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.