Long-Term Care Insurance: Better Information Critical to Prospective
Purchasers (Testimony, 09/13/2000, GAO/T-HEHS-00-196).
Pursuant to a congressional request, GAO discussed the challenges the
baby boom generation and society face in planning for and financing its
future long-term care needs, and the role that private long-term care
insurance may play in meeting those challenges, focusing on: (1) the
increased demand the baby boom generation will likely create for
long-term care; (2) an overview of current spending for long-term care
of the elderly, including recent changes in Medicaid and Medicare
financing of long-term care; and (3) the potential role of private
long-term care insurance in helping finance this care, including who
buys this insurance, its affordability, and the critical need for
consumer information and protections.
GAO noted that: (1) estimates of the magnitude of the baby boomers'
future long-term care needs vary, with estimates of the number of
disabled elderly when the baby boom generation becomes elderly ranging
from 2 to 4 times the current number; (2) estimates of cost are even
more imprecise due to the uncertain effect of several important factors,
including how many will be needing care, the types of care they will
need, and the availability of public and private sources to pay for that
care; (3) spending for long-term care for the elderly is an estimated
$123 billion this year; (4) Medicaid and Medicare will pay for nearly 60
percent of these services, contributing $43 billion and $29 billion
respectively; (5) Medicaid funds go primarily to nursing homes and other
institutional settings of long-term care, but home and community-based
services represent a growing share of Medicaid spending and recipients;
(6) Medicare primarily covers acute care services, and thus plays a
lesser role in financing nursing home care but has grown to play a
significant role in covering long-term care through its home health
benefit; (7) recent federal legislative changes in response to rapid and
inexplicable growth in spending for long-term care services in Medicare
have already resulted in a reduction in home health spending, but it
remains uncertain how much Medicare will be spending for long-term care
services in the future; (8) several recent congressional initiatives,
including establishing a program to make group long-term care insurance
available to federal employees and proposals to provide tax subsidies to
individuals purchasing long-term care insurance, aim to expand the role
of private long-term care insurance; (9) less than 10 percent of the
elderly and an even lower percentage of near-elderly individuals have
purchased long-term care insurance, although these numbers are
increasing; (10) questions remain about the affordability of policies
and the value of the coverage relative to the premiums charged; (11) if
long-term care insurance is to have a more significant role in
addressing the baby boom generation's upcoming chronic health care
needs, the policies offered must be viewed by consumers as good,
affordable products that are easily understandable; and (12) the
National Association of Insurance Commissioners has recently
strengthened its model regulation for long-term care insurance,
including recommending that states enact laws requiring additional
disclosure to consumers about the potential for future policy rate
increases and better ensuring that long-term care insurers accurately
price their policy premiums.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-HEHS-00-196
TITLE: Long-Term Care Insurance: Better Information Critical to
Prospective Purchasers
DATE: 09/13/2000
SUBJECT: Home health care services
Patient care services
Health care programs
Long-term care
Health insurance
Consumer protection
Nursing homes
Health insurance cost control
Elder care
Insurance premiums
IDENTIFIER: Medicaid Program
Medicare Program
Medicare Prospective Payment System
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GAO/T-HEHS-00-196
* For Release on Delivery
Expected at 10:30 a.m.
Thursday, September 13, 2000
GAO/T-HEHS-00-196
LONG-TERM CARE INSURANCE
Better Information Critical to Prospective Purchasers
[0x08 graphic]
Statement of William J. Scanlon, Director
Health Financing and Public Health Issues
Health, Education, and Human Services Division
[0x08 graphic]
[0x08 graphic]
Testimony
Before the Special Committee on Aging, U.S. Senate
United States General Accounting Office
GAO
[0x08 graphic]
Long-Term Care Insurance: Better Information Critical to Prospective
Purchasers
Mr. Chairman and Members of the Committee:
I am pleased to be here today as you discuss the challenges the baby boom
generation and society face in planning for and financing its future
long-term care needs, and the role that private long-term care insurance may
play in meeting those challenges. Long-term care includes an array of
health, personal care, and social and supportive services provided in a
range of settings including nursing homes, assisted living facilities, and
people's own homes. While much care is provided by family members, paying
for purchased services presents a significant financial burden for many
individuals and for public health care programs. Of the nation's
approximately 35 million elderly people aged 65 and older, an estimated 5.2
millionor over one-seventhhave some form of long-term physical or mental
disability for which they require assistance, such as help with bathing,
dressing, eating, preparing meals, or taking medicines. For those needing
nursing home or other extensive continuous care, the costs can be
substantial. On average, nursing home care currently costs $55,000 annually,
with many nursing home residents paying much of that out of their own
pockets.
Long-term care financing will be an increasing concern as the 76 million
baby boomers age and begin, in just over a decade, to turn 65 and become
Medicare eligible. Over the next 30 years, the number of elderly individuals
is expected to double as the baby boom generation enters its senior years.
Similar growth is expected for the number of individuals needing long-term
care. With baby boomers living longer and greater numbers reaching age 85
and older, this generation is expected to have a dramatic effect on the
number of people needing long-term care services and will challenge these
individuals, their families, and public programs to finance and furnish that
care.
My remarks today focus on (1) the increased demand the baby boom generation
will likely create for long-term care, (2) an overview of current spending
for long-term care of the elderly, including recent changes in Medicaid and
Medicare financing of long-term care, and (3) the potential role of private
long-term care insurance in helping finance this care, including who buys
this insurance, its affordability, and the critical need for consumer
information and protections. My comments are based on our previous work and
other published and ongoing research. A list of related GAO products follows
my statement.
In summary, estimates of the magnitude of the baby boomers' future long-term
care needs vary, with estimates of the number of disabled elderly when the
baby boom generation becomes elderly ranging from 2 to 4 times the current
number. Estimates of cost are even more imprecise due to the uncertain
effect of several important factors, including how many will be needing
care, the types of care they will need, and the availability of public and
private sources to pay for that care. Nonetheless, the confluence of the
aging baby boom generation, longer life expectancies, and evolving options
for providing and financing long-term care services will require substantial
public and private investment in long-term care and the development of
sufficient capacity to serve the growing number of disabled elderly.
Spending for long-term care for the elderly, including post-acute and
chronic care in nursing homes and home care, is an estimated $123 billion
this year. Medicaid and Medicare will pay for nearly 60 percent of these
services, contributing $43 billion and $29 billion respectively. Medicaid
funds go primarily to nursing homes and other institutional settings of
long-term care, but home and community-based services represent a growing
share of Medicaid spending and recipients. Medicare primarily covers acute
care services, and thus plays a lesser role in financing nursing home careby
paying only for short-term stays following a hospitalizationbut has grown to
play a significant role in covering long-term care through its home health
benefit. Recent federal legislative changes in response to rapid and
inexplicable growth in spending for long-term care services in Medicare have
already resulted in a reduction in home health spending, but it remains
uncertain how much Medicare will be spending for long-term care services in
the future. In part, this is because the new Medicare prospective payment
system provides incentives to control home health services, but it also is
based on an increased number of visits per user than currently provided,
thereby making funding available for a large expansion of home health
services. Public programs pay for the majority of long-term care
expenditures, but out-of-pocket costs paid by individuals and their families
are substantial, representing 30 percent of total long-term care
expenditures ($43 billion in 2000). These amounts, however, do not include
many hidden costs of long-term care because nearly 60 percent of the
disabled elderly living in the community rely exclusively on their families
as caregivers and other unpaid sources for their care.
Private long-term care insurance has been viewed as a possible means of
reducing catastrophic financial risk for the elderly needing long-term care
and of relieving some of the financing burden currently falling on public
long-term care programs. Given concerns about the long-term financial
solvency of the Medicare program, the additional financial stress created by
the forthcoming eligibility of the baby boom generation, and the potential
costs of proposed new benefits for prescription drugs, congressional
interest in stimulating long-term care financing through private means has
grown. Several recent congressional initiatives, including establishing a
program to make group long-term care insurance available to federal
employees and proposals to provide tax subsidies to individuals purchasing
long-term care insurance, aim to expand the role of private long-term care
insurance. Yet private long-term care insurance represents a small fraction
of long-term spendingabout $5 billion. Less than 10 percent of the elderly
and an even lower percentage of near-elderly individuals have purchased
long-term care insurance, although these numbers are increasing. Questions
remain about the affordability of policies and the value of the coverage
relative to the premiums charged. If long-term care insurance is to have a
more significant role in addressing the baby boom generation's upcoming
chronic health care needs, the policies offered must be viewed by consumers
as good, affordable products that are easily understandable. To that end,
the National Association of Insurance Commissioners has recently
strengthened its model regulation for long-term care insurance, including
recommending that states enact laws requiring additional disclosure to
consumers about the potential for future policy rate increases and better
ensuring that long-term care insurers accurately price their policy
premiums.
Background
[0x08 graphic]
Long-term care includes many types of chronic care services needed because
of physical or mental disability. Individuals needing long-term care have
difficulty performing some functions involved in normal daily living, such
as bathing, dressing, toileting, eating, and moving from one location to
another without assistance. They may also have mental impairments, such as
Alzheimer's disease, which may require supervision and assistance with tasks
such as taking medications. Although a chronic physical or mental disability
may occur at any age, the older an individual becomes, the more likely a
disabling condition will develop or worsen. Nearly one-seventh of the
nation's current elderly populationan estimated 5.2 millionhave a limitation
in either activities of daily living (ADL), instrumental activities of daily
living (IADL), or both. More than one-third of these have limitations in 2
or more ADLs.
Long-term care for the elderly has often been misunderstood to mean only
institutional care provided by nursing homes for individuals with chronic
care needs, but it is more than that. Nearly 80 percent of the elderly
requiring assistance with ADLs or IADLs live at home or in community-based
settings, while more than 20 percent live in nursing homes or other
institutions. The majority of long-term care is provided by unpaid family
caregivers to elderly individuals living either in their own homes or with
their families. However, a growing minority receives paid assistance from
various sources. For example, Medicare pays for home care for a small
percentage of beneficiaries who received home health services for
longer-term care. In addition alternatives to nursing home care, such as
assisted living arrangements, are developing. An estimated 1 million
individuals live in residential settings, such as assisted living
facilities, that have long-term care services available. As the baby boom
demand for long-term care grows, so must the capacity for providing
long-term care in individuals' homes and other appropriate settings.
The Baby Boom Generation Will Greatly Expand Demand For Long-Term Care
[0x08 graphic]
The baby boom generation, about 76 million people born between 1946 and
1964, will contribute significantly to the growth in the number of elderly
individuals who need long-term care and the increased amount of resources
required to pay for it. The oldest baby boomers are currently in their
fifties. In 2011, the first of the baby boomers born in 1946 will turn 65
years old and become eligible for Medicare. The Medicaid program, which pays
for many health care services for low-income elderly, including nursing home
care, will also begin to feel their impact. The effect on long-term care
demand is expected to grow even more after 2030 when the first baby boomers
reach 85 years of age, the age at which the need for long-term care services
is greatest.
Today's elderly comprise 12.7 percent of our nation's total population. That
percentage will increase by nearly one-third to 16.5 percent in 2020. At
that time, one in six Americans will be 65 years old or older and will
represent nearly 20 million more seniors than today. By 2040, the number of
seniors aged 85 years and older, the age group most likely to require
long-term care, will more than triple to 14 million (see fig. 1).
Figure 1: Estimated Number of Elderly Individuals in 2000, 2020, and 2040
[0x01 graphic]
Source: U.S. Census Bureau, Projections of the Total Resident Population by
5-Year Age Groups and Sex With Special Age Categories: Middle Series,
selected years 2000 to 2040, January 2000.
Besides their numbers, the extended life spans of the baby boom generation
will have an impact on long-term care. Life expectancy has grown over the
last decades, increasing more than 6 years since 1965 when life expectancy
at birth was 70.2 years to 76.5 years in 1997. With aging individuals who
reach 65 today expected, on average, to live to 80.9 years for males and
84.2 years for females, many baby boomers can expect to survive well into
their eighties. The increasing proportion of baby boomers who will live to
85 and beyond will be most likely to need long-term care services.
Estimating the exact number of baby boomers who will need long-term care
services is complicated by several factors. While experts agree that
population aging will increase the number of disabled elderly needing
long-term care over the next several decades, no consensus exists on the
size of that increase. Long-range estimates of the magnitude of the baby
boomers' long-term care needs vary with estimates of the number of disabled
elderly ranging from 2 to 4 times the current number. Conclusions differ
concerning the effects of better health care and healthier lifestyles on the
baby boomers' need for long-term care. Some researchers contend that medical
advances have increased life expectancy but have not changed the age at
onset of illness and therefore the need for long-term care may have
increased. Others contend that better treatment and prevention could
decrease the number of years long-term care is needed. How these factors
will translate into the need for long-term care services and actual spending
also will depend on the types of care used and the public and private
resources devoted to purchasing long-term care.
Baby boomers in general are expected to be wealthier in retirement than
their parents. Those who are single, have less education, or do not own
homes, however, may not do as well. While many baby boomers will have
greater financial resources, they will have fewer social resources because a
smaller proportion of this generation will have a spouse or adult children
to provide unpaid caregiving. The geographic dispersion of families and the
large percentage of women who work outside the home also may reduce the
number of unpaid caregivers available to elderly baby boomers, thus creating
greater need for purchased long-term care services.
For women of the baby boom generation, long-term care needs are an
especially significant concern. More than 7 out of 10 unpaid caregivers are
currently women, three-quarters of nursing home residents 65 years and older
are female, and two-thirds of home health care users are female. Given their
longer life expectancies and the fact that married women usually outlive
their spouses, many women face a higher risk of needing long-term care and
not having a spouse to serve as a caregiver.
Long-Term Care Expenditures Estimated to Double in 25 Years
[0x08 graphic]
Over the next 40 years, between 2000 and 2040, the Congressional Budget
Office estimates that long-term care expenditures for the elderly, adjusted
for inflation, will grow annually by 2.6 percent. In 1998, long-term care
spending for nursing home and home health care was estimated at more than
$117 billion. Individuals needing care and their families paid for almost 30
percent of these total expenditures out-of-pocket, Medicaid and Medicare
funded 57 percent, private health insurance accounted for about 7 percent,
and other sources paid the remaining 6 percent (see figure 2). These
amounts, however, do not include the many hidden costs of long-term care,
because an estimated 60 percent of the disabled elderly living in their
community rely exclusively on their families as caregivers and other unpaid
sources for their care. CBO estimates $123 billion in total long-term care
spending for the elderly in calendar year 2000, projecting that these
expenditures will reach $207 billion in 2020 and $346 billion in 2040. Based
on these projections, long-term care expenditures would roughly double in 25
years.
Figure 2: Elderly Long-Term Care Expenditures, by Source of Payment, 1998
[0x01 graphic]
Source: Office of the Actuary, National Health Statistics Group, Personal
Health Care Expenditures, HCFA, Department of Health and Human Services,
2000.
Medicaid
[0x08 graphic]
Medicaid, a joint federal-state health financing program for low-income
individuals, continues to be the largest public funding source for long-term
care. Within broad federal guidelines, states design and administer Medicaid
programs that include coverage for certain mandatory services, such as
skilled nursing facility care, and other optional coverages, such as home
and community-based services. Although most Medicaid long-term care
expenditures are for nursing home care, in the last two decades there has
been a shift to more home and community-based care. The result is a
significant change in the proportion of people with the need for long-term
care that are receiving Medicaid-financed services and in the average costs
of those services. By fiscal year 1998, the number of Medicaid recipients
receiving home health or home and community-based services was similar to
the number of Medicaid recipients receiving nursing facility services.
State Medicaid programs have, by default, become the major form of insurance
for long-term care, but only after individuals have become nearly
impoverished by spending down their assets. Medicaid eligibility for many
elderly results from having become poor as the result of depleting assets to
pay for nursing home care, the average price of which is $55,000 per year.
In most states, nursing home residents without a spouse must have less than
$2,000 in countable assets to become eligible for Medicaid coverage. About
two-thirds of nursing home residents in 1998 relied on Medicaid to help pay
for their care, and just over half (58 percent) of Medicaid expenditures for
long-term care were for institutional care in nursing homes.
States historically limited coverage of in-home services under Medicaid due
to concern about the potential cost of covering services for the large
number of disabled who were being cared for by their families. However, as
part of the Omnibus Budget Reconciliation Act of 1981, the Congress
established the home and community-based service waiver program. The waiver
program gave states the option of applying for Medicaid waivers to fund home
and community-based services for people who met Medicaid eligibility
requirements for nursing home care. These waivers also gave states the
ability to restrict the number and costs of eligible individuals to be
served under Medicaid in home and community-based settings. All states now
have home and community-based waivers, and more than 200 waiver programs
served more than 450,000 individuals nationwide in fiscal year 1998.
Medicaid expenditures for home and community-based waivers have increased an
average of 25 percent per year from 1993 to 1999, reaching a level of $10.5
billion in 1999.
Medicare
[0x08 graphic]
During the 1990s, costs for both skilled nursing facility services and home
health care became the fastest growing components of Medicare spending,
although changes introduced by the Balanced Budget Act of 1997 (BBA) have
significantly altered this situation. In contrast to Medicaid, which is
estimated to pay about 46 percent of total nursing home and other
institutional care expenditures in 2000, Medicare plays a relatively small
role, paying only about 12 percent of total nursing home and other
institutional care expenditures. Medicare primarily covers acute health care
costs, and therefore limits its nursing home coverage to short-term,
post-acute stays of up to 100 days per spell of illness following
hospitalization. Medicare nursing home spending increased from $1.7 billion
in 1990 to $10.4 billion in 1998.
Since 1989, Medicare became a significant funding source of home care,
financing $10.4 billion in careor more than one-third of the home care
purchased for the elderlyin 1998. Court decisions and legislative changes in
coverage guidelines essentially transformed the Medicare home health benefit
from one focused on patients needing acute, short-term care after
hospitalization to one that also served chronic, long-term care patients. By
1994, only about one-fourth of home health visits covered by Medicare
occurred within 60 days following a hospitalization. As a result, Medicare,
on a de facto basis, has financed an increasing amount of long-term care
through its home health care benefit. Both the number of beneficiaries
receiving home health care and the number of visits per user more than
doubled from 1989 to 1996. From 1990 to 1997, the average annual growth rate
for Medicare home health care spending was 25.2 percentmore than 3 times the
growth rate for Medicare spending as a whole. The increase in the use of
these services cannot be explained by any increase in the incidence of
illness among Medicare beneficiaries.
In response to concerns about the growth in spending for Medicare services,
including skilled nursing facility and home health services, Congress
enacted the BBA which included provisions to slow growth. The Act required
prospective payment systems to be implemented for Medicare services provided
through home health care agencies and skilled nursing facilities, replacing
the retrospective, cost-based reimbursement that did not provide adequate
incentives to control costs. The skilled nursing facility prospective
payment system began to be implemented in July 1998 and will be completely
phased in by 2001. Even though nursing home use has continued to increase
during the phase-in of the new payment system, a temporary increase in
Medicare payments to nursing homes caring for certain high-cost patients,
pending the inclusion of a refined case-mix adjustment for payments to
nursing homes, was enacted in response to complaints from the industry that
payments were inadequate.
For home health, rather than immediately introducing a prospective payment
system, an interim home health care payment system was implemented in
October 1997, pending development of a case-mix adjusted prospective payment
system. Between 1997 and 1998, Medicare home health spending fell by nearly
15 percent, while home health visits dropped sharply by 40 percent, and this
decline continued in 1999. The home health prospective payment system (PPS),
scheduled to be in place by October 1 of this year, is expected to be a more
appropriate payment tool than the interim payment system because it is
designed to more closely align payments with patient needs. The PPS rates
are based on a higher number of home health visits per user than those
currently being provided. As a result, the new payment system can support a
large expansion of services. However, PPS incentives are intended to reward
efficiency and control use of services. Because criteria for what
constitutes appropriate home health care do not exist, it may be difficult
for Medicare to ensure that patients receive all necessary services. How
home health agencies respond to the PPS and its incentives could have major
implications for the amount of future Medicare funding for home health care
and the services provided.
Private Long-Term Care Insurance Represents A Very Small But Growing Share
of Long-Term Care Expenditures
[0x08 graphic]
While many baby boomers will have more financial resources in retirement
than their parents and may be better able to absorb some long-term care
costs, long-term care will represent a catastrophic cost for a relatively
small portion of families. This type of situation can be ideal for a private
insurance program because it spreads risk among many individuals. Private
long-term care insurance has been viewed as a means of both reducing
potential catastrophic financial risk for the elderly needing long-term care
and relieving some of the financing burden currently falling on public
long-term care programs. Some observers also believe private long-term care
insurance could provide individuals greater choice in selecting services to
satisfy their long-term needs. However, less than 10 percent of elderly
individuals and even fewer near-elderly individuals have purchased long-term
care insurance to protect against the financial risks of the potential high
costs of future care. The National Association of Insurance Commissioners
reported that in 1998 approximately 4.1 million persons were insured through
long-term care insurance policies, compared with 1.7 million persons in
1992. In contrast, about two-thirds of the elderlyabout 23 million
individualshave private Medicare supplemental insurance policies to cover
other non-Medicare covered expenses such as copayments, deductibles, and
prescription drug costs.
Private long-term care insurance is still a little known product with
insurance providers seeking to build a larger market. Barriers to purchasing
long-term care policies still exist. Many baby boomers continue to believe
they will never need such coverage. A recent survey of the elderly and near
elderly found that only about 40 percent believe that they or their family
will be responsible for paying for their long-term care. Some mistakenly
believe that public programs, including Medicaid and Medicare, or their own
health care insurance will provide comprehensive coverage for the services
they need. This lack of awareness decreases people's perceived need for
protection, thus decreasing demand for long-term care insurance. Others may
be concerned about whether they can afford such insurance now or in the
future when their premiums may increase and their retirement incomes may
have decreased.
Some employers offer their employees a voluntary group policy option for
long-term care insurance, but this market remains small and is offered
predominantly by large employers. Usually employers do not pay for any of
the costs of these policies, but group policies have lower administrative
costs than individually-purchased policies which can result in lower
premiums for those employees choosing to purchase a policy. The American
Council of Life Insurance reported in 1998 that only 29 percent of long-term
care insurance policies in force were group policies. Studies estimate that
6 to 9 percent of eligible active employees took advantage of
employer-provided group long-term care insurance where it was available. The
House and Senate have recently passed legislation that would offer group
long-term care insurance to federal employees and retirees beginning by
fiscal year 2003, an initiative that, if enacted, would likely establish the
largest group offering of long-term care insurance and could significantly
expand this market.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
extended tax deductibility of some premiums and tax exemptions for certain
benefits to qualified long-term care insurance policies. Qualified policies
have to satisfy certain requirements including consumer protection
standards. The consumer protection standards are deemed satisfied if a
policy complies with the National Association of Insurance Commissioners'
(NAIC) Long-Term Care Model Act. As of July 1998, the Health Insurance
Association of America reported that all 50 states (which have primary
responsibility for regulating insurance policies) required policies adhere
to at least 3 NAIC long-term care insurance standards. These three standards
require policies to not require prior institutionalization as a condition
for coverage, to have an outline of coverage provided by the policy, and to
be guaranteed to be renewable and non-cancelable. In addition, all but one
state adheres to the NAIC definition of long-term care insurance (policies
providing coverage for at least 12 months for necessary services provided in
settings other than acute care hospital units), and all but two states
adhere to the pre-existing conditions standard. Overall, 14 of the 19 HIPAA
long-term care insurance standards had been adopted by at least 35 states as
of July 1998.
Long-Term Care Insurance Affordability of Concern to Many Elderly
Individuals
[0x08 graphic]
Questions exist about the affordability of policies for many elderly and
near-elderly, and the value of the coverage relative to the premiums
charged. The affordability of long-term care insurance has a large effect on
its marketability, and is a key factor in individuals' decisions to purchase
and retain a long-term care insurance policy. Although assessing whether
individuals can afford a policy is a subjective judgement, some studies
estimate that long-term care insurance is affordable for only 10 to 20
percent of elderly individuals. Affordability is even more difficult for
married couples who must each purchase coverage. While some insurers offer
discounts to married couples when both purchase long-term care coverage,
elderly couples are likely to pay at least several thousand dollars annually
for long-term care coverage. Individuals who consider and then decide
against purchasing long-term care insurance cite skepticism about whether
private policies will provide adequate coverage. Those who do find long-term
care insurance affordable may later decide it is not affordable because
their financial circumstances have changed or the premiums have increased.
An industry group estimates that only 55 to 65 percent of all long-term care
insurance policies sold as of June 1998 remain in force.
Insurers try to convince individuals that it is prudent to decide to buy
long-term care insurance early in life rather than later because policy
premiums are based largely on an individual's age when the policy is
purchased. A policy purchased when a person is in his or her 40s or 50s has
much lower premiums than a policy purchased later in one's life; however,
those premiums will be paid over a longer period. A person purchasing a
long-term care policy with inflation protection at age 65 may pay premiums
as high as $2,000 annually for the policy. If an individual waits until age
79 to purchase a policy, the premiums are typically about 2.5 times higher
than if the same policy had been purchased when the individual was 65 years,
and about six to ten times higher than if the policy was purchased at age
50.
The unfamiliarity and uncertain value of long-term care insurance may deter
some individuals from purchasing a policy. A low premium at age 45 may seem
high for a risk that may not be realized for 40 years. Individuals need to
determine if they can afford the long-term care policy premium both now and
in the future when their retirement income may be lower and their policy
premiums may have increased. Concerns about premiums relative to the value
of policies may be a factor, especially when premiums for a similar policy
for the same individual can vary widely. For example, a 65-year-old in
Wisconsin could pay $857 to $2061 per year for a long-term care insurance
policy from different carriers with similar terms.
Consumer Information and Protection Is Necessary, Especially If Private
Insurance Is to Assume a Larger Role in Financing Long-Term Care
[0x08 graphic]
While consumers deserve complete and accurate information about any
insurance product they purchase, sales of long-term care policies are not
likely to increase significantly unless consumers have adequate and
understandable information to assess them. If long-term care insurance is to
have a role in addressing the baby boom generation's upcoming long-term care
needs, individuals need to be able to understand clearly what they are
buying at the time of purchase and what changes, if any, they may face in
their policy's coverage or premiums in the future. We have previously
reported on a number of problems in the long-term care insurance market,
including those related to disclosure standards, inflation protection
options, clear and uniform definitions of services, eligibility criteria,
grievance procedures, nonforfeiture of benefits, options for upgrading
coverage, and sales commission structures that potentially create incentives
for marketing abuses.
Long-term care insurance policies are not standardized by law as are
Medicare supplemental (Medigap) policies, making comparisons among different
policies difficult. Although long-term care policies provide many options
for individuals to choose among to create a policy to meet their perceived
needs and financial situation, these choices can complicate the purchasing
decision. If people do not fully understand their options, they may not make
the best choices. Further, for some prospective purchasers, the cost of some
options, such as inflation protection, can compromise the affordability of
the policy.
Several checklists exist to help individuals considering a policy purchase
determine the options they should buy to create a policy that best fits
their needs. However, the specific policy information required to make these
reasoned decisions may not be readily available, and the decisions
themselves may be too daunting. Among the questions an individual should try
to answer when purchasing a long-term care insurance policy are:
* What is the probability that long-term care services will be needed in
the future and for how long will they be needed?
* How much coverage can the individual afford, will the premium remain
affordable over time, and will the coverage provide sufficient
services?
* Should the policy cover only nursing home care, or also home care, or
other alternatives such as assisted living?
* Should the individual purchase a less expensive policy that has a
waiting period before the policy begins paying for services received?
* What level of coverage for specific services should be purchased? For
example, what per day amount (such as $100 or $130 per nursing home
day) should be stipulated for nursing home care? For home health, what
per month or per visit amount is adequate? Should total coverage be
provided for 3 years, 5 years or for lifetime coverage?
* Should inflation protection be purchased (for an additional 25 to 40
percent of the premium) to preserve more of the policy's future value?
* Should optional nonforfeiture protection be purchased (for an
additional 10 to 100 percent of the premium) to allow the purchaser to
retain some coverage if he or she stops making premium payments?
Particularly important for many consumers is a clear understanding of the
current price of the policy and whether that price is subject to future
increases. This concern was highlighted by a recent class action lawsuit
involving long-term care policyholders in North Dakota, which was brought
against two insurers who sold individual, guaranteed renewable, level
premium policies. To the policyholders, level premium policies meant that
the amount of their premiums at the time of purchase would remain at the
same level. They believed that the premiums would not increase as long as
they held their policies, which they were guaranteed could be annually
renewed. To the insurers, level premiums meant an individual's policy
premiums would not be increased unless the entire class holding the same
type of policy had a premium increase. After the insurers stopped selling
these policies to new purchasers in 1990, premiums for existing
policyholders began increasingfor some by more than 700 percent. For
example, one female policyholder's annual policy premium at purchase was
$829.86 and increased to $6,638.42. As a result, some policyholders were
unable to afford the increases and were forced to drop their policies at a
time when their age made buying another policy very expensive. Others at
high risk of needing coverage had to continue paying very high premiums to
maintain their policies. The class action suit contended that the insurers
did not explain to purchasers that a level premium policy could result in
premium increases for an entire class of policyholders and did not
appropriately determine the initial premium rate for the policy. In 1999,
the class action in North Dakota was settled along with class actions in
several other states for monetary payments to former policyholders, premium
rate reductions for those still holding policies, and agreement by two
insurers to have no future rate increases for these policies.
In August, the National Association of Insurance Commissioners amended its
Long-Term Care Insurance Model regulation to strengthen consumer disclosure
to address problems such as those highlighted by the class action suit. In
states that adopt the Model regulation amendments as part of their insurance
regulations, insurers will have to provide written information to
prospective purchasers explaining
* that a policy's premium may increase in the future,
* why premium increases may occur,
* what options a policyholder has in the event of an increase, and
* what the 10-year rate history for their policies has been.
Consumers will also have to specifically acknowledge that they understand
their policy's premiums may increase, and insurers must explain any
contingent benefit available to policyholders who let the policy lapse due
to a substantial rate increase. Additionally, the NAIC adopted amendments to
better ensure that long-term care insurers accurately price their policy
premiums to be sufficient over the lifetime of the policy, so as to minimize
the need for future premium increases. As a further consumer protection,
these amendments require insurers to reimburse policyholders when any rate
increase is found to be unnecessary and allow state insurance commissioners
to ban insurers from the long-term care market if they have a pattern of
offering initial policy purchasers inadequate premium rates.
Concluding Observations
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In conclusion, the aging of the baby boomers will lead to a very large
increase in this nation's elderly population in the next 3 decades, and an
even greater increase in the number of individuals aged 85 and over who are
likely to need long-term care services. Recent Congressional proposals,
including the passage of legislation that would authorize a new federal
employees' long-term care insurance offering and proposed tax subsidies for
the purchase of private long-term care insurance, aim to increase the role
private insurance plays in financing long-term care. Increased consumer
information about and confidence in long-term care insurance and the
availability of affordable, reliable products are also crucial components of
private insurance if it is expected to play a larger role in financing
future generations' long-term care needs.
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Mr. Chairman, this concludes my statement. I would be happy to answer any
questions that you or Members of the Committee might have at this time.
GAO Contacts and Acknowledgments
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For more information regarding this testimony, please contact William J.
Scanlon or Kathryn G. Allen at (202) 512-7114. John Dicken and Opal
Winebrenner also made key contributions to this statement.
Related GAO Products
Medicare Home Health Care: Prospective Payment System Could Reverse Recent
Declines in Spending (GAO/HEHS-00-176, Sept. 8, 2000).
Medicare and Medicaid: Implementing State Demonstrations for Dual Eligibles
Has Proven Challenging (GAO/HEHS-00-94, Aug. 18, 2000).
Medicare: Refinements Should Continue to Improve Appropriateness of Provider
Payments (GAO/T-HEHS-00-160, July 19, 2000).
Low-Income Medicare Beneficiaries: Further Outreach and Administration Could
Increase Enrollment (GAO/HEHS-99-61, April 9, 1999).
Long-Term Care: Baby Boom Generation Presents Financing Challenges
(GAO/T-HEHS-98-107, March 9, 1998).
Health Care Reform: Supplemental and Long-Term Care Insurance
(GAO/T-HRD-94-58, Nov. 9, 1993).
(201049)
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[Author ID1: at Thu Sep 7 18:40:00 2000 ]The MetLife Mature Market Institute
survey also found that nursing home costs vary widely by region of the
country, from [Author ID1: at Thu Sep 7 18:40:00 2000 ]nearly [Author ID1:
at Thu Sep 7 18:41:00 2000 ]$33,000[Author ID1: at Thu Sep 7 18:40:00 2000 ]
per year in Hibbing, Minnesota to more than $100,000 per year in
Manhattan.[Author ID1: at Thu Sep 7 18:41:00 2000 ]
An additional 17 percent of Medicaid long-term care expenditures were for
intermediate care facilities for people with mental retardation, with the
remaining quarter of Medicaid long-term care expenditures for
noninstitutional care provided [Author ID1: at Mon Sep 11 14:41:00 2000
]through home health, personal care services, and home and community-[Author
ID1: at Mon Sep 11 14:41:00 2000 ] [Author ID1: at Mon Sep 11 14:41:00 2000
]based services[Author ID1: at Mon Sep 11 14:41:00 2000 ] waivers.
See Medicare Home Health Care: Prospective Payment System Could Reverse
Recent Declines in Spending (GAO/HEHS-00-176, Sept. 8, 2000).
See Medicare: Refinements Should Continue to Improve Appropriateness of
Provider Payments (GAO/T-HEHS-00-160, July 19, 2000).
[Author ID1: at Mon Sep 11 15:03:00 2000 ]The accuracy of these policy
numbers is dependent upon the accuracy of the information filed by the
insurers themselves with the National Association of Insurance
Commissioners.
The House and Senate passed the Long-Term Care Security Act, H.R. 4040 and
S. 2420, on July 27, 2000. The legislation awaits[Author ID1: at Mon Sep 11
15:11:00 2000 ] and it awaits [Author ID1: at Mon Sep 11 15:12:00 2000
]further action. The President is expected to sign the legislation.[Author
ID1: at Thu Sep 7 13:04:00 2000 ]
A qualified long-term care insurance plan is defined as a contract that
covers only long-term care services; does not pay for services covered under
Medicare; is guaranteed to be renewable; does not provide for a cash
surrender value or other money that can be paid, assigned, or pledged as
collateral for a loan, or borrowed; applies all refunds of premiums and all
policy holder dividends or similar amounts as a reduction in future premiums
or to increase future benefits; and meets certain consumer protection
standards. Also, payments received from a qualified plan are considered
medical expenses and are excluded from gross income for determining income
taxes. Per diem policies that pay on the basis of disability rather than
reimbursing for services used are subject to a cap of $180 per day per
person in 1998. Out-of-pocket expenses for long-term care are allowed as
itemized deductions along with other medical expenses, if they exceed 7.5
percent of adjusted gross income.
Annual premiums for individual basic long-term care insurance policies
marketed in Wisconsin with $100 per day nursing home benefit, $50 per day
home health benefit, lifetime benefits, a 90 or 100-day elimination period,
and no optional benefits as of October 1999.
Health Care Reform: Supplemental and Long-Term Care Insurance
(GAO/T-HRD-94-58, Nov. 9, 1993).
*** End of document. ***