The evolution of long term care
By Peter Gelbwaks
Gelbwaks Executive Marketing Corp.
Long term care insurance began evolving in this country as early as the middle 1960s, as nursing home coverage for the elderly became an issue with the establishment of Medicare in July of 1965. Between the 1970s and 1990s, there was increasing concern among the policy makers about the rising costs to Medicare and cost containment was, and still is, a constant theme. This "social program" called Medicare was not designed to pay for non-acute care and, 40 years later, still does not do so. Entering the picture were some bold and adventurous insurance industry leaders of the time who saw this as an opportunity to break new ground in a much-needed and completely unfounded area. Americans were living much longer due to advances in medical technology and did not have adequate retirement savings. In addition, the ratio of workers to retirees was rapidly reversing itself.
The early years of exploration into these products created many frustrations and challenges for the actuaries, underwriters and the producers alike. The actuaries had no credible data to base their pricing assumptions on and the underwriters were experiencing an entirely new "hybrid" product with a new and different underwriting needed. They could not use mortality underwriting as they did for life coverages or standard morbidity underwriting that was being done for major medical coverages for younger buyers. The producers had their jobs also cut out for them and it was, and still is, a very difficult task to convince people that there is a need for coverage when the consumer is either convinced Medicare would cover this event or it would never happen to them.
The potential buyers or interested parties became a complete "adverse selection" for the industry. Only the oldest, sickest, highest risk people were intrigued and interested in becoming policyholders. For the most part, they had a claim ready to file and they just needed a policy to put in force first.
Enter some rather intense and onerous regulatory pressures on the carriers. Due to the fact that they were primarily dealing with the older and more-frail part of the population, regulators viewed this group as needing protection from our industry and, therefore, an extremely challenging marketplace developed.
With all of that being said, many more than 100 carriers have a positive outlook on LTCI and continue to look at this extremely large, untapped market as a place to deliver a much-needed product, now and in the future.
The earliest policies of the 60s and 70s used similar qualifying languages to trigger benefits as to what was in the Medicare Supplement policies of the time.
After adequate research, more advanced and more appropriate Activity of Daily Living (ADL) definitions unique to long term care insurance (LTCI) were developed. Much throughout the 1970s and 1980s, there was very little agreement among companies promoting and underwriting LTCI. In addition, great frustrations developed within the producer/agent groups. While one carrier was declining coverage, another carrier would issue the same application as a preferred risk. Premiums varied so broadly among carriers that it was hard to believe they were looking at the same applicant.
The "higher-priced" carriers were very concerned with anti-selection and high acquisition costs due to lack of consumer awareness and the cost of training underwriters. The "lower-priced" carriers were using much more positive or overly optimistic assumptions and not focusing on any potential future surprises. A lot has changed and continues to change as we move through this last decade of experience.
Fast forward to today, let's look at what has occurred over the last few years and where we are headed in the near future. The older than age 50 consumer has become much more aware of the need for long term care insurance. Our average age buyer of individual long term care insurance coverage in America has dropped significantly to around 58 years of age, decreasing from the high 70's just a decade ago.
Employer-sponsored plans are where a great degree of the growth of LTCI is taking place and that is not going to change in the near future. In the worksite, the average age buyer is only 41 years of age.
Financial planners, estate planning attorneys and CPAs have been much more accepting of the need for LTCI coverage to now be used as an integral part of the financial plan of the age 50-something clients (and not just for the parent or grandparent who needs to be in a nursing home or assisted living facility).Meanwhile, carriers have continued to develop products of much higher quality covering a much broader spectrum of care and addressing the needs of today's much younger and healthier consumer.
The awareness level of consumers has been increased with the assistance of the Federal Government. In 2002, all Federal employees, spouses, dependants, approximately 20 million Americans (including the military) were offered LTCI. With more than 250,000 people applying to date, and considering the government is not contributing any portion of the premium, this program is being considered by many as a huge success.
Unlike some of the stories you may have read, even though underwriting may appear "tighter", well over 75 percent of all applicants for long term care coverage are being approved. A lot of that has to do with a much younger, healthier group of applicants applying for coverage and people not waiting until they think they need it to apply. In other words, the more we educate, the healthier the industry will be and the healthier and more stable our rate structures will become.
Speaking of rate stability, about 50percent of the states in the U.S. have adopted the NAIC Guideline Model Act of 2000 and amended it to their individual state needs. It requires that each carrier refile plans and rates and have actuaries sign off stating that these rates will remain stable throughout the lifetime of the policies. It is not a guarantee, but it is a very good message. Is that a perfect answer? No, however, we do not live in a perfect world and this is a dramatic step in the right direction. Going beyond that, most LTCI carriers do offer a "Limited Pay" program such as a "10 Pay" or "To Age 65 Pay", that once the premiums are completed, the plan can never have a rate increase take place.
Additional LTCI awareness campaigns are taking place at this time. The National Governors' Association, in cooperation with the U.S. Department of Health and Human Services has launched a consumer campaign. The Governors of eighteen different states are sending personalized letters and brochures to every residence in each of those states that houses someone between the ages of 50-70 (or 45-65 in some). This pilot project has been extremely well received and we hope to see it continue throughout the rest of the country.
Another important topic that has been implemented all over the US is National Partnership Expansion. There are four states (all different than the ones involved in the National Governors Campaign) that have had active partnership plans in place since the mid 90s. Those states are New York, California, Indiana and Connecticut. The collective claims experience was very positive over this last decade, which has created a driving force to open up a national program.
Currently, partnership programs are joint efforts between State Medicaid plans and private LTCI carriers. Partnership policies help protect assets of consumers and at the same time take away some of the financial burden States feel in having to protect uninsured residents.
In conclusion, some carriers are continuing to look at LTCI as too high of a risk for too low of a profit potential and are exiting the marketplace. This "reevaluation" has caused the media, the existing and potential buyers, and even LTCI producers some confusion and cause to be concerned.
At the same time, other carriers feel this is the very best of times to make even bigger commitments than before and gain a large market share as we have yet even "scratched the surface" of this phenomenal marketplace. (We currently have approximately 10 percent penetration). But a much broader group of producers is developing. We now see the Broker/Dealer, bank and P&C channels widening their interest because their clients are finally asking them for advice and counsel on this topic.
The trend in LTCI product design is to simplify, simplify, simplify. This is what all the non-buyers and non-sellers have been telling the industry for years. We are finally listening and the good news is that it is not too late.
As we continue to see innovative and creative thinking take place within the LTCI industry, we will see this industry realizing strong gains in the near future and beyond. As we address the complexity and pricing argument issues of the non-buying consumer, we will see a much broader acceptance of LTCI by a much healthier group of consumers. As we see the continued national awareness campaigns expand and the national and state partnerships develop, we will see a dramatic change of attitude and acceptance of this product line.
With rate stability, carrier stability and plan design stability, we will see producer stability as well. More diverse groups of producers will develop and become successful offering this exceptionally important product to the masses.
Remember: 2009 is the beginning of a new era in LTCI. Join me on this exciting ride into our future.
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