Why is LTC A Pressing Issue?

Long-term care is an important concern for several reasons:

• The demographics of the baby boom lead to projections of a population explosion in the higher age groups. In 2000, approximately 34 million Americans, 12.6 percent of the population, were older than age 65. By 2030, that age group will have grown to over 70 million, more than 20 percent of the population. Further, the population at greatest risk of needing LTC, those 85 years old and older, is expected to grow in number from 4.3 million in 2000 to between 8.9 and 10.1 million in 2030.
• Medical advances, ironically, have helped to convert many critical short-term health problems into long-term health problems. New techniques and technology save the lives of heart attack and stroke victims, premature babies, and many other people whose diseases or injuries would have been fatal in the past. Yet, while modern medicine prevents death, it often cannot restore health. Particularly for older people, life-saving medical treatment often is the threshold to months or years of custodial care. And even without a major health "event," some people's health and strength deteriorate slowly and steadily. Those who think the need for long-term care "won't happen to me" stand on shaky ground; for example, at age 65, there is a 40 percent probability of staying in a nursing home sometime before death. More will need some type of support at home.
• Changes in family structure have made it less likely that long-term care can be provided at home by the patient's family. Few people enjoy the built-in support system of a large, local extended family to provide help with occasional nonmedical affairs, such as financial paperwork, meal preparation, or transportation, much less physical care or 24-hour supervision. And now, women, who were the traditional informal caregivers, regularly work outside the home for pay. Women who work outside the home, some 59.5 percent of women age 16 and over in 2003, cannot necessarily be counted on to care for their ailing parents, in-laws or husbands. Even if family members and friends are able to provide LTC, there are other costs to consider such as personal stress, the need to reduce or terminate employment, and out-of-pocket expenses for travel, supplies and babysitting for other dependents.
• The high charges for LTC services are surprising, if not shocking. Long-term care costs vary considerably depending on location, and are beyond the means of many Americans. (See Table 1.)

  Table 13–1: Privately Paid LTC Costs in Selected U.S. Cities, Mid-2004

  	Annual Cost of Nursing Home Confinement (semi-private rooms)	Annual Cost of Five Four-Hour Home Health Aid Visits/Week (at average hourly rate)
  Atlanta, GA	$49,275	$17,680
  Chicago, IL	$45,260	$16,640
  Dallas/Fort Worth, TX	$39,785	$16,640
  Milwaukee, WI	$63,510	$22,880
  New York City, NY	$109,865	$15,600
  Philadelphia, PA	$76,650	$18,720
  Phoenix, AZ	$51,465	$19,760
  San Francisco, CA	$74,825	$21,840
  Seattle, WA	$69,715	$21,840
  Based on daily and hourly data from the MetLife Market Survey of Nursing Home and Home Care Costs, September 2004.

• Existing medical coverage is inadequate to pay for long-term care. Government and private medical insurance programs cover nursing home care and home health care, but generally for limited time periods or as a response to an acute medical problem. Such benefits generally are capped. For example, Medicare covers up to 100 days in a skilled nursing facility per "benefit period" (effectively a service interval involving an illness or injury requiring hospitalization) and in very restricted circumstances, and Medicaid is only available to individuals below certain income thresholds and those who have "spent down their assets." Other coverages such as long-term disability insurance and pension plans are typically not structured to pay the significant out-of-pocket costs associated with purchased LTC services. Since most insurance plans provide little or no coverage for LTC expenses while traditional sources of LTC caregiving are contracting, individuals and families are exposed to a potentially huge financial risk.
• Low public awareness about the risks and costs of long-term care has been an ongoing concern for policymakers and industry experts. Unless someone's family or friends have had to address a long-term care situation, he or she is unlikely to recognize the amount of physical and emotional attention required, may underestimate actual LTC charges, and may believe that Medicare, Medigap or other insurance policies will cover the full cost of long-term care. In the past, surveys found that about half the population had the misconception that traditional insurance products would cover this care although this is now changing.
• Government help is limited. The 2002 offering by the federal government of a private, participant-paid group LTC insurance (LTCI) plan for its workforce, retirees and their families sent the message that government would not provide broad, publicly financed LTCI for all citizens. And it is unlikely that this will change in the foreseeable future because of the high cost of such programs.

Since most people cannot save enough money to cover ongoing LTC costs, private LTC insurance may serve as the only realistic option for people to pay for personal care and certain health care services if and when they are needed. More Americans are recognizing this need—from 1987 through 2001, almost 8.3 million LTC insurance policies had been sold.^[7] And at the end of 2003, over six million persons retained LTC coverage, almost one-third of whom were in group (typically employer-sponsored) plans.

ENSURING LONG-TERM COMMITMENT

The use of fixed-term service agreements used to be perceived as a benefit as well as a legally required written contract of employment. Such agreements were thought of as status symbols - signs of company commitment to its top executives. There is now concerted pressure to limit the terms of such contracts for 12 months or less; hence it is now necessary to look for other methods of ensuring directors' long-term commitment.

Share options, deferred bonuses or other long-term incentives are the three main ways in which remuneration policy can provide messages on the need for loyalty and commitment to the organization.

Their design  will reflect the different emphasis the company may wish to place on attraction, retention and motivation. Some examples are illustrated below.

Deferred Bonus Schemes

Some companies have adopted deferred bonus schemes under which part of the executive's annual bonus is deferred for, say, two years. The deferred element is converted into shares, each of which is matched with an extra, free share on condition the executive remains employed by the company at the end of the deferral period. Such a scheme is designed to reward: 1) annual (sometimes personal) performance, and 2) loyalty to the company, but does not differentiate on the basis of long-term performance (other than that reflected in the share price).

Share Option Schemes

Some companies have adopted share option schemes under which options are awarded to executives that may be exercised if long-term performance conditions are met. Typical conditions may be that the company's earnings per share (EPS) growth should exceed inflation by a set amount over three years and that the executive remains employed by the company at the exercise date. Such a scheme emphasizes: 1) share price growth (the option has no final value to the executive unless the share price increases), 2) loyalty to the company, 3) real earnings per share growth (which the executive may be able to influence by profit maximization, cost control, etc), and 4) share capital stability or reduction (eg through the buy-back of shares).

Performance Share Schemes

Some companies adopt performance share schemes under which executives are provisionally awarded shares. The release of the shares is subject to the company's performance, typically determined on a sliding scale by reference to the company's total shareholder return (a combination of share price growth and dividend yield) ranking against its chosen peer companies over a three-year period. Release is also conditional on the executive remaining employed by the company at the vesting date. Such a scheme emphasizes: 1) relative share price and dividend performance (hence even if the company's share price falls the scheme can deliver rewards to participants, provided the company's peers have done worse), 2) loyalty to the company, 3) value delivered to shareholders (in the form of share price performance and dividends), but does not link directly to business performance.

Economic Factors

Although share option schemes remain extremely common for a variety of reasons, the historically typical economic 'boombust' cycle means that they periodically fail when stock market values are low. During the last recession, Hay Group found that 70 per cent of companies in the FTSE 100 had executive options in issue that were 'deep underwater' (ie the share price was less than 80 per cent of the option price). During such times the popularity of other arrangements, such as performance share schemes, tends to grow. When the bull market returns, however, options become fashionable again as companies and their executives see the possibility of large option gains returns.

Group Long-Term Care Policies | GROUP LONG-TERM CARE INSURANCE

Most of the early group long-term care policies were designed for specific large employers, and much variation existed. For the last few years, most insurance companies have had a standard group long-term care product, which in virtually all cases is consistent with the provisions in the Long-Term Care Insurance Model Act of the National Association of Insurance Commissioners. The result is that group policies tended to be comparable to the broadest policies sold in the individual marketplace.

Effect of Health Insurance Portability and Accountability Act

The tax treatment of long-term care insurance was made more favorable by HIPAA. Because favorable tax treatment is given only if long-term care insurance policies meet prescribed standards, the nature of most long-term coverage has changed. In most cases, the imposition of federal standards results in broader coverage for consumers. However, Congress seems to have been concerned with the revenue loss associated with this tax legislation. As a result, policies that are modified to comply with the federal standards may in some cases actually provide more limited coverage than has been previously required in several states, particularly with respect to qualifying for benefits.

It should be emphasized that the long-term care changes in the act are primarily changes in the income tax code. States still have the authority to regulate long-term care insurance contracts. They have no obligations to bring state rules and regulations into conformity with these tax changes. However, all states allow "qualified" contracts so that consumers can obtain the new tax benefits.

In the individual marketplace, there are both "qualified" contracts and contracts that do not meet the new HIPAA rules—called nonqualified contracts—and there is some debate over which type of contract is better. However, in the group marketplace, most, if not all, of the contracts are qualified.

Eligibility for Favorable Tax Treatment. The act provides favorable tax treatment to a qualified long-term care insurance contract. This is defined as any insurance contract that meets all the following requirements:

• The only insurance protection provided under the contract is for qualified long-term care services.

• The contract cannot pay for expenses that are reimbursable under Medicare.

• The contract must be guaranteed renewable.

• The contract does not provide for a cash surrender value or other money that can be borrowed or paid, assigned, or pledged as collateral for a loan.

• All refunds of premiums and policyholder dividends must be applied as future reductions in premiums or to increase future benefits.

• The policy must comply with various consumer protection provisions. For the most part, these are the same provisions contained in the NAIC model act and already adopted by most states. However, the new federal act requires the issuer of any level-premium contract to offer a nonforfeiture benefit that can take the form of one of the following: paid-up insurance, extended term insurance, a shortened benefit period, or any similar benefit allowed by regulations that might be issued.

The act defines qualified long-term care services as necessary diagnostic, preventive, therapeutic, curing, treating, and rehabilitative services, as well as maintenance or personal care services that are required by a chronically ill individual and are provided by a plan of care prescribed by a licensed health care practitioner.

A chronically ill person is one who has been certified as meeting one of the following requirements:

• The person is expected to be unable to perform, without substantial assistance from another person, at least two activities of daily living (ADLs) for a period of at least 90 days due to a loss of functional capacity. The act allows six ADLs, and a qualified long-term care policy must contain at least five of the six. These ADLs are eating, bathing, dressing, transferring from bed to chair, using the toilet, and maintaining continence. (The secretary of health and human services is permitted to prescribe regulations so that a person having a level of disability similar to the level of disability of a person who cannot perform two activities of daily living would also be considered chronically ill.)

• Substantial services are required to protect the individual from threats to health and safety due to substantial cognitive impairment, even if the person can perform all other ADLs.

Federal Income Tax Provisions. A qualified long-term care insurance contract is treated as accident and health insurance. Therefore any employer contributions are deductible to the employer and do not result in any taxable income to an employee. Benefits received under a group plan are received tax free by an employee with one possible exception. Under contracts written on a per diem basis, proceeds are excludable from income up to $190 per day in 2000. (This figure is indexed annually.) Amounts in excess of $190 are also excludable to the extent that they represent actual costs for long-term care services.

Coverage cannot be offered through a cafeteria plan on a tax-favored basis. In addition, if an employee has a flexible spending account for unreimbursed medical expenses, any reimbursements for long-term care services must be included in the employee's income.

With some exceptions, expenses for long-term care services, including insurance premiums, are treated like other medical expenses. That is, self-employed persons may deduct a portion of premiums paid, and persons who itemize deductions can include the cost of long-term care services, including insurance premiums, for purposes of deducting medical expenses in excess of 7.5 percent of adjusted gross income. However, there is a cap on the amount of personally paid long-term care insurance premiums that can be claimed as medical expenses

Policy Characteristics

Eligibility for Coverage. The typical eligibility rules (that is, full-time employee, actively at work, and so on) apply to group long-term care policies. At a minimum, coverage can be purchased for an active employee and/or spouse. Many policies also provide coverage to retirees and to other family members such as children, parents, parents-in-law, and, possibly, adult children. There is a maximum age for eligibility, but it is frequently as high as age 85 and may be higher.

Cost. As previously mentioned, the cost of group long-term care coverage is almost always borne by the employee. Initial premiums are usually based on five-year age brackets and increase significantly with age. For example, one plan has an annual premium of $300 for persons aged 40 to 44 and $975 for persons aged 60 to 65. Once coverage is elected, premiums remain level and do not increase when a person enters another age bracket. Coverage is guaranteed renewable, so premiums can be increased by class.

Under some plans, premiums are payable for life. Under other plans, premiums are higher but cease at retirement age. Such a plan is analogous to a life insurance policy that is paid up at age 65. Virtually all plans contain a waiver-of-premium provision that becomes effective when a covered person starts to receive benefits.

Levels of Care. There are several types of care that group long-term care policies can provide. All group policies cover the first three items on the following list, and most policies can provide coverage for all the listed items. However, to receive coverage for some benefits, such as home health care, a covered person might have to elect the benefit and pay an increased premium.

• Skilled-nursing care, which consists of daily nursing and rehabilitative care that can be performed only by or under the supervision of skilled medical personnel and must be based on a doctor's orders.

• Intermediate care, which involves occasional nursing and rehabilitative care that must be based on a doctor's orders and can be performed only by or under the supervision of skilled medical personnel.

• Custodial care, which is primarily to handle such personal needs as walking, bathing, dressing, eating, or taking medicine and can usually be provided by someone without professional medical skills or training.

• Home health care, which is received at home, and includes part-time skilled nursing care, speech therapy, physical or occupational therapy, part-time services from home health aides, and help from homemakers or chore workers.

• Adult day care, which is received at centers specifically designed for the elderly who live at home but whose spouses or families are not available to stay home during the day. The level of care received is similar to that provided for home health care. Most adult day care centers also provide transportation to and from the center.

• Care coordination, which includes the services of a licensed health care practitioner who can access a person's condition, evaluate care options, and develop an individualized plan of care that provides the most appropriate services.

• A bed reservation benefit, which continues payments to a long-term care facility for a limited time (such as 20 days) if a patient must temporarily leave because of hospitalization. Without a continuation of payments, the bed may be rented to someone else and unavailable on the patient's release from the hospital.

• Respite care, which allows occasional full-time care at home for a person who is receiving home health care. Respite-care benefits enable family members (or other persons) who are providing much of the home care to take a needed break.

Some policies provide other types of benefits. These include, for example, the purchase or rental of needed medical equipment, emergency alert systems, and assisted-living benefits for facilities that provide care for the frail elderly who are no longer able to care for themselves but do not need the level of care provided in a nursing home.

Benefits. Benefits are usually limited to a specific dollar amount per day, with $50 to $150 being common. A few plans allow participants to select varying benefit levels (for example, $50, $75, $100, $150, or $200 per day) when coverage is initially elected. Benefits may vary by level of care, with the highest benefits being provided for skilled nursing care and the lowest level for home health care and/or adult day care if they are covered. For example, home health care benefits are often paid at one-half the level of custodial care benefits. Annual respite care benefits are usually limited to some multiple, such as 20, of the maximum daily benefit. Most states require that insurance companies offer protection against inflation, usually in the form of benefits increasing periodically based on some index such as the consumer price index. However, inflation increases are often capped at some annual maximum, such as 3 percent.

While a few group long-term care plans provide benefits for an unlimited duration, most limit benefits to a period of time, ranging from three to seven years, or to some equivalent dollar maximum. It should be noted that most persons who enter nursing homes either are discharged or die within two years. However, it is not unusual for stays to last seven years or longer. As in the case of disability income insurance, benefits are often subject to a waiting period, which may vary from 10 to 150 days with 90 days being most common.

Some policies provide for a full restoration of benefits if a covered person has recovered and not been receiving long-term care benefits for a certain period of time, often 180 days. In the absence of such a provision, maximum benefits for a subsequent claim are reduced by the amount of any benefits previously paid.

Eligibility for Benefits. Eligibility for benefits under group long-term care policies is based on meeting the requirements of a chronically ill person as previously described. With respect to ADLs, most policies specify that the covered person be unable to perform at least two out of six ADLs (without substantial assistance from another person) for at least 90 days. However, some policies use a criterion of two out of five ADLs.

There is a second criterion for eligibility, which if satisfied results in the payment of benefits even if the ADLs can be performed. This criterion is based on cognitive impairment, which can be caused by Alzheimer's disease, strokes, or other brain damage. Cognitive impairment is generally measured through tests performed by trained medical personnel.

Because eligibility for benefits often depends on subjective evaluations, most insurance companies use some form of case management. Case management may be mandatory, with the case manager determining eligibility, working with the physician and family to decide on an appropriate type of care, and periodically reassessing the case. Case management may also be voluntary, with the case manager making recommendations about the type of care needed and providing information about the sources for care.

Underwriting. If a group is large enough, coverage is provided on a guaranteed-issue basis for employees who are actively at work. Other categories of eligible persons and employees of small groups are usually subject to individual underwriting, in a manner similar to that in the marketplace for individual long-term care insurance.

Unlike medical expense insurance, a long-term care policy usually does not contain a preexisting-conditions provision. There is little need for such a provision because insurers are required in most states to underwrite at the time coverage is written and are not allowed to use post claims underwriting. If properly underwritten at that time, claims within usual preexisting-conditions periods are very unlikely to occur. In addition, waiting periods for benefits often serve a similar purpose.

Exclusions. Several exclusions are found in group long-term care policies:

• War

• Institutional care received outside the United States

• Treatment for drug or alcohol abuse

• Intentionally self-inflicted injury

• Attempted suicide

• Confinement or care for which benefits are payable under workers' compensation or similar laws

• Confinement or care for which the covered person or the covered person's estate is not required to pay

In contrast to many older individual policies, group contracts have not been written to exclude organic-based mental diseases such as Alzheimer's disease.

Renewability and Portability. Group long-term care plans are guaranteed renewable. If a participant leaves employment, the group coverage can usually be continued on a direct-payment basis, under either the group contract or an individual contract.

Sources of Long-Term Care | GROUP LONG-TERM CARE INSURANCE

There are several sources other than insurance that are available for providing long-term care. However, there are drawbacks associated with each source.

One source is to rely on personal savings. Unless a person has substantial resources, however, this approach may force an individual and his or her dependents into poverty. It may also mean that the financial objective of leaving assets to heirs will not be met.

A second source is to rely on welfare. The Medicaid program in most states will provide benefits, which usually include nursing home care, to the "medically needy." However, a person is not eligible unless he or she is either poor or has exhausted most other assets (including those of a spouse). There is also often a social stigma associated with the acceptance of welfare.

Life-care facilities are growing in popularity as a source of meeting long-term care needs. With a life-care facility, residents pay an "entrance fee" that allows them to occupy a dwelling unit but usually does not give them actual ownership rights. The entrance fee may or may not be refundable if the resident leaves the facility voluntarily or dies. As a general rule, the greater the refund is, the higher the entrance fee will be. Residents pay a monthly fee that includes meals, some housecleaning services, and varying degrees of health care. If a person needs long-term care, he or she must give up the independent living unit and move to the assisted-living or nursing home portion of the facility, but the monthly fee normally remains the same. The disadvantages of this option are that the cost of a life-care facility is beyond the reach of many persons, and a resident must be in reasonably good health and able to live independently at the time the facility is entered. Therefore the decision to use a life-care facility must be made in advance of the need for long-term care. Once such care is needed or is imminent, this approach is no longer viable.

A few insurers now include long-term care benefits in some cash-value life insurance policies. Essentially, an insured can begin to use this accelerated benefit while still living. For example, if the insured is in a nursing home, he or she might receive a benefit equal to 25 percent or 50 percent of the policy face. However, any benefit reduces the future death benefit payable to heirs.

The Need for Long-Term Care | GROUP LONG-TERM CARE INSURANCE

The Need for Long-Term Care

The need for long-term care arises from the following factors:

• An aging population

• Increasing costs

• The inability of families to provide full care

• The inadequacy of insurance protection

An Aging Population

Long-term care has traditionally been thought of as a problem primarily for the older population. The population aged 65 or over is the fastest-growing age group; today, it represents about 11 percent of the population, a figure that is expected to increase to between 20 percent and 25 percent over the next 50 years. The segment of the population aged 85 and over is growing at an even faster rate. While less than 10 percent of the "over 65" group is over age 85 today, this percentage is expected to double over the next two generations.

An aging society presents changing problems. Those who needed long-term care in the past were most likely to have suffered from strokes or other acute diseases. With longer life spans, a larger portion of the elderly will be incapacitated by chronic conditions such as Alzheimer's disease, arthritis, osteoporosis, and lung and heart disease—conditions that often require continuing assistance with day-to-day needs. The likelihood that a nursing home will be needed increases dramatically with age. One percent of persons between the ages of 65 and 74 reside in nursing homes, and the percentage increases to 6 percent between the ages of 75 and 84. At age 85 and over, the figure rises to approximately 25 percent.

It should be noted that the elderly are not the only group of persons who need long-term care. Many younger persons are unable to care for themselves because of handicaps resulting from birth defects, mental conditions, illnesses, or accidents.

Increasing Costs

More than $50 billion is spent each year on nursing home care. This cost is increasing faster than inflation because of the growing demand for nursing home beds and the shortage of skilled medical personnel. The cost of complete long-term care for an individual can also be astronomical, with annual nursing home costs of $30,000 to $50,000 and more not unusual.

The Inability of Families To Provide Full Care

Traditionally, long-term care has been provided by family members, often at considerable personal sacrifice and great personal stress. However, it is becoming more difficult for families to provide long-term care for the following reasons:

• The geographic dispersion of family members

• Increased participation in the paid work force by women and children

• Fewer children in the family

• More childless families

• Higher divorce rates

• The inability of family members to provide care because they themselves are growing old

The Inadequacy of Insurance Protection

Private medical expense insurance policies (both group and individual) almost always have an exclusion for convalescent, custodial, or rest care. Some policies, particularly group policies, do provide coverage for extended-care facilities and for home health care. In both cases, the purpose is to provide care in a manner that is cheaper than care in a hospital. However, coverage is provided only if a person also needs medical care; benefits are not provided if a person is merely "old" and needs someone to care for him or her.

Medicare is also inadequate because it does not cover custodial care unless this care is needed along with the medical or rehabilitative treatment provided in skilled nursing facilities or under home health care benefits.