The Advisor's Guide to Long-Term Care, 2nd Edition

Stephen Forman, Jeff Sadler

• Publisher: The National Underwriter Company
• Year: 2014
• ISBN:
  9781941627044
• Topic: Business
• Subtopic: Assicurazioni
• Index: Business

We are entering a new era in which those with the means will need to rely on their own financial planning for their future security. This includes many, if not most, of your clients. The Advisor's Guide to Long-Term Care is literally guaranteed to make you better able to understand and address the long-term care insurance needs of your clients.

Part

1

Current Trends in Long-Term Care

“In preparing for battle I have always found that plans are useless, but planning is indispensable.”

—Dwight D. Eisenhower

This part of the book describes the latest trends shaping the financing of long-term care. It should be read first to provide adequate background for the planning sections that follow. All chapters are vital for assessing your clients’ personal situations and how they may be affected by the need for extended care.

Chapter

1

Long-Term Care Partnership Programs

The key question framing long-term care planning is this: If one incurs medical expenses for which there is no immediate source of financing, how are these costs paid? The ideal solution is one which creates a stream of funds exactly when needed to fund the plan of care: long-term care insurance does this beautifully. Unfortunately, most people do not prepare years in advance like they should, leaving very few choices when a long-term care event occurs. Absent insurance, most of us who one day require extended care will turn to Medicaid. Medicaid is a means-tested program for which one must demonstrate not just medical need, but also financial need. In spite of this, it has become our country’s single largest payer of long-term care expenses, accounting for 40 percent of our $357 billion bill.¹ Medicaid is the only public program that covers long-term care indefinitely.

Trouble on the Horizon

About twenty-five years ago it became obvious to those who administer the federal/state Medicaid programs that future demand for long-term care was going to become enormous as the population of the United States aged. Fear of being overwhelmed financially by long-term care needs caused the folks who run the Medicaid program to begin searching for ways to proactively address these escalating costs.

As a result, they commissioned a privately-funded study by the Robert Wood Johnson Foundation (RWJF) to analyze the problem and construct a long-term solution. The model RWJF returned was unique: states would promote the purchase of private long-term care insurance as first payor, and should the policy exhaust, then Medicaid would step in as second payor.²

The rationale was that—at the very least—Medicaid would benefit by delaying an individual’s need to access help through this public program, because the insurance policy would initially provide another source of funding. In the best-case scenario for Medicaid, the person in need of care would not have to turn to Medicaid at all; the insurance plan would be enough. Thus, the partnership between private insurers and Medicaid was born.

A Possible Remedy

The solution proposed in the RWJF report in the late 1980s was received with astonishment. Rarely—if ever—do such studies recommend private insurance as an answer to a major governmental problem.

Yet, the idea made perfect sense. The best way for Medicaid to avoid mass demand for long-term care reimbursement in the future was to give consumers a better option. In the 1980s, Medicaid generally steered people toward nursing homes—probably the least desirable long-term care option (this “nursing home bias” continues today). By covering care in all settings (including home and assisted living), private insurance presents an attractive alternative. The RWJF authors thought that private insurance would take care of most long-term care needs. The proposed partnership would return Medicaid to its intended role as the payer of last resort.

Some states thought this was a great concept. Bleeding red ink from their Medicaid programs, these pioneers decided to try to implement the partnership program. RWJF had also volunteered to finance up to eight states to see whether this program had any validity. The following six states accepted the money:

• Connecticut

• New York

• California

• Indiana

• Iowa

• Maryland

Connecticut deserves the lion’s share of the credit. It pushed the envelope on private long-term care insurance, demanding (and getting) a better policy for consumers from insurers.

To be fair, at the time many insurers were still exploring the feasibility of long-term care insurance; its viability and design were still very much up in the air when the RWJF study came out. But if you were an insurer interested in long-term care, how could you not respond to this clarion call? Although the product still needed work, the study outlined how it believed the partnership process should work:

1. The consumer buys a long-term care insurance policy from an insurer through a state’s Long-Term Care Partnership Program. Total coverage available through the plan is, for example, $250,000.

2. The consumer has a long-term care claim and incurs expenses. The policy reimburses first.

3. The insured consumer utilizes all of the benefits, $250,000.

4. The consumer now applies to Medicaid, which already permits her to keep certain “exempt” assets, such as her home, her car, and personal property). But now, she can protect an additional $250,000 worth of “countable” assets—assets of any kind, including all the liquid assets that Medicaid normally would require you to spend or give away (see Chapter 2 for more details) such as checking and savings accounts, stocks, bonds, individual retirement accounts, pensions, annuities, etc.

5. This makes it much easier to qualify for additional help with long-term care expenses—and simultaneously helps to preserve assets.

This was a win-win scenario. Medicaid benefits because the consumer relies on insurance proceeds first, thus delaying Medicaid claims for months or even years. The consumer benefits not only from being able to protect assets that would ordinarily have to be disposed of, but also by accessing high-quality long-term care in a setting of her own choice by means of insurance. This arrangement is exactly how Connecticut set up the first Long-Term Care Partnership Program, which became available to Connecticut consumers in late 1991.

This model is called the “dollar-for-dollar” model. The amount of Medicaid asset disregard is equal to the dollar amount of LTC insurance benefits paid. Note that asset disregard applies not only to countable assets at the time one applies for benefits, but a second time, during estate recovery. We will see why this is important. New York, another pioneer of this concept, constructed a different model. Concerned with the possibility that an insured might still have to spend down some of her assets to qualify for Medicaid if her dollar-for-dollar partnership plan was too skimpy to cover her entire estate, New York proposed a version called total asset protection. The virtue of a TAP plan is that the value of your countable assets are irrelevant.

Then the only question became how much insurance coverage should be required to satisfy a meaningful total asset protection criteria. Eventually New York decided on a minimum of three years of nursing home care benefits, six years of home care assistance, or six years of the two combined (this predated assisted living facilities.) The policyholder was also required to purchase and maintain a minimum daily benefit, which rises with inflation each year ($274 in 2014).³ New York introduced its Long-Term Care Partnership Program in 1992. It should be noted that since that time, the Empire State has expanded its program to include five total variations, including three TAP variations and two dollar-for-dollar versions.⁴

California and Indiana followed in 1993. California used Connecticut’s dollar-for-dollar blueprint. Indiana eventually settled on more of a hybrid concept. The Indiana Long-Term Care Insurance Program (initially a dollar-for-dollar model, then changed in 1998) drew a line in the asset sand. In its early years, that line was $140,000: if a Hoosier bought a long-term care partnership insurance policy and its total coverage was less than $140,000, the program would follow the dollar-for-dollar rules, if more than $140,000 it would follow the TAP rules. Not surprisingly, most consumers in Indiana bought enough coverage for the total asset approach. Indiana raises this minimum coverage amount each year; in 2014, the initial limit is $305,603.⁵

These four states were able to launch this exciting new public-private partnership. Iowa and Maryland were in the developmental stages when the curtain came crashing down on this project.

What happened?

Second Thoughts

Government happened, as it so often does. Earlier it was noted that the RWJF study report and its conclusion (that the best way to protect future Medicaid money from an aging population and long-term care expenses was for individuals to choose long-term care insurance) was a surprise to many. Members of Congress were among those who did not favor this result.

There are those in Congress who distrust private insurance and who certainly do not see it as operating in conjunction with a public program like Medicaid. They believe that public and private programs should remain separate, much like church and state.

In 1993, citing concerns about the appropriateness of using Medicaid funds to promote the Long-Term Care Partnership Program, Congress enacted restrictions on any further development of such state programs. Representative Henry Waxman (D-CA) added an amendment to the federal budget, the Omnibus Budget Reconciliation Act of 1993 (OBRA), which disallowed the future granting of waivers from the Health & Human Services department for the purpose of forming a Long-Term Care Partnership Program.⁶

OBRA ’93 required states to implement an estate recovery program: only twelve states reported having had one in effect prior to 1990, ...