Long Term Care Insurance
by Thomas Day
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Buying Insurance
Overview Of The Long Term Care Insurance Industry
Types Of Long Term Care Insurance Policies
Choosing The Right Carrier
Types Of Group Coverage
Tax Qualified Policies
Claims
Underwriting and Pricing
Long Term Care--Funding And Providers
Government Programs Only Pay for About 16% of Long-Term Care
Home Care
Long Term Care Insurance for Home Care
Understanding Long Term Care Insurance Benefits
Taxation Of Long Term Care
Designing A Group Ltc Insurance Policy

 

BUYING INSURANCE

Why Should You Buy Long-Term Care Insurance?
1. It will help you keep your independence and dignity. Here's how. . . some of you will spend all your assets on care while others plan to give their money away or put it in trust. With no assets you will now qualify for a welfare program called Medicaid. Medicaid typically pays for a semiprivate room in a nursing home, and; not all nursing homes take Medicaid patients. In many states it's not easy to get Medicaid to cover home care or pay for assisted living. Many people want to stay at home, but with Medicaid may not be able to. And assisted living is rapidly becoming a preferred alternative to nursing home care for certain disabilities but Medicaid may insist on a nursing home instead.

A nursing home is not the most desirable place to finish out one's life. For many, a terminal stay in a nursing facility robs them of a purpose in life and strips away their dignity. As an example, have you ever thought of the indignity of being bathed, toiletted or diapered in a nursing home environment? No wonder many people express the desire to die before ever having to go into a nursing home.

For some conditions a nursing home is the only alternative, but for many long-term care patients there are more options than nursing homes. A good long term-care insurance policy covers those options and when all else fails, it pays for nursing homes too.

2. If you are married and you have a need for long-term care, your spouse may be forced to pay for an outside care giver. The cost is likely to come from your combined income and assets. If the need for paid care drags on too long, your spouse may be left with minimal cash assets for future needs. Insurance solves this problem and allows your spouse to keep the assets.

3. Many healthy care-giving spouses won't spend their money and choose to "tough it out" on their own without help. If care of a disabled spouse drags on too long, this can have a devastating effect on the physical and emotion health of the caregiver. Surveys reveal that even though healthy caregivers often don't spend their money for help, they will use insurance if available. Insurance allows the healthy caregiver to buy much-needed respite from paid professionals, while at the same time, retaining the assets and possibly avoiding an early death from the mental and physical stress of caregiving.

4. If your children or extended family promise to take care of you when the time comes, insurance will help them do that. Probably you nor your children have thought of the prospects of moving you from place to place, changing your dirty diapers, cleaning up after "accidents" in the bathroom or helping you with bathing and dressing. Insurance will pay for aides to help with these tasks.

5. If you are single and a need for long-term care arises, insurance can pay for and coordinate that care. With insurance you won't have to feel you would be a burden for family or friends.

6. If you have the desire to leave assets behind when you die, insurance will help preserve those assets from the cost of long term care.

Why Not Buy This Insurance When You're Older?
1. Don't forget that 43% of those needing long term care are under age 65. You may need it now.

2. Roughly every two years insurance companies come out with new policies. Although these policies contain many new benefits and features, they are also more expensive for new people signing up than the previous policy. Estimates are, because of this rate creep, new applicants for long-term care insurance are paying about 5% more each year than applicants at the same age would be paying with older policies. At this rate of increase, ten years from now, a policy for a 50 year old would cost 50% more than an equivalent policy for a 50 year old would cost today.

3. To get long term care insurance you must answer questions relating to your health. If you wait, you may develop a condition that would prevent you from obtaining coverage.

4. The cost of coverage increases with age. For younger ages you can get a rate that is relatively inexpensive. At older ages the rate becomes very expensive.

5. It costs less, over time, buying now than buying equivalent coverage in the future. The 20 year total cost of buying now is less than the 19 year total cost of buying next year, or the 18 year cost of the next year, and so on.

Why Not Invest the Premiums Instead of Buying Insurance?
The invested amount of premiums over 20 years, may be only 5% to 12% of the potential insurance benefit. A 6 year insurance benefit may only yield ½ year of long term care if the premiums are invested instead. Besides, if you invested premiums, where would the money come from if you needed long term care next year or even 5 or 10 years from now? The saved premium account wouldn't have time to grow.

Why Waste Money on Insurance if You Have Assets to Cover the Cost Directly?
The same question could be asked of auto, home owner's or medical insurance. Why not self-insure there as well? You could just as easily pay your medical bills from your pocket. Or pay for damage to your cars and loss of your home out-of-pocket and possibly save a lot of money over time? No matter what the risk, the total cost of premiums over a long period is usually a fraction of the cost of paying a claim from your own pocket. The purpose we buy insurance is to preserve assets by leveraging premiums to buy a benefit at pennies on the dollar instead of paying dollar-for-dollar out-of-pocket for a loss. The probability of a house fire is 1 in 1200, of having a major auto accident is 1 in 240 and of needing long term care is 1 in 2 . With a much higher probability doesn't long term care insurance make as much sense as buying those other coverages?

Why Don't You Get Your Money Back if You Don't Use the Insurance?
This question always begs the underlying reason for it's being asked. In essence the person with this concern is thinking, "it won't happen to me, so it's a waste of money". To play to this objection, many carriers design policies with cash values, life insurance death benefits or return of premium at death. But these features increase premium cost and sometimes make coverage unaffordable. The same question could be asked of all insurance. Why don't we get a refund with term life, health, disability, commercial lines, auto, or homeowners insurance? People seem to take it in stride, paying $80,000 for auto insurance or $20,000 for homeowners insurance over their lifetime. Then when they make a claim, if they ever do, they get their coverage canceled or more likely their rates are increased to cover the cost of the claim. Yet, out of denial or ignorance they can't see why they should pay $40,000 over their lifetime for long-term care insurance where the probability for a claim is higher and the risk of loss is 4 to 10 times higher than the risk of loss with a car or home.

 

OVERVIEW OF THE LONG-TERM CARE INSURANCE INDUSTRY

The first long-term care policies were offered about 30 years ago. These were primarily nursing home-only policies designed to take over when Medicare rehabilitation ran out. They were not the comprehensive benefit policies we see today. It took until 1987 for the total number of policies nationwide to reach 800,000, a literal drop in the sea of traditional US health insurance policies. Since 1987, the number LTCi policies has increased annually at an average annual rate of 21%. It is estimated that at the end of 2000 there were approximately 6,000,000 LTCi policies in the US generating about $4.8 billion in annual premiums; about 80% of these policies were individual and 20% were employer sponsored group plans. (However, group premiums are only 7.9% of total premiums). Over 2,500 US employers now offer LTCi group plans.

The number of companies selling LTCi peaked in 1989 at 143 and has been declining since then. About 1/3 of these companies are Blue Cross/Blue Shield organizations selling in only a few states. Ten or so of these companies offer LTC cash benefits as riders to life insurance or annuity contracts. There are about 60 or 70 Life/Health companies licensed to sell LTCi stand-alone policies in more than 40 states, but their numbers are decreasing year to year.

There is not enough market share to support the current number of carriers. In 1998, 10 companies accounted for over 70% of yearly premiums. In 2000, G.E. Capital with 29% market share and the Conseco group of companies with 17% share, accounted for 46% of the market alone. By 2000, 10 companies owned about 84% of the market. There is a lot of consolidation going on in this industry.

Companies selling LTCi as a new product require additional capital to build distribution channels and staff administrative and claims departments. Many of these companies report , year after year underwriting losses on their long-term care business. This is not a business for small, poorly rated, or undercapitalized companies. Nor is it an endeavor for companies not committed to years of loss in order to build an eventual profitable book of business. Companies that play the middle ground and sell few policies will eventually exit the market due to high overhead and adverse selection from stagnant sales of LTCi.

In the past 5 years, 18 major companies have sold out their long term care insurance business , may sell out or are gone from the market. Transamerica was bought by Aegon and recently Transamerica and four other Aegon companies, selling long term care insurance, have pulled out of the market. The long-term care business of Time/John Alden/Fortis was acquired by John Hancock. Travelers sold it's LTCi business to GE Capital. Conseco and Bankers United are also gone. CNA put it's individual life and LTCi business on the block in 2002, but withdrew the sale because of inadequate offers. CNA now offers only group. American Travelers was bought by Conseco. Lincoln Benefit, Farmer's, IDS, TIAA/CREF and AFLAC are also gone. And finally, Penn Treaty Network America, a leading producer selling only LTCi-- but a small company asset-wise-- has run out of capital. It has no deep-pocketed parent company so may be up for sale. Probably no one has kept track of the number of smaller companies selling long term insurance that have pulled out of the market as well.

When the dust settles, if it ever does, 6 companies may represent over 80% of the market: Genworth (formerly GE Capital), Banker's Life, John Hancock and MetLife with Aetna and UNUM/Provident leading producers of group plans.

On the other hand, the future may hold an entirely different scenario. There are a number of large, well-respected and well-funded companies like Prudential, New York Life, Northwestern Mutual, Mass Mutual, Allianz and State Farm who are currently in the market and they are determined to build market share. These companies have proven in the past they can be successful latecomers to new markets. Their sheer size and financial resources make it possible to carve out significant market niches if they choose to focus those resources directly on long-term care insurance.

 

TYPES OF LONG-TERM CARE INSURANCE POLICIES

Stand-alone, comprehensive coverage policies represent the bulk of policies sold. These plans strive to cover all long-term care services and are usually purchased with monthly, quarterly, semiannual or annual premiums which are paid for the life of the insured. Abbreviated payment options are also available with policies fully paid up after 20 years, 10 years or 1 year of payments. Comprehensive stand-alone policies are very much like the typical modern group or individual health insurance policy. They try to cover as many different care alternatives as possible.

There are other ways to package long-term care insurance as well. One is as a rider to a cash value life insurance policy. The policy represents 2 separate coverages and the premium is split up to pay for both. This LTC rider should not be confused with the "accelerated death benefit" which is a popular feature of many modern life policies. Accelerated death pays part of the death benefit for terminal illness or doctor-certified, terminal, long-term care confinement while the insured is alive. Since very little long-term care could be certified as terminal, this policy feature is a poor substitute for "real" long-term care insurance.

Another way to package LTC insurance is as an "either/or" feature in life insurance. When the insured dies, a death benefit results. If the insured needs long-term care before death, stipulated benefits are paid instead of life insurance. If all benefits are paid before death, the policy expires. Any benefits not used result in a reduced pay-out at death. These policies can be purchased with periodic premiums for the life of the insured or with a single premium of $50,000 or more. These policies offer the advantage that the insured is guaranteed a benefit since everyone eventually dies. A disadvantage is that many people who purchase LTC insurance don't need life insurance, but because the policy needs to cover the mortality risk of death as well as the morbidity risk of LTC, premiums are much higher than an equivalent stand-alone LTC policy. Another disadvantage is that underwriting standards for life insurance are more strict than standards for LTC insurance. Many who qualify for LTC insurance would be denied coverage for life insurance.

A third way to package LTC insurance is to integrate it into a single premium deferred annuity. Again, this usually requires a lump sum of $50,000 or more. Part of the earnings on the annuity pay for the morbidity risk of the LTC insurance. Thus an annuity that would normally yield 6% might only yield 4% when combined with LTC insurance. One advantage of this arrangement is that LTC premiums are paid with tax deferred earnings but since they are expensed inside the policy, premiums become tax free. Another advantage is the perception that no money is lost to an LTC policy that may never be used. In fact the lump sum even grows larger. A major disadvantage is that the money is tied up. Removing money will kill the LTC coverage, yet few people have $50,000 lying around that they're willing to tie up and never use. In most cases it's better to fund a stand-alone LTC policy with earnings from a separate investment account. This leaves the account unencumbered. Pending federal legislation will also make investment income used for LTC insurance premiums tax free.

A fourth way to package LTC insurance is combined with a disability income policy. Prior to age 65, the policy can only be used for disability income. Premiums paid after age 65 provide long-term care coverage. Premiums for such a policy will be higher than a stand-alone disability policy since long-term care coverage requires a portion of every premium be set aside as reserve for future claims.

 

CHOOSING THE RIGHT CARRIER--YOUR MOST IMPORTANT DECISION

General Observations.
As I mentioned in the overview, long-term care insurance is not the cake walk many companies expected. Most carriers anticipated immediate and huge success by expanding into one of the few new market opportunities to come along in the past 20 years. But, despite an aging population and a federal government increasingly reluctant to pay for long-term care, the idea of LTC insurance has not caught on as quickly as the insurance industry had hoped. True, sales are clipping along at a yearly increase of 21%, but for insurance to really make a difference as an alternative source of funding for long-term care, at least 40% to 60% of those over age 65 should own LTCi. This would create efficiencies of scale allowing premiums to be more affordable and would create a "band wagon" effect ensuring continuing sales of insurance. The truth is, nationwide, less than 10% of individuals over age 65 own LTCi. Participation in large, employer group, voluntary-pay plans, nationally is about 6%.

But rather than despair, I believe LTCi insurance is a product whose time has come. It just may take more time. I also believe employers have a vested interest in promoting long-term care insurance. A survey from the National Family Caregivers Association, released in October, 2000, reported that 54 million Americans are involved in family care giving. Many of these are full time employees. Estimates of the cost to employers for employees involved in long-term care range from $20 billion to $50 billion per year. It makes sense economically for employers to promote the product. If you believe as I do that insurance can and will make a difference, then you as an employer can help by designing and implementing a good plan from a strong, committed carrier. Or if you already offer a plan, you can add enhancements to improve employee participation.

Company Financial Strength and Size.
Financial strength and size are very important. First of all, LTCi is generally considered a product for the aged. It is true that about 40% of long-term care recipients are younger than 65 with a large portion of these under age 35. But many of these people were born with disabilities or developed them early in life. These disabled generally did not come from the working population. And they make up a tiny fraction of traditional nursing home or assisted living residents. If these younger care recipients need facility care they are accommodated in special intermediate care facilities. Their care is almost always funded by Medicaid or SSI and rarely does the cost come from family or private funds.

Most employees buying LTCi will probably not make claims until age 78, which is the average claims age nationally. In 1999, the average purchaser of group long-term care insurance was aged 43. Thus, the average worker may not make claims for 35 years. (Don't forget that unlike all other group insurance, employees will keep their group LTCi for life. To buy a new policy at retirement age would result in new premiums 6 to 10 times higher). You can see that it is extremely important to pick a company financially strong enough and large enough to be around 35 years from now.

Small poorly rated companies selling only 2 or 3 lines of insurance, including LTCi are particularly vulnerable for the long-term. This is because few companies have more than 10 years of claims experience. With such limited experience most companies don't have definite actuarial guidelines for the premium reserving required for claims 20 to 30 years from now. If claims experience turns unfavorable, it will take a large company with deep pockets to continue to service claimants. Small, poorly rated companies will have little chance of surviving a bad claims experience.

The second reason for picking strength and size is because of the current market environment. The current market is not large enough for all the players. In 2000, 13 companies controlled about 90% of the market and these carriers continue to consolidate and grow market share by buying out discouraged carrier's business. The other 10% of the market belongs to over 100 companies. It takes a lot of money to introduce a new product, build market share and reach a critical mass of premium income that eventually starts producing profits. Only large, successful companies have the resources to stay the course and build market share. A good example of this problem is Penn Treaty Network America, a $400 million insurer, selling primarily LTCi. By insurance company standards Penn Treaty is considered small, yet in 2000 this company produced substantial new LTCi premiums. Penn Treaty is not large enough to have enough excess capital to fund it's growing sales and has relied heavily on new equity issue to fund growth. With equities gone south the company can't find additional capital. It must either find a potential buyer or go out of business. Other examples are CNA and Conseco which have been downgraded by the rating agencies due to financial problems. It is likely that part of a management fix from both companies would be a purging of unprofitable lines of business such as long-term care insurance.

Company Commitment to Long-term Care Insurance.
I think it's crucial to pick a carrier that has a long-range commitment to long-term care. Even market leaders such as CNA seem to be rethinking their participation in the market-at least with regard to non-group sales. I believe many carriers are selling the product as a defensive move-they don't want to be left out if sales really start soaring. Without a firm commitment, they won't stay with it if the going gets tough.

A good indicator of the commitment level is to observe the level of resources devoted to a company's long-term care business. For instance Allianz is serious because it dumped its third party administrator and acquired LifeUSA which has an established LTCi administration department. This was an expensive move but one that signals commitment. Northwestern Mutual is serious because it formed a separate company that only sells long-term care. These are but a few examples.

Another indicator of commitment is the amount of market share a company has. Obviously a larger market share is going to commit a company to staying with long-term care insurance because of a substantial financial obligation.

Rate Stability.
To the best of my knowledge, no insurance company is selling long-term care insurance with "non-cancellable" premiums-meaning premiums are guaranteed not to increase over the life of the policy holder. For an industry with little claims experience, to guarantee rates for insureds who may not collect for another 40 years, would be committing financial suicide. Some carriers do offer short-term, initial rate guarantees but these are limited. All policies I've seen, including the ones with limited guarantees, use "guaranteed renewable" premiums. This means, once the coverage is approved, the company cannot increase premiums for an individual policy holder for a change in age or health. The company can, however, file a rate increase for a class of policyholders or all policy holders on a specific contract form in any given state. By the way, it is illegal for any agent of a company to leave an impression with an insured that guaranteed renewable premiums will stay level forever. They might, but that possibility cannot be stated as fact.

The current intent of insurance regulators is to promote rate stability in the LTCi industry, much like the stability we see in life insurance. This is primarily to protect older policyholders on fixed incomes from losing their policies if rates go up. But even the regulators know that a lack of long-term claims experience makes it difficult to predict future claims. Still, companies have been eager to favor public confidence by keeping increases under control. Rates industry-wide have been reasonably stable over the past 10 years. We occasionally read about 70% increases causing a spate of retaliatory law suits, but this is the exception rather than the rule.

It's difficult to identify companies that may have to file for premium increases sometime in the future. Ironically, the companies with the lowest premiums may not be the ones in trouble. There are two tools to use that can give us clues to which companies have adequate premiums and which don't. The first is the "Long-term Care Experience Reports" published annually by the NAIC. The most recent edition shows actual claims loss ratios from 1992 to 2000. Companies with high loss ratios may be more likely to need future rate increases. However, for various reasons, this is not always an accurate predictor.

The second and more useful indicator is the company's underwriting philosophy. Since many group plans are not medically underwritten we can still determine underwriting from the company's approach to obtaining bid information, benefits offered and how aggressively the company tries to increase participation rates. With individually underwritten policies, a recent study by consulting actuaries Millman & Robertson Inc., reports that companies with "loose" underwriting procedures have about 3 times the claims loss ratio in the first three years than those companies with "tight" underwriting.

As a rule, underwriting philosophy combined with loss ratio is a more accurate predictor for rate increases. For policies in-force 5 to 9 years, the average loss ratio for "loose" underwriters was still about 45% higher than "tight" underwriters. It appears that underwriting will have the greatest effect on rate stability.

What Happens if Your Carrier Sells Out or Goes Out of Business?
If you pick a large well-rated carrier with a commitment to LTCi, the scenario above should not happen. However, if your coverage is sold, my experience has been that the acquiring company often respects the rate structure and a rate increase doesn't occur at least for awhile. On the other hand, if the selling company got out because it was unprofitable, then the acquiring company may find it necessary at some future date to raise the rates on the acquired policies. We see this happening for example with John Hancock raising the rates on the policies it acquired from Fortis.

In the event of an insurance company failure, insureds will not lose coverage. The insurance commissioner for the state in which the company is registered, almost always finds a buyer for the defunct company's policies. But even if no buyer is found, then the state guaranty fund still keeps coverage going. All insurance companies doing business in the state are assessed by the fund to continue coverage and pay claims for the defunct company's policies.

You might question why your initial carrier selection is so important with this amount of default protection available. The answer is, if the coverage was to blame for the defaulted company failure, then it won't benefit an acquiring company either. Chances are the new company may follow with a rate increase for existing insureds.

In the case where no buyers are found and the guaranty association gets stuck with coverage, Insureds would be in limbo. No new enrollees could sign on. With no claims department available, getting claims paid would be a nightmare and switching coverage to a new carrier would probably be impossible. Finally, many guaranty associations limit coverage, for example $300,000 total claims per claimant may be imposed.

Bottom line: pick a strong carrier.

 

TYPES OF GROUP COVERAGE--A DISCRIMINATION ISSUE
There are basically 3 types of group coverage and the issue of which is right for you revolves around discrimination.

True or Large Group Plans.
These plans are filed as group plans. There are advantages to the employer and to the carrier. For the employer, these plans are usually (but not always) guaranteed issue (no disqualifying health questions) for all full-time employees. With guaranteed issue, no employee gets discriminated against if he or she has a disabling or potential disabling condition. As a group plan, a select set of identical benefits can be offered to all employees no matter which state they live in. Other benefits other than the select set may be available but usually require medical underwriting, i.e.. health questions are asked and medical records obtained.

The advantage of true group to carriers is that company representatives do not have to be licensed agents in every state to represent the plan and enroll participants. One major disadvantage of true group plans is, at the insistence of employers, they are almost always voluntary plans-the employer does not make contributions. Nationally, participation rates on voluntary plans are less than 10%. Carriers must charge higher rates as compared with individual plans to compensate for the fixed cost of installing and maintaining the plan. Administrative costs are high because true group premium income is small compared with the total number of participants . Higher rates are also necessary to guard against adverse selection caused by low participation. (sick or disabled employees are more likely to enroll). This is confirmed by the following: The average purchase age for group coverage is 43 while the average age for individual coverage is 67. One would expect claims for individual policies to be much higher because older buyers would be expected to have poorer health. This is not the case. Industry-average loss ratios of 35.3% for group policies are about 35% higher than the 27.1% average loss ratio for individual policies. These higher group rates can be as much as double the rates for equivalent coverage with individually-purchased, medically underwritten policies. On the other hand, employer groups with a high proportion of young employees and with 20% or better participation, can often get premiums that are much cheaper than individually underwritten policies. By law, true group plans can be converted, at the same prevailing group cost, to an identical individual plan when the employee leaves the group.

Modified Guaranteed Issue, Individual Plans.
These plans are filed as individual plans in each state where the employee resides. There may be variations on the benefits depending on restrictions of specific states, but to the employer this is usually of little consequence. Representatives of the carrier must be licensed, appointed agents in each state in which an employee enrolls. The plans may be designed only for groups or they may be the same policy sold to the public and may include additional group discounts. As with true group, a select set of benefits is offered but on a modified guaranteed issue basis. Other benefits are available through medical underwriting.

Modified guaranteed issue means no medical underwriting is used but one or more disqualifying questions are asked to eliminate very sick or disabled employees. Here are some typical questions: Transamerica: "During the past 6 months, have you missed 5 or fewer days of work due to your accident, sickness or other physical or cognitive infirmity?" A "Yes" to this question requires medical underwriting and based on the findings results in acceptance or denial of coverage. Another example from Monumental Life: 1. "Have you been diagnosed with Acquired Immune Deficiency Syndrome (AIDS) or AIDS Related Complex?" 2. "Do you need assistance (mechanical or personal) or supervision of any kind to perform everyday living activities; dressing, eating, walking, bathing, transferring, toilet activities or taking medication?" 3. "In the past 3 years, have you been declined long-term care insurance?" Answering "Yes" to any of these questions results in denial of coverage. Some carriers will offer individual group with true guaranteed issue to very large employer groups, but the rates are usually closer to true group rates. In general, for groups with poor participation, rates for modified guarantee issue plans are less than true group rates. Because the policies are individual, the employee can keep the policy and rates when he or she leaves the group.

Individual Plans With Group Discounts.
These are the identical plans that are offered to the public but the premiums are discounted 5% to 15% for the group, depending on the carrier. The employee can select any of hundreds of benefit options since everything is medically underwritten. For large groups, sometimes underwriting concessions are offered. Often, employers will offer these plans as carve-out options for a select group of employees since benefits are richer and premiums for identical benefits may be as much as half the cost of true group plans. Another reason employers like these plans as carve-outs is they can be designed as 10 year paid-up policies, that are tax-free to the employer and the employee. (See other chapters for more details) Another advantage is that these carve-out plans can be offered alongside another group plan. You have to make sure you satisfy the true group provider's participation requirements if you do offer more than one plan.

 

TAX QUALIFIED POLICIES-A HOTLY DEBATED ISSUE

Congress defined tax qualified policies in the HIPAA (Health Insurance Portability & Accountability Act) legislation of 1996. The intent was to create an objective test for determining benefit eligibility. There is a great deal of debate in the industry over the merits of qualified versus non-qualified. Advocates of non-qualified argue that the government made it more difficult to qualify for benefits by defining the benefit triggers too narrowly. Most non-qualified contracts are more liberal in defining benefit eligibility. However, what is always missing from this debate is that tax qualified moved the certification of benefit eligibility from claims people at the insurance company to an impartial third party. Tax qualified requires any licensed health care practitioner to certify eligibility. Opponents of qualified assume insurance companies are going to be as impartial as a third party certification. Personally, I'm not as trusting.

The other issue with qualified is taxability. Only qualified policies sold after January 1, 1997 allow for income tax exemption on benefits received up to a certain limit. Also limited itemized deductions are allowed on qualified policies. If Congress passes long-anticipated legislation allowing above-the-line deductions for LTCi and the pass-through of premiums in a cafeteria plan, it will only pertain to qualified policies. For these reasons I think it's important that you select a carrier offering tax qualified policies. (For a more thorough discussion of tax issues, see the chapter on taxation of long-term care insurance)

 

CLAIMS

If you ask the carrier how well it pays claims, you'll get the same response: "We pay 90% or more of our claims in a timely manner." There is really no way of knowing which company is most reliable with claims except by reputation. My observation after 18 years in the insurance business is that companies with a long-standing image or reputation to maintain are best with claims. Some of these companies or their parent companies have been in business over 100 years. They didn't survive that long by not paying claims. I have observed that some of the smaller, more aggressive companies don't care that much about image and are more likely to dispute claims.

One way to avoid the claims hassle is to choose a carrier that offers "indemnity" or "cash" benefits. Let me explain. There are two ways to pay benefits under a long-term care policy--Claims-based, sometimes called expense-based, and indemnity-based. Claims-based or expense-based means that every expense must be submitted for reimbursement. Since a number of LTC related expenses (see understanding benefits section) are excluded under all policies, some claims may be denied. Also, the expense reimbursement method only pays up to expenses actually incurred-It may not pay the maximum allowable policy benefit. Under the indemnity-based method, once you qualify for benefits, you don't submit claims. The insurance company will send you or your representative a check once a month for the maximum allowable daily, weekly or monthly benefit in the policy. Some companies with built in cash or indemnity pay a lesser amount under that option than under a claims option. You can use the money to pay your costs and if any is left over, pay for items not covered under the policy, such as personal need items, diapers, medications, doctor visits, transportation, etc. Or you can stick the extra in the bank to pay future costs if the policy runs out.

With indemnity, you are more likely to receive the full benefit in the policy before you recover or die. Under both plans, you are, however, only reimbursed for the actual number of days you receive care. Both plans also require periodic proof that you're still eligible for benefits. Not all carriers offer indemnity. For those that do, it might be part of the policy provision or it might be a separate rider.

 

UNDERWRITING AND PRICING

Underwriting Individual Policies
The uniform insurance code adopted by all states requires individual policies to be fully and medically underwritten. This means an insurance company must verify, through means legally available, the applicant's medical history, lifestyle and potential for cognitive impairment prior to issuing the policy. Once this has been done the company cannot refuse to pay claims based on a condition that did not exist at the time of application. On the other hand the underwriting process also allows a company to refuse to cover someone who poses a significant risk for future claims. The underwriting process prevents the future denial of claims based on the fact that the insurance company was unaware of the risk at the time that it issued the policy. The insurance code also allows a company to defer coverage for pre-existing conditions, after issue of the policy, for a certain time period, say six months. The majority of insurance companies do not use pre-existing conditions and for the majority of companies, the policy is in effect at the time it is paid and issued .

Companies are protected from fraud by being able to deny claims if an applicant deliberately withheld information that would have affected whether the policy would have been issued or not. If an applicant in good faith did not reveal information that would not have significantly affected the issuing of a policy, then the insurance company cannot challenge any future claims after the policy has been in force two years or longer. If an applicant did not state his or her age properly, the policy benefits will be altered to reflect the amount of benefit the premium would have bought at the correct age.

Unlike life insurance companies which often rely heavily on medical exams and current health to issue a policy, long-term care companies rely heavily on medical records and the history of past medical conditions. For older ages, companies also use a phone interview or schedule a personal interview with a nurse. In the interview the company is looking for lifestyles, activities and hobbies or pursuits to indicate whether a person is already partially disabled or not. The phone interview also helps keep agents honest who for the sake of trying to get a policy issued may have deliberately downplayed or excluded information on the application that could affect whether a policy is issued or not. Finally, the insurance company is extremely interested in whether a person is struggling with short term memory problems. The phone interview is designed to uncover this and if it is suspected a person has cognitive impairment of any kind, the interviewer will conduct a cognitive impairment survey.

In the past, companies have been more liberal in issuing policies than they are today. This change of attitude has probably come from the companies misjudging the amount of current claims resulting from more liberal, past underwriting assumptions. Because of this change, if you are thinking about buying long-term care insurance and are in good health, but you are delaying buying it for whatever reason, you should not wait until your health changes because it may be too late at that point to buy it. You should buy it now.

Rate Creep
In recent years long-term care insurance companies have been following a pattern of designing new policy forms about every two years. Part of the reason for new policies superseding old ones is that companies want to offer newer and better benefits. But I also believe that the issuing of new policies is a way to cover the increasing costs of claims. Almost without exception the new policies are more expensive at the same age than the old ones were. Many companies are reluctant to raise rates on existing policyholders and a few of them are even advertising it as part of their sales process. These companies are claiming they have never raised rates on any policies some dating back as far as twenty years.

The new code-mandated application process also requires companies to disclose in writing to the applicant, whether there have been any rate increases on existing policyholders and the details of these rate increases. Because of these pressures to not raise existing rates, I believe companies can only cover increased costs by having new policyholders subsidize the policies of previous insureds. This is certainly an advantage to existing policyholders who are concerned about future rate increases, but new policyholders are paying higher rates at the same age than existing policyholders would have paid on the old policy at that same age. This is all the more reason to buy insurance now instead of delaying the purchase. The combination of higher rates at an older age as well as higher premiums due to rate creep, could make the delayed purchase of insurance a very expensive decision.

Underwriting and Pricing Group Policies
So-called large group policies, policies offered through very large employers, are not medically underwritten when people sign on during the initial enrollment period. The question is how do companies control their risk of not getting too many people who have health problems and who may cause a large number of future claims? This is done in two ways. First, there is a concerted effort to get as many employees to sign on as possible. This helps dilute the number of people who have health problems, who would naturally be attracted to the coverage, with people who are healthy. Unfortunately, large group plans are only signing up about 6% of eligible employees nationwide. This low participation rate does not significantly weed out the ratio of unhealthy to healthy applicants and so the insurance companies offering group plans must charge higher rates for benefits than they would for underwritten individual plans.

On the other hand, the participation of younger employees is encouraged by keeping their rates very low. Since younger employees are less likely to have health problems, this helps reduce the risk of future claims for the insurance company. Also the enrollment of healthy younger employees has another benefit. These people are more likely to leave their jobs for another company and will probably not take their insurance with them. This means the insurance company will never have to make a payment for claim with younger employees who leave and the insurance company has made some additional profit that it normally would not have made with older policyholders who tend to keep their coverage for life.

The second way that an insurance company controls its future costs with group policies is to limit the benefits that are available to employees. This is done by providing only three or four choices for employees and limiting the amount of home care and downplaying the availability of inflation protection. By skimping on benefits the company will have a better handle on future claims. Limited benefits also make the policies less expensive and this helps encourage more people to sign on thus increasing the participation rate.

But limited benefits pose a huge future risk for existing group policies. By not offering automatic inflation protection and limiting home care benefits, group policies will be woefully lacking 30 years from now when claims are made. Since it is not in the best interest of the insurance company to explain this problem with group policies, employees who buy group policies think that they have adequate coverage when in reality they don't.

 

LONG TERM CARE--FUNDING AND PROVIDERS

What Is Long Term Care?
When a person requires someone else to help him with his physical or emotional needs over an extended period of time, this is long-term care. This help may be required for many of the activities or needs that healthy people take for granted and may include such things as:

• Walking
• Bathing
• Using the bathroom
• Incontinence
• Pain management
• Preventing unsafe behavior
• Preventing wandering
• Providing comfort and assurance
• Physical or occupational therapy
• Attending to medical needs
• Counseling
• Feeding
• Answering the phone
• Meeting doctors' appointments
• Providing meals
• Maintaining the household
• Shopping and running errands
• Providing transportation
• Administering medications
• Managing money
• Paying bills
• Doing the laundry
• Attending to personal hygiene
• Personal grooming
• Writing letters or notes
• Making repairs to the home
• Maintaining a yard
• Removing snow

The need for long-term care help might be due to a terminal condition, disability, illness, injury or the infirmity of old age. Estimates by experts are that at least 60% of all individuals will need extended help in one or more of the areas above during their lifetime. The need for long-term care may only last for a few weeks or months or it may go on for years. It all depends on the underlying reasons for needing care.

Temporary long term care (need for care for only weeks or months)

• Rehabilitation from a hospital stay
• Recovery from illness
• Recovery from injury
• Recovery from surgery
• Terminal medical condition

Ongoing long term care (need for care for many months or years)

• Chronic medical conditions
• Chronic severe pain
• Permanent disabilities
• Dementia
• Ongoing need for help with activities of daily living
• Need for supervision

Long-term care services may be provided in any of the following settings:

• In the home of the recipient
• In the home of a family member or friend of the recipient
• At an adult day services location
• In an assisted living facility or board-and-care home
• In a hospice facility
• In a nursing home

Custodial Care versus Skilled Care
Custodial care and skilled care are terms used by the medical community and health care plans such as health insurance plans, Medicare, Medicaid and the Veterans Administration. They are used primarily to differentiate care provided by medical specialists as opposed to care provided by aides, volunteers, family or friends. The use of these terms and their application is important in determining whether a health care plan will pay for services or not. Generally, skilled services are paid for by a health care plan and custodial services, not in conjunction with skilled care, are not covered. However, custodial services are almost always a part of a skilled service plan of care and by being included, custodial services are paid by the health care plan as well. Many people have the misconception that only skilled services are covered. This is simply not true.

According to the American College of Medical Quality:

" Skilled care is the provision of services and supplies that can be given only by or under the supervision of skilled or licensed medical personnel. Skilled care is medically necessary when provided to improve the quality of health care of patients or to maintain or slow the decompensation of a patient's condition, including palliative treatment. Skilled care is prescribed for settings that have the capability to deliver such services safely and effectively.

Custodial care is the provision of services and supplies that can be given safely and reasonably by individuals who are neither skilled nor licensed medical personnel. The medical necessity and desired results of skilled care must be clearly documented by a written treatment plan approved by a physician. A patient may have skilled and custodial needs at the same time. In these circumstances, only those services and supplies provided in connection with the skilled care are to be considered as such. The treatment plan must include:

•  The applied therapies;
•  The frequency of the treatment which is consistent with the therapeutic goals;
•  The potential for a patient's restoration within a predictable period of time, if applicable;
•  The time frame in which the prescribing physician will review the case for the purpose of evaluating a patient's status and before reassessing the medical necessity of ongoing treatment; or
•  The maintenance, palliative relief, or the slowing of decompensation in a patient's status, if applicable.

Determinations of the medical necessity of skilled care must be based on the applicable standard of care."

Writers and advisers who are not part of the medical community often confuse custodial care and skilled care with specific care activities. For example help with the activities of daily living and many of the items on the list in the previous section are care activities thought to be by definition custodial care. Whereas the monitoring of vital signs, ordering medical tests, diagnosing medical problems, administering of intravenous injections, prescribing and dispensing medicine, drawing blood, giving shots, dressing wounds, providing therapy and counseling are all activities normally associated with skilled care. But many non-medical advisers and writers don't know that skilled and custodial refer to the people who deliver the care not the actual care given.

A skilled care provider can also provide services normally thought to be provided by custodial caregivers. Such things as help with activities of daily living and so-called instrumental activities of daily living are often furnished by skilled providers in the course of their treatment. Or a skilled care plan may call for services that can be delivered by a custodial caregiver but it would still be under the skilled plan of care for that individual. On the other hand people who deliver custodial services may from time to time perform those activities supposedly reserved for skilled providers. Such things as taking blood pressure, administering medicines, giving shots or changing wounds might be provided under certain circumstances by a custodial provider.

Please remember that the terms skilled and custodial do not refer to specific types of long-term care services but rather who delivers those services. Also the delivery of skilled services must be done under a written plan of care which often includes custodial care services.

Does Medicare Cover Custodial Care?
Of course it does. Medicare routinely pays for custodial care in every skilled care setting for which it provides payment. Medicare will not pay for custodial care in the absence of a skilled care plan.

Medicare covered nursing home stay
A patient receiving skilled care in a nursing home from Medicare not only receives care from skilled providers such as nurses, therapists or doctors but also receives care from custodial providers such as aides or CNA's. This care usually consists of help with bathing, dressing, ambulating , toileting, incontinence, feeding and medicating. Medicare does not exclude the custodial services but pays the entire bill because custodial care is a necessary part of the skilled care plan in a nursing home.

Medicare covered home care
Custodial care is always a part of a skilled care plan for home care. The patient receives skilled care from a nurse or therapist and custodial care from an aide for help with bathing, dressing, ambulating , toileting, incontinence, medicating and possibly feeding. Medicare pays for both types of services.

Medicare hospice care
The hospice team consists of a doctor, a nurse, a social worker, a therapist when needed, a counselor and an aide to provide custodial care. Help with activities of daily living is provided at home or in a Medicare approved hospice facility. Custodial care is always a part of a hospice plan of care and Medicare routinely pays for these services.

Please note that there is no such thing as a custodial nursing home.  All nursing homes are by definition skilled care facilities because they have nurses who are skilled care providers.  Also be aware that not all states license intermediate care facilities which might provide less than 24 hour registered nursing care. "Skilled care patients" in nursing homes are referred to as such because they are receiving payment from Medicare or sometimes payment from private health insurance plans.  Practically all nursing home residents have medical needs but Medicare and other insurance plans will only pay for patients that have certain acute medical needs where recovery is anticipated.  Patients with chronic medical problems are typically not covered by Medicare but would be covered by Medicaid.

The confusion with understanding the term "skilled nursing care" probably comes from Medicare itself. To be a certified Medicare nursing home and receive payments from Medicare a nursing home must meet the Medicare definition of a "skilled nursing facility". This means there must be registered nurses on duty 24 hours a day, there must be a doctor on call at all times and there must be ambulance service to a local hospital. Medicare may also require additional staffing and facility arrangements to receive certification. It is unfortunate that the word "skilled" is used in this definition. All nursing homes whether they meet the definition of a "skilled nursing facility" or not provide services from a nurse, doctor or therapist and this meets the medical definition of skilled care. Many states have adopted the same federal criteria for licensing their nursing homes. In some states the "skilled" definition is the only option for a nursing home. But in some states facilities with lesser services can receive different licensing classes. These might be called intermediate care facilities or "small nursing homes".

Formal Care versus Informal Care

Formal Caregivers
Formal caregivers are volunteers or paid care providers associated with a service system. Service systems might include for-profit or nonprofit nursing homes, intermediate care facilities, assisted living, home care agencies, community services, hospice, church or charity service groups, adult day care, senior centers, association services, state aging services and so on. More detail on the services, availability and costs of nursing homes, assisted living facilities and home care agencies are provided in other sections of this article.

During 1998, in the U.S. , 9.5 million patients were served by home health agencies and 576,000 by hospice care. This care was provided by approximately 13,000 agencies, nationwide. The percent distribution of disorders requiring home care were: diseases of circulatory system-25.2%, injuries and poisoning-9.9%, muscle and skeletal disease-8.8%, respiratory-8.4%, cancer-7.3%, endocrine, nutrition, metabolic, immune-5.4%, nervous system- 4.3%, others-balance of distribution. Of the patients served by hospice, about 76% had cancer or heart disease.

In 1997, there were about 17,000 skilled and intermediate term nursing homes in the US serving 1,609,000 residents. About 1,465,000, or 91% of residents, were age 65 and older. Out of those 1.5 million elderly patients in nursing homes in 1997, as a percent of the total, help was provided with 1 or more activities in the following categories: bathing or showering-96.2%, dressing-87.2%, using toilet room-56.2%, eating--45%, transferring to chair or bed-25.4%.

As of the year 2000, an estimate by NatWest Securities places the total number of assisted living beds nationwide at 1,387,836 beds with total revenue of $33.1 billion.

Some ALFs have found a niche in providing care to Alzheimer's patients and many ALFs are exclusively dedicated only to Alzheimer's residents. This disorder requires constant supervision but not necessarily from the more costly skilled medical staff found in nursing homes. And since at least 5% of those over 65 and 46% of those over 85 suffer from mental impairment, this provides a potentially large market for ALF Alzheimer's facilities

Not all residents of ALFs need care or assistance. Many are there because they want a simpler lifestyle without the worry of maintaining a home and they seek the companionship of other people their own age. They have chosen assisted living because they may need some minor help with IADLs but they anticipate a time when they may need the more intensive care available with an ALF.

As of 1996, ALF residents who were independent with ADLs (needing no assistance) were as follows: eating--88%, transferring--84%, toiletting--78%, dressing--58%, bathing--49%. A recent survey of assisted living administrators estimated that 24% of their residents received assistance with 3 or more activities of daily living, such as bathing dressing and mobility. They estimated that about one-third of residents had moderate to severe cognitive impairment.

Informal Caregivers
Informal caregivers are family, friends, neighbors or church members who provide unpaid care out of love, respect, obligation or friendship to a disabled person. These people far outnumber formal caregivers and without them, this country would have a difficult time providing funding for the caregiving needs of a growing number of disabled recipients.

Depending on the definition of caregiving, estimates of the number of informal caregivers range from 20 million to 50 million people. This could represent about 20% of the total population providing part-time or full-time care for loved ones.

The typical caregiver is a daughter, age 46, with a full-time job, providing an average of 18 hours per week to one or more of her parents.

Among adults aged 20 to 75, providing informal care to a family or friend of any age, 38% care for aging parents and 11% care for their spouse. About two-thirds of those caregivers for people over age 50 are employed full-time or part-time and two-thirds of those-about 45% of working caregivers-report having to rearrange their work schedule, decrease their hours or take an unpaid leave in order to meet their caregiving responsibilities.

A recent study estimates these people lose about $660,000 in wage wealth over their lifetime because of work sacrifices. And estimates of productivity losses to businesses because of time off for caregiving range from $11 billion to $29 billion yearly. The average amount of time informal caregivers provide assistance is 4.5 years but 20% will provide care for 5 years or longer.

Understanding the Progression of Care Commitment

The chart below illustrates the relationship of informal care to formal care. As care needs increase, both in the number of hours required and in the number or intensity of activities requiring help, there is a greater need for the services of formal caregivers. Unfortunately, many informal caregivers become so focused on their task they don't realize they are getting in over their heads and they have reached the point where some or complete formal caregiving is necessary. Or the informal caregiver may recognize the need for paid, professional help but does not have the money to pay for it.

It is the job of a care manager or a financial adviser or an attorney to recognize this need with the client caregiver and provide the necessary counsel to protect the caregiver from overload. An overloaded caregiver is likely to develop depression and/or physical ailments and could end up needing long-term care as well. Or the consequences of not being able to cope with caregiving might even result in an early death for the caregiver.

Intermittent Care
This would require the occasional attention of an informal caregiver but there may also be a medical condition that may require expertise the informal caregiver does not possess. As a general rule most people receiving this kind of care would probably be in their own home and the caregiver would be living or working close by and stop only for occasional visits.

There is, however, a growing trend where the only family caregivers may be living hundreds or thousands of miles away from their loved one. In this case, a care manager would be hired to provide the intermittent care for the loved one.

Part Time Care
This could still be furnished by an informal caregiver assuming there is no extensive medical condition requiring frequent attention. It is more likely under this scenario the care-recipient and the informal caregiver would be living together. Or with no caregiver available a decision would have to be made whether it would be in the best interest of the care-recipient to receive formal care in the home or to go to a care facility. Oftentimes a care facility can offer a better environment at a lesser cost. On the other hand, many care-recipients prefer to remain in their homes at all costs. And for long distance caregivers, hiring a care manager is still the best option.

Full-Time Care
Full-time care can often be offered by informal caregivers living with the care-recipient. But this arrangement is not always in the interest of the caregiver. Because of the demand on a caregiver's time and attention, this arrangement will often result in the caregiver suffering from severe depression, social isolation and the development of medical ailments. Again, the decision is often dictated by the lack of funds to pay for professional care. But when the need for care has progressed to a fulltime basis, advisers or family should be looking to implement formal care delivery either in the home or in a facility. As with the other care options above, a care manager could prove invaluable in selecting the setting and the care providers.

Depending on what causes the need for long-term care, a care-recipient could start out at any point on the curve below. For instance a stroke, injury or sudden illness may result in the immediate need for part time or fulltime care. On the other hand the slowly progressing infirmity of old age, the slow onset of dementia or a progressively deteriorating medical condition may only require occasional help; beginning with intermittent care from an informal caregiver but gradually progressing to the need for fulltime, formal care.

 

Understanding Who Is Receiving Care and For What Reason

The following was taken from a presentation for the congressional hearing below:

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on Health of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on long term care.  The hearing will take place on Tuesday, April 19, 2005, in the main Committee hearing room, 1100 Longworth House Office Building , beginning at 4:30 p.m.

"As our society ages, the question of how we finance long term care services will become even more pressing.  About 9 million adults currently receive long term care assistance, either in community settings or in nursing homes.  Over 80 percent of those adults reside in the community, not in institutions.  Among those 85 and older, about 55 percent require long term care assistance.  Nearly 60 percent of elderly persons receiving long term care assistance rely exclusively on unpaid caregivers, primarily children and spouses.  Only 7 percent of the elderly rely exclusively on paid services". 

The chart below indicates that as much as 22% of the population over age 65 could be receiving long-term care services. It should be noted however, that care for some of these people might only consist of a moderate amount of supervision or help that can be handled easily by an informal caregiver. But at least 7% or more of the aging population is receiving care from formal caregivers in assisted living or in a nursing home. In addition, with the current proliferation of non-medical, paid home care services, probably a high percentage of those receiving care in the home are paying for the fulltime or occasional services of a formal caregiver.

The data for the chart below were taken from an AARP research article and represent the year 1995. It should be noted that long-term care-recipients below the age of 65 are not typically part of the workforce or ever were. For the most part these are people who were born with developmental disabilities or mental retardation or developed these conditions early in life. They are healthy otherwise and may live a normal life span which could be scores and scores of years. Most long-term care-recipients over the age of 65 were healthy and functioning prior to developing a need for care. For these people the need for care seldom lasts longer than three to five years after which many will die. Since care-recipients under age 65 may live six to ten times longer than the elderly care-recipients, the younger folks tend to accumulate in numbers and skew the statistics. This often leads to misinterpretation of data describing the age populations receiving care.

If statistics were available comparing the number of people needing long-term care for the first time in any given year, the incidence rate for the elderly population would be significantly higher than that for the younger population.

It should also be noted that the younger care-recipients are typically covered by Medicaid and receive payments from SSI. They don't struggle with the same lack of funding issues as the older generation. The reason for a low percentage reporting under age eighteen is because reporting methods for long-term care don't apply to this younger age group.

 

 

The chart below reveals significant proportions of the population under age 65 may need physical or emotional help from other people. But, as has already been pointed out above, there are some in the population who have developmental disability or mental retardation and this may explain the high number of disabled under age 65. Of particular interest is the fact that close to half of the population over age 75 is disabled. Since more and more people are surviving to age 75 and beyond we can only expect an increased demand for long-term care services in coming years.

 

Source: 2005 Statistical Abstract Of The United States , Health And Nutrition

 

The chart below shows a general classification of the types of disabilities people age 65 and older are dealing with. Note that a little over four out of ten of all elderly are dealing with some form of disability. Also note the large number of elderly who are afraid to leave their homes by themselves. About one in five elderly can't leave home alone.

 

Source: 2005 Statistical Abstract Of The United States , Health And Nutrition

 

The 2 following charts were taken from a presentation for the congressional hearing cited below:

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on Health of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing on long term care.  The hearing will take place on Tuesday, April 19, 2005, in the main Committee hearing room, 1100 Longworth House Office Building , beginning at 4:30 p.m.

 

 

 

The Big Picture--How Much Does It Cost and Who Pays?

The following was taken from the same presentation from the congressional hearing cited earlier:

"In 2004, according to CBO, approximately $135 billion was spent on long term care for the elderly.  Sixty percent of this amount was financed through Medicaid and Medicare, one third through out-of-pocket payments, and the remainder by other programs and private insurance.  This funding excludes the significant resources devoted to long term care by informal caregivers (primarily spouses and children).  The CBO estimates that informal care is the largest single component of long term care".  

Estimates of the equivalent cost of informal care provided by family or friends run as high as $300 billion or more a year. If the Federal government were providing this care instead of unpaid caregivers, the combination of funds already expended and the potential costs would be the third largest single budget item exceeded only by Social Security and defense spending.

 

Source: 2005 Statistical Abstract Of The United States , Health And Nutrition

 

The chart below was taken from the same presentation from the congressional hearing cited earlier:

The chart below tracks all categories of health care costs for the elderly. There are four categories that pertain to long-term care services.

The first of these bars is titled "hospice". Hospice care is paid exclusively 100% by Medicare. This typically covers an hour or less a day for palliative care for a terminal condition. Additional hospice coverage could be covered out of pocket or by long-term care insurance.

The second category is called "home healthcare". This is the kind of care covered on a temporary basis and under prescription from a doctor and normally paid by Medicare. Of note is the fact that 15% of this care is not covered by Medicare. The other costs may be covered by the veterans administration, the national institutes of health, the bureau of Indian affairs or private insurance. This care is provided by companies called Home Health Agencies. These companies provide the skilled and custodial care as part of a plan of care prescribed by the doctor and limited to a certain period of time (money is usually provided for a 60 day period). Home care from Medicare does not cover long-term care needs beyond a few months.

The Veteran's Administration will also pay for home care for qualifying veterans on a basis similar to Medicare: however, it is probably paid more liberally without a definite cut off of services. VA home care must be approved by a medical staff at the local veteran's hospital.

In the last ten years we have seen an astounding growth of companies providing non-medical home care which is not typically covered by government programs but must be paid directly by the family. Costs are also covered if the recipient has long-term care insurance. Many home health agencies are also offering this care as a separate service. There is no plan of care unless these services are sub-contacted under a plan of care by a hospice or home health agency which is sometimes the case. In some states Medicaid will also pay for this kind of care under certain conditions. There is also no limitation on how long Medicaid services can be offered. The data for these services are not represented in the chart below.

The third category is entitled "short term institution". This is a misleading title that refers to Medicare nursing home coverage after a three day hospital stay. Note that not all of this care is covered by Medicare. This is because a short term nursing home stay may not have met the three day rule, or did not originate from a hospital or require skilled care, which are all prerequisites for Medicare to pay. The services may also have been covered by other government agencies such as the VA, the bureau of Indian affairs, private insurance or Medicaid.

The fourth category is "nursing home/long-term institution". Note the reversal of who pays the bill. In this case it is shared by the family and Medicaid. The other" category might include payments by the veterans administration and the bureau of Indian affairs or private insurance. Many of those paying out of pocket are going through a spend-down process to deplete their assets in order to qualify for Medicaid. People with too much income or assets will not qualify for these government, means tested programs and must pay for long-term care institution costs out of their own pockets.

 

 

How Reliable Are National Cost Surveys?

Nursing Home Phone Sample, Cost Surveys
We recently completed a survey of the cost of all nursing home beds in our state. We then calculated the average cost and the median cost on a weight adjusted basis of the number of beds in a given cost category. Our average cost was significantly and statistically less than a national sample survey for our state in the same year. Our median cost (the halfway point cost of all beds more costly equal to the same number of beds less costly) was significantly less than our average cost and the national survey cost.

We believe that it is not possible to do a reliable sample phone survey of nursing home costs because all nursing homes in a given state are not the same in structure and operation and marketing philosophy. Because of a lack of uniformity, all nursing homes in the state will not follow a standard statistical distribution on costs and therefore a random sample survey will not give reliable results.

We could probably use up six or seven pages describing in detail the factors that affect private-pay bed rates for nursing homes. Also the application of these factors and different state approaches on regulating nursing homes affect the private-pay bed rates from state to state. Here are some of the factors:

• State regulation allowing skilled only or also intermediate care facilities
• The degree to which a state attempts to control the supply of beds and the subsequent occupancy rate
• The number of non-certified nursing homes that cater to the wealthy and charge higher rates
• The number of specialty nursing homes that use a different private pay long term care rate structure
• State Medicaid reimbursement procedure and policy which may affect the setting of private-pay rates
• State imposed staff ratios which may vary from state to state and vary for different types of facilities
• Whether Medicare reimbursement for a particular area is covering actual costs and if that is reflected in private-pay rates
• Whether an existing home has paid its plant costs or is still amortizing those costs
• The cost of liability insurance from region to region and state to state

Assisted Living Cost Surveys
Sample phone surveys for assisted living costs are acceptable as far as they go, but they probably don't reflect the entire assisted living service market. Surveys are not reliable as a comparison from state to state because of the differences in services offered between states.

The term "assisted living" is a marketing tool that refers to a large number of different community living arrangements that also offer care. There is no uniform regulation of these services from state to state. Some states regulate on the basis of number of residents while other states regulate on the basis of services offered. Not all states use the term assisted living for these living arrangements. In the states that control services, some of those states allow very little in the type of services offered and residents in those states must go to a nursing home to receive more extended services. On the other hand, some states even allow assisted living to offer nursing home skilled services under certain conditions. Obviously the services offered will affect the cost of care and the cost of an assisted living arrangement. Also in some cases assisted living cost includes the cost of long term care services and in other cases the cost is charged in addition to room and board.

A large number of operations offering community living with care are invisible to the public. They are small operations that don't advertise and probably fail to register with their state health department. Their residents come to them via referrals from others. For purposes of classification we will call these "board and care " facilities.

These are operations using a residential home and housing residents in bedrooms in the home, sometimes shared with another person. Dining facilities, living room and bathrooms are shared. Some of these operations are employer and employee companies but the vast majority are run by the people who own the home and have taken in aged boarders to supplement their income. Long term care services are usually limited to what the owner operators can handle themselves. To augment services, a number of these operations will bring in home health agencies to help with medical conditions.

Board and care operations naturally have a lower cost of operation and will charge their residents typically much less than the apartment-based assisted living facilities included in national surveys. The surveys will not include these providers because they don't advertise, they don't list in the phone book and many have failed to license with their health department.

Home Health Agency Cost Surveys
Since 85% to 90% of home health agency cost is covered by government, such surveys are of little use to the public because the government will pay for it.

What would be very useful is if surveys were to include the cost of non-medical home health services. These costs are borne by the public and it would be useful for planning purposes to know what the cost is in a given area. Perhaps the national surveys will add this information in the future.

 

 

HOME CARE

Long Term Care For The Elderly, Supervised or Provided By Family or Others at Home (Informal Care Givers)

 

DESCRIPTION:

The supervision of care or hands-on care from informal caregivers, who are usually family and friends, is limited to activities that don't require a skilled background. Lifting , bathing, dressing, diapering, toileting and helping with walking can be a challenge to family caregivers because they don't have the proper tools or are not trained in this area. Or the children of elderly care-recipients may have difficulty dealing with cleaning messy bottoms or bathing their parents. Another problem may be handling errant behaviour from dementia. Because of this, some caregivers bring in paid providers to help with lifting, walking, bathing, incontinence, toileting, dressing and dementia supervision. Another home care arrangement is for family members, who are not living close by or who are employed fulltime, to become supervisors and coordinators of care but to offer only limited, personal, hands-on care.

Home care is almost always provided in the home of the recipient or the home of a family member or friend. Home care may under certain circumstances be offered in other settings such as group homes or independent retirement communities. Estimates are that 67% of all long term care for the elderly is provided by caregivers in the home. Below is a restatement of the activities provided by or supervised by family caregivers and listed at the beginning of this article.

• Help with walking, lifting and bathing
• Help with using the bathroom and with incontinence
• Providing pain management
• Preventing unsafe behavior and preventing wandering
• Providing comfort and assurance or arranging for professional counseling
• Feeding
• Answering the phone
• Making arrangements for therapy, meeting medical needs and doctors' appointments
• Providing meals
• Maintaining the household
• Shopping and running errands
• Providing transportation
• Administering medications
• Managing money and paying bills
• Doing the laundry
• Attending to personal hygiene and personal grooming
• Writing letters or notes
• Making repairs to the home, maintaining a yard and removing snow

Source for all charts: 1999 National Long-Term Care Survey

 

   

LENGTH-OF-STAY:

Because it is not typically covered by the government, inclusive statistics for how long home care can last are lacking. The 1999 national long-term care survey did ask how long caregivers have been offering care. We do not have the data for length of stay for particular types of conditions but reports from the survey indicate home care can last 3 to 5 years.

COST:

There is usually little ongoing cost for services with this type of care since services are mostly furnished free of charge by informal caregivers. However, there is a growing trend for out-of-state or fulltime employed caregivers to bring in paid provider services for home care. There can also be significant costs for supplies, medications, hospital equipment and home modification.

Supplies could include diapers, wipes, pads and personal hygiene supplies. These are paid typically out-of-pocket and surprisingly could cost as much as $200.00 to $400.00 a month.

Medications are currently not covered by Medicare and must be covered by the care-recipients, although Medicare prescription drug coverage is coming next year. The savings from Medicare part D may be useful to help the elderly pay for other long-term care costs. Currently drugs could be costing an older individual $300.00 to $600.00 a month. Those requiring long term care are probably taking more medications than their peers in the community who are relatively more healthy.

Hospital equipment includes such things as special air beds, walkers, wheelchairs, scooters, stools, oxygen equipment, crutches and hospital beds. Generally these costs are covered by Medicare but co-pay must be made unless the recipient has a Medicare supplement policy which should pick up the additional cost.

Home modification could include building ramps, widening doorways, installing special showers and toilets, installing lifts and handrails. These costs are borne by the care-recipient or her family.

If the family finds it necessary to bring in a homecare agency to help with lifting, bathing, walking, incontinence, toileting, dressing or supervision the cost could be anywhere from $12.00 to $25.00 an hour depending on the area of the country and whether there is a contract for extended weekly services.

WHO PAYS?

As has been mentioned, this care is typically provided free of charge by informal caregivers who are family or friends. But increasingly, Medicaid is also paying for these home services for those who are Medicaid qualified. In order to receive Medicaid home care a person must qualify for Medicaid and spend at least 90 days in a nursing home. Local area agencies on aging sometimes in conjunction with Medicaid will often pay for home repairs, transportation and snow removal for low income recipients. In addition, many low-income people can receive rent subsidies and help with utility bills from Federal and local governments. The local area agency on aging can furnish information on these programs.

Medicare will also pay for home care services on a limited basis to help a person who is homebound recover from an injury or medical condition. Medicare provides a home health agency about 60 days worth of payment to help with the recovery. If the recipient fails to respond, deteriorates or is not improving in any way Medicare will no longer cover the cost of care.

For people with low incomes, area agencies on aging provide some free help. There are volunteers who will sit with a care-recipient to give some free time to the caregiver. There is meals on wheels at no cost or very low cost. Senior centers are usually sponsored by area agencies on aging and they sometimes provide transportation for a disabled person at home. If the person requires no medical attention, the caregiver can allow her care-recipient to spend some time at a senior center and she can get some rest. About three years ago Congress appropriated some money for caregiver respite. This should be available to all caregivers regardless of income level. Area agencies also provide legal help, counseling, caregiver support groups and a whole raft of other benefits. And of course the local agency is a great resource for other senior support programs that are available in the area.

 

LONG TERM CARE INSURANCE FOR HOME CARE

For those who have the foresight to buy it, long-term care insurance will cover the cost of home care either for help with activities of daily living, with supervision for dementia and, if it is a newer policy, for help with many of the other activities listed at the beginning of this section. These activities are called "homemaker services". Most policies will pay in addition, for home modification and other necessary training and support to help a person remain in the home.

Providing informal long term care services at home is changing significantly for the American public. Traditional caregivers are now employed full time or are living away from their loved ones and cannot provide the care directly. It is becoming increasingly difficult for caregivers to provide the level of care offered in the previous century. The time for long-term care insurance to play a significant role in paying the cost of home care has come.

A recent survey by LifePlans, Inc. (see table below) indicates that people with long term care insurance will purchase services with the insurance they normally would have furnished for free themselves. This is an extremely important issue because caregivers may often have money to pay for these services but will not spend it because, as they reason, they may need the money after their loved one is gone. By not seeking help, many caregivers destroy their own emotional and physical health struggling to provide countless hours of care for a loved one.

The insurance survey specifically pinpointed the fact that with insurance to help, the stress from caregiving was substantially reduced, especially for caregivers who were employed and working outside of the home. Caregivers were given a needed rest. And unlike the tendency to avoid using personal funds, people with insurance will almost always use it and make claims to help with care.

Source: LifePlans, Inc

 

UNDERSTANDING LONG TERM CARE INSURANCE BENEFITS

General Observations
Long term care insurance is a complicated product. With over 16 different benefit options to select from and each option offering 2 to 4 choices (daily benefits may offer up to 30 choices) there are hundreds and possibly thousands of policy combinations under the same plan. This can result in hundreds or thousands of different premiums.

In an effort to keep it simple, group plans will preselect 3 or 4 different benefit combinations for employees along with a few additional riders such as shortened pay, inflation protection and non-forfeiture. This cuts the number of options to 10 or 15. It also serves another purpose. By forcing everyone to buy predefined benefits, employees who are sick or disabled are prevented from selecting very generous benefits for themselves. Since these people are more likely to make claims, the size of their claims are held in check and they cause less negative impact on the risk pool.

But restricting benefits, causes the healthy employees to miss the advantages of richer and better plans. And in many cases restricted benefits force them to buy inadequate coverage. The danger here is that employees think they're covered when they're really not. For instance, in order to make policies look like a bargain so as to increase participation rates, many carriers don't require inflation protection. Or they offer incomplete protection. They don't even stress it's importance. Employees think they're buying adequate coverage, but 35 years from now, without proper inflation protection, their insurance may not even buy the sheets on their hospital bed. (Perhaps this is an exaggeration to make my point, who knows?) In fact, as I mentioned in a previous chapter, a recent survey of people currently using insurance benefits for care, reveals they have inadequate coverage for their actual LTC needs. Another bad idea, resulting in poor future coverage, is a carrier recommending a plan that is cheap at first but allows periodic bump-ups in benefits with corresponding premium increases. I'll explain the problems with this strategy later.

This is why I usually recommend that you choose a plan that allows the selection of additional benefits. These extra options are always medically underwritten, but at least employees have the opportunity to get better coverage. Probably 90% to 95% of actively working employees will qualify for preferred rates under a medically underwritten plan. Or you may want to offer an additional individual plan some time after having met the initial participation goals with enrollment of your primary plan. If it were an individual plan, you could offer it as a supplement with no enrollment period. People could sign up at any time during the year.

One other observation. Because it's so complicated and because the wrong choice of benefits now may not have implications for 30 or 40 years, it's important you deal with an advisor who only specializes in long term care insurance. This is a recommendation often repeated in numerous public awareness articles over the past 10 years.

Receiving Benefits-Qualified and Non-qualified Policies
HIPAA (Health Insurance Portability & Accountability Act of 1996) legislation is specific for receiving benefits under a tax qualified policy. First of all it defines qualified long term care services and then defines the conditions to be met for the insurance to pay. All qualified policies contain derivations of this language:

Qualified Long Care Services
Qualified long term care services are:

1) Necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services, and 2) Required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Chronically ill individual

You are chronically ill if you have been certified by a licensed health care practitioner within the previous 12 months as one of the following:

1) You are unable for at least 90 days, to perform at least two activities of daily living without substantial assistance from another individual due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing and continence, or

2) You require substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

Non qualified policies use similar benefit triggers but usually add a third trigger: "If deemed medically necessary" Which might make qualification easier. These policies also leave out the restrictive language such as: "substantial supervision", and "for at least 90 days". On the other hand this more liberal approach is offset by the fact that the insurance company often determines eligibility with non-qualified; whereas, a third-party, impartial, licensed health care practitioner certifies eligibility under qualified policies. Cognitive impairment covers Alzheimer's, stroke, dementia and other organic nervous disorders with both policy forms.

Some policies include an IRS definition waiver that also lessens the advantage of the "medical necessity" clause of non-qualified contracts. These waivered qualified contracts allow either as a policy rider or by contract language the "substantial assistance" (which is interpreted as hands-on assistance) to be redefined as "substantial or standby assistance". Standby assistance does not require "hands-on" and may be nothing more than verbal encouragement or an assuring presence. This added