59

amounts shall be timely paid by the government to the carrier for each such
contract.

Eligible Contract: Any group or individual long-term care insurance contract
(including reimbursement and per diem type policies) that:

(a) is a qualified long-term care insurance contract (as defined in Title Ill,
Subtitle C of the Health Insurance Portability and Accountability Act of
1996, Pub. L, 104-191, or as this definition may be amended),

(b) is issued by a carrier that is licensed by the State or other jurisdiction in
which the insured resides to issue insurance contracts,

(c) provided benefits and coverage that cannot be unilaterally changed by the
carrier (except for nonpayment of premiums and in the case of
misrepresentation that would permit a carrier to contest a qualified long-
term care insurance contract), and provides premiums that are
determined on a noncancellable, or guaranteed renewable basis.

(d) is fully insured by the carrier or reinsured in all or part with other carriers,
and

(e) the Office determines to be appropriate for the provision of long-term care
insurance, taking into account the financial soundness of the carrier and
its administrative capability to serve covered insureds.

For this purpose, a carrier means a voluntary association, corporation,
partnership, or other non-governmental organization which is lawfully
engaged in providing, paying for, or reimbursing directly or indirectly the cost
of long-term care services under group or individual contracts of insurance in
consideration of premiums or other charges payable to the carrier.

Enroliment Season and Communications: The Office shall, at least annually,
provide a period of not less that 3 weeks during which any employee or
annuitant shall be permitted to apply for coverage with a carrier. In addition,
employees may apply for coverage any time during a calendar year. The
Office shall, after consultation with the carrier, make available to each such
employee and annuitant information as may be necessary to enable the
individual to exercise an informed choice among eligible contracts.

Continuation of Coverage: !f an individual (whether or not an employee or
annuitant) is covered under an eligible contract and withholding ceases to be
available or sufficient (such as after a divorce), such individual shall be
entitled to pay premiums directly to the carrier to continue the insurance in
force.

-13-


123

this review will likely lead to several proposals in the benefits area,
although it is too early to comment today on what they might be.

With the Department of Health and Human Services, we are also
awaiting a study of employer-sponsored group long-term care insur-
ance being conducted by the Lewin Group. The project results,
which are expected in the summer of 1999, should offer added in-
sight on the design of a successful long-term care insurance pro-

‘am.

Finally, Mr. Chairman, you asked me to comment on the merits
of self-insured long-term care insurance. I think the evidence clear-
ly demonstrates significant evolution in this insurance market and
State regulation of it since 1987. Given that evolution, competition
among qualified private insurers seems a reasonable approach.

Government sponsorship of a long-term care insurance program
for the Federal workforce, we think, could provide leverage for pre-
mium discounts and policy enhancements.

This concludes my statement. I would be happy to answer any
questions you might have.

[The prepared statement of Mr. Flynn follows:]


25

future, unprecedented growth in the elderly population by 2030 alone will place additional
burdens on the long-term care system.

Long-term care consists of many different services aimed at helping people with chronic
conditions. Those who need help at home with everyday activities may rely on personal
assistance services or a homemaker. Care in the community includes adult day services and
assisted living facilities. Individuals who need skilled care or constant supervision often receive
care in a nursing home.

Long-term care can be expensive. For example, a person with a severe disability who lives at
home may pay over $36,000 per year for the help of a home care aide.’ Assisted living facilities
charge $26,000 on average. A nursing home can cost $40,000 per year.‘ All of these figures are
averages and can vary widely depending on geographic location.

Increasing numbers of baby boomers are becoming aware of long-term care as they provide
care to their own aging parents. Many of these caregivers are beginning to think, who is going to
take care of me? Baby boomers emphasize that they do not want to end up in a nursing home.
However, despite people's preference for services to help them stay in the home and community,
government spending predominantly pays for institutional care. Medicaid is the largest
government payer of long-term care, but only 21 percent of Medicaid long-term care
expenditures cover home and community-based services.* Less than half of states (22) have
programs that pay for long-term care services in assisted living facilities. As a result, those who
impoverish themselves paying for long-term because they lack private insurance or substantial
funds could spend their remaining days as a Medicaid recipient in a nursing home.

Given the current institutional bias in how long-term care services are financed and in the
absence of a major change, nursing home use will continue to dominate long-term care
expenditures over the next 30 years. Under this scenario, by 2030 we can expect the number of
people receiving institutional care to increase to 5.3 million individuals, almost double the
current nursing home population (Figure 2).

‘American Council of Life Insurance 3


154

Honorable John L, Mica
April 14, 1998
Page 6

[hope the above responses are helpful to you and members of the Subcommittee and staff
as you move forward with this important effort to make long-term care insurance
available to federal employees, Should you have further questions, please feel free to
contact me at 617 572-7497 or Ms. Angela J, Arnett, Senior Counsel, ACLI, at 202 624-
2319.

Sincerely,

David S. Martin

Chairman

ACLI Long-Term Care Work Group &
Director

Contracts & Legislation

John Hancock Mutual Life Insurance Company


‘American Council of Life Insurance

April 14, 1998

The Honorable John L. Mica

Chairman

Subcommittee on Civil Service

Committee on Government Reform and Oversight
United States House of Representatives
Washington, D.C. 20515

Dear Mr. Chairman:

I want to thank you for your invitation to testify before the Subcommittee’s hearing on
March 26, 1998 on behalf of the American Council of Life Insurance (ACLT) and its
member companies. It was certainly my pleasure to appear before the Subcommittee,
both to offer testimony in support of your efforts to offer private long-term care insurance
to federal employees, retirees, and their families and to answer questions from the
Subcommittee. In your letter dated April 6, 1998, you requested further information,
which I have included in this letter.

1. Please describe the various types of long-term care insurance plans that
employers are offering to their employees. Please include types of services
covered, benefit amounts, premium costs, eligibility requirements, and
protection from inflation.

There are two types of group long-term care insurance plans: disability (also known
as "per diem") and reimbursement (also referred to as “indemnity"). A disability
model policy provides money to be used at the discretion of the insured for covered
services. Once the insured becomes eligible for benefits under a disability model
policy, the claimant receives a daily maximum benefit payment, but need not incur
charges in order to receive payment. A reimbursement model policy provides
payment for covered services received up to the maximum amounts specified in the
policy.

131002 PENNSYLVANIA AVENUE, NW.
WASHINGTON, 0.C. 200082599
202/624-2000 + FACSIMILE 202/624-2319
ToD 202/624-2080


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York

J. DENNIS HASTERT, Illinois
CONSTANCE A. MORELLA, Maryland
CHRISTOPHER SHAYS, Connecticut
CHRISTOPHER COX, California
ILEANA ROS-LEHTINEN, Florida
JOHN M. McHUGH, New York
STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. McINTOSH, Indiana
MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

ROBERT E. WISE, dr., West Virginia
MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

GARY A. CONDIT, California

CAROLYN B. MALONEY, 3 a York
THOMAS M. BARRETT, Wi

BLEANOR HOLMES NORTON, We Washington,

CHAKA FATTAH, Pennsylvania
ELIJAH E. CUMMINGS, Maryland
DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Llinois
DANNY K. DAVIS, Dlinois

JOHN F. TIERNEY, Massachusetts
JIM TURNER, Texas

THOMAS H. ALLEN, Maine
HAROLD E. FORD, JR., Tennessee

MARSHALL “MARK” SANFORD, South
Carolina

JOHN E. SUNUNU, New Hampshire

PETE SESSIONS, Texas

MICHAEL PAPPAS, New Jersey

VINCE SNOWBARGER, Kansas

BOB BARR, Georgia

DAN MILLER, Florida

BERNARD SANDERS, Vermont
(Independent)

Kevin BINGER, Staff Director
DANIEL R. MOLL, Deputy Staff Director
WILLIAM MOSCHELLA, Deputy Counsel and Parliamentarian
JupirH McCoy, Chief Clerk
PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON THE CIVIL SERVICE
JOHN L. MICA, Florida, Chairman

MICHAEL PAPPAS, New Jersey
CONSTANCE A. MORELLA, Maryland
CHRISTOPHER COX, California

PETE SESSIONS, Texas

DAN BURTON, Indiana

ELIJAH E. CUMMINGS, Maryland
ELEANOR HOLMES NORTON, Washington,

pc
HAROLD E. FORD, JR., Tennessee

Ex OFFICIO

HENRY A. WAXMAN, California

GEORGE NESTERCZUK, Staff Director
JEFF SHEA, Professional Staff Member
CHARLI Coon, Professional Staff Member
CAROLINE FIEL, Clerk
Cepric HENDRICKS, Minority Counsel

dp


119

policies are analyzed thoroughly, which the Consumer Reports article did not
seem to undertake, the value index is an unreliable indicator of whether a
company will raise future LTC! premiums.

ISSUE: How agents sell LTC]

CONSUMER REPORTS: They (agents) limit your choices, impart
misinformation, and almost never explore the complexities of a policy.

HIAA RESPONSE: HIAA strongly believes that consumers have a right to
appropriate insurer and agent sales and marketing practices. LTC! is considered
by many agents a complicated product and requires expertise and product
knowledge to sell responsibly. In fact, HIAA, through its education program,
offers a certification program on long-term care and other health insurance
products to better educate agents and others. A few “bad” agents should not be
generalization for all LTCl agents. It does a disservice to the majority of LTC
agents who responsibly market the product.

ISSUE: Long-term care for ALL people

CONSUMER REPORTS: The US still needs a universal system for all medical
care—including long-term care — funded by a broad based tax ....

HIAA RESPONSE: HIAA believes that social insurance proposals for long-term
care are prohibitively costly and unwarranted given the potential of the private
market. Moreover, research has shown that social programs are an ineffective
use of public dollars. The marginal benefits from such programs assist the
elderly who need it least — those with higher income and asset levels. HIAA
supports a comprehensive approach to financing long-term care which utilizes.
the inherent strengths of both the private and public sectors. HIAA believes that
given the knowledge and opportunity, the vast majority of Americans would
prefer to make provisions for their own long-term care needs through private
savings mechanisms, especially those involving risk pooling. HIAA also believes
that given competing national priorities, this nation cannot afford to pay for a
long-term care program financed entirely out of taxpayer dollars. HIAA also
recognizes that the private sector cannot realistically meet the entire need and
that there is a significant need for public sector involvement. HIAA believes that
government should target its assistance to those who are in greatest need.


(21977 He nares Acute
eatangon, 06
Jed ape rene

Guide to
longterm Care
Insurance

‘Most Americans Know about the kind of heakh insur-
ance that pays doctor and hespital bis. But the kind
that pays for longterm care in a nursing home or at
home is not as familar This booldet explains what
longterm cae i, how lang tenn care insurance works,
and what it costs. It also has a checklist you can use to
compare policies Wit this information. vou'l be able
ty make an informed decision.

kar 's “ongrerm care?
‘

Long-term care goes beyond medical care and qursing
care 10 include al the assistance you could need if you
eter have a chronic illness or disability that leaves you
Unable 10 care for yourelf for an extended penod of
fame You can recewe longterm care ina nursing
home oF in your owen home. in the form of help with
such activites ay huthing oF dressing. Long-term care
scan be of help te young or maldle-aged person who
fas been an an accident or suffered a debilitating ill
snes But mest longterm care services are used be
ckdet people.

evond muning homes, there ma range of series wai
ahle an the communiny «9 help: meet longterm care
exes Care ven by tantly means can be suppke
mented by visting anes. home Health sides. inendly
istor programs. home-deliened meals, chore seme
adult vcare cunies. and respite sersices for caregven,
who need a rea from daly esponsbaiv,

Thee sennes are hexoming more widely svalable
Some o al of theme may he found in your community
Your focal Area Ageney on Aging or Office on Aging can
tie sou Hocate the eves vou nee. Call the Fdercare
Texsator al 80.67 11 to ket your bol etic,


152

Honorable John L. Mica
April 14, 1998
Page 4

4. How is "guaranteed issue" addressed in group or individual plans?

Guaranteed issue is only available in the group market; individual policies are
underwritten for all applicants. When offered, guaranteed issue applies only to
actively at work employees to avoid anti-selection, and to new hires when they first
become eligible for benefits.” It is offered during the initial enrollment period and at
other periods mutually agreeable to the insurer and the employer. Guaranteed issue is
only available when a single carrier has been authorized by the employer to solicit its
population. In instances where multiple carriers are involved, either a modified or
full underwriting approach is used, in order to avoid anti-selection.

5. What portability provisions are included in employer-based group plans?

Persons insured under a group long-term care insurance plan have full continuation of
coverage (i.e., portability). Group long-term care plans generally provide that an
individual may remain insured under the group plan after termination of employment
on the same rate basis.

If an employer chooses to move its long-term care insurance plan from one carrier to
another there is still full continuation of coverage; however, the original contract must
anticipate transfer of built-up reserves that result from entry age-level premium in
order to arrive at an equitable exchange.*

6. If policies are less restrictive now than in the past, what limitations still exist and
what are the impacts of these limitations on employees?

Policies have, in fact, become less restrictive and more comprehensive in terms of
what they cover. Consistent with the NAIC Long-Term Care Model Act and
Regulation:

Some carriers of long-term care insurance exclude coverage for those with certain
pre-existing conditions.

© Other exclusions limit or exclude care that is needed due to acts of war, self-inflicted
injury, alcohol or drug disorders, mental and nervous disorders of inorganic origin,
for which reimbursement is available under a government program, or that is
provided outside of the United States.”


79

And because the long-term care insurance market is such a new
market, it is difficult to set premiums accurately. Little long-term
claims insurance experience yet exists, and it may not be available
for many years to come because many of those who currently hold
long-term care insurance will likely not use it for many years.

The largest barrier to the expansion of the private long-term care
insurance market is the lack of public readiness to use assets to
insure against the relatively low probability of need. Public edu-
cation is very much needed. Until it occurs and the public is ready
to 0 Pay either through premiums or taxes, it is un! ikely that the
goals of adequate coverage, universal access and affordability
through risk pooling will be achieved.

Mr. Chairman, this concludes my statement. I would be happy
to answer any questions you or members of the subcommittee
might have.

Mr. Mica. Thank you.

[The prepared statement of Mr. Fronstin follows:]


15

‘The ACLI study shows that private insurance can go a long way toward financing
the nation’s Jong-term care needs in the future. For example, if a large number of baby
boomers (workers age 34 to 52) purchased long-term care insurance, the share of nursing
home expenditures paid for by private insurance could increase from 3 percent today to
29 percent in 2030, Under this scenario, the Medicaid program could save $28 billion (in
1996 dollars) or 21 percent of total Medicaid nursing home expenditures. Similarly,
about 40 percent of individual “out of pocket" nursing home costs could be saved by the
increased ownership of long-term care insurance.

Many employers provide a long-term care insurance option to their
employees.

In the private sector, over 1,500 employers have already recognized the importance
of long-term care insurance and offer this benefit to their employees. These organizations
range in size from very small firms (under 100 employees) to Fortune 500 companies.
Employer-sponsored private insurance for long-term care is usually available to
employees and immediate family members. In addition, about three-quarters of
employers offering this benefit extend the option to purchase long-term care insurance to
retirees and their spouses. Average age of purchase of employer-sponsored coverage is

43.

In these times of restraint in employee benefits, why are increasing numbers of
employers offering long-term care insurance? A recent study by William Mercer found
that the most important reason cited by employers is the desire to offer a cutting-edge

benefit. Employers are beginning to recognize the importance of incorporating long-term


128

DEPARTMENT OF HEALTH AND HUMAN SERVICES HAS ALSO BEEN INTERESTED
IN DEVELOPING A LONG TERM CARE INSURANCE PROGRAM FOR FEDERAL
EMPLOYEES TO DEMONSTRATE ITS POTENTIAL. BEGINNING IN 1995, THEY
INVITED US TO PARTICIPATE IN A COOPERATIVE RESEARCH EFFORT. WE
ATTENDED SEVERAL HHS-SPONSORED MEETINGS TO HEAR PRESENTATIONS ON
EXISTING EMPLOYER GROUP PLANS. IN THE FALL OF 1996, WE DETERMINED
THAT THE NEXT LOGICAL STEP WOULD BE TO SURVEY FEDERAL EMPLOYEES.

TO DETERMINE THEIR INTEREST IN A LONG TERM CARE PRODUCT.

WE INCLUDED QUESTIONS IN THE 1997 FEDERAL EMPLOYEES HEALTH BENEFITS
CUSTOMER FEEDBACK SURVEY TO DETERMINE INTEREST IN COVERAGE, AND IF
SO, WHETHER FOR SELF, SPOUSE, CHILDREN, AND PARENTS/IN-LAWS. WE
ASKED IF EMPLOYEES WOULD WANT NURSING HOME CARE, HOME CARE, OR
BOTH. WE LISTED REPRESENTATIVE PREMIUMS AT VARIOUS AGES AND ASKED

RESPONDENTS ABOUT AFFORDABILITY.

FOURTEEN PERCENT OF THE RESPONDENTS EXPRESSED NO INTEREST IN LONG
TERM CARE COVERAGE. REMAINING RESPONDENTS WERE MOST INTERESTED
TN COVERAGE FOR SELF, AT 36 PERCENT, AND SPOUSE , AT 25 PERCENT. SIXTY-
THREE PERCENT OF RESPONDENTS DESIRED BOTH INSTITUTIONAL AN D HOME
CARE. OPINIONS ON THE AFFORDABILITY OF PREMIUMS VARIED WITH THE AGE
AT WHICH THE PRODUCT WAS PURCHASED. FOR EXAMPLE, AT AGE 25, 12

5.


134

they need to remain in their own homes and communities and to
protect themselves against the risk of catastrophic nursing home
costs.
We thank the subcommittee for inviting us to testify and will be
happy to answer questions.
‘he prepared statement of Mr. Williams follows:]


74

30 days to return the policy and get your money back r
Ths ealed ihe shee ok. longterm cate policy checklist
“The following checklist will help you compare policies

Dont give in to high-pressure sles tactics. Dont be Jes ay be soma

afraid to ask your insurance agent to explain anything

that is unclear. If you are not satisfied with an agent's 1 Wr senvces are covered
answers, ask for someone to contact in the company Nusing home care
‘self. Call your sate insurance depar.ment if you are Home heath care
‘ot satisfied with the answers you get from the agent Adu daveare
(«from company’ representatives. Akernate care
Respite care
Omer

2. How much does the policy pay per day
For nursing home care?
For home health care?
For ad diye
For alternate ce
Foe respite a
Other!
Hew long wall Dents Las
Jax uring Hoon?
AC home?
Deas the potky hate a mu
team henefit I< Wace 2

For nursing home caer
For howe health cate?

Deas the poly hase 4 maximum

leayat of evra toe ect period

of continemient If. wht 6

oe nursing ome caret
For howe heath care?

How long mas I watt helene

Provaisting conditions ae coveted

How many avs mos Tit

before benefits bein?
For nursing bome caret
er hone eal care

Ae Alrheimers disease and

‘ther oman: mental and

eros disorders coven

oes this pedi eit
Am aseesanent scien of dal living?
An asesmnent cognitive impairment”
Pioseian conicaton ff new?

n a


32

The Medicaid program could save $28 billion (in 1996 dollars) or 21 percent of total
Medicaid nursing home expenditures as a result of increased ownership of long term care
insurance. This amount represents more than one out of every five dollars that Medicaid would
have had to spend on nursing home care in the year 2030. These savings translate into 19
percent fewer nursing home residents who would need to rely on Medicaid in 2030 or about
490,000 individuals.

Figure 8

Impact on Medicaid NH Expenditures (2030)
(Inflation - Adjusted)

Bios
suo
siz | Corrent Trends Incrnsed LTC ins
‘$100 — —
‘$80
so
so
$20

2000 2030

‘Source: ACLI Policy Research Dept.

The loss of financial independence due to impoverishment is a big concern to individuals
who need long-term care. The projections suggest that 385,000 of the 863,000 nursing home
residents at risk of impoverishment in 2030 could avoid reliance on Medicaid through private
insurance. This means that long-term care insurance could reduce the number of nursing
home residents who "spend-down" by 44 percent. \n addition, many people who impoverish
themselves paying for care have little choice but to enter a nursing home. A significant portion
of these individuals may avoid institutionalization since itis likely that their long term care
policy included home care.

Out-of-pocket expenditures borne by nursing home residents and their families could be
substantially reduced due to the increased ownership of long term care insurance. About 40
percent of out- of-pocket costs could likely be saved by the increased ownership of long term
care insurance. As shown in Figure 9, total out-of-pocket expenditures could be reduced by $63
billion to $95 billion (in 1996 dollars) in 2030.

‘American Council of Life Insurance 10


1038

Fourth, insurance carriers must have reasonable standards for making enrollees eligible for long-
term care benefits. So-called “benefit triggers” rely on a policyholder’s inability to perform a
list of “activities of daily living,” which include eating, walking, getting in and out of bed or @
chair, dressing, bathing, using a toilet and remaining continent. Policyholders who fail to

perform two or more activities of daily living should qualify for long term care benefits.

Moreover, some individuals may be able to perform activities of daily living, but have a medical
condition that prevents them from taking care of themselves. Benefits ought to be triggered
because of medical necessities as well. And, all too often we find that the greatest need for long
term care is for a person with a cognitive disorder like Alzheimer’s disease. Yet, unfortunately
many private plans exclude coverage for this or other mind-robbing illnesses. We believe it is a

must!

Fifth, long-term care plans need to be flexible. Individuals who want home and community-
based care instead of nursing home care should have that choice. Plans could also be tailored to

individual needs by allowing enrollees to receive benefits in the form of services or cash.

Sixth, plan portability would be necessary for those who leave federal service. In today’s
society, career mobility between the private and public sectors, as well as among individual
employers, is not the exception, but the rule. We believe that if long-term care plans are to

attract enough workers to make premiums affordable, portability is essential.


39

Figure 12, |
Percent Who Can Afford LTC Insurance by Age
aa bein
| 35-39 Years Old B
| (40 - 44 Years Old 7m i
45 - 49 Years Old a1
50 - 54 Years Old 2
‘55 - 59 Years Old 63
60 - 64 Years Old 47
s+ 31
Total 62%

‘The implications of this are very significant for the future potential of long-term care
insurance. We need to educate baby boomers that it is important to purchase insurance at
younger ages when it is more affordable. The results of this study indicate that about three-
{quarters of individuals ages 35 to 44 could afford a policy if they spend 2 percent or less of their
income on private insurance (see Figure 12). Under this criteria, 46 percent of those ages 35 to
44 would be able to afford a 5 year policy, while the rest would purchase a 2 year policy.
Similarly, 58 percent of individuals ages 45 to 49 years old could afford a 5-year policy.

‘©American Council of Life Insurance 17


64

children’s college tuition) and financial and retirement planning. Further, the
educational effects of such tax incentives could far outweigh its monetary value
by educating consumers about an important issue and as a result, would help to

change attitudes as well.

Encouragement of Delivering Quality Long-Term Care Services and Focus
on Research Affecting Long-Term Care Use and Costs is Critical - Rather
than spend tax dollars to provide long-term care to those who can afford to
protect themselves, HIAA believes it is a higher priority to devote public
expenditures toward encouraging the delivery of quality long-term care services.
Reimbursement policy under public progiams must be adequate to ensure high

quality patient care and deter cost-shifting to private paying patients.

Public expenditures should also focus on research affecting long-term care use
and costs, and support of budget-neutral demonstrations involving public-private
financing partnerships. In addition, more resources are needed in basic and
applied biomedical aging research to facilitate the management of chronic
disease and disability. Treatments which ameliorate or control conditions such
as Alzheimer's disease, incontinence, and osteoporosis will greatly enhance the
quality of an older person's life and significantly reduce or delay the need for

costly long-term care services.

Another priority for additional public spending on long-term care would be the
monitoring of genetic studies. These studies could help in learning more about
the aging process and how to reduce or delay the impact of aging on service

delivery. Applying lessons learned from these efforts could improve the ability of

-18-


148

Honorable John L. Mica
April 13, 1998
Page 5

6. What is the range of administrative costs incurred and administrative
responsibilities assumed by the private sector employers in offering
Jong-term care insurance benefits to their employees?

The administrative costs incurred by the employers offering a long-term care
insurance plan to their employees is minima!. Generally, the insurer is
responsible for the majority of these administrative costs. The insurer is typically
responsible for the following: production of enrollment kits; sponsorship of and
participation in employee informational meetings; production of marketing and
informational material; underwriting costs for eligible participants; and other
related activities.

The administrative costs borne by the employer are minimal and generally relate
to collection of premiums (through payroll deduction); personnel costs for initial
selection of the long-term care plan; costs associated with maintenance of the
long-term care plan (i.e., tracking of enrollees and provision of plan information
to employees who leave the company and may want to maintain their long-term
care coverage individually); and expenses for producing any employer
endorsements or additional information on the long-term care insurance plan
that the employer may wish to provide to its employees.

1 hope these responses help you in moving forward with your proposal to
make long-term care insurance available to all federal employees, retirees and
their dependents. If you have any questions, please feel free to contact me at
(207) 770-4311 or Susan Coronel at (202) 824-1697.

Sincerely, 2
Dad E neat} he

David H. Brenerman

HIAA LTC Committee &

Second Vice President

Government Relations

UNUM Life Insurance Company
of America


35

We need to educate baby boomers about the risk that they will need long-term care and the
impact of unplanned long-term care expenditures on their financial security.

Because it seems so far off in the future, few members of this generation have begun to
prepare for their own long-term care needs. Part of this stems from the fact that Americans tend
to underestimate the risk of needing assistance due to disability. A recent survey conducted by
the National Council on Aging and John Hancock reported that more than two-thirds of the

survey respondents found it difficult to admit that they would ever need some long-term care
during their lives.

In reality, today about 1 in 10 Americans older than 65 and almost half of Americans age 85
and older who live in the community require assistance with their everyday activities." The risks
of needing nursing home care are also substantial. Over half of women and nearly one-third of
men age 65 and older will need a nursing home stay sometime during their lifetime.

Many baby boomers are not planning for the future because they are preoccupied with more
immediate concerns. Boomers currently represent almost half of all workers, and are parents of
about 60 percent of the nation’s children under age 18, The baby boomers are now in their high-
expense years, between the ages of 32 and 50, when child care and housing expenses tend to
dominate their budgets. In addition to their immediate needs, baby boomers are also trying to
save enough for their children’s college education.

Looking into the future, many people are worried about the financial well-being of baby
boomers when they retire. It is highly possible that some baby boomers could spend one-third
of their lives in retirement. Many fail to realize that rapid increases in long-term care
expenditures projected for the 21* century have serious implications for their retirement security.

Equally importantly, baby-boomers need to look at retirement security in different terms
from their parents. As life expectancy and the risk of disability increases, retirement is becoming
alless predictable stage in life. An unanticipated nursing home stay can deplete hard-earned
savings and threaten a family’s financial future. At the same time, the 21* century could see an
erosion of the social safety net for aging baby boomers. If expenditures for long-term care
continue to rise dramatically, government may try to control costs by limiting Medicaid benefits
and tightening eligibility requirements for middle-income individuals. At the same time, it will
become increasingly challenging for children of baby boomers to serve as their parents’ and
other relatives’ caregivers.

‘American Couneil of Life Insurance 3


Guide to
Long-lerm Care
Insurance



104

Seventh, the number of long term care plans offered to federal employees and annuitants should
be limited to ensure that enough individuals join a plan to build a satisfactory risk pool. Unlike
conventional health plans, it is hard to convince potential enrollees to buy an insurance product
they cannot imagine ever needing., For instance, I have an age advantage to most of you here,
yet Ihave difficulty believing today that I might need long term care--even tomorrow. And so
perhaps not showing a level of wisdom my age should guarantee, I have not bought a long-term
care policy. I suppose I cannot justify paying the premium cost for something I find hard to
realize I may ever need. Now, if I'm a hard sell, just think how difficult it will be to persuade a
30, 40 or even 50 year-old federal employee to buy long -term care insurance. Younger
employees should be rewarded with lower premiums for buying early into a long-term care plan.
Nonetheless, it will still be necessary to initially limit the number of plans available to build a

sufficient risk pool

Finally, a major effort to educate federal workers and annuitants will be necessary to assure an
adequate pool of plan enrollees. Such an effort should include an information and referral
service such as private-sector employers frequently provide to their employees along with long-
term care insurance. Beyond the insurance policy itself, information and referral service
counselors must be capable of telling employees and annuitants about the full range of long-
term care services available to them. This knowledge will help individuals make informed

decisions about long-term care options.


126

TYPE OF BENEFIT WOULD BE A MECHANISM FOR LONG-TERM FUNDING IN
COMBINATION WITH A BROAD RISK POOL--CHARACTERISTICS WHICH THE

FEDERAL EMPLOYEES’ GROUP LIFE INSURANCE (FEGLI) PROGRAM EXHIBITS.

WITH ASSISTANCE FROM INSURANCE INDUSTRY REPRESENTATIVES, WE
SUBSEQUENTLY DEVELOPED A PROPOSAL TO OFFER LONG TERM CARE
COVERAGE USING THE FEDERAL EMPLOYEES’ GROUP LIFE INSURANCE
PROGRAM AS A SPRINGBOARD. WE TRANSMITTED THIS PROPOSAL TO
CONGRESS IN SEPTEMBER 1987 AND IT WAS INTRODUCED IN BOTH THE HOUSE
AND THE SENATE. IT ENVISIONED VOLUNTARY PARTICIPATION FOR,
EMPLOYEES AGE 50 AND OLDER WITH NO NEW FEDERAL FUNDING, BUT WITH
ATTRACTIVE GROUP RATES. TO HELP FINANCE THE NEW BENEFIT, EMPLOYEES.
WITH AT LEAST 10 YEARS OF GROUP LIFE PARTICIPATION COULD ELECT TO.
TRADE A PORTION OF THEIR BASIC LIFE INSURANCE COVERAGE FOR LONG
TERM CARE COVERAGE, AND THE CORRESPONDING GOVERNMENT
CONTRIBUTION AND RESERVE ACCUMULATION WOULD APPLY TOWARD
REDUCING THE LONG TERM CARE PREMIUMS. THE PROPOSAL ENABLED OPM TO.
SET CRITERIA FOR INSURER PARTICIPATION , DETERMINE BENEFIT PACKAGES,

ESTABLISH PREMIUMS , AND MAINTAIN RESERVES.

CONGRESS TOOK NO ACTION ON OUR LONG TERM CARE PROPOSAL, THOUGH
THE PROPOSAL WAS REINTRODUCED IN THE NEXT CONGRESS, THE

3


45

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87

Ingurance Commissioners, 1993,

‘The Prudential. Written communication, 1994,

Shikles, Janet. Testimony. U.S. Congress. House Committee on Ways & Means. Subcommittee on Health. 11 April
1991.

‘Teachers Ingurance and Annuity Association, Long-Term Care: A Guide for the Education and Research Communi-
ties, New York, NY: Teachers Insurance and Anauity Association, 1993.

‘Transamerica Life Companies, Personal and written communication, April 1996.

USS. Bi-Partisan Commission on Comprehensive Health Care, A Call for Action. Washington, DC: U.S. Govern-
‘ment Printing Office, 1990.

USS. Department of Labor. Bureau of Labor Statistics. Employee Benefits in Medium and Large Private Establish-
‘ments 1993, Washington, DC: U.S. Government Printing Office, 1995.

US, Department of Labor. Bureau of Labor Statistics. Employee Benefits in Medium and Large Private Establish-
‘ments 1995. Washington, DC: U.S. Government Printing Office, 1998.

U.S. General Accounting Office. Long-Term Care: Diverse, Growing Population Includes Millions of Americans of
All Ages. GAOHEHS. 95-129. Washington, DC: U.S. General Accounting Office, 1994.

Weiner, Joshua M., Laurel Hixon Tilston, and Raymond J. Hanley. Sharing the Burden: Strategies for Public and
Private Long-Term Care Insurance. Washington, DC: The Brookings Institution, 1994.

‘Yakoboski, Paul, et al, “Employment -Based Health Benefits: Analysis of the April 1983 Current Population
Survey.” EBRI Issue Brief no. 152 (Employee Benefit Research Institute, August 1994).

Endnotes

“These data represent the total number of policies sold as of the date ‘Due to policy lapees, the

of policies actually in force is lower.

? Disability insurance replaces lost wages; it does not cover any health or long-term care costs.

One study indicates that, for persons who reached age 65 in 1990, 43 percent will enter a nursing home at some
time before they die. Of those entering a nursing home, 65 percent will have a total lifetime use of five years or
more. The authors of the study also projected that women are more likely to enter a nursing home than men
(52 percent versus 33 percent). See Kemper and Murtaugh (1991).



8

risdiction of the full committee, that simply do not cross-cut with
other jurisdictions.

On my own staff I have people to meet with Cedric when they
come on so they will know how to be a staff person, which means
he has become what in the teaching profession they call a master
teacher. I suppose the rest of it call it a mentor. In any case, his
standard of excellence he has achieved I will not say will be hard
to achieve, I will say will be what we should demand that others
strive for.

Cedric, you are irreplaceable. Now, go out and prove it by finding
us somebody as good as you to replace you.

Mr. Mica. Mr. Pappas.

Mr. Pappas. Cedric, I certainly wish you well. It wasn’t that long
ago that you trekked up to central New Jersey to my district in
probably one of the worst rain storms that we have had in a long
time. You endured that, and I think you probably were concerned
that the chairman would be taking this subcommittee on the road
a bit more and did not want to encounter any more monsoons. I
appreciate your participation that day, your taking your time and
the effort that you did to come participate in that, and certainly
have appreciated your professionalism as a member of this sub-
committee. I wish you well.

Mr. Mica. I thank each of my fellow panelists for recognizing
someone who has served us very well. We will miss him, and we
wish him well.

I would now like to proceed with our first panel. We have had
the privilege of having Mr. Allen introduce Mr. David Brenerman,
second vice president of Government Relations for UNUM Life In-
surance Co., and on behalf of the Health Insurance Companies As-
sociation of America. Second panelist is Mr. David S. Martin, direc-
tor of contracts and legislation division of the John Hancock Mu-
tual Life Insurance Co., on behalf of the American Council of Life
Insurance. The third panelist this morning is Mr. Paul Fronstin.
He is a research associate with the Employee Benefit Research In-
stitute. And then last, but not least, someone who is very well
known to this panel, a very distinguished national president of the
National Association of Retired Federal Employees, Charles R.
Jackson, who is a familiar face and a gentleman we have all
worked with on this panel.

I welcome our first panel. Mr. Jackson, you know the routine.
This is an Investigative and Oversight Subcommittee of Congress.
We swear in all of our witnesses, so, gentlemen, would you please
stand, raise your right hands.

[Witnesses sworn.]

Mr. Mica. Welcome again, and for our new panelists, let me just
tell you our MO here. If you have a lengthy statement, we will be
glad to make that and any other documents or testimony part of
the record, and we will do that by unanimous consent. We do have
to ask you to limit your oral presentation before the subcommittee
to 5 minutes. We will put the timer on this morning.

With that I would like to recognize first Mr. David S. Martin.
You are welcome, sir, and recognized.


LONG-TERM CARE INSURANCE AS AN
EMPLOYMENT BENEFIT

THURSDAY, MARCH 26, 1998

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON THE CIVIL SERVICE,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 9:30 a.m., in room
2154, Rayburn House Office Building, Hon. John L. Mica (chair-
man of the subcommittee) presiding.

No gesent: Representatives Mica, Pappas, Morella, Cummings, and
orton.

Also present: Representative Allen.

Staff present: nEe Nesterczuk, staff director; Caroline Fiel,
clerk; Jeff Shea and Charli Coon, professional staff members; and
Cedric Hendricks, minority counsel.

Mr. Mica. I would like to call this meeting of the House Civil
Service Subcommittee to order.

This morning we are going to consider the question of long-term
care insurance as an employee benefit for our Federal employees.
I will begin this morning’s hearing with an opening statement.
Then I will yield to others for their opening statements. I see we
have two panels this morning.

Ladies and gentlemen, this morning our subcommittee is examin-
ing the issue of long-term care insurance and the role that it can
play in protecting individuals and families from facing catastrophic
financial risk, and reducing their reliance on Medicaid when they
or their loved one needs long-term care.

Employee-based plans represent the fastest growing market for
long-term care insurance. ‘Employer-based plans are marketed to
individual employers and are generally available to the firm’s em-
ployees, their spouses, parents of employees, and spouses and retir-
ees on a beneficiary-pay-all basis.

As one of the Nation’s largest employers, I strongly believe it is
time for us, we here in Congress, to examine the feasibility of offer-
ing long-term care insurance as a benefit to our Federal employees.
As a group plan, long-term care insurance would be less costly to
Federal employees than purchasing an individual plan, due in part
to economies of scale in marketing and administration.

Providing this employment benefit, I believe, will help the Gov-
ernment remain competitive with private-sector compensation prac-
tices. But perhaps more importantly, making affordable long-term
care insurance available to Federal employees would help our Fed-

@


150

Honorable John L. Mica
April 14, 1998

Page 2

f@)

()

(©)

@)
(©)

Covered services may include, but are not limited to: nursing home care,
home health care, and community-based services, such as adult day care.
Other covered services include: alternate care facility, personal attendant
services, assisted living facility, case management, chore/homemaker services,
respite care, hospice care, durable medical equipment, prescription drug
coverage, ambulance service, alternate plans of care, bed reservation, and
caregiver training?

Benefit amounts can range from $25-$300 per day for nursing home care, and
from $20-$200 per day for home health care under the reimbursement model.
The typical John Hancock (reimbursement model) group policy would include
a $100 nursing home daily maximum benefit (DMB) and a five-year lifetime
maximum benefit (LMB). Disability model benefit amounts range from
$1,000 to $3,000 per month for nursing home care, and $500 to $1,000 per
month for home health care.’

According to the most recent LIMRA industry survey, the average annual
premium paid per participant in employer-sponsored long-term care plans was
$429.00 in 1997.4

Eligibility requirements are addressed in response to question three below.

There are two approaches to inflation protection: Under both approaches,
inflation protection is provided to insureds without further evidence of
insurability.

(1) Itmay be offered at a 5 percent simple or compound rate. The
compounded approach increases benefits 5 percent each year over the
previous year’s benefit, whereas the simple approach increases the
benefit each year by the same dollar amount. The compounded
approach grows benefits at a faster rate than the simple approach, and
consequently, costs more.


42
About the Authors

Janemarie Mulvey, Ph.D. is Director of Economic Research at the American Council of Life
Insurance (ACLI). Her areas of expertise include cost forecasting, Social Security and pension
issues. Prior to joining ACLI, she was an economist at the Urban Institute where she developed
their State Legislative Impact Model (SLIM). The SLIM model was used to evaluate health care
reform proposals in various states. She also co-authored a book with Marilyn Moon entitled

g Prior to the Urban
Institute, Dr. Mulvey was a Senior Analyst in the Public Policy Institute ofthe American
Association of Retired Persons (AARP). At AARP, her research included measuring the tax
burdens of the elderly, the extent of the elderly’s out-of-pocket health care costs, and the
macroeconomic impacts of health care reform. She has a Ph.D. in Economics from George
Mason University and an M.A. in Economics from the University of Maryland.

Barbara R. Stucki, Ph.D. is a Senior Policy Analyst at the American Council of Life Insurance
working on long-term care and disability issues. Prior to joining ACLI, Dr. Stucki was a Policy
Analyst for the American Association of Retired Persons, where she worked on long-term care
issues including private-sector financing options, aging with a disability, and informal
caregiving. Dr. Stucki has also conducted field research on the impact of urbanization on rural
elders in West Africa, She has a Ph.D. in anthropology with emphasis on gerontology from
Northwestern University in Chicago.

‘American Council of Life Insurance 20


Disclosure

Your medical history is very imponant because the
information you provide on your application is used by
the insurance company in assessing your eligibility for
coverage. The application must be accurate and com-
plete IF 1s no, the insurance company may be with:
{nits rights to deny coverage when you file a claim

What about switching policies?
.

New longterm care insurance policies may have mone
favorable provisions than older policies. Newer poli
es, a8 noted above, generally do not have require:
rents for prior hospital stays or for prior levels of care
But, you do switch, provisions excluding pressing
conditions for specified periods of nme will have
begin again So you should never sech polices
before making sure thatthe new policy is rel Peter
than the one you alteady have. And you should never
drop an kd policy betone making sure that the: new
‘one i force

A summary of features
.

The National Associstion of Insurance Commissioners
has developed Manduads that protect comsuinets Look
fora poly cluding
4 ACTesst une vear of using. bone «bone ie
‘care coverage: including imtermediste snd use
Gate, Nursing home oF home health care henetits
shouid aot be fated primani to skilled «ae
Conerage for Aldheimer<dseave shoul the poli
holder develop the Uc ater pur ssi policy
An inflaton protection option. The policy shold
offer chowe among
1 automaticaly increasing the inital beret ever
(an nn hays
a guranteed! right 0 increase benetit heels
petoxicul without prniding evidence of ins

ff coven. specitic. percentage ob sete or
reasonable changes

73

4 An “outline of coverage” that systematically desebes
the polcy’s benefits, mations, and exctusions, and
also alow you to compare it with ober.
‘A long-term care insurance shopper's gurde that
helps you decide whether longterm care insurance
is appropnate for vou
(A guaranice thatthe poly cannot be can ke, non
renewed, oF otherwise terminated because you get
‘older or suffer deterioration in physical or mental
heath.
‘The nght to return the policy within 30 days afer
you have purchased the policy (if for any reason
‘you do not want it) and to receive 4 premium
refund
No requirement that policyholders:
1» frst he hospitalized in order 10 receive nursing
home benefits cr home health care benefits,
1» fis receive skilled using home care before
receiving sotermediute or custodial nursing home
cate
1 frst receive nursing home care belone receiving
Fenetits foe home health care

A final word
.

Insurance polices are legal contrcts: Read and cont-
pare the policies you ute considering hefore vou buy
fone ant “nulhie sure Sou understand all of the proxi
ons Marketing or sales hterature is no substitute for
she tetual pobey. Reud the potiey wself hefore vou but
Discuss the policies you ate considering with people
shone opimins sou tespet—pethups your doctor
sour chiklren. or an inlormed friend or relative

Ad for the ansurance Compune’s financial rating and
tor 4 summary of each policy s benefits or an outline of
ceoverage. (Ratings sult from analyses of a company »
Financial records.) Good agents und goo amurance
vompanies want tou to know What vou are busing

And hear in mind ever afer vou buy a policy, if vou
tind that i ewsnt meet Sour needs vou generally have


82

Medicaid while retaining some of their assets.

‘The private-sector LTCI market has also evolved significantly in recent years, growing from approxi-
mately 815,000 policies sold by 1987 to a total of 4.4 million by 1995 (Coronel and Fulton, 1997).' Improvements in
plan design have helped to fuel this growth, For example, many plans now include protection against inflation and
loss of benefits due to policy lapses. However, perhaps the most significant change haa been in the increased
flexibility that is now built into many policies, in some cases even allowing individuals to customize the use of
their benefits package to meet their needs at the time care becomes necessary. This flexibility enables plans to
keep pace with the continually evolving LTC market.

While private insurance now finances only a small portion of LITC needs (chart 2), it is expected to grow as
plan design improves and as an increasing number of individuals recognize the possibility of needing LTC and the
associated costs. Both individually purchased policies and employment-based plans will expand further as a result
of changes in the tax laws. However, barriers remain that may inhibit this growth. For example, some studies
indicate that growth potential is limited because only a small portion (10 percent to 20 percent) of those most
likely to need services-the elderlycan afford a good quality LTCI policy (Weiner, et al., 1994; Friedland, 1990). In
particular, though, there is currently no clear public poliey with regard to LTC in the United States.

Private Programs

Private Insurance
Private insurance now finances only a small portion of LTC needs (chart 2). Theoretically, individuale with assets
to protect should be willing to pay for LTCI. Furthermore, since people of any age may potentially need LTC.
services, their asbets could be at risk at any time. While the chances of having extended LTC needs are small, the
costs of addressing such needs are extremely high. However, for a variety of reasons, only a small portion of those
who can afford LTCI have actually purchased it. For individuals who have no assets they wish to protect or who
believe they will never require formal care (perhaps because they have a large family), LCI may never be worth
the price. However, others may lack information on the probability of needing such care; may mistakenly believe
that they are already covered by Medicare, health insurance, or disability insurance;* or may be dissatisfied or
mistrustful of policies that are currently available. Still others may not purchase insurance because of the know!-
edge that Medicaid covers LTC, albeit while restricting choice and requiring that the individual be at or near the
poverty level to qualify for coverage.

However, as an increasing number of individuals recognize the possibility of needing LTC and the costs
associated with such care, private initiatives to provide for this need have grown, both through individually
purchased and employment-based plans. As mentioned above, by the end of 1995, a total of 4.4 million private-
sector insurance policies had been sold, up from about 815,000 in 1987 (chart 3). Private policies include indi-
vidual, group association, continuing care retirement community (CCRC), employment-based, and accelerated
death benefits specifically for LTC. While the majority of these plans were sold to individuals or through group
‘associations, employment-based plans accounted for a significant proportion of this growth (increasing from
20,000 poticies sold and 7 employers offering LITCI in 1988 to over 630,000 policies aold and 1,260 employers
offering LTCI in 1996) (chart 3 and table 2). A separate study indicated that 12 percent of all employers with 10 or
more employees offered LTCI in 1993, 10 percent to active employees only and 2 percent to both active employees
and retirees (table 3). Most likely to offer coverage were employers in the Northeast (23 percent), in the manufac:
turing industry (17 percent), and those with 600-999 employees (22 percent). Least likely to offer coverage were
employers in the West (5 percent), employers in the transportation, communications, and utilities industries
(0 percent), and employers with 200-499 employees (8 percent). Among those who did not offer coverage, 9 percent
indicated they would consider offering it in the future.

Plan Types
Individual and group association policies are the most common LTCI products (chart 3) and have been available
the longest. Individual policies are marketed on an individual basis rather than through an employer or other
‘group. Group association LTCI policies are made available to members of nonemployment-based groups or associa
tions that typically have elderly or near-elderly memberships such as the American Association of Retired Persons,
‘These types of policies are targeted at elderly or near-elderly individuals for whom the prospect of LTC may seem
imminent.

Employment-based plans are marketed to individual employers and are typically available to a firm's
employees, their apouses, parents of employees and spouses, and retirees on a beneficiary-pay-all basis. These
insurance plans have grown significantly over the past few years but are stil uncommon relative to other types of
‘employment-based insurance. For example, analysis of the April 1993 Current Population Survey indicates that
73 percent of workers ages 18-64 worked for an employer that sponsored a health insurance plan in 1993,
(Yakoboski, et al., 1994). Data from the Bureau of Labor Statistics indicates that 6 percent of full-time employees
in medium and large private establishments in 1993 and 1995 were eligible for LTCI (US. Department of Labor,
1995 and 1998). However, these policies have the potential to reach a large number of people because they are
marketed not only to older retirees and parents of active workers but also to younger active workers and their
spouses. Thus, the average age of employment-based LTCI enrollees is younger (age 43) than enrollees in indi-
‘vidual and group association plans (age 68) (Coronel and Fulton, 1997).

LTC coverage sold as a rider to life insurance policies is also fairly new and tends to attract younger
enrollees. Life insurance policies with a LTC accelerated death benefit rider generally advance the death benefit

a



LONG-TERM CARE INSURANCE AS AN
EMPLOYMENT BENEFIT

HEARING

BEFORE THE

SUBCOMMITTEE ON THE CIVIL SERVICE

OF THE

COMMITTEE ON
GOVERNMENT REFORM
AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
SECOND SESSION

MARCH 26, 1998

Serial No. 105-136

Printed for the use of the Committee on Government Reform and Oversight

ee

U.S. GOVERNMENT PRINTING OFFICE
49-699 WASHINGTON : 1998

For sale by the U.S. Government Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-057300-9
3



108

Mr. BRENERMAN. Well, I guess if I knew that, I would be in Con-
gress. I think, I guess, what we are saying today is that private
long-term care insurance is one way for individuals to try to protect
themselves without having to wait for Medicaid or wait for Con-
gress to pass some program that would cover all Americans, which
would be prohibitively expensive. I think a partnership between
private insurance and State governments and the Federal Govern-
ment through tax incentives, through employees being allowed to
purchase private insurance are two ways to try to address this
issue. Maybe there needs to be more research on what other pri-
vate-public partnerships would be necessary to try to encourage
people to plan for their futures.

Mr. Mica. While I can’t change the tax laws from this sub-
committee, what we can do is ask that this be made an option
available to our Federal employees. You all have testified, those of
you in the industry, that we should be able to get a good group
rate, and make this available for those who do want to get that
coverage. That is probably the first step that we can take in the
markets available and fairly competitive; is that correct, Mr. Mar-
tin?

Mr. Martin. Yes. I would agree absolutely.

Mr. Mica. Mr. Brenerman.

Mr. BRENERMAN. Yes, I agree. And you may want to explore
whether companies that sell individual policies, because the Fed-
eral group is so large, could also provide a policy that is less expen-
sive than if people bought it across a kitchen table from an agent.

Mr. MIca. Mr. Fronstin did you want to comment?

Mr. FRONSTIN. I would say that is a first step. Offering it is nec-
essary, but it is not sufficient. The next step is getting people to
actually buy the policy.

Mr. Mica. If you can buy it at a reduced rate and make it avail-
able and then find some creative financing. I like my MSA idea on
a very limited basis, Mr. Jackson, just to see how it works. Did you
want to comment, Mr. Jackson?

Mr. JACKSON. Well, comment on the group or the MSA?

Mr. Mica. Any and all of the above, sir. You are recognized.

Mr. JACKSON. Mr. Chairman, first of all, you have to remember
that most annuitants, such as me, are unlikely to build up the cash
in an MSA that would afford a long-term care policy. I do agree
with the group policy, and it is our feeling that on the group policy,
the fact that it is like buying anything in bulk at a grocery store
or for an organization: if you buy in bulk, you are probably going
to get a cheaper price. I just yesterday received in the mail from
an organization that I belong to offering a group discount policy,
but it was on car accident, and it was on travel. But I was shocked
at the price that they were quoting me per month for my wife and
myself, and it is a policy that I could afford because I had no idea
that it was out there, that it was that cheap. But it is because that
organization is so large, and they are offering it as a group policy.
I think that would be the secret of it. Would it be that it would
reduce the premiums?

Mr. Mica. I thank you, each of you, for your responses.

I would like to recognize now, Mr. Cummings.



131

THIS CONCLUDES MY STATEMENT. I WILL BE GLAD TO ANSWER ANY

QUESTIONS THE SUBCOMMITTEE MAY HAVE NOW.


159

Please describe what parameters you believe should be considered in drafting this legislation.

The design of a federal employer group long term care insurance option should position the product
to succeed ( ie, achieve an acceptable “take up" rate of at least five percent). Policies should also
meet quality standards and endeavor to offer better options than the individual market currently has
available.

One of the real advantages of an employer approach could be to have some sort of guarantee issue
product available for actively at work individuals.




109

Mr. Cummincs. I also want to thank you all for your testimony.
You have done a good job of informing us about a number of issues.

Mr. Martin, I take it that State and local governments offer this
kind of insurance?

Mr. MarTIN. Yes. Some do. I think it is just beginning, but most.
recently the State of Washington has decided to put in a long-term
care program.

Mr. CUMMINGS. Now, do you know if they are paying a large por-
tion of the premiums, all of the premium?

Mr. MarTIN. They are offering it on an employee-pay-all basis,
similar to what would be in regular programs.

Mr. CUMMINGS. So the employee pays the entire——

Mr. MartIN. That is correct.

Mr. Cummincs. As I listened to Mr. Jackson, he was talking
about his situation where you would think that someone in his po-
sition would be purchasing or have this kind of insurance if it is
offered. How do you suggest, and maybe any of you, that you edu-
cate people to even buy it?

Mr. Martin. I think that is one of the points that we certainly
raised in our testimony, education. I think Mr. Jackson touched on
that as well. There is, I think, a denial aspect of this that exists
in all of us. I think it is only human. We think that a lot of things
that both insurers and public institutions can do, public service an-
nouncements telling people perhaps when they become eligible for
Medicare or when they are approaching that, maybe doing some-
thing when people turn 50, anything that can raise the awareness
of the need for it. I think pulling the focus back a bit and realizing
this doesn’t just happen to older people, a lot of younger people re-
quire long-term care services, too. Bo I think anything could be
done to raise public awareness. We do a lot of that when we are
talking to people whether they are individuals or groups. But that
is a key issue, I think.

Mr. CuMMINGS. One of the other things that you said that—you
said that Federal employees should obtain coverage from finan-
cially sound companies. Are any of the 125 companies that offer
long-term care insurance in financial difficulty?

ir. MARTIN. I don’t believe so. Our point was certainly that as
you look at this, that there should be some criteria applied so that
you have assurances that the carriers are meeting the standards
that you expect for the employees and their families.

Mr. CuMMINGS. Now, . Jackson raised some very interestin;
issues, and one of them was about qualifying; he also mentione
Alzheimer’s, correct me if I am wrong, Mr. Jackson, that if one
came up with Alzheimer’s, they might have a problem even though
they had a policy?

Mr. JACKSON. There are some policies that are offered on long-
term care that will accept an Alzheimer’s patient, but there are
many that do not. That is one of the problems on long-term care
policies. If you have Parkinson’s or Alzheimer’s, then it is difficult,
because there is also in many instances in the policies that we have
reviewed, in some of it, it requires a waiting period also. How do
you determine whether a waiting period, if you had essential trem-
ors, as to whether it is actually Parkinson’s or essential tremors?
And so some of the people cannot get policies. They order them.


30

Private Insurance Offers a Solution to the Looming Long-Term Care Crisis

By the time the baby boomers retire, entitlement spending on Social Security and Medicare
could consume the entire federal budget, leaving little room for other discretionary spending.
Thus, attempts to increase public spending to expand long term care coverage for baby boomers
seem highly unlikely. As a result, the policy debate is shifting from discussions of a national
health care program that includes long-term care toward greater support for private-sector
solutions to financing long-term care.

‘The willingness of policymakers to support private sector initiatives is most evident in the
recent enactment of the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
HIPAA improved financial incentives for long term care purchasers in a number of areas. First,
HIPAA excludes benefit payments from qualified long term care policies from taxable income.
‘Second, HIPAA. allows individuals to deduct as medical expenses the cost of premiums for tax-
qualified long-term care insurance from federal taxes. While these tax incentives are limited to
those taxpayers who itemize medical expenses, they still represent a positive step towards
expanding tax incentives for purchasers of private long term care insurance. Most importantly,
the enactment of HIPAA signals that policymakers expect consumers to assume greater
responsibility for their long-term care needs.

Private long-term care insurance consists of a wide variety of products that help protect
people if they become disabled and need long-term care services. Unlike government programs
that focus on institutional care, long-term care insurance policies cover a wide range of
to help people with disabilities live at home, participate in community life, as well as receive
skilled care in a nursing home. Policies may also include respite care, coverage for home
modifications, or payment for family caregivers. Most policies pay for services such as assisted
living that are not covered under many state Medicaid programs. These options enable frail,
elderly baby boomers to retain their independence.

Can long-term care insurance help protect baby boomers from financial hardship and reduce
their reliance on Medicaid? In this study, we simulated long-term care expenditures under two.
alternative financing scenarios:

‘Scenario I: Current Financing Trends Continue .
‘Scenario II: Increased Purchase of Long-term Care Insurance
In the case of increased purchase of long-term care insurance, we assumed that everyone age
35 and older in the year 2000 who could afford a policy purchased a policy.’ Long-term care
insurance policies incorporated coverage for either two or five years of benefits and included
‘compound inflation protection of 5 percent a year. Individuals purchased the policy they were
most able to afford.

‘©American Council of Life Insurance 8


89

cart?
LONG-TERM CARE EXPENDITURES AS A PROPORTION OF TOTAL NATIONAL HEALTH EXPENDITURES
‘AND BY SOURCE OF FUNDS, 1996

NATIONAL HEALTH EXPENDITURES, 1996 Lone-Tenm Cane EXPENDITURES, BY SOURCE, 1996

$208.7 BLUON
Sure: HealthCare Fagcing Admin abon,

at3
‘Lona-TeRM Cane POLICES SOLD I IenIMIDURL AND Gnoum EMPLOYER, AND LIFE INSURANCE MARKETS,
1987-1

1987

eaiduat and Grove
3580
99 Merployment Bases

‘Dlute ners

Source: eat Insurance Associaton of Aer,

10


84

and/or skilled nursing care as a prerequisite for home- or community-based care. However, medical necessity
triggers and prior hospitalization requirements are prohibited by current model regulations and are regarded as
anti-consumer by regulators and consumer advocates, For the most part, these features are no longer included in
‘current plan design. However, in past—as well as in current plans—definitions of ADL are not standardized; some
insurers may clearly define each ADL, others may not, making eligibility less clear. Some insurers may also
specify that the individual be unable to perform the ADL, as opposed to simply needing supervision with the
activity, thereby making eligibility more restrictive.

‘Some plans may also include limitations on preexisting conditions, although such provisions are no longer
common. Policies are much more likely to include a specified waiting period for benefits based on a preexisting
condition (generally six months).

Sites of Care—Most plans now offer coverage for nursing home care and home- and community-based care. In
addition, coverage is often now available in many nontraditional types of settings such as in adult day care centers
(see chart 1).

Some plans give potential insureds the option of selecting a nursing-home-only provision or a more
comprehensive plan that lets the individual decide on where care will be provided at the time the care is needed.
However, even though a policy may indicate that care at home is covered, there may be restrictions such as a
maximum daily benefit amount.

‘Many plans also now include a case management or care advisory provision. Case management is a form
of utilization review. In some plans, it is mandatory that the plan of care be followed in order for benefits to be
paid, Sometimes mandated ease management is combined with premium reduction incentives. More often, plans
include a care advisory provision. In this case, the plan of care does not need to be followed in order that benefits
be paid but is there to assist the individual in identifying and sorting through care options. Care may also be
‘monitored to ensure that the individual has access to services that meet his or her needs. However, terms are not
standard and are not used consistently; therefore, itis important to carefully interpret what type of care provision
is included in a given contract.

Benefit Amounts-—Private LTCI plans now generally base benefit amounts on a daily benefit maximum, with a
corresponding lifetime benefit maximum. Generally, an individual is given several options regarding level of
coverage. For example, an individual may select a daily benefit maximum of $50, $100, or $150 per day with
corresponding lifetime benefit maximums of $91,250, $182,600, or $273,750. Once the individual becomes eligible
for benefits, the insurer would pay based on charges incurred up to the daily benefit maximum and based on the
site of care. Nursing home care is generally paid at 100 percent of the daily benefit amount, while charges in-
‘curred for home health care and adult day care are generally paid at 50 percent of the daily benefit amount.

‘The level of benefits selected can significantly affect premiums. Thus, factors to consider in selecting &
daily and maximum benefit amount should include, for e the cost of services in the sorvice area (table 5),
what the individual can afford, and the type of care that will likely be needed. For example, ifthe individual hes @
good support system (L., family members in the area), adult day care and/or respite care benefits may suffice.
Others may prefer-or need-nursing home care.

‘Most plans now also include a coordination of benefits feature to prevent duplication of benefits. For
example, ifthe daily benefit amount selected is $100 and an individual is receiving care at the cost of $90 per day
in a nursing home and Medicare pays $19 for that care, then the LTCI plan would pay $71. The remaining $29
‘would still be available as part of the maximum lifetime benefit.

Inflation Protection—Several insurers now offer policies that adjust the daily benefit maximum and lifetime
benefit maximum for inflation. One type of inflation protection feature results in an automatic adjustment in the
benefit, commonly 5 percent per year. Premiums for a policy with this feature will be considerably higher than for
‘ policy without such a feature, A second type of inflation protection feature allows policyholders the option of
increasing their benefit every s0 many years (for example, every three to five years) (Teachers Insurance and
Annuity Association, 1993; The Prudential, 1994). In this case, premiums are lower from the outset, but the cost of
‘any additional coverage purchased is based on age at the time the increase is selected. Some proposals have
advocated that inflation protection be made mandatory, while others would require only that insurers offer the
option of an inflation protection feature when a policy is initially sold,

Premiums—Premiums for LTCI vary substentially based on age and plan design. For example, Health Insurance
Association of America survey data indicate that average annual premiums for leading individual and group
association LTC sellers in 1995 ranged from $310 for individuals purchasing a base plan at age 60 to $8,146 for
individuals purchasing a plan that included inflation protection and a nonforfeiture provision at age 79 (table 6).
‘Other plan features, such as categories of care covered (nursing home care, home care, community care), daily
benefit amount, maximum benefit duration, and deductible periods can also significantly affect premium amounts
(National Association of Insurance Commissioners, 1993). Because premiums are based on age at enrollment, the
younger the individual, the lower the premium. Insurers generally attempt to set premiums auch that they will
remain level over the individual's lifetime. Thus, premiums do not increase based on aging or use of benefits. In
addition, policies are guaranteed renewable; thus, as long as premiums are paid, coverage cannot be canceled.

However, premiums may rise over time because rates generally can be increased on a class basis if claims.
are higher than expected. And, because the LTCI market is such a new market, it i difficult to set premiums

5



12

Good morning, Mr. Chairman and members of the Committee. [ am David Martin,
Director, Contracts and Legislation, at John Hancock Mutual Life Insurance Company in
Boston. | also serve as the chair of the State/NAIC Subcommittee on Long-Term Care
Issues for the American Council of Life Insurance (ACLI). The ACLI is a Washington,
D.C.-based national trade association that represents 532 member life insurance
companies. Our member companies that provide long-term care insurance to the
American public represent more than 80 percent of the long term care insurance

marketplace.

On behalf of the ACLI, I want to thank you for the opportunity to talk about the key
role the federal government can play in helping its employees take greater responsibility
for their long-term care needs through private insurance. ACLI supports the efforts of the
Committee with regard to offering long-term care insurance to government workers as an
employee benefit. We look forward to working closely with Committee members on this

issue,

Congress is increasingly emphasizing the need to encourage private-sector solutions
to financing long-term care. The recently enacted Health Insurance Portability and
Accountability Act of 1996 (HIPAA) allows individuals to deduct as medical expenses
the cost of certain premiums for qualified long-term care insurance from their federal
taxes, HIPAA also excludes benefit payments from qualified policies from taxable
income. Equally important, the provisions of this Act encourage employers to offer long-

term care insurance by allowing employers to deduct premium payments for their


54

account for about 7 percent of the entire long-term care insurance market, with
over 340,000 policies sold cumulatively as of the end of 1996.

Figure 3: Number of Employer-Sponsored Long-Term Care
Insurance Plans Offered, by Year,
Cumulatively, 1987-1996

2000 -

1532

1260

oso (1028
1000 .
506
500 288 |
138
2 7 kad
.o- — =

1987 1988 *1989-««1990«1991«1992 199319941995 1996
Year

Number of Plans.

As in previous years, the long-term care insurance market remained highly
concentrated among a relatively small number of sellers. Twelve sellers
represent approximately 80 percent of all individual and group association
policies sold in 1996. HIAA conducted an in-depth look at the top sellers’ latest
policies and found that insurers offer policies with a wide range of benefit options

and design flexibility at moderately priced premiums. Key findings follow:

* All companies offer plans which cover nursing home, home health care, adult
day care, respite care and alternate care services. Hospice care was
specifically covered by 10 insurers and a separate assisted living facility
benefit was offered by 10 of the top sellers.

* Other common benefits include: care coordination or case management
services, homemaker or chore services, restoration of benefits, bed
reservation reimbursements, medical equipment coverage, spousal
discounts, survivorship benefits and caregiver training

° Benefit eligibility criteria used are deficiency in performing Activities of Daily
Living (ADLs) and determination of cognitive impairment.

-8-


March 19, 1998

Rep. John L. Mica, Chairman
‘Committee on Government Reform and Oversight
Civil Service Subcommittee

B-371 Raybum House Office Building
Washington, DC 20515

Dear Chairman Mica:

This disclosure statement is being provided to you to comply with House and Committee rules
regarding receipt of federal monies by witnesses providing testimony. The Employee Benefit
Research Institute has been asked to provide testimony at the Civil Service Subcommittee's
March 26, 1998 hearing on long-term care insurance issues.

During the current and past two fiscal years, neither the Employee Benefit Research Institute
(EBRD nor its Education and Research Fund (ERF) have received any grants, contracts or
subcontracts from the federal goverament.

Sincerely,

WA ———
William L. Pierron

Public Affairs Associate

Washington. DC

20037-1896

202-689.0670
Fax 202.775.6912


15

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Home health care?
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Other”
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12 Is there a waiver premium prosision?
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For home health cate?
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ows the policy huve 4 pontoons
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Whats the rte of sree

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A new law's impact on
longterm care insurance
’

A nes law, the Health Insurance Portability and
Accountability Act of 1996, affects fong-term care
insurance. The following are answers t0 commonly
asked questions about the law's tax clanficaion provi
sions and consumer protection standards.

Tax clarification

+
Q. Whar fs tax clarification for private long-term
care insurance, and wy is it necessary?

The tas Ltt ta pr

ios for fang term cate ins
liye af conlames the Heal sonar Pertnie
rnd Accuurtahae Sot of 9M, spe be Preset
oti Age ZL, (as The eliatons wre
rat Un a treatment Loe pb lang ten cise si
see 9 ee Sunes a ot apr a centage

©

Will benefits received by consumers under a
Long-term care policy be taxed?

ath dhe antotiins, eis fron ate ony
core inert, genre oe tatable Wao tie

nah Ty cemena asabe

Q. Will consumers be able to take a tax deduction
for the cost of long-term care insurance? Can
‘consumers deduct from their taxes costs asso
ciated with receiving long-term care?

Hse area eh guess 868 Snke pte

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remot ts soon nel beth msurance eevee
Laminin or angen cane insrane;

alls Gants col mkt expen
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se me fs hy fal amen psn aa

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sk wth sour vn

she S percent tae

see ot ne ele to tae thie vation



36

We need to make long-term care insurance an essential part of any debate on retirement
security.

Looking into the future, there are two key goals of retirement security: 1) saving enough
money for retirement, and 2) protecting against life’s uncertainties including the uncertainty
associated with future long-term care costs.

While both goals require planning, the calculations are very different. Saving for retirement
is largely a matter of accumulating enough assets to last a lengthy retirement period. There has
been much debate on whether the baby boomers are saving enough. Some believe they are
saving enough and others believe most boomers savings will fall short of their needs. While the
answer to this question is beyond the scope of this paper, ultimately the answer arrived at will
affect the baby boomers standard of living in retirement.

‘An equally important issue is the need for baby boomers to protect against life’s
uncertainties, specifically the risk of needing long-term care. This second issue requires a much
different approach. This is because long-term care costs are extremely expensive and would
require a large amount of savings. For example, the 45-year old who needs nursing home care
when she is 85 years old would have to save a total of $489,000 for atwo year stay. To reach
this goal she would have to save $3,500 annually. Considering the multiple demands on
boomers today, relying on savings to pay for long-term care needs is not a financially feasible
option for most middle income Americans.

A more affordable alternative is long-term care insurance. Long-term care insurance makes it
possible for middle income families to manage the risk that they may become disabled without
having to save large amounts of money each year. Long-term care insurance, like other
insurance, is intended to spread the risk across many individuals and thus lower costs to any one
individual in the event they would need long-term care services.

‘American Council of Life fnsurance 4


48

Good morning, Mr. Chairman and Members of the Committee. | am David
Brenerman, Second Vice President for Government Relations for UNUM Life
Insurance Company of America, based in Portland, Maine. } am also the
immediate past chairman of the Long-Term Care Committee of the Health
Insurance Association of America (HIAA). As the nation’s preeminent health
insurance trade association, HIAA, based in Washington, D.C., is the industry's
most influential advocate for the private market-based health care system.
HIAA‘s more than 250 member companies provide medical expense and
supplemental insurance, as well as long-term care insurance and disability
income protection, to more than 65 million Americans. HIAA advocates federal
and state policies which would build upon our health care system's quality,

affordability, accessibility and responsiveness.

On behalf of HIAA, | appreciate the opportunity to talk to you today about the
critical role of long-term care insurance in financing our nation's long-term care
crisis. | would also like to commend the Subcommittee for realizing the potential
of the long-term care insurance market by considering legislation that would
enable federal employees to purchase long-term care insurance as an employee
benefit. Today, more than 100 companies provide long-term care insurance to
over 5 million people. In addition, over 1500 employers have now sponsored a
long-term care insurance plan for their employees. High quality private
insurance coverage is offered through a variety of mechanisms, including
individual, group association and employer-sponsored arrangements and riders.

to life insurance plans.

Let me begin by summarizing the most important points of my testimony:


gy

HIAA RESPONSE: This is irresponsible advice. Most states and the federal
government, through enactment of HIPAA, do not include or mandate the use of
medical necessity, because it is viewed by many as unreliable, subjective and
unfair. More importantly, correlating tax-qualified policies, because they do not
contain the medical necessity trigger, as policies consumers should beware of,
while not alerting consumers to the possible serious negative tax implications of
non-qualified LTCt is irresponsible behavior. (See additional comments on tax-
qualified LTC! below.)

ISSUE: Tax-Qualified LTC! policies

EPORTS: Beware: They are far more restrictive than many non-
qualified plans.

HIAA RESPONSE: The generalization that tax-qualified policies are more
restrictive than non-qualified policies has no basis in fact. As we mentioned
earlier, the absence of a medical necessity trigger does not indicate a more
restrictive policy. Tax-qualified LTC! policies will pay benefits through triggers
such as the inability to perform ADLS and cognitive impairment, viewed by many
as the more objective and appropriate measures for the need for LTC. The
inclusion of a 90-day certification of disability for tax-qualified LTCI policies, is in
fact, a certification, not a requirement that the disability last 90 days nor is ita
deductible period before benefits can begin. As the article points out, one LTC!
policy is different from another. Depending on the policy one chooses to
purchase, one policy may have more benefits and the benefits may be easier to
access than another policy. The policy features of individual policies serve as
the distinguishing factors for judging whether a policy is more restrictive or less
Testrictive. The tax status of the particular policy one has chosen dictates how
premiums and benefits are treated for these policies and is NOT the benchmark
for how restrictive a policy is.

The authors of this article display a strong bias against tax-qualified LTC!
policies. HIAA feels that Consumer Reports has acted irresponsibly by not
mentioning in the article that the IRS has not ruled on the status of non-qualified
LTCI policies and that purchasers for these policies may face very serious
consequences if the IRS determines that benefits from such policies would be
considered income and therefore be taxable to the insured. In addition, while it
is true that few people itemize medical deductions, it is important to remember
that as age increases and/or incomes become more limited, the ability to deduct
a portion of your LTC premiums become important to a significant number of
people.


53

The majority of long-term care insurers continue to sell policies in the individual
market. As of the end of 1996, approximately 80 percent of the 4.96 million long-
term care insurance policies had been sold through the individual and group
association markets. However, about one-third of the 1996 long-term care
insurance carriers sold policies in either the employer-sponsored or life
insurance markets, up from 14 percent in 1988. These two markets also
represented 20 percent of all long-term care policies sold as of 1996, up from

less than 3 percent in 1988. (See Figure 2 below.)

Figure 2: Distribution of Long-Term Care Insurance P.
as of December 1996

ies Sold,

Lite Riders
TM%

Employer-Sponsored
13%

Individual
80%

Although all three markets experienced growth in 1996, the majority of growth,
about 79 percent, can be attributed to the individual and group association
markets. The total premium volume for the individual and group association
policies sold in 1996 alone was about $750 million. The employer-sponsored
market enhanced this growth by contributing close to 20 percent of the sales in
1996. At the close of 1996, over 650,000 policies had been sold through 1,532
employers. (See Figure 3 on the following page.) Although the growth in the

long-term care life insurance rider market was minimal in 1996, it continues to


138

Itis estimated that only 12 percent of all private employers (but 21 percent of employers
with 500 or more employees) offer private long-term care insurance. Almost all such
employer-sponsored long-term care insurance is offered on a voluntary (ie.
employee-pay-all) basis. However, spouses, parents, and other relatives are often
permitted to take advantage of the group offer.

The Department has contracted with The Lewin Group to survey the employer group
long-term care insurance market. Because some group products have been more
successful than others in terms of employee participation, a main purpose of the survey
is to understand as much as we can about "best practices" in the employer market.

We expect the results of this survey to be of great interest to other large employers,
including the Office of Personnel Management, with whom we are collaborating on the
survey design. The Federal government is. after all, the largest and most visible
employer. What we do with respect to employee benefits can have considerable
influence over other large employers. Accordingly, we are working with OPM to provide
them with information reflecting the "state-of-the-art" regarding private long-term care
insurance among public and private employers. In addition to the employer survey, our
contract with the Lewin Group also provides for access to actuaries and other
consultants who have specialized expertise in long-term care insurance.

The Department also has another major research project underway to study the efficacy
of long-term care insurance. We have contracted with LifePlans, an insurance
company, to carry out a study of the experience of private long-term care insurance
claimants. Nine private long-term care insurance companies agreed to participate in
the research project by allowing LifePlans to interview a statistically representative
sample of their policyholders who have triggered benefits. The study also involves a
telephone survey of policyholders to determine whether some policyholders who may
be entitled to benefits have failed to file a claim or attempted to file a claim and were
denied benefits.

The claimant survey focuses primarily on users of home care benefits, with a smaller
supplemental sample of claimants who have accessed nursing home or other
residential care benefits. The main purpose of this research is to determine whether
and to what extent individuals who purchased private long-term care insurance policies
and their family caregivers are satisfied with their coverage once the policyholders have
met eligibility triggers and begun to access benefits. The study is still in the field
interviewing stage; however, early anecdotal information from some interviewers
indicate that both home care and nursing home claimants and their informal caregivers
appear satisfied with their insurance benefits. Patterns of reliance on formal and
informal home care among private long-term care insurance claimants will be compared
with those of other similarly disabled elders in a nationally representative survey of
disabled elders living in the community. Final results are expected to be available early
next fall.


49

« Our nation faces a long-term care crisis. Long-term care is the largest
unfunded liability facing Americans today. Despite the tremendous need for
long-term care protection, there is a clear lack of adequate planning for it.
While the current system is flawed, the financing of long-term care is
complicated and requires a thoughtful solution, not a rush to judgment.

* Fiscal realities and national priorities make it irresponsible to place the
financing burden primarily on the nation’s taxpayers. All elements of society
~ individuals, policymakers, employers, and insurers must play a vital role.

« There is a growing and critical role for private insurance to provide a better
means of financing long-term care for the vast majority of Americans who can
afford to protect themselves. Continued growth of the market will alleviate
reliance on scarce public dollars, enhance choice of long-term care services
for those who may need them in the future and promote quality among
providers of long-term care.

The long-term care insurance market is growing and the policies that are
available today are affordable and of high quality.

* There is a continued role that the government can play in financing long-term
care for those without adequate resources to protect themselves.

* The government plays a critical role in enhancing the growth of the private
long-term care insurance market. Government initiatives which show
support of the private long-term care insurance market emphasizes to the
public the importance of assuming personal responsibility and less reliance
‘on public support for their own long-term care.

«There also continues to be a critical government role, in education and
research, to further our collective knowledge about who needs long-term
care, what services should be provided and what the total costs to society will
be.

To address these concerns, HIAA believes the following steps must be taken:

1. Encourage personal responsibility for financing long-term care through the
expansion of the private long-term care insurance market;

2. Educate the public about the risks and costs of long-term care. Without
understanding the problem, the public cannot be expected to understand the
appropriate solutions. It is critically important for the public and private
sectors to do more in this area.


78

Mr. Mica. I will now recognize Mr. Paul Fronstin who is with the
Employee Benefit Research Institute.

Mr. FRONSTIN. Mr. Chairman and members of the subcommittee,
I am pleased to appear before you this morning to discuss the issue
of long-term care insurance br Federal employees. My name is
Paul Fronstin. I am_a research associate at the Employee Benefit
Research Institute [EBRI], a private, nonprofit, nonpartisan public
policy research organization based in Washington, DC. EBRI has
been committed since its founding in 1978 to the accurate statis-
tical analysis of economic security issues. Through our research we
strive to contribute to the formulation of effective and responsible
health and retirement policies. Consistent with our mission, we do
not lobby or advocate specific policy solutions.

Increased life expectancy and the aging of the baby boom genera-
tion will bring rapid growth in the number of people at risk of
needing long-term care. Relative to the number of individuals who
can provide physical and financial assistance, the proportion of
those in need will increase dramatically over the next several dec-
ades. In response the private-sector long-term care insurance mar-
ket has grown, growing from approximately 800,000 policies sold by
1987, to over 4 million policies by 1995. Employment-based plans
account for a significant proportion of this growth.

Private insurance now finances only a small portion of long-term
care needs. Theoretically individuals with assets to protect should
be willing to pay for long-term care insurance. While the chances
of having extended long-term care needs are small, the cost of such
needs are extremely high. Only a small portion of those who can
afford long-term care insurance have actually purchased it. For in-
dividuals who have no assets to protect or who believe they will
never require formal care, long-term care insurance may never be
worth the price. However, others may lack information on the prob-
ability of needing such care, may mistakenly believe that they are
already covered by Medicare, health insurance or disability insur-
ance, or may be dissatisfied or mistrustful of policies that are cur-
rently available. Still others may not purchase insurance because
of the knowledge that Medicaid covers long-term care.

While private insurance now finances only a small portion of
long-term care needs, its use is expected to grow as plan design im-
proves, and as an increasing number of individuals recognize the
possibility of needing long-term care and the associated costs. Both
individually purchased policies and employment-based plans will
expand further as a result of the changes in tax laws. However,
barriers remain that may inhibit this growth.

For example, some studies indicate that growth potential is lim-
ited because only a small portion of those most likely to need serv-
ices can afford a long-term care insurance policy.

Premiums for long-term care insurance vary substantially based
on age and plan design. For example, average annual premiums in
1995 ranged from $310 for individuals purchasing a base plan at
age 50 to over $8,100 for individuals purchasing a plan that in-
cluded inflation protection and a nonforfeiture provision at age 79.

Other plan features can also significantly affect premium
amounts. Premiums may rise over time because rates generally can
be increased on a class basis if claims are higher than expected.


hard
LONG-TERM CARE SERVICES, SETTINGS, AND PROVIDERS,

one care can general be classe sled using cave, termed aig care, and castor persona cave These services ave aston been
onde iter by lat mbes at name or in formal sens such sina mrsng heme. Whe cre ifn proved at hr by amt members, a mmr of
antadtenl stings and eso provers ave developed tat os en ponding caren he most hme etn posable We tis itu to classy thse
Setings and provers, te folowing conausm tengo rest 820 the services, setigs and provers the eat tensive to he most itersive—
ow able

Intensity
Low Hin

‘his ontaw isby no means inclusive or standard. Its mea to ga general ofthe range of LTC services, setings, and provicers. or example, we
sisted tng facilis are preset 2 nore ersve wih regard the peo sting in whch car i prove, based enh ivenincnas needs, he ype of
are proved tn ad day car center ay actu bere inensi. In adeno vc ated on eachindsa's etd, dts vary and may oe
Fellowng ave geeraldesciptons of the tems wed inthis Mustain.

dt Day Care
‘as ay car tera structured apne progr that typical incluses asian wt esol cr, nce, nde vay sca recreation, anata
tie acttisina elective anionment (ha Paden, 199) Lon tem care aurance (TCT cot acts may Gaba or care man alt dy cave cate ne
‘cee apropaly state licensed ris recoeited as home heath agancy by Medicare.

sisted Lng Faces
These lactis fer shared and supenise housing or those who anel ancl infepenerth ning nda nteig ony rina suppor aswel as hose
who are mare severiympaced Tene Insurance ané Any Associaton, 1993.

Contin Care Retirement Commuriy (RQ
[ACCRCs resent community or ole ecole tht ler etme housng anda range oso and bean cae services (Teaches Insranc nd Arty
‘Assocation, 1999, Tas ree are general provi n xchange fran von fe and math payments

‘usta or Persona Care
‘Casta care maybe gen by pope witout macs to lp a pertn perform acti ily ng, which ince assistance with ating, eating, sess,
‘andl real aces. sss intensive a cophcaled Ian sie or nermedae care and canbe provided in may segs, ling mrsing hanes, at
(ay ear cares or t home abana Assasin of Insurance Commissores, 99).

Family Members
‘thao a large proportion of TC series are povided ora by arty members ost poles, wh rare excepts, pesca ecu coverage or sich

Hore Heath are
scr cs aie ay fees cared one eesti acannon hedge an pty pest
‘ace ad el wih Reset eheres Teachers Insurance and Any 193.

ospce cre
Hospice are nus services provided oasis person wth terminal ites that mayb provided in vos segs, ncn, a example, at ae ain
ering hme cae sting (avlers Grup, 1995).

Intermediate Mrs Care?
‘Ts pe tears ordered ya plysican ad spensed ya egstared nase or abe condtons that equa dy butt 26-hour, arsigsuperein,
Intermediate cares geeraly needed or eng pv ol tne Natal Associaton fInsrance Corasines, 105) ss speed Bn ied mursg cre
ad fleninvves mare personal cae.

espe Care
‘espe care alles temporary rel ctf for tamly members or cter rgd careers whe are espa forthe care of a ependent ern (The
Praesti 1994 Ts sre provided by vlrteers, an inten, oan a ay care cena (lachrsIsarance and vay Assocation, 199), LTT pans
‘eoeraly et th umber ay tox whch reste cares reimbursable (The Prodertal, 1994),

Sate ring Care
‘is cael avatabe2¢ ours day. ordere bya physi, andes a eset lan for mel condtans hat regu care by Med medic personel
such a5 regsterednrses or preesioa! thera. Soe peopl eed se care fora short tine afte an acte ness, Oer ree ile cae fr ioe
rid ie. Sometimes te ar is preven a peran's home wh Rl om isting nse National Asacitn of sro Comision, 1993).

1 591989, on stay estates tat paren of he severly sale lel reed slay on aly members er ther unpaid ep ponte ont care
sarices See US Bpartan Commission on Comprehensive Hea Cart 100 Daa ae Base on Lewin/ICF nd rotigs Isadon esas he 1982
ten og Tem re Sey)

2rd Mead Rave ter own dition of arsig care ta nc nacessariy mach efios funda LTC pain,



43

Endnotes

1. Hobbs, FB and Damon, BL (1996). 65+ in the United States. Current Population Reports P23-
190. Washington, D.C. Bureau of the Census.

2. Hobbs, FB and Damon, BL (1996). 65+ in the United States. Current Population Reports P23-
190. Washington, D.C. Bureau of the Census.

3. This is for two visits per day by a home care aid costing $54 per visit in 1997. National
Association for Home Care(1997). Basic Statistics About Home Care 1997, Washington, D.C.

4. American Health care Association (1998). Today's Nursing Facilities and the People They
Serve. Washington, D.C.

5. Bectel, RW and Tucker, NG (1998), Across the States 1998. Washington, DC: American
Association of Retired Persons.

6. Coopers and Lybrand (1996). An Overview of the Assisted Living Industry, 1996. Fairfax,
VA. Assisted Living Federation of America.

7. Weiner, Joshua; [ilston, Laurel H.; and Hanley, Raymond J. (1994) Sharing the Burden:
Strategies for Public and Private Long Term Care insurance. The Brookings Institution,
Washington, D.C.

8. National Alliance for Caregiving and AARP (1997)._Family Caregiving in the U.S.: Findings
From a National Survey.

9. Affordability is defined as spending no more than 2 percent of income for ages 35 to 44, 3
percent for ages 45-54, 4 percent of income for ages 55-59, and 5 percent of income for ages 60
to 64, and 5 percent of income for ages 65+.

10. Coronel, S and Kitchman, M (1997). Long Term Care Insurance in 1995. Washington, DC:
Health Insurance Association of America.

11. U.S, Dept. of Health and Human Services, (1997) "Characteristics of Elderly Nursing Home
Residents: Data from the 1995 National Nursing Home Survey". NCHS, Washington, D.C.

12, Lewin VHI, Inc. (1994). "Aging Baby Boomers: How Secure Is Their Economic Future?",
Report Prepared for the American Association of Retired Persons.

13. Hobbs, FB and Damon, BL (1996). 65+ In the United States. Current Population Reports
23-190. Washington, D.C.

‘American Council of Life Insurance 21


129

PERCENT FELT THE PREMIUM WAS TOO HIGH, BUT AT AGE 65, 57 PERCENT FELT
THE COST WAS TOO HIGH. THIS CLEARLY DEMONSTRATES THAT THE DESIGN
OF LONG TERM CARE COVERAGE, TO RECOGNIZE THE TRADE-OFF BETWEEN
COST AND AGE AT INITIAL PARTICIPATION, WOULD HAVE TO BE CAREFULLY
STRUCTURED IN ORDER TO BE A VIABLE PROGRAM WITHIN A TOTAL BENEFITS

PACKAGE CONTEXT.

CONSIDERATION OF LONG TERM CARE INSURANCE IS ALSO A COMPONENT OF
OPM’S BENEFITS VISION STUDY BEGUN LAST FALL. WE HAVE ENGAGED A
PRIVATE BENEFITS CONSULTANT TO RESEARCH EMERGING BENEFIT TRENDS
AMONG LARGE PRIVATE AND NON-FEDERAL PUBLIC EMPLOYERS. THIS.
INFORMATION IS NEEDED TO ENABLE THE FEDERAL GOVERNMENT TO REMAIN,
A COMPETITIVE EMPLOYER BY STRUCTURING CONTEMPORARY BENEFIT
PACKAGES WITHIN A TOTAL COMPENSATION FRAMEWORK. USING THE
CONTRACTOR'S REPORT AS A FOUNDATION, WE PLAN A BROAD DISCUSSION OF
BENEFITS AND DELIVERY STRATEGIES. THE CONSENSUS DEVELOPED THROUGH
THIS REVIEW WILL LIKELY LEAD TO SEVERAL PROPOSALS IN THE BENEFITS.

AREA, THOUGH IT IS TOO EARLY TO COMMENT ON WHAT THEY MIGHT BE.

LASTLY, I WANT TO MENTION OUR COLLABORATION WITH THE DEPARTMENT
OF HEALTH AND HUMAN SERVICES IN A STUDY OF EMPLOYER-SPONSORED
GROUP LONG TERM CARE INSURANCE, BEING CONDUCTED BY THE LEWIN

6-


113

dustry not known sometimes for the straightforwardness of its
products or the veracity of its marketing.”

Mr. Brenerman, what is your reaction to this statement, in par-
ticular, and the whole article in general?

Mr. BRENERMAN. Well, the article generated a response from
HIAA which I would like to introduce into the record, because——

Mr. Mica. Without objection, we will make that a part of the
record.

[The information referred to follows:]


122

Today long-term care can be expensive, and the expense depends
on the amount of care needed and its setting. Partly as a reflection
of that, one estimate is that nearly 2 million working adults pro-
vide significant levels of unpaid care to elderly relatives. The strain
on employees who provide this care, in addition to their other home
and family responsibilities, affects the workplace in a variety of
ways and adds a further dimension to the cost of long-term care
that an employer like the Government should not ignore.

Insurance to cover long-term care expenses has been available
since the 1980’s, and we have observed its evolution as an em-
ployee benefit. The early products were individual policies, included
a number of benefit limitations, and lacked many of the consumer
protections that are available today.

About 10 years ago, in June 1986, OPM testified about long-term
care insurance for Federal employees. We concluded then that the
keys to developing this type of benefit would be a mechanism for
long-term funding in combination with a broad risk pool. And with
assistance from insurance industry representatives, we subse-
quently developed and submitted a proposal to offer long-term care
coverage using the group life insurance model as an example. We
transmitted this proposal to Congress in 1987, and it was intro-
duced then in both the House and Senate. It envisioned voluntary
participation for employees age 50 and older, with no new Federal
funding, but with group rates to help finance the new benefit. Em-
ployees would be given a chance to trade a portion of their basic
life insurance coverage for long-term care coverage. The proposal
enabled OPM to set criteria for insurer participation, to determine
benefits packages, establish premiums, and maintain reserves.

In the next Congress the administration withdrew its support for
the proposal over a number of concerns that had surfaced. Because
of demographic factors mentioned earlier and passage of the Health
Insurance Portability and Accountability Act of 1996, interest in
long-term care insurance for Federal employees has been rekindled.
Also, one of OPM’s strategic goals is the establishment of a mod-
ernized performance-oriented total compensation system that in-
cludes a competitive benefits package for Federal employees. We
believe the idea of a Federal employee long-term care program
should be revisited as part of this effort.

The Department of Health and Human Services has also been in-
terested in developing a long-term care insurance program for Fed-
eral employees to demonstrate its potential. Beginning in 1995,
they invited us to participate in a cooperative research effort with
them, and we have done so. In the fall of 1996, we also decided to
survey Federal employees to gauge their interest in long-term care
insurance. The survey results clearly demonstrate that the design
of a long-term care program for Federal employees must recognize
the tradeoff between cost and age at initial participation in order
to work.

Last fall OPM engaged a benefit consultant to research emerging
benefit trends among large private and non-Federal, public employ-
ers. Long-term care insurance is a component of that review. Using
the contractor’s report as a foundation, we plan a broad discussion
of benefits and delivery strategies. A consensus developed through


127

ADMINISTRATION WITHDREW ITS SUPPORT. THE ADMINISTRATION'S POSITION
HAD CHANGED, IN PART, BECAUSE OF NATIONAL DEBATE ON SUCH ISSUES AS
WHETHER THE BENEFITS FROM LONG TERM CARE MERITED THE SAME
PREFERENCE UNDER THE TAX CODE AS WAS PROVIDED FOR HEALTH AND LIFE
INSURANCE BENEFITS, AND IF SO , HOW TO ABSORB THE ASSOCIATED LOSS OF
TAX REVENUE. CONCERNS ALSO DEVELOPED INVOLVING FEATURES OF THE
PROPOSAL ITSELF-- APPROPRIATE INDEXING OF LONG TERM CARE BENEFITS,
THE VALUE FOR INDIVIDUALS IN THE PROPOSED LIFE INSURANCE TRADE OFF,

AND THE BUDGET IMPLICATIONS OF DIVERTING FEGLI RESERVES.

ULTIMATELY, THE DECISION ON TAX TREATMENT FOR LONG TERM CARE
INSURANCE OCCURRED WITH PASSAGE OF THE HEALTH INSURANCE
PORTABILITY AND ACCOUNTABILITY OF 1996. FOR QUALIFIED LONG TERM
CARE INSURANCE CONTRACTS OFFERED BY AN EMPLOYER, ELIGIBLE
PREMIUMS ARE DEDUCTIBLE MEDICAL EXPENSES SUBJECT TO IRS RULES, AND

BENEFITS RECEIVED ARE GENERALLY EXCLUDABLE FROM GROSS INCOME.

OPM HAS ESTABLISHED THE OBJECTIVE OF ACHIEVING A MODERNIZED
PERFORMANCE-ORIENTED TOTAL COMPENSATION SYSTEM THAT WOULD
INCLUDE A COMPETITIVE BENEFITS PACKAGE FOR FEDERAL EMPLOYEES. WE
BELIEVE THE IDEA OF A FEDERAL EMPLOYEE LONG TERM CARE PROGRAM
SHOULD BE REVISITED AS PART OF THIS TOTAL COMPENSATION SYSTEM. THE

4.


151

Honorable John L. Mica
April 14, 1998
Page 3

2

(2) Inflation protection is usually offered as a future purchase option
(FPO) that can be elected or declined by insureds over time. This
approach gives the individual the option to purchase additional
benefits periodically, usually tied to increases in the cost of care. This
approach allows the plan to be offered at lower rates, making basic
coverage more affordable to a wider range of eligible individuals.
Under such an arrangement, each time an additional amount is
selected, an additional premium is added to the initial premium; the
additional premium reflects both the additional benefit and the age at
which it is purchased. The combined amount becomes the new annual
premium’

‘What is the participation rate of employees in these employer-based plans?

Many factors impact participation: employee age, salary level, job classification,
corporate culture and climate, the level of the sponsoring employer's support for the
plan, and an effective communications and education campaign. A 1996 study by
Towers Perrin of the two leading group long-term care insurers found the following
participation rates by age:

Tssue Age Participation Rate
Under 30 5.8%
30-39 8.2%
40-49 11.9%
50-59 12.0%
60-69 11.0%

What typical eligibility requirements are found in employer-based plans?

Many employer-based long-term care plans guarantee issue of insurance to activ.
workers during the initial enrollment period with limited or no medical underwriting.
Others, such as retirees, spouses, parents, parents-in-law, and domestic partners are
generally medically underwritten.

Long-term care policies base claim eligibility on the insured’s ability to perform
activities of daily living (ADL) or on the cognitive abilities of the insured.


155

‘ Lewin VHI, Ensuring Quality Products, increasing Access to Coverage, and Enabling Consumer Choice,
February 1996, p. 11

> Lewin VHI, Ensuring Quality Products, Increasing Access to Coverage, and Enabling Consumer Choice,
February 1996, pp. 12-14

> Lewin VHI, Ensuring Quality Products, Increasing Access to Coverage, and Enabling Consumer Choice,
February 1996, p. 18.

“ Life Insurance Marketing Research Association, U.S. Employer Sponsored Group Long-Term Care
Insurance, 1991, p. 2.

5

Health Insurance Association of America, Long-Term Care: Knowing the Risk, Paying the Price, 1997,
pp. 62-63.

© Employee Benefit Plan Reseach Institute, Long-Term Care and the Private Insurance Market, July 1995,
p.l2

* The Advisory Board Company, Group Long-Term Care Insurance, Aprib 1996, pp. 17-18.

8

Health Insurance Association of America, Long-Term Care: Knowing the Risk, Paying the Price, 1997, p.
69.

9.

Health Insurance Association of America, Long-Term Care: Knowing the Risk, Paying the Price, 1997,
pp. 60-61

"© Health Insurance Association of America, Long-Term Care: Knowing the Risk, Paying the Price, 1997,
p. 23.

"John Hancock, 1998.


CONTENTS

Hearing held on March 26, 1998 ....
Statement of:

Flynn, William E. III, Associate Director, Retirement and Insurance Serv-
ices, Office of Personnel Management; and Bob Williams, Deputy As-
sistant Secretary for Long-Term Care and Disability Policy, Depart-
ment of Health and Human Services ...

Martin, David S., director, Contracts & Legislation Division, John Han-
cock Mutual Life Insurance Co., on behalf of American Council of
Life Insurance; David Brenerman, second vice president, Government
Relations, UNUM Life Insurance Co., on behalf of Health Insurance
Association of America; Paul Fronstin, research associate, Employee
Benefit Research Institute; and Charles 'R. Jackson, president, National
Association of Retired Federal Employees ....

Letters, statements, etc., submitted for the record by:

Allen, Hon. Tom, a Representative in Congress from the State of Maine,
prepared statement of ....

Brenerman, David, second vice president, Government Relations, UNUM
Life Insurance Co., on behalf of Health Insurance Association of Amer-

ica:
Letter dated November 4, 1997
Prepared statement of ..
Flynn, William E. III, Associate Director, Retirement and Insurance Serv-
ices, Office of Personnel Management, prepared statement of ...
Fronstin, Paul, research associate, Employee Benefit Research Tastitute,
prepared statement of
Jackson, aan R., president, National Association of Retired Federal

Employees, statement of ...
Martin, S Ptdirector, Contracts & Legislation Division, John Han-
Mutual Life Insurance Co., on lf of American Council of

oe Insurance, prepared statement of ..
Williams, Bob, Deputy Assistant Secretary for
ability Policy, Department of Health and Human
Letter dated April 13, 1998
Prepared statement of ..

(uD

121

114
48


145

Honorable John L. Mica
April 13, 1998.
Page 2

However, the program only finances long-term care services after an individual
has spent-down his or her assets to the poverty level. This level varies by state.

About 70 percent of the non-institutionalized elderly with long-term care needs
receive all their help from family members and friends. Because of this,
quantifying national long-term care expenditures has been difficult. The best
estimate of costs associated with long-term care can be derived from the Health
Care Financing Administration's (HCFA) statistics on national health
expenditures. HCFA does not have a specific item for long-term care, however,
it does track nursing home and home health care expenditures. Below is a
breakdown of these expenditures and the percentage that the different sources
of payment represent.

Payment, 1

_Narsing : Home HealthCare
- in Billion $ | nt | in Bition$ | Percent
Medicare 89 11.3 13.6 45.0
Medicaid 37.5 418 44 13.6
Other Public 418 23 04 0.3
Out - of - Pocket 25.1 32.0 59 19.5
Private Insurance 37 47 3.2 10.6
Other Private 1.4 4.8 3.3 10.9
TOTAL ree ae 4000 302 [1000

‘SOURCE: Health Care Financing Administration, Office of the Actuary, National Health Statistics Group

2. What out-of-pocket costs are generally born by individuals in need of
long-term care services?

A year's stay in nursing homes averages about $41,000 today. In high cost
areas of the country, costs can easily double that amount. Home health care,
depending, on what type of care is received, can easily cost half the annual
nursing home expenses, and even equal or exceed them if care received in the
home requires professional or medical services. This is especially true in cases
where skilled home care is needed on an extended basis (i.e., 24 hours a day).
Such costs, without long-term care insurance, are generally all borne by the
individuals and or their families who need the care. Medicaid steps in only when
the individual has impoverished himself.


106

Mr, Mica. I thank you, Mr. Jackson, and all of our panelists this
morning for your testimony. I have several questions. I wanted to
start out with Mr. Jackson, who has raised, I guess, one of the pri-
mary barriers between employees or individuals, retirees and oth-
ers securing long-term care insurance, and that is the cost. We
have 1.9 million Federal employees and 2.2 million Federal retir-
ees. Mr. Martin, is that a pretty good size group to get a group
rate?

Mr. MartTIN. Certainly unmatched in my experience. I think cer-
tainly looking at what you would expect, and I think Dave
Brenerman touched on this, there is a message that is sent just by
the very fact that the Government can extend coverage to its em-
ployees. But the type of coverage that would be offered, I think you
would be able to fashion a plan that is comprehensive, that does
the best for employees and their families and also has administra-
tive savings that would make this a very good benefit.

Mr. Mica. I have also heard that corporations do offer this as an
option, a growing number of corporations now. A couple of ques-
tions in that regard. I guess the corporate rate with larger numbers
also provides a better group rate than if an individual goes out. Is
there some savings you could estimate, either Mr. Brenerman, Mr.
Martin?

Mr. BRENERMAN. Well, typically, a group plan, because there are
administrative savings, the premiums are deducted from the per-
son’s Paychecks for example, rather than having to set up——

Mr. Mica. What kind of savings can there be to the individual
if you & outside—again, our Federal employees right now can go
out and buy their own.

Mr. BRENERMAN. The savings are in the range, I think, of about
10 to 20 percent.

Mr. Mica. With a group rate.

Now, let me ask about these corporate plans and what the pri-
vate sector is doing. Are they paying a portion of the premium, or
is all of this left up to the employee? at is your experience, Mr.
Brenerman, Mr. Martin?

Mr. MarrTIN. Certainly the vast majority of larger employers offer
this as an employee-pay-all. The employer does what you would
call the due diligence, selecting the carrier or carriers that will be
providing the coverage, works oftentimes with national consulting

ouses in fashioning the plan of benefits. There is quite a bit of ne-
gotiation over the price, what the choices will be, not making them
overly complicated. There are employers who do contribute toward
the premium, and I think in the smaller market there are actually
employers, Dave has more experience in that, where the premium
is paid fully to a certain level by the employer.

Mr. Mica. Mr. Brenerman, what is the trend?

Mr. BRENERMAN. I think, generally speaking, in groups under
500 employees, I would say about 40 percent of the employers pay
a portion or all of the premium. But in the larger groups, like the
companies that Mr. Martin mentioned before, IBM, et cetera, those
are usually employee-pay-all plans.

Mr. Mica. I think in your testimony you said that right now for
long-term care we sort of go through this process of individuals
using up all of their savings and then eventually getting into Med-


66

The public and private sectors must combine their efforts and knowledge to
create a solution that will benefit most Americans today and in the future. This
Subcommittee's consideration of offering long-term care insurance to all federal
employees is an investment that will pay off many tires over as our population
ages and will help our nation avoid placing an insupportable tax burden on our

children.

Thank you Mr. Chairman and Members of the Subcommittee. We look forward
to working with you to provide further assistance in this area.

-20-


52

technology and general health are increasing the life span of the elderly, but
they are also increasing the number of people who will need treatment for
chronic illness. At the same time, rising income, particularly among the current
elderly and future baby boomer retirees, makes insurance against the costs of
long-term care more affordable. Long-term care insurance must now be folded

into this country's extensive private health insurance system.

The market is developing rapidly, as evidenced by the number of companies
developing long-term care insurance products, the number of individuals covered
and the variety of products available to the public today. By December 31, 1996,
over 100 companies have sold close to 5 million long-term care insurance
policies. The number of policies purchased increased by more than 600,000 in
1996 alone, and the market has grown an average of 22 percent between 1987
and 1996. These insurance policies include individual, group association,
employer-sponsored and riders to life insurance policies that accelerate the

death benefit for long-term care. (See Figure 1 below).

Figure 1: Long-Term Care Insurance Policies Sold,
Cumulatively 1987-1996 4969

5000 4351

4000

3837
3417
2930
3000 2430
1930
2000 1550
1130
“Ti | |
il i
1994 1995

1987 1988 1989 1990 1991 1992 1993
Source: HIAA LTC Market Survey, 1997

Thousands

1996


101

Without an adequate national response to long term care needs, an increasing number of private
and public sector employers are offering group long term care insurance to their employees. In
fact, half of the current Fortune 500 companies make private long term care insurance available

to their workers.

The advantages of employer-sponsored long-term care insurance are obvious. First, buying any
form of insurance as a group is usually less costly than buying it as an individual. Second,
company benefits specialists can assist in cutting through the marketing hype and selecting a
reputable insurance carrier that will provide adequate coverage to policyholders, These

advantages are critical if we are to succeed on the federal level.

At a minimum, this subcommittee must establish that the federal government can offer long-
term care insurance with cheaper premiums and better coverage than federal employees or

annuitants could buy on their own.

Beyond this goal, there are several parameters that we believe must be built into any long-term

care insurance program offered by the federal government


26

Figure 2

Projected Nursing Home
Residents, 2000 - 2030

‘Soure: Forecast by American Coumel of Lie Insurance

Not only will the total number of nursing home residents increase but so will the costs per
resident. Since 1990, the costs per stay have increased at an annual average rate of 3 percent
above the overall rate of inflation. Assuming this trend continues, the annual cost of a nursing
home stay is expected to increase from $40,000 today to $97,000 (in 1996 dollars) by 2030.

Increasing numbers of nursing home residents combined with a higher cost per stay will lead
to a quadrupling of nursing home expenditures by the year 2030 (see Figure 3). As the baby
boomers age into the 21* century, total expenditures for nursing home care could reach $330
billion (in 1996 dollars). To put this number into perspective, nursing home expenditures in
2030 will equal the size of the entire Social Security system today.

‘American Council of Life Insurance 4


Who Will Pay for the Baby Boomers’ Long-
Term Care Needs? Expanding the Role of
Private Long-Term Care Insurance

Testimony Before the U.S. Senate
Special Committee on Aging

March 9, 1998

Presented by:

Janemarie Mulvey, Ph.D.
Director, Economic Research
American Council of Life Insurance
and
Barbara Stucki, Ph.D.

Senior Policy Analyst
American Council of Life Insurance


105

Besides these parameters, I must also comment on the tax deductibility of long-term care
Please work with me on this, although I know that tax issues are outside the jurisdiction of this
committee. NARFE welcomed a mandate in the Health Insurance Portability and Accountability

Act (P.L. 104-191) to treat long-term care insurance as a medical expense for purposes of

itemizing deductions. However, the problem is that taxpayers cannot deduct long-term care

premiums unless their health expenses exceed 7.5 percent of adjusted gross income,

Public policy makers could encourage taxpayers to prepare for the future by making long term
care premiums entirely tax deductible. While such a tax break would result in an initial cost to
the federal government, savings should be achieved in the future, since a larger number of long-
term care insurance policyholders would reduce the demand for Medicaid nursing home benefits.
‘And whether it is through Medicaid, Medicare, or other federal safety nets, costs for long-term

care, in one form or another, can only increase as the population ages and lives longer.

In closing, I want to commend you, Mr. Chairman, for recognizing our critical need for private
long term care insurance, While I know you are understandably eager to move legislation, it is
cour wish that the subcommittee take its time to gather sufficient information on lessons learned

from private and public employer long-term care insurance programs.

Obviously, NARFE cannot endorse any legislation proposal in advance of its introduction and
specifics. We are, however, generally supportive of your efforts to hold more hearings and draft
a proposal. We would welcome the opportunity to contribute to this process. Thank you again

for inviting us to testify.


34

Whether private insurance will play a greater role financing the cost of long-term care in the
next century depends in large part on the extent to which baby boomers plan ahead for their
retirement, There is an important role for government to help encourage individuals to plan for
their long-term care needs by:

+ educating baby boomers about the limitations of goverment programs that pay for long-
term care,

educating Americans about the risk of needing long-term care and the impact of
unplanned long-term care expenditures on their financial security,

‘incorporating long-term care insurance as an essential part of any public policy debate on
retirement security, and

‘* encouraging purchase at younger ages when premiums are less expensive.

We need to educate baby boomers about the limitations of government programs that pay for
long-term care,

Many Americans believe that Medicare will pay for their long-term care needs. In reality,
this program primarily focuses on acute care needs (hospital stays and physician visits). The
Medicare home health benefit is also medically-oriented, and is targeted to people who need
skilled nursing care and rehabilitative therapy at home. Medicare does not pay for help with
daily activities unless provided with home health care. In addition, the nursing home benefit
under Medicare only covers short stays (up to 100 days).

Those who are poor can tum to Medicaid. In fact, unless the way long-term care is financed
changes when baby boomers grow old, 38 percent of residents will be eligible for Medicaid when
they enter the nursing home."' Some of these will be individuals who are poor, while others will
have experienced a drop in income, possibly due to the loss of their spouse’s pension. In
addition, without adequate private insurance, a significant number are likely to become poor
paying for medical costs and for long-term care in the community.

Many baby boomers are unaware that the Medicaid program requires people with disabilities
to impoverish themselves before they are eligible for public assistance. As a result, middle
income families have few options but to use their own income and assets to pay for their long-
term care needs. In 2030, a nursing home stay will cost $97,000 a year (in 1996 dollars). This
will likely equal more than two and a half times the projected median income of elderly
households in 2030 of $35,000 (in 1996 dollars).'? These resources will be inadequate to pay
for a single year of nursing home care.

‘American Council of Life Insurance 12


115

HIAA Talking Points on
October 1997 Consumer Reports Article on
Long-Term Care Insurance Policies

ISSUE: Who needs long-term care insurance (LTCI)?

CONSUMI .EPOR’ ESP\ :: If you're poor, Medicaid pays. If you can
set aside about $160,000 at compounded interest solely to pay for nursing home
care, you don't need LTCI.

HIAA RESPONSE: HIAA fully agrees with Consumer Reports that LTC! is not
for everyone. If you currently qualify or will soon qualify for Medicaid, you clearly
do not need LTC!. However, who needs LTCI beyond this point is much more
difficult to quantify. A figure of $160,000 for an expected nursing home stay of 4
years and depending on where you may be insufficient for many people. LTCI
allows you to protect yourself for an indefinite amount of time (e.g., lifetime
coverage).

The financial advantage of buying insurance rather than putting aside $160,000
today is compelling. For example, the average annual cost of an LTCI policy for
a 65-year old’ is $1,881. By the time this person reaches 85, he would have
paid about $37,620 in premiums, less than one-fourth of the $160,000
recommended by Consumer Reports. (Or even paying until age 95, where total
premiums paid would be about $56,430, only about 35 percent of $160,000.)
This person would end up with generally the same type of coverage Consumer
Reports recommends, and still have access to an extra $120,000 (or an extra
$100,000 if a person pays till age 95) which he may use for other needs or to
enhance his retirement lifestyle.

ISSUE: Why buy LTCI?

col R TS: The principal reason to buy LTCI is to preserve from a
Medicaid “spenddown,” the assets that a spouse may need to live on or that you
are determined to leave to children and grandchildren.

HIAA RESPONSE: Protection of assets is an important reason to buy LTCI.
However, it is not the only reason nor is it the primary reason why people
purchase LTCI. An HIAA survey of 2,601 buyers of LTCI revealed that people

‘This is a average cost for a LTC! policy covering $100 a day in a nursing home costs and at
Jeast $50 in home health care costs, with a 20-day deductible period, with a § percent
compounded inflation protection feature and covering up to four years of coverage.


136

The U.S. system of long-term care is today heavily reliant on informal caregivers,
predominantly spouses -- some of whom have health problems of their own —- and
middle-aged children caring for their elderly parents. Close to half of adult daughters or
daughters-in-law who provide informal eldercare are in the labor force. Balancing work
with caregiving and other family responsibilities is no easy task. A nationally
representative study found that employed women who are the primary caregivers for
disabled elderly relatives spend, on average, 18 hours per week providing unpaid
eldercare, in addition to other home and family tasks.

Currently, there are two main sources of funding for formal long-term care:

out-of-pocket payments by the elderly themselves and/or their families and Medicaid
Medicaid financing is, of course, only available to the poor, including those who have
"spent-down" by exhausting their ability to pay privately for medical or long-term care.

At mild to moderate levels of disability, most disabled elders are able to rely exclusively
(on informal help from family, friends, and neighbors or on informal help supplemented
by a few hours a week of paid assistance. However, severely disabled elders -- such
as those who have 3 or more ADL disabilities ~ typically require 75 or more hours per
week of assistance in a home care setting. For many severely disabled elders, this
level of assistance is beyond what the family alone can supply, especially when family
caregivers are employed or live too far away to provide regular assistance.

Disabled elders who are unable to access sufficient in-home assistance from relatives
and/or paid helpers are at high risk of nursing home admission. Among Americans who
live to at least age 65, almost one quarter (23%) can expect to spend a year or more in
a nursing home at some point prior to death.

Currently, the average annual private pay cost of nursing home care is estimated to be
around $46,000 per year. At this rate, middle income elders rapidly deplete their life
savings and the longer their nursing home stays, the more likely they are to eventually
spend-down to Medicaid eligibility. It is estimated that between one quarter to one third
of nursing home residents currently on Medicaid were originally admitted as private pay
residents.

Advantages of Employer Group Long-Term Care Insurance

Over the long-term, private long-term care insurance may provide protection against
catastrophic out-of-pocket nursing home costs. Also importantly, it may help certain
upper-middle income elders with long-term care needs remain at home as long as
possible, by making their own money go further. While the availability of private
long-term care insurance does not necessarily obviate the need for informal help from
family members, it may make it easier for employed family caregivers to balance work


58

long-term care through avenues such as long-term care insurance. Second, the
sheer size of the Federal Government as an employer would assure an
immediate and heightened awareness of long-term care financing issues among
working adults. Finally, because the federal employee population is large and
considered to be a relatively young and healthy group (compared to the more
senior population that individual long-term care insurance policies are currently
being marketed to), administrative and marketing costs will be less; premiums

will be lower; and underwriting may be minimized.

HIAA supports the offering of long-term care insurance to all federal employees.
It is imperative that the structure of a Federal Employee Long-Term Care
Insurance Plan allow for market competition and design flexibility. This would
assure that long-term care insurance policies that would be offered to federal
employees through this program would be affordable and not hinder product
development and future innovation in the coverage of long-term care services.
In this regard, below are some initial thoughts on the parameters HIAA feels
should be considered when drafting legislation that would enable this to happen.
* Authorization: The Office of Personnel Management (the “Office”) shall
establish the program under which eligible group and individual long-term
care insurance contracts are made available to federal employees,
annuitants; and eligible family members of such employees and annuitants
with long-term care insurance coverage. Eligible family members are an
employee's or annuitant’s spouse, children, parents, grandparents, and such
other individuals as the office may specify.
* Withholding: Premiums for eligible long-term care insurance contracts shall

be withheld from the pay of each enrolled employee and the annuity of each
enrolled annuitant, and be contributed to the government. Such withheld

-12-


112

erage for those people who would like to take advantage of the in-
dividual plans where the employees may have more choices of pro-
grams than you might get in the group coverage where the em-
ployer makes a number of decisions for the employee. Other than
that, I don’t have anything to add, Mr. Chairman.

Mr. Mica. Mr. Fronstin.

Mr. FRONSTIN. I would just raise the question of whether it is in
your best interest to self-insure this type of program. Even though
Medicare and Medicaid are not employee benefits for workers, they
are self-insured by the Government, and every few years we revisit
those programs because the costs increase faster than expected.
And in a self-insured environment, you may experience the same
type of—you may have the same experience. So, I think, in terms
of the question is do you really want to assume that risk or not.

Mr. Mica. Thank you.

Mr. Jackson, what do you think our Federal retirees, who insist
on being included, would like to see as the way this is administered
and operated?

Mr. JACKSON. Well, we would certainly welcome anything in
long-term care. As it so happens, Mr. Chairman, our Retirement
Life magazine in May will run an article on long-term care insur-
ance because we have found that so many of our annuitants have
questions on this particular subject. They don’t know what policies
are the best to take. So what we have done is begun an education
program on this in the month of May, as it so happens.

And we do not get a lot of correspondence concerning this sub-
ject, but it is on the minds, and I think one of the problems is that
it is in my age group, and my age group is dying off, so to speak.
But we grew up in an era that we learned, or it was instilled into
us, that we took care of Mother and Dad. I am the class of this
group in my age group. The younger people that are coming up
today, I am not sure that my daughter is going to take care of me,
if I come to the point that I can’t take care of myself. I need that
policy, I know that. But in my age group, if you are in good health,
you believe you are never going to need it. That is one of the prob-
lems that we have.

So, I think, it is important for the Federal workers particularly
to realize the importance of this because they have a different life-
style than the group in my age group. And I commend you for what
you are doing with regard to this and the hearing on this because
it opens up something that needs to be done.

Mr. Mica. Thank you, Mr. Jackson. I want to ask again, do you
think when we set this up we should have the Federal Government
do a self-insurance plan and have basically one plan available, and
maybe bring in an administrator? Or, do you think that we should
have multiple choices such as we have in FEHBP?

Mr. JACKSON. I personally would prefer multiples such as we
have the opportunity in the FEHBP program.

Mr. Mica. The other thing, too, Mr. Jackson has raised some
points. The Consumer Reports reviewed long-term health care in-
surance policies in their 1997 October issue, and an article in Con-
sumer Reports concluded, and let me quote, “Long-term care insur-
ance is one of the most complex types of insurance sold by an in-


1 Wi employers be able wo dednct anything for
he cast of providing or paying for private
longterm care lasurance for their employees?

‘A. General employers willbe abe to dec. 2 3 bse
es expense, bo the cos of sein up 4 lang term
‘cae insuace plan forthe employees 38 well tthe
‘contnaions that they may make toward paying for he
‘on of premiums

9° wm contrtions be excused from
the taxable income of employees?

A Yes

Cam indichdnal Retirement Accouts (IRAs)
(end 401K funds be used 10 purchase privaie
long-term care tesseraace?

A No However, under a demonaration prog at:
funds deposted in Medial Savings Accounts can he
‘used tu py ong fem care insurance premiums

°

Consumer protection standards
ra

GIs there a convection betueen the longterm
care consumer Mandards ta the new
bbealth tarurance reform law and the tax clart
Aication of longterm care?

Yes To qual for favorable Ue tcatment ony
fen care policy sald ter 1980 ms enn the
consumer protection unde in the re LW.
insurance companies must follows evan anise
tre and marketing peace oe ices fs
General speaking. poles sold pr to lana
2997, stomaneal Bil he elighe ft tavorable x
treaiment Las. nothing in the nes: we prevents
tte rom imposing mote REDE UNSER Pr
‘exton sandals

What kinds of procedures must tesurance com:
_Panies comply with to protect consumers?

Ay There are several Here ane seme of the tre
Lmportant ones Constnier: MUS HEHE 4
“Shoppers Guide” and a desenption of the pais
benefits and lumiutnins tie, Outi of Conerige?
‘ex in the les proxess. The Outline of Coverage
alhres consumers to compare policies from diterent

6

76

companies Companies must ep arcu the
rune of lms dened and information on pokey

"No policy can be sold as 3 Jong term care inaurance
policy i Limes or exces coverage by iype of eat
‘ment. medical condaion. or accident. Several excep-
inst this uke ese. however For example, policies
may limi or exclude coverane Cor prexitng condi-
tions or doeises. meraal cr nervous disorders but ot
Althsmer') or akcobokien or deug adchcuon A policy
‘anna, tamever, exc coverage for preexsting om
dues for ore than & months afer the ete date
Ab sowerage

‘What will prevent a company from canceling my
poles wen I need it?

{he in pts ompany tant ance spi
wept fe nna premiums Palas cannot
inveterate ml
‘ise ah Intact the cent phe
Tae am pain sper the pb can be re
ut S my lk he as Rong
Stun he ete aie

Ut ibese new standards belp people who, for
tehatever reason lose thelr group coverage?
hes ll Hele cere 9 gry py wl be
lhrwe conve ter ener when the eave
{he anphiner img a thes pas thee prensa
vets shen Furey am nial who has heen
ener unk 3 gnup pln fo at lea 6 ahs
“ever an nde py ard when the ap
Pin scanned The inl a do Waeut
pronation canknce ot tae

r


28

These trends in Medicaid expenditures for nursing home care will be unsustainable at
current tax rates. Legislation to dramatically increase taxes to fund the expected increases in
Medicaid is politically unlikely in an era of balanced budgets and fiscal conservatism. Yet,
without explicit increases in tax rates the future growth in tax revenues to fund Medicaid will be
limited by growth in overall wages. As a result, growth in Medicaid nursing home spending is
expected to outpace growth in tax revenues over the next 30 years (see Figure 5). Without
additional tax revenues, Congress would be forced to reduce Medicaid nursing home
expenditures either by reducing benefit levels or further restricting eligibility requirements.
These actions could threaten the Medicaid safety net for low-income individuals who have no
alternative but to rely on public programs.

In order to control Medicaid expenditures, some states are trying to reduce nursing home use
by emphasizing care in the home and community. While home and community-based care is less
costly per person than institutional care, many studies suggest that any savings could be more
than offset by increased demand for services. Other strategies involve limiting provider fees and
growth in nursing home beds, and using care management. It is still unclear whether these
approaches will be adequate to contain future !ong-term care costs.

Medicaid Revenues vs. Expenditures
For Nursing Home Care

2000-2030

200%

150% 143%
100%

56%
50%
0%
Revenue Growth Expenditure Growth

Source: ACLI Policy Research Dept,

‘Though government pays for a large portion of long-term care costs, if baby boomers fail to
plan ahead and purchase private insurance, much of the burden of rising nursing home costs will
continue to fall on individuals and their families. Currently, about 48 percent of nursing home
costs are paid for by individuals in the form of out-of-pocket costs. If current trends continue,
projected out-of-pocket expenditures for nursing home care are expected to increase to $158
billion (in 1996 dollars) in 2030 from an estimate of $33 billion in 2000 (see Figure 6). This
represents a 378 percent increase in total out-of-pocket costs for nursing home care by 2030.

Out-of-pocket payments for long-term care services are substantial, but these expenditures do
not capture the full cost of caring for older people with physical and mental limitations. About

‘American Council of Life Insurance 6


94

ables
AVERAGE ANNUAL PREMIUMS FOR LEADING INDIVIDUAL AND GROUP ASSOCIATION
LONG-TERM Care SELLERS, 1995
ase Pant fase Man win base an wim oth
ase SPecentCompounded None Invaon Prete ans
sae Pan Imation Patton Prowon Neatrtetare Protector
Coverage Aunt $8840 Day Nursing Home Mame Hea Care
so $310 5 6 S631 se
6 ay Last Ls8 nae
» 3353 “sy on ‘800
Coverage Aue: $100880 8 Day Hurg Home Maee Heth Care
so sus 518 + 40
rs 010 at 1395
” ry Salo ser8
Source Neat Iasrance association ot Aneica
Notes es pales geseaiy cies 920-69 eiiatn para and prondes 6 years coverage

Toble7
NATIONAL HEALTH EXPENDITURES (NHE) In NURSING HOME AND HOME HEALTH AGENCIES,
SELECTED Years, 1960-1996

Nursing Home Epenatres ome Heath Expenses
Tora Ostet owe
veer mie Taal Meicis Mescare pocket Gter_—“atal_—Mascand Maicarepocte! otter
(8 ion)
1960 SD $10 $00 soo S08 = S900 st
1580 ws ye ghd 78 ze
190 ms 9 lst
1998 sos. 7S SY Te S02 a? Ss
(asapercenane (asa percentage tel Lasapercertane fas apecenage of oa
htt WHE) rrsing none expentures) ei E) ema heath expentres
1960 Woo «37 OOH N20 Owe vk
1920 yoo 71 SDS? 2031S Data SN
1990 imo 873A GS 7S
1996 too 78 BONDS ka OSS

Source Heath are FrancngRénstraton



9

STATEMENTS OF DAVID S. MARTIN, DIRECTOR, CONTRACTS
AND LEGISLATION DIVISION, JOHN HANCOCK MUTUAL LIFE
INSURANCE CO., ON BEHALF OF AMERICAN COUNCIL OF
LIFE INSURANCE; DAVID BRENERMAN, SECOND VICE PRESI-
DENT, GOVERNMENT RELATIONS, UNUM LIFE INSURANCE
CO., ON BEHALF OF HEALTH INSURANCE ASSOCIATION OF
AMERICA; PAUL FRONSTIN, RESEARCH ASSOCIATE, EM-
PLOYEE BENEFIT RESEARCH INSTITUTE; AND CHARLES R.
JACKSON, PRESIDENT, NATIONAL ASSOCIATION OF RE-
TIRED FEDERAL EMPLOYEES

Mr. Martin. Good morning, Mr. Chairman and members of the
subcommittee. I am David Martin, director of contracts and legisla-
tion at John Hancock. I also serve as chair of the Subcommittee on
Long-Term Care Issues for the American Council of Life Insurance.
Our member companies that provide long-term care insurance to
the American public represent more than 80 percent of that mar-

tplace.

On behalf of the ACLI, I want to thank you for the opportunity
to present our comments to Ps today. ACLI supports the efforts
of the committee with regard to offering long-term care insurance
to Government workers as an employee benefit. We look forward
to working with committee members on this issue.

Congress has played a key role in encouraging private-sector so-
lutions to financing long-term care. The recently enacted Health In-
surance Portability and Accountability Act of 1996, referred to as
HIPAA, sets standards for tax-favore licies and imposes strong
consumer protection provisions. While these Federal initiatives are
important first steps, there is an urgent need to do more to address
the challenge of financing long-term care in the 21st century.

Earlier this month in testimony before the Senate Special Com-
mittee on Aging, William Scanlon, director of Health Financing and
Systems Issues, stressed that the aging of the baby boom genera-
tion will lead to a decrease in the elderly Population, especially
those over age 58 who are most likely to need long-term care serv-
ices. A study just completed by the ACLI indicates that Medicaid
and individual out-of-pocket long-term care expenditures for elderly
baby boomers could rise by over 360 percent within the next 30
years. A copy of our study is included with our written testimony.
By the year 2030, when the class of baby boomers reach retire-
ment, it is estimated that the number of elderly persons will double
from 35 million to nearly 70 million. Over 20 percent of the popu-
lation will be over 65 in 2030 compared with 13 percent in 1990.
This means that in about 30 years, 32 States will resemble Flor-
ida’s population today.

As a very significant employer in America, the Federal Govern-
ment can reach over 2.8 million workers. By offering this product
to persons during their working years, the Government can help
encourage the purchase of private insurance at younger ages when
premiums are very affordable.

We believe that private long-term care insurance can play an im-
portant role in financing long-term care and providing for a secure
retirement. Relying on savings to pay for long-term care needs is
not a financially feasible option for most middle-income Americans.
The chart, which you have a copy of as well as up here, Ways to


If you need help
7 °

Every save has a department of insurance that regu-
tas insurers and assis consumers. If you need more
information or if you want to register 2 complain,
check the goverment lisings in your local phone
‘book for your state's department of insurance.
‘Additional information about health care coverage and
longterm care is available from the Area Agency on
Aging. For your local fice, call 1-900-677-1116. Other
souross include:

‘American Health Care Association
1201 L Sarees, NW.

‘washington. 0 C. 20005
(202) 42

National Association of Insurance
‘Commissioners
Suite 1100
LOW. 1h Sect
Kanwis City. MO 64105
(R16) 842-8600

LST Seat, SAC
Wanhungion, D.C 2405,
(202) 984

The Health Insurance Association
of America

‘The Health Insurance Association of America (HIAA) is
12 national trade association hased in Washingt 1, DC.
lus members ae insurers and managed care companies
that serve tens of millions of Americans. HIAA's mem-
‘bership includes companies that finance and deliver
‘basic heath care, and that offer supplemental insur-
ance. longterm care insurance. and disability income
protecuon.

IAA’ activities range broadly, from lobbying 10 ed
cation t0 collecting and disseminating data and enor
mation, Combining 2 product onentatia with member
semicey HIAA advances both the interests ofthe indus:
tr and of individual members. and works 60 muincin
{fe sents of our curent heakh care seem and 10
Jiprone the sem to nef all Americans

For More Information

You can find HIAA un the Word Wide Wty at
Fo: waw hiss ong

TIAA trsarance Education Program can be rescheat
AUD RLETOTS, 1O°S, Oe IRB,

Tir onler the Sauce Bea of Health Insurance Data
and orher matenals, cll toll-free LA0O-82O1T1


83

(or a portion of t) to the insured in the event of terminal illness or a specified disease and have experienced rapid
growth since their introduction. One study indicated that in 1987 there were no life insurance policies with a LTC
rider, but that about $35,000 such policies had been sold by 1996 (chart 3).

‘Although the market is currently dominated by policies that are sold individually and through associa-
tions, employment-based plans offer several benefits over individual policies and could potentially dominate the
‘market in the future. Group insurance can be less costly because of potential economies of scale in marketing and
‘administration. Employment-based groups generally bave « particular advantage in this respect because there is
‘central mechanism for collecting premiums (.e., payroll deduction). These factors, together with the reduced
likelihood of adverse selection when younger groups are enrolled, can make group plans less expensive than
comparable coverage offered on an individual basis (Friedland, 1990).

in addition to the potential of group insurance to be less expensive, employment-based LTCI policies may
‘make employees, retirees, and their families aware of the possible liabilities associated with LTC at an earlier age,
‘when they can better afford to plan for LTC needs. Moreover, employment-based LTCI policies are generally
‘negotiated by a benefite professional, who may be better informed than a lay person about the nuances of policy
provisions and coverage limitations. Past reports citing the prevalence of sales abuses euggest that having a
‘knowledgeable person conduct the search for the beat policy can be particularly valuable (Consumer's Union, 1991;
‘Shikles, 1991).

Plan Design
Private LTCI plans have changed significantly since their inception in the early and mid 1980s. LITCI policies have
become less restrictive as they have and many of today's policies have additional provisions that make

them more valuable to employees and other individuals than earlier policies. For example, many plane no longer
require only a medical trigger to become eligible for benefits, and several insurers now offer policies that adjust
‘the benefit for inflation. Many policiea also now offer an optional rider that enaurea that policyholders who have
stopped paying premi
indication of how much the private LTCI market has . , the most development relates
to the flexibility included in current plan design.

LTCI is evolving in an environment of continuously changing regulations and uncertainty regarding the
future direction of LTC policy, the cost of LTC, which services are most cost effective, and which design features
‘are best suited to meet individuals’ neede-especially given the increasingly diverse population in need of LTC
services, The market haa responded by creating plans that have several options and that, in some cases, can be
custom tailored at the time care is needed. The “alternate plan of care” option provides the possibility of payment
for nonstandard customized services not specified in the policy. Services may include alternative sites of care,
facilities, end/or providers. Examples are care in a facility that is not a nursing home but that specielizes in care
for patients with Alzheimer's disease or modifying a residence to accommodate wheelchair access (Teachers
Insurance and Annuity Association, 1993). Generally, a plan of care is developed that the inured, insurer, and
provider agree on at the time care is needed, In addition, some plans now enable the individual to select from
numerous options when purchasing a policy, such as the daily benefit amount, a maximum benefit amount, the
type of care to be provided (e.g., nursing home only veraus nursing home or other type of eare setting to be deter-
mined at the time care is needed), or whether to include provisions such as inflation protection. This flexibility ia a
likely imperative to the aurvival ofthe LCI market given the continually evolving LTC system.

‘These and other design features now commonly available—particularly in employment-based plans—
include those listed in table 4. Much of the following discussion is based on review of individual employers’ and
ingurers’ current actual LTC policies for the individual and/or group markets. (Individual and group plan design
features are not discussed separately.)

Eligibility and Benefit Eligibility Triggers—Many employment-based plans guarantee issue of insurance to active
‘workers, with limited or no medical underwriting, during an enrollment period. Others (e.g., retirees, spouses,
parents, and parents-in-law) are generally medically underwritten.

‘Benefit eligibility is generally triggered when the insured is unable to perform or needs assistance with
two out of five or three out of six or seven ADLa, depending on the insurer and insurer's definition of ADL. Eligibil-
ity may also be triggered based on cognitive impairment such as the need for supervision due to Alzheimer's
disease.

Benefit waiting periods generally require the individual to wait between 20 days and 100 days from the
time of meeting the criteria to the time of receiving payment for services received. The waiting period (often called
the elimination period) may be based on a set number of days regardless of the receipt of services or may be based
on services received. In the first case, the waiting period generally begins based on the date ADL dependence is
ascertained. In the latter case, the waiting period usually begins based on the first day of services received. In
‘general, the waiting period must be satisfied again if care is not received for a specified amount of time (for
months) (The Prudential, 1994),

‘Although policies are now generally less restrictive than in previous years, several limitations may still
ticularly for individuals who purchased a policy in years past and have not updated that policy. For

jsion based on a cognitive di
‘much LTC is by definition not medical in nature, the medical necessity trigger can prevent people from qualifying
for claims payment. Some plans may also require prior hospitalization as a prerequisite for nursing home coverage

4


5

tional options that our folks, Federal employees and retired Federal
employees should have, I think, is very important. This is long
overdue, and I certainly thank you for calling this.

Mr. Mica. I would like to ask our first panel to come up and take
your seat, please. I am so pleased this morning to recognize and
welcome to our panel the distinguished gentleman from Maine, Mr.
Allen. I understand Mr. Allen is with us, and would like to recog-
nize him either for an opening statement or to introduce, if he
gould for the panel, one of our panelists, who I believe is from his

tate.

Mr. Allen, you are recognized.

Mr. ALLEN. Thank you Mr. Chairman. I will try to do both. I
want to thank you for your leadership in addressing the long-term
care crisis that our Nation is facing. I am not a member of this par-
ticular subcommittee, though I am a member of the Committee on
Government Reform and Oversight. But I am here really to wel-
come my good friend, David Brenerman, to the committee. Mr.
Brenerman and I both served as mayors of the city of Portland. He
was an outstanding mayor and city councilor for our city, and
David Brenerman’s dedication to the public has continued with his
work as the second vice president for Governmental Relations for
UNUM Life Insurance Co. UNUMs corporate headquarters are in
Portland. David is the immediate past chair of the Long-Term Care
Committee of the Health Insurance Association of erica, for
which he will testify today.

UNUM has been the largest writer of group health, of group
long-term disability insurance, since 1976 and a leader in personal
accident, sickness, life and cancer insurance policies in this coun-
try. Iam proud to welcome Mr. Brenerman to the committee.

I would also like to say that one staff member on this committee
has shared with my office how in her words UNUM and this t;
of insurance has “saved her family.” About 10 years ago her mother
was diagnosed with an illness that required long-term care. UNUM
at that time was one of the very few companies in the country that
was offering this type of coverage. Her mother had a policy that
kicked in when she needed it.

It is clear that this kind of long-term care insurance coverage is
essential for a great many Americans. As our society is aging, the
need for long-term care coverage is more compelling. It is estimated
that 30 percent of the 7.3 million elderly are severely disabled and
require assistance. About 22 percent live in nursing homes. Again,
the need is clear, and expanded coverage ever more important.

Mr. Chairman, I thank you for your leadership on this issue and
for allowing me to welcome Mr. Brenerman. I regret that I have
another committee meeting which will not allow me to stay here,
but I certainly will review the materials and the testimony that
have been presented.

[The prepared statement of Hon. Tom Allen follows:]


111

Mr. FRONSTIN. I am not sure exactly what you are getting at?

Mr, Cummincs. I am talking about the private insurance; how
would it affect it, the market in this area?

Mr. FRONSTIN. I am not sure that it would. It may make it more
competitive, may bring some more insurance companies into the
market if there are more people eligible for plans. It would take
some time before that would happen.

Mr. CuMMINGS. How do you determine today what kind of long-
term benefits you are going to need 20 or 30 years from now?

Mr. FRONSTIN. I think that is very difficult. It may be even
longer than that if we are talking age 70 or 80 for a worker who
is just coming out of college. They have to think about what kind
of plan they want. Certainly they may want inflation protection.
But I think in the back of their mind they are hoping they never
need it even if they are willing to buy it. That is not a difficult deci-
sion to make.

Mr. CuMMINGS. Thank you.

Mr. Mica. I thank the gentleman.

I have a couple of questions. First of all, if we are going to set
this up for Federal Government and Federal employees, there are
probably a couple ways to go. One of those methods would be sort
of a self-insurance plan with the Government having someone as
an administrator, probably from the private sector. Another meth-
od would be multiple providers such as we have with our Federal
Employees Health Benefit Program where we open it up to com-
petition, set some basic parameters.

Mr. Martin, Mr. Brenerman, maybe Mr. Fronstin, you can tell us
a little bit of what you think would be best, and why and how it
would affect costs, premiums, administration?

Mr. Martin.

Mr. Martin. I thank you. I think, certainly, to have a number
of insurers introduce an element of both competition and choice in
terms of plans that I think is healthy for everyone. The sheer size
of the eligible population, I think, argues for that.

I think at the same time the type of coverage standards, the plan
design, what the benefit triggers are, comprehensive plans that
cover all types of facilities, those are the types of things I think you
would want to think about in fashioning the plan design options
that would be available.

At the same time, whether it is a group arrangement or an indi-
vidual one, there can be discounts. It may be more appropriate for
certain segments of the population to buy group coverage. Others
might want to have a tailored Plan that can more often happen in
an individual setting where older people perhaps might want to
look at something that is more tailored. But the savings, I think,
could exist however you set it up, and certainly the Government,
as it contracts or sets policy for what is permissible, has, I think,
a great deal of control over how the pricing—what pricing is accept-
able and making sure it is affordable.

Mr. Mica. Mr. Brenerman, what do you recommend?

Mr. BRENERMAN. I don’t differ much from what Dave Martin just
said. I think having multiple providers introduces an element of
competition, ‘which f think is useful for the consumer, and also of-
fering a combination of group coverage and perhaps individual cov-


81

Committee on Government Reform and d Oversight
‘Subcommittee on Civil Servi

Long-Term Care Insurance

Introduction

‘Mr. Chair and members of the committee, I am pleased to appear before you this afternoon to discuss the issue of
long-term care and the baby boom generation. My neme is Paul Fronstin. I am a research associate at the Em-
ployee Benefit Research Institute (EBRD, a private, nonprofit, nonpartisan, public policy research organization
based in Washington, DC. EBRI has been committed, since its founding in 1978, to the accurate statistical analy-
sis of economic security issues, Through our research we strive to contribute to the formulation of effective and
responsible health and retirement policies. Consistent with our mission, we do not lobby or advacate specific policy
solutions. { would ask that my full statement be placed in the record.

Increased life expectancy and the aging of the baby boom generation will bring rapid growth in the
number of people at risk of needing long-term care (LTC), Relative to the number of individuals who can provide
physical and financial assistance, the proportion of those in need will increase dramatically over the next several
decades. Continuing trends of more two-worker families, more single workers, and the increased geographic
spread of family members means that there will be fewer family members available to provide care on an informal
basis. In this testimony I provide an overview of the current LTC financing and delivery system in the United
‘States, focusing on private-sector initiatives to meet the nation's LTC need

Long-Term Care

‘The terms long-term care and long-term care services refer to a broad range of health, social, and environmental
support services and assistance provided by paid and unpaid caregivers in institutional, home, and community
settings to persons who are limited in their ability to function independently on a daily basie. Functional depen-
dency can result from physical or mental limitations and is generaily defined in terme of the inability to indepen-
dently perform essential activities of daily living (ADLs) euch as dreseing, bathing, eating, toileting, transferring
(for example, from a bed to a chair), walking, and maintaining continence or to perform instrumental activities of
daily living ([ADLs) such as shopping, cooking, and housekeeping.

‘The majority of LTC services are provided by the private sector but are financed through the public sector.
LTC can include care in many different settings and for many different kinds of support services (see chart 1). For
‘example, care may be provided at home, in an adult day care center, or in a nursing facility. It may include both
‘killed medical care (care that can only be provided by a registered nurse on a doctor's orders) and custodial care
‘(for example, assistance with bathing and dressing) or it may include only custodial care. However, skilled care for
‘an acute temporary medical condition is different from LITC, This can be an important distinction because, while
treatment for a temporary medical condition by a licensed provider is generally covered by private medical insur-
ance plans and Medicare, custodial care generally is not.

The Market

‘The population in need of LTC has become increasingly diverse. While the likelihood of requiring long-term care
does increase with age, a growing proportion of those in need of services are under age 65. A study by the USS.
General Accounting Office indicates that, ofthe 12.8 million people needing assistance with everyday activities,
5.1 million (39.6 percent) are working-age adults, and approximately 420,000 (3.3 percent) are children under age
18 (table 1) (U.S. General Accounting Office, 1994). Chronic conditions such as mental retardation and AIDS affect
individuels of all ages. In addition, due to advances in medical technology and treatments, individuals are increas-
ingly likely to survive—although not necessarily free from disability—what may in the past have been a fatal
accident or childhood ailment.

‘The needs of this growing and diverse population vary considerably. For example, some individuals may
need around-the-clock assistance. Others may simply need assistance with shopping or traveling to and from
school or work.

Individuals, employers, and public policymakers have all begun to focus on the impact of these trends.
‘Among the general population, recognition that neither Medicare nor most private health insurance plans cover
LTC has come slowly. Nevertheless, many retirees and workers have now begun to understand their exposure to
the risk of needing costly community or institutional LTC aa an increasing number have faced the necessity of
caring for a parent, spouse, or child needing long-term personal care assistance. Employers hav
realize that not only must many of their employees now care for young children, but many are bei
care for elderly parents. Recognizing and meeting the needs of these individuals by assisting them in providing for
their children, parents, and grandparents may have the potential to reduce absenteeism and improve morale,
company loyalty, and ultimately producti

‘The debate can be expected to continue about whether government or private-sector initiatiyes hold
greater promise for meeting the needs of a growing and increasingly diverse LTC population. Currently, init
are being taken in both sectors. The Medicaid program has increased coverage for home- and community-based
care, while several public/private sector partnerships have developed that allow people to become eligible for

2



107

icaid, which seems to be the trend for those who require long-term
care. They expend all of their personal resources so the Govern-
ment ends up paying. Do you see any benefit to us taking an initia-
tive and making this available now, particularly given the statistics
that I think we were quoted today about the demographics and the
aging population?

Mr. BRENERMAN. Well, I think the American Council of Life In-
surance has just done a study on the impact of the purchase of a
long-term care policy on the cost. of Medicaid. Mr. Martin could
speak to that. I think there is a significant savings to the Medicaid
Program if people own an insurance policy for long-term care rath-
er than expending all of their resources and then ultimately relying
on Medicaid to pay for a nursing home.

Mr. Mica. I think also you caught my attention by mentioning—
I believe it was you who said that one of the biggest unfunded po-
tential liabilities we have is this long-term care question and cost.
Right now it can go anywhere, for instance, in Florida, $16,000 to
$40,000 a year in costs are some of the estimates I have seen. You
talked about an unfunded liability. What is that going to be like
in the future?

Mr. BRENERMAN. Well, I can’t put a total on it, but given the fact
that we have a growing number of elderly, baby boomers will soon
reach the age where they will be thinking about long-term care and
actually needing long-term care ultimately. Those numbers are so
large that if you take $40,000 a year in today’s dollars and look at
it 20 years from now, 30 years from now, it is such an extraor-
dinary number if people are not protected, an extraordinary num-
ber for the government to try to protect and pay for.

Mr. Mica. Well, again, I started out by saying the only thing that
stands between an employee and this type of coverage is the cost.
I think we have heard testimony here where Mr. Jackson said that
it is also difficult when you have to get 7 percent, I guess, to get
to a deductible level. If we had MSA’s—I don’t know if you are fa-
miliar with that. I understand under some of the provisions that
we passed, that money could be taken from the MSA’s to pay for
a premium like that. Would that provide some avenue for resources
to cover these expenses on an annualized basis? Mr. Martin, are
you familiar with this?

Mr. Martin. Yes, and I think that is an excellent point. I think
that HIPAA certainly went a long way toward legitimizing private
long-term care insurance by giving it tax-favored status in ex-
change for hitting certain standards and including consumer pro-
tection provisions. If you could go further and include favorable
provisions within MSA’s, or perhaps, I think as Mr. Jackson
touched on, lift the 7.5 percent requirement, you would be doing
what some of the States are doing following HIPAA, and that is
putting in tax credits and deductions at the State level that will
further, I think, focus people on the need for this. I think when you
legitimize a product like this that has such wide appeal given the
demographics, you really further send a message that this is some-
thing you need to think about; that in the Tax Code you are saying
you will give something at least for preparing for your own future.

Mr. Mica. Mr. Brenerman, any ideas on creative financing mech-
anisms to help pay for this?


92

T109

Evcrover

Bexerir
Rest ven
Ixstiit

Addendum to EBRI Testimony

Hearing on
Long-Term Care Insurance
by

Paul Fronstin, Ph.D.
Research Associate

Employee Benefit Research Institute
2121 K Street, NW
Suite 600
Washington, DC 20037

26 March 1998

‘The views expressed in this statement are solely those of the author and should not be attributed to the
Employee Benefit Research Institute, or the EBRI Education and Research Fund, its officers, trustees,
sponsors, or other staff, or to the EBRI-ERF American Savings Education Council. The Employce Benefit
Research Institute is a nonprofit, nonpartisan, publie policy research organization which does not lobby or
take positions on legislative proposals.



60

* Reports and Audits: As a condition of participation in the program, carriers
must agree to furnish such reasonable reports as the Office determines to be
necessary to enable it to carry out its functions under this program, and
permit the Office and representatives of the General Accounting Office to
examine records of the carriers as may be necessary to carry out the
purposes of this program. In addition, each Government agency shall keep
such records and furnish the Office with such information and reports as may
be necessary to enable the Office to carry out its functions under this

program.

¢ Jurisdiction of Courts: The district courts of the United States have original
jurisdiction, concurrent with the United States Court of Federal Claims, of a
civil action or claim against the United States founded under this program.

* Coordination with State Laws: Any requirements or standards relating to the
Federal Government Long Term Care Insurance Program shall supersede
and preempt any state or local law, 9r regulation which relate to long term
care services or insurance contracts. This rule shall not be construed to alter
the requirement that an eligible contract must otherwise constitute a qualified
long term insurance contract.

* Regulations: The Office may prescribe regulations necessary to carry out
this program

* Authorization of Monies: There should be sufficient funds appropriated to
carry out this program, including amounts to cover administrative costs that
may be incurred. In addition, there should be an authorization of future
Government contribution for a portion of the cost of any eligible contract
covering an employee or annuitant or the spouse of any such persons as.
may be necessary to encourage the purchase of long-term care insurance
coverage.

Challenges to the Long-Term Care insurance Market

Incentives for the purchase of long-term care insurance were included in the
recent passage of the Health Insurance Portability and Accountability Act of
1996 (HIPAA). A new federal focus on streamlining public expenditures and
encouraging individual responsibility has emerged. HIPAA's long-term care

provisions have improved the political climate for private long-term care

-14-


56

The average premiums in 1996 decreased an average of 5 percent when
compared to the average premiums for the leading sellers in 1995. This is a
‘strong indication that market competition and insurers’ increasing confidence
with their pricing and anticipated claims experience have kept premiums stable, if
not more affordable. In addition, given the tremendous changes in long-term
care insurance policy design (i.e., elimination of prior hospitalization
requirements, expansion of available benefits, coverage of additional sites and
levels of long-term care), buyers are now clearly receiving more benefits for their

prenuum dollar.

The Employer-Sponsored Long-Term Care Insurance Market
7

The growth in employer-sponsored plans is particularly promising. Employer
plans offer the opportunity to reach a large number of people efficiently during
their working years when premiums are more affordable. Coverage in the
workplace offers the additional advantage of employers selecting the best plan at
the best price for their employees. Enrollment experience shows that the
average age of the employee electing this coverage is 43. This is strong
evidence that with education and availability, younger people can and will
purchase long-term care protection. Most of these plans offer coverage to the
elderly as well by including retired employees and their spouses and parents of

the employee or employee's spouse.

By the end of 1996, 1,532 employers were offering a long-term care insurance
plan to their employees and retirees. There were over 500 employer-sponsored
plans introduced in 1995 and 1996. Most of these plans were employee pay-all
plans. However, at least 432 of these employers paid part or the entire

=10-


18

result of an accident, chronic illness, or disability. Long-term care insurance will pay for
a variety of services when a person is unable to perform a specific number of activities of
daily living (also termed "ADLs"), such as bathing, eating, going to the toilet,
maintaining continence, moving from one place to another, and dressing. Policyholders
can also qualify for benefits if they have Alzheimer's disease and other cognitive

impairments.

Today’s long-term care policies cover a wide range of services to help people live at
home, participate in community life, as well as receive skilled care in a nursing home.
Policies may also include respite care, medical equipment coverage, care coordination
services, payment for family caregivers, or coverage for home modifications. These
options can enable people with disabilities to live in the community and retain their

independence.

Designing long-term care policies for federal employees.

‘The design of long-term care insurance policies for federal employees will require a
variety of considerations. Most important, the policies should be of high quality and
affordable. In addition, since most employees will not need their long-term care benefits
for many years, it will be important to ensure that federal employees obtain coverage
from financially sound companies that have the experience and administrative capacity to

serve individuals covered by private insurance.

Premiums for private insurance vary considerably based on plan design. To benefit

from the wide range of options offered in the marketplace today, government employees


AT

benefit to its employees, this impact would be magnified tremen-
ously.

A Federal employee long-term care insurance plan is particularly
encouraging because of three factors. First, such an action would
be the clearest signal of Government support for encouraging per-
sonal responsibility and planning for long-term care through ave-
nues such as long-term care insurance. ond, the sheer size of
the Federal Government as an employer would assure an imme-
diate and heightened awareness of long-term care financing issues
among working adults. And finally, because the Federal active em-
ployee population is large and considered to be a relatively yo
and healthy group, the administrative and marketing costs woul
be less. Premiums will be lower, and underwriting may be mini-
mized.

We have submitted as part of our written testimony our initial
thoughts on the parameters we believe should be considered when
drafting legislation that would enable this to happen.

I would like to commend the Congress for passage of majo!
centives for the purchase of long-term care insurance that were in-
cluded in the Health Insurance Portability and Accountability Act
of 1996. HIPAA’s provisions have improved the climate for private
long-term care insurance. Nevertheless, HIPAA is not a panacea,
and will not, by itself, achieve the optimum public-private partner-
ship for long-term care financing. HIAA believes other equally im-
portant tax-related changes could make long-term care insurance
more affordable to a greater number of people. We have included
examples of such actions in our written testimony.

Finally, the importance of consumer education about financing
long-term care insurance cannot be overstated and is the shared re-
sponsibility of both the public and private sectors. The public must
understand the need to plan for long-term care and be aware that
there is no government p: , including Medicare, unless they
become destitute. A Federal employee and retiree long-term care
plan will only be successful with a carefully planned education pro-

gram.

Over time, HIAA fully believes that private long-term care insur-
ance will give millions of people an opportunity to be financially
independent throughout their retirement years. Recognition of the
private long-term care insurance market in this hearing is a solid
step in this direction. Thank you, Mr. Chairman and members of
the subcommittee. We look forward to working with you as you de-
velop legislation.

Mr. Mica. Thank you, sir.

[The prepared statement of Mr. Brenerman follows:]


51

Long-term care is the major catastrophic health care expense faced by the
elderly today and will definitely remain so for our retiring baby boomers. For the
elderly who have out-of-pocket health care expenses of over $2,000 a year, an
average of 80 percent is spent on nursing home care. Witn annual nursing
home costs averaging $41,000 (increasing to about $100,000 in 1996 dollars by
2030), and easily double that amount in high cost areas, such expenses can
indeed cause financial ruin. Instead of pooling risks, the current system places
each household on its own and when household resources have been depleted,
Medicaid becomes the payer of last resort. This approach combining out-of-
pocket outlays and welfare features remediation and relief when prevention and

planning should be the preferable approaches.

Today's situation, a population of approximately 8 million people, increasing to
about 13 million in 2030, needing long-term care services and lacking
preparation for this catastrophic event, calls for a thoughtful and deliberate
approach. Today is not a time to consider a quick plunge into national broader
solutions that fail to recognize how these financing and delivery issues affect
costs and access to long-term care. HIAA supports a comprehensive approach
to financing long-term care that utilizes the inherent strengths of both the private
and public sectors in a more efficient and equitable manner than the essentially

unintended system created today.

‘The Private Long-Term Care Insurance Market Today

The insurance industry is justifiably proud of the role it has played in the
evolution of the largest private insurance system in the world. Now, we are

entering the next logical phase of this evolution. Advances in medical

-5-


80

Principal Points

Increased life expectancy and the aging of the baby boom generation will bring rapid growth in the number of
people at risk of needing long-term care (LTC), Relative to the number of individuals who can provide physical
and financial assistance, the proportion of those in need will increase dramatically over the next several
decades. In response, the private-sector long-term care insurance (LTCI) market has also evolved significantly
in recent years, growing from approximately 815,000 policies sold by 1987 to a total of 4.4 million by 1995.
Employment-based plane accounted for a significant proportion of this growth, increasing from 7 employers
offering LTCT in 1988 to 1,260 employers offering it in 1996. Improvements in plan design have helped to fuel
this growth.

Private insurance now finances only a small portion of LTC needs. Theoretically, individuals with assets to
protect should be willing to pay for LTCI. While the chances of having extended LTC needs are small, the
costs of euch needs are extremely high. Only a small portion of those who can afford LTCT have actually
purchased it. For individuals who have no assets to protect or who believe they will never require formal care,
LTCT may never be worth the price. However, others may lack information on the probability of needing such.
‘care; may mistakenly believe that they are already covered by Medicare, health insurance, or disability
insurance; or may be dissatisfied or mistrustful of policies that are currently available. Still others may not
purchase insurance because of the knowledge that Medicaid covers LTC.

‘While private insurance now finances only a small portion of LTC needs, its use is expected to grow as plan
design improves and as an increasing number of individuals recognize the possibility of needing LITC and the
associated coats. Both individually purchased policies and employment-based plans will expand further as a
result of the changes in tax laws. However, barriers remain that may inhibit this growth. For example, some
studies indicate that growth potential is limited because only a small portion of those most likely to need
services—the elderly—can afford a LTCI policy.

Premiums for LTCI vary substantially, based on age and plan design, For example, average annual premiums
{in 1995 ranged from $310 for individuals purchasing a base plan at age 0 to $8,146 for individuals purchas-
ing a plan that included inflation protection and a nonforfeiture provision at age 79. Other plan features can
algo significantly affect premium amounts.

Premiums may rise over time because rates generally can be increased on a class basis if claims are higher
than expected. And, because the LTCI market is such a new market, itis difficult to set premiums accurately.
Little long-term claims insurance experience yet exists, and it may not be available for many years to come
because many of those who currently hold LTCT will likely not use it for many years.

‘The largest barrier to the expansion of the private LTCI market is the lack of public readiness to use assets to
insure against the relatively low probability of need. Public education is very much needed. Until it occurs and
the public is ready to pay either through premiums or taxes, itis unlikely that the goals of adequate coverage,
universal access, and affordability through risk pooling will be achieved.



142

tration will certainly make every effort to do so with deliberate
speed.

Mr. Mica. Thank you, Mr. Williams. Deliberate speed on the
issue is music to my ears.

Mr. Flynn, if the insurance product that you came up with is to
be offered and financed entirely through employee premiums, why
do we need OPM studies as a prelude to offering the product? Fur-
ther studies?

Mr. FLYNN. Mr. Chairman, I think what we want to try and do
is make sure that we can deal with a number of the issues that
you heard from the panel members who testified at first. There are
some issues associated with benefit design, things like making sure
that we have got, for example, home health care and nursing care
considered, inflation protection, issues related to benefits elimi-
nation periods and things of that nature, so that we have a pack-
age that is as easily understandable as it can be because of the im-
portance of the educational effort with respect to employees. So
that is one area.

A second area that I think is important, as people have men-
tioned also during the first panel, is that we have a relatively
young market here. We have premiums that are somewhat advan-
taged in group offerings, but not a lot of experience in terms of the
cost of providing long-term care and whether or not those pre-
miums have been set appropriately. We want to make sure that we
don’t get into a situation where perhaps we start out with pre-
miums that people regard as reasonable, and then as we gather ex-
perience, we find them increasing and things like that.

These are just a couple of examples of the kinds of things we
want to make sure we have got covered because, as I said earlier,
the success of any program like this involves broad participation at
an early age because that is the way in which people in effect save
for the long-term—in this case, save for the long-term care needs.

Mr. Mica. Well, just finally, Mr. Flynn, I would like to try and
see if we can get things done. It sounds like we have hired the pro-
fessionals to do the study. You are now examining, digesting the
study to make certain that the considerations that have been
brought forward by the panel members, and that you have just pro-
nounced to the subcommittee today, are addressed. Hopefully that
can be done this year, and then by the end of next year we can
make this as an option available. And it will probably be at no cost
to the Federal Government and reduced cost versus what is avail-
able in the open market to our Federal employees and retirees
based on the size of the group that we can offer. Do you think that
is all possible?

Mr. FLYNN. As I said earlier ——

Mr. Mica. With a little kick in the butt from up here?

Mr. FLYNN. Or from other sources as well, possibly. I think—as-
suming agreement—we would want to work as quickly as we could.

Mr. Mica. I have taken so much time, I want to yield to my dis-
tinguished ranking member.

Mr. Cummincs. I just have a few questions. Mr. Flynn, how
would OPM undertake to administer a long-term care insurance
program?


135

TESTIMONY OF BOB WILLIAMS,
DEPUTY ASSISTANT SECRETARY FOR PLANNING AND EVALUATION
FOR DISABILITY, AGING, AND LONG-TERM CARE POLICY
U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES

TESTIMONY FOR THE U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON
GOVERNMENT REFORM AND OVERSIGHT
SUBCOMMITTEE ON CIVIL SERVICE

MARCH 26, 1998

My name is Bob Williams. | am Deputy Assistant Secretary for Disability, Aging, and
Long-Term Care Policy in the U.S. Department of Health and Human Services, Office of
the Assistant Secretary for Planning and Evaluation

Background

The Department of Health and Human Services perspective on private long-term care
insurance starts from the premise that policymakers must begin to plan.now for the
social and economic implications of population aging. One of these implications will be
increased demand for long-term assistance for those with chronic illnesses and
disability.

Disability and associated long-term assistance needs increase at older ages. In 1994,
approximately 12 percent of Americans aged 65 to 74, 27 percent of Americans aged
75 to 84, and 58 percent of Americans aged 85 and older required long-term assistance
with one or more Activities of Daily Living such as bathing, dressing, transferring,
toileting, and eating and/or Instrumental Activities of Daily Living such as
housecleaning, meal preparation, shopping, laundry, medication and money
management.

About one quarter of elderly persons with long-term care needs are in nursing homes or
other specialized residential care settings. Three quarters live in the community, either
in their own homes or the homes of relatives.

On January 1, 2011 --13 years from now -- the baby boom generation will begin turning
65. By 2030, one in five Americans will be 65 or older and there will be more
Americans over 65 than under 18. But even before baby boomers begin to develop
their own age-related long-term care needs, they will likely experience the demands and
trade-offs of caring for an older relative. By 2010, it is estimated that there will be twice
as many elderly aged 85 and older as there were in 1990.


13

employees who have long-term care coverage. Employer contributions to a qualified
Jong-term care plan are also excluded from the gross income of the employee. More
recently, members of Congress have begun to sign on as co-sponsors of H. Con. Res.

210, which expresses the sense of Congress with respect to promoting coverage of

luals under private long-term care insurance.

While these federal legislative initiatives are important first steps, there is an urgent
need to do more to address the challenge of financing long-term care in the 21st century.
Earlier this month, in testimony before the Senate Special Committee on Aging, William
Scanlon, Director of Health Financing and Systems Issues (GAO), stressed that the aging
of the baby boom generation will lead to a tremendous increase in the elderly population,
especially those over age 85, who are most likely to need long-term care services. A
study just completed by the ACLI indicates that Medicaid and individual out-of-pocket
long-term care expenditures for elderly baby boomers could rise by over 360 percent

within the next 30 years (see attached).

There is still time to seck out private sector solutions to the looming long-term care
crisis. Asa very significant employer in America, the federal government can reach over
2.8 million workers. In addition, by offering this product to individuals during their
working years, the government can help encourage the purchase of private insurance at

younger ages, when premiums are very affordable.


137

with eldercare and other family responsibilities

Today only 5 percent of elderly Americans have private long-term care insurance
coverage. An important reason for this relatively low rate of participation is that 80
percent of all policies sold to date have been individual or group association sales to
persons already aged 65 or older. High quality coverage purchased at older ages can
be expensive. In 1995, the average annual premium for a comprehensive policy
{paying $100 a day for nursing home care, $50 per day for home care), with
nonforfeiture and 5% compounded annual inflation indexed benefits was $2,560. An
identical policy purchased at age 50 cost $1,124.

It is important to provide a note of caution about long-term care insurance products,
which vary in their protective quality, costs, eligibility requirements, and triggers.
Long-term care insurance products must, for example, be scrutinized for the availability
of inflation protection, for the extent to which pre-existing conditions exclude potential
insurees, portability, to ensure that there are adequate protections against forfeiture, to
minimize the use of employee premiums for marketing and distribution costs, and to
determine whether there is an adequate supply of services to be purchased with or
without such insurance.

We believe that employer-sponsored group insurance is the best vehicle for making
high quality coverage more affordable because individuals are encouraged to enroll at
younger ages and because group policies are typically 15 percent cheaper than
identical policies sold individually. Employer-sponsored insurance also has several
other advantages over individual insurance. First, although disability is more common
at older ages, it can occur at any age. Moreover, group insurance may be offered to
active employees without underwriting requirements -- whereas individual purchasers
usually must be examined by a physician before their application for coverage will be
accepted.

Second, individual purchasers often find it confusing and difficult to evaluate competing
plans whereas employees know that an employer-sponsored product has been vetted
by professional benefits specialists. Third, policy premiums can often be paid via
payroll deductions. Thus, obtaining long-term care insurance coverage is a relatively
easy way for individuals to plan ahead to protect themselves against a risk that may not
‘occur until far in the future. In fact, respondents in a 1997 national survey sponsored by
the National Council on Aging and the John Hancock Mutual Life Insurance Company
‘said that they would be more likely to purchase long-term care insurance if an employer
sponsored group plan were available. Finally, employer-sponsored group insurance
may be more likely to discourage “churning” practices to which individual purchasers
may be more susceptible.

Research Underway


55

¢ All plans are guaranteed renewable, have a 30-day free look period, cover
Alzheimer's disease, have a waiver of premium provision, offer unlimited or
lifetime nursing home maximum periods.

« Whereas in previous years, most companies used a 6-month preexisting
condition limitation, 9 of the 12 sellers now waive their preexisting condition
limitation as long as pertinent medical conditions are disclosed at the time of
application.

« Age limits for purchasing are also expanding. Companies now offer
individual policies to people as young as 18 and as old as 99 years.

+ Allplans offer the NAIC Model Act and Regulation inflation protection
requirement of benefits increasing at an annual 5 percent compounded rate,
funded with a level premium.

« All companies offer plans that have a nonforfeiture benefit, with a shortened
benefit period or a return of Premium, as the most common types.
In addition to examining each top seller's policy provisions and marketing
materials, we also reviewed the premiums they offered for their most recent
policy. Premiums for long-term care insurance policies varied widely depending
on multiple factors, including entry-age of the policyholder and benefit designs
chosen. HIAA analysis reveals that the average annual premiums reported by
the 1996 leading sellers (see Table 1 below) have been decreasing over time.

Table 1: Average Annual Premiums for Leading Individual
and Group Association Long-Term Care Sellers in 1996

AGE Base With 8% With @ WIP & NFB
Compounded Nonforfeiture
Inflation Benefit (NFB)
Protection (IP)
0 $250 3690 $340 $800
50 3365 $800 $520 ‘$4200
Cy ‘$1000 ‘$7830 $1320 $2460
7 $4000 $8600 ‘$5200 $7500

(NOTE: These are preliminary estimates for premiums of 1996 leading sellers. Premiums are generally
for a $100/$50nursing home*ome health coverage, 4 years coverage, and 20-day elimination period.)
SOURCE: HIAA LTC Market Survey, 1997.


2

eral employees plan for financing long-term care services and to
avoid severe financial hardships in the future.

Federal employees have already expressed a very significant in-
terest in being offered an option to purchase long-term care insur-
ance. In a customer feedback survey that the Office of Personal
Management distributed to Federal employees from January
through March 1997, an amazing 86 percent of those that re-
sponded expressed interest in long-term care insurance.

In light of the growth in private-sector employers offering em-
ployees a long-term care insurance option and the obvious interest
of Federal employees in long-term care as a benefit, the time is
right, I believe, for Congress to carefully examine this issue. That
is the purpose of today’s hearing, to collect information on long-
term care insurance, to examine how private-sector employees are
addressing their employees’ long-term care needs, and then to
make an informed decision about how to give our Federal employ-
ees access to this important and long overdue benefit.

Let me say also, off the script, that as chairman of this sub-
committee for the past 36-plus months, it has been my intent, as
I said in my statement, to see how we can assist our Federal em-
ployees and try to bring them in line with what is happening in
the private sector. We have done that through several mechanisms.
One, we have passed through this committee and through the
House adjustments to life insurance coverage for our Federal em-
ployees. Our Federal employees have inadequate life insurance cov-
erage at an expensive rate, fixed in stone by a law that is outdated
and a system that has not been competitively bid, in my opinion,
in 40 years. And we are going to change that.

We also have the problem of health care insurance. We have
looked at what has happened to our Federal employees and our
Federal retirees, and on average they have experienced a 15-per-
cent increase in 1 year, which is not acceptable, particularly when
they get a very small, around a 3-percent or less, increase for cost
of living, and their health care insurance costs have gone up dra-
matically. With the concerns in mind of our retirees and others, we
are looking at and we will pass some other options, including medi-
cal savings accounts, to bring down those costs for all of our Fed-
eral employees and retirees.

Today, we will look at something that has been ignored by this
panel, but, in fact, is needed and should be something that we con-
sider, as a Congress, for those who are employed in our Federal
work force, and that is long-term care insurance for our Federal
employees as a benefit. We will do those things.

With those comments, I am pleased to recognize our ranking
member, the gentleman from Maryland.

Mr. CUMMINGS. Thank you, Mr. Chairman, for holding this hear-
ing and bringing to the forefront an issue of great importance to
thousands of Americans and their families.

As we, as a society, age, more and more people are coming to
consider the desirability, if not the necessity, of taking steps to en-
sure that during their senior years they and their family members
continue to enjoy a high quality of life. In part, this can be ad-
dressed through a secure retirement annuity and the maintenance
of comprehensive health insurance. However, what it can also re-


‘Alcoholism and drug abuse are usually not covered.
along with care necessitated by an act of war or an
intentionally sefinicted injury

Prior levels of care

Most policies will pay for whatever level of care you
need, A few require 2 certain period of nursing home
care before you are eligble for home care. Generally
fewer resinctions make policies more useful

What else should | know
before | buy?
.

Despite some move 10 uniformity—virally all policies
now cover Alzheimer’s disease and no longer require
2 hospital stay before paying aursing home henelits—
there are different ophions available under diterem
policies. These are some of the things 10 consites

Eligibility
MF you are in result beh an! can ake cae
cf yourell and sou ate hecveen the jes ot 8a
84 you can probs fy longtean care insurance
Mow companies do ox sll nal pies pe
ple under age 50 or vers

Note tur these age lutions apple aay 0 sr tae a
the ume uf purchuse, not atthe tune you we the henetis

Duration of benefits
Long.tenn care polices generally mit Pemetts 80 4
maumum dollar amount or 4 maximum nuniber of
days and often have separate Denetit nas foe nursing
home and home health care within the sume policy
For example. a pol muv offer fixe sears of nursing
home coverage (many policies no fer etme nur
Jing home coverage? and avo years of home eth cae
coverage

Generally, dere are nso ways an which eampanies deine
2 policy’s muxinnum henefit periad Under one definition
2 policy ma offer esime nuvi Peneft peroal A

12

policy with five years of nursing home coverage, isued
‘by a company using this defination, would pay jus. once
ina policyholder lifetime Oxher polices offer a max:
mum benefit penod for each “period of confinement *
Under this second definition, a policy with a five-year
maximum benefit period would cover more than ane
nursing home stay lasung up 10 fice years each the
stays were sepanied by six months or more

Re
Virually all Jong.term care policies sold 10 individuals:
are guaranteed renewable, they cannot be canceled 3s
long 4s vou pay your premiums on ume and 2s long 3s
‘you have told the inath about your health on the appl-
cation, Premiums can be increased, however if thev
are increased Tor an entire group of poliex holders

The renewaity provision. normally found on the first
page ofthe poli’ specifies under whan conditions the
poly cin be canceled andl when premiums mov
meres

Nonforfeiture benefits
This Benefit returns wo pols tlders same oftheir pa
rents af they ion their conerage. Most companies
oiler tis henetit as an eption, The most common
‘epesol nontorteture henetit otfered toby are “fetuen
of preayom or ree pundup With setuen of pre
tian Benefit the poficyhokler receies «ash, usual
1 percent ot the sum of pentium pad date after
pe or death, With. educed paidsup benetit dhe
longeteem care coverage continues but the das pts
iment anvount is sedced as specified in the poiey. &
rontatcitare hen can dl eon 20 0 HA percent ro
{Epic's ost

Waiver of premium
This prawision lows vou fo op paving premiums
dling the tie yeas ae reser ang Fees. Read the

policy carey to see a there ate any resnetions on.
Ins proxision. seh os 4 regirement 1 Pe in a urs
ing homie fir gay Fenty of tine Om Lis sw piel

Feamements byte peemnums are waned



27

Figures

Projected Total Naraing Home Expenditures
‘inflation - Adjasted)

2000 2005 210s 0280282080,
Year

‘Seare: ACL Pty Research Dept

The Impact of Rising LTC Expenditures on Government and Individuals

Rising numbers of nursing home residents by 2030 will place increased financial burdens on
the Medicaid program. Currently, Medicaid pays for about 41 percent of total nursing home
expenditures’. Assuming Medicaid’s share of total expenditures remains constant in the future,
the simple fact that the population is aging will lead to a doubling of nursing home residents
receiving Medicaid assistance. As a result, total nursing home expenditures paid for by Medicaid
are expected to increase 360 percent by 2030 to $134 billion (in 1996 dollars) ( see Figure 4).

Figure 4

Projected Medicaid Nursing Home Expenditures
(Inflation - Adjusted)

200020052010 01s 202020282030
Your
Searee: ACL Plicy Rasearch Dept

‘American Council of Life Insurance 5


What kind of insurance
is available?
ry

care insurance is similar to other insurance
in that allows people to pay a known and affordable
premium that offsets the risk of much Larger out-of
Pocket expenses. Although long-term care insurance is
relatively new, more than 100 companies now offer
coverage.

Several ypes of policies are available, but most are
indemaity policies. This meas that they pay a fixed
dollar amount for each day you receive specified care
feather in a nursing home or at home, No policy is guar-
anteed to cover all expenses fully

Policyholders usually have 4 choice of indemnity
amounts ranging from $40 10 more than $200 per dav
for nursing home coverage These amounts are pegged
to the averige daily cost of a nursing home. The daily
benefit for at-home care is usually much tess chan the
benefit for nursing home care. Note though. that vou
are responsible for your actual nuraing home oF home
cate cons

Because the perday benefit you buy today maybe
inadequate 10 cover higher cows atict 4 number of
years, mov polees now offer an ination adjust
‘ment festure In many polices. for ecample. the intl
henefit amount oil increase autonaticals each Vear at
4 specified rate such ay 5 percent) compounded over
the life ofthe poly

Some hfe insurance policies offer lerigtemn cae bene
fits. Cader these accelerated or living benefits pi

sions. potion ofthe fe imurrance henefit spat o the
policyholder if long-term care is needed! invead of tothe:
beneficuin athe poly hoklers death: Some companies
make these benefits avaiable to sl polevboldes bers.
fer them nk’ to people hung ne poles

70

What do policies cost?
°

{In 1994, individual policies without an inflation adjus-
‘ment featuie ranged in cost frum about $325 per year
{o more than $3,642. Inflation adjustments can add 3°
‘percent to 90 percent to your premium. depending on
the option you select, but can keep benefits in line
vith rising costs.

But the actual premium youll pay depends on many
actos, including vour age. the level of benefits, and.
the length of time you are wiling to wait until benefits
begin, Here are details

Age

In 1994. a policy offenng an $80 per day nursing home
benefit for four vears, with 3 20-day deducuble, cost a
Se-year-'d about $325 per year. For someone who
Was 05 years old in 1994. the same poly cost about
3855, and for a “9veurold. the cost was $3.41. The
‘ame policy with an inflation feanure may cox $659 at
age 50. $1,538 at ape 03. and $5.095 at age “9.

Premiums generally don’ increase with age but remain
the same each year (unless they are increased for all
poliholders at once’. The younger You are When ou
Hint ua poli. therefore the lower Your nn pre
nium will be

Benefits

‘The premium is also directh affected by the size ofthe
«duly benefit and the length of time for which benefits
will he paid. For example a policy that pays $100 a
«tiv for up 10 five years oF nursing home care costs
ore than a policy that avs $50 a day for three years

Elimination or deductible
‘oealled elimination or deductible periods refer tothe
‘numer of dav vou mus he sn residence at a nursing
home or the number of home care visits You must
receive before policy benefits begin. Most policies offer
4 choice of deduetile ranging from 0 t0 100 days. A
204lav eliminuwion period. #8 an example, means that


146

Honorable John L. Mica
April 13, 1998.
Page 3

3. For employer-based plans, what is the typical range of premiums?

HIAA has not recently tracked average premiums in the employer-sponsored
market. However, we do track premiums in the individual market and premiums
of some employer-sponsored plans. To provide you with some estimate of
average premiums that may be available in the employer sponsored market
today, below is a table that provides an average of premiums from: (1) the top
twelve individual carriers and (2) two long-term care employer-sponsored plans.

AGE BASE WI5PERCENT wi wWiP&
COMPOUNDED NONFORFEITURE | NFB
INFLATION BENEFITS (NFB)
PROTECTION (IP)
% $209 $503 $264 $634
0 $328 $665 IS $866
65 $964 $1761 $1166 $2126
79 $3803 $6276 $4384 36200

(NOTE: These are based on preliminary estimates for premiums of 1996 leading sellers and from two LTC
‘employer-sponsored plans. Such premiums do not specifically exist for any one insurer or a specific employer
LTC plan, Premiums are generally for a $100/$50nursing home/home health coverage, 4 years coverage, and
20-day elimination period)

SOURCE: HIAALTC Market Survey, 1997.

4, What are the main factors that determine premium amounts?

The main factors that determine premiums for long-term care insurance are the
age of the insured and benefit designs selected. Some of these benefit
variations are: the type of coverage (i.e., nursing home and/or home health
care); daily benefit levels (i.¢., $100 daily benefit amount for nursing home
and/or $50 daily benefit for community-based and home health care); benefit
duration period (i.e., 2, 3, 4, 5 years or lifetime coverage); optional features (i.e.,
inflation protection and/or nonforfeiture benefits); and elimination or deductible
periods (i.e. 0,20, 30, 40, 60, 90, 120, 180 days).

5. What is the relationship between the level of benefits selected and
premium amounts?

As the level of benefits selected increases, so do premiums for long-term care
insurance. Based on premium figures collected by HIAA, below are rough
estimates of how certain benefit designs generally affect long-term care



63

insurance for many Americans, would increase their appeal to employees and
employers, and would increase public confidence in this relatively new private
insurance coverage. Further, enhancement of tax incentives for the purchase of
jong-term care insurance would demonstrate the government's support for and
its commitment to the private long-term care insurance industry as a major
means of helping Americans fund for future long-term care needs. It also

reinforces the message to the public about individual responsibility.

These efforts will lead to an increase in the portion of the population who seek to
protect themselves against catastrophic long-term care expenses. Some

examples of specific actions that cou’ 1 be taken are to:

+ Enhance the deduction for long-term care insurance premiums, such
that premium dollars are not subject to a percentage of income;

* Permit the tax-free use of IRA and 401(k) funds for purchases of long-
term care insurance;

* Permit the premiums to be paid through cafeteria plans and flexible
spending accounts;

* Provide a tax subsidy for the purchase of long-term care insurance;
and

. Encourage state tax incentives for the purchase of long-term care
insurance.
These tax incentives would largely benefit two groups: those who did not have
the opportunity to purchase such coverage when they were younger and the
premiums were lower and as a result, now face the greatest affordability
problems because of their age; and those younger adults, our current baby
boomers, who need incentives or mechanisms to fit providing for their own long-

term care protection into their current multiple priorities (e.g., mortgage and

-17-


20

policyholders providing proof of cognitive impairment or loss of functional capacity
within five months after termination may reinstate coverage for long-term care

insurance if they pay past due premiums.

The contract should be fully insured by the carrier or reinsured in all or part with

other carriers.

© Policies should be noncancellable or offered on a guaranteed renewable basis. This
ensures that policyholders will be able to retain their long-term care coverage as long
as they pay their premiums. In addition, the contract should provide benefits that
cannot be unilaterally changed by the carrier, except for nonpayment of premiums or

in the case of misrepresentation.

* Policies should have continuation of coverage. This means that individuals covered
under an eligible contract would be entitled to pay premiums directly to the carrier to
continue the insurance if they no longer worked for the government or if their

withholding became insufficient (such as after a divorce).

© The carrier should be licensed by the State or other jurisdiction in which the
policyholder is located or resides.

Anecdotal evidence suggests that lapse rates are much lower in the group long-term
care insurance market when premiums are paid through payroll deductions. To facilitate
payment for private insurance and help minimize lapses, the government should withhold
the amount equal to the premium from the pay of each enrolled employee. Such withheld

funds would be paid by the government to the carrier for each contract.


37

Figure 10
Alternative Ways to Pay for Future Long-Term Care Needs
Age Today

45 year old 60 year old
Option 1: Asset Accumulation
Annual Savings Needed $3,557 $4,481
Lifetime Assets Needed at Age 85 To Pay for 2 $489,446 $235,432
Years of Nursing Home Care
Option 2: Purchase Private LTC Insurance
‘Annual Premium Contributions M17 $824
Lifetime Value of Premiums $57,907 $52,097
Potential Savings From LTC Insurance:
‘Annual Savings From LTC Insurance $3,140 $3,657
Lifetime Savings From LTC Insurance $431,539 $183,335
Source: Author's cacuasions based ona 2-year LTC policy with nlation ot percent.

‘The 45 year old women in the illustration above would only have to pay about $417 a year
for a long-term care premium covering two years in a nursing home. This policy would include
inflation protection of 5 percent a year. Long-term care insurance could thus save her $3,140 a
year in savings that could be used for many of her more pressing needs including accumulating
assets for retirement. In terms of lifetime savings, these numbers are even more staggering.
After paying her long term care premiums, the 45 year woman could protect $431,539 of her
savings if she buys a long-term care policy instead of trying to pay for nursing home care on her
owm (see Figure 10).

We need to educate baby boomers about the importance of purchasing insurance at younger
ages, when it is more affordable .

Many policymakers have emphasized that the high cost of private long-term care insurance is
unaffordable for most Americans. In reality, the cost of a long-term care insurance policy is tied
to the age of purchase. Variations in premiums by age reflect the increased risk of needing long-
term care as people grow older (see Figure 11). Insurance companies are only able to financially
assume the risk presented at older ages if they charge higher premiums.

‘@American Council of Life Insurance 15


157

QUESTIONS ON FEDERAL EMPLOYEES LONG TERM CARE INSURANCE
Please estimate the number of individuals that are currently nursing home residents.

According to the 1995 National Nursing Home Survey, there were 1,529,525 nursing home
residents in 1995, of whom 1,410,776 were aged 65 or older.

‘What was the average out-of-pocket expenses that these residents paid before they became
Medicaid eligible?

It is difficult to get good data on this point. Many nursing home residents have short stays and
never spend-down to Medicaid. Moreover, analysis of spend-down is complicated by the fact
that some nursing home residents are admitted and discharged to nursing homes multiple times
because of intervening hospital stays. However, based on work by Brenda Spillman of AHCPR,
Joshua Wiener of the Urban Institute and others, it is estimated that 31 percent of nursing home
residents who are initially admitted to nursing homes as private pay patients spend-down to
Medicaid eligibility prior to their final discharge. One study in Connecticut, carried out by
Leonard Gruenberg, found that nursing home residents who entered as private pay patients and
subsequently spent-down to Medicaid had nursing home stays averaging 4.5 years in length, of
which 1.5 years were wholly funded with private out-of-pocket payments, Thus, while costs
vary from state to state, this would suggest that, at current private pay rates, nursing home
residents who are currently in the process of spending down might expect to pay out, on average,
$69,000 in personal income and savings before becoming Medicaid eligible.

It is important to bear in mind, however, that even after spending-down to Medicaid eligibility,
nursing home residents must continue to dedicate all of their monthly income (less a minimum
$30 personal needs allowance Medicaid permits them to retain) toward payment of their nursing
home bill. Thus, private, out-of-pocket spending does not end with Medicaid eligibility.

{s it reasonable to assume that individuals can save a sufficient amount of money on their
‘own to pay for their long-term care services without having to rely on Medicaid?

Deena B. Katz, a certified financial planner who heads the financial planning firm of Evensky,
Brown, Katz, and Levitt has estimated the amount an individual would need to set aside to have
an adequate level of assets for the sole purpose of covering long-term care costs. In 1998
constant dollars, the amount needed would be approximately $230,000 to pay for a 5 year
nursing home stay. Assuming a 5% annual inflation rate for nursing home costs, this would
mean that a 45 year old today might well have to save over three quarters of a million dollars
($750,000) by age 75 in order to adequately “self-insure.”

Of course, relatively few Americans will spend five years in a nursing home. This is what makes
the possibility that one might eventually need such high cost long-term care an “insurable risk.”
When viewed in this fashion it makes more sense to buy insurance against the risk of a lengthy
stay in a nursing home than to save against it.


57

employee premium for long-term care insurance. The majority of these
employers were very small firms (under 100 employees), and were insured by
one insurance company. Among the employee pay-all plans, employee
participation rates varied widely by insurer and employer. The average percent
of active employees participating in this coverage per employer group is about 6

percent.

Since June 1990, many small employers (1-500 employees) have started
offering long-term care insurance to their employees. This number has
increased from 58 in 1990 to over 600 in 1996. This group represents over 60
percent of all employers offering long-term c: 42 coverage to their employees
and/or retirees. There have also been substantial increases in the number of

medium-sized and large-sized employers who offer long-term care coverage.

Offering of Long-Term Care Insurance to Federal Government Employees

Long-term care related issues cost employers $29 billion a year in lost time, lost
employees, and lost productivity. Many believe, therefore, that private long-term
care insurance coverage can have its greatest impact in the employer-sponsored
market. With the Federal Government, the nation’s largest employer, offering

this benefit to its employees, this impact would be magnified tremendously.

A Federal Employee Long-Term Care Insurance Plan is particularly encouraging
because of three factors. First, such an action would be the clearest signal of

government support for encouraging personal responsibility and planning for

-14-


23

Who Will Pay for the Baby Boomers' Long-Term Care Needs?
Expanding The Role of Private Long-Term Care Insurance

Study Overview

‘The aging of the baby boomers and increases in life expectancy are expected to boost
demand for long term care services over the next 30 years. The objective of this study is to
project the long term care needs of retirees in 2030 and the subsequent financial impact on the
Medicaid program and individual's out-of-pocket costs. Most importantly, this study will
measure the extent to which the increased ownership of long term care insurance can help to
finance these costs in the future.

‘The study finds that private long term care insurance can play an important role in
financing long term care needs of the baby boomers. Specifically, increased ownership of long
‘term care insurance can:

+ reduce Medicaid nursing home expenditures by 21 percent

+ reduce out-of-pocket expenditures for nursing home care by 40 percent

‘The potential of long-term care insurance to finance future long-term care costs will
depend on the extent to which baby boomers plan ahead for their long- term care needs. The
government can help in this effort by educating baby boomers in the following areas:

the limitations of government programs in paying for long-term care services,
the potential risk of needing long-term care services,
the impact of unplanned long-term care expenditures on their financial security,
the need to incorporate long-term care insurance as an essential part of their
retirement planning process, and
+ the importance of purchasing long-term care insurance at younger ages.

The Looming Crisis: Aging Baby Boomers

‘One of the biggest challenges facing America in the 21st century will be the aging of the
“baby boomers". individuals born between 1946 and 1964. Due to the large size of this segment
of the population, baby boomers have dramatically affected societal trends and the demand for
services at each stage of their lives. In their formative years, they crowded the school systems.
As they reached adulthood, they dominated the housing and labor markets. Now as baby
boomers are beginning to save for their retirement, the stock market is reaching record highs.

The impact of baby boomers will continue to be felt as members of this large and influential
group ages. The first baby boomers have already tumed 50. As the 21st century approaches,
over 70 million baby boomers will face the prospect of retirement and the needs associated with
an aging population, These demographic trends will present new challenges to families and
society.

By the year 2030, when the last of the baby boomers reach retirement, it is estimated that the
number of elderly individuals will double from 35 million to nearly 70 million. Over 20 percent

‘©American Council of Life Insurance


April 13, 1998

The Honorable John L. Mica

Chairman

Subcommittee on Civil Service

Committee on Government Reform and Oversight
United States House of Representatives
Washington, D.C. 20515

Dear Mr. Chairman:

| would like to thank you again for inviting me to testify on behalf of the
Health insurance Association of America at your Subcommittee’s March 26,
1998 hearing, on offering long-term care insurance to federal employees. The
hearing was a very positive first step in addressing our nation’s long-term care
financing problem. The long-term care insurance industry commends the
Subcommittee for bringing this issue to the forefront and recognizing the
important role that the private long-term care insurance market can play in
solving our nation’s long-term care dilemma.

We also received your letter that contained additional questions on the
long-term care insurance market. Below are HIAA’s responses to these
questions.

1. Please describe the roles that Medicare, health insurance, HMOs and
Medicaid play in paying the costs associated with long-term care?

“Long-term care,” refers to a wide range of health and personal care services
provided to individuals who have lost some or all capacity to function
independently due to a chronic illness or condition and who are expected to
require these services for an extended period of time. By its nature, long-term
care services are typically custodial and not medical.

Medicare, generally does not and was not intended to cover long-term care
expenses. Medicare pays for some nursing home and home health care, but
only for instances where such care or services are medically necessary, post-
acute and short-term. Private health insurance or HMOs, also typically do not
cover long-term care. Like Medicare, some nursing home and home health care
are covered under health insurance, but only when such care or services are
medical in nature. Medicaid is the primary payer for long-term care expenses.

555 13th Street, NW Suite 600 East, Washington, DC 20004-1109 202-824-1600


90

chat 4
Navionat NURSING HOME AND HOME HEALTH CARE EXPENDITURES, BY SOURCE OF FUNDS, 1996

Table?
‘SPONSORED LONG-TERM
(Cane PLANS INTRODUCED EACH’
1987-1995
Total Munber ot Comat Teal
Yer Pans Inogwed of Pana larediced
107 2
ae 7
v9 a st
190 us
ry 153 7
19 06
19 a 8
19 ny 8
195 me 10
Source: eat Insurance Assan of Americ, 1955,

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85

‘sccurataly, Little long-term claims insurance experience yet exists, and it may not be available for many years to
come because many of those whe currently bold LIVI will likely not use it for many years. Insurers are encour-
‘aged by current lagslstive proposals to enter the field of LTC financing in order to provide an alternative to

public-sector financing. They are also encouraged to keep premiums level. Yet, the actuarial basis for developing
Premiums and statutory reserves is limited.

Nonforfeiture—As is increasingly common in private disability insurance, many LTCI policies now include ep-
tional nonforfeiture features. Nonforfeiture provisions prevent the policyholder from forfeiting his or her full
benefit in the event of a voluntary policy lapse.

Nonforfeiture benefits can take many different forms and may vary with an insured’s age, claims history,
and the duration the policy iaea been in force. These benefite may be included in the policy on a voluntary basis,
with « higher premium assessed for those purchasing the option.

‘One type of nonforfeiture provision continues coverage at a reduced benefit level ifa minimum number of
payments has been made. For example, one employer plan provides that ifthe insured has paid premiums in the
LTCI program for 10 consecutive yeara and then voluntarily discontinues premium payments, he or she will retain
coverage of 20 percent of the criginal daily maximum benefit. For each year beyond the 10th year that the ineured
continues to pay premiums, the amount of the reduced coverage is increased by 3 percent, up to a maximum
reduced coverage of 75 percent of the daily maximum benefit (IBM, 1994) Some plans, rather than reducing the
daily benefit amount, provide for a shortened benefit period. For example, in one plan, if'a shortened benefit
period nonforfeiture rider has been in effect for at least five years at the time the policy lapees, coverage is contin-
‘ued based on the same benefits in effect at the time of the lapse; however, the policy maximum is reduced
(Transamerica Life Companies, 1995).

‘Anothor type of nonforfeiture benefit allows partial recovery of premiums paid in the event of voluntary
\npse of the policy. For example, one employer plan provides that for every year the policy isin foree, 5 percent of
the premium will be refunded in the event of a voluntary lapse (less any benefits that have already been paid).
‘Thus, for example, ifthe policy has been in force for one full year, § percent of the premium would be refunded; if
the policy has been in force for two full years, 10 pereent would be refunded. The individual is entitled to a
100 percent refund if the policy iain force for 20 or more years (The Prudential, 1994).

While a nonforfeiture provision may be effective for the person who does not want another LITC policy, for
the buyer who wants to exchange one policy for another, a nonforfeiture provision is of only limited value
(McNamara, 1995). On the group side, policies may be upgraded through the same insurer, or reserves may be
transferred to a new insurer who will then upgrade the policies, By transferring reserves, credit is given such that
the upgraded policies may be based on the age at which coverage was originally purchased rather than at the
‘more expensive rate based on the insured's current age. Some larger employers may be able to negotiate when,

‘their plan to provide for upgrades and to ensure that funds will be transferred to another insurer on
request If this is not done, the insurer may refuse to transfer reserves. Then, if the employer does decide to move
to. new insurer, individuals in the plan are required to decide whether they want to pay the higher premium or
leave the group plan in order to remain with the original insurer.

Although not specifically a type of nonforfeiture benefit, another design feature sometimes included in a
policy provides that a portion of the premium may be returned to the ingured’s estate in the event of death. For
‘example, one employer plan provides that if the insured dies on or before his or her 65th birthday, an amount
‘equal to all contributions paid up to the time of death, less any benefits paid, will be paid to the insured’s estate. If
the individual covered under the plan dies between his or her 65th and 75th birthday, the estate receives an
amount equal to all contributions paid up to the 65th birthday, reduced by 10 percent for each yoar after the 65th
birthday and less any benefits already received (J.P. Morgan & Co., 1994; Prudential, 1994). Many policies also
now include protection against unintended lapee through the designation of an alternative party who would be
notified in the case of « missed premium payment before the policy lapses.

‘Some companies may also offer “paid-up” policies, These policies entitle the insured to the full amount of
benefits if premiums have been paid for a certain amount of time (for example, for 20 years or 30 years). Once the
policy is “paid-up,” no additional payments are required (American Association of Retired Persons, 1995).

Waiver of Premium-Many policies now include a provision that allows policyholders to stop paying premiums after

‘8 specified number of days of care in a nursing home. Some policies include a waiting period such as 60 days from
the day payments are firet made to the day premiums are waived.

‘The majority of functic ‘individuals LTC on an informal basis from and
family, making it difficult to measure the total value of thia care (U.S. Bipartisan Commission on

Health Care, 1990), In a 1998 EBRV/Gallup poll, 69 percent of respondents who indicated they had a family
member receiving LTC eaid they were providing that care (Employee Benefit Research Institute, 1993). However,
data from the U.S. Health Care Financing Administration's national health accounts indicate that of the
‘$1,036.1 billion in total health expenditures in 1996, $108.7 billion (11 percent) was spent on nursing home care
‘and on care received from home health agencies (chart 2). Medicaid financed the largest proportion of this care
($41.7 billion o 38 percent), followed by out-of-pocket payments from patients and families ($20.6 billion or

28 percent), Medicare ($22.5 billion or 21 percent), and private health insurance ($7.2 billion or 7 percent). Of the
‘$108.7 billion, nuraing home expenditures totaled $78.5 billion in 1996, of which 32 percent was financed through

6



62

generation of elderly and disabled individuals, who have not had the time,
product availability or financial resources to provide effectively for themselves. in
this regard, HIAA supports initiatives to improve the current long-term care
Public assistance programs and research and demonstrations on innovative
needs-based public long-term care programs.

We recognize that such innovations could be costly. However, we believe that
their benefits are significant and that it is the responsibility of the public sector to
target its assistance to those most in need. Funding of these improvements
could be partially offset through mandatory estate recoveries of recipients after
their death and the death of a surviving spouse. Additional revenues could also
be generated from further strengthening and strictly enforcing the transfer of
assets rules so that individuals could not give away property in order to qualify
for Medicaid.

Expansion of Long-Term Care Insurance Coverage Should be Encouraged
through Tax Incentives - While several tax clarifications passed in HIPAA, we
believe that other equally important tax-related changes, at both the federal and
state levels, could make long-term care insurance more affordable to a greater
number of people. The expansion of this market will have the parallel effect of
reducing future costs to the federal and state governments by reducing Medicaid

outlays.

Federal and state governments have an important role in encouraging the
growth of private long-term care insurance market. This could be achieved by
enhancing tax provisions for long-term care insurance. Encouraging additional

tax provisions for these products would reduce the cost of long-term care

-16-


86

consumer out-of-pocket payments (chart 4). Most of the remainder was financed through the Medicaid program
(478 percent), with Medicare accounting for 11.3 percent, other public and private programs accounting for

43 percent, and private insurance paying for 5.1 percent. Home health agencies accounted for $32.2 billion, of
which 42.2 percent was financed through Medicare, 13 percent through Medicaid, and 18.3 percent through out-of
pocket payments.

Trends

While expenditures for nursing home care have risen from $20.6 billion in 1980 to $78.5 billion in 1996, they have
remained fairly constant as a proportion of total national health expenditures over this same time period (table 7).
‘As a proportion of all expenditures for nursing home care, Medicaid has remained fairly constant, with Medicare
‘accounting for an increasingly larger proportion and out-of-pocket costs accounting for an increasingly smaller
proportion.

Home health care expenditures have also risen over time (from $2.4 billion in 1980 to 30.2 billion in 1996)
However, unlike nursing home expenditures, home health care expenditures have risen as a praportion of total
national health expenditures, increasing from 1.0 percent in 1980 to 2.9 percent in 1996, As a proportion of all
home health care expenditures, both Medicaid and out-of-pocket expenditures have declined since 1990, whereas
Medicare has accounted for an increasingly larger proportion.

Out-of Pocket
A large proportion of LTC is financed out-of-pocket by recipients or their friends and families, National health
account data indicate that $30.6 billion, or 28 percent, was spent by patients and their families on nursing home
‘and home health care in 1996 (chart. 2). Additional amounts spent in nontraditional LITC settings, such as for adult
ay care and respite care as well as, for example, costs for help with personal care and homemaking, meal pro
grams, and special transportation would increase this amount but are difficult to determine.

Nursing home care—the most expensive type of LTC—consumes the greatest amount of out-of-pocket
spending, As shown in chart 4, individuals spent $24.7 billion on nursing home care and an additional $5.9 billion
on hame health care in 1996.

Conclusion

Although a large proportion of LTC is provided on an informal basis by family and friends, many individuals
require formal care either in the community or in an institutional setting, which can be quite expensive. The need
for LINC services is most prevalent among the elderly. However, individuals of all ages may need LTC services.
Moreover, demographic trends such as an aging population, an increased female labor participation rate, and
delayed childbearing may mean a reduction in traditional sources of informal LI'C. These factors have caused
leaders in business, academia, and government to be concerned about finencing LTC.

Aside from informal care provided in the community, the current system of financing LTC depends on the
Medicaid program and individual financing, Issues confronting this system include spiraling costs associated with
LTC services that may threaten beneficiaries’ access to care. Other issues include the potential depletion of
personal assets, a bias toward institutionalization (which may not always provide the most cost-effective or
desived type of care available), and the ability of some individuals who transfer assets to become eligible for
Medicaid. Many leaders regard private LITCI as a way to increase access to financing and as a potential alterns-
tive to Medicaid and out-of-pocket financing. As a recent innovation, this method of financing care currently
accounts for only a small proportion of expenditures, However, tax incentive measures, plan design improvements,
‘and population aging may encourage more Americans to purchase coverage. Some anelysts believe that taxpayer
financed publie social programs should simply be expanded.

‘The largest harrier to the expansion of the private LTCT market is the tack of public readiness to use
assets to insure against the relatively low probability of need, Public education is very much needed. Until it
‘occurs and the public is ready to pay either through premiums or taxes, itis unlikely that the goals of adequate
coverage, universal access, and affordability through risk pooling will be achieved,

References

“American Association of Retired Persons, “Long-Term Care Tax Clarification.” Testimony before the House Ways &
‘Means subcommittee on Health, 20 January 1995.

Consumers Union “An Empty Promise to the Elderly?" Consumer Reports (June 1991): 425-442.

Coronel, Susan, and Diane Fulton. “Long-Term Care Insurance in 1995,” Washington, DG: Health Insurance
‘Association of America, 1997.

Employee Benefit Research Institute/The Gallup Organization, Inc. Public Attitudes on Long-Term Care, 1993.
Report no. G-47. Washington, DC: Employee Benefit Research Institute, August 1993.

Friedland, Robert B, Facing the Costs of Long-Term Care. Washington, DC: Employee Benefit Research Institute,
1990.

1BM, Written communication, 1994

J.P. Morgan & Co, Written communication. 1994

Kemper, Peter, and Christopher M, Murtaugh. “Lifetime Use of Nursing Home Care.” New England Journal of
Medicine (February 28, 1991) 595-600.

‘McNamera, Cheryl. CNA Insurance Companies. Written communication, 1995.

National Association of Insurance Commissioners. Shoppers Guide. Kansas City, MO: National Association of

7


121

the private sector, sometimes the human resources departments,
personnel departments or the president of the companies can make
decisions and not have to ask a lot of questions before they do that.

This may take a lot, a longer period of negotiation and decision-
making. Ultimately though, as I think every Panelist has said,
when this is offered to employees, education of the employees is so
vital, and so we need to come up with, jointly, some way to make
sure that the employees understand the reason why Congress has
decided that this ought to be offered to them and why they should
begin to plan for the future by buying the policy.

ir. Mica. Mr. Fronstin, did you have anything to add?

Mr. FRONSTIN. I would add that even if it takes only 6 months
or a year, education is the key, and it may take much longer than
that before you start seeing high participation rates, especially if
it is an employee-pay-all type of plan.

Mr. Mica. I am not sure what participation we would have based
on the experience in the private sector, but the testimony seems to
indicate that making it available would probably take 6 months to
a year. So if we passed a resolution directing OPM to make it
available by December 1999, that would be feasible. What do you
think, Mr. Martin?

Mr. Martin. Yes, I would think so. That would give ample time.
Mr. Mica. OK. That is what we will do. I thank this panel ve:
much for your participation, for your contributions today. We will

dismiss this panel, and I will welcome our second panel today.

I would like to welcome the second panel today. Again, no strang-
er to this subcommittee, Mr. William Flynn III, associate director
of Retirement and Insurance Services for the Office of Personnel
Management. We also have Bob Williams, deputy assistant sec-
retary for Long-Term Care and Disability Policy with the Depart-
ment of Health and Human Services.

We are going to swear in our two witnesses.

{Witnesses sworn.]

Mr. Mica. The record will reflect both of our witnesses answered
in the affirmative.

Again, we try to limit our oral testimony to 5 minutes. Mr.
Flynn, you are familiar with that routine. Mr. Williams, welcome.

I will recognize first Mr. Flynn for 5 minutes.

STATEMENTS OF WILLIAM E. FLYNN III, ASSOCIATE DIREC-
TOR, RETIREMENT AND INSURANCE SERVICE, OFFICE OF
PERSONNEL MANAGEMENT; AND BOB WILLIAMS, DEPUTY
ASSISTANT SECRETARY FOR LONG-TERM CARE AND DIS-
aes Oey DEPARTMENT OF HEALTH AND HUMAN
SERVI

Mr. FLYNN. Thank you Mr. Chairman and members of the sub-
committee, for inviting me here today. In addition to my prepared
statement, I would like to make just a few remarks and then be
available for any questions you might have.

You have heard from the first panel a lot of the demographic
background information leading up to the interest in employer-
sponsored long-term care insurance. I won’t go back through that
today, just perhaps offer a few points of perspective as an em-
ployer, a potential employer sponsor.


124

STATEMENT OF
WILLIAM E. FLYNN, III
ASSOCIATE DIRECTOR FOR RETIREMENT AND INSURANCE
U.S. OFFICE OF PERSONNEL MANAGEMENT
before the

SUBCOMMITTEE ON CIVIL SERVICE
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

US. HOUSE OF REPRESENTATIVES

on

GROUP LONG TERM CARE INSURANCE
FOR FEDERAL EMPLOYEES

March 26, 1998

MR. CHAIRMAN AND MEMBERS OF THE SUBCOMMITTEE:

THANK YOU FOR CONVENING THIS HEARING TO DISCUSS THE DESIRABILITY OF
INCLUDING GROUP LONG TERM CARE INSURANCE IN THE FEDERAL EMPLOYEE

BENEFITS PACKAGE.

MEDICAL ADVANCES AND OTHER FACTORS IN RECENT DECADES HAVE
DRAMATICALLY IMPROVED AVERAGE LONGEVITY. AS AGE INCREASES, THE
NEED FOR LONG TERM CARE, WHICH CAN INCORPORATE PERSONAL CARE,
HOME HEALTH CARE, ADULT DAY CARE, AND NURSING HOME CARE,
NATURALLY INCREASES. REPORTEDLY, THERE ARE OVER 3 MILLION
AMERICANS OVER 85 YEARS OLD TODAY. THESE NUMBERS ARE PROJECTED TO.

INCREASE BY FOUR TIMES TO OVER 13 MILLION BY 2020.


31

Figure 7

Nursing Home Financing in 2030

Current Trends Increased LTC Ins.
re ee Ins.
‘Out of Pocket
CM
Medicaid

32%

Source: ACLI Policy Research Dept.

The results of this study indicate that private insurance can be an important source of funding for
Jong-term care in the future and can substantially reduce nursing home expenditures for both
Medicaid and individuals. Assuming three-fourths of purchasers retain their policy to the year
2030, the share of nursing home expenditures paid for by private insurance would increase from
3 percent today to 29 percent in 2030. At the same time, Medicaid’s share of nursing home
‘expenditures could decline from 41 percent to 32 percent and those paid directly out-of-pocket
by individuals could decline from 48 percent to 31 percent of the total. Under this scenario, the
proportion of national expenditures for nursing home care paid by private insurance (29 percent)
would almost equal that of the Medicaid program (31 percent) and private out-of-pocket
payments (30 percent).

(@American Council of Life Insurance 9


156

ng
(la DEPARTMENT OF HEALTH & HUMAN SERVICES Ottice of the Secretary

Washington, 0 € 20201

Honorable John L. Mica

‘Committee on Government Reform and Oversight
US House of Representatives

2157 Raybum House Office Bidg

Washington, DC 20515

Dear Congressman Mica.
We have received your letter of April 3, 1998 with questions on the topic of Jong term care
insurance for federal employees. We appreciated the opportunity to testify on this matter at your
hearing in March and look forward to working with you on this matter. Our responses are
attached.

If you have further questions do not hesitate to contact John Cutler or Pam Doty of our staff at
(202) 690-6443. Again, we thank you for the opportunity to answer these questions.

Respectfully,

OF
ane
Bob Williams

Deputy Assistant Secretary for
Disability, Aging and Long-Term Care Policy
Office of the Assistant Secretary for Planning and Evaluation



7

Mr. Mica. Before I introduce the balance of our panel, I would
like to take a moment of personal privilege and ask Mr. Cedric
Hendricks to come up and stand next to me.

Ladies and gentlemen, I am chairman of this subcommittee, and
we don’t often get this many Members of our panel here. Maybe I
could get a photographer to take a picture. I wanted to take just
a moment to recognize Cedric. Cedric, I was informed today, is
going to be reassigned, but over the past years I have known and

ad the privilege as chairman to work with him. He is the chief
assistant for the subcommittee, for the full committee, and also as-
signed to this subcommittee. He has had to endure several ranking
members and me as chairman, so he certainly deserves our praise.
I cannot tell you of anyone with whom I have more enjoyed work-
ing with as far as staff or Member on either side of the aisle. We
are certainly going to miss him. I want to tell him personally and
publicly how much we appreciate what he has done, not just for the
panel, but also for the Congress and for our Federal employees and
retirees, and others. We will miss you. I am sorry to hear about
this reassignment, but you are welcome back any time either on
that side or this side.

I would like to recognize the ranking member.

Mr. CUMMINGS. I want to say that since I have been the ranking
member here, I have worked very closely with Cedric. I just want
to thank you for all that you have done, Cedric. There are few indi-
viduals that—you know I am a stickler for errors, and I can say
that you have never presented anything to me with an error in it.
You have been very, very efficient and have always been there for
me and for the Members on this side. I just want to thank you for
persistently pursuing excellence and being the very best that the
Congress has to offer. We are going to miss you tremendously. We
know that you are now moving onto higher ground, but always
know that we really love you, and we thank you so much for giving
your blood, sweat and tears to us. Thank you, and thank you again.
j Mr. Mica. I would like to recognize the gentlewoman from Mary-
and.

Mrs. MoRELLA. Cedric, I don’t know why you are leaving us. We
have enjoyed so much the relationship we have had, remembering
the' old Post Office and Civil Service Committee, when we could al-
ways rely on Cedric to come up with the issue, background and the
Reople orientation. He has always been very fair, and I hope you
do know that we would like to have you back here. It is just a
pleasure in a bipartisan manner to say here is a.guy who serves
Congress and the people well.

Mr. Mica. Ms. Norton.

Ms. Norton. Thank you, Mr. Chairman. I regard Cedric as my
gift to the committee, although I was a very unwilling and
uncheerful giver. At least we got the benefit, however, of Cedric’s
enormous intelligence and energy, because he continued to work on
areas of great concern to the District of Columbia. Cedric was my
legislative director when I came to the Congress in 1991.

Cedric will challenge us, I think, to demonstrate that the truism
that no one is irreplaceable is, in fact, the case. He brought and
accumulated—was not born with, but accumulated—encyclopedic
knowledge of two very difficult areas of our jurisdiction, of the ju-


139

Conclusion

In conclusion, the Department is pleased that our excellent working partnership with our
colleagues at OPM has led to the development of a research agenda that will help
inform policymakers with respect to the feasibility and desirability of a long-term care
insurance optional benefit for federal workers. Within the Administration, OPM has the
lead on questions related to federal workers’ employer-sponsored benefits. The
Department of Health and Human Services has a broader and longer-range interest in
how employer sponsored long-term care insurance plans can help meet the growing
demand for cost-effective formal long-term care services. Specifically, we hope that if
affordable insurance coverage becomes more widely available, a larger share of 21st
century older Americans will be better able to afford the paid home care that could
enable them to remain in the community, as well as protect themselves against the risk
of catastrophic out-of-pocket costs for nursing home or other residential care, and
reduce their reliance on Medicaid.

We thank the subcommittee for inviting us to testify and will be happy to answer
questions.


ua

Honorable John L. Mica
April 13, 1998
Page 4

insurance premiums. (Please note that these are just estimates and that
premium differences may vary from company to company depending on other
factors. ):

« Daily Benefit Amounts: As the daily benefit amounts increase, so do
premiums. Generally, premiums increase proportionately to daily benefit
amounts. For example, a 50 percent increase in daily benefit amounts.
corresponds to a 50 percent increase in premiums.

» Type of Coverage: Coverage for additional benefits increases premiums.
For example, a policy covering for nursing home only would cost less than a
policy that covers both nursing home and home health care costs. The
difference in premiums also varies by age. In general, HIAA has observed
that the addition of some level of home health care coverage in long-term
care insurance policies increases premiums by about 5 to 50 percent,
depending on the age of the insured.

* Elimination or Deductible Periods; The longer the elimination period, the
lower the premium. For example, a long-term care insurance policy that pays
benefits after a 100-day elimination period has been met will cost less than a
policy that pays benefits after a 20-day elimination period. In general,
elimination periods available in the market today are 20, 30, 40, 60, 90, 100,
120, 180 days. Premium variances between each elimination period are
between 3 to 10 percent.

«Inflation Protection: The addition of an automatic inflation protection feature
increases LTCI premiums. These increases vary depending on the age of
the insured. Common inflation protection features available today are either
annual 5 percent simple increases, 5 percent compounded increases, or
CPl-indexed increases. HIAA tracks only 5 percent compounded lifetime
increases. HIAA data reveal that such inflation protection would cost more
for a younger individual than for an older individual. Depending, on the
insured’s age, premiums for this additional benefit can increase anywhere
from about 220% for a 30-year old (and possibly more for a younger insured),
to about 35 percent for a 79-year old (and possibly less for an older insured),

» Nonforfeiture Benefits: The addition of a nonforfeiture benefit increases LTC!
premiums, The most common type of nonforfeiture currently being offered in
long-term care insurance policies today is the NAIC-recommended shortened
benefit period approach. Depending on the age of the insured and some
variances in the shortened benefit period a company is offering, increases in
premiums may range from 10 to 50 percent.


153

Honorable John L. Mica
April 14, 1998
Page $

9. On what do private long-term care insurance plans base benefit amounts?

Long-term care insurance benefit amounts are determined according to the types of
care across the United States. For example, the average cost of a home health care
visit is about 60% of the daily cost of nursing home care."° This proportion is
reflected in the benefit levels of long-term care insurance plans. It is important to
note that the construction of employer-based plans is often based on what the
employer or consultant feels is appropriate for the employee population, based on
demographics and affordability.

10. What is the relationship between the level of benefits selected and premium
amounts?

Premiums are directly proportional to an increase in the Daily Maximum Benefit
(DMB) amount selected. In the case of nursing home only coverage versus
comprehensive coverage, nursing home only coverage is priced 30% or 40% less than
comprehensive coverage. Differences in the number of years of coverage allowed by
the lifetime maximum benefit (LMB) are not priced proportionally, rather they are
based on expected benefit use."

1

. What percentage of cost do long-term care policies cover for nursing home care,
assisted living facilities/residential care facilities, home health care, community
care, and adult day care?

Most purchasers buy comprehensive long-term care insurance policies (i.e., benefits
are payable for care both in conventional facilities as well as home and community-
based care). Policies are available that will provide a benefit equal to the prevailing
rate in the region where the care is received. Therefore, purchasers have the option of
buying benefit amounts that will cover the full amount or some percentage of that
amount. Generally, long-term care insurance policies pay benefits for confinement in
a nursing home or similar facility at the rate of 100% of the daily maximum benefit
elected by the insured; at a rate of 75% to 100% for confinement in an alternate care
or assisted living facility; and at a rate of 50% to 100% for home or community-based
care/adult day care, As noted in question I above, policies may provide limited
coverage for some homemaking, personal care, and other services.


46

Mr Mica. We will suspend questioning until we finish the entire
panel.

I will next recognize, representing the Health Insurance Associa-
tion of America, Mr. David Brenerman.

Mr. BRENERMAN. Thank you, Mr. Chairman, members of the sub-
committee. I am David Brenerman, second vice president of govern-
ment relations for UNUM Life Insurance Co. of America, which is
based in Portland, ME.

First, although the Congressman has left, I would like to thank
Congressman Allen for his kind introduction.

Today, I am speaking as the immediate past chairman of the
Long-Term Care Committee of the Health Insurance Association of
America. On behalf of HIAA, I appreciate the opportunity to talk
to you today about the role of private long-term care insurance in
financing our Nation’s long-term care bill and the importance of of-
fering a long-term care insurance benefit to Federal employees.

Our Nation faces a looming crisis. Long-term care is the largest
unfunded liability facing Americans today. For today’s elderly and
tomorrow’s retirees, long-term care is the single major catastrophic
expense. About 40 percent of all elderly will spend some time in a
nursing home. With annual nursing home costs averaging over
$41,000 today and increasing to about $100,000 in 1996 dollars by
the year 2030, such expenses can indeed cause financial ruin. In-
stead of pooling risks, the current system places each household on
its own, and when household resources have been depleted, Medic-
aid becomes the payer of last resort.

There is a critical role for private insurance to provide a better
means of financing long-term care for the vast majority of Ameri-
cans who can afford to protect themselves. The long-term care in-
surance market is growing, and the policies that are available
today are affordable and of high quality. Policies have changed dra-
matically since they were first introduced. Today they provide ex-
panded benefits and cover virtually all sites and types of long-term
care, including nursing homes, assisted living facilities, adult day
care, respite care, hospice and home health care.

By the end of 1996, close to 5 million long-term care insurance
policies had been sold. The market has grown an average of 22 per-
cent annually. Approximately 80 percent of long-term care insur-
ance policies have been sold in the individual market. The em-
ployer-sponsored market enhanced this growth by contributing
about 14 percent of all policies sold. Today more than 650,000 poli-
cies have been sold through 1,500 employers.

The growth in employer-sponsored plans is particularly promis-
ing. Employer plans offer the opportunity to reach a large number
of people efficiently during their working years when premiums are
more affordable. The average age of the employee electing coverage
is 43. This is strong evidence it with education and availability,
younger people can and will purchase long-term care protection.

Long-term-care-related issues cost employers $29 billion a year
in lost time, lost employees and lost productivity. Many believe,
therefore, that private long-term care insurance coverage can have
its greatest impact in the employer-sponsored market. With the
Federal Government, the Nation’s largest employer, offering this


Opening Statement by Representative Tom Allen (ME)
before the
Subcommittee on the Civil Service
Committee on Government Reform and Oversight

March 26, 1998

Thank you, Mr. Chairman. I want to thank you for your leadership in
addressing the long-term care crisis that our nation is facing. I am here to
welcome my good friend, David Brenerman, to the committee. Mr.
Brenerman and I both served as Mayors of the City of Portland. He was an
outstanding Mayor and City Councilman for our city. Mr. Brenerman’s
dedication to the public has continued with his work as the Second Vice
President for Government Relations for UNUM Life Insurance Company.
UNUM’s corporate headquarters is in Portland, ME. David Brenerman is the
immediate past Chairman of the Long-Term Care Committee of the Health
Insurance Association of America for which he will be testifying today.

UNUM has been the largest writer of group long term disability insurance
since 1976 and a leader in personal accident, sickness, life and cancer
insurance policies in the country. I am proud to welcome Mr. Brenerman to
the committee. | would also like to say that one staff member on this
committee shared with my office how UNUM has saved her family.
Approximately ten years ago, her mother was diagnosed with an illness that
required long-term care. UNUM was at that time one of the very few
companies to offer this type of coverage. Thankfully, her mother had a
policy that kicked in when she needed it. It is clear that long-term care
insurance coverage is essential. As our society is aging, the need for long-
term care coverage is more compelling. It is estimated that 30% of the 7.3
million elderly are severly disabled and require assistance. About 22% live in
nursing homes. Again, the need is clear, and expanded coverage ever more
important.

Mr. Chairman, thank you again for your leadership on this issue and for
allowing me to welcome Mr. Brenerman.


40

Conclusions

Projections about long-term care needs 30 years into the future may seem too distant for
consumers and policymakers faced with more immediate concerns. Nonetheless, this study
provides an important framework within which to examine options to help Americans plan for
their long-term care needs. The results of this study indicate that long-term care insurance has
the potential to significantly reduce future out-of-pocket and Medicaid expenditures for long-
term care. If a large proportion of baby boomers purchased long-term care insurance, total
nursing home expenditures paid by Medicaid could decline from the current 41 percent to 32
percent. In addition, the proportion of total nursing home expenditures paid for by individuals
out-of-pocket could decline from the current 48 percent to 31 percent.

The cost estimates presented in this study reflect only the tip of the iceberg. In 2030, the
baby boomers are concentrated between ages 65 and 84. By 2050, however, all of the baby
boomers will have reached age 85 years and beyond, an age when the probability of needing
long- term care services increases markedly. So both total long-term care costs and the potential
savings from long-term care insurance could be considerably higher by that time.

In addition, our analysis assumes that spend-down rates under Medicaid in 2030 would be
similar to today’s and that the share of nursing home costs paid for by Medicaid (under our
current financing trends scenario) would remain constant through 2030. In reality, as nursing
home costs rise faster than overall inflation and incomes, many more middle income baby
boomers could become impoverished by nursing home costs and thus become eligible for
Medicaid. In this case, increased purchase of long-term care insurance could provide greater
costs savings to Medicaid than our projections suggest.

There is still time to seek out private sector solutions to the looming long-term care crisi
Baby boomers need to be encouraged to make plans to ensure that disability does not destroy
their future financial security. The study also shows that private long-term care insurance is
affordable for most Americans. However, it is important to one's financial security to plan ahead
and purchase long-term care insurance as early as possible. This means incorporating long-term
care insurance as an essential part of retirement planning.

The insurance industry is constantly evolving to meet these new challenges. Companies are
making a significant effort to add features and design policies that will appeal to consumers.
Greater flexibility and increased choice in benefits also provide some new options for people
with modest incomes to purchase long-term care insurance. In addition to traditional long-term
care insurance policies, individuals can also obtain a rider to their life insurance policy that will
accelerate benefits to finance long-term care. With this type of product, the insurer pays a
portion of a life insurance benefit to the policyholder instead of paying the beneficiary at the
policyholder’s death. Employer participation in the long-term care insurance market is also
increasing, allowing earlier and more affordable planning for employees seeking coverage for
long-term care.

‘CAmerican Council of Life Insurance 18


120

Mr. Mica. If you want to summarize your response, please.

Mr. BRENERMAN. We felt that the Consumer Reports article dis-
turbingly took a biased position against long-term care insurance
policies, particularly tax-qualified policies under HIPAA, and tried
to dissuade readers from considering those types of policies. We
also thought that the article misled consumers about the impor-
tance of the financial stability of the company that you are buying
a policy from, saying that that does not matter. So we submitted
a letter because we felt that the article was not—did not fairly
characterize the current long-term care insurance market.

Also I believe that, not to disagree with Mr. Jackson, but most
policies do cover Alzheimer’s disease under the term of cognitive
impairment. A dozen companies cover about 80 percent of the—sell
80 percent of the policies, and all of those companies cover cog-
nitive impairment, which would include Alzheimer’s. So that was
another issue that was raised in the Consumer Reports article. I
would like to offer those to the committee.

Mr. Mica. Thank you. We will include that by unanimous con-
sent.

You answered another question I had about Alzheimer’s disease
coverage.

Again, we oversee several millions of Federal employees and re-
tirees. We can have a very significant group. We can offer a sub-
stantial discount. I don’t see any reason why we can’t do that.

Let me ask you this, gentlemen from the private sector. I come
from the private sector, so I am somewhat handicapped, because if
I had a group, I would go out and negotiate, and we would make
it available, and it would be done posthaste. Here we study it to
death, beat around the bush, and we never get to the issue, or we
block it in some way.

If you were to sit down with the Office of Personnel Management
and negotiate making options available, how long do you think this
would take? I know we have a bigger group, but give me some pa-
rameters. Would it take 6 months, 3 months, a year? Or if you
were in the private sector and had a pretty significant group, how
soon could we make a package available to those individuals? Mr.
Martin? Is this a lifetime endeavor, or can it be done within——

Mr. MartTIN. Thankfully it is not a lifetime endeavor, Mr. Chair-
man. But that is a very good question because this is exactly what
happens when we install large groups now. The period can be
short. It could be 6 months, a year. It need not be longer than that.
I think what you don’t want to do is do it in like 2 months; do it
so quickly that you can’t educate People, let them know again and
again that this program is coming. You want to be able to select
the plan design. That will take some doing. But certainly you will
get a lot of expertise from companies that write the business.

In terms of the enrollment period, you need to think about when
this would become available, how that would work, and again not
have people deciding at the last minute, tied in with whatever you
think the enrollment period should be, give them time to talk with
their families about it.

Mr. Mica. Mr. Brenerman, how long do you think it would take?

Mr. BRENERMAN. I think it would take probably 6 months to a
year. I think there are a lot of decisions that need to be made. In


19

should be able to purchase private insurance from carriers meeting the criteria set forth by

the Office of Personnel Management.

To ensure high quality and strong consumer protections, any group or individual
private long-term care insurance offered to federal employees should be a qualified long-
term care insurance contract, as defined in the Health Insurance Portability and
Accountability Act of 1996, Public Law 104-191. Title II], Subtitle C of this Act

imposes strong consumer protections in all tax-qualified policies. These include:

* Prohibitions against limitations and exclusions by type of illness, treatment, medical
condition or accident, except for preexisting conditions or diseases, mental or nervous
disorders (excluding Alzheimer’s Disease), alcoholism and drug addition, suicide,

acts of war or military service, or participation in a riot or felony.

* Prohibitions against post-claims underwriting unless a policyholder misrepresents his

or her medical status at the time of application.

* Disclosure of provisions for renewability, riders and endorsements, payment of
benefits, benefit triggers, tax consequences, and limitations or conditions on

eligibility for benefits.

© Mandatory offer of a policy where benefits increase with inflation. In addition,
insurance companies must offer individual and group policyholders a nonforfeiture
provision that provides at least reduced paid up insurance, extended term insurance,

or a shortened benefit period.

© The right to designate at least one other person who will receive a notice of lapse or

termination of the policy due to nonpayment of the premium. In addition,


14

Private long-term care insurance can play an important role in financing
jJong-term care and providing for a secure retirement.

Most working-age adults are preoccupied with the immediate concerns of paying
for child care, housing expenses, and saving for their children’s education. Looking to
the future, many worry that protecting against life’s uncertainties, especially the
uncertainty associated with long-term care costs, is going to be very challenging. This is
because long-term care costs are extremely expensive and would require a large amount
of savings. For example, a 45 year-old would have to save almost half a million dollars
($489,000) to pay for a two year nursing home stay at age 85. To reach this goal, she
would have to save $3,500 annually. Considering the multiple demands on workers
today, relying on savings to pay for long-term care needs is not a financially feasible

option for most middle-income Americans.

‘A more affordable altemative is private insurance. Long-term care insurance, like
other insurance, spreads the risk across many individuals and thus lowers costs to any one
individual in the event he or she would need long-term care, A 45 year-old would pay
about $417 a year for a policy covering two years of long-term care services. This policy
would include inflation protection of 5 percent a year. Compared to the $3,500 needed in
savings, long-term care insurance could save her over $3,100 a year. In terms of lifetime
savings, these numbers are even more substantial. After paying long term care premiums,
the 45 year-old could protect over $430,000 of her savings if she buys a long-term care

policy instead of paying for nursing home care on her own in the 21st century.

The ACLI study shows that private insurance can go a long way toward financing


3

quire is protection from the extraordinary costs of care that can
arise should one experience a health-related incapacitating disabil-
ity.

True peace of mind in our golden years will come only with
knowing that we will have access to services that will help us cope
with heart disease, strokes, arthritis, vision and hearing impair-
ments, Alzheimer’s and other debilitating conditions and illnesses.
We are here today to discuss whether and how best to offer Federal
employees and retirees this peace of mind through the provision of
long-term care insurance as a new benefit option.

lany families are already straggling today with the cost of qual-
ity child care for their children. To add to this, the cost of quality
nursing home care for a parent, a spouse or child can trigger a fi-
nancial crisis that is difficult to handle. With nursing home care
averaging over $40,000 a year, and no private insurance to cover
such a cost in place or available, financial resources can quickly be
depleted, and poverty becomes the likely result. Only then can the
limited public assistance provided by Medicaid be obtained to help
secure the needed replacement.

The purchase of private long-term care insurance is the means
by which an ever-increasing number of families are providing for

e cost of severe medical disability. This product is still in its in-
fancy, and many questions remain about it. Specifically, what I
would like to know is: What steps should be taken to make Federal
employees and retirees more aware of the need and availability of
long-term care insurance? What type of long-term care insurance
coverage could be offered as part of the overall Federal employee
benefit package? How should a long-term care insurance benefit for
Federal employees and retirees be administered? And whether the
group purchasing power of Federal employees and retirees can
make long-term care insurance more affordable than it would be if
purchased on an individual basis?

I hope these questions will be addressed by today’s witnesses. I
thank them for appearing and look forward to the testimony.

fgain, I thank you, Mr. Chairman.

M ; Mica. I now recognize the gentlewoman from Maryland Mrs.
orella,

Mrs. MORELLA. Mr. Chairman, I want to thank you for holdi.
today’s hearing on long-term care as an employee benefit. We al
worry about long-term care, whether it is for our own futures, for
our spouse, for our parents, for our dependents. Despite our wor-
ries, we are never adequately prepared to face the challenges of
long-term care. Long-term care is often necessary in the face of a
serious injury, chronic illness or the effects of aging. Drawing from
my own family’s experiences, I know how emotionally difficult long-
term care is.

Long-term care is incredibly expensive, and we are ill-prepared

ation to pay for it. Soon baby boomers will retire, increasi
the need for long-term care. From 1997 to 2030, individuals 85 anx
over will more double from about 3.9 million to about 8.5 mil-
lion. By 2050, that number will double in to about 18 million
individuals. This is a time to act. Medicaid was designed as a pro-
gram for the poor, but in many States a large proportion of Medic-
aid is used for middle-income people to fund long-term care ex-


132

Mr. Mica. I will now recognize Mr. Bob Williams, Deputy Assist-
ant Secretary for Long-Term Care and Disability Policy with HHS.
You are recognized, sir.

Mr. WILLIAMS. Thank you. I am Bob Williams, the Deputy As-
sistant Secretary for Disability, Aging and Long-Term Care Policy
in the Department of Health and Human Services Office of the As-
sistant Secretary for Planning and Evaluation.

I am pleased to appear before you and offer the Department’s
perspective on private long-term care insurance. We believe that
policymakers must begin to plan now for the social and economic
implications of population aging. One of these implications will be
increased demand for long-term assistance for those with chronic
illness and disability.

A major success of the 20th century is increased longevity and
improved health among older individuals. In 1990, the number of
Americans 65 years of age and older was about 32 million, or about
12 percent of the population. In a little over 25 years, we expect
the Nation’s elderly population to nearly double to over 62 million
people, about 18 percent of the population. The fastest growing
population will be people 85 years or older.

While aging need not lead to disability and dependency, the like-
lihood of chronic disability and thus the need for long-term care as-
sistance significantly increases as we grow older. In 1994, about 12
percent of Americans age 65 to 74 needed help with one or more
of the routine activities of daily living such as eating, bathing, or
housekeeping or taking medications. However, 58 percent of Ameri-
cans 85 and older needed this kind of help. About one-quarter of
the long-term care population are in nursing homes or other resi-
dential care settings. Three-quarters live in the community in their
own homes or the homes of relatives.

Many here today are aging baby boomers who have yet to experi-
ence the need for long-term care. Many already know the demands
of caring for an older relative. About two-thirds of older people with
long-term care needs receive part or all of their care from unpaid
caregivers, predominantly spouses and middle-aged children. There
are about 7.6 million persons providing unpaid care to older people
with disabilities. Close to half of adult daughters or daughters-in-
law who provide informal care are also in the labor force. Bal-
ancing work and caregiving responsibilities is no easy task. A na-
tional study found that working women who are primary caregivers
spend about 18 hours per week providing unpaid elder care.

The need for long-term care can be a significant economic and
emotional burden. Private long-term care insurance is not a silver
bullet, but it can help protect against the high costs of nursing
home care, which now average about $46,000 a year. Equally im-
portant, it can help middle-income elders with long-term care needs
remain at home by making their own money go further. The avail-
ability of private long-term care insurance does not eliminate the
need for informal help, but it can go a long way to making it easier
both for older Americans and their families.

Today, only 5 percent of seniors have private long-term care in-
surance. One of the reasons so few people participate is that most
people do not buy it until they are older. By so doing, they must
pay more for their policies. For example, in 1995, it cost a 50-year-


110

They buy the policy. They give a payment. Then they get the policy
and they find out that they have something and they may not be
covered. So it is a problem.

Mr. CuMMINGS. Do you think that in the scenario you just stated,
do you think that there is a failure on the part of some insurance
companies to spell out-——

Mr. JACKSON. If I were an insurance company, I would be the
same way. I can understand that, because they have to be very
careful on what they are accepting. What I am merely saying is
that one of the problems in people getting long-term care is that
there are many things in a long-term care policy that are not cov-
ered.

Mr. CumMINGS. Mr. Brenerman, you stated in your testimony
that the potential of the current system is not as efficient and equi-
table as it could be. What do you mean by that?

Mr. BRENERMAN. What I mean is Medicaid—we have one essen-
tial Federal program that covers people. We have what we all know
about, Medicaid. You cannot qualify for that unless you are des-
titute. Medicare covers some medically necessary home care for
short periods of time. The cost of that program, just like the Medic-
aid Program, has gone beyond what I think Congress has ever pro-
jected. Five percent of the public has long-term care insurance. I
guess what I am saying is this is sort of a hit-or-miss method for
covering long-term care in this country. That is why I made that
statement.

Mr. CUMMINGS. Could you explain the proposed structure for
Federal long-term care insurance plan and who pays the cost, ad-
ministration cost?

Mr. BRENERMAN. Well, typically the employer would pay the ad-
ministrative costs. I mean, that is something that could be nego-
tiated. But typically the employer would pay for providing informa-
tion to employees about the plan that is being offered to them.
Again, we have employers ask for all types of plan design, and
some employers want to do more than others in educating their
employees about the plan. So I would guess that the Federal Gov-
ernment would have to cover some or all of the cost of administer-
ing the rogram.

ir. CUMMINGS. Under the Federal Employee Health Benefit
Plan, insurance companies must offer certain basic health benefits.
Would a set of basic services be provided under a long-term care
benefits package?

Mr. BRENERMAN. Yes. I think, Congressman, that when this pro-
gram is designed, I think the Federal Government needs to, at
least, outline some benefits that it wants its employees to be of-
fered. We need to be flexible in what the companies offer, but at
the same time we want to make sure that people have nursing
home coverage, home care as an offer, assisted living, as three ex-
amples of the types of care that people might want to have, and
then we can get into the details of how much coverage a person
should have under each of those areas, what the elimination period
should be before you qualify for coverage. Those are all items that
we need to agree upon before the program can ever be offered.

Mr. CUMMINGS. Mr. Fronstin, how would a Federal long-term
benefit program affect the private sector, private market?


Are you likely to need
longterm care?
’

This year about 7 milion men and women over the
age of 65 wall need long-term care. By the year 2005,
{the mumber wll increase t0 9 million By the year 2020,
12 milton older Americans ssi need longterm care
Most will be cared for at home: family members and
{nends are the sole caregivers for 70 percent of elderly
people, Buta study by the US. Depanment of Health
and Human Seruices indicates thar people of age 65
face at least 2 40 percent lifeune isk of entenng 1
uring home. About 10 percent will tay there five
years oF Tonger

The American population » growing okler, Jnl the
OUP over age 85 fs now the Lises-grnn seme,
of the populinon The odds of entenng. nusing hunk
and saving for longer pends incresse wth age, ba Lat
Sates show that at any given tine. 22 pencent es thon
age 88 and older are int nursing home Bacsuse
‘Somen generally outive men by several years they ace
450 percent grester likeliond than men ot ete
nursing honve aller age 08

You muy never need 4 nursing howe Bur the longer
vou live, the greater the chance that your wll neeet
some form of longer care

What does longterm care casi?
3

Longtem care can be very expensive: AS a national
serage. year in a nursing home is estimsted 6 cost
$10.000. In soe regions, it cin easy cont mee Hat
amoust.

Home care ts ess expensive but i sill adds up, Bangs
sm aide Into Your home jus three timkeS 4 week
to help with dressing, huthing, preparing meals. snd
samular household chore-—easily can cent $1,000 exc
‘month. oF $12.00 a year. Add in the caw of skilled help,
such as physical dherapnts, and these costs can he
much greater

69

Who poys the bills?
‘

For the most pant. the people who need the care pay
the bills Generally, neither Medicare nor private
Medicare supplement insurance nor the hea’ h insur
ance you may have ether on your own of through
your employer will pay for longterm care

Medicare supplement insurance (often called Medigap
( MedSup) is prvate insurance that helps cover some
of the gaps in Medicare coverage. Those gaps are hos-
pital deducubles, doctors’ deductibles, and coinsurance
payments or what Medicare considers excess physician
urges hut they sre not longterm care

About one-hul ofall nue home costs are pid ent
Dobpeket hy sndiv alias and thee famiies. Only about

45 perweat spa hy Medicare. far shorter skilled
nurang hone care following hospitalization. Medicare
iso pas toe some skilled achome care but unly te
Shor icm unstable conditions and not fo the ongoing
ssisunce that many elderly people need, Mos the
hulance of the aati Tongterm cae bill—more than
hull af all qursng home cos—is picked up.
Medicaid ether immedutel. for people meeting feu
jal powers guides or ater musing Rome residents
spon den their ove savings and become eighle
Mane people who hegin pasing for nursing home re
find tha their Sings ave not enough to cover lengihy
confinement. IF they become impuvenshed ater
ketening 4 uri heme: they turn 10 Medicaid to pay
thy Daly Tarning to Medicaid once meant impoverh-
ing the spouse who renuained at home as wel as the
sponte confined 1 4 auning home. Revent change in
the aw: however. permit the arhome spouse 10 ein
specified levels of assets and income

You cant predict what kind of care you might need in
the future. of know exactly what the costs ill be, Buc
since ont may hase longterm care expenses. vex
peed 16 know of Jonietenn care insurance is appropst
ate fae yo


24

of the population will be over 65 in 2030,' compared with 13 percent in 1990. This means that
in about thirty years, 32 states will resemble Florida’s population today.

Life expectancy is also expected to improve into the 21* century. As a result, individuals
ages 85 and older are expected to be the fastest growing segment of the elderly population,
increasing 143 percent between 1990 and 2030 (Figure 1).

Figure?

Percent Increase in Elderly Age
Groups From 1990 to 2030

Percent increase:

150%
Om

125%

100%

B%

Source: Social Security Admbeitrntion
Tatermedlate Projections

What will happen as the baby boomers enter retirement? How will the cost of health care,
particularly long-term care be affected? Although there are still many uncertainties regarding the
future of this diverse group, itis clear that the boomers will play an increasingly important role
in our long-term care system.

Long-Term Care Expenditures Are Likely to Increase Dramatically

Itis not clear whether increased longevity will be accompanied by more healthy years or
whether aging baby boomers face additional years limited by chronic conditions. Currently,
people age 85 and older are almost six times more likely to need long-term care than people in
their 60's. As we look to the future, some researchers suggest that the incidence of disability
will decline as a result of medical breakthroughs. Others maintain that raising life expectancy
may increase the likelihood of developing age-related disabilities such as Alzheimer's disease.
Although there are still many uncertainties regarding the likelihood of becoming disabled in the

‘©American Council of Life Insurance 2


143

Mr. FLYNN. Mr. Cummings, you heard also from the first panel
and then just real briefly in my remarks, I think that the private
market, at a minimum, sort of quasi-Federal Employees Health
Benefit Program model, might be an appropriate administrative
model to use here. As Chairman Mica indicated, assuming we can
reach agreement, we would want to move quickly toward imple-
mentation. It is probably that model that would get us there most
quickly.

Mr. CuMMINGS. A little bit earlier the witnesses said that—at
least one of the witnesses said that there could be a 10 to 20 per-
cent savings. Do you agree with that?

Mr. FLYNN. Yes, sir, I do.

Mr. CummINGS. Should the Federal Government share the cost
of premiums for this kind of insurance?

Mr. FLYNN. Well, Mr. Cummings, that is a question that I think
we really do need to look at from the standpoint of the benefits
package as a whole, as part of the compensation package as a
whole. As you heard from the first panel this morning, in the
small-employer market, you do see a fair amount of employer par-
ticipation in this particular product. But at the larger-employer
level, IBM and others, this is all employee-paid. I think, quite hon-
estly, that is not a reflection so much of a specific decision made
with respect to long-term care insurance in the large-employer
market but, rather, a set of benefit design decisions that involve
corporate strategic decisions about where an employer wants to in-
vest its dollars, in the benefit package or in the salary package.

That is a difficult question to answer. I would say, though, that
an offering like this could be made without an employer contribu-
tion, and we have seen initial take-up rates in the 5 to 7 percent
range.

Mr. CuMMINGS. I don’t have anything else.

Mr. Mica. I don’t have any further questions this morning. But
we would like to get a copy of the OPM study and any information
that can be provided by HHS to the subcommittee. I will leave the
record open for 10 days, and we will have some additional ques-
tions that we would like to submit in writing to some of the panel-
ists today.

[The information referred to follows:)


10

Pay for Future Long-Term Care, illustrates that the financial pro-
tection long-term care insurance can provide is a clear alternative
to asset and savings depletion. As the second chart entitled Long-
Term Care Insurance: Average Annual Premiums, and you have a
copy of that as well, indicates, a more affordable alternative is pri-
vate insurance. The chart shows average premiums for a 2-year
and a 5-year plan, including inflation protection of 5 percent per
ear.

The ACLI study shows that private insurance can go a long way
toward financing the Nation’s long-term care needs in the future,
helping individuals and reducing Federal and State Medicaid budg-
ets. In the private sector over 1,500 employers have already recog-
nized the importance of long-term care insurance and offered this
benefit to their employees. These organizations range in size from
very small firms to Fortune 500 companies. Such nationally promi-
nent employers as General Motors, Ford Motor Co., Chrysler Corp.,
IBM, AT&T to name just a few, have sponsored long-term care pro-
grams.

Employer-sponsored private insurance for long-term care is usu-
ally available to employees, retirees, spouses and parents, and par-
ents-in-law. Average age purchase of employer-sponsored coverage
is 43,

A recent survey by the National Alliance for Care Giving and
AARP found that there are 22 million American households with
at least one member providing some unpaid assistance to a spouse,
relative or other person over age 50. A study by Met Life estimates
that family caregiving costs U.S. businesses $11 to $29 billion per
year in lost productivity.

For the majority of employers, long-term care insurance is an
employee-pay-all benefit. Our study found that close to two-thirds
of persons over age 35, and over 80 percent of those ages 45 to 49,
could afford a high-quality policy that covers both nursing home
and community-based services. I would again refer you to the sam-
ple premium chart in the handout.

Long-term care insurance policies for Federal employees should
be of high quality and affordable. To ensure high quality and
strong consumer protections, any group or individual private long-
term care insurance offered to Federal employees should be a quali-
fied long-term care insurance contract as defined in HIPAA.

Offering private long-term care insurance as a core Government
benefit needs to be coupled with an educational program to in-
crease awareness among Federal employees and their families
about the importance of planning ahead for long-term care. Work-
ers need accurate and credible information about the limitations of
Government programs in paying for long-term care services and
the potential risk of needing long-term care services.

'e believe that private long-term care insurance is an important
part of the solution for tomorrow’s uncertain future. As Americans
approach the 21st century, living longer than ever before, their
lives can be made more secure knowing that long-term care insur-
ance can provide choices, help assure quality care and protect their
hard-earned savings and assets when they need assistance in the
future. The Federal Government can take a leading role in ensur-


141

Mr. Mica. Can you get us a copy of that? Do we have a copy of
that? Could you get us a copy of that, or is it confidential, top se-
cret?

Mr. FLYNN. There is not anything confidential that I am aware
of. I would be happy to make a copy available to the subcommittee.

(NoTe.—The information requested was never received.]

Mr. Mica. We can’t get an exact date. You said sometime this
year you will be through vetting?

Mr. FLYNN. That is correct, Mr. Chairman.

Mr. Mica. OK. Mr. Williams, when did your study begin?

Mr. WILLIAMS. We expect findings of the Lewin study to be avail-
able in the autumn or winter at the latest. It will require OMB
clearance.

Mr. Mica. Thank you.

Well, you heard testimony today, Mr. Flynn, that if we moved to
a competitive system and made this available, it might take 6
months to a year to make some plan available, a benefits package
available. Do you think you could work in that timeframe, or given
the size, the scope, the coverage area, that might not be possible?

Mr. FLYNN. I am not aware of anything, Mr. Chairman, that
makes that estimate unrealistic for the Federal Government.

Mr. Mica. So if we vet the rest of this year, and next year we
negotiate, by my timetable of December 31, 1999—if we pass a res-
olution of Congress directing OPM to make this option available,
do you think we could make it?

Mr. FLYNN. Mr. Chairman, if there were agreement between the
Congress and the administration on moving forward with this, we
would move it forward as quickly as we possibly can.

Mr. Mica. Is there any objection that you know of from within
the administration to making this available on a group basis and
competitive basis to our Federal employees and retirees?

Mr. FLYNN. I think that it is clearly the case within the adminis-
tration that we recognize the importance and desirability of provid-
ing for the long-term care needs of individuals.in the future. We
would want to look, obviously, at a specific proposal in order to be
able to make a specific judgment on it.

Mr. Mica. Mr. Williams, given the timetable that I outlined, and
given the study that you have concluded so far, do you think that
we should be offering this option and benefit to our Federal em-
ployees, and can we do it within the timetable I outlined?

Mr. WILLIAMS. I think that offering this type of coverage is an
appropriate role for the Federal Employees Health Benefits Pro-
gram and will most likely help leverage some similar change in the
private long-term care insurance economy market as well.

Mr. Mica. The second part of my question, Mr. Williams, is that
OPM is studying this, or has studied this, had consultants study
this. They are now digesting and vetting this. I understand that
HHS has been studying this and is digesting their studies. If we
spend the rest of 1998 studying and vetting and digesting, do you
think that by the end of 1999, we can adopt this as a benefit to
our Federal employees?

Mr. WILLIAMS. Yes. My colleague has just said if there is agree-
ment that this is the direction we should go in, then the adminis-


29

57 percent of frail elders who live in the community rely solely on family and friends to provide
care, In fact, a recent survey found that there are 22 million American households with at least
one member providing some unpaid assistance to a spouse, relative, or other person over age 50.*
Whether family caregivers will be able to continue to provide this level of help to numerous very
old relatives in the 21* century remains to be seen.

Figure 6

Projected Out-of-Pocket Costs
For Nursing Home Services
(Inflation - Adjusted)

2000-2005 201020152020, 20282030
Yer

Searce: ACLI Polley Research Dept.

Rising life expectancy increases the likelihood that baby boomers will rely more on their
children to help them with their long-term care needs. As elderly boomers live longer, they are
also more likely to face multiple chronic conditions that require complex and physically
demanding care. At the same time, the pool of potential family caregivers is shrinking due to
smaller family sizes and greater geographic dispersion of families. Caregiving in the 21* century
will be further complicated by the fact that the burden of providing assistance will increasingly
fall on family members who are employed. In 1960, only one-third of married women worked
outside the home. By 1996 over three-fifths of women were in the labor force. About 14 million
‘American households include working caregivers who currently provide some unpaid care to
elderly relatives and friends living in the community. As the physical stress of caregiving
increases, many of these families may face additional financial burdens if they have to rely more
on paid long-term care.

Equally troublesome is the growing number of Americans who may lack family support to
help them if they become disabled. About 26 percent of baby boomers were childless in 1990.
These trends may increase the percent of baby boomers over age 85 that may be living alone in
2030. Individuals without children available to provide long-term care often require
institutionalization at earlier ages than those with family support.

‘CAmerican Council of Life Insurance 7


98

Fourth, insurance carriers must have reasonable standards for
making enrollees eligible for long-term care benefits. So-called ben-
efit triggers rely on a policyholder’s inability to perform a list of ac-
tivities of daily living. Policyholders who fail to perform two or
more activities of daily living should qualify for long-term care ben-
efits. Moreover, some individuals may be able to perform activities
of dailv living, but have a medical condition that prevents them
from taking care of themselves. Benefits ought to be triggered by
medical necessities as well. Often we find the greatest need for
long-term care is a person with a cognitive disorder like Alz-
heimer’s, yet many plans exclude coverage for this or other mind-
robbing illnesses. We believe it is a must.

Fifth, long-term care plans need to be flexible. Individuals who
want home- and community-based care should have that choice.
Plans could be tailored to needs by allowing enrollees to receive
benefits in the form of services or cash.

Sixth, plan portability would be necessary for those who leave
Federal service. In today’s society, career mobility is not the excep-
tion, but the rule. If long-term care plans are to attract enough
workers, portability is essential.

Seventh, the number of long-term care plans offered should be
limited to ensure that enough individuals join a plan to build a sat-
isfactory risk pool. It is hard to convince potential employees to buy
an insurance product they cannot imagine ever needing. For in-
stance, I have an age advantage of most of you here, yet I have dif-
ficulty believing today that I might need long-term care even to-
morrow. And so perhaps not showing a level of wisdom my age
should guarantee, I have not bought a long-term care policy. I sup-
pose I cannot justify paying the premium costs for something I find
hard to realize I may ever need. If I am a hard sell, just think how
difficult it will be to persuade a 30-, 40- or 50-year-old Federal em-
ployee to buy long-term care insurance.

Besides these parameters, I must comment on the tax deductibil-
ity of long-term care. NARFE welcomed a mandate in the Health
Insurance Portability and Accountability Act to treat long-term
care insurance as a medical expense. However, the problem is that
taxpayers cannot deduct long-term care premiums unless they ex-
ceed 7.5 percent of adjusted gross income.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Jackson follows:]


140

Mr. Mica. Thank you Mr. Williams, Mr. Flynn, for your testi-
mony.

I have a couple of questions. I will start with Mr. Flynn. In your
testimony you indicated studies that are ongoing that are looking
at long-term care. I thought you said one study, is that it, that you
have a consultant started last fall. Is that OPM—and I guess there
is another study going on in conjunction with HHS. How long have
those studies been going on, and how long will they take?

Mr. FLYNN. Well, Mr. Chairman, I will defer to Mr. Williams on
the study that the Department of Health and Human Services has
contracted for, but last fall we engaged a benefit consultant to work
with us in terms of developing what we call a benefit vision; a view
of what Federal employee benefits in the context of total compensa-
tion ought to look like over the course of the next 5 to 10 years so
that we could be assured that we are offering a contemporary bene-
fits package that is competitive; that enables the Government to at-
tract and retain the employees that it needs to do the work of Gov-
ernment.

We have the first deliverable from that contractor. That came to
us in December. It is essentially a compendium of benefit practices
of other large private and non-Federal public employers in terms
of the types of programs they offer and in terms of the particular
delivery structures that they have. We are working with that. I ex-
pect that we will have vetted that within the Government later this
year.

Mr. Mica. Well, OK. We are vetting, and we have been vetting
since you said it came in January.

Mr. FLYNN. December.

Mr. Mica. When can we expect the termination of the vetting?

Mr. FLYNN. As I say, Mr. Chairman, I think we will have the re-
sults of that. And that——

Mr. Mica. June, July, August, September? How long is it going
to be vetted and digested?

Mr. FLYNN. I am afraid, Mr. Chairman, I can’t be more specific
than that.

Mr. Mica. Is there more coming out of your study, or is that it?

Mr. FLYNN. Is what it?

Mr. Mica. You said you had sort of the preliminary. Is there
more study being done, or is it completed? You are now studying
the study, vetting the study?

Mr. FLYNN. No, Mr. Chairman. What we are doing is we are
looking at what the practices of other employers are and how those
are delivered in terms of a benefits package. What really needs

Mr. Mica. You have been doing that since December?

Mr. FLYNN. Yes, sir.

Mr. Mica. Is there more? Is this consultant charged with going
out to get anything else? Is there more study to come in?

Mr. FLYNN. We will be asking the consultant to assist us with
exposing the results of this study to a broader audience. We expect
to have, as I say, sometime this year, some recommendations to
make with respect to further evolution of the total benefits package
available to Federal employees.


91

Tle 3
PERCENTAGE oF EupLovens OFrenina LONG-TERM CARE INSURANCE, BY REGION,

InousTay, anp Firm SIZE, 1993
Perortage et Enola Orig ‘OF Toae Net Onerig Lane Term are
Lane frm Care erence ts Parentage We:
hee Botactva Tal a
‘erwiopees —Ratians—emglyees Dectiednot Mgt ae
oy ty __sedrares_Corerage Coverage toctlar ive conrad
im TM mam TM ar.)
5 ° 2 6 3 a “
7 5 2 o ° ao .
2 3 a 7 ‘ 4
’ ° ® ” 5 ry “
v ° v 5 2 ’ =
* B v ° a *
2 7 cy ° » a
° ° 10 2 ° .
u u “ 1 1 ”
2 4 % 1 2 *
H wo * a ‘ oy
a B o a a ”
w a ® ‘ “
u ro 5 ° rv)
7 a n 1 %
“ 2 n 7 7 a“
w a » 2 TM “a
5 1s 5 w “ @
7 rg Ss B 2 a
“ w a 2 y a
w 2 a 2 ’ a
a ’ a n w u ”
Table
‘TYPICAL CovERAGE OFFERED BY 1995 LEADING SELLERS
‘Sarees Covered ers ae car 1 ot 1)
Home at care (1 to 11)
‘Aerator (oo of 11)
city (ot of 1)
Hessce car 00 out 2)
Respite cre 1 et of 1)
Doty Benet {40-525 0/ay rr ame
‘$40-4B.0ay Doma eat cre
Benet Egy Madlea mecssty ADL rcpt parent (1 ou ot)
Masou Banett Prod ‘nteiteatetine (ovo 12)
Deductle Prag 100 aos
Preexisting Contin month out of 11)
None closed daring ppation (ou of 11)
Renewabty Guarantee ext 11)
‘eines iense Coverage For ages 10-99
‘ge Ui frPorchasing Yes tf)
Waser of renions Yes outer)
Free Lok Prod days out ef)
Intation Proton of
‘Percent Compounded Yes (11 et of 1)
Necture Bente atm premio eco pal (1 ou 31)
Mactan Company or inapencent agents
Stree Heat Insurance Assocition of Anerca.
Not: Bren seers wre iene ws Raigad 80 percent fal inva nd group asocebon
longterm ae insurance ois in 195.

12



ll

ing that people Plan for their future by offering this important ben-
efit to their employees and their families.
Thank you Mr. Chairman. We look forward to working with you.
Mr. Mica. I thank you.
{The prepared statement of Mr. Martin follows:]


97

Mr. Mica. I will now recognize Mr. Charles Jackson, president
of the National Association of Retired Federal Employees.

Mr. Jackson. Thank you, Mr. Chairman. As president of
NARFE, I appreciate the opportunity to participate in today’s hear-
ing, and I commend your interest in the feasibility of making long-
term care insurance available as a Federal employment benefit.

Half of all women and a third of all men who are now 65 are
likely to spend some time in the latter years in a nursing home at
a cost in excess of $40,000 a year. Such statistics, and the age of
NARFE members gives us an understandable interest in long-term
care insurance.

In a survey of our members 8 years ago, only 12 percent said
that they would be able to afford nursing home expenses above
$30,000 per year. Although this survey is now dated, it remains a
fact that absent adequate income or insurance, individuals who
need long-term care are required to impoverish themselves to qual-
ify for Medicaid nursing home benefits. For individuals with
enough income, private long-term care insurance has been an alter-
nate to Medicaid. However, such insurance is very expensive and
offers limited coverage. This is especially true with respect to poli-
cies sold to individuals instead of groups, and as Consumer Reports
magazine wrote in October 1997, long-term care insurance is one
of the most complex types of insurance.

‘oday an increasing number of employers are offering group
term care insurance. In fact, half of the current Fortune 500 com-
panies make private long-term care insurance available to their
workers. The advantages of employer-sponsored long-term care in-
surance are obvious as any group insurance is usually less costly
than buying it as an individual, and company benefits specialists
can assist in cutting through the marketing hype and selecting a
reputable insurance carrier.

At a minimum this subcommittee should establish that the Fed-
eral Government can offer long-term care insurance with cheaper
premiums and better coverage than employees or annuitants could
buy on their own. Beyond this, there are several parameters that
must be built into any long-term care insurance program offered.

First, policies must be made available to Federal annuitants as
well as active employees. Underwriting costs and resulting pre-
miums for annuitants will be higher, but such policies could still
be attractive to annuitants if the premiums for a group are lower
than the individual policies on the private market, and if employ-
ees are to be asked to bear the full premium cost of long-term care
insurance, then annuitants should have the same option.

Second, the decision to select long-term care insurance should
not mean that employees or annuitants would be forced to forgo
other benefits. Since employees and annuitants are likely to pay
100 percent of the cost of long-term care insurance, there is no rea-
son why they should give up retirement, health or life insurance
benefits.

Third, the dollar amount of benefits payable under a new policy
must be sufficiently indexed for inflation. Without this protection,
the cash benefits purchased today by a 40-year-old would be sub-
stantially eroded when they are needed most.


102

First, policies must be made available to federal annuitants as well as active employees. We
realize that underwriting cost and resulting premiums for annuitants will be higher.
Nevertheless, such policies could still be attractive to annuitants if the premiums for a group are
lower than what is available to individuals on the private market. And, if employees are to be
asked to bear the full premium cost of long-term care insurance, then annuitants should have the

same option.

Second, the decision to select private long-term care insurance should not mean that federal
employees or annuitants would be forced to forgo other benefits. Since employees and
annuitants are likely to pay 100 percent of the cost of long-term care insurance, there is no
reason why they should give up retirement, health or life insurance benefits. I mention this
concern because of interest by some on Capitol Hill in creating a “cafeteria” benefit plan for

federal employees.

Third, the dollar amount of benefits payable under any policy made available must be
sufficiently indexed for inflation, Without this important protection factor, the cash benefits
provided in a policy purchased today by a 40-year old employee would be substantially eroded

years from now when they are needed most.


118

CONSUMER REPORTS: The insurance industry lobbied hard for these tax
incentives. ...the policy limitations dictated by law will save insurers money in
benefits that should have gone to policyholders in need of care.

HIAA RESPONSE: The implication the insurance industry lobbied for restrictions
for LTCI in the tax provisions of HIPAA to increase profitability is completely
false. It is true that the industry lobbied to get tax breaks for consumers.
However, the industry did NOT lobby for restrictions in HIPAA. Why would the
industry lobby for restrictions in a fledgling market where such restrictions could
impinge growth instead of stimulate growth in the LTC! market?

ISSUE: At what age should you purchase LTCI?
CONSUMER REPORTS: It makes little sense to buy LTCI before 55.

HIAA RESPONSE: No rationale is provided in the Consumer Reports article as
to why it makes little sense to purchase before age 55. On the other hand, it
makes a lot of sense for a lot of people. Premiums are much lower and people's
health are generally better at younger ages. Affordability is less of a problem
and the guarantee that a change in your health status later in life will not make
you ineligible for LTC coverage are compelling reasons to purchase a policy
before age 55.

ISSUE: How important is a company’s financial stability?

CONSUMER REPORTS: A company’s financial instability, does not necessarily
put policyholders at risk...... States maintain guaranty funds - which pay claims
from policyholders insured by failed companies. Those holding LTC policies can
look to the guaranty funds for help.

HIAA RESPONSE: The implication that state guaranty funds will cover all the
obligations of failed LTC insurers is inaccurate and probably one of, if not the
most, disturbing features of this article. The suggestion that relying on guaranty
funds instead of careful shopping and selection of a financially strong insurance
company is irresponsible advice.

ISSUE: Consumer Reports’ value index as the gauge for
premium stability

CONSUMER REPORTS: A better gauge (for whether premiums will go up) than
the actual premium is the value index in the ratings.

HIAA RESPONSE: There are many complexities in the pricing of each type of
LTCI policy. Unless all these pricing and actuarial assumptions from ail the


65

future long-term care insurance products to meet the needs of consumers.
However, it is essential that such studies not impede development and growth of
the market and that insurers continue to have access to and consider any
relevant medical information for insurance purposes. Like all insurance, long-
term care insurance will only remain affordable if adverse selection can be

minimized.

The federal government must also continue its important function of collecting
and organizing data through national surveys and share this information with the
public in a useful and timely manner. Financial support of such research and
demonstration efforts is fairly minimal when cqmpared to the tremendous

benefits they will reap over the long haul.

Summary and Conclusions

We all agree that solving the nation's long-term care problem is vitally important.
The flexibility and versatility that private long-term care insurance could offer
federal employees and their families make it the preferred approach to pre-
funding the catastrophic long-term care costs. In addition, private insurance also
provides maximum flexibility to present and future informal caregivers. Many of
us have experienced or will soon experience, either needing or providing long-
term care for our loved ones. Over time, HIAA fully believes that private long-
term care insurance will give millions of people an opportunity to be financially
independent throughout their retirement years. Recognition of the private long-

term care insurance market in this hearing is a solid step in this direction.

-19-


your policy will begin paying benefits on the 2ist day
‘The longer the elimination or deductible period, the
lower the premium.

You can lower your own costs for longterm cate cov-
erage, therefore, by buying a policy at an early age and
by selecting carefully both the level of benefits and the
<deducube period. In making your selecuon, bear in mind
that while 45 percent of cursing home says last vee
mons oF less. more than onetird las one year oF
longer, fs the costly longer say that may be the devas:
tating financial blow hat you may want wo insure agains

What do longterm care
insurance policies cover?
.

Most longterm care policies will pay henetts ether
when need is demonstrated by the inahibiy to pertom’
4 specific number of personul functions ut acthities of
dhiliy living such 8 bathing. dressing. o¢ eating. or
‘when care is needed due 10 cognitive anpurment, oF
when care is medically necessie al prescribe he
the patients physician, New policies no longer reqaine
a hospital say before puny nussing homie bens

Tex’ policies cover shill, imtemrelite and! cushy
dll care Sate dicensed nursing homes Longtenm wae
odices usally she cover home cane senwes such
stalled or nonskiled nursing care physical theraps
homemakers and hime heh des pr gl I ste
Jicermedt und or Medieareeritied home heii agen:
ies. Newer policies no langer require a venain period
(of nursing home care below covery home hush care
senices

Many policies also cover adult daveare and other «ite
in the Conimunity, alternate Gre, and respite ear’ fot
the caregiver

Alernite care retery to non-conventional care and
semices developed by 4 physician that can serve ats
an alternative 10 more cowly nursing home care

TW

Benefits may be available or special medical care and
‘weatments, diferent sites of care, or medically neces
Sary modifications to the insured's home, lke building
ramps for wheelchairs oF moxifications toa kitchen or
bathroom. A health care professional develops the
alternate plan of care. uhe insured or insurer may init
_ate the plan, andthe insurer approves it Its important
{0 nofe thatthe benefit amount will reduce the maxt-
‘ium or ifetime benefit avaiable for later confinement
ina fongrterm care facilty and that most policies int
the expenses covered under this benefit (ie. 60 per
cent ofthe itime maximum tii)

Alzheimers dnease and other organic cognitive dis
rbvlues,Teading causes for nursing home admissions
fund 4 leading cae ot wom for many” older
Americans! re generally covered_under longterm
cote ponies

What is not covered?
’

Ali pabeies. contain limitations and exclusions
Cthenvive premiums would become unafforable, Bul
the specific lnutacions and exclusions ae bkely «0 >
fax from pokey © policy

Consnter
Preexisting conditions

Insurance Compames may require that penod of time
piss hetore the policy pars for care related ty 9 health
problem vou hcl when vow became insured. Such
heath problems are called preexisting condivons
Some companies exclude coverige of preexisting con:
{ions for ix months Hf vou need lang tem care wh.
in iy munis of the policy's issue date for 4 condition
for which treatment sas ether underei o¢ had bee
recommended belore you took the policy. yow may be
denied benefits

Specific exclusions

Before you buy, by sure you understand exactly what
Is.and 1s nox covered under 4 panicular policy. Some
mesial and nervous disorders are ofa not covered


16

care insurance as an essential part of retirement planning. They are concerned that rapid
increases in long-term care expenditures projected for the 21st century could have serious
implications for their workers’ retirement security. An unanticipated nursing home stay
(projected to cost $97,000 per year in 2030) could deplete hard-earned savings and

threaten a family’s financial protection.

Employees and retirees are also increasingly requesting this type of insurance. Part
of this interest stems from their experiences in providing care to aging parents. A recent
survey by the National Alliance for Caregiving and AARP found that there are 22 million
‘American households with at least one member providing some unpaid assistance to a
spouse, relative, or other person over age 50. Most firms offer long-term care insurance
not only to employees but also to their parents and parents-in-law. Knowing that their
parents have this protection can be particularly important for middle-age employees,
many of whom must juggle caregiving with the demands of management or other senior-
level positions. Employers also benefit, since caregiving often reduces worker

productivity through absemieeism, workday interruptions, and the loss of skilled

employees who quit due to elder care responsi s. A study by MetLife estimates that

family caregiving costs U.S. business over $11 billion per year in lost productivity.

For the majority of employers, long-term care insurance is an employee-pay-all
benefit. This means that the employer pays for administrative costs, Since employees
pay the premiums, some policymakers are concerned that private insurance may be

unaffordable for most federal workers. In reality, the cost of a long-term care policy is


160
Mr. Mica. There being no further business to come before the
Subcommittee on the Civil Service, this meeting is adjourned.

Thank you.
(Whereupon, at 11:35 a.m., the subcommittee was adjourned.]

(e)

ISBN 0-16-057300-9

| 0000

9"780160"573002


99

Charles R. Jackson, President
National Association of Retired Federal Employees

Charles R. Jackson was elected President of the National Association of Retired Federal
Employees (NARFE) at the Association's 1994 National Convention in St. Louis, Missouri, and
re-elected in Houston, Texas in September 1996 for another two year term.

A native of Fairfield, a small town in southern Illinois, Jackson's early life work experience
included the Illinois State Police and 5 years of military service. During his military service he
served with an anti-tank company and spent four years with military intelligence.

Prior to employment with the United States Postal Service, he spent eighteen months with the
United Nations Relief Agency, under the famed Mayor LaGuardia of New York City. His 23
years of service with the Post Office Department included 14 years as Training Director for
‘Arkansas, Iowa and Missouri. Following his retirement from the government, he and his wife,
Clara, remained in St. Louis where he spent several years in hotel and property management
before retiring a second time

A member of NARFE since 1973, Charles Jackson served in almost all positions of his local
chapter and state federation, including chapter President, State Legislative Chairman and
President of the Missouri Federation of NARFE Chapters, He also served four years as Field
Vice President of NARFE's Region V, which includes lowa, Kansas, Minnesota, Missouri,
‘Nebraska, North Dakota, and South Dakota. In this position, he served as a member of NARFE's
Executive Board, becoming Chairman of the Board upon his election as National President in
1994,

‘HALSALL
Disclaimer
NARFE does not now, nor has it ever, received federal grants, contracts or subcontracts.


21

Offering private long-term care insurance as a core government benefit needs to be
coupled with an educational program to increase awareness among federal employees and
their families about the importance of planning ahead for long-term care. Currently,
many Americans underestimate the risk of becoming disabled and also have
misconceptions about who will pay for long-term care. Wo-kers need accurate and
credible information about the limitations of government programs in paying for long-

term care services, and the potential risk of needing long-term care services.

In conclusion, protection and coverage for long-term care is critical to the economic
security and peace of mind of all American families. However, planning for the future is
a formidable task for anyone. It requires early and thoughtful preparation. Long-term
care insurance is an important part of the solution for tomorrow's uncertain future. As
‘Americans approach the 21st century—living longer than ever before—their lives can be
made more secure knowing that long-term care insurance can provide choices, help
assure quality care, and protect their hard-earned savings and assets when they need
assistance in the future. The federal government can take a leading role in ensuring that
people plan for their future by offering this important benefit to its employees and their
families.

Thank you Mr. Chairman, and again, we look forward to working with you. I will

happy to answer any questions that the Committee may have at this time.


50

3. Improve the government's ability to target assistance to those most in need.
The government must take full responsibility for providing care to those
without the resources to do so.

4. Stimulate the private insurance market through enhancement of the tax
status of long-term care insurance and offering of long-term care insurance to
ail federal government employees.

5. Support research and demonstrations related to the need for long-term care
services and private and public sector partnerships in paying for long-term
care.

This hearing is a very positive first step in accomplishing these objectives. The

public and private sectors must take the time to make the necessary investment

now in designing a financing arrangement that our elderly can live with today, our
future retirees can live with tomorrow and our children can depend on in the next
generation. Long-term care is an especially critical issue the entire nation’s
population faces. We commend the Subcommittee for bringing this issue to the
forefront and recognizing the important role that the private long-term care

insurance market can play in solving our nation’s long-term care dilemma.

Nature of the Problem

When we speak of “long-term care,” we are describing a wide range of health
and personal care services provided to individuals who have lost some or all
capacity to function independently due to a chronic illness or condition and who
are expected to require these services for an extended period of time. About 70
percent of the non-institutionalized elderly with long-term care needs receive all
their help from family members and friends. However, 30 percent receive
additional paid home care services and about 40 percent of all elderly will spend

some time in a nursing home.


95

EDUCATION AND
RESEARCH FUND

Paul Fronstin, Ph.D.
Employee Benefit Research Lostitute

Paul Fronstin is an economist with the Employee Benefit Research Institute, a nonprofit,
nonpartisan organization committed to original public policy research and education on
economic security and employee benefits. Dr. Fronstin's research interests include tends in
health insurance coverage and the uninsured, the effectiveness of managed care, retiree health
benefits, retirement transitions, employee benefits and taxation, the role of nonprofit
organizations in providing employee benefits, and children's health insurance coverage. His most
recent publications include a chapter in Driving Down Health Care Costs: Strategies and
Solutions, 1996 on health care cost management strategies, and articles in Inquiry and Social
Science Quarterly, both explaining trends in health insurance coverage.

In 1995, Dr. Fronstin testified twice before the U.S. House of Representatives’ Ways and Means
‘Committee, Subcommittee on Health, to discuss health insurance portability and how employers
have responded to rising health care costs.

Dr. Fronstin has appeared before many groups to share his expertise on employee benefits. He
has spoken before the National Education Association, the Healthcare Leadership Council, the
Harvard School of Public Health, the Southern Economic Association, the American Economic
Association, the Population Association of America, the Association for Behavior Analysis, the
Gerontological Society of America, and the Dade County Economic Forum. He has also made
‘numerous presentations for congressional staff and the media.

Dr. Fronstin has been quoted in numerous newspapers, including the New York Times, the Wall
Street Journal, the Washington Post, the Miami Herald, and the Philadelphia Inquirer. In
addition, he has appeared on CNBC, C-Span, Money Watch, and America's Talking and has
been repeatedly interviewed on National Public Radio.

Dr. Fronstin eamed his bachelor of science degree from SUNY Binghamton and his Ph.D. from
the University of Miami:

Suite 600
"21 K Street, NW
ashington, DC

20037-1896

202-659-0670
Fax 202.775.6312

Web Site huip://ewwebetorg
sonic) as e301


33

Figure 9

Impact on Out-of-Pocket Expenditures
(inflation - Adjusted)

Current
$200 Trends
—_ 3
s1s0
Increased
100 LTC Ins, $95
$80
so
2000 2030

Source: ACLI Policy Research Dept

Keys to Realizing the Potential of Private Long-Term Care Insurance

Private insurance currently pays for only a small portion of the nation’s long-term care
expenditures. This in part reflects a small, but growing market for long-term care insurance.
Over 4.3 million policies had been sold as of 1995."° Payments by private insurance for long-
term care are also limited by the fact that many who have purchased a policy have not yet begun
to utilize long-term care services.

About 6 percent of elderly people and a very small number of baby boomers have purchased
long-term care insurance. Part of the reason for limited sales among baby boomers may stem
from the fact there is still widespread denial about the risk of needing long-term care. Having
largely invented youth culture during the 1960's, many of the baby boomers are still concerned
with sustaining their youth and vitality. In addition, a large proportion of Americans continue to
have numerous misconceptions about long-term care.

(American Council of Life Insurance M


133

old $1,124 a year to buy a comprehensive policy, paying $100 a day
for nursing home care, $50 per day for home care, with nonforfeit-
ure and inflation protection. An identical policy purchased at age
65 costs $2,560, over twice as much. Eighty percent of the policies
sold to date have been to persons 65 years or older.

We believe that employer-sponsored group insurance is the best
vehicle for making high-quality coverage more affordable. It en-
courages people to enroll at younger ages. It is also typically 15
percent cheaper than individual policies since selling costs are
lower. There may be other advantages. While disability increases
with age, it happens to much younger people, too. Group insurance
may be offered to employees without underwriting requirements,
while individual buyers usually must first be screened by a doctor.
Individual buyers may also find it hard to evaluate competing
plans. Employees know that an employer-sponsored product has
been vetted by professional benefits specialists. Finally, employer-
sponsored insurance can often be paid through payroll deductions.
This makes it fairly easy to plan ahead to protect against a future
risk. A 1997 survey by the National Council on Aging and the John
Hancock Co. found that respondents said they would be more likely
to buy long-term care insurance if an employer-sponsored group
plan were available.

HHS has contracted with Lewin to survey the employer group
long-term care insurance market. Since some products seem more
successful than others in terms of employee participation, a main
purpose of the study is to understand best practices. This research
will also assist in any pricing and design matters relating to a Fed-
eral employee offering. We have asked OPM to collaborate with us
on this study so that they can learn from the experience of the pri-
vate group market.

The Department also has another long-term care study with
LifePlans to examine the actual experience of long-term care insur-
ance claimants. The study is still in the field; however, early infor-
mation suggests that home care and nursing home claimants and
their informal caregivers are satisfied with their insurance bene-
fits. Final results will be available in the fall.

The Department has developed an excellent working partnership
with our colleagues at OPM. Within the administration, OPM is re-
sponsible for Federal employee benefits. Together we are generat-
ing information that will help inform Congress and the administra-
tion about the feasibility and desirability of providing the Federal
work force with a voluntary long-term care benefit. The Federal
health program is widely recognized as a model for other employ-
ers. We are hopeful that if it proves feasible, the Federal Govern-
ment can play a similar leadership role with respect to private
long-term care insurance.

The Department also has a broader interest in the role of private
long-term care products. If affordable high-quality insurance prod-
ucts become more widely available, we can expect a larger share
of 21st century Americans to be better able to purchase the care


7

tied to the age of purchase. Our study found that close to two-thirds (62 percent) of
individuals over age 35, and over 80 percent of individuals ages 45 to 49 could afford a
high quality policy that covers both nursing home and community-based services. This is
because private long-term care insurance is less expensive when purchased during one’s
working years. For example, compared to a 65 year old, premiums are more than 50

percent lower for a 55 year old purchaser, and 70 percent lower for a 45 year old.

The private long-term care insurance market

While the market for private long-term care insurance is relatively small, it is
growing. Over 4.3 million policies had been sold as of 1995. A total of 125 companies
sell long-term care policies, though 12 companies account for about 80 percent of all
individual and group association policies sold. More than half of the companies have
been in the market for at least seven years and have actively participated in the

development of this innovative product.

The majority of policies have been sold to individuals or through a group
association (such as AARP). Employer-sponsored long-term care insurance is a
relatively new product. In 1995, this product was sold by about 18 percent of insurance
companies and represented about 12 percent of the total policies purchased. The sale of
employer-sponsored policies continues to grow. Within the last ten years, the employer-

sponsored long-term care insurance market grew at an average annual rate of 60 percent.

Long-term care has long been associated with care of the elderly in a nursing home.

However, it is much more than that. People of all ages may require long-term care as a


61

insurance. Nevertheless, HIPAA is not a panacea and will not, by itself, achieve
the optimum public-private partnership for long-term care financing. HIAA.
believes that several factors could hasten the development of private long-term
care insurance and strengthen its ability to respond to the baby boomer's

demand and need for long-term care protection.

Educating the Public is Essential -- The need for better consumer education is
the responsibility of both the private and public sectors. It is virtually impossible
to sell a product to someone who already believes they have it or they will never
need it. However, this is where we often find ourselves with long-term care
insurance. Education should begin early, sc sat working age people understand
their risks for long-term care and can pian for their potential long-term care

needs while they have the income to do so.

Over the last several years, the insurance industry has made an extensive effort
to inform the public about long-term care and its potential costs. Since 1987,
when the HIAA long-term care consumer guide was first published, over two
million copies have been distributed. (A copy of the most recent HIAA Guide to
Long-Term Care Insurance is attached.) It is clear the public wants information
‘on this subject. HIAA remains willing to work with all levels of government to

further similar consumer communication and education efforts.

Public Expenditures Should be Targeted — HIAA also recognizes that the
private sector alone cannot realistically meet society's entire need. There will
always be a significant need for public sector involvement. For those unable to
finance their own long-term care services, a “safety net” program of public
assistance must continue to be provided. This is true especially for the current

-15-


130

GROUP FOR THE DEPARTMENT. THE PROJECT INVOLVES THREE PHASES. PHASE
I WILL ASK EMPLOYERS WHOSE LONG TERM CARE PROGRAMS REFLECT
BENEFIT INNOVATION OR HIGH TAKE-UP RATES AMONG ELIGIBLE
PARTICIPANTS TO COMPLETE A SURVEY ABOUT FACTORS WHICH
CONTRIBUTED TO THE EMPLOYER'S DECISION TO OFFER GROUP LONG TERM
CARE COVERAGE, PARTICIPATION AND BENEFIT FEATURES OF THEIR LONG
TERM CARE PROGRAM, AND ITS RELATIONSHIP TO OTHER EMPLOYEE BENEFITS.
PHASE II WILL CONSIST OF AN ACTUARIAL ANALYSIS TO IDENTIFY AND.
ANALYZE BEST PRACTICES, AND TO PRICE OUT ALTERNATIVE BENEFIT
DESIGNS. THE THIRD PHASE IS AN EDUCATIONAL EFFORT ON LONG TERM CARE
ISSUES. WE UNDERSTAND A PRELIMINARY ANALYSIS OF THE SURVEY DATA
WILL BE READY IN FEBRUARY 1999 AND THE PROJECT WILL BE COMPLETED

LATER THAT SUMMER..

FINALLY, YOU ASKED ME TO COMMENT ON THE MERITS OF SELF-INSURED
LONG TERM CARE INSURANCE. THE EVIDENCE CLEARLY DEMONSTRATES
SIGNIFICANT EVOLUTION IN THIS INSURANCE PRODUCT, AND STATE
REGULATION OF IT SINCE 1987. GIVEN ITS EVOLUTION, COMPETITION AMONG
QUALIFIED PRIVATE INSURERS SEEMS A REASONABLE APPROACH.
GOVERNMENT SPONSORSHIP OF AN LONG TERM CARE INSURANCE PROGRAM
FOR THE FEDERAL WORKFORCE COULD PROVIDE LEVERAGE FOR PREMIUM

DISCOUNTS AND POLICY ENHANCEMENTS.



Hab imran Svein of Arne

November 4, 1997

Bill Gradison
President

Letters to the Editor
Consumer Reports

101 Truman Avenue
‘Yonkers, New York 10703

To the Editor:
‘Your story on long-term care (LTC) insurance, “How will you pay for your old age?” (October

1997) provides valuable information for consumers thinking about buying such protection, But the
article contains several inaccuracies that must be addressed.

For a magazine dedicated to providing its readers with complete, objective anlaysis, Consumer
Reports displays a disturbing bias against tax-qualified LTC insurance policies, and it appears
compelled to dissuade readers from considering such policies by omitting information critical to any
purchase decision.

First, the article fails to mention how its recommendation not to purchase tax-qualified LTC
insurance policies potentially could have negative effects on consumers. People who purchase non-tax
‘qualified LTC policies face the possibility of having their benefits taxed as income. There is no such
tisk with tax-qualified plans.

Second, the assertion that, because such policies lack a medical necessity trigger, tax-qualified
LTC policies are more restrictive than non-qualified plans is a careless generalization with no basis in
fact. The absence of a medical necessity trigger does not indicate a more restrictive policy. Tax-
‘qualified LTC insurance policies pay benefits based on more objective and appropriate measures of the
need for LTC, such as the inability to perform activities of daily living and cognitive impairment.

Third, it is irresponsible to tell consumers that they can disregard an insurance company’s
financial stability because state guarantee funds will pay claims for policy-holders insured by failed
‘companies. There are no guarantees that such funds will cover all of the obligations of failed LTC
insurers. To suggest that consumers can rely on a government check, and therefore forego careful

shopping to select the most financially sound company, seems to undermine the very mission of your
publication.
Sincerely,
B. headin
Bill Gradison
President

ess/BG

955 13th Street, NW Suite 600 East, Washington, DC 20004-1109 202-824-1623 Vax 202-824-1719


116

bought LTCI for many reasons, not only to protect their assets. When
respondents were asked to choose the single most important reason behind their
purchase decision, the reason cited most frequently was to avoid having to
depend on others and to preserve independence. Protection of assets and
standard of living was the next most cited response. In addition, fully 25 percent
of the respondents cited “other reasons" as the single most important reason for
purchase. These numbers clearly show that there is diversity in the LTC]
purchase motivation. To limit the reason for purchasing LTC! to protection of
assets only, understates and disregards people's real motives for purchasing
LTCi,

ISSUE: How important is the inflation protection feature for
LTCI policies?

CONSUMER REPORTS: You must add inflation protection to your LTCI. Buy
only a policy with 5 percent compounded inflation protection. Anything less may
leave you short, and you could end up on Medicaid anyway.

HIAA RESPONSE: HIAA agrees that inflation protection is an important feature
in LTCI policies, and that every potential purchaser must consider this feature.
However, the benefit may not be for everyone. Consumers should always be
given the option to purchase inflation protection, and depending on several
factors, like the insured’s age, priorities and financial status, the choice of
purchasing inflation protection and the type of protection to purchase ultimately
becomes the purchaser's decision.

For example, it may be a wise decision for a 50-year old to purchase a 5%
compounded inflation protection. However, a 79-year old purchaser may want to
trade-off the premium for 5% compounded inflation protection for a lower cost
5% simple inflation protection, a higher daily benefit, a shorter deductible period
or a longer benefit duration period. Assuming that such benefits are less
important for certain purchasers and pre-empting that person's ability to decide
which is more valuable to him, undercuts his choice and undermines his ability to
decide which benefits are most suitable for him. Finally, Consumer Reports has
failed to point out that a benefit amount purchased today, even if it may not fully
cover costs in the future, is still some protection that would help offset future
costs. Some protection is better than no protection.

ISSUE: How important is the medical necessity trigger?

CONSUMER REPORTS: Beware of (tax-qualified) LTC! policies that do not
contain a medical necessity trigger.


4

penses. At a cost of between $40,000 and $50,000 a year, long-term
care expenses can quickly drain families’ resources. Unfortunately,
many people make the incorrect assumption that Medicare covers
long-term care expenses. Long-term care insurance would go a long
way toward helping those facing an already difficult transition.

‘oday, we will consider the possible outcomes of offering long-
term care insurance as a potential benefit for Federal employees.
I look forward to working with my colleagues to make this idea a
reality. I have heard from many constituents, and I know they are
very enthusiastic about this idea.

Tam very interested in hearing from today’s witnesses. The De-

tment of Health and Human Services has been working with
OpM to examine employer group long-term insurance. I believe the
Federal Government should lead the way in offering long-term in-
surance through the workplace, and I look forward to working on
this issue.

I thank you, Mr. Chairman.

Mr. Mica. I now yield to the gentlewoman from the District of
Columbia, Ms. Norton.

Ms. NorTON. Thank you Mr. Chairman. I particularly appreciate
your initiative in calling this hearing. I regard it as a kind of con-
sciousness-raising hearing, a wake-up call. The average employee,
I think certainly the average Federal employee, understands the
importance of having ordinary health insurance, but I do not think
that is the case for most Federal employees or most Americans
when it comes to long-term care. Counted among the reasons may
be that most people don’t want to face the fact that they might
need long-term care, and in case one is inclined to face that fact,
there is the cost of long-term care, which makes it easy to want to
avoid facing that fact. Therefore, I think it is up to this committee
and to Congress to raise this issue, particularly given the statistics
on long-term care that we already have and that we know confront
us with the baby boom generation. :

The FEHBP is seen as a state-of-the-art health program based
largely on costs and choice. FEHBP is ahead of most health insur-
ance programs and remains a model for many. It may still be the
more likely model for national health insurance than any other
that has been put forward. National health insurance is simply
going to have to come.

Part of the 15 percent increase we see now is because we don’t
have in place a national system that both contains costs and makes
health care available to Americans. It is one of the great shames
of America, as it crosses the millennia. FEHBP offers a way to
begin to address that problem, particularly for working Americans
who do not have health insurance. FEHBP itself, however, will not
remain a state-of-the-art health care system unless we find the wa’
to make an affordable option for long-term care available to Fed.
eral employees. I, therefore, very much appreciate your initiative in
calling this hearing this morning.

Thank you, Mr. Chairman.
ws Mica. The Chair recognizes the gentleman from New Jersey,

r. Pappas.

Mr. Pappas. Thank you Mr. Chairman. I commend you for calling
this hearing. The issue of long-term care and the option that—addi-


93

Tables
MEDIAN Daity NuasinG HOME CHARGES, 1991 ano 1993

sate IneemesateCare —Shiled Core ——ntermeateCwe———Shieg Care
ol 193

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North Caraioa 5 os 5 0
orth Date % » a 2
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Peensyan 0 7 6 10
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South Oak 6 6 n
Teoescee 58 a m0 105
Teas 7 7% sa 7
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Seurce NA Narig Home Cost Sree
ata wot araiabe.



38

Consequently, the earlier policies are purchased the lower the premiums. Generally,
premiums are much lower when purchased before age 65. For example, premiums are 70 percent
lower for a 45 year old as compared to a 65 year old ($702 per year at age 45 for a five-year
policy with inflation protection). Similarly, premiums are 54 percent lower for a 55 year old as
compared to a 65 year old ($1,068 per year at age 45 for a five year policy with inflation
protection).

Figure 11
Long-Term Care Insurance
Average Annual Premiums
By Age
Ages 2 Year Policy* 5 Year Policy*
35 to 39 $358 ‘$507
AD to 44 $403 3605
4510 49° ‘$500 $734
50 to 54 ‘$645 ‘$905
551059 $892 $1,204
60 t0 64 ‘$1,265 $1,709
65 to 69 $1,849 $2,432
101074 $2,638 $3,610
75+ $3,851 $5,274
Policies include: coverage for $100/50 per day for nursing home/hore care, 90 day
climination period, and 5% compounded inflation protection.
‘Source: American Council of Life Insurance

Purchasing at an earlier age has other benefits. Since this product involves medical
underwriting, those who purchase insurance at an early age are more likely to qualify for
coverage. In addition, lower premiums also increase the likelihood that baby boomers will be
able to purchase policies with very comprehensive benefits. A 1994 survey by the Health
Insurance Association of America found that purchasers age 55-64 had policies with more
coverage (almost 7 years) than older purchasers (about 5 years for those age 65 to 74 and 4 years
for those age 75+). Younger purchasers were also far more likely to choose inflation protection.
(61 percent) as a policy feature in contrast to older purchasers (38 percent of those 65-69, 27
percent of those 70-74).

‘©American Council of Life Insurance 16


158

..dleseribe the public policy benefits of having more people purchase private long-term care
insurance.

There are two main sources of funding for long-term care: out-of-pocket payments by the
elderly themselves and Medicaid. Medicaid financing is, of course, only available to the poor,
including those who have "spent-down" by exhausting their ability to pay privately for medical
or long-term care. Long-term care insurance, if properly structured, gives families an option
to protect their savings and decrease the potential that they would become impoverished.
Experts (e.g. Joshua Wiener of the Urban Institute, Lisa Alecxih of Lewin, and Marc Cohen
of Lifeplans) agree that widespread availability of employer-sponsored long-term care
insurance would be more likely to result in significant market penetration - hence greater
savings from avoidance of Medicaid spend-down ~- than if the private long-term care market
continues to be based on sales of individual policies as is currently the case. . Estimates of
Medicaid savings that could result are contingent on highly speculative assumptions about the
level of market penetration that might be achieved over the next twenty years. Under
pessimistic assumptions, Medicaid savings would be minor; under optimistic assumptions
Medicaid savings could be significant.

Informal family care is also an option for individuals with long term care needs, but one that
will increasingly come under pressure as a majority of middle-aged women -- who have
traditionally been the primary cate givers for widowed parents and parents-in-law -- are
employed outside the home, as the population ages, and as family structures change. A
nationally representative survey of female primary caregivers of the elderly found that
employed primary caregivers could personally contribute, at most, half that amount of
assistance ~ and still remain employed. For employed caregivers to provide personally 35 or
so hours of informal assistance to a severely disabled elderly relative in addition to holding
down a full or even a part-time paid job is clearly a very burdensome time commitment. Long
term care insurance would allow this caregiver coverage to be supplemented or replaced.

«why does the Department believe that employer-sponsored group insurance is a good
product for addressing long-term care needs?

Employer-sponsored group insurance may make coverage more affordable if it encourages
individuals to enroll at younger ages. Also due to economies of scale and savings on the
delivery method (for example, premiums can often be paid via payroll deductions), group
policies are typically 15 percent cheaper than identical policies sold individually. Moreover,
group insurance may be offered to active employees on a guarantee issue basis (that is to say,
without underwriting). People also may be more favorably inclined to purchase coverage if an
employer sponsored group plan were available, in part due to the lower price and in part due
to the employer “blessing” of the product. However, to the extent that employer-sponsored
Iong-term care insurance is purchased at earlier ages ~ long before the need to access benefits
~ these policies are vulnerable to erosion of benefits by inflation and to take this into account
in the design of an offering.


125

LONG TERM CARE ITSELF CAN BE EXPENSIVE , DEPENDING ON THE AMOUNT OF
CARE NEEDED AND THE SETTING. MEDICARE, MEDIGAP INSURANCE , AND
MAJOR MEDICAL HEALTH INSURANCE GENERALLY PROVIDE EXTREMELY
LIMITED COVERAGE OR NONE AT ALL. MEDICAID PROGRAMS COVER NURSING
HOME CARE AND SOME COMMUNITY-BASED SERVICES FOR PERSONS WHO MEET
POVERTY GUIDELINES FOR INCOME AND ASSETS. NONETHELESS, BY ONE
ESTIMATE, NEARLY 2 MILLION WORKING ADULTS ARE PROVIDING SIGNIFICANT
LEVELS OF UNPAID CARE TO ELDERLY RELATIVES. THE STRAIN ON EMPLOYEES
WHO PROVIDE THIS CARE, [IN ADDITION TO OTHER HOME AND FAMILY
RESPONSIBILITIES, AFFECTS THE WORKPLACE IN A VARIETY OF WAYS AND.
ADDS A FURTHER DIMENSION TO THE COST OF LONG TERM CARE THAT AN

EMPLOYER SHOULD NOT IGNORE.

INSURANCE TO COVER LONG TERM CARE EXPENSES HAS BEEN AVAILABLE
SINCE THE 1980's AND WE HAVE OBSERVED ITS EVOLUTION AS AN EMPLOYEE
BENEFIT. THE EARLY PRODUCTS WERE INDIVIDUAL POLICIES AND INCLUDED A
NUMBER OF BENEFIT LIMITATIONS, AND LACKED MANY CONSUMER
PROTECTIONS OFFERED TODAY, SUCH AS INFLATION ADJUSTMENTS AND
NONFORFEITURE PROVISIONS. IN JUNE 1986, OPM TESTIFIED AT A JOINT
HEARING CONVENED BY TWO SUBCOMMITTEES OF THE HOUSE COMMITTEE ON
POST OFFICE AND CIVIL SERVICE ABOUT LONG TERM CARE INSURANCE FOR
FEDERAL EMPLOYEES. WE CONCLUDED THAT THE KEYS TO DEVELOPING THIS

2


100

Mr. Chairman, I am Charles R. Jackson, President of the National Association of Retired Federal
Employees (NARFE). 1 appreciate the opportunity to participate in today’s hearing, and 1
commend your interest in the feasibility of making long-term care insurance available as a

federal employment benefit,

Half of all women and a third of all men who are now 65 are likely to spend some time in their
later years in a nursing home at a cost in excess of $40,000 year. Such statistics, and the age of
NARFE members give our organization an understandable interest in long term care insurance.
Ina survey of NARFE members eight years ago, only 12 percent said they would be able to
afford nursing home expenses above $30,000 per year. Although this survey is now dated, it
remains a fact that absent adequate income or insurance, individuals who need long term care are
required to impoverish themselves to qualify for Medicaid nursing home benefits. It is a gut
wrenching experience to watch a disabled person consume their hard-earned life savings after a

year or two in a nursing home.

For individuals with enough income, private long-term care insurance has been an alternative to
Medicaid. However, such insurance is very expensive and offers limited coverage. This is
especially true with respect to policies sold to individuals instead of groups. And as Consumer
Reports magazine wrote in October 1997, “long term care insurance is one of the most complex
types of insurance sold by an industry not known for the straightforwardness of its products or

the veracity of its marketing,”


41

If the government is serious about encouraging people to purchase private insurance then it
has got to do more. There continues to be a great need to educate the public about the risks of
needing long-term care. In addition, people have to understand the limitations of Medicaid and
Medicare programs for long-term care. As part of this educational effort, there is a need to
encourage purchase at younger ages when premiums are less expensive. Finally, expansion of
tax incentives for long-term care insurance premiums could promote greater affordability
especially among older individuals and those with modest incomes.

Finally, while this study focused primarily on the role of long-term care insurance in
offsetting future nursing home costs, it is important to note, that we also believe that private
long-term care insurance can change much of the bias towards institutional care in the current
system and thus the very nature of the how long-term care services are delivered in the next
century. Baby boomers will demand more services and different options than presently exist in
long-term institutional and home care.

(CAsmerican Council of Life insurance 19