Long Term Care Insurance as an Employee Benefit

Most of the press on CLASS Act hails the program for solving a problem that has devastated millions of American families. And there are some important benefits, but you almost forget that people will need to actually pay premiums themselves that are projected to be $180-$240 per month. By statute, CLASS Act will be funded exclusively by participant premiums. And those premiums must be set to ensure the program is actuarially sound for 75 years.

1. Adverse selection
   I discussed adverse selection on my previous post as causing more unhealthy people to participate in greater numbers than those of healthy people. I think it’s pretty clear why that would cause premiums to be higher than private insurance carriers who require medical underwriting to control cost. With no underwriting, CLASS is a good thing for the sick people who cannot get less expensive private coverage making CLASS a high risk pool for people uninsurable in the private market.
   
2. Subsidized premiums
   Under CLASS premiums are only $5 per month for students and poor Americans. Noble intention, but subsidizing premiums for a segment of society creates an entitlement for a segment that is paid for by everyone else. The amount of the subsidy is the difference between $5 and aged based premiums projected to be $180-$240 per month. Do you think this could make premiums higher?
3. Limits on premium increases
   CLASS Act boxes the government in a corner with regard to complying with its own regulations and it will require premiums to be higher. Any person who attains age 65, or who has paid in for 20 years and is not working, cannot have their premiums increased. This is good if your premium can’t be increased and not so good if an increase is needed and it must be spread over a smaller number of participants.
4. Limitation of money that can be spent on marketing and administration
   CLASS specifies that 97% of all premium collected must be used to pay benefits. On the surface this sounds like a good thing. Let’s eliminate corporate excess and let the government deliver more bang for the buck. Hmmm. How has the government done with its Social Security and its own budget?

According to the American Society of Actuaries, reviewing claims alone often costs private insurers more than this – and administrative cost of enrollment, premium collection, marketing and education, the last of which is very important if CLASS is to gain widespread participation to avoid adverse selection. Even with extensive educational efforts, private long-term care insurance companies have sold only about 8% of the market to date.

If you are an employer wanting to learn more about how Long Term Care differentiates your benefits or a broker looking to help your clients with Long Term Care, reach out and contact Doug Ross at 800-483-1115 or visit EMpowerLTCI.com.

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The primary concern about CLASS Act stems from “adverse selection”. This is a term used by organizations constrained by fundamental rules of business that require financial responsibility. Private insurance companies, for example build products with underwriting to control the cost of their products so they are affordable.

Adverse selection refers to a structural bias that causes a disproportionate number of people to participate who are more prone to need benefits in the future. Adverse selection violates the basic insurance principle of spreading risk over an entire population and will cause claims paid to exceed premiums collected.

Consider the following aspects of CLASS that have caused actuaries to use the term “death spiral” when describing the CLASS Act.

Employees will receive coverage without medical underwriting on a guaranteed issue basis. This concession may also be extended to non-working spouses. Every person who is uninsurable for private coverage will be motivated to participate in CLASS.

Participation is voluntary. Employees can opt-out initially, and opt back in at a later time. Why would a young healthy person participate when they can opt-in at any time?

Premiums are to be set by the Department of Health and Human Services to ensure financial viability for a 75 year period. A nominal benefit of $50-75/day is projected to cost $180-$240/month. With premiums this high participation has been estimated to be as low as 2% of the eligible population.

What is the “death spiral”?

CLASS Act is to be funded exclusively by premiums paid by participants. Participation in the program will be conversely proportionate to the size premiums of the premium. More expensive premiums will depress participation while lower premiums have the opposite effect. The death spiral is that setting premiums high enough to keep the program financially solvent will reduce participation which in turn will also affect the solvency of the program. And the problem is exacerbated the higher the premium is.

The death spiral is a catch 22 situation of sorts. Premiums need to be high enough to make CLASS actuarially sound as defined statute. People with pre-existing conditions will choose the CLASS Act in greater numbers while those who are younger and healthier choose comprehensive private insurance that is more affordable.

The implications of this will be discussed in my next blog.

Tags: Class Act, Class Program, Community living Services and Supports Act, Education for long-term care, Employee benefits, Employee recruiting strategies, Employer sponsored benefits, Executive benefits, Federal long-term care legislation, group long term care insurance, long term care insurance plan, long term care insurance quote, Long-term care education, Long-term care insurance tax advantages, Long-term care planning strategies, LTC, LTCI, Nursing home insurance, Opt out long-term care insurance, Paying for home health care, Paying for nursing homes, Tax advantages of long-term care planning, Voluntary long-term care insurance, Wealth preservation, worksite Long Term Care Assisted living | Filed under: Class Act, worksite Long Term Care | 1 Comment »

Finally, the Federal government has recognized the devastating gap in the safety net caused by long-term care by passing the CLASS Act, a national voluntary long-term care insurance program. Don’t wait to begin a conversation on long-tem care because once CLASS Act becomes operational, employers will need to decide if they should participate or if there are better alternatives. Regardless of what employers choose, employees hearing about CLASS Act will begin bringing questions to work.

There are some important differences between private long-term care insurance and the government run program – and it is in your interest to understand them now – before a decision to participate or opt-out is required. And these differences make it advantageous to offer private coverage to employees today.

1. Coverage is projected to be more expensive and the risk of future premium increases will be higher with government coverage
   One size fits all coverage from the government, when available, is projected by Milliman, a respected independent actuarial firm, to be more expensive and more likely than private insurance to increase in price in later years. Because government provided long-term care has no underwriting requirements, provides subsidies to the poor, and premiums must be set to ensure financial viability for 75 years, the cost will be higher than private insurance.

   When CLASS was first introduced, the expected monthly premium was $30. Compare that now to premiums projected to be $180-$240 month for a nominal benefit. The higher the premiums, the lower the participation and the more likely the government will suffer from adverse selection with participants more likely to have pre-existing health conditions that prevent them from being approved for private coverage.

2. Waiting for CLASS may cause some employees to lose insurability and age based premiums get more expensive each year
   Educating employees now and offering private insurance allows employees to submit applications when they are most likely to pass medical underwriting required by private insurance carriers to screen out high risk people that drive up the cost of coverage. Offering coverage today allows employees to lock in both their insurability and rates that are tied to the age coverage is purchased.
3. Providing employees’ education now will help them to make informed decisions when CLASS becomes available
   The CLASS Act does not include sufficient funding to provide extensive marketing or education to employees making it likely participation will be poor. Education provided as part of a private long-term care insurance benefit allows employees to learn about long-term care, how it is paid for and how to make it part of financial planning. Educated employees will be in a position to make an informed when CLASS Act does become available, and those who could not pass medical underwriting will be able to purchase coverage then.

Still think you should wait for details on the CLASS Act before implementing an employer sposnored plan? Click here to see what executives from the respected financial rating agency A.M. Best have to say about CLASS Act.

Bringing the conversation about long-term care to employers and employees addresses a serious planning issue. Offering private insurance provides an opportunity to learn about the problem now and put an affordable solution in place. And when CLASS Act is available, those who cannot pass the underwriting of private insurance will have an option to protect themselves.

Tags: Class Act, Class Program, Community living Services and Supports Act, Education for long-term care, Employee benefits, Employee recruiting strategies, Employer sponsored benefits, Executive benefits, Federal long-term care legislation, group long term care insurance, long term care insurance plan, long term care insurance quote, Long-term care education, Long-term care insurance tax advantages, Long-term care planning strategies, LTC, LTCI, Nursing home insurance, Opt out long-term care insurance, Paying for home health care, Paying for nursing homes, Tax advantages of long-term care planning, Voluntary long-term care insurance, Wealth preservation, worksite Long Term Care Assisted living | Filed under: Class Act, worksite Long Term Care | 1 Comment »