: GAO analysis of the four states' UDS Partnership data and
               data provided by five insurance companies selling traditional
               long-term care insurance.

               Note: Percentages may not add to 100 due to rounding.

               aReported values for daily benefit amount, benefit period, and
               elimination period include nursing facility data, but not home
               care data.

               bApproximately 2 percent of people nationwide with long-term care
               policies have Partnership policies. Thus, although the data may
               include a number of Partnership policyholders, about 98 percent of
               these people are likely to have traditional long-term care
               insurance. Because this is only 2 percent, we consider this as a
               reasonable proxy for traditional long-term care policyholders.

               cIncludes policies with a future purchase option (7 percent) and
               policies with a deferred inflation option (1 percent). Enrollees
               who select a deferred inflation option may increase benefits at a
               later date that they choose.

               dComprehensive coverage insurance policies provide benefits for
               both nursing facility-only and home care services.

               eIncludes home care coverage.

               Insurance Companies Cannot Charge Partnership Policyholders Higher
    		   Premiums for Asset Protection, and Premiums for Partnership Policies
    		   Must Be Equivalent to Premiums of Traditional Policies That Have
    		   Comparable Benefits

               According to state officials, the four states with Partnership
               programs require Partnership and traditional long-term care
               insurance policies to have equivalent premiums if the benefits
               offered--except for asset protection--are otherwise comparable.
               According to information from one state's Partnership program, one
               reason for this requirement is that, unlike other insurance
               company benefits, insurance companies do not provide asset
               protection to Partnership policyholders. Instead, the four states
               with Partnership programs provide the asset protection benefit by
               allowing Partnership policyholders to protect some or all of their
               assets from Medicaid spend-down requirements. However, because
               Partnership policies are required to have inflation protection and
               other benefits that traditional long-term care insurance policies
               are not required to have, Partnership policies are likely to have
               higher premiums. According to a Connecticut state official, in
               1996, before the state required that Partnership and traditional
               long-term care insurance policies have equivalent premiums for the
               same benefits, Partnership policies were 25 to 30 percent more
               expensive than traditional long-term care insurance policies with
               comparable benefits. The official further explained that after the
               requirement was established, sales of Partnership policies in
               Connecticut more than tripled.

    		   Compared with Traditional Long-Term Care Insurance Policies, Two of
    		   Four States Subject Partnership Policies to Additional Review, and
    		   All Four States Require Additional Agent Training

               State officials told us that, while both Partnership and
               traditional long-term care insurance policies undergo reviews by
               the DOI in each of the four states with Partnership programs,
               Partnership policies in California and Connecticut also undergo
               another review by state Partnership program officials.^46,47
               California and Connecticut Partnership program staff review
               Partnership policies to determine whether the policies include the
               benefits mandated by Partnership regulations, and whether the
               insurance companies can meet additional data reporting and other
               administrative requirements. The programs' staff also try to
               ensure that the policies can be easily understood and contain all
               of the required language. The Partnership program offices in
               California and Connecticut perform their review of policies first,
               and then pass the application on to the DOI for further review.

               DOI officials in California and Connecticut told us that the
               Partnership office review of Partnership policies tends to be
               lengthier for insurance companies than the DOI review. A DOI
               official explained that when insurance companies add new benefit
               options to policies, the Partnership review can take longer. Other
               factors that may slow the Partnership review process include the
               time spent coordinating between the Partnership program and the
               state DOI, and the time it takes for insurance companies to learn
               how to complete the Partnership review process for the first time.
               State officials in Indiana and New York--where reviews of new
               Partnership policies are conducted by the DOI and not a separate
               Partnership program office--told us that it generally takes the
               same amount of time for Partnership and traditional long-term care
               insurance policies to pass through the review process.

               Before they can sell Partnership policies, insurance agents are
               subject to additional state training requirements compared with
               agents who sell only traditional long-term care insurance
               policies. Although each of the four states with Partnership
               programs has somewhat different requirements, in general the
               states require Partnership agents to undergo about a day of
               training specific to the Partnership program in addition to the
               training that the states require for those who sell traditional
               long-term care insurance.^48,49 Partnership program training
               typically includes information on topics such as long-term care
               planning, Medicaid, Medicare, the specific benefits required by
               the Partnership program, and how Partnership policies differ from
               traditional long-term care insurance policies. According to some
               state officials, agents need training on the Partnership program
               and Medicaid in order to understand the program and provide
               appropriate advice to their clients. In 2006, in three of the four
               states all Partnership program training was conducted in person,
               rather than via correspondence or on the internet; however, in New
               York agents completed an online internet-based course as well as
               classroom training as part of the Partnership program training.
               According to state officials, all four Partnership states require
               that the provider of this specialized Partnership training be
               approved by the state DOI, and in Connecticut, the training is
               provided exclusively by Partnership program staff.

    46The New York Partnership program does not conduct a review of
    Partnership policies. The New York DOI reviews all Partnership and
    traditional long-term care insurance policies.

    47Until recently, the Indiana Partnership program was housed in the
    Medicaid office and conducted an initial review of Partnership policies
    prior to the DOI review. As of September 2006, the Indiana Partnership
    program was housed in, and administered by, the DOI and there was only one
    review of Partnership policies, which was conducted by the DOI.

               Despite the complexity of long-term care insurance products, DOI
               officials in three states with Partnership programs reported that
               long-term care insurance policies, including Partnership policies,
               garner few complaints from policyholders. For example, from 1998
               to 2005 the New York Insurance Department received an average of
               two to three complaints about Partnership policies each year
               (there were 51,262 active Partnership policies in the fourth
               quarter of 2005 in New York). During this time period, according
               to data from the New York state DOI, complaints about all
               long-term care insurance policies in New York related to issues
               such as the interpretation of policy provisions, premium amounts,
               and refusals to issue policies.

    48In order to continue to sell long-term care insurance in the four
    Partnership states, insurance agents must receive several hours of
    continuing education every 2 years. The required hours ranged from 5 hours
    every 2 years in Indiana to 24 hours every 2 years in Connecticut.

    49In New York, the continuing education credits from the required
    Partnership policy training can be used to meet the DOI requirements for
    agent recertification for traditional long-term care policies.

               Long-Term Care Insurance Policyholders Are Generally Wealthier
    		   than Those Without Such Insurance, and Partnership Policyholders
    		   Are Typically Younger than Traditional Long-Term Care Insurance
    		   Policyholders

               Long-term care insurance policyholders--that is, both Partnership
               policyholders and traditional long-term care insurance
               policyholders--are more likely to have higher incomes and more
               assets than people without long-term care insurance. On average,
               Partnership policyholders are younger than traditional long-term
               care insurance policyholders. Those with long-term care insurance
               policies are also more likely to be female rather than male, and
               married than unmarried.

               Long-Term Care Insurance Policyholders Generally Have Higher
    		   Incomes and More Assets than Those Without Long-Term Care Insurance

               In examining Partnership policyholders in two states, traditional
               long-term care insurance policyholders nationwide, and those
               without long-term care insurance nationwide, we found that
               Partnership and traditional long-term care policyholders are more
               likely to have higher incomes than those without such
               insurance.^50 In California and Connecticut--the two states with
               Partnership programs for which we had data--at the time they
               purchased a policy, 55 percent of Partnership policyholders over
               age 55 had monthly household incomes of $5,000 or greater. In
               comparison, 43 percent of all households with people over age 55
               in these states had monthly household incomes at this level at the
               time they were surveyed.^51,52 Similarly, at the national level,
               when surveyed, 46 percent of traditional long-term care
               policyholders over age 55 had monthly household income of $5000 or
               greater, whereas 29 percent of those individuals over age 55
               without long-term care insurance had such incomes.^53 We also
               found that more than half (53 percent) of Partnership
               policyholders had household assets of $350,000 or more in
               California and Connecticut. Data on the asset levels of all
               households in those states were not available for our comparison.
               Nationwide, 36 percent of traditional long-term care insurance
               policyholders and 17 percent of people without long-term care
               insurance had household assets exceeding $350,000 (see table 2).

    50Data from Indiana and New York are excluded from our income and asset
    comparisons. New York did not collect income or asset data for its Partnership
    program, while Indiana income and asset data were not detailed enough to make
    comparisons with other states.

    51Income data for Partnership policyholders in Connecticut were from 2002
    through 2005. Income data for Partnership policyholders in California were
    from 2003 to 2004. Data for all households in those two states were from
    2004. We combined multiple years of these data in order to increase the
    sample size.

    52Because we did not have a direct measure of the population without
    long-term care insurance, we used the general population of all households
    as a proxy. Nationally, about 12 percent of the population over age 55 has
    long-term care insurance. Therefore we assume that the income information
    from all households in two states with Partnership programs-California and
    Connecticut-largely reflects the income and asset patterns of people
    without long-term care insurance.

    53The national-level data are from 2004.

    Table 2: Household Income and Household Asset Distribution among
    Partnership Policyholders and Comparison Populations in Partnership States
    and Nationally

                           Partnership states: CA and
                                      CT^a                     All states^b
                                                                             Those
                                                             Traditional   without
                              Partnership           All   long-term care long-term
                         policyholders^c, households^e,        insurance      care
                                        d             f  policyholders^g insurance
    Monthly household income ranges^h
    <$1000                          1%            8%               4%       15%
    $1000-$4999                     45            49               50        56
    $5000 or greater                55            43               46        29
    Household asset
    ranges^i, j
    <$100,000                      16% Not Available              36%       62%
    $100,000-$199,999               14 Not Available               14        12
    $200,000-$349,999               17 Not Available               14         9
    $350,000 or                     53 Not Available               36        17
    greater

    Sources: GAO analysis of Partnership program purchaser surveys, American
    Community Survey (ACS), and the HRS.

    Note: Percentages may not add to 100 due to rounding.

    aDoes not include data from New York and Indiana.

    bData for all states are from the HRS, 2004.

    cConnecticut values are based on survey data from 2002 through 2005.

    dCalifornia values are based on survey data from 2003 and 2004.

    eData are from the ACS, 2004.

    fWe use the All Households category as a proxy for those without long-term
    care insurance in California and Connecticut. Approximately 12 percent of
    people nationwide over 55 have long-term care insurance so our measure is
    likely to contain approximately 88 percent without long-term care
    insurance.

    gApproximately 2 percent of people nationwide with long-term care policies
    have Partnership policies. Thus, although the HRS data may include a small
    number of Partnership policyholders, about 98 percent of these people
    likely have traditional long-term care insurance.

    hData for monthly income ranges are for survey respondents aged 55 and
    over.

    iData for asset ranges are for all survey respondents regardless of age.

    jIn the policyholder surveys, California and Connecticut instructed
    policyholders to exclude the value of homes and cars when reporting their
    assets. The HRS data for assets also exclude homes and vehicles.

    Partnership Policyholders Are Younger on Average than Traditional Long-Term Care
    Insurance Policyholders and People Without Long-Term Care Insurance

    In our analyses, we found that Partnership policyholders in California,
    Connecticut, Indiana, and New York are younger on average than traditional
    long-term care insurance policyholders nationally and those without
    long-term care insurance nationally (see table 3). We also found that
    those who purchase long-term insurance policies--both traditional and
    Partnership--are more likely to be women than men, and married than
    unmarried.^54

    Table 3: Demographic Characteristics of Partnership Policyholders and
    Comparison Populations in Partnership States and Nationally

                                                                   People without
                      All partnership   Traditional long-term care long-term care
                   policyholders^c, e insurance policyholders^a, d    insurance^d
    Average age                 59                         63^c           64^b
    Age range               18-104                      30-95^c       24-107^b
    Age
    categories
    Under 55                   28%                          20%            21%
    years
    55-64 years                 49                           37             36
    65-74 years                 19                           30             22
    75 years &                   3                           13             20
    over
    Sex
    Female                     58%                          56%            54%
    Male                        42                           44             46
    Marital
    status
    Married                    75%                          72%            62%
    Not married                 24                           28             38
    Unknown                      1                            0              0

    Source: GAO analysis of the UDS and the HRS.

    Note: Percentages may not add to 100 due to rounding.

    aApproximately 2 percent of people nationwide with long-term care policies
    have Partnership policies. Thus, although the HRS data may include a small
    number of Partnership policyholders, about 98 percent of these people are
    likely to have traditional long-term care insurance.

    bDenotes average age at time of survey.

    cData are as of time of purchase.

    dData are from the 2004 HRS, which is a longitudinal national panel survey
    of individuals over age 50.

    54To make this comparison, we used cumulative data from the 2002 through
    2005 UDS data sets on Partnership policyholders and data from the 2004 HRS
    survey.

    eData are from the UDS for 2002 through 2005.

    Partnership Programs Unlikely to Result in Savings for Medicaid Largely Because
    of the Asset Protection Benefit of Partnership Policies

    Surveys conducted in some states with Partnership programs and our
    illustrative financing scenarios together suggest that in the four states
    with Partnership programs, the programs are unlikely to result in Medicaid
    savings and could result in increased Medicaid spending. Survey data show
    that in the absence of a Partnership program in their state, 80 percent of
    Partnership policyholders would have purchased a traditional long-term
    care insurance policy and may represent a potential source of increased
    spending for Medicaid. Data are not yet available to determine the extent
    to which the 20 percent of individuals who would have self-financed their
    care will access Medicaid in the absence of a Partnership program.
    However, our scenarios suggest that an individual could self-finance care
    and delay Medicaid eligibility for about the same amount of time as he or
    she would have with a Partnership policy, although we identify some
    circumstances that could delay or accelerate the time to Medicaid
    eligibility. Because of the amount of insurance Partnership policyholders
    generally purchase and their typical income and assets, few Partnership
    policyholders are likely to ever become eligible for Medicaid, which
    suggests that the Partnership programs are likely to have a small impact
    on Medicaid spending.

    Most Partnership Policyholders Would Have Purchased Traditional Long-Term Care
    Insurance in Absence of Partnership Program, Suggesting an Increase in Medicaid
    Spending

    The four Partnership programs are unlikely to result in savings for their
    state Medicaid programs and may result in increased Medicaid spending.^55
    Based on surveys of Partnership policyholders conducted by state
    Partnership programs in California, Connecticut, and Indiana, we estimate
    that, in the absence of a Partnership program in their state, 80 percent
    of Partnership policyholders would have purchased traditional long-term
    care insurance policies instead, while the other 20 percent would have
    self-financed their care.^56 To assess the impact Partnership programs may
    have on Medicaid savings in the four states with Partnership programs, we
    explored, under three different illustrative financing scenarios and using
    certain assumptions, how long it would take before an individual using a
    Partnership policy would become eligible for Medicaid and how long--in the
    absence of a Partnership program--it would take for the same individual to
    become eligible for Medicaid using the other two financing options
    depicted in the scenarios. Our financing scenarios indicate that with a
    Partnership policy, an individual with assets and benefits typical of many
    policyholders becomes eligible for Medicaid sooner than if the individual
    financed his or her long-term care with a traditional long-term care
    policy. Because a Partnership policy, unlike a traditional long-term care
    insurance policy, exempts the individual in the scenario from spending his
    or her protected assets on long-term care before the individual becomes
    eligible for Medicaid, the individual with a Partnership policy becomes
    eligible for Medicaid sooner than if the individual had a traditional
    policy, which is likely to increase the amount of time Medicaid finances
    the individual's long-term care. The scenarios also suggest that if the
    individual would have self-financed his or her long-term care in the
    absence of the Partnership program, the individual would become eligible
    for Medicaid at about the same time as he or she would have with a
    Partnership policy.

    55This is consistent with CBO's estimate that repealing the moratorium on
    new Partnership programs could increase Medicaid spending.

    56The results for the individual states were 84 percent, 76 percent, and

    57 percent for California, Connecticut, and Indiana, respectively. Using
    the number of respondents in each state to weight the calculation, the
    average for the three states combined was approximately 80 percent.

    The three financing scenarios we compared were

               o financing using a Partnership policy,

               o financing using a traditional long-term care insurance policy,
               and

               o self-financing without any long-term care insurance.

               For illustrative purposes, our scenarios are based on an
               individual with assets that are typical of many of those who have
               long-term care insurance--that is, an individual who holds assets
               of $300,000.^57 In two of our scenarios, the individual holds
               long-term care insurance benefits of $210,000, which will cover a
               nursing facility stay of about 3 years--the average nursing
               facility stay is between 2 and 3 years. We also make several
               simplifying assumptions, such as that the individual is not
               overinsured (i.e., does not have insurance that exceeds the value
               of the individual's assets) and is unmarried at the time long-term
               care is required.

               Specifically, scenario A (see fig. 1) depicts a Partnership
               policyholder with $300,000 in assets who purchases a policy valued
               at $210,000 (worth about 3 years of nursing facility coverage),
               automatically receiving $210,000 in asset protection. When the
               individual requires long-term care, the Partnership policy will
               pay for the first $210,000 worth of care--the total amount of his
               or her insurance benefits. After these Partnership benefits have
               been exhausted, the individual will have to spend down the $90,000
               of unprotected assets on long-term care and then, assuming the
               individual meets state Medicaid income eligibility requirements,
               Medicaid will begin to finance the individual's long-term care. As
               depicted by scenario B, if this same individual purchases a
               traditional long-term care insurance policy worth $210,000 instead
               of the Partnership policy, insurance will pay for the first
               $210,000, and the individual will then have to spend down the
               unprotected assets--all $300,000--before he or she is eligible for
               Medicaid.^58,59 Scenario C describes how this same individual
               would finance his or her long-term care without any long-term care
               insurance. As scenario C shows, if the individual had $300,000 in
               assets, these would have to be spent before the individual would
               be eligible for Medicaid.^60 In both this scenario and in the
               scenario in which the individual owns a Partnership policy,
               Medicaid begins paying for the individual's long-term care at
               about the same time, with the difference being whether long-term
               care costs prior to Medicaid eligibility are paid by long-term
               care insurance or by the individual.

    57For example, 53 percent of Partnership policyholders in California and
    Connecticut had household assets of $350,000 or more. Approximately 37
    percent of Partnership policyholders purchased policies with a 3-year
    benefit period.

    58To qualify for Medicaid, individuals must meet a number of requirements,
    including their state's allowable asset limitation, excluding the amount
    of protected assets due to the Partnership policy. For 2006, these were
    $2,000 in California, $1,600 in Connecticut, $1,500 in Indiana, and $4,150
    in New York. The situation is more complicated when the person has a
    spouse. For instance, regarding assets, when someone in an institution
    applies for Medicaid and they are married, Medicaid looks at all the
    assets of the couple, regardless of ownership (certain items such as the
    couple's home, personal and household property, one vehicle, and a small
    amount set aside for burial, are excluded). One half of the remaining
    countable assets, up to a maximum of approximately $100,000 in 2007, are
    then protected for the community spouse. Any remaining assets are then
    used to determine Medicaid eligibility for the spouse in the institution.

    59Individuals may choose a different set of benefits, depending on whether
    they select a traditional or Partnership program policy. In order to
    simplify our comparison of scenarios A and B, we assume that the benefits
    of a Partnership policy and a program traditional long-term care policy
    are the same, except for the asset protection benefit of the Partnership
    policy.

    60More than half of all Partnership policyholders in California and
    Connecticut combined reported assets of at least $350,000, which is more
    than the national average of about $210,000 that would be needed to pay
    for a 3-year stay in a nursing facility--the average stay being between 2
    and 3 years.

    Figure 1: Financing of Long-Term Care Nursing Facility Stays Under Three
    Scenarios

    Note: To simplify our scenarios, we made some simplifying assumptions,
    such as, the individual depicted in the scenarios has assets and benefits
    that are typical of many individuals with long-term care insurance; the
    individual is unmarried; and the individual has assets that are greater
    than or equal to the value of the individual's Partnership policy. Our
    results do not depend on the level of assets or the amount of insurance
    dollars, provided the amount of insurance dollars does not exceed the
    amount of assets. Appendix II further discusses the effects of changing
    these assumptions.

    We found some circumstances when adjusting the assumptions underlying our
    scenarios resulted in delaying or accelerating Medicaid eligibility, but
    most did not change the outcomes related to Medicaid savings. For example,
    to construct our scenarios, we assumed an individual who had $300,000 in
    assets, $210,000 in insurance coverage, and who used this coverage for
    long-term care that cost about $70,000 per year. When we changed these
    amounts--as long as the amount of insurance coverage did not exceed the
    amount of assets--the scenarios still showed that the individual became
    eligible for Medicaid sooner with a Partnership policy than with a
    traditional policy, and became eligible for Medicaid at the same time with
    a Partnership policy and self-financing.

    Our scenarios also assumed that the individual with a Partnership policy
    or a traditional long-term insurance policy was not overinsured--that is,
    had more insurance coverage than the value of his or her assets. When we
    modified this assumption, we found that one portion of our finding still
    held true--the individual in the scenarios using the Partnership policy
    still became eligible for Medicaid sooner than he or she did using a
    traditional long-term care insurance policy. However, the individual also
    became eligible for Medicaid later using the Partnership policy than when
    the individual self-financed his or her own long-term care. This suggests
    that if individuals overinsure their assets, those who finance their
    long-term care using Partnership policies could represent a source of
    savings for Medicaid when compared with those who self-finance their care.
    However, the number of policyholders that this applies to is unlikely to
    be large enough to offset the number of Partnership policyholders who
    represent a potential source of increased Medicaid spending. While we do
    not have information about the amount of assets that Partnership
    policyholders have at the time they use their benefits, survey data from
    California and Connecticut indicate that when Partnership policyholders
    purchased their policies, they tended to purchase policies that were equal
    to or lower than the value of their household assets. This suggests that
    most individuals are unlikely to overinsure their assets at the time of
    purchase, though their status could change over time.^61 In California and
    Connecticut combined, in 2004, 53 percent of Partnership policyholders had
    at least $350,000 worth of household assets at the time of purchase, while
    only about 32 percent of these Partnership policyholders have more than 5
    years of coverage equal to about $350,000.

    Our scenarios also depicted an unmarried individual. While most
    Partnership policyholders are married when they purchase a Partnership
    policy, by the time most individuals require long-term care services, they
    are unmarried. Our analysis of 2004 HRS data of individuals entering a
    nursing facility who are age 65 or older showed that about 66 percent are
    widowed, and more than 75 percent are not married. However, there are
    likely some individuals who will be married when they require long-term
    care services. In general, after applying the Medicaid spousal exemption,
    if the individual's assets remain higher than the value of his or her
    insurance, being married does not change the result that compared with a
    Partnership policy, the individual's time to attain Medicaid eligibility
    is accelerated with a traditional policy and is the same as with
    self-financing.^62 However, if the amount of the Medicaid spousal
    exemption brings the individual's eligible assets below the value of the
    insurance policy, then the individual would fall into an overinsured
    category. Being overinsured means the individual would become a source of
    savings for Medicaid; however, this only applies to the 20 percent of
    individuals who would have self-financed their care in the absence of a
    Partnership program. The 80 percent of individuals who would have
    purchased a traditional policy still represent potential increased
    spending, whether they are overinsured or not.

    61Household assets may be jointly owned by a couple. In order for assets
    to be fully protected for the couple, both individuals need to have their
    own Partnership policies that insure all eligible assets because many
    individuals are no longer married by the time they require long-term care
    services, and the asset protection associated with a Partnership policy is
    not transferable. We do not consider a married couple to be overinsured
    when both individuals have long-term care insurance policies that are
    worth the value of their estate.

    We also explored what would occur if we modified our assumption that an
    individual is equally likely to transfer assets in all three of our
    scenarios. We found that if the individual who would have self-financed
    care transfers his or her assets, it would likely take less time for the
    individual to become eligible for Medicaid than it would with a
    Partnership policy. This could result in some savings to Medicaid for
    those individuals who purchase Partnership policies instead of
    transferring assets. We also found that for an individual who would have
    purchased traditional insurance, the amount of assets transferred would
    have to be at least as much as the value of the insurance policy purchased
    in order for the Partnership program to result in Medicaid savings. While
    we do not know how many individuals would have transferred assets in the
    absence of the Partnership program, one of our recent reports suggests
    that asset transfers may not be that prevalent. In March 2007, we reported
    that few applicants who were approved for Medicaid coverage ultimately
    transferred assets.^63 In addition, the asset transfer standards
    established under DRA increased the look-back period to 5 years, which
    reduces the opportunity for individuals to transfer assets to establish
    Medicaid eligibility.

    62The Medicaid spousal exemption, also known as the community spouse
    resource allowance, permits the spouse remaining in the community to
    retain an amount equal to one-half of the couple's combined countable
    assets, up to a state-specified maximum level. In 2007, the federal
    maximum was $101,640; that is, states were allowed to set their community
    spouse resource allowance equal to a value no greater than this amount.
    Medicaid eligibility of the institutionalized spouse is determined using
    the remaining assets.

    63This finding was based on our review of the prevalence of asset
    transfers among 465 approved applicants in three states. See
    [42]GAO-07-280 .

    Overall, our scenarios suggest that in the aggregate the savings potential
    from the Partnership programs of the 20 percent of individuals who would
    have self-financed their care is outweighed by the 80 percent of
    individuals who will likely result in increased Medicaid spending. For
    more information on our simplifying assumptions and the impact of
    adjusting these assumptions on our findings, see appendix II.

    Few Partnership Policyholders Are Likely to Become Eligible for Medicaid,
    Limiting the Impact on Medicaid Expenditures

    Although our survey data and scenarios show that about 80 percent of
    Partnership policyholders who become eligible for Medicaid are likely to
    do so sooner than they otherwise would have without a Partnership program,
    we also expect that few Partnership policyholders will actually become
    eligible for Medicaid and turn to the program to finance their long-term
    care. There are two reasons for this expectation. First, most Partnership
    policyholders purchase policies that are likely to cover all or most of
    their long-term care expenses during their lifetimes, thereby reducing the
    likelihood that the policyholders will require financing from Medicaid for
    their long-term care. We found that 86 percent of Partnership
    policyholders had benefits covering 3 or more years, while the average
    nursing facility stay lasts between 2 and 3 years. One study of
    traditional long-term care insurance policyholders with lifetime benefits
    found that only about 14 percent of policyholders used their benefits for
    more than 3 years, and fewer than 5 percent of all policyholders used
    their benefits for more than 5 years. These data suggest that if
    Partnership policyholders continue to purchase policies with benefit
    periods that cover their long-term care needs, the percentage of
    Partnership policyholders who exhaust their benefits and then become
    eligible for Medicaid is likely to be limited. While some experts have
    reported that there is a recent trend for traditional long-term care
    insurance policies to be sold with shorter benefit periods, the minimum
    benefit requirements that applied to Partnership policies could result in
    Partnership benefits remaining more stable over time.

    The second reason we estimate that few Partnership policyholders are
    likely to turn to Medicaid for their long-term care financing is that, in
    general, Partnership policyholders have incomes that exceed Medicaid
    income eligibility thresholds. Although Partnership policyholders can
    purchase varying amounts of asset protection, they must still meet state
    Medicaid income thresholds in order to become eligible for Medicaid. In
    2006, the monthly income eligibility thresholds for all states were
    required to be no higher than 300 percent of the Supplemental Security
    Income standard, which was $1,809 in 2006.^64 However, only 1 percent of
    the Partnership policyholders in California and Connecticut had household
    incomes less than $1,000 per month at the time they purchased their
    long-term care insurance policies. Our analysis of HRS data also indicates
    that wealthy individuals continue to have a high level of assets^65 at the
    time they are admitted to a nursing facility, which suggests that many
    Partnership policyholders will continue to be relatively wealthy and
    unlikely to meet Medicaid eligibility thresholds, even at the time they
    enter a nursing facility. For example, of all people who entered a nursing
    facility in 2004, the average asset value for the 25 percent of people
    with the highest assets was over $334,000 in 1992, and by 2004, 12 years
    later, their assets had grown to almost $430,000. Similarly, the average
    monthly income for the 25 percent of people with the highest incomes who
    were admitted to a nursing facility in 2004 was about $5,600 in 1992, and
    about $3,700 in 2004--more than double the threshold for Medicaid
    eligibility in any of the four states with Partnership programs.

    The income levels of Partnership policyholders may reflect the fact that
    the cost of purchasing a long-term care insurance policy--including a
    Partnership policy--may exceed what most elderly households can afford.
    According to guidelines published by the NAIC, a person should spend no
    more than 7 percent of his or her income on long-term care insurance. A
    traditional long-term care insurance policy covering 3 years of care, with
    inflation protection, a $200 daily benefit allowance, and comprehensive
    coverage, costs about $3,000. In order to afford such a policy, an
    individual would need an annual income of about $43,000. However, data
    from the 2004 HRS show that about half of elderly households nationwide
    had annual incomes below $43,000. A survey of Connecticut Partnership
    policyholders suggested that cost was the most important factor in
    policyholders' decision to let their policies lapse. Sixty-two percent of
    surveyed individuals in Connecticut who let their Partnership policy lapse
    said that they dropped their Partnership policy because it was too
    costly.^66

    64Specifically, the Medicaid eligibility thresholds in the four states
    with Partnership programs were $600 in California, $619 in Indiana, $1,809
    in Connecticut, and $692 in New York in 2006. If individuals were in a
    nursing facility, they were permitted to keep a personal allowance amount
    to cover incidental purchases in the nursing facility. The personal
    allowances for individuals in nursing facilities in 2006 were $35 in
    California, $52 in Indiana, $61 in Connecticut, and $50 in New York.

    65In this particular example, our criterion for being among the wealthiest
    people is those people whose assets are in the highest 25 percent.

    As of 2006, few Partnership policyholders in the four states with
    Partnership programs had accessed Medicaid to finance their long-term
    care. Of the approximately 218,000 Partnership policies sold since the
    program was first introduced in the late 1980s, approximately 190,000 were
    still active as of August 2006. In addition, as of that same date, a total
    of 3,454 Partnership policyholders--less than 2 percent of all Partnership
    policyholders--have accessed long-term care benefits since the Partnership
    programs began. Of that group, 292 Partnership policyholders exhausted
    their long-term care insurance benefits, and 159
    policyholders--approximately 54 percent of those who exhausted their
    benefits--subsequently went on to access Medicaid benefits. The number of
    Partnership policyholders who access benefits and also access Medicaid is
    likely to grow, because people typically use long-term care services 15 to
    20 years after they purchase a policy, and the first Partnership policies
    were established less than 20 years ago. We do not know why some of the
    292 individuals who exhausted their long-term care insurance benefits did
    not access Medicaid. It is possible that their income was higher than
    Medicaid eligibility thresholds, or they may have had unprotected assets
    that they had to spend down. Alternatively, they may have preferred to
    self-finance their care, they may have died, or they may have stopped
    using long-term care services.

    Concluding Observations

    With DRA authorizing all states to implement Partnership programs,
    information on the Partnership policies and policyholders from the four
    states with Partnership programs may prove useful to other states
    considering implementing such programs. In particular, states may want to
    consider the trade-offs that come with implementing a Partnership program.
    First, a Partnership program's potential impact on Medicaid expenditures
    should be considered. Based on our scenario comparison and survey data, we
    anticipate that Partnership programs in California, Connecticut, Indiana,
    and New York are unlikely to result in savings for their state Medicaid
    programs and could result in increased Medicaid expenditures. This is
    largely due to the modifications of state Medicaid eligibility
    requirements states have to make in order to offer asset protection to
    Partnership policyholders and survey data showing that the majority of
    Partnership policyholders would have purchased traditional long-term care
    insurance had the Partnership program not existed. However, given the
    amount of long-term care insurance benefits and income and asset levels of
    current Partnership policyholders, we also anticipate that relatively few
    policyholders will access Medicaid in the four states with Partnership
    programs. Therefore, the impact of Partnership programs on state Medicaid
    programs will likely be small.

    66It is possible that Partnership policyholders with higher incomes could
    meet Medicaid income thresholds because the four states with Partnership
    programs allow individuals to deduct medical expenses from their income
    when determining Medicaid eligibility. However, the individuals would
    still need to contribute their income toward the cost of care. Therefore,
    this limits Medicaid's liability for individuals with higher incomes.

    While Partnership programs are not likely to reduce states' Medicaid
    expenditures, the programs do offer some benefits to some consumers. The
    asset protection feature, which states require Partnership policies to
    offer at no additional premium cost, can benefit policyholders who exhaust
    their Partnership benefits and who access Medicaid. Even if individuals do
    not end up using their Partnership insurance or Medicaid, the availability
    of asset protection may provide peace of mind for those who fear the risk
    of having to spend their assets on their long-term care. However, states
    that implement Partnership programs should recognize that, because of
    their cost, Partnership policies generally do not benefit all consumers.
    The cost of annual premiums for long-term care insurance may not be
    affordable to individuals with moderate incomes, and as a result long-term
    care insurance policyholders, including Partnership policyholders, tend to
    be wealthier than those without such insurance.

    Agency and State Comments and Our Evaluation

    We received written comments on a draft of this report from HHS (see
    appendix III) and from the four states with Partnership programs,
    California, Connecticut, Indiana, and New York (see appendix IV).

    HHS commented that the results of our study should not be considered
    conclusive because the results do not adequately account for the effect of
    estate planning efforts such as asset transfers. Specifically, HHS was
    concerned that the simplified scenarios were flawed in that they did not
    account for individuals who engage in estate planning activities prior to
    expending all of their own funds on long-term care costs. HHS further
    noted that the data sources used in our report would not likely yield
    accurate data on asset transfers and criticized the report for not
    incorporating a review of the literature on this issue and reporting on
    analyses of the experience of the four states with Partnership programs.
    The four states with Partnership programs disagreed with our conclusion
    that the Partnership programs are unlikely to result in Medicaid savings
    and, like HHS, commented that our scenarios did not adequately account for
    the impact of asset transfers. California, Connecticut, and New York
    raised concerns about our methodology for estimating the financial impact
    of the Partnership program on Medicaid. California and Connecticut noted
    that we had excluded two Partnership policyholder survey questions from
    our analysis that they consider in their own analysis of the Partnership
    program.

    We maintain that the evidence suggests that the Partnership program is
    unlikely to result in savings for Medicaid, despite limited data and
    program experience. We agree with HHS and the four states with Partnership
    programs that Medicaid savings could result from those individuals who
    would have transferred assets in the absence of the Partnership program.
    However, our scenarios suggest that the savings associated with asset
    transfers are likely to offset the potential costs associated with
    policyholders who would have purchased traditional long-term care
    insurance in the absence of the Partnership programs. Further, the
    assumptions used by California, Connecticut, and Indiana to predict
    savings could underestimate the percentage of Partnership policyholders
    that represent a cost to Medicaid and overestimate the percentage that
    represent savings to Medicaid. We did not provide an overview of the
    literature on asset transfers in our draft report because, as we noted in
    our March 2007 report, the evidence on the extent to which individuals
    transfer assets to become financially eligible for Medicaid coverage for
    long-term care is generally limited and often based on anecdote.^67 We did
    not comment on states' analyses of their experience with the Partnership
    programs because, according to our analysis, their methodology overstates
    potential savings and understates potential costs.

      Impact of Asset Transfers on Medicaid

    In appendix II of our draft report we acknowledged that some savings could
    result for Medicaid if, in the absence of a Partnership program, an
    individual would have self-financed his or her long-term care and
    transferred assets. We also acknowledged how a Partnership program can
    result in Medicaid savings if, in the absence of the Partnership program,
    an individual would have purchased a traditional long-term care insurance
    policy and transferred assets that were at least equal to the value of the
    traditional long-term care insurance policy. However, our analysis
    suggests that these savings would be limited to those individuals who,
    prior to requiring long-term care, would have transferred assets to become
    eligible for Medicaid in the absence of the Partnership program. Further,
    the larger percentage of policyholders who represent a potential cost to
    Medicaid are likely to offset savings attributable to asset transfers.

    67See [43]GAO-07-280 .

    While the literature on the extent of asset transfers is generally limited
    and anecdotal, in March 2007, we published a report that included an
    analysis of asset transfers by nursing home residents using HRS data. We
    complemented that analysis by examining a sample of Medicaid applications
    in three states to identify the extent of asset transfer activity.^68 Both
    of these analyses suggested that about 10 to 12 percent of individuals
    transferred assets before applying for Medicaid, and the median amount
    transferred based on analysis of the HRS data and state Medicaid
    applications was $1,239 and $15,152, respectively.^69 The relatively low
    incidence of asset transfers and the small amounts transferred relative to
    the costs associated with long-term care suggest that the impact of asset
    transfers on Medicaid may be limited. While the results of this study are
    not specific to Partnership policyholders, we found no other credible
    evidence suggesting that Partnership policyholders would transfer
    sufficient assets to offset the costs to Medicaid associated with the
    large number of individuals who would have purchased traditional long-term
    care insurance in the absence of the Partnership program. Also, although
    the overall impact of DRA on Medicaid eligibility is uncertain, DRA
    reduces the opportunity for people to transfer assets in order to become
    Medicaid eligible by increasing the period Medicaid programs can
    "look-back" at an individual's assets to 5 years. In response to HHS'
    comments about asset transfers, we have amended our draft report to make
    the discussion of asset transfers more prominent in the body of our report
    and to include reference to our March 2007 study.

      Methodology for Assessing Medicaid Savings

    California, Connecticut, and New York raised concerns about our
    methodology for estimating the financial impact of the Partnership program
    on Medicaid. California and Connecticut noted that we had excluded two
    Partnership policyholder survey questions from our analysis that they
    consider in their own analysis of the Partnership program. These questions
    asked Partnership policyholders whether they would have transferred assets
    to become eligible for Medicaid in the absence of the program and whether
    the Partnership program influenced their decision to buy long-term care
    insurance.^70

    68See [44]GAO-07-280 .

    69The HRS analysis was based on transfers during the 4 years prior to
    nursing home entry by elderly nursing home residents who were
    Medicaid-covered. The analysis of a sample of Medicaid applications in
    three states was based on transfers during the 3-year look-back period by
    approved Medicaid applicants.

    We maintain that our methodology is sound and that the methodology
    California, Connecticut, and Indiana use underestimates the potential for
    Medicaid costs and overestimates the potential for Medicaid savings. We
    relied on a question that asked Partnership policyholders whether they
    would have purchased traditional long-term care insurance in the absence
    of the Partnership program.^71 We disagree with California, Connecticut,
    and Indiana regarding the appropriateness of including additional survey
    information because of concerns about ambiguous wording and these states'
    assumption that policyholders' responses can be used to predict the
    likelihood of future asset transfers. We did not present the states'
    analyses for evaluating Medicaid spending in our draft report because we
    believe the states' analyses overstate potential savings and understate
    potential costs.

    In our analysis, we estimated that about 80 percent of policyholders would
    have purchased traditional long-term care insurance in the absence of the
    program, and we estimated that these individuals generally represented a
    potential cost to Medicaid. Our 80 percent estimate was based on analysis
    of the survey question about how Partnership policyholders would have
    financed their long-term care in the absence of the Partnership program.
    The methodology that California, Connecticut, and Indiana use to estimate
    potential costs is based on a policyholders' response to the following
    criteria, obtained from three survey questions:

               1. The policyholder would have purchased traditional insurance in
               the absence of the Partnership program;
               2. the Partnership program had no influence on the policyholders'
               decision to purchase insurance; and
               3. the policyholder would not have transferred assets in the
               absence of the Partnership program.

    70One survey question asks: "Did the [partnership program] influence your
    decision to purchase long-term care insurance? (yes or no)." The other
    asks: "Why did you decide to purchase long-term care insurance?" Eight
    response options are provided, one being "As an alternative to
    transferring assets to qualify for Medicaid."

    71The California, Connecticut, and Indiana surveys asked: "Would you have
    purchased long-term care insurance in the absence of the Partnership?"
    (yes or no).

    By adding the two additional criteria to determine whether an individual
    represents a potential cost to Medicaid, the states' estimate of the
    percentage of policyholders who fell into this category was more
    restrictive than ours. We have several concerns with the wording of the
    survey questions used to define the additional two criteria. In addition,
    according to our analysis, the criteria that define costs are not
    correctly specified because there are some circumstances when the second
    criterion would represent a cost to Medicaid whether or not the
    Partnership program had an influence on the policyholder's decision to
    purchase insurance.

    The wording of the survey question about whether the Partnership program
    influenced the policyholder's decision to purchase insurance was not
    specific with regard to how the decision was influenced. In particular,
    the Partnership programs' influence could have been to influence the
    policyholder to purchase a different benefit package, to change the timing
    of the policyholder's purchase, or to change the policyholder's decision
    to purchase at all. Given the ambiguity of the question, it is not clear
    how a response should be interpreted. Moreover, how this question is
    interpreted could influence the outcome of an analysis of the likely
    impact of the Partnership program on Medicaid spending. Our analysis
    suggests that even if the Partnership program influenced policyholders to
    purchase enhanced benefits, the Partnership program still represented a
    potential cost, just a smaller cost. Adding this criterion incorrectly
    narrows the number of policyholders who represent potential costs to
    Medicaid.

    We also disagree with the states' assumption that policyholders' responses
    to the asset transfer question can be used to approximate the extent to
    which individuals would or would not transfer all of their assets in the
    future and--in the absence of the program--become eligible for Medicaid.
    The respondents were asked about events that are unlikely to occur for 15
    to 20 years, and to speculate on what their actions would be in the future
    if there was no Partnership program. California, Connecticut, and New York
    reported that about 25 percent of respondents said they would have
    transferred assets to become eligible for Medicaid. All of these
    individuals are excluded from the pool of policyholders who represent a
    potential cost to the program in the state cost estimates. The assumption
    that all of these individuals would have transferred all of their assets
    is inconsistent with our March 2007 report regarding the incidence of
    asset transfers and amount of assets transferred for the purposes of
    becoming eligible for Medicaid. We agree that some individuals would have
    transferred assets in the absence of the program, but do not agree that
    this question provides an adequate measure of the extent to which it
    occurs. Therefore, we believe using the responses to this question may
    overstate the extent to which respondents would actually transfer all of
    their assets.

    We have similar concerns with the methodology California, Connecticut, and
    Indiana used to estimate savings, because it is based on the same three
    questions, two of which we view as inadequate. We assumed in our scenarios
    that individuals who would have self-funded their long-term care without
    insurance were likely to be budget neutral, but acknowledged there were
    several circumstances that would cause these individuals to become a
    potential source of savings. However, we did not attempt to quantify the
    percentage who would become a source of savings because of data
    limitations and because the savings were likely to be outweighed by the
    larger percentage of policyholders who likely represented a cost to the
    program. In contrast, California, Connecticut, and Indiana consider a
    policyholder to represent savings if:

               1. the policyholder would have purchased a Partnership policy as
               an alternative to transferring assets; and
               2. (a) the Partnership program influenced their decision to
               purchase insurance, or (b) the policyholder would not have
               purchased long-term care insurance in the absence of the
               Partnership program.

    As we noted in the discussion above regarding the states' methodology for
    estimating Medicaid costs, we disagree with the reliance on the asset
    transfer question as a measure of the extent to which individuals would
    have transferred assets. We also believe it was incorrect to predict
    Medicaid savings for those respondents who said the Partnership program
    influenced their decision to purchase a policy. Even if the Partnership
    program influenced the policyholder's decision to purchase enhanced
    benefits, our analysis suggests the Partnership program would not result
    in savings but would rather result in a reduction of costs to Medicaid.

    New York commented that our analysis was not applicable to their state.
    They cited preliminary results of a 2006 survey that estimated the number
    of recent Partnership policyholders who would have financed their care
    with a traditional policy in the absence of the Partnership program. Their
    estimates were considerably lower than the 80 percent we estimated based
    on our results from California, Connecticut, and Indiana. New York used
    different questions in their survey than California, Connecticut, and
    Indiana.^72 As such, their results were not comparable to those of the
    other states. We believe New York's question was less direct for the
    purposes of our analysis than the question used by California,
    Connecticut, and Indiana in their survey of Partnership policyholders. New
    York's question asked policyholders--using a multiple choice format--how
    they would pay for long-term care in the future, if they had not purchased
    a Partnership policy. One of the possible responses was that they would
    purchase traditional insurance. This required policyholders to speculate
    about future behavior, and to respond to a more complex question and
    answer format. California, Connecticut, and Indiana asked directly about
    decisions made in the past--whether the Partnership policyholder would
    have purchased long-term care insurance in the absence of the Partnership
    program, with a simple yes or no response.

      Impact on Medicaid Savings of Purchasing Different Levels of Benefits by
      Partnership and Traditional Policyholders

    California, Connecticut, and New York also commented that our finding that
    Partnership policyholders tended to have more extensive benefits than
    traditional policyholders was inconsistent with our scenarios that assumed
    that the policyholder would have purchased comparable benefits in the
    absence of the Partnership program. Assuming comparable benefits in our
    scenarios allowed us to assess the impact of the Partnership program on
    Medicaid savings in a simpler framework. As we explain in appendix II,
    some Partnership policyholders may have more coverage than if they had
    purchased a traditional policy. We show that if the value of the insurance
    policy is less than the amount of assets owned by the policyholder, the
    person will still take longer to become Medicaid eligible with a
    traditional long-term care insurance policy with a lesser value than with
    a Partnership policy. However, the amount of additional time it would take
    for the individual with a traditional policy to become eligible for
    Medicaid would be less than if the two policies had the same amount of
    benefits.

    HHS, the Indiana Partnership program, and the New York Department of
    Insurance provided us with technical comments and clarifications, which we
    incorporated as appropriate.

    72Whereas California, Connecticut, and Indiana surveys asked: "Would you
    have purchased long-term care insurance in the absence of the
    Partnership?" (yes or no), New York's survey asked: "Had you not purchased
    Partnership insurance, what would be your plan to pay for LTC you may
    need?" Seven response options were provided, one being "I would purchase
    non-Partnership long-term care insurance."

    As agreed with your offices, unless you publicly announce its contents
    earlier, we plan no further distribution of this report until 30 days
    after its issue date. At that time, we will send copies of this report to
    the Secretary of Health and Human Services, congressional committees, and
    other interested parties. We will also make copies available to others
    upon request. In addition, the report will be available at no charge on
    the GAO Web site at http://www.gao.gov.

    If you or your staff have questions about this report, please contact me
    at (202) 512-7119 or dickenj@gao.gov. Contact points for our Office of
    Congressional Relations and Public Affairs may be found on the last page
    of this report. GAO staff who made key contributions to this report are
    listed in Appendix IV.

    John E. Dicken
    Director, Health Care

    Appendix I: Data and Methods for Analysis of Long-Term Care Insurance
    Benefits and Demographics

    In this appendix we describe the data and methods that we used to examine
    the benefits of Partnership and traditional long-term care insurance
    policyholders. We also describe the data and methods we used to assess
    income, assets, age, gender, and the marital status of Partnership program
    long-term care insurance policyholders, traditional long-term care
    insurance policyholders, and people without long-term care insurance.

    Examining Long-Term Care Insurance Benefits Purchased by Partnership
    Policyholders and Traditional Long-Term Care Insurance Policyholders

    We examined the benefits purchased by Partnership long-term care
    policyholders and the benefits purchased by traditional long-term care
    policyholders, using 2002 through 2005 data from two sources. Our data
    source for the benefits purchased by Partnership policyholders was the
    Uniform Data Set (UDS)--a data set supplied to us by each of the four
    states with Partnership programs that contained information on all
    Partnership policyholders who had purchased long-term care Partnership
    policies. The UDS was developed collaboratively among the four states with
    Partnership programs, insurers, the National Program Office at the Center
    on Aging, University of Maryland, and the Program Evaluator, Laguna
    Research Associates. The UDS contains information submitted by insurers
    with Partnership policyholders and summarized by each of the states on a
    quarterly basis. Insurers are required to submit data to the state
    Partnership program on: (1) newly insured people,^1 (2) people who dropped
    their policies, (3) applicants for insurance who were assessed for
    long-term care insurance eligibility, and (4) the amount of payments for
    services and utilization. We used the data set for newly insured people to
    analyze the benefits purchased by Partnership policyholders. These data
    contain information on daily benefit amounts, the length of the benefit
    period, the length of the elimination period, and the type of coverage,
    including whether the coverage is comprehensive coverage or for facilities
    only. To obtain data about the benefit characteristics of insurance
    policies purchased by traditional long-term care policyholders, we
    surveyed five large insurance companies selling long-term care insurance.
    We selected these five insurance companies on the basis of the total
    number of policies and amount of annualized premiums in effect in the
    individual market, as of December 31, 2004. The five insurance companies
    were AEGON USA,^2 Bankers Life and Casualty Company, Genworth Financial,
    John Hancock Life Insurance Company, and Metropolitan Life Insurance
    Company. All five insurance companies sold policies in the individual
    market, and two of the five carriers--John Hancock Life Insurance Company
    and Metropolitan Life Insurance Company--were also among the five largest
    carriers that sold products in the group market. We requested data on the
    number of enrollees in the individual market who chose selected benefit
    options for new long-term care insurance policies sold from July 1, 2002,
    to March 31, 2005. We collected data on coverage types, daily benefit
    amounts, elimination periods, benefit periods, inflation protection
    options, and optional benefits offered.

    1This part of UDS data contains information on each person who applied for
    a Partnership policy and who passed the underwriting process.

    2AEGON USA left the long-term care insurance market on March 31, 2005.

    Examining Income and Asset Distributions Among Partnership Policyholders and
    Comparison Populations in Two Partnership States and Nationally

    We used three data sources to examine the income and assets of Partnership
    policyholders, traditional long-term care insurance policyholders, and
    people without long-term care insurance: Partnership program surveys of
    Partnership policyholders; the 2004 American Community Survey (ACS); and
    the 2004 Health and Retirement Study (HRS).

    To examine the household income and household assets of Partnership
    policyholders, we used data from Partnership program surveys of a sample
    of Partnership policyholders at the time they first purchased insurance
    coverage. We restricted our analysis of the income and assets of
    Partnership policyholders to surveys conducted by the California and
    Connecticut Partnership programs because the Indiana Partnership program's
    data were not sufficiently detailed to include in our analysis, and the
    New York Partnership program was not able to provide us with data from
    recent years. In addition, because the surveys were of a sample of
    Partnership policyholders--40 percent of Partnership policyholders in
    California and 50 percent of Partnership policyholders in Connecticut--we
    increased the number of observations by analyzing more than 1 year of
    data. We included data from 2003 and 2004 for California, and data from
    2002 through 2005 for Connecticut.

    To approximate the household income of individuals without long-term care
    insurance in California and Connecticut, we used the 2004 ACS. Household
    asset information was not available in these states. The ACS is conducted
    by the Census Bureau, as a part of the Decennial Census Program, and
    provides information about the characteristics of local communities. The
    ACS publishes social, housing, and economic characteristics for
    demographic groups, including household income and assets, covering a
    broad spectrum of geographic areas in the United States and Puerto Rico.
    It is the largest household survey in the United States, with an annual
    sample size of about 3 million. In order to make appropriate comparisons
    between the income data from the California and Connecticut Partnership
    program surveys and the ACS, we restricted our calculations in the income
    analysis to respondents who were aged 55 and over, when we calculated our
    household income ranges.^3 In our analysis, we used the ACS state
    population data as a proxy for people without any long-term care
    insurance. Approximately 12 percent of people over age 55 have long-term
    care insurance, so our measure is likely to contain approximately 88
    percent of people without long-term care insurance.

    To examine national-level data on household income and assets of
    individuals with and without long-term care insurance, we used information
    from the 2004 HRS, the most recent year available for that survey data
    set. The HRS is a longitudinal national panel survey of individuals over
    age 50, and is sponsored by the National Institute on Aging and conducted
    by the University of Michigan. The HRS includes individuals who were not
    institutionalized at the time of the initial interview and tracks these
    individuals over time, regardless of whether they enter an institution.
    Researchers conducted the initial interviews in 1992 in respondents' homes
    and conducted follow-up interviews over the telephone every second year
    thereafter. HRS questions pertain to physical and mental health status,
    insurance coverage, financial status (including household income and
    assets), family support systems, employment status, and retirement
    planning. We used data from the HRS to calculate the household income
    distribution nationally for people with long-term care insurance and for
    people without long-term care insurance. To make our income analysis of
    HRS data consistent with the income analysis of Partnership policyholders
    and individuals without long-term care insurance in California and
    Connecticut, we restricted the HRS income analysis to individuals age 55
    and over. The HRS data for people with insurance do not differentiate
    between Partnership and traditional insurance policyholders and
    approximately 2 percent of people with long-term care insurance nationwide
    have Partnership policies. Therefore, although the HRS data may contain a
    small number of Partnership policyholders, about 98 percent of all
    long-term care policyholders are likely to have traditional long-term care
    insurance.

    3We restricted our analysis of income to people age 55 and older because
    long-term care policies tend to be purchased by people in their late 50s
    or early 60s, and people in this age group may have a different level of
    income compared to the average for the population as a whole.

    Examining Demographic Characteristics--Age, Gender, and Marital Status--of
    Partnership Policyholders and Other Populations in Partnership States and
    Nationally

    To compare the age, gender, and marital status of Partnership
    policyholders and other populations in Partnership states and nationally,
    we used data from the UDS from 2002 through 2005 and the HRS data from
    2004. The UDS data contain information on Partnership policyholders, while
    the HRS was used to calculate estimates for traditional policyholders and
    for those people without long-term care insurance.

    Data Reliability

    We took several measures to ensure the reliability of the data used in
    this report. For the UDS and Partnership policyholder surveys conducted by
    the states with Partnership programs, we interviewed the officials at the
    state offices familiar with these data in order to establish whether the
    data were reliable and suitable for the purposes of our report. For the
    GAO survey of traditional long-term care insurance carriers, we
    interviewed each of the carriers about their data to ensure the accuracy
    and reliability of the data provided. For the ACS and HRS data sets, we
    collected and examined the data documentation and sought information from
    the providers of the data. In addition, we took steps to ensure that the
    data were valid and within reasonable ranges. To do this, where
    appropriate, we examined the distribution of our key variables,
    calculating estimates of central tendency, ranges, and frequencies,
    missing values, and sample size. We determined that these data sets were
    sufficiently reliable for the purposes of this report.

    We performed our work from September 2005 through May 2007 in accordance
    with generally accepted government auditing standards.

    Appendix II: Explanation of the Simplifying Assumptions Used in the
    Illustrative Scenarios

    To analyze the impact of the Partnership programs on Medicaid, we used
    scenarios that are illustrative of the options individuals have to finance
    their care. This appendix provides additional information on the
    construction of the three scenarios and how adjusting the simplifying
    assumptions affects the length of time it takes for the individual to
    become eligible for Medicaid in the scenarios.

    Illustrative Scenarios for Time Taken to Become Eligible for Medicaid

    We developed three illustrative scenarios based on the three basic options
    that are available to an individual for financing his or her long-term
    care: (1) self-financing without any long-term care insurance, (2)
    financing using traditional long-term care insurance, and (3) financing
    using Partnership long-term care insurance. For illustrative purposes, our
    scenarios are based on an individual who owns assets worth $300,000. If
    the individual has a long-term care insurance policy, this policy covers 3
    years of nursing facility care at a cost of $70,000 per year: that is, the
    policy covers $210,000 of nursing facility care costs. We then used the
    scenarios to compare the time it would take for the individual to become
    eligible for Medicaid using each of the three financing options.^1

               o Self-financing Without Any Long-term Care Insurance (Scenario
               C): The calculations underlying the self-financing scenario are
               the simplest. If the individual self-finances in the absence of
               the Partnership program, the individual pays for his or her own
               care, essentially spending his or her assets down to Medicaid
               eligibility thresholds before becoming eligible for Medicaid. In
               this case, the number of years it takes for the individual to
               become eligible for Medicaid equals the total assets^2 divided by
               the cost of a year of nursing facility care. In our example, this
               is $300,000 in assets divided by $70,000 in nursing facility costs
               per year, or about 4.3 years until the individual is eligible for
               Medicaid. The equation for this calculation can be expressed as

               Equation 1: Self-financing time to Medicaid

               = Assets / cost per year

    1We used constant dollars in our scenarios. This means that the purchasing
    power of dollars in our scenarios is constant over time. We also hold the
    individual's assets at a fixed dollar amount over time.

    2In our illustrative scenarios, we assume the individual spends his or her
    assets to zero. In other words, we disregard the effect of Medicaid
    allowing beneficiaries to retain some assets. We address the effect of
    adjusting this assumption in this appendix.

               o Traditional Long-term Care Insurance (Scenario B): Next we
               calculated the time it would take to become Medicaid eligible if
               the same individual has a traditional long-term care insurance
               policy. In this scenario, the insurance policy pays for care up to
               the limits of the policy. After the insurance policy is exhausted,
               the individual spends his or her own assets to pay for long-term
               care. Once the assets are exhausted, the individual is eligible
               for Medicaid. In our example, the individual has a traditional
               long-term care insurance policy worth 3 years of care in a nursing
               facility or $210,000. The time to Medicaid in this example is
               $210,000 in insurance coverage plus $300,000 in assets, all
               divided by $70,000 in nursing facility costs per year, or about
               7.3 years. The equation for this calculation can be expressed as

               Equation 2: Traditional insurance time to Medicaid

               = (Insurance policy value + assets) / cost per year

               o Partnership Long-term Care Insurance (Scenario A): Finally, we
               calculated the time it would take to become Medicaid eligible if
               the same individual has a Partnership policy. In this scenario,
               the insurance pays for care up to the limits of the policy, and
               then the individual has to self-finance using unprotected assets.
               Once those assets are exhausted, the individual is eligible for
               Medicaid because protected assets do not have to be spent on care.
               In a dollar-for-dollar model, the protected assets are equivalent
               to the value of the insurance policy. The time to become eligible
               for Medicaid in this example is $210,000 in insurance coverage
               plus $90,000 in unprotected assets, all divided by $70,000 in
               nursing facility costs per year or 4.3 years. The equation for
               this calculation can be expressed as

               Equation 3: Partnership insurance time to Medicaid

               = (Insurance policy value + unprotected assets) / cost per year

               Under the assumptions of our illustrative scenarios, with a
               dollar-for-dollar policy, the sum of the insurance policy and the
               unprotected assets is equal to total assets: the same as for the
               self-financing scenario. Therefore, the time to Medicaid is the
               same for the individual in both the Partnership and self-financing
               scenarios, and it is greater if the individual purchases a
               traditional policy than if he or she purchases a Partnership
               policy. These relationships are shown graphically in the report in
               figure 1.

    		   Evaluating the Effects of Adjusting the Assumptions Underlying
    		   the Illustrative Scenarios

               Underlying our illustrative scenarios were several simplifying
               assumptions. When we adjusted these simplifying assumptions, we
               found that some resulted in no change, some resulted in
               accelerated Medicaid eligibility, and some resulted in delayed
               Medicaid eligibility. Overall, we believe that the survey data
               showing that 80 percent of Partnership policyholders would have
               purchased a traditional long-term care insurance policy in the
               absence of the Partnership program represent compelling evidence
               that, as currently structured, the Partnership programs are
               unlikely to result in Medicaid savings.

               While some of the 20 percent of Partnership policyholders who
               would have self-financed their care and become eligible for
               Medicaid may represent a source of savings, others may represent a
               source of increased spending and still others will result in
               neither savings nor spending. We believe that in the aggregate the
               savings potential from the Partnership programs of these 20
               percent of individuals is outweighed by the 80 percent of
               individuals who will likely result in increased Medicaid spending.
               Specifically, we made the following simplifying assumptions in our
               scenarios and discuss the effect on our results of adjusting these
               assumptions:

               o The individual depicted in the scenarios has assets and benefits
               that are typical of many individuals with long-term care
               insurance. The individual depicted in the scenarios has $300,000
               in assets and 3 years of long-term care insurance--assets and
               benefits that are typical of many individuals with long-term care
               insurance. The individual also receives long-term care in a
               nursing facility with costs for a year of care of $70,000 that are
               roughly equivalent to average nursing facility costs nationwide in
               2004. In our example, the individual has assets of $300,000 and,
               in two of our scenarios, a long-term care policy worth $210,000.
               The cost of a year of nursing facility care is $70,000. As long as
               the individual has assets that are greater than the value of the
               insurance policy, we can insert any numbers into equations (1),
               (2), and (3), and the individual becomes eligible for Medicaid at
               the same time as with a Partnership policy and if he or she
               self-finances, but it takes longer if the individual has
               traditional insurance.

               o The individual spends eligible assets to zero as a condition for
               Medicaid eligibility. While states allow individuals to keep a
               small amount of assets, these assets are in addition to anything
               that needs to be spent to become eligible for Medicaid. Including
               these assets has little impact on the scenarios since the
               individual can keep the same assets in all three scenarios, and
               these assets are outside of any spend-down requirement. Using our
               examples above, we decrease the assets in equations 1 and 2, and
               decrease the unprotected assets in equation 3 by the amount of
               assets the individual is allowed to keep. We find that having a
               traditional policy will still result in more years to Medicaid
               eligibility than having a Partnership policy or self-financing,
               and the Partnership and self-financing scenarios still result in
               the same time to Medicaid eligibility.

               o The individual purchases the same amount of insurance benefits
               under the Partnership and traditional long-term care insurance
               scenarios. While this is our simplifying assumption, we recognize
               that the Partnership policyholder might have more coverage than if
               he or she had purchased a traditional policy because of the extra
               benefit requirements of Partnership policies, such as inflation
               protection, that are not required of traditional policies.
               Provided the individual has assets that are no less than the value
               of the insurance policies, the Partnership policyholder will still
               not take as long to reach Medicaid eligibility as he or she will
               with a traditional policy, although the difference is narrower
               than if the benefits are the same. For example, if we change the
               value of the benefits in the traditional policy to $150,000 (and
               keep the value of the Partnership policy at $210,000 and the value
               of assets at $300,000) the equation for the traditional policy
               becomes ($150,000 + $300,000)/$70,000, which is about 6.4 years
               and is still longer than the approximate 4.3 years with the
               Partnership policy but less than the approximate 7.3 years
               expected if the policies in the traditional and Partnership
               scenarios were the same.

               o The individual has income below Medicaid eligibility thresholds.
               We made this assumption because Medicaid income eligibility
               thresholds vary across states. However, increasing the
               individual's income up to Medicaid eligibility thresholds has no
               impact on the scenarios since the individual can keep the same
               income in all three scenarios. If the income exceeds Medicaid
               eligibility thresholds, the individual is ineligible for Medicaid
               in all three scenarios.

               o The individual's assets are greater than the value of the
               insurance policy. We assumed that most individuals would have
               assets that are worth more than the value of the insurance policy.
               Individuals have a disincentive to purchase long-term care
               insurance with a value exceeding their assets because it might
               increase their premium unnecessarily. While we do not have
               information about the amount of assets that Partnership
               policyholders have at the time they use their benefits, available
               evidence suggests that most individuals do not overinsure the
               value of their assets at the time of purchase, though their status
               could change over time. Survey data from California and
               Connecticut show that while 53 percent of Partnership
               policyholders have more than $350,000 worth of household assets at
               the time of purchase, only about 32 percent of these Partnership
               policyholders have more than 5 years of coverage equal to
               $350,000.^3

               However, it is possible that some policyholders will spend some or
               all of their assets by the time they require long-term care and
               will have more insurance than assets. If we modify our example
               above, and assume the individual's insurance policy has greater
               value than the assets in our scenarios, we see that with a
               Partnership policy, the individual will still become eligible for
               Medicaid sooner than with a traditional policy, but later than if
               he or she self-financed. Therefore, for the 20 percent of
               individuals who would have self-financed their care in the absence
               of a Partnership program, and who have more insurance than assets,
               the Partnership program results in savings to Medicaid.
               Specifically, if we assume the insurance policy is worth $210,000,
               and the individual has assets equal to $150,000, we obtain the
               following results from our scenarios:

               Self-finance: assets / cost per year = $150,000 / $70,000 = 2.1
               years

               Traditional insurance: (insurance + assets) / cost per year =
               ($210,000 + $150,000) / $70,000 = 5.1 years

               Partnership insurance: (insurance + unprotected assets) / cost per
               year =

               ($210,000 + 0) / $70,000 = 3 years

               o The individual is unmarried. In our illustrative scenarios, we
               assume the individual is unmarried--the most likely marital status
               of policyholders at the time nursing home care is required. On the
               other hand, if the individual is married, Medicaid allows spouses
               to keep a certain amount of jointly owned assets (i.e., half of
               the value of the assets up to a maximum amount that was
               approximately $100,000 in 2007). In general, the spousal exemption
               that is deducted from assets would be the same across all three
               scenarios and would not affect the basic relationships among the
               three scenarios unless the net assets after the spousal exemption
               are of less value than the insurance policy. If the amount of
               insurance exceeds the value of assets net of the spousal
               exemption, there is a potential for Medicaid savings for a
               Partnership policyholder who would have self-financed. If that
               individual would have purchased a traditional policy, Medicaid
               spending would increase. Our scenarios illustrate this point. If
               we assume the individual is married and the spouse has already
               taken the spousal exemption such that the individual's assets are
               $300,000, the results do not change and our original formulas
               remain intact. Alternatively, if we assume the individual's spouse
               is entitled to half of the household assets of $300,000, up to the
               maximum of $100,000, then our results do change and the
               policyholder becomes overinsured. In this instance, if the
               individual self-finances, the spousal exemption would be $100,000,
               leaving the individual with $200,000 in assets. If the individual
               has traditional insurance, the spouse is also entitled to
               $100,000. However, if the individual has a Partnership policy,
               $210,000 of the assets are protected, leaving $90,000 in
               unprotected assets. The spouse would be entitled to half of the
               $90,000, or $45,000. The formulas are presented below.

    3Some of these individuals may be married and the household assets may be
    shared. In order for the assets to be fully protected for married
    individuals, both individuals need to have a Partnership policy.
    Partnership policies are not transferable, and if a surviving spouse of a
    Partnership policyholder requires long-term care and does not have a
    Partnership policy, the assets would not be protected.

               Self-finance: assets / cost per year = $200,000 / $70,000 = 2.9
               years

               Traditional insurance: (insurance + assets) / cost per year =
               ($210,000 + $200,000) / $70,000 = 5.9 years

               Partnership insurance: (insurance + unprotected assets) / cost per
               year =

               ($210,000 + $45,000) / $70,000 = 3.6 years

               o The individual uses the same long-term care services in all
               three scenarios. An individual who self-finances might have an
               incentive to use fewer or less expensive services than if he or
               she were insured by either a Partnership or traditional policy
               because the individual would be paying for services. If the
               individual uses fewer services when self-financing, the assets
               last longer, enabling the individual to pay for care longer and
               postponing Medicaid eligibility. In this situation, the cost per
               year of self-financing would be smaller than if he or she had
               either Partnership or traditional insurance. This would result in
               an increase in the time it takes to become Medicaid eligible for a
               person who self-finances relative to what it would have taken if
               he or she had purchased either a Partnership or traditional
               insurance policy.

               o The individual does not save premiums paid if he or she would
               have self-financed their care such that assets are equal in all
               three scenarios. We made this assumption to make our scenarios
               easier to understand. Premium payments may be
               substantial--potentially as much as $3,000 per year--so it is
               possible that if the individual would have saved their premium
               payments by instead self-financing his or her long-term care, the
               individual would have more assets than either Partnership or
               traditional policyholders would when they begin to use their
               benefits. If this is the case, by self-financing, the individual
               would have more assets to pay for long-term care before becoming
               eligible for Medicaid, which would delay the time to Medicaid.
               Therefore, individuals who purchase Partnership policies would
               have saved their premium dollars and not purchased long-term care
               insurance represent a potential cost to the Medicaid program.
               Using our examples above and assuming 15 years of payments saved
               at $3,000 per year, by self-financing, the individual would save
               $45,000 in additional assets that would otherwise have been spent
               on Partnership premiums. Therefore, the self-financing individual
               has assets of $345,000. Using our equation we see that the time to
               Medicaid is delayed ($345,000 / $70,000 = 4.9 years) if the
               individual self-finances, while relative to this option a
               Partnership policy would accelerate the individual's time to
               Medicaid by 0.6 years. In this case, the Partnership and
               traditional policy scenarios would not change because premiums are
               required to be identical for the Partnership and traditional
               polices.

               o The individual is equally likely to transfer assets in all three
               scenarios. An individual who self-finances or uses traditional
               insurance might be more likely to transfer assets to a spouse or
               other family members than he or she would with a Partnership
               policy, because assets are protected under Partnership policies.
               If the individual self-finances and transfers assets, he or she
               would likely take less time to become eligible for Medicaid than
               with a Partnership policy (and assuming no transfers with the
               Partnership policy), resulting in Medicaid savings. If the
               individual would have purchased traditional insurance, the amount
               of assets transferred would have to be equal to at least the value
               of the insurance policy purchased in order for the Partnership
               program to result in Medicaid savings. If the amount of asset
               transfer is less than the value of the insurance policy, the
               increase in Medicaid spending attributable to the Partnership
               program would be less than without the asset transfer, but would
               still be an increase.

    		   Appendix III: Comments from the Department of Health & Human
    		   Services

    		   Appendix IV: Comments from the four states with Partnership programs,
               California, Connecticut, Indiana, and New York

               Appendix V: GAO Contact and Staff Acknowledgments

               GAO Contact

               John E. Dicken (202) 512-7119 or dickenj@gao.gov

    		   Acknowledgments

               Christine Brudevold, Assistant Director; Krister Friday; Michael
               Kendix; Julian Klazkin; Elijah Wood; and Suzanne Worth made key
               contributions to this report.

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    Highlights of [52]GAO-07-231 , a report to congressional requesters

    May 2007

    LONG-TERM CARE INSURANCE

    Partnership Programs Include Benefits That Protect Policyholders and Are
    Unlikely to Result in Medicaid Savings

    Partnership programs allow individuals who purchase Partnership long-term
    care insurance policies to exempt at least some of their personal assets
    from Medicaid eligibility requirements. In response to a congressional
    request, GAO examined (1) the benefits and premium requirements of
    Partnership policies as compared with those of traditional long-term care
    insurance policies; (2) the demographics of Partnership policyholders,
    traditional long-term care insurance policyholders, and people without
    long-term care insurance; and (3) whether the Partnership programs are
    likely to result in savings for Medicaid.

    To examine benefits, premiums, and demographics, GAO used 2002 through
    2005 data from the four states with Partnership programs--California,
    Connecticut, Indiana, and New York--and other data sources. To assess the
    likely impact on Medicaid savings, GAO (1) used data from surveys of
    Partnership policyholders to estimate how they would have financed their
    long-term care without the Partnership program, (2) constructed three
    scenarios illustrative of the options for financing long-term care to
    compare how long it would take for an individual to spend his or her
    assets on long-term care and become eligible for Medicaid, and (3)
    estimated the likelihood that Partnership policyholders would become
    eligible for Medicaid based on their wealth and insurance benefits.

    California, Connecticut, Indiana, and New York require Partnership
    programs to include certain benefits, such as inflation protection and
    minimum daily benefit amounts. Traditional long-term care insurance
    policies are generally not required to include these benefits. From 2002
    through 2005, Partnership policyholders purchased policies with more
    extensive coverage than traditional policyholders. According to state
    officials, insurance companies must charge traditional and Partnership
    policyholders the same premiums for comparable benefits, and they are not
    permitted to charge policyholders higher premiums for asset protection.

    Partnership and traditional long-term care insurance policyholders tend to
    have higher incomes and more assets at the time they purchase their
    insurance, compared with those without insurance. In two of the four
    states, more than half of Partnership policyholders over 55 have a monthly
    income of at least $5,000 and more than half of all households have assets
    of at least $350,000 at the time they purchase a Partnership policy.

    Available survey data and illustrative financing scenarios suggest that
    the Partnership programs are unlikely to result in savings for Medicaid,
    and may increase spending. The impact, however, is likely to be small.
    About 80 percent of surveyed Partnership policyholders would have
    purchased traditional long-term care insurance policies if Partnership
    policies were not available, representing a potential cost to Medicaid.
    About 20 percent of surveyed Partnership policyholders indicate they would
    have self-financed their care in the absence of the Partnership program,
    and data are not yet available to directly measure when or if those
    individuals will access Medicaid had they not purchased a Partnership
    policy. However, illustrative financing scenarios suggest that an
    individual could self-finance care--delaying Medicaid eligibility--for
    about the same amount of time as he or she would have using a Partnership
    policy, although GAO identified some circumstances that could delay or
    accelerate Medicaid eligibility. While the majority of policyholders have
    the potential to increase spending, the impact on Medicaid is likely to be
    small because few policyholders are likely to exhaust their benefits and
    become eligible for Medicaid due to their wealth and having policies that
    will cover most of their long-term care needs.

    Information from the four states may prove useful to other states
    considering Partnership programs. States may want to consider the benefits
    to policyholders, the likely impact on Medicaid expenditures, and the
    income and assets of those likely to afford long-term care insurance.

    HHS commented on a draft of the report that our study results should not
    be considered conclusive because they do not adequately account for the
    effect of estate planning efforts such as asset transfers. While some
    Medicaid savings could result from people who purchase Partnership
    policies instead of transferring assets, they are unlikely to offset the
    costs associated with those who would have otherwise purchased traditional
    policies.

    References

    Visible links
      37. http://www.gao.gov/cgi-bin/getrpt?GAO-05-1021R
      38. http://www.gao.gov/cgi-bin/getrpt?GAO-07-280
      39. http://www.gao.gov/cgi-bin/getrpt?GAO-06-401
      40. http://www.gao.gov/cgi-bin/getrpt?GAO-06-401
      41. http://www.gao.gov/cgi-bin/getrpt?GAO-07-280
      42. http://www.gao.gov/cgi-bin/getrpt?GAO-07-280
      43. http://www.gao.gov/cgi-bin/getrpt?GAO-07-280
      44. http://www.gao.gov/cgi-bin/getrpt?GAO-07-280
      52. http://www.gao.gov/cgi-bin/getrpt?GAO-07-231
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