I came upon this very informative article yesterday, which literally pushed me to write this blog. To make a vivid case, I will start from something seemingly unrelated with long term care: Car insurance.
Bad luck with my Honda Insight
My poor little Honda Insight was hit while parked on the Prospect Street. A Berkeley father was helping his son move into the apartment and misjudged the space between his U-Haul and my car. The front bumper was misplaced and was towed to a local car shop to be fixed, using the father’s insurance to pay for the damage. Meanwhile, the incident triggered my thinking of facts and statistics in auto insurance.
Comparing demands for auto and care insurances
First of all, according to bankrate.com, “The average American pays $1,674 a year or about $140 a month on auto insurance.” On the other hand, based on Insurance Information Institution III, the national claim rate for car insurance policies has been pretty low: “In 2018, 6.1% of collision insurance policyholders had a claim, while 3.0% of people with comprehensive coverage had a claim.” We can translate the claim rates into risk level, meaning a low claim rate indicates low risk level for an average insured driver to be involved in an accident, even those involving parked vehicles like in my case.
If you compare the high prevalence of car insurance policies and the low risk level, it seems people own an auto insurance policy (comprehensive and liabilities) almost for nothing (or for a near zero chance of risks). Of course, government mandatory enforcement for liability insurance is an important driver behind, but I wonder how many would want to buy a car insurance policy anyway.
Now let us consider long term care insurance or LTCi. The field the LTCi covers has a much higher risk level. According to this government site, someone turning age 65 today has almost 70% chance of needing some type of long-term care services in their remaining years. Women need care longer (3.7 years) than men (2.2 years) because women live longer. One-third of today’s 65 year-olds may never need long-term care support, but 20 percent will need it for longer than 5 years.
Note the definition of the need for LTC is seniors (or anyone) requiring assistance with at least two activities of daily living (ADLs) either during their final days of life or anytime when anyone cannot independently perform some ADLs. The name of long term care is somewhat misleading as LTC needs can be really long (from onset to the end of life) or short or intermittent. The real defining element is the loss of capabilities for some ADLs, which spells the loss of capability of living independently.
Regardless of how likely we all may run into disabilities that require LTC, most people do not see the need to buy a LTC insurance (LTCi), let alone to get it when they are relatively young — when it is the best time to be easily qualified for a policy.
Drivers behind the demands
One reason is that auto insurance, at least in the perception of many if not most people, deals with “clear and present danger” as the title of the Harrison Ford movie in 1994 had it. Sometimes the danger can be grave. This website says “On average, there are 6 million car accidents in the U.S. every year. That’s roughly 16,438 per day. Of these crashes, 22,471 caused only property damage. Over 37,000 Americans die in automobile crashes per year.” If you divide 37,000 by 6 million, the average number of annual accidents, you get a 0.62% death rate, meaning out of 100 people, slightly more than half a human will be killed in an auto accident.
Knowing the statistics and probabilities helps little, because for each individual buying an auto insurance, it makes sense — and even beneficial — to be mindful of the probability to be killed in a car crash. The thing about auto accident is that it always involved more than one party and therefore its nature is beyond individual control and unpredictable. None of the 37,000 Americans who died each year wanted to die, but if you were involuntarily involved in a fatal accident, your probability of dying is one, not any other smaller number.
In other words, it is the extreme scenario, no matter how rare it is, that shapes the demand for policies and even the entire industry. When it comes to long term care, on the other hand, no such dramatic scenario is expected. The worst you can think of is for someone to die slowly, after days, months or even years of struggling with small challenges of everyday life. Since eating is one of six ADLs, it is possible that someone may die of hunger because she/he cannot feed her/himself. But I hate to break it, even when a senior died of no care, some may still think that seniors die anyway, with or without LTC. Besides, it helps little to generate interest and concerns that almost every adult drive, but frequently only seniors need long-term care.
Once Again, extreme scenarios, age related attitudes and perceived relevance all play an important role shaping the demands for Insurances, they just act in the opposite direction for long-term care and for auto.
If you think of it, LTC is not special, climate change and even the pandemic all point to the difference between acute, dramatic and chronic or slow evolving events. For example, we have too many Americans who refuse to believe the coronavirus is any different from common cold and flu.
An overestimated need?
The other thing I have noticed is that I had hardly driven my car, which explains why this 2019 vehicle has less than 12,000 miles on it, even including driving it for Lyft in 2019. Yet the minute after my car was sent to the shop, I was anxious to get a replacement vehicle. Of course, part of the reason is that the Toyota Camry rental car from Hertz will be paid for by the insurance company with unlimited mileage as long as my car is in the shop. But I wonder whether we all tend to overestimate our need for a car and underestimate the importance of LTCi.
Costs and Coverages
The interesting thing is that no matter how much our premium for a car insurance policy went down to the drain, meaning most of us may never file an insurance claim, nobody is complaining about that “loss” or “waste.” When it comes to LTCi, however, the number one concern people have is to “spend money on something I never need”, meaning assisted livings or more likely, in-home care for daily activities of living. This concern is there even though the odds of an automobile accident is clearly much lower than the event triggering the LTC claim.
Now let us look at the costs. As cited earlier by Bankrate.com, The average American pays $1,674 a year or about $140 a month on auto insurance, while according to MarketWatch.com, the premium for a full-fledged senior LTCi policy with modest benefit coverage is priced close to an auto insurance, at least for males. “On average in 2021, a single 55-year-old male purchasing a $165,000 policy benefit will pay $950 per year, while a single 55-year-old woman will pay $1,500 annually. Adding 10 years, a 65-year-old single male will pay $1,700 per year for the policy, while a single female of the same age will pay $2,700.” Notice this is so despite that a healthy and independent human body is priceless in value, unlike an automobile.
The game of large numbers
When it is all said and done, the reality is that the demand for LTCi policies is much lower than for an automobile. Insurance is a business based on large numbers, so having a high demand is everything. This explains why auto insurance policies can tolerate some abuse. I remember when my Honda was hit by someone from behind on the highway, the car shop in Oakland for my vehicle demanded for almost $10,000 to simply fix the back bumper, which was accepted by the insurance company with no question asked.
Now look at the market of the long term care. Because of a dwindling demand, many previous LTCi carriers now went out of business or out of the LTC market, leaving only a few financially strong and solid companies.
This is a good news and a bad news. The good part is that we have only the good guys standing in the field. It is comforting to know that we are dealing with insurers with a low chance of insolvency.
The bad part is that the small number of LTC carriers also points to, or reflects, a small market for LTC. We know insurance relies on a large number of the insured so that they can spread the risks to fill up the claims and still make money. Put simply, if the 30% of seniors who would never file any LTC claims also chose to purchase a LTCi policy (just like the most prudent drivers also own auto policies), then the insurance companies would have a much easier life than they do now, even though 70% of seniors will certainly file LTC claims during their lives.
The thing I like about insurance is that it is one of the best ways of having a flat and even playing field without ideological and political fusses — if we can generate the right social demand like we have in auto insurance.
Comparing LTC with annuity
On the flip side, if an insufficient number of people applying for LTCi, chances are there will be reverse selection, meaning only those with preexisting medical conditions would apply for LTCi, because they all expect the need for long term cares later in lives. If every LTCi applicant will (eventually or immediately) file a claim, imagine the financial pressure on the insurers!
We must also consider the supply side. When nursing homes, assisted living facilities all raise prices to all new and existing clients, and when the in-home service providers also charge more for their clients, the cost of filling up LTC claims must also increase.
With supply and demand both working against LTCi policies, the outlook of LTC market is not bright.
In my view, if every LTCi policyholder will file a claim, the LTC market will be effectively turned into an annuity market, and the business model of annuity will apply to LTC.
Why do I say that? Annuity contracts are highly reliable because the majority of annuity owners will become annuitants, who receive regular, most typically monthly, payments for the rest of their lives. We do not expect many annuity owners to not “file the claims,” meaning they all will become annuitants themselves later in life.
If you think of it, social securities system is nothing but a system of collective annuities covering every working person in the country. This article tells me that I was not the only one thinking this way. The difference is that social securities gather money from all working people for at least 40 quarters of their lives, and then allow them to withdraw different monthly payments as retirement income.
Annuity on the other hand works at individual level and the insurance company will calculate how much premium will be collected from each person during the so called accumulation phase, which then determines how much money the person receive during the annuitization phase.
Annuity is self-funded, meaning individual annuity owner will make regular deposits of money during the accumulation period, not much different from depositing money into one’s bank account, except that the money enters the annuity account opened by insurance company, which in turns earns higher interest than a typical bank account can offer.
The other difference between annuity account and bank account is that the insurance company will determine the deposit amount and length of the accumulation period, which in turn controls the onset and length of the annuitization period, when the owner of the annuity turns into the annuitant to receive a lump sum or monthly payment from the money he/she deposited during the accumulation period.
The whole point of talking about annuity here is that we could borrow a page from the book of social security’s so that we as a society can establish a better system covering long term care.
This is the natural point to turn to one of the most informative and insightful articles about LTC.
The market demand problem
The October 2020 article by Alexander Sammon had a central message that says “Attempts to have the private market manage support and services for the elderly or people with disabilities have utterly failed.” Some public actions are therefore definitely needed.
I agree. The only reservation I have is his words on LTC market failure. It is not that we have plenty of private demand for LTC but insufficient supply as he implicitly proposed, “just because there’s demand doesn’t mean there’s supply.” Instead, the real issue is an insufficient demand from the private sector — for something people need in the future but the best time to invest is today.
Like the social security, if we collect money early enough, we can avoid reverse selection entirely, as during the early life we do not know who is vulnerable to LTC claims and who is not. This is how an insurance system becomes sustainable. We do not depend on individuals to make private calls for LTC or not, just like the social security does not depend on individuals’ willingness to surrender a part of their regular pays to fund the system. For politicians, the 70% LTC claim rate provides a good motive to do something in the public sector, because they are protecting and serving the majority of people.
From low awareness to low demand
One reason for the low demand is the low awareness. “A significant percentage of people wrongly believe that they’re covered for long-term care via their employer-provided health insurance; others believe that some combination of Medicare, Medicaid, or the Affordable Care Act will handle their needs. A study by the Nationwide Financial Retirement Institute found that only 28 percent of Americans age 50 and older with an income of over $150,000 know that the ACA does not cover long-term care costs, while 70 percent of baby boomers falsely believe that Obamacare covers long-term care.”
“Most older Americans have not looked into long-term care options at all, while just 8 percent consider it “very likely” that they will ever experience a long-term care need (again, something like 70 percent will). Medicare only covers short-term use of nursing home and home health care services, up to 100 days, strictly curtailed and narrowly defined.”
“Medicaid, meanwhile, currently the single-largest source of funding for long-term services, only kicks in at a point of financial ruin. Most states require long-term care recipients to draw down their financial resources to the very last $2,000 before Medicaid kicks in, even requiring them to empty out IRAs and 401(k)s and assets like real estate. Of course, financial ruin is not some far-off possibility; Americans making the median wage have a 1-in-6 chance of needing long-term care that entirely eclipses their financial resources.”
“According to the Congressional Budget Office, the cost of long-term care in the U.S. went from $30 billion in 2000 to $225 billion in 2015, compounding annually at nearly 15 percent. And yet the United States remains one of only a handful of developed nations whose government does not provide at least some universal long-term care benefits funded by taxes.”
The supply side problems
The above is not saying the supply side is free of problems. At the beginning the supply side made mistakes, as Sammon correctly pointed out that there was “a wild mispricing error by the insurance industry, which severely underestimated the cost of such plans.”
As a result, at the beginning and all the way into 2000, “about 750,000 individuals successfully purchased LTC insurance in a single year.” But such a low cost model is not sustainable. “As the industry paid out huge sums for relatively cheap plans year after year, they scrambled to make up the difference by surging premiums and trying to minimize outlay.”
The market did not respond well, and we saw a significantly reduced annual policy sales, going from 750,000 per year to just 57,000, “a more than tenfold contraction, even as the percentage of the American population in the prime purchasing demographic, ages 60 to 69, expanded rapidly, from 9.5 percent in 2010 to 11.4 percent in 2018, according to a study from the Treasury Department.”
A significantly shrunk market in turn adds further financial stress on the suppliers, who had to deny policies to as many people as possible. “(S)omewhere between 44 percent and 51.5 percent of people over 70 who apply for a long-term care policy are now declined. Almost one-third of those between 60 and 65, a less risky demographic, are turned down. Even 21 percent of people in their fifties, more than one in five, can expect to have their applications rejected. Any combination of two or more chronic conditions is grounds for near-automatic disqualification, as are diseases like AIDS and multiple sclerosis, a history of strokes, or diabetes requiring insulin shots.”
Meanwhile, the seniors remain vulnerable to health risks, including corona virus. Sammon offered a brief history to get to the core of the links between the pandemic and LTC. “The first announced American death from coronavirus came in February from a nursing home in Kirkland, Washington. Within weeks, an astounding two-thirds of inhabitants and staff had contracted the virus, with 37 deaths among just 108 residents. It was the beginning of a painful record of long-term care facilities like nursing homes as the most deadly theater of the coronavirus pandemic. By May, one-third of all coronavirus deaths were nursing home residents or workers. By September, some 46,400 deaths had been confirmed, even with states providing spotty and partial data. Roughly 1 in 10 people who were in long-term care facilities when the pandemic started in New Jersey were dead by May.”
“(T)here is perhaps no component of health insurance where the private sector has failed more profoundly than long-term care, making this one of the worst and most rapidly faltering aspects of our impossibly expensive, wildly inefficient, and poorly performing health care system.”
As the evidence to prove his point, “(C)ommon estimates say that about 50 percent of older adults will need long-term care at some point in their lives; for adults over 65, the odds shoot up to 70 percent.” “Right now, fewer than 1 in 30 Americans own a long-term care (LTC) insurance policy, and only about 7 percent of adults over 50. The raw figure of 7.5 million insured has barely budged since 2008, despite an increasing aging population.”
Public-Private Coordination Solutions
When the private market demand is low, the public sector may help. Some states have already made the right move, “Washington state passed a long-term care social-insurance program last year, which reimburses at $100 per day for in-home care up to a fixed lifetime maximum that translates to one year of daily support. It’s funded by a small payroll tax on all wages. The tax begins in 2022 and payouts in 2025.” Sammonthen correctly pointed out that “piecemeal solutions at the state level are not likely to be sufficient.” Federal level action is needed.
Other ways of public-private coordination include the Medicare’s Part C (aka Medicare Advantage) plan for medical savings account (MSA), which is designed to help pay medical bills to meet the high deductible demand before the high deductible health plan kicks in later. It is a small scale plan, one of the three types under Medicare Advantage or Part C (the other two are coordinated care plans like HMO, PPO, POP and private fee for service plans). It also has limitations. For example, people who have other types of health insurance in addition to Medicare generally cannot enroll.
However, the plan does allow the money from the MSA to be used for long term care.
The other option is to rely on Medicaid, where we issue the so-called partnership policies for long-term care, which would not count the assets toward Medicaid disqualification threshold.
Finally, from pure private sector we have seen hybrid LTC plans getting more popular than the traditional LTC plans. This article provides a good and quick overview of the plan: “A person can buy a hybrid policy by paying a one-time lump sum premium or by paying over a number of years. If it turns out long-term care is not needed, the policy works much like a traditional life insurance policy, with a death benefit paid to a beneficiary when the insured person passes away.
If the insured person does need long-term care, the policy will pay benefits toward those expenses. Similar to a traditional long-term care policy, the benefits are paid in an amount chosen when the policy is purchased, and expressed as an amount per day, month or year.”
In other words, this hybrid plan answers the most common concern of policyholders: What if I never need LTC? I don’t want to pay premium and end up getting nothing in return. The idea behind the hybrid plan to bundle LTC with life insurance, so you or your loved ones can get the money back if you did not make any LTC claim!