Reduced benefit option imbalances in LTC can impact Medicaid, cause finance issues and confuse consumers, groups warn

Aug. 23, 2020 — Life and health insurers’ representatives are warning state regulars that a reduction in benefits for long term care policies, part of a strategy to keep LTC blocks solvent, could impact state Medicaid budgets, among other undesirable and unintended effects.

The insurers’ groups also are worried about the solvency or financial stability of the remaining block of LTC business. That could happen if the choices policyholders make to even cease their contracts lead to adverse selection, they warn.

The insurers’ grapple with ill effects driven by regulatory reverse-engineering of LTC rates and once-rich policy benefits to fit the actuarial risk of today, not the risk actuaries in the past formulated in error for LTC insurance. Consumer advocates argue, though, that won’t happen if RBOs stick to actuarial equivalence in the overall rate for the coverage offered.

“State Medicaid budgets could be impacted to the extent that the policyholder becomes eligible for and starts receiving benefits under their policy and continues to need care after the benefits under their LTC policy are exhausted,” stated a letter written by two Washington trade groups to insurance regulators.

Those constructing the array of reduced benefit options must look at what happens to the remaining policyholders and the rest of the company’s finances if certain policyholders drop coverage or pay new amounts in premiums as well as on the impact on the state Medicaid budgets, said the American Council of Life Insurers and American Association of Health Insurance Plans.

Their letter is up for discussion by the National Association of Insurance Commissioners’ Reduced Benefit Options Subgroup of the Long Term Care Task Force.

“To what extent could anti-selection take place, placing the financial stability of the remaining block of business at further risk?” the Aug. 3 letter asked. 

Health insurers and life insurers pick up the tab for liquidations of LTC insurers through the state guaranty funds, in some states evenly, under recent legislation intended to even the burden, and in others, statutorily health insurers still have more of the onus. Taxpayers also end up paying.

The ACLI and AHIP are also asking about the “impact on remaining policyholders and company finances, and [the] impact on Medicaid budgets if regulators are driving reduced LTCI benefits.

“State Medicaid budgets could be impacted to the extent that the policyholder becomes eligible for and starts receiving benefits under their policy and continues to need care after the benefits under their LTC policy are exhausted,” the insurance groups explained. It’s a complex question that needs further analysis, they said in the letter signed by actuary Jan M. Graeber of ACLI and Ray Nelson, a consulting actuary for AHIP. 

The more people who have LTC insurance, rather than dropping their coverage, though, will actually help Medicaid budgets, argued NAIC consumer advocate from the Center for Economic Justice, Birny Birnbaum

The insurance groups also wrestled with the possibility of actually going current policyholders fewer choices to help manage the decision-making process.

“Should regulators, in some cases, encourage a company to offer fewer options to reduce the complication in decisions policyholders will face?” the insurance groups asked. They believe “too many options [such as multiple inflation choices] can cause consumer confusion with respect to the decision-making process.”

They agreed that each company should prioritize very clear communications to policyholders and make as many appropriate choices as possible available to them. This would be addressed during the rate and form filing with the state regulators. 

In its comment letter ACLI goes on at length about the differences in LTCI products, in LTC insurer marketing strategies and in LTC policyholder motivations culminating in ACLI’s demand for LTC RBO flexibility and for policyholders to “contact the carrier to understand the range of options that are available to them.”

However, Birnbaum said the group “completely” disagrees with insurers counseling policyholders on RBO choices due to potential conflicts of interest as the two parties will weigh them differently, but due to their past performances.

“LTC insurers have a pathetic track record of demonstrating they actually understand the products they are selling,” Birnbaum stated.

Instead, the RBO should be “based on the actuarial equivalence of the overall rate of the policy, not limited to expected claims, so anti-selection would not be an issue, according to Birnbaum. “Stated differently, the expected after-tax return on invested capital should be identical for the new, higher rate and any of the RBOs,” he wrote in his Aug. 11 letter.

The letters are addressed to Jessica Altman, Pennsylvania’s insurance commissioner and chair of the subgroup. The group is set to meet Aug. 24 on the response to the NAIC’s RBO Principle document, exposed in early July. The goal is to create a framework to provide guidance for policyholders as LTC insurers with claim payouts outstripping premium increases create RBO offers for them.

Consumer advocates are expressing worries about the plan going forward, as well.

“Our primary concern for policyholders is that long standing coverage be preserved and that the options they select to reduce cost maintain reasonable amounts and duration of coverage,” stated Bonnie Burns of California Health Advocates and an NAIC consumer representative. She told Altman that most of the policyholders that come to CHA or local groups are actually “confused about the information they received and worried about losing coverage or making the wrong choice.”

In fact, Burns noted, “some considered just giving up their coverage.”

 The charge of the parent task force is to develop a consistent nation approach for LTC premium rate increases as well as other options, such has reduced or otherwise modified benefits. Some states had long complained they were subsidizing others when they allowed rate hikes for the seriously under-priced insurance while other states did not allow much, if any, of a premium increase in order to protect the policyholders fro rate shock. This has led to instability in the LTC blocks as they struggle with solvency and financial stability issues.

LTC policies were initially underwritten in a time when interest rates were higher and assumed to stay that way, mortality was lower, health care costs were much lower and the percentage of people living a long time with chronic illnesses was not anticipated. Thus, rates were much lower than they needed to be.

Insurers have been reporting that Covid-19 deaths have benefitted quarterly earnings in the near-term from higher policyholder mortality and fewer amounts of submitted claims, but some say that there is a backlog of usage and nursing home and health care aide care that will kick in once the pandemic significantly eases its grip in the U.S. 

But, if the health crisis does allow for rate decreases because of mortality trends or more efficient, cheaper treatments, “policyholders who have selected a RBO because of higher rates should also have the option of reinstating original benefit levels if rates decrease,” Birnbaum told regulators. He said he wants to have policyholders have flexibility, too, and have an upside if experience does again shift, arguing that much of the fission has been one-sided, in favor of the insurer in recent discussions.