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What the Class Act can teach the long term care insurance industry

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Many in the long term care insurance industry dismiss the proposed long term care benefit of approximately $50/day, in the Community Living Assistance Services and Supports (CLASS) Act of 2007, as laughable due to its inadequacy.

On the other hand, we think the benefits are worth a good hard look.

As a refresher, Senators Kennedy, Harkin, Dingell, and Pallone first introduced the legislation back in July 2007 and versions still show up in legislation before Congress today.

This discussion will not argue that CLASS overall is a good or bad thing, nor will it debate the pricing and shortcomings in the legislation. The two of us are simply suggesting that the LTC insurance industry can learn from what’s right with CLASS. Who can argue that $1,500/month of extra cash in the pocket of a person who needs care isn’t valuable?

Although the Senate Finance Committee Chairman’s version of the bill announced on Sept. 16., 2009 does not include a CLASS-like program (and adds a Section 125 deduction), it’s anyone’s guess whether CLASS will resurface as the legislative process progresses. Regardless, reevaluating key aspects of CLASS should prove useful to the LTC insurance industry, whether or not health care reform is accomplished, and whether or not CLASS is reintroduced.

Reflecting on the benefits of CLASS can help the LTC insurance industry as it grapples with the question: Why aren’t consumers buying? With the exception of 2007, the industry hasn’t had an up year since 2002.

Before the current economic downturn, speculation as to why consumers weren’t buying included negative press from premium hikes and sticker shock from repriced policies. But there has also been an usually-unspoken fear: what if the industry is selling something that most people just don’t want–ever? Is it selling 8-tracks and they want iPods? Or is it selling iPods and they want an 8-track? Would price be less of an objection if the benefits were different?

The dust has settled on the widespread repricing of LTC insurance premiums. A lifetime benefit period with compound built-in inflation protection, long the gold standard for LTC insurance protection, has been priced out of reach for many buyers. Can product innovation bring us benefits people want to buy, at an affordable price, that are credible solutions to the problem of LTC? What can CLASS teach the industry as it pursues the Holy Grail of LTC insurance?

The current CLASS ACT (included in the Senate’s HELP Committee health care reform proposal) has a minimum average daily benefit of $50, with an inflation clause. There is no maximum benefit period. Cash benefits would be paid into a “Life Independence Account.”

Questions to consider: Is this more along the lines of what LTC insurance prospects want? Do people want simpler policies? Do they want cash benefits to manage their own expenses as they like? How much cash is required to make a difference, or, put another way, how much of a cash benefit is required to make a policy steak, not just marketing sizzle? Is the CLASS benefit of $50/day enough to make a difference?

Results of “Cash and Counseling,” a quantitative 10-year demonstration project involving 6700 people, lead us to conclude that there is much less to fear than to like about a CLASS-like benefit. The project involved paying Medicaid recipients a cash benefit to purchase care. It was a private-public partnership supported by both Republican and Democratic administrations. The cash payments in many cases were even less than CLASS. (According to a 2005 report on the project, payments ranged from a little over $300 a month to over $1,000 a month, depending on the state. A link to the report appears below.)

Over the 20+ year modern history of LTC insurance, only one or two carriers have provided a true cash benefit policy.

However, much recent product innovation has been around simplifying reimbursement policies or having both cash benefit and reimbursement benefits coexist on one policy (alternate cash benefit). In fact, a small number of LTC insurers have been selling these alternate cash benefit policies, and their experience is interesting. At one of the carriers, we hear, virtually all claimants choose the cash benefit, as opposed to collecting under a much higher reimbursement benefit. It seems that claimants are in no hurry to switch over to reimbursement.

The takeaway? Apparently, money has solved their care problem.

Our personal and professional experiences tell us that $50 day in cash can make a profound difference in home-based claims.

We wonder, though, would people on claim be up to managing their care? Would they be easy fraud targets? Common sense would seem to indicate there could be problems.

The report on Cash and Counseling suggests otherwise. In 10 years of history, the researchers reported no major incidents fraud or abuse. Fully 99% of participants signed up for bookkeeping, check-writing and taxpaying services that took the payroll demands of being a caregiver’s employer off the participant’s shoulders. The availability of an affordable service to help claimants to do this could be a valuable LTC insurance benefit.

No one has to be a rocket scientist or even in the LTC insurance sales business to know that people want to receive their LTC at home. And while they may not want their adult child to be a hands-on caregiver, that choice may be preferable to bringing in an unpleasant stranger, especially if the cost/benefit equation can be influenced by giving the parent the ability to monetarily compensate the child for work time lost.

One caveat: Product innovation shouldn’t be at the expense of usability and integrity. It does not make sense to offer a clone of CLASS benefits. As industry professionals know, when a LTC claim progresses, sometimes people who were able to get by with inexpensive home care need more care or have to move to a facility.

However, just because CLASS doesn’t cover 100% of these higher LTC expenses, doesn’t mean a CLASS-like benefit isn’t valuable.

Marilee Kern Driscoll, CLU, is a Plymouth, Mass. speaker, consultant and writer specializing in reaching age 50+ consumers and their advisors. Her e-mail is [email protected]. Michael Lynch is general manager at Goldencare USA, Plymouth, MN. His e-mail is [email protected].

Proposed CLASS Act Benefits:

o The CLASS Act of 2007 was to be financed through voluntary payroll deductions of $30/month, with an opt-out provision. (NOTE: This is not to be confused with the 2009 Senate’s HELP CLASS proposal, which proposed an average premium of $50/month).

o Tier 1 benefits of $50/day would be paid to eligible individuals who have 2 or more impairments of activities of daily living (ADLs) or the equivalent cognitive impairment.

o Tier 2 benefits of $100/day would have been payable for 4 or more ADLs or the equivalent cognitive impairment.

o The monthly case benefit would be posted to a debit account. Amounts not used are carried over month-to-month, but not year to year.

o The program benefit can be an addition to long term care insurance, according to the press release issued by Sen. Kennedy’s office on July 10, 2007.

Related links:

The original Kennedy 2007 CLASS press release

The Cash & Counseling report


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