Financing Options for Long Term Care Services and Supports

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1 Financing Options for Long Term Care Services and Supports AARP National Policy Council Summer Meeting July 2013

2 LONG TERM CARE INSURANCE: INDUSTRY IN TRANSITION Talk about the industry s past, present and future Favorable and unfavorable changes over time Current state of the market What the future holds

3 OVERVIEW: LTC FINANCE AND DELIVERY OPTIONS No single option today perfectly meets current or growing needs. Some cost more than many people feel they can pay; Some only provide only partial protection; Some limit eligibility based on health, income, age or other criteria; Others impose asset and income restrictions. Options mistakenly believed to offer LTC protection: Medicare and Medicare supplement insurance Private disability insurance Social Security disability benefits Also, today s LTC options provide limited reach due to the challenges of raising awareness, motivating and enabling planning, and overcoming denial.

4 OVERVIEW OF OPTIONS

5 HYBRID LIFE/LTC AND ANNUITY/ LTC PRODUCTS Small but growing market: 266,000 life/ltc combo 10,200 annuity/ltc hybrids* More flexible, but also more complex Help overcome denial What if I don t need LTC? Expensive, mostly single premium products Example = Life/LTC single premium of $70,000 provides roughly 2 years of LTC benefits Example = Life/LTC annual premium of $5,000 provides about 4 years Similar buyer demographics to standalone LTCI *Only half of all companies selling reported

6 HEALTH SAVINGS ACCOUNTS Tax-advantaged pool of dollars used for health care expenses not covered by insurance, including LTC expenses or premiums Must have high deductible health plan Account funds and growth can roll-over tax-free Annual caps on HSA contribution limits likelihood they can pay for LTCI: $3,250/year individual and $6,450/year family Average individual contribution amount $886 ($1,559 for family) After paying health expenses, not much left for LTC As of 2011, one-third of HSAs had rollover amounts less than $500

7 USING HOME EQUITY $3.14 trillion in home equity, median home value $160,000 (2011) Options: Sell home/move, home equity loan, reverse mortgage Sell home: Funds produced may not be adequate for care needs. Emotionally and physically difficult. Timing is an issue Home Equity Line: Interest payments may be tax deductible. Credit history and income qualifications apply Funds produced may not be adequate. Might owe more than home worth if housing values drop. Risk foreclosure if can t maintain payments.

8 REVERSE MORTGAGE Must be age 62 or older Loan comes in variety of forms No payments while living in the home Loan becomes due when last borrower dies, sells or moves out permanently Just over 775,000 RMs to date

9 REVERSE MORTGAGE (continued) Advantages: No income, health or credit history Non-taxable Never owe more than home value at time loan repayment is due. Concerns: Large up-front costs Amounts may not be adequate to pay for LTC or insurance Depletes home values New models emerging

10 LTCI: IN THE BEGINNING Products left much to be desired Market sales dominated by senior market players Medicare model in terms of coverage, language, and leading players Skewed toward facility care, post-hospital, skilled care Bottom line not well suited to meet true long term care needs Insurers didn t understand the nature of the risk and how best to manage it while also meeting consumer needs

11 PRODUCT DESIGN IMPROVEMENTS Comprehensive coverage all relevant care settings and providers Removed artificial gates and benefit triggers Pool of dollars concept for lifetime coverage amounts Care coordination and support, provider discounts Emergence of best practice risk management: Objective benefit triggers (ADLs and Cognitive Loss) Appropriate underwriting Objective assessment and timely re-assessment

12 HOW POLICIES CHANGED OVER TIME Policy Characteristics Comprehensive Coverage Average for 2010 Average for % 37% Nursing Home DBA $154 $72 Home Care DBA $153 $36 Benefit Duration 4.8 years 5.6 years Inflation Protection 92% 40% Annual Premium $2,268 $1,071 Source: Who Buys Long-Term Care Insurance in ? A Twenty Year Study of Buyers and Non-Buyers in the Individual Market. AHIP, March 2012

13 THE CURRENT MARKET Between million policies in force Individual market represents 58% of entire market today down from 75% in Group market today at 42% of total, with more than 11,000 employer groups sponsoring coverage, including state and federal government Total annualized premiums of over $10 billion Average annual sales growth over past 5-10 years roughly 5-6% Significant market exits Source: The Current State of the Private LTCI Industry. Presented to the LTC Commission by Marc A. Cohen, PhD., LifePlans, June 27, 2013

14 WHY PEOPLE BUY: LIFESTYLE PROTECTION Source: Who Buys Long-Term Care Insurance in ? A Twenty Year Study of Buyers and Non- Buyers in the Individual Market. AHIP, March 2012

15 HOW PEOPLE USE LTC 70% of individuals 65+ will require some type of LTC service during their lifetime. LTC needs are significant for adults <65 due to stroke, trauma, early-onset dementia, etc.

16 CLAIMANTS ARE WELL-SERVED Roughly 95% of all claims are paid Among those on claim: 94% had no disagreement with the insurer and 3% had a disagreement that was satisfactorily resolved Insurance covers between 72% and 98% of care costs Most claimants say their policy benefits meet care needs -- 90% feel their policy provides flexibility in service choice In absence of insurance, half the claimants felt they would have to seek facility care or not be able to afford care Most (77%) do not find it difficult to file a claim Source: The Current State of the Private LTCI Industry. Presented to the LTC Commission by Marc A. Cohen, PhD., LifePlans, June 27, 2013

17 SIGNIFICANT SLOW DOWN IN SALES Thousands 8,000 7,000 6,000 5,000 4,000 3,000 3,697 3,338 3,202 2,601 2,946 4,130 4,793 4,497 5,179 5,612 6,404 6,053 7,115 7,157 7,263 6,995 6,894 7,030 2,000 1,704 1, Year Source: The Current State of the Private LTCI Industry. Presented to the LTC Commission by Marc A. Cohen, PhD., LifePlans, June 27, 2013

18 WHY PEOPLE DON T BUY Source: Who Buys Long-Term Care Insurance in ? A Twenty Year Study of Buyers and Non-Buyers in the Individual Market. AHIP, March 2012

19 BEHIND THE DATA Non-Buyers underestimate the risk of needing LTC Underestimate the costs of LTC services Over-estimate the cost of obtaining coverage So, don t see the value proposition of paying for LTC insurance

20 SLOW SALES: FACTORS Economy people don t buy when they feel they are worse off today than in prior years Right pricing rate increases making the product more expensive While re-enrollments in group market doing well, little growth in new employer-sponsorship Other factors: denial, confusion, the product s value proposition, and more

21 RECAP OF PAST 25 YEARS: INDUSTRY BEHAVIOR RIGHT Claim results and claimant satisfaction Provide care in least restrictive setting Pay for and help provide/ arrange for care (including caregiver support) Bringing value add to the product: provider discounts, information and referral WRONG Pricing interest rates and lapses Underwriting and claims management Letting distribution drive product evolution Managing industry image

22 RECAP OF PAST 25 YEARS: MARKET ENVIRONMENT POSITIVE Improved expertise in pricing and managing risk Products with more consumer appeal and flexibility Standardized features driven by HIPAA Consumer protections Large private and public employers as role models State tax credits and deductions Reposition product to lifestyle and asset protection NEGATIVE Challenging regulatory environment Recession Distribution system challenges Dim view of product from rating agencies Negative press Market exits

23 SIGNIFICANT UNTAPPED MARKET POTENTIAL About 59 million people are not eligible (based on estimates of affordability, insurability and Medicaid)

24 MARKET SHIFTING AWAY FROM MIDDLE/ LOWER MARKET Note: Low income <33% of income distribution; Middle income = 33% - 66%; Higher income = >66% Source: Who Buys Long-Term Care Insurance in ? A Twenty Year Study of Buyers and Non-Buyers in the Individual Market. AHIP, March 2012

25 PREMIUM PRICE SENSITIVITY Market acceptance triples from roughly 20% to about 60% if premiums are significantly reduced (cut in half). Challenge designing low cost products that still provide value and consumer protection Some options: More cost sharing on daily benefit or duration Alternative ways to fund inflation protection Longer waiting periods Benefit amounts tiered to level of disability Lower cost products still exposes consumer to more out-ofpocket costs. Is some coverage better than none? Source: Forbes Consulting, 2013

26 WAYS TO RE-VITALIZE THE MARKET Product innovation (cost-sharing) to reduce price Regulatory changes: Lower mandated inflation protection offer Allow innovative inflation protection options (e.g., benefit bank) Allow significant cost-sharing for ALF (care costs only) Consider reduced benefit payments for loss in 2 vs 3 ADLs Allow longer elimination period and/or short coverage duration Legitimate rate relief along with enhanced consumer disclosure

27 Public Sector Role is Critical Awareness & Education Federalize regulation including rate relief Tax credits/deductions Mandated offer leverage affinity sponsors Expanded state and/or federal plan offers Medigap standardized plan model Medicaid reform home care buy-in National Partnership model/demo many forms European models: France, Israel Include LTCI with Medicare Advantage

28 CONCLUSION By all measures private market not meeting expectations Explore public sector role(s) Encourage strategies that help to minimize risks outside of the control of companies to de-risk to lower capital requirements Important to provide companies with more certainty around rate relief Public policy and regulatory approaches should be designed to help the industry re-set to attract middle market buyers: Lower cost policies (cost sharing and inflation protection) Greater product funding flexibility Support new forms of combination products

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