The new drug benefit–also called Medicare Part D–does 4 things for long term care insurance sales:
1) It helps find the money to pay LTC premium by limiting the out-of-pocket costs for prescription drugs.
2) It allows LTC insurance to truly contain the LTC risk.
3) It makes the daily or monthly benefit much easier to establish, which makes the sales process much simpler.
4) It puts a final nail in the coffin for expecting a government-funded LTC program.
Let’s look at each point.
Point 1: Finding the money. It helps find the money to pay premium by limiting the out-of-pocket costs for prescription drugs.
For only about $32 a month, a Medicare beneficiary finally can get a handle on out-of-pocket drug costs in a year. In a nutshell, the out-of-pocket costs are as shown in Table 1.
After charges exceed $5,100, the Medicare beneficiary only has to pay a maximum of 5% of each prescription and Medicare Part D picks up the rest! (Only 18% of people over 65 are expected to have drug charges above $5,100, so most people will never exceed the $3,600 out-of-pocket, according to the 2005 Medicare Chart Book from Kaiser Family Foundation.) In fact, Kaiser is projecting that the average Medicare beneficiary will have $2,864 in direct charges in 2005, which equates to an out-of-pocket of only $1,364, so it would look like the computation in Table 2.
Point 2: Containing the LTC risk. It allows LTC insurance to truly contain the LTC risk.
Not only do people not have to worry about uncontrollable drug charges while at home, the biggest safeguard comes for those in a nursing home. Typically, the drugs must come through the pharmacy that services the nursing home, and the charges can be $1,000 or even more a month.
(I have an aunt who ran $1,500 a month consistently while in a nursing home! That’s an extra $18,000 a year, which can be much more out-of-pocket than someone expects to pay who has LTC insurance, especially if the person is coinsuring part of the cost, as most people do. In a situation like my aunt’s, having an LTC policy may not keep the patient off Medicaid because some people just can’t make up that kind of unanticipated difference.)
Point 3: Simplifies. It makes the daily or monthly benefit much easier to establish. This makes the sales process much simpler.
Ever get stuck in the benefit consultation because people can’t decide the daily or monthly benefit they want? In my sales presentation, I try to build the daily or monthly benefit choice around the cost of an 8- to 10-hour home care shift and a semi-private room in a facility.
It’s been difficult to advise clients of the appropriate daily benefit as long as drugs have been an open-ended risk. I’m convinced that it isn’t always explained in the sales process, that nursing homes only give you the rate for room and board and there’s another 20% or so tacked onto the bill for drugs and supplies (diapers, etc.).
Therefore if the room and board charge is $167 or $176, for instance, the real charge would be $200 or $211, respectively, by adding that extra 20%.
The benefit consultation on this point gets really sticky, especially when dealing with a reimbursement product. In my sales process, I ask the client, “How much do you want the insurance company to pay? Half, two-thirds, 80%, or if you ever had to go to a nursing home as a last resort, are you a private room person?” Then you recommend a daily or monthly benefit based on local costs to fit that expectation–or based on costs in the area in which the client plans to retire. (Of course, use common sense when measuring the clients’ expectation against their financial ability to make up the difference at claim time.)
If the client is willing to pay 20% and you are selling a reimbursement product, you would typically suggest an amount equal to the average semi-private room and board (or private if that is the preference) and know that the additional 20% would most likely be made up of drugs and supplies. The exception would be someone with a retiree health plan with good drug coverage, but younger people usually don’t have any idea how much drug coverage they will have at retirement.
With an indemnity plan, you could add in the 20% above room and board, then multiply times .80 and suggest that amount.
Complicated, right? It’s one of the most complicated parts of long term care insurance for me to train in my entire career of training agents. But immensely important–because the drugs in real life could be much more than the 20% (see Point 2).
Now we can base the facility benefit recommendation on the room and board without going into the extra 20% explanation, that complication is gone with the new Medicare drug program. What a relief!
Point 4: Nail in government funding coffin. It puts a final nail in the coffin for expecting a government-funded LTC program.
The new drug bill is most likely the final nail in the coffin to ensure there can never be a national LTC program for everyone. The Comptroller General said in 2002 that the big three entitlements (Social Security, Medicare and Medicaid) plus interest on the national debt makes up almost half of total federal revenue today and predicted it would be 75% by 2030, if nothing new happened (General Accountability Office, GAO-02-544T, 3/21/02). And that was before the $700 Medicare Rx bill.
To learn all the ins and outs of the Medicare drug bill, an excellent document is “The New Medicare Prescription Drug Coverage: What You Need to Know” from AARP.
Phyllis Shelton is president of LTC Consultants, Hendersonville, Tenn. Her e-mail address is firstname.lastname@example.org.
Among other things, it helps the client to find the money to pay the LTC premium