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Life Health > Health Insurance > Health Insurance

LTCI Watch: Skepticism

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Last week, I wrote a blog entry about an analysis by a financial planner who tried to figure out the present value of the stream of cash needed to pay for good private long-term care insurance (LTCI) coverage.

In other words: If you were, say, a 50-year-old who wanted to create a safe bank account or government bond fund today, and use the income from the fund to pay for the LTCI policy until you were 85, how much cash would you need to put in the fund today?

One reader took the opportunity to suggest that I’m “skeptical about long-term care insurance.”

I like to think that I have an open mind, and I have to acknowledge that I have a highly impressionable mind. I have to admit that I’m still rooting for the idea that Santa Claus somehow exists.

But I, like most U.S. reporters, am pretty obviously biased in many ways. I’m biased in favor of the idea that peace, safety, niceness and economic prosperity are generally better than the opposites; that the United States is nice; that, all other things being equal, owning insurance is probably generally a good thing; and that I want more readers to read my articles rather than fewer.

I’m absolutely not qualified to know whether any particular insurance company is a good company, whether any producer or consultant is a good producer or consultant, whether one product that meets state insurance department standards is “better” than another product that meets state insurance department standards, whether any particular product is good or bad for any particular individual, or what the future holds. But, to me, it just seems as if the concept of having private LTCI coverage is a great idea, and as if the people writing and selling LTCI are making heroic, very obviously necessary efforts to educate people about the need to plan for LTC costs.

I felt sad when some readers viewed the column as being skeptical toward private LTCI.

To me, it just seemed as if the idea of the present value of the cash needed to pay for LTCI coverage is an interesting idea all by itself.

A lot of you readers are financial planners yourselves, or at least have spent a lot of time calculating present values yourselves in connection with licensing or professional designation exams. I, honestly, haven’t.

To me, it seemed as if the interesting thing was to figure out what the present value of the long-term care (LTC) nursing home benefits obligations that Medicaid has built up is.

Readers pointed out (quite persuasively, I think) that the financial planner who came up with the present value estimate used an interest rate that was very low and a price for LTCI benefits that was very high, and that he ignored the fact that he could use the principal in the LTCI premium fund as well as the income to pay for the LTCI policy.

But, still: What hit me is that, no matter how many adjustments you make to that formula, the present value of Medicaid LTC obligations is huge. Maybe something like a quarter, half or all of the financial wealth that the United States now has.

Unless scientists really do figure out how to prevent most cases of Alzheimer’s soon, or engineers develop easy-to-manage fusion reactors and that gives us a fabulous new economy, or some other amazing change occurs, there’s just no possible mathematical way for the government to meet all of the Medicaid LTC obligations it has accumulated and pay for acute health care and pay for a military and pay for all of the other expenses that governments have.

Sunforester will roll her eyes at the idea of freeloaders expecting the government to pay their nursing home bills in the first place.

Other folks here who come at all of this from the perspective will rail against the idea of the strong and solvent ignore the moral claims of the aged and the infirm.

But — unless science and technology save our bacon — something has to give. We might figure out some way to keep older, frail people comfortable in 2040, but whatever system exists will look a lot different from the system we have today.

I think one important reason to encourage companies to write private LTCI and individuals to buy it is that having a functional commercial LTCI market simply helps people think in a clear, hard-headed way about planning for LTC costs.

As Claude Thau, the well-known LTCI seller and actuary has said, one reason to split the insurance industry from government is that it’s a way to make effective regulation possible.

When the government is both responsible for running an insurance program and regulating the program, it’s likely to be wildly over optimistic early on, then, when finances go sour, let itself get away with financial murder.

Look at the sad story of the Patient Protection and Affordable Care Act (PPACA) Early Retiree Retirement Program (ERRP). Congress gave it $5 billion to help subsidize employer retiree health plans for workers ages 55 to 64.

I’m sympathetic to objectivists and other people who believe in a pure free-market system, but I’m just not an objectivist. I don’t have any theoretical objection whatsoever to the idea of the existence of ERRP. I have no objection to some of my tax dollars going to pay for ERRP. I take no joy in seeing ERRP have problems.

But, because of the way Congress designed the ERRP system, ERRP managers blew through the $5 billion in funding by September 2012, now have virtually no ERRP cash left, and have just about no way to reimburse $2.5 billion in ERRP reimbursement requests.

Imagine that a big, private LTCI company generated $5 billion in revenue in two or three years, then shut down with $2.5 billion in unpaid claims on its books. Regulators would get medieval on that insurer, and executives at competitors would concede that the insurer had it coming.

But ERRP closed down with a whisper, and, before I read the U.S. Government Accountability Office (GAO) report on the matter, I had no idea how dire the ERRP situation was. I don’t see consumer groups or government agencies, other than the GAO, rushing to pillory either the ERRP managers or, if the real problem is that ERRP statute, the lawmakers who drafted the ERRP program statute.

I just don’t have the actuarial and economic forecasting skills to know whether private LTCI can really make much of a dent in total LTC financing needs. But I know it can help the people who do buy and use the coverage very much.

And I think that, whatever the existence of the industry does in terms of percentages of financing need met, it does a lot to help make sure there are hard-headed, bottom-line-oriented, skeptical people who do have serious actuarial and economic forecasting skills thinking about these issues.

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