Financing Long Term Care Al Schmitz, FSA, MAAA Yung-Ping Chen, Ph.D. Bob Yee, FSA, MAAA

(1)

Joint Colloquium of the IACA, PBSS and IAAHS Sections Joint Colloquium of the IACA, PBSS and IAAHS Sections

of the International Actuarial Association of the International Actuarial Association

Westin Copley Place Hotel, Boston, U.S.A.

Westin Copley Place Hotel, Boston, U.S.A. – – 4- 4 -7 May 2008 7 May 2008

Financing Long Term Care

Al Schmitz, FSA, MAAA Yung-Ping Chen, Ph.D.

Bob Yee, FSA, MAAA

(2)

Financing Proposal Summary*

Page 2

Joint Colloquium of the IACA, PBSS and IAAHS Sections Joint Colloquium of the IACA, PBSS and IAAHS Sections Westin Copley Place Hotel, Boston, U.S.A.

Westin Copley Place Hotel, Boston, U.S.A. – 4–4--7 May 20087 May 2008

Private LTCI Promotion

– Standardized Policies & Lower Price

– Medi-LTC

– Tax Deduction for Premiums

– Mandatory Savings to Pay Premiums

– Optional LTC Benefit in Medicare Linked to Private Insurance

– Trade-Off Principle

Social Insurance

– Catastrophic LTC Insurance

– Basic LTC Benefit Financed by Social Security Benefits

– Universal LTC

– Voluntary Federal Program Through Payroll Deduction

– Medicare LTC Benefit Financed by an Income Tax Surcharge

– Social Insurance a la Germany

* LTC Financing: Policy Options for the Future J. Feder, H. Komisar, R. Freidland, June 2007

(3)

Demographics

Page 3

31.6

5.1 64.6

15.4

0 20 40 60 80

2005 2040 (Millions)

Ages 85

& Over Ages 65-84

2000 2025 2050 ($Billions in

Constant Dollar)

$0

$100

$200

$300

$400

Medicaid Spending Non-Medicaid Spending

Projected Elderly LTC Expenditures Could Nearly Quadruple by 2050 Elderly Population will More

Than Double by 2040

Number of Workers Per Elderly

But Support is Declining

(4)

Services ^•Custodial Care

• Nurses on Staff

Acute Long Term Care Terminal

Need Intensive Medical Care Supervisory & Nursing Care Final Stage Before Death

5.5MM 1.0MM

1.6MM

# Elderly Users

4.3% 2.7% 14.9%

% Elderly Pop.

$16K

$33K Cost/Year (2006)* $66K

Typical Stay 1-90 Days 3-48 Months 1-3 Months

Setting Hospital Facility & Home Hospice

(excludes informal/

unpaid care)

$180 $90 $25 Per Hour

Cost/Day

Long Term Care Defined

Elderly Health Care Continuum

Nursing Home Assisted Living

Facility (ALF) Home Care

• Skilled to Custodial Care

• 24/7 Nursing Support

• Low to Moderate Care

• Therapist/Home Aide Visits

Page 4

* Genworth 2007 Cost of Care Survey

(5)

LTCI Sales

Page 5

200,000 300,000 400,000 500,000 600,000 700,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 80

927

58 695

65 661

65 608

63 633

$0

$200

$400

$600

$800

$1,000 (Millions)

2003 2004 2005 2006

Individual Group

2007

New Individual Sales by Number of Lives New Sales by Premium

(6)

Market

Page 6

(Millions)

Dominance by a Few

Genworth 18.4%

John Hancock 10.6%

Conseco 9.8%

MetLife 8.1%

CNA 7.0%

Aegon 6.1%

UNUM 5.4%

Others 32.9%

Total 100.0%

2005 Market Share by In-Force Premium (Total Individual & Group: $8.2 Billion)

Ages Ages 40-54 55+

8%

33.6 20%

2.9

15.4 3.8

0 10 20 30 40

Estimated LTCI Sold Among Income

& Health Eligibles

Considerable Penetration at Older Ages

About 1/3 Policies

are in Closed

Blocks

Policies Sold Remaining Eligibles

(7)

Traditional Face-to-Face $581 88%

Association/Affinity $40 6%

Worksite $28 4%

Financial Institution $8 1%

Direct Response & Other $4 1%

Total $661 100%

Distribution

Page 7

Westin Copley Place Hotel, Boston, U.S.A. – 4–4--7 May 20087 May 2008 2005 Individual New Premiums ($Millions)

Evenly Split Between Brokers & Captives Singular Sale Approach Distribution Method Key Sales Attributes

• Existing Relationship

• Referrals from Other Agents

• Regional Sales Support

• In Context of Financial Planning

• Typically Direct Mail Solicitation

• No Prior Relationship

• Hit & Miss by Some Financial Institutions &

Broker-Dealers

• Leveraging Health Coverage Relationship Independent Agents

LTC Specialists Brokers

Financial Planners

Captive Agents

Stockbrokers Group Brokers

Brokers 43%

Captives Group Brokers 41%

9%

Stockbrokers 7%

2005 New Premiums by Distribution

(8)

Critical Product Characteristics

Page 8

Guaranteed Renewability

– Can Adjust Premiums by Risk Class

Activities of Daily Living (ADL) & Cognitive Impairment Benefit Triggers

– Objective & Effective Criteria

– Common Eligibility Criteria for All Policies

Fixed Benefits

– Specified Policy Maximum, Daily Maximum & Inflation Protection Increases Insulate Policies from Inflation Risk

Comprehensive Coverage

– Substitution Effect Between Nursing Home, Assisted Living Facility (ALF) & Home Health Care

Federal Tax Qualification

– Tax-Free Benefits & Tax Deduction of Premium Under Medical Expense Deduction

– Maintains Relatively High Eligibility Threshold – 2 of 6 ADLs

– Keeps Superfluous Benefits Out of Policy

(9)

Product Choices & Options

Page 9

Daily Benefit Maximum – $30 - $400 Daily Maximum – Weekly or Monthly Available

Reimbursement or Cash

– Reimburse Actual Charges Up to Daily Maximum, or

– Cash Benefit = % of Daily Maximum (30%

to 100%)

Policy Benefit Maximum

– 2, 3, 4 Years, etc. Times Daily Maximum – Unlimited Available

– Works Like a Bank Account

Elimination Period (Days Before Benefit Payments Commence)

– 0, 30, 90, 180 Day Typical

– 0 Day for Home Care Available – Need to Satisfy Only Once

Shared Benefit

– Allows Couple to Share a Single Benefit Pool

Comprehensive, Facility Only, Home Care Only

Benefit Choices Policy Options

Inflation Protection

– Daily Maximum and Policy Maximum Annual Increases

– Increases for Life or Fixed Period – 5% Compound, 5% Simple, Other %

– Guaranteed Purchase Option of Additional Amount at Attained Age Entry Premiums

Alternate Plan of Care

– Pays Out-Of-Contract Benefits Subject to Insurer’s Approval

Paid-Up

– Premiums Stop at Age 65, 20 Years, etc.

– Single Premium Available

Reduced or Expanded Home Care Benefit

– 50%, 75% or 150% of Facility Daily Maximum

Restoration of Benefits

– Policy Benefit Maximum Restored if Not Claim Eligible for 180 Days Following Recovery

Nonforfeiture

– Reduced Paid-Up Coverage if Lapsed

(10)

Rate Stability Saga

Page 10

Loss Ratio Requirement – Prior to 2002 – 60% Lifetime Loss Ratio

– Can Raise Premium Rates if Not Met

Rate Increases Became Prevalent

– “Predatory Pricing” under Loss Ratio Requirement

– Competitive Pressure on Prices

– Lack of Credible Insured Experience by Most Insurers

Rate Stability Regulations – Post 2002 – No Loss Ratio Requirement at Initial Filing

– If Experience Proven Worse Than Expected:

• 58% Loss Ratio Requirement on Original Premiums

• 85% on Increased Premiums

– Pricing Must Include Margins for Adverse Deviation

– Increasing Penalties & Reporting Requirements for Repeated

Rate Increases

(11)

Where is LTCI Heading?

Page 11

Product Features – Wellness Benefits

– Cost-Sharing Benefits

– Combinations with Life, Annuity, Critical Illness & Disability Income

– Lower Premium Schedules

Markets

– Worksites

– Associations & Affiliated Groups

– Web-Assisted & Tele-Sales

– Financial Planners

– Streamlined Underwriting

Regulations

– Tax Incentives

– Experience Exhibit

– Principle-Based Reserves

(12)

Changes in Social Trends (1970 - 2000)

1970 2000

Female Labor Force Participation Rate 42% 58%

Divorced (% of adults) 3% 9.9%

Unmarried adults 38 mil 87 mil

Never-married adults

(% of all adults) 16% 24%

(13)

Declining Percentages of Married Adults (1970 - 2000)

15% drop among whites, from 73% to 62%

36% drop among blacks, from 64% to 41%

18% drop among Hispanics, from 72% to 59%

(14)

Increase in Never-Married Persons (1970 - 2000)

31% increase (from 16% to 21%) for whites

86% increase (from 21% to 39%) for blacks

53% increase (from 19% to 29%) for Hispanics

(15)

Funding Long-Term Care:

Applications Of

The Trade-Off Principle

In Both Public And Private Sectors

An Intragenerational Funding Model for or Long-Term Care

(16)

Census Bureau Estimates of Number of Elderly Individuals in 1997, 2030, and 2050

30,258

60,924 60,636

3,938

8,455 18,223

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

1997 2030 2050

P opu la ti on i n T h ou sa n ds

Total

85 and above 65-84

(17)

Aging of the Elderly Population in the U.S. (in millions)

2000 2030 2050

Age 65-84 30 60 60

Age 85+ 4 9 18

(18)

Defining Long-Term Care

Medical, nursing, social, and personal services

At home, in the community, or in an institution

Extended period of time

Functional impairment (activities of daily living—ADLs)

• Bathing

• Dressing

• Eating

• Transferring

• Toileting

• Continence

Cognitive Impairment

(19)

Types of Long-Term Care

Informal (non-paid)—family and friends

Formal (paid)—professional providers

(20)

Reasons for Less Informal Care

Geographic dispersion of family members

More women working in paid labor force

Smaller families

– fewer children per family – more childless families – higher divorce rates

– more single-parent families

Impairments of adult children themselves

(21)

Tests for Insurability of a Risk

Involuntary risk

Economic loss incurred

Verifiable risk

Law of large numbers

Contingency falling on a small proportion at one time

Predictable risk

(22)

Long-Term Care as an Insurable Risk

Need for LTC

– predictably small proportion of population – costs may be substantial or even

catastrophic

Risk pooling limits an individual’s financial exposure

Insurance in private and public sectors

(23)

Present Pattern of Funding in the U.S.

Out of pocket (personal savings)

Medicaid (public welfare)

Medicare (social insurance)

Private insurance

(24)

Formal Long-Term Care Expenditures for the Elderly, 2000

Medicare 24%

Medicaid 35%

Private long- term care insurance

4%

Other payer

2% Personal out-of- pocket

35%

Source: Based on projections in Congressional Budget Office (2000).

(25)

Formal Long-Term Care

Expenditures for the Elderly, 2000

Public and Private Sectors Combined

Risk Pooling

20.2%

No Risk Pooling

79.8%

(26)

Formal Long-Term Care

Expenditures for the Elderly, 2000

Public Sector

Risk Pooling

33.3%

No Risk Pooling

66.7%

(27)

Formal Long-Term Care

Expenditures for the Elderly, 2000

Private Sector

No Risk Pooling

98.8%

Risk Pooling

1 .2%

(28)

Impediment to Social and Private Insurance Programs

Competition for funds

– Social insurance vs. general health, education, welfare, and other

expenditures

– Private insurance vs. other consumption outlays

(29)

Lack of Penetration by Private Insurance: Demand Factors

High costs

“Use it or lose it”

Exclusions (the “fine print” problem)

Can self-insure

Rely on public welfare (Medicaid)

Procrastination

Uninsurable

Will never need it

Long lapse of time between sales/purchase and use

(30)

Lack of Penetration by Private Insurance: Supply Factors

Moral hazard (greater use of services induced by insurance)

Adverse selection (buyers are those who

“know” they will likely need LTC services)

Problems for the sales force

Long lapse of time between sales / purchase and use

(31)

Guiding Principles for LTC Funding

Insurance in public and private sectors

The trade-off principle

(32)

Sharing Public and Private Responsibility:

A three-legged stool approach

Retirement income

Acute health care

Long-term care

(33)

A Three-legged Stool Approach:

Retirement Income

Social insurance as a floor of protection

Employment-based (occupational) pensions as supplement

Personal savings as supplement

[ Public assistance as safety net when three legs prove insufficient ]

(34)

A Three-legged Stool:

Acute Health Care

Medicare

Employer-provided health benefits

Medicare Supplemental (Medigap) policies

[ Medicaid as a safety net for the poor ]

(35)

Funding Long-Term Care: A Schematic View

Out-of-pocket payment

Stand-alone LTC policy

Accelerated death benefit with a rider Combination Policy

Private Long-Term Care Insurance Private Sector

Medicaid and other public sources

Inter-generational Model (Medicare)

Intra-generational Model (Social Security/

Long-Term Care) Social Insurance

Public Sector Sources of Funds

(36)

Estimated revenue for the proposed Long-Term Care (LTC) Trust Fund in first 5 years of operation (no disbursements)

(All dollar amounts are in billions)

Calendar

year Social Security (OASDI)

benefit payments

Annual contributions

to the LTC Trust Fund Interest rate for contributions in the year

LTC Trust Fund

accumulat ed at the end of the year

Percent of OASDI benefits

Amount

1996 $355.0 1% $3.6 6.0% $3.7

1997 $374.9 2% $7.5 6.0% $11.7

1998 $396.1 3% $11.9 6.1% $24.7

1999 $419.0 4% $16.8 6.3% $43.5

2000 $444.2 5% $22.2 6.4% $69.1

Note: OASDI benefits and interest rates are those projected under the alternative II (intermediate) assumptions in the 1993 Annual Report of the Trustees.

(37)

Financing Proposal Summary*

Page 37

Private LTCI Promotion

– Standardized Policies & Lower Price

– Medi-LTC

– Tax Deduction for Premiums

– Mandatory Savings to Pay Premiums

– Optional LTC Benefit in Medicare Linked to Private Insurance

– Trade-Off Principle

Social Insurance

– Catastrophic LTC Insurance

– Basic LTC Benefit Financed by Social Security Benefits

– Universal LTC

– Voluntary Federal Program Through Payroll Deduction

– Medicare LTC Benefit Financed by an Income Tax Surcharge

– Social Insurance a la Germany

* LTC Financing: Policy Options for the Future J. Feder, H. Komisar, R. Freidland, June 2007

Financing Long Term Care Al Schmitz, FSA, MAAA Yung-Ping Chen, Ph.D. Bob Yee, FSA, MAAA

Joint Colloquium of the IACA, PBSS and IAAHS Sections Joint Colloquium of the IACA, PBSS and IAAHS Sections

of the International Actuarial Association of the International Actuarial Association

Westin Copley Place Hotel, Boston, U.S.A.

Westin Copley Place Hotel, Boston, U.S.A. – – 4- 4 -7 May 2008 7 May 2008

Financing Long Term Care

Al Schmitz, FSA, MAAA Yung-Ping Chen, Ph.D.

Bob Yee, FSA, MAAA

Financing Proposal Summary*

 Private LTCI Promotion

– Standardized Policies & Lower Price

– Medi-LTC

– Tax Deduction for Premiums

– Mandatory Savings to Pay Premiums

– Optional LTC Benefit in Medicare Linked to Private Insurance

– Trade-Off Principle

 Social Insurance

– Catastrophic LTC Insurance

– Basic LTC Benefit Financed by Social Security Benefits

– Universal LTC

– Voluntary Federal Program Through Payroll Deduction

– Medicare LTC Benefit Financed by an Income Tax Surcharge

– Social Insurance a la Germany

Demographics

Long Term Care Defined

Elderly Health Care Continuum

LTCI Sales

Market

Distribution

Critical Product Characteristics

 Guaranteed Renewability

– Can Adjust Premiums by Risk Class

 Activities of Daily Living (ADL) & Cognitive Impairment Benefit Triggers

– Objective & Effective Criteria

– Common Eligibility Criteria for All Policies

 Fixed Benefits

– Specified Policy Maximum, Daily Maximum & Inflation Protection Increases Insulate Policies from Inflation Risk

 Comprehensive Coverage

– Substitution Effect Between Nursing Home, Assisted Living Facility (ALF) & Home Health Care

 Federal Tax Qualification

– Tax-Free Benefits & Tax Deduction of Premium Under Medical Expense Deduction

– Maintains Relatively High Eligibility Threshold – 2 of 6 ADLs

– Keeps Superfluous Benefits Out of Policy

Product Choices & Options

Rate Stability Saga

 Loss Ratio Requirement – Prior to 2002 – 60% Lifetime Loss Ratio

– Can Raise Premium Rates if Not Met

 Rate Increases Became Prevalent

– “Predatory Pricing” under Loss Ratio Requirement

– Competitive Pressure on Prices

– Lack of Credible Insured Experience by Most Insurers

 Rate Stability Regulations – Post 2002 – No Loss Ratio Requirement at Initial Filing

– If Experience Proven Worse Than Expected:

• 58% Loss Ratio Requirement on Original Premiums

• 85% on Increased Premiums

– Pricing Must Include Margins for Adverse Deviation

– Increasing Penalties & Reporting Requirements for Repeated

Rate Increases

Where is LTCI Heading?

 Product Features – Wellness Benefits

– Cost-Sharing Benefits

– Combinations with Life, Annuity, Critical Illness & Disability Income

– Lower Premium Schedules

 Markets

– Worksites

– Associations & Affiliated Groups

– Web-Assisted & Tele-Sales

– Financial Planners

– Streamlined Underwriting

 Regulations

– Tax Incentives

– Experience Exhibit

– Principle-Based Reserves

Changes in Social Trends (1970 - 2000)

1970 2000

Female Labor Force Participation Rate 42% 58%

Divorced (% of adults) 3% 9.9%

Unmarried adults 38 mil 87 mil

Never-married adults

(% of all adults) 16% 24%

Private LTCI Promotion

Social Insurance

Guaranteed Renewability

Activities of Daily Living (ADL) & Cognitive Impairment Benefit Triggers

Fixed Benefits

Comprehensive Coverage

Federal Tax Qualification

Loss Ratio Requirement – Prior to 2002 – 60% Lifetime Loss Ratio

Rate Increases Became Prevalent

Rate Stability Regulations – Post 2002 – No Loss Ratio Requirement at Initial Filing

Product Features – Wellness Benefits

Markets

Regulations

15% drop among whites, from 73% to 62%

36% drop among blacks, from 64% to 41%

18% drop among Hispanics, from 72% to 59%

31% increase (from 16% to 21%) for whites

86% increase (from 21% to 39%) for blacks

53% increase (from 19% to 29%) for Hispanics

Medical, nursing, social, and personal services

At home, in the community, or in an institution

Extended period of time

Functional impairment (activities of daily living—ADLs)

Cognitive Impairment

Informal (non-paid)—family and friends

Formal (paid)—professional providers

Geographic dispersion of family members

More women working in paid labor force

Smaller families

Impairments of adult children themselves

Involuntary risk

Economic loss incurred

Verifiable risk

Law of large numbers

Contingency falling on a small proportion at one time

Predictable risk

Need for LTC

Risk pooling limits an individual’s financial exposure

Insurance in private and public sectors

Out of pocket (personal savings)

Medicaid (public welfare)

Medicare (social insurance)

Private insurance