A new federal law that includes provisions bolstering long term care insurance is the latest step in the product’s acceptance in serving our aging population.
Signed by President Bush earlier this year, the Deficit Reduction Act of 2005 gives insurers and distributors an immediate opportunity to discuss with clients changes in Medicaid that make planning for LTC more important than ever.
In addition, it provides future opportunities to discuss the benefits of LTC partnership policies, which now will be nationally available. For now, implementation of the partnership piece of the legislation is just getting under way.
Taken as a whole, the new law underscores government support for the idea that private industry will assume the lead in providing for the LTC needs of Americans. It is an important step in establishing the legitimacy of long term care insurance once and for all.
One important provision in the DRA makes it more difficult for people to rely on Medicaid for their LTC needs, closing a loophole that allowed individuals to gain eligibility for state aid by transferring or divesting assets. This is a group for whom Medicaid was not originally intended.
More importantly, the law allows LTC partnerships to expand nationally, effectively repealing an amendment to a 1993 law that prohibited new partnership programs. The four existing state partnership programs–in California, Connecticut, Indiana and New York–are allowed to continue under the law.
Partnership policies are compelling for consumers because they allow purchasers to protect their assets–equal to the dollar value of their policy–before qualifying for Medicaid. Having this protection available across the country should spur demand for the product, because it means more Americans can buy smaller, more affordable LTC insurance policies, knowing they can rely on Medicaid when private coverage is not enough.
The larger promise of partnership policies is that they will appeal to a new cohort of applicants and ease the pressures on Medicaid. In the four states with the partnership programs today, more than 225,000 policies have been purchased, but fewer than 150 policyholders have exhausted their benefits and drawn on Medicaid. These policies already have shown that partnerships can achieve dual goals: protecting policyholder assets and saving money for the states.
Another benefit of the partnership legislation: It provides funds for consumer awareness campaigns about the availability of partnership policies and about the need for LTC insurance. The federal appropriation for this campaign is $3 million a year in fiscal years 2006 through 2010.
DRA also cuts the administrative burdens of existing partnership programs for both carriers and the states. It requires partnership policies to be tax qualified, to meet specified consumer protection standards and to provide some amount of compound inflation protection for individuals age 60 or younger.
The LTC insurance story
Given that more than 78 million Americans will turn 60 over the next 18 years, the benefits of LTC insurance should already be evident. But the industry has had to fight hard for LTC insurance’s acceptance, continuously having to argue for its potential as a product beneficial for government and consumers alike. With the new legislation, our efforts have paid off.
Introduced in the 1980s as nursing home insurance, regulations specific to LTC insurance first were developed by the National Association of Insurance Commissioners, via its Long Term Care Insurance Model Act and Regulation. Its intent was to protect applicants from unfair practices and introduce policy requirements and consumer protections that would ensure the availability of excellent products. Over the years, these models have evolved and been widely adopted by the states.
In 1996, the federal government further legitimized LTC insurance as a bona fide product through provisions of the Health Insurance Portability and Accountability Act. HIPAA essentially treated LTC insurance similar to other health insurance benefits in terms of federal income tax treatment–for example, deductibility of premiums, benefits not taxable and not considered imputed income. HIPAA also said LTC insurance premiums paid by an employer on behalf of an employee are not considered income to that employee yet can be deducted as a business expense. It also provided that benefits paid under such a tax-qualified plan are generally not taxable as income, subject to an annual limitation.
The passage of DRA continues the trend to assimilate LTC insurance as a mainstream product. It is the result of concerted efforts by insurers, distributors and trade associations such as the American Council of Life Insurers and America’s Health Insurance Plans.
The federal Department of Health and Human Services will begin implementing the partnership legislation by providing initial guidance to the states on developing partnership programs. Most states, already seeking relief for overburdened Medicaid budgets, certainly will want to implement these programs. In fact, we could start seeing participation by some states later this year, depending on how quickly HHS acts. We hope that most states will have their partnership programs in place within the next year or so.
In the meantime, the closing of the Medicaid loopholes in the law provides excellent reason to approach clients about LTC insurance. This, in combination with the market having stabilized over the past few years and increasing consumer demand for this coverage, underscores that there has never been a better time to sell LTC insurance.
It is important the LTC insurance industry take advantage of the momentum that this legislation has sparked. Distributors should focus on sales, while carriers and trade organizations must work toward a smooth implementation of partnership programs nationally.
As always, the industry will continue to fight for even broader support of this product. This means convincing lawmakers to pass an above-the-line tax deduction for LTC insurance and permit LTC insurance in cafeteria plans and flexible spending accounts while persuading employers to embrace LTC insurance as a voluntary benefit.
Working together as an industry, we can achieve these goals.