Emerging demographics, new legislation, and budget shortfalls have converged to create unprecedented long-term care insurance opportunities for both U.S. insurers and consumers.

Sidebar: What’s Up on Capitol Hill?

By Jennifer C. Rankin

In America, old is in. Newstands are crowded with covers such as Aging With Style. The country’s president is a Baby Boomer. Diane Keaton is back. Unfortunately, for every senior model, well-to-do politician, and movie star, there are millions of Americans who have not saved nearly enough to fund their retirement, let alone pay for help when they are unable to do things for themselves any longer. An increasingly popular solution is long-term care insurance (LTCi).

Long-term care is an extraordinarily complex subject. There are tax implications and suitability issues. The products themselves are some of the most complicated in the industry. Missteps on the part of the consumer can have catastrophic results; those on the part of the carrier can destroy its image and bottom line. A plethora of care providers is involved. Associated government programs are dealing with budget shortfalls and consumer misuse.

Just what do we mean by long-term care? Loosely speaking, it is a term used to describe the care that individuals who are not able to perform the activities of daily living require. This includes people with degenerative conditions, prolonged illness, or cognitive disorders and those who are recovering from serious accidents or illness—not just the elderly. Long-term care can take place in your own home, a nursing home, or in an assisted living facility.

Funding sources include personal savings, Medicare, Medicaid and private insurance (see Who Will Pay? below). In aggregate, Medicare/Medicaid pays 60 percent of long-term care expenses, consumers pay 36 percent out-of-pocket, and private LTCi covers four percent, according to the American Council of Life Insurers (ACLI).

As you can see, LTCi covers only a tiny portion of the country’s long-term care expenses. That’s about to change. The federal government is making it increasingly clear that it wants private insurance to play a much larger role. "This began with the recommendation of the Pepper Commission in 1992 and continued with the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the long-term care insurance program launched in 2003 for federal employees and their families," reports Thomas Day, CLU, CEA, founder of LTC Link and a long-term care advocate.

There are several bills now pending in Congress that would allow full deduction of premiums and the pass-through of premiums in cafeteria plans (see What’s Up on Capitol Hill? below). Both HIPAA and these bills focus primarily on federal tax breaks for LTCi. HIPAA also closes loopholes that allowed Americans to abuse Medicaid benefits—loopholes that the 1993 Omnibus Budget Reconciliation Act (OBRA) also addressed. In addition, many states offer tax incentives for LTCi.

Despite the small role it currently plays in the long-term care arena, LTCi is not a new phenomenon. In fact, the first policies were offered a quarter century ago. They were primarily nursing home-only policies designed to kick in when Medicare rehabilitation ran out, and in no way resemble the comprehensive products we have today.

"It took until 1987 for the total number of policies nationwide to reach 800,000," reports Day, "a literal drop in the sea of traditional U.S. health insurance policies. Since 1987, the number of LTCi policies has increased annually at an average annual rate of 21 percent. It is estimated that at the end of 2000 there were approximately six million LTCi policies in the U.S. generating about US$ 4.8 billion in annual premiums. About 80 percent of these policies were individual and 20 percent were employer-sponsored group plans. However, group premiums are only 7.9 percent of total premiums. More than 2,500 U.S. employers offered LTCi group plans."

According to Day, the number of companies selling LTCi peaked in 1989 at 143 and has declined slowly to about 100. About one-third of these companies are Blue Cross/Blue Shield organizations selling in only a few states. A handful offer LTC cash benefits as riders to life insurance or annuity contracts. Some 60 to 70 life/health companies licensed to sell LTCi standalone policies in more than 40 states. In 1998, 10 companies accounted for more than 70 percent of yearly premiums. In 2000, two companies accounted for close to half of the market—GE Capital, with a 29 percent market share, and Conseco, with a 17 percent share—and 10 companies owned about 84 percent of the market.

That was then, this is now. According to LIMRA International, there were 5.3 million LTCi policies (3.8 million individual and 1.5 million group) and and US$ 6.9 billion of premiums in force at the end of 2002. And industry analysts peg the amount of annual claims paid that year at more than US$ 1 billion.

Who’s in the game? For starters, the government. The Federal Government Long-Term Care Program, which is jointly marketed and underwritten by John Hancock and MetLife, is available to more than 20 million possible enrollees, including active government employees, retirees, spouses, parents and other family members. During the initial enrollment period in the first quarter of 2003, the program enrolled 265,000 individuals.

According to Long Term Care America, 88 percent of individual LTCI policies were written by 10 companies in 2002 (see Some LTCi Players).

The sector has experienced—and will continue to experience—a significant level of consolidation. In the past few years:

• Aegon acquired Transamerica, which has LTCi business.

• John Hancock acquired Fortis Inc.’s individual LTCi business, then Manulife Financial acquired John Hancock.

• GE Capital acquired LTC insurer AMEX Life and the LTCi portfolio of Citigroup’s Travelers Life and Annuity. Then, in November 2003, GE announced it would spin off its life and mortgage insurance operation in an initial public offering (IPO) of a new company dubbed Genworth Financial, which it hopes to complete mid-year.

• CNA placed its individual life and LTCi business up for sale, then retracted the offer because of inadequate offers. It just entered into a binding agreement to sell its block of life insurance to SwissRe in a transaction expected to close before the end of March. While CNA will retain its individual LTC book of business, the insurer will no longer take new applications for individual LTCi policies. The move does not affect group LTCi operations.

• Conseco bought American Travelers and Bankers Life and Casualty, then filed for bankruptcy in 2001. New York state allowed the company to raise premiums more than 40 percent so it could continue to service its LTCi policies.
  
• AIG, AFLAC, Gerber, Principal Life and John Alden discontinued LTCi coverage.

• UnumProvident, created by a 1999 merger of three of the largest disability income (DI) companies, announced a premium rate hike on inforce LTCi policies in February 2003, then backed off. While other carriers have gotten state insurance department approvals to raise premiums on in-force policies, UnumProvident was in the midst of defending itself against several class action lawsuits for alleged DI claims-handling practices.

When the dust settles, a handful of companies may control the market. Some relative newcomers are rapidly gaining ground. "There are a number of large, well-respected and well-funded companies," writes Day, "such as MetLife, Prudential, New York Life, Northwestern Mutual, Allianz, State Farm, Hartford, and TIAA-CREF, who are currently in the market and they are determined to build market share. These companies have proven in the past that 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."

Long-term care insurance is a complicated product. There are dozens of benefit options and each option offers many choices. Consequently, a single plan may offer an astonishing array of policy combinations. Group plan providers, such as employers, typically preselect three or four benefit combinations plus a few additional riders, which substantially shrinks the number of choices. Carve-out group plans, which are offered separately from company-wide plans, offer substantial benefits and tax advantages to both the employer and the executives to whom they are offered.

From the consumer’s perspective, the choices can be overwhelming. For starters, a prospective buyer must choose between a tax-qualified or non-qualified policy. Then he must select:

• A daily benefit amount for facilities care
• A daily benefit amount for home care, adult day care or hospice
• A benefit period (how long benefits should last)
• An inflation protection option (or no protection)
• An elimination period (the amount of time he will pay for services before the insurance starts paying)
• Stated period benefits (policy pays for a specified period of years) or pool of money benefits (policy pays a specific dollar amount) or two-pool benefits (don’t ask)
• Claims/expense-based benefits (every expense must be submitted for reimbursement) or indemnity benefits (insurer sends you a check for the maximum allowable daily, weekly or monthly benefit in the policy)

Some insurers offer discounts for good health or if the family buys more than one policy. There are surviving spouse, shared benefit and extended family coverage options; various pay period options; non-forfeiture benefits; out-of-country coverage; death benefits; waiver of premium options. These choices are just the tip of the iceberg.

More and more insurers are adding cost containment provisions to their products. These provisions include tightening qualification for coverage, establishing managed care arrangements with care providers, and requiring care coordination.

According to LIMRA International, agents and brokers sell more than 95 percent of individual policies. Employer-sponsored group sales represent two-thirds of group plans sold. Emerging channels include banks, financial planners, and CPAs.

Many LTCi carriers are targeting pre-retirees, who typically are fiftysomething. If they have children, they are close to writing their last college tuition check. If their parents are still alive, they are highly attuned to the medical expenses associated with aging—and even may be paying some of those expenses. They also may be panicked about their own financial future. Americans are notorious for not saving money. Many pre-retirees are beginning to realize they haven’t put away nearly enough for retirement and that a serious medical problem would wipe out what little they’ve put aside. They also realize that putting off an LTCi purchase could result in substantially higher coverage costs and the possibility of becoming uninsurable.

Events have converged to create what many analysts believe to be the perfect climate for LTCi providers. Among these are:

• Attractive demographics
• Budget woes
• Government program deficits
• Consumer need
• Escalating cost of care
• Low penetration
• Employer concerns
• Possible tax relief

Let’s start with demographics. The growing population of the elderly in America—especially those over the age of 85—and the concomitant increase in chronic conditions has caused a rising demand for LTC services. According to LTC Info, there now are 31 million Americans who are older than 65 years of age, three million of whom are older than 85. By 2020, the U.S. population over the age of 65 is projected to grow to 55 million, while the population over the age of 85 is projected to increase fourfold to more than 13 million. In aggregate, 42 percent of all individuals over the age of 65 will enter a nursing home in their lifetime. More than one-third of those age 85 and older will require long-term care.

In addition, the country’s Baby Boom generation will reach retirement age during the next decade. There are 76 million of them and they represent more than US$4 trillion in assets, which is about 61 percent of today’s entire mutual fund market. The Boomers are beginning to shift their focus from asset accumulation to asset management. As more of them realize they will need to turn their assets into an income stream on which they can live in retirement, they will consider income products such as annuities and dividend-paying stocks. To protect that income stream, they will consider long-term care insurance.

Another factor sure to enhance the appeal of LTCi is tight government budgets. The federal budget has flipped from a triple-digit surplus to a triple-digit deficit. State governments are scrambling to cover their expenses. Medicaid, which accounts for 20 percent of state budgets and seven percent of the federal budget, is a large part of the problem. The federal budget deficit makes new social insurance financially impossible, even if the government was interested in paying for long-term care, which it is not.

In addition, existing government programs are in financial trouble. Medicaid is running a big deficit. In fact, 36 states faced Medicaid budget shortfalls in 2002 and 41 states faced them in 2003. Long-term care expenditures consume a quarter to a half of most states’ Medicaid budgets and the federal government pays close to 60 percent of all Medicaid costs. State guarantee funds, the place of last resort for insureds whose carriers go out of business, are deeply concerned about who’s going to foot the bill if long-term care costs spiral out of control.

There also is a growing realization that LTCi is a viable product that meets a real need. Configured properly for the appropriate consumer, LTCI enables an individual to keep his independence and dignity through home care or assisted living, to spare family members from the stress of handling care themselves or the expense of paying for a care giver, to preserve assets for a spouse or heirs, and more. Plus Medicaid primarily covers nursing home care—an alternative many seniors consider a last resort.

The escalating cost of care also is driving interest in LTCi. Long-term care is expensive. Average nursing home costs range from US$ 40,000 to 80,000 per year, according to Americans for Long Term Care Security. Healthcare costs have been growing at twice the rate of the consumer price index and attempts to control those costs have failed. Analysts expect the cost of long-term care to grow five percent annually, from 2003, doubling by 2018, and doubling again by 2033.

In addition, there are lots of prospects for LTCi. Although product sales are increasing every year, less than 10 percent of individuals over age 65 own an LTCi policy. Participation in group voluntary-pay plans offered by employers is about six percent.

Employers are beginning to show a real interest in LTCi, primarily because they see the toll that providing long-term care to a relative takes on the employee, which often translates into days off and decreased productivity. According to a recent National Family Caregivers Association survey, 54 million Americans, many of full-time employees, are involved in family care giving. And U.S. businesses now lose an estimated US$ 20 to 30 billion every year due to the lost productivity of employees who provide care to family members.

Finally, the Bush administration has included tax incentives for long-term care in its proposed 2005 budget that include an above-the-line deduction for LTCi premiums and an additional personal exemption to home caregivers of family members with long-term illnesses. These incentives would greatly improve the appeal of LTCi products.

Despite these ideal business conditions, LTCi providers face several challenges, among them:

• High entry costs
• Shifting terrain
• No real preferential tax treatment
• Competition from tax-friendly financial products
• Underwriting concerns
• Reinsurance
• Mixed press reviews
• Creative consumer accounting
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Analysts stress that LTCi is not a sector for the faint-hearted. Many players report underwriting losses on their long-term care business year after year, so it requires deep pockets and patience. "Companies that play the middle ground and sell few policies," writes Day, "will eventually exit the market due to high overhead and adverse selection from stagnant sales of LTCi."

In addition, every day seems to bring an announcement of an LTCi provider bankruptcy, investigation, merger or acquisition. Analysts expect sector consolidation to continue, resulting in a few large, financially strong players.

In many ways, President Bush has favored financial vehicles other than insurance during his tenure. For starters, he broadened the appeal of non-insurance products by reducing the tax on capital gains to 15 percent. He also wants to replace exsisting tax-favored accounts — such as IRAs, education savings accounts and 401(k)s — with lifetime savings accounts, retirement savings accounts and employer retirement savings accounts. Consequently, the insurance industry has welcomed the tax-friendly treatment of LTCi in his 2005 budget. Still, the budget and aforementioned bills have not been passed, which curbs LTCi appeal.

Another challenge is tough economic conditions. Poor investment results coupled with low interest rates have squeezed profits. Care costs are escalating. The stock market is improving, but still has a long way to go. While battling these conditions, LTCi providers also are being hit with lower-than-expected lapse rates and higher-than-expected claims rates. In response, "LTCi providers are reevaluating [product] potential and profitability," writes Alfred C. Clapp, Jr., president, Financial Strategies & Services Corporation, in his September 2003 analysis for the CPA Journal. "[They are] offering better coverage, tightening underwriting, and increasing premium prices."

Analysts expect reinsurers to impose rate hikes and more stringent requirements on LTCi issuers, which could impair future improvement in LTCi product design.

Consumer editors are quick to point out the potential downside of LTCi products. They are not cheap and there are no guarantees that premiums will not go up just when the policyowner can least afford it. They also point out that the ability to pay claims, as graded by the rating agencies, does not signal the intent to pay claims. Most of these editors tell their readers that choosing the right carrier is their single most important decision.

More and more well-heeled Americans are finding creative ways to qualify for Medicaid. In the March 2003 issue of Health Care News, Stephen A. Moses, president, Center for Long-Term Care Financing, writes, "Medicaid is a means-tested public assistance program. It is welfare. People who need acute, emergency, or preventive health care must be dirt poor to qualify for Medicaid.For anyone who needs nursing home care, however, the eligibility rules are very different and highly generous. Despite the conventional wisdom that people must be poor to qualify for Medicaid nursing home benefits, income only disqualifies the top tier of seniors. In 30 medically-needy states, people qualify if they cannot afford private nursing home care, which averages about US$ 5,000 a month. In the remaining income-cap states, most people with monthly income in excess of the ostensible US$1,656 limit can set up Miller income trusts and qualify immediately. Married couples are allowed to keep up to an additional US$ 2,267 per month in income for the healthy spouse at home, while the ill spouse receives nursing home care paid for by Medicaid."Moses also points out that, for most people, assets don’t interfere with Medicaid nursing home eligibility. While Medicaid recipients are allowed only US$ 2,000 in non-exempt assets, they also may retain a home and all contiguous property of unlimited value; a business, including the capital and cash flow of unlimited value; one car of unlimited value if used for the recipient’s benefit; a burial trust fund of unlimited value; practically unlimited home furnishings; and many other exempt assets.In addition, there are Medicaid planning attorneys who use sophisticated legal techniques to shelter or divest the wealth of their clients. These include special trusts, annuities, self-canceling installment notes, life care contracts, and more."The truth is," writes Moses, "no one has to be poor to receive nursing home care paid for by Medicaid. All anyone needs is a cash flow problem."

This problem is debated hotly whenever the U.S. economy is in recession. During the last recession, for instance, Congress and President Clinton closed some eligibility loopholes, mandated estate recoveries, made it a crime to transfer assets to qualify for Medicaid, and replaced the criminalization of Medicaid asset transfers with the criminalization of Medicaid planning advice. According to Moses, "None of these measures succeeded. States didn’t enforce tougher eligibility rules or Medicaid estate recovery, nor did the federal government compel them to do so. Criminalization of asset transfers was repealed and criminalization of Medicaid planning advice was deemed unconstitutional." The bottom line? The more seniors can tap Medicaid money, the less incentive they have to purchase an LTCi policy.

Rather than railing against the media, savvy insurers are positioning themselves to win in a challenging climate. They are:

• Building teams of highly-skilled LTCi professionals
• Making a long-range commitment to long-term care
• Emphasizing rate stability
• Signaling their commitment to paying claims
• Investing in a highly-trained sales force
• Educating consumers

Long-term care insurance has unique actuarial, product design, underwriting and sales requirements. Serious insurers are putting much time and effort into examining the business risks from all angles and pricing responsibly.

The policyowner knows he may not make a claim for 25 years and he’s expecting his insurer to be there. "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", says Day. " 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. Aegon is serious because every company it acquires is soon selling long-term care insurance. Northwestern Mutual is serious because it formed a separate company that only sells long-term care. These are but a few examples."

Generally speaking, the LTCi industry has limited claims experience, which makes it very difficult to guarantee rates for insureds who may not make a claim for decades. Most offer a guaranteed-renewable-premium option, which means the company cannot increase an individual’s premiums for age or health reasons. Savvy consumers know, however, that their insurer can file a rate increase for a class of policyowners—or all policyowners—on a specific contract form in any given state. Carriers who intend to make significant inroads into the LTCi sector are strengthening their underwriting philosophies, keeping rate increases under control, and communicating their commitment to rate control. Despite the occasional, albeit well-publicized, rate hike, industry-wide rates have been reasonably stable during the past decade.

The most frustrating part of purchasing LTCi for the consumer is getting a straight answer about a company’s claims experience. Financial editors are cautioning consumers that a rating agency’s assessment of an insurer’s ability to pay claims is not the same thing as an insurer’s intent to pay claims. "If you ask the carrier how well it pays claims," writes Day, "you’ll get the same response: We pay 90 percent 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."

Because LTCi is complicated and the wrong choice of benefits now may not have implications for decades, many consumer editors are advising readers to deal with sales people who specialize only in long-term care insurance.

Forward-thinking insurers are bolstering their marketing programs with comprehensive consumer education programs. Good examples are New York Life’s Education Center, GE’s Center for Financial Learning, and MetLife’s Life Advice, all of which are Web-based, exceptionally helpful, and truthful about the pros and cons of LTCi.

As you can see, long-term care insurance is poised to take off. America is graying, legislators are determined to secure tax relief, and the government is unable to foot the bill. And some of the nation’s most respected companies have entered the sector. Resource will keep you posted as events unfold.

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So what’s it like to be in the LTCi game? For insight into market place challenges and opportunities, Resource turned to Kenneth Grubb, senior vice president of New York Life’s long-term care operations. An industry veteran with 30 years of experience—a dozen of them in the long-term care industry—he chairs the Health Insurance Association of America (HIAA) LTC Committee and testifies in Congress about LTC products and their consumer benefits.

Resource: How is the typical LTCi product structured? Do you see any emerging product design trends?

Grubb: Most products cover services across the spectrum—home health care, facility care, and assisted living care. This means many forms of service delivery are covered: care in your home, care in assisted living facilities, adult day care, informal care by someone not living in your home, and care delivered in a skilled care facility such as a traditional nursing home. Early long-term care products were bought as nursing home coverage only. The new, more comprehensive policies are almost "nursing home avoidance". Today consumers are purchasing long-term care insurance to ensure they can stay at home for as long as possible and maintain their independence. Some developing trends include benefits that mitigate the high cost of purchasing inflation protection and plan designs that encourage home care. Some carriers offer alternate means of funding the policies. An example is a 10-pay policy, where one pays much higher premiums for 10 years. At the end of the 10 years, the policy is paid up.

Companies are introducing policies offering more basic benefits; i.e., a "compact car" plan versus one with "luxury car" features. Both have value, but the "compact" is less expensive. Another method of accomplishing the same end is to have a solid "base" plan that can be enhanced by adding optional riders such as benefits that might appeal to married couples.

Customers are increasingly focused on how inflation will impact their ability to pay premiums. New York Life’s LTCSelect Premier product offers a particularly innovative feature, the CPI-U option, an inflation protection rider pegged to the urban consumer price index. This patent-pending feature has flexibility and helps us to provide policyholders with the right amount of coverage at the right price when they need services.

Resource: What distribution channels are the major players using to sell LTCi? Do you see any emerging distribution trends?

Grubb: The most common distribution model for LTCi is through traditional broker/agents who specialize in long-term care or make it a large part of their business. Second to this would be sales through a national network of career agents, the New York Life model.

In terms of emerging trends, banks and other financial services companies are showing interest in selling LTCi. An example would be the trend for agents and brokers to sell within wire-houses. Direct marketers are slowly entering the LTCi market, but the product thus far has been resistant to that sales methodology. More LTCi policies are being sold through employers, stockbrokers now have an interest in LTCi and financial planners and accountants are becoming aware of the importance of including LTCi in their clients’ plans.

Resource: The consumer press has given LTCi mixed reviews, warning prospective buyers about future premium rate hikes and other issues. What advice do you have for those who are in the market or wish to enter it?

Grubb: LTCi is a core product of New York Life. As such, we assembled a team of long-term care insurance professionals highly skilled in LTCi actuarial issues, product design, underwriting and sales to avoid making financial or pricing decisions that put our rate stability at risk. We price responsibly and have carefully examined the business risks, such as morbidity, lapse rates and investment income assumptions. Carriers need to have a good grasp of what’s happening in this marketplace. It is essential to use realistic pricing and to balance risk. Companies should make decisions on a sound actuarial basis, and not become enamored by near-term loss ratios. Companies have to manage how they’re doing compared to how they expected to do at that point in time. They need to have very low loss ratios early on to support high loss ratios anticipated in the later durations (i.e., you expect few claims in the early years but many more as the policies mature over time). Of equal importance is the skill set of the carrier’s underwriters. To protect the risk pool for both the carrier and the policyholders (the consumer wants stable rates), it is critical to select people from the application pool who need long-term care insurance, not people who already need long-term care services or are likely to very near term.

When consumers are considering purchasing long-term care insurance, they should ask questions: How long has the carrier been in the insurance business? How long have they been in the LTCi business? What are the company’s ratings? Has the company ever filed for a rate increase on its in-force policies? It is also important for consumers to learn whether long-term care insurance is a core product in the company’s business plan. The consumer should be comfortable that the company has the proper skills to manage the risk and is in the business for the long run as their need for benefits is likely to be many years in the future.

Resource: What’s happening on the legislative front? What are LTCi writers lobbying for these days?

Grubb: Tax treatment is a hot issue. There are some situations where LTCi premiums are tax deductible if the policy is tax-qualified under HIPAA. Some business owners may deduct LTCi premiums and there is some relief to individuals who have met the medical deduction limit filing their individual returns. Also, recent legislation allows, with limitations, long-term care insurance to be purchased with pre-tax dollars through health savings accounts (HSAs). Some states offer deductibility of all or part of LTCi premiums from state income tax, but the federal government has not yet enacted legislation. The industry is strongly lobbying for tax relief for those who purchase long-term care insurance.

Resource: Are there any international opportunities for LTCi players, especially leading multinationals such as New York Life?

Grubb: Long-term care insurance is a new product and there are still tremendous growth opportunities in the United States. While some countries are exploring it, America is furthest along in the long-term care market.

Resource: Is there anything else you’d like to tell our readers, who are executives in the life/health industry?

Grubb: The long-term care marketplace is a great one to be in and—when properly managed— offers strong growth opportunities. It is not only a viable product from a sales and profitability perspective, but it is also an important societal issue. Long-term care insurance makes a tremendous impact on people’s lives. Market awareness is improving as consumers are becoming more conscious of the need for LTCi and how the product can work for them. We are pleased with where we are in the market. Our strategic decision to offer valuable products, underwrite them carefully, and price them properly is serving us well as we grow our presence in the LTCi market.

At press time, President Bush’s proposed 2005 budget includes tax incentives for long-term care, including an above-the-line deduction for LTCi premiums and additional personal exemption to home caregivers of family members with long-term illnesses.

Also in the hopper are various proposals for federal legislation:

HR 2096: Introduced by Reps. Nancy Johnson (R-Conn.) and Earl Pomeroy (D-N.D.) in May 2003, HR 2096 provides for an above-the-line tax deduction, caregiver tax credit, greater consumer protections and the ability to purchase long-term-care insurance through a section 125 or cafeteria plan. The bill also simplifies the phase-in and has a portability feature. Under the bill, taxpayers could deduct 25 percent of LTCi premiums from 2003 through 2005, 35 percent in 2006, 65 percent in 2007, and 100 percent in 2008 and after.

S 1335: Sponsored and introduced by Sens. Charles Grassley (R-Iowa) and Bob Graham (D-Fla.) in June 2003, S 1335 is the Senate companion bill to HR 2096.

HR 1406: A bill that permits more states to enter into long-term care partnerships. The Omnibus Budget Reconciliation Act of 1993 (OBRA) prohibits the development of long-term care partnership programs beyond the four states (Conn., N.Y., Ind. and Calif.) where such programs already exist. President Bush has included LTC partnerships in the FY04 budget request; however, the current prohibition must first be lifted. H.R. 1406 does just that. LTC partnership programs allow people owning state-approved LTCi policies to qualify for Medicaid without "spending down" their life savings. There are two partnership models: dollar-for-dollar protection and total asset protection. In both cases, Medicaid becomes the payer only after the partnership policy benefits are exhausted.

HR 4946: A tax deduction to help middle income people defray the cost of insurance for LTC has won passage in the House on a 362-61 vote. HR 4946 would permit the deduction for a taxpayer, a taxpayer's spouse or a dependent and it would apply whether or not the taxpayer itemizes tax deductions. The new deduction would be limited to individuals earning between US$ 20, 000 and 40, 000 in adjusted gross income and between US$ 40, 000 and 80, 000 for married couples filing jointly. In addition, the taxpayer would have to pay at least half of the insurance premiums. HR 4946 would also permit an additional personal tax exemption, worth US$ 3,000 in 2002, for members of a taxpayer’s family who function as long-term caregivers and expands the types of expenses drug manufacturers can claim as a tax credit in testing drugs for certain rare diseases.

HR 1: Congress has included a provision in H.R. 1, the Medicare Prescription Drug, Improvement and Modernization Act of 2003, that will let holders of the new Health Savings Accounts use tax-deductible contributions to pay for qualified long-term care insurance and long-term care services.

S 538: Introduced by Sen. Hilary Rodham Clinton (D-N.Y.) and passed by the Senate in April 2003, S 538 calls for the establishment of a program to assist family caregivers in accessing affordable and high quality respite care.

HIPAA: Over the years, numerous bills have been introduced to clarify the tax treatment of LTCi and long-term care expenses in the tax code. The substance of these proposals was included in the Health Insurance Portability and Accountability Act (HIPAA), which was signed into law in August 1996. HIPAA amended the tax code to treat private long-term care policies and long-term care expenses the way health insurance policies and health care expenses are currently treated under the code, effective January 1, 1997. These changes have several different dimensions. Amounts received under a "qualified" long-term care insurance plan are considered medical expenses and are excluded from gross income. Contributions of an employer to the cost of qualified long-term care insurance premiums are excluded from the gross income of the employee. Out-of-pocket long term care expenses are allowed as itemized deductions to the extent they and other unreimbursed medical expenses exceed 7.5 percent of adjusted gross income. Self-employed individuals are allowed to include premium costs of long term care insurance in determining their allowable above the line deduction for health insurance expenses. HIPAA enhanced private sector financing of long term care by authorizing these tax incentives for individuals and employers to purchase long term care insurance. HIPAA also criminalized certain Medicaid asset transfers executed for the purpose of qualifying for public assistance. Long term care insurance policies that were purchased before January 1, 1997 were grand fathered in and are considered tax-qualified for federal purposes. They will remain tax-qualified if there are no material changes made to them.

Prior to 1997, Medicare payments were very helpful in allowing long-term care recipients to stay at home and avoid institutions. But, Medicare was never intended to pay for chronic, long-term home care. A 1989 lawsuit asserting rights of homebound recipients as well as a lack of Medicare oversight allowed the system to get out of hand. Home health payments by Medicare increased an astounding 25 percent a year between 1990 and 1997, about four times the health care inflation rate. In 1996, Congress passed the Balanced Budget Act (BBA) and the Health Insurance Portability and Accountability Act (HIPAA), both of which restricted Medicare home health and reasserted the intent of only covering acute-care recovering patients was reasserted. In November 1997, under BBA, Medicare adopted an interim payment system based on a projected 1999 implementation of a Prospective Payment System for home care. PPS greatly restricted eligibility and reimbursements for homebound patients. Medicare home health benefits went from a high of US$ 18.3 billion in 1997 to US$ 9.5 billion in 1999, a drop almost in half.

OBRA: The Omnibus Budget Reconciliation Act of 1993, President Clinton's first budget, provided much of what is needed by closing many of the loopholes that made Medicaid eligibility so attractive. It also required every Medicaid program in the country to recover benefits paid from the estates of deceased recipients. OBRA '93 did two things: codified 1986 legislation on the prohibition of certain types of trusts and expanded the rights of states to go after funds in a decedent recipient's estate. OBRA '93 effected a strikingly new approach to Medicaid eligibility, and in so doing, effectively curtailed many of the techniques previously employed by lawyers and their astute clients.

In addition, many U.S. states offer tax incentives for long-term care insurance, including various deductions and credits. These are too numerous and nuanced to describe here.

The National Association of Insurance Commissioners (NAIC) has developed LTCi model regulations that address in-force premium price increases, affordability and suitability, but these are recommendations without sanctions for violators.

In the past decade, insurers have developed a dizzying array of LTCi products. Individual policies include:

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.

The policy represents two separate coverages and the premium is split up to pay for both

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 payout at death.

Usually requires a lump sum of US$ 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.

Prior to age 65, the policy can only be used for disability income. Premiums paid after age 65 provide long-term care coverage.

Among the group LTCi products are:

Filed as group plans, true group plans offer advantages to the employer and to the carrier. Employers are able to offer these plans to all full-time employees on a guaranteed issue basis—that is, with no disqualifying health questions—regardless of the state in which they live. 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. Disadvantages include low participation rates and high administration costs, which often means the plans are more expensive than individual plans. 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.

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, which means no medical underwriting is used but one or more disqualifying questions are asked to eliminate very sick or disabled employees. Other benefits are available through medical underwriting. Because the policies are individual, the employee can keep the policy and rates when he or she leaves the group.

These are identical to plans offered to the public, but the premiums are discounted five to 15 percent for the group. The employee can select any of hundreds of benefit options since everything is medically underwritten. For large groups, underwriting concessions may be 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. Another advantage is that these carve-out plans can be offered alongside another group plan, as long as the true group provider’s participation requirements are met.

At the moment, most long-term care is handled gratis by family members, who tap into health insurance policies, Medicare and Medicaid to pay for health-related expenses. Here’s a look at what’s available to those requiring long-term care.

Wealthy individuals have the option to use their own assets to cover the cost of long-term care. Some financial planners believe this is a sound approach, while others believe their clients should preserve their assets by paying premiums to buy a benefit at pennies on the dollar instead of paying dollar-for-dollar for a benefit.

A government health insurance plan for all eligible individuals age 65 and older, Medicare will pay for some services, such as doctor’s services, outpatient hospital treatment and some in-home care. It also will cover some, but not all, care in a skilled nursing facility. Medicare applicants must meet many coverage qualifications. And, in 1996, the Balanced Budget Act as well as HIPAA tightened access to Medicare.

A welfare program jointly funded by the federal government and the states and largely administered by the states, Medicaid paid for 46.3 percent of the US$ 88 billion received by all US nursing homes in 1998. Geared toward covering eligible patients in semi-private rooms in nursing homes, the courts are putting pressure on the States to consider more Medicaid funding for home care and assisted living. To qualify for Medicaid a person must spend-down his liquid assets to US$ 2,000.

Insurance is a fast growing source of funding for long term care. From virtually nothing 10 years ago, insurance paid five percent of nursing home receipts in 1998. This percentage is increasing about 20 percent a year.