Summary
Although private long-term care insurers have had to increase premiums on in-place business, private LTCI remains a much better option than going bare and relying on the social safety net. My reply to a Washington Post column explains why.
Analysis
In his August 13, 2009 "Federal Diary" column in the Washington Post titled "Federal Diary: Buyers of Long-Term Care Insurance Riled by Premium Increase," Joe Davidson recounts the frustration of two Federal LTC insurance policy holders about a recent premium increase. We replied to the columnist thus . . .
Dear Mr. Davidson:
I am writing with regard to your August 13, 2009 piece in the Washington Post titled "Federal Diary: Buyers of Long-Term Care Insurance Riled by Premium Increase."
It is understandable that policy holders object when insurance premiums go up. But Mr. and Mrs. Joy's consternation with private insurers today will pale in comparison to taxpayers' agitation later when the unfunded liabilities for Medicaid, Medicare and Social Security come due. Please consider the following context.
The long-term care insurance market IS in a world of hurt. Prices (premiums) are up; sales are down; and attrition has whittled away many of the companies formerly in the business.
What's going on? Industry experts understand the fundamental problem. LTC insurers struggle to sell a product profitably that the government has given away (through Medicaid and Medicare) for forty-four years.
Despite the conventional wisdom that Medicaid eligibility requires impoverishment, the truth is that anyone with income below the cost of a nursing home ($6,000 per month on average) qualifies AND can keep unlimited assets in exempt form such as a home, business, auto, term life insurance and prepaid burial plans. On top of that, "Medicaid planners" specialize in artificially impoverishing people with even greater income and assets. Nothing significant will change for LTC insurers until that problem is fixed.
But there is much more to it than that. Technical problems beset the LTCI industry. LTCI companies overestimated lapse and interest rates. Consequently, they under-priced earlier products. All have had to raise premiums on new sales and many have raised premiums on in-place business. They had to do that and they did it responsibly just to be sure future reserves would suffice to pay rightful claims.
But here's my key point. There is a critical lesson for public policy makers in the experience of private LTC insurers.
Long-term care has a "long tail." To be able to pay benefits 20 or 30 years from now, insurers (whether private companies or government programs) must build reserves that appreciate adequately. They have to spread and price risk, collect sufficient premiums or taxes, and invest them wisely if they are to have any hope to meet the needs of their policy holders or constituents when beneficiaries need benefits decades later.
Now, here's the lesson for government policy makers. Private LTC insurers may have charged too little initially and set aside insufficient reserves to pay benefits without premium increases. They are now doing the responsible thing and fixing that problem by increasing premiums. But public insurers, such as Medicare and Medicaid, have set aside nothing in the first place!
Sure, Medicare has a trust fund, but there is nothing in it except IOU's that the federal government will have to make good in the future by pulling more taxes out of the productive economy. Medicare's infinite-horizon unfunded liability is over $89 trillion according to this year's Trustees' report. When that bill comes due as baby boomers age, watch out! The crippling economic consequences are likely to be catastrophic.
Unlike Medicare, however, Medicaid doesn't even have a phony "trust fund" to rely on. And yet, Medicaid is now and will likely remain indefinitely the primary payor of long-term care, and not just for the poor. The program is already stretching state and federal fiscal resources beyond reasonable limits even as it pays providers too little to ensure quality care in nursing homes or home and community-based settings.
Ironically, there is nothing safe about the Medicaid "safety net." By covering people who would have, could have and should have paid for their own long-term care, Medicaid has chilled the market for private insurance, locked in an "institutional bias," dragged down long-term care quality for everyone, and guaranteed a dismal future for boomers as they age toward senescence.
Please ask yourself this question: What is the government doing right about funding long-term care that the insurance industry has done wrong? I think you'll find that the answer is: Nothing!
Government has under-priced long-term care by giving away Medicaid to people who had substantial income and assets before they confronted a long-term care crisis. Government has set aside zero reserves to prepare for the gargantuan demands boomers will place on the long-term care service delivery system. Consequently, when it comes time for America's biggest generation to need long-term care, government will have no choice but to do what private insurers have been forced to do.
To wit, government will have to increase premiums, i.e. taxes, and cut benefits. And by then, it will be too late to build long-term care reserves responsibly. The inevitable result will be that boomers will have to use their home equity to pay for long-term care while their heirs lose inheritances and shrug under the weight of a vastly increased tax burden.
That's where we're headed. Thoughtful public policy makers will learn the bitter lesson of LTC insurance before it is too late, re-target Medicaid to the genuinely needy, and use the savings to encourage private insurance, so that LTC risk will be properly spread and priced, and reserves will build adequately to meet the crisis when it comes.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
