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Life Health > Health Insurance > Health Insurance

LTCI Watch: California

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A reader emailed me a copy of a David Lazarus column about long-term care insurance (LTCI) rate increases that appeared recently in the Los Angeles Times.

“For decades,” Lazarus writes, “the United States has relied primarily on private-sector companies to meet Americans’ health-insurance needs. One upshot is that tens of millions of people have been left uninsured. Another is that this country has the highest healthcare costs in the world… Now we face the prospect of millions of baby boomers entering their homestretch and placing unprecedented strain on the nation’s senior-care resources — and potentially not being able to pay for it.”

People who sell LTCI coverage are not happy with the article.

Lazarus writes about a serious problem — two California residents who believe they will have to choose between paying 90 percent more for their 10-year-old LTCI coverage, cutting back on coverage to keep the premium stable, or dropping the coverage.

Lazarus was writing a column, not a news story, and he did call the insurance company that issued the coverage for a reaction. 

Some agents are saying policyholders should be happy they got coverage that turned out to be much more valuable than expected for such a low price for 10 years.

Well, sure. But the coverage was cheap during the 10 years the policyholders were unlikely to need the coverage. Maybe the policyholders would have decided to buy something fun, like a boat, if they knew how much the coverage would cost when they got closer to needing the coverage.

I think a better point to make is that acute medical care and long-term care (LTC) finance are two separate areas, for now. The United States looks bad when it comes to acute health finance but is close to the Organisation for Economic Co-operation and Development (OECD) average when it comes to paying for LTC services.

And the truth is that the United States actually does have a tattered LTC benefits program: Medicaid. LTCI producers will say it’s a safety net program for the poor, and that it doesn’t give people the ability to pass on assets to their children, but how many young members of the Silent Generation or baby boomers will really have any financial assets to pass on to their children, anyway?

Most of us children of those folks are more afraid of inheriting bill collectors, repo men and homes out of “Hoarders: Buried Alive” than looking forward to inheriting much cash.

I think another important point to make is that the factors that have bedeviled issuers of private LTC insurance have hit hard at just about every entity, public or private, that has anything to do with any kind of post-retirement benefits. 

Those factors include low interest rates, low growth in productivity, resistance to paying more taxes, increases in fuel and food costs and the use of the “peace dividend” to fight terrorism.

And those factors have affected people in Greece, Spain and the Netherlands at least as much as they’ve affected people in the United States, and they’ve affected nonprofit or quasi-nonprofit organizations such as Medicaid, Medicare, the U.S. Postal Service and the California Public Employees’ Retirement System as much as they’ve affected private LTCI carriers.

The main differences between private LTCI carriers and Medicare are that accounting rules make the LTCI carriers report on their funding problems clearly, as they go along, and that they at least have some theoretical ability to make up the gap by asking someone (the policyholders) for more cash, and don’t just have to try not to think too hard about the movie “Soylent Green” as they see the “Soylent Green” world rolling in.

But, on the other hand: The insurers and producers kept talking about how the great thing about LTCI was that the rates wouldn’t go up.

So, the family Lazarus wrote about did actually get great value for its money. 

In my opinion, Lazarus is failing to recognize what a crushing mountain of “Soylent Green” horror we’re all up against.

But insurers enabled that denial by practicing denial of their own when they wrote and marketed LTCI policies 10 years ago. The insurers failed to recognize how quickly and how terrifyingly the world could change.

Instead of trying to offer blanket “guarantees,” and then fold when reality turns out to be a scenario that would have been in the bottom (most horrible) 1 percent of expected scenarios, I think insurers should very clearly describe their hopes and expectations for the universe in their policies, and then offer guarantees that apply when, and only when, reality performs roughly as expected.

Insurers can certainly offer guarantees that protect consumers if the stock market falls 20 percent, or if interest rates are 2 percentage points lower than expected for a few years.

Insurers probably can’t make good on guarantees if interest rates are 6 points lower than expected for a generation, the government seizes all of the banks, or a meteor destroys half the country. 

If insurers could find a nice, soothing, tactful way to describe the situations in which they can provide guarantees, and make sure consumers (and columnists) understand the practical limits of the guarantees, I think that would help inoculate the insurers against future rate increase columns. 

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