March 31, 2006
LONG-TERM CARE INSURANCE
By: Helga Niesz, Principal Analyst
You asked (1) for general information on long-term care (LTC) insurance, including the different types, how many such policies are outstanding in Connecticut, who offers them and to whom, and why more have not been sold; (2) what percentage of elderly people go to nursing homes; (3) the current federal tax deduction status and other states' income tax deduction or credit for LTC insurance premiums paid; (4) what it would cost Connecticut to offer such a tax deduction; (5) what effect increasing LTC insurance in Connecticut would have on the Medicaid program; and (6) the potential effect of recent federal legislation on LTC insurance sales.
A person who is unable to perform one or more activities of daily living because of a chronic illness or an accident or who has a cognitive impairment, such as Alzheimer's disease often needs long-term care (LTC). These services can be provided in a nursing home, the person's home, or some other setting. Medicare pays only for short-term care in a nursing home or at home following hospitalization under certain circumstances. If a person needs longer-term care, he either has to pay privately or receive coverage through Medicaid by meeting income and asset limits.
LTC insurance is intended for people who want to insure their risk of needing LTC for which they would otherwise have to pay privately. The LTC insurance now offered often covers not only nursing home care, but also alternative care such as home care, adult day care, respite care, and care in assisted living facilities. More employers are beginning to offer some type of group LTC plan for employees.
The Connecticut Partnership for Long-Term Care is a public/private initiative under which the state approves special LTC insurance policies sold by private companies. The policies must meet certain state standards. People who buy them can later qualify for Medicaid and still keep assets equal to the amount the policy has paid for their care. Only Partnership-approved policies have this feature, called Medicaid asset protection.
Sales of LTC insurance have increased in recent years, but barriers include the high cost of premiums, especially for people who buy the policies when they are older; the lack of interest of younger people who could get lower premiums; and a need to better educate the public on the limits of Medicare and Medicaid LTC coverage.
Connecticut has over 98,000 active LTC insurance policies of all types in force; of these, over 32,000 are Partnership policies. So far, only 505 individuals have applied for benefits under Partnership plan. We do not have usage statistics for the other types of plans.
About 44% of people who reach age 65 will spend some time in a nursing home. Many of these stays will be short-term following a sickness or an operation. But 53% of those who enter a nursing home will be there for at least one year, and 20% will be there for five years or more. About 10% of nursing home residents are under age 65.
Federal law allows taxpayers who itemize personal income tax deductions to deduct part of their LTC insurance premiums as part of all other medical expenses, but only if this total exceeds 7.5% of adjusted gross income.
Twenty-six states have enacted some type of state income tax deduction or credit for LTC insurance premiums. The Office of Fiscal Analysis estimates (preliminarily) that enacting a full tax deduction for the premiums would costs Connecticut about $9 million annually.
We have so far found no estimates for overall LTC insurance savings for Medicaid in Connecticut. But the Office of Policy and Management (OPM) estimates that the Partnership, since it started in 1992, has saved Medicaid over $3 million. It estimates projected Medicaid savings of 6.8% per year by 2016-2020 as a result of the Connecticut Partnership; in 2005, based on current Medicaid expenditures, a 6.8% savings in 2005 would be about $140 million.
Recent federal legislation tightened the Medicaid look-back period and penalties for inappropriate transfers of assets. These changes, coupled with the expansion of authority to establish Partnership plans in all states, may become factors in motivating more people to buy such insurance.
LONG-TERM CARE (LTC) INSURANCE
In general, LTC is needed when someone (1) has a chronic illness or an accident that makes him unable to perform one or more activities of daily living or (2) has a cognitive impairment that affects his ability to think, reason, or remember, such as Alzheimer's disease. Activities of daily living are basic tasks such as eating, toilet use, bathing, dressing, and getting in and out of a bed or chair.
The Medicare program, which covers hospitalization and doctor's bills for seniors and disabled people, covers only short periods of skilled nursing home and at-home care needed due to an acute, rather than chronic, illness. The state-federal Medicaid program covers these services for as long as they are needed, but only for the very poor and people who have become impoverished by spending down their assets enough to qualify for Medicaid in a nursing home.
Many private insurance companies now sell some type of LTC insurance, which will pay for some of these services in nursing homes, at home, in assisted living facilities, or in adult day care. Premiums are often based on the person's health status and age when buying the policy. The policies can vary considerably in terms of premium cost, years of coverage (most frequently between one and three), waiting periods (often 90 days, but people can choose other periods), inflation adjustments, and covered services. Recently, more employers have begun offering group LTC insurance to their employees. Connecticut is one of a handful of states that have a Partnership for Long-Term Care program
that approves special plans with a Medicaid asset protection feature. A list of companies selling LTC insurance is available on the Connecticut Insurance Department website at: http://www.ct.gov/cid/cwp/view.asp?a=1272&q=254370.
Progress in LTC insurance sales has apparently been slow but has increased lately. The high cost of premiums, which are especially prohibitive for older people who are most likely to need the services, is one reason advanced for the relatively slow rate of sales. Rates are more affordable for younger people, but they are generally less motivated to buy the policies to cover them for an event they believe is not very likely or in the far future.
Many people appear to expect Medicare or Medicaid to cover LTC services; the general public is ill-informed about the specifics of Medicare's limited coverage for LTC or the severe levels of impoverishment required to qualify for Medicaid. Some may rely on Medicaid planners to help them qualify for Medicaid and thus may not be motivated to buy private insurance even though they could afford to.
OPM and the Department of Social Services (DSS) engage in a number of outreach efforts to educate people about LTC insurance, particularly the state-approved Connecticut Partnership plans. Recent federal tightening of the Medicaid look-back period and penalties for inappropriate transfers of assets coupled with the expansion of authority to establish Partnership plans in all states may become factors in motivating more people to buy LTC insurance in the future.
Numbers of LTC Policies. There were 98,479 long-term care insurance policies in force in Connecticut as of December 31, 2004 (this includes Partnership and non-Partnership policies), according to OPM, which collects this data annually. Of these, over 32,000 are Partnership policies. Companies must submit the 2005 data by June 30, 2006. (Nationally, some sources estimate the number of LTC policies sold has doubled from 4.9 million in 1996 to about 10 million policies today, according to 2005 testimony by the American Health Insurance Plans (an industry association) before the U.S. House Committee on Energy and Commerce Subcommittee on Health.
Premiums. The average premium paid for Partnership policies is approximately $2,100 per year, the median premium is approximately $1,800 per year. The policyholders' average age at purchase is 58. OPM does not have premium data for non-Partnership policies.
Connecticut Partnership for Long-Term Care
The Connecticut Partnership for Long-Term Care is a public/private initiative between the state and private insurance companies (CGS § 17b-252 et seq.). Its purpose is to enhance LTC insurance standards, give people a way to plan for LTC without risking impoverishment, and conserve state Medicaid funds. The Medicaid asset protection feature is an incentive for people who have or expect to have assets to protect. People with no or few assets are less likely to buy the policies.
The policies are currently offered in the state by eight insurance companies. To be approved for Medicaid asset protection under the Partnership program, an insurance policy must
1. contain a minimum daily benefit for nursing home and home care at a level set by the program, which is adjusted annually for inflation;
2. automatically increase the daily, weekly, monthly, and lifetime benefits annually by at least 5% to adjust for inflation for policyholders under age 65 (the company can offer older people an option to adjust only the first three benefits and not the lifetime benefits);
3. offer a broad array of home- and community-based services including case management, in addition to nursing home care; and
4. offer policyholders in danger of having their policies lapse shorter-term coverage as a way to lower premiums. People who buy Partnership policies are also guaranteed a 5% discount on nursing home rates in Connecticut.
For some people, the Partnership policies can actually be more affordable than other LTC insurance because, under a Partnership policy, people only need to buy insurance equal to the amount of assets they wish to protect from Medicaid, rather than enough to cover all their projected long-term care needs. The policy's Medicaid asset protection is currently valid only in Connecticut and Indiana, although the insurance benefits can be paid to people who move out-of-state.
Although all Partnership policies have the features listed above, they can otherwise vary among the insurance companies that offer them. The Partnership'sconsumer information packet includes a Policy Comparisons Report, which is available by calling 1-800-547-3443. More details on the Partnership and the policies are available at:
The OPM website lists cumulative policies purchased since the program began in 1992 as 39,747 with 31,954 in force as of September 30, 2005, and another 2,919 pending. So far, 505 individuals have applied for benefits, according to David Guttchen, director of health and human services at OPM, who also serves as director of the Partnership program.
State-sponsored Employee Connecticut Partnership Insurance
In the mid-1990s the state began offering its employees, retirees, and eligible family members a group Connecticut Partnership LTC insurance plan under the supplemental employee benefits program (CGS § 3-123g). The participant pays the entire premium. Subsequently, the state lost its vendor for the plan. Existing participants are still covered (822 employees and 239 retirees), but the plan is no longer accepting new applicants. The Comptroller's Office has recently issued a request for proposals for a new vendor to restart the program; one company responded.
PERCENTAGE OF ELDERLY PEOPLE WHO GO TO NURSING HOMES IN CONNECTICUT
Information on the OPM Partnership website states:
The cost of long-term care in Connecticut is very expensive. The statewide average cost for a semi-private room in a Connecticut nursing facility is more than $260/day and close to $96,000 per year...Nursing facility costs in Connecticut have been increasing about 4% each year for the past several years. While home care can cost less, it is only less expensive when you have family and friends available to provide the majority of care. Without this 'informal' support, home care can be as, or more, expensive than the costs for nursing facility care.
It also states:
The risk of needing long-term care is high. According to a national study conducted in 2002, 44% of persons who reach the age of 65 will spend some time in a nursing facility. Of those who enter a nursing facility, 53% will receive care for at least one year and almost one out of five will need care for five years or more. The older a person is, the greater the risk of needing nursing facility care. Based on another study conducted in Connecticut, the average nursing facility stay in Connecticut is 2 1/2 years. This means the average financial risk for nursing facility care can be approximately $240,000. Because the majority of long-term care is provided in people's homes, the financial risk for any type of long-term care is far greater.
OPM's Annual Nursing Facility Census reports that on September 30, 2005, there were 29,643 licensed nursing home beds in 247 facilities in Connecticut. Of these beds, 94% were occupied (27,840 individuals); 10% by residents under age 65. This census was a 7% decrease from 1999. During that period, the number of residents age 75 and older decreased by 11%, but the numbers of younger residents increased, by 18% for those under age 55 and 38% for those between age 55 and 64.
FEDERAL TAX DEDUCTION STATUS
Current federal tax law allows taxpayers to include part of their LTC premiums, based on their age, in their medical expense deductions (which, however, can be deducted only if their total exceeds 7.5% of the taxpayer's income). Thus, the deduction is limited to people who itemize deductions and have high medical bills or other high health insurance premiums that are deductible. Less than 5% of federal taxpayers make use of itemized medical deductions. Only LTC insurance plans with certain characteristics are eligible for the deduction.
OLR Report 2000-R-1085 (enclosed) provides more details on the federal itemized deduction. It is available at http://www.cga.ct.gov/2000/rpt/olr/htm/2000-r-1085.htm
Proposals have repeatedly surfaced in Congress to change the deduction to an “above the line” deduction, which would enable a taxpayer to subtract all or a percentage of the premiums paid from his gross income to arrive at his adjusted gross income (AGI), rather than subsuming it in the itemized medical deduction. This change would allow people who do not itemize to also benefit from such a deduction. So far, none of these proposals have passed. They are supported by the insurance industry and senior organizations.
STATES' INCOME TAX DEDUCTION OR CREDIT FOR LTC INSURANCE PREMIUMS
Twenty-six states and the District of Columbia either have an income tax deduction or a tax credit for LTC insurance premiums. They are Alabama, Arkansas, California, Colorado, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Missouri, Montana, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Utah, Virginia, West Virginia, and Wisconsin. This information comes from an American Council of Life Insurers chart, updated to August 29, 2005, which is available at:
POTENTIAL COST TO CONNECTICUT TO OFFER A TAX DEDUCTION
A preliminary, informal estimate by the Office of Fiscal Analysis (OFA) indicates that it could cost the state about $9 million annually to offer a 100% tax deduction for the cost of long-term care insurance. The estimate assumes 100,000 policies and an average premium of $1,800. OFA is still working on, and may revise, this estimate.
EFFECT OF INCREASED LTC INSURANCE ON THE MEDICAID PROGRAM
According to OPM's Annual Nursing Home Survey, Medicaid is the main source of payment for nursing homes in Connecticut (68% of the residents). Medicare covers 16%; 15% was paid out of pocket; and 1% was covered by either private medical or LTC insurance. About one-third of LTC insurance payments were by Partnership plans.
Although less than 1% of nursing home residents currently have LTC insurance, this could change in the future as people who have bought LTC policies begin to use them. (It is also important to note that not all long-term care happens in nursing homes and that many LTC policies also pay for home care or services in other settings.)
According to Guttchen, OPM has estimated Medicaid cost savings due to the Partnership (but not other LTC insurance) for the short-term and long-term. In the short-term, OPM estimates that the Partnership, since it started in 1992, has saved Medicaid over $3 million in long-term care expenses. This estimate is based on actual Partnership claim data and surveys of policy holders. The savings accrue based on the policies' usage; the more people who use their policies, the more savings Medicaid achieves. The $3 million in savings is low because there has been little claims experience so far; only 505 out of 32,000 active Partnership policyholders have applied for benefits so far, according to Guttchen. In the future, when there are more claimants, Medicaid savings will be more significant. OPM estimates that for every dollar a Partnership policy pays in benefits, Medicaid saves 13 cents.
To estimate long-term savings, the Partnership relies on simulations that were done using a Brookings Institution long-term care financing model. Below is an excerpt provided us by Guttchen for the Partnership's latest Annual Progress Report to the General Assembly that describes the potential savings estimated by this model:
Using the Brookings/ICF Long-Term Care Financing Simulation Model (a national model widely employed by a variety of users, including the U.S. Department of Health and Human Services, to assess the impact of public and private changes to our country's long-term care financing system), results show Medicaid savings of 6.8% per year by 2016-2020 as a result of the Connecticut Partnership. Based on current Medicaid expenditures, a 6.8% savings in 2005 would represent approximately $140 million.
Based on actual experience to date, Guttchen thinks it may take longer to accrue these projected future savings due to the Partnership's slow start and the fact that the average age of purchasers is younger than originally anticipated. Apparently, the Brookings Model assumes that about 30% of the elderly will have purchased long-term care insurance by the year 2020. If that level is not reached, then the savings will be less.
EFFECT OF RECENT FEDERAL LEGISLATION
Tightening Medicaid Eligibility
The recent federal Deficit Reduction Act (P.L. 109-171) tightened Medicaid eligibility and consequently may make private LTC insurance more attractive to certain people with higher assets. It (1) increased the Medicaid look-back period for asset transfers from three years to five; (2) changed the start date of penalties of Medicaid ineligibility for nursing home residents from the date they made the transfer to the date that the person would otherwise be eligible for Medicaid, thus subjecting more people to a penalty; and (3) denied Medicaid eligibility to people with more than $500,000 equity in their homes (but gave states the discretion to raise this ceiling to $750,000). Details on these Medicaid-related provisions are available in OLR Report 2006-R-0230 (enclosed).
Renewed Federal Authorization for State Partnership LTC Plans
The legislation also renewed authorization for all states, if they choose, to establish public-private partnerships like the Connecticut Partnership plans, allow Medicaid asset protection under them, and engage in reciprocal agreements with other states.
Before this new federal law passed, only Connecticut, California, Indiana, and New York were permitted to establish Partnership plans with Medicaid asset protection features. Congress allowed these plans in the early 1990's but then prohibited them elsewhere. Connecticut recently entered into a reciprocal Medicaid asset protection agreement with Indiana, which allows policyholders who move between the two states to have the protection in their new place of residence. Under prior law, the policies would pay benefits in any state, but the asset protection was allowed only in the state where they bought the policy. The federal change could encourage more states to start these programs and enter into such reciprocal agreements with other states.