For Release on Delivery

Expected at 10:30 a.m.

Thursday, September 13, 2000

GAO/T-HEHS-00-196

LONG-TERM CARE

INSURANCE

Better Information Critical

to Prospective Purchasers

Statement of William J. Scanlon, Director

Health Financing and Public Health Issues

Health, Education, and Human Services Division

Testimony

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

United States General Accounting Office

GAO
Page 1 GAO/T-HEHS-00-196

Mr. Chairman and Members of the Committee:

I am pleased to be here today as you discuss the challenges the baby boom

generation and society face in planning for and financing its future longterm care needs, and the role that private long-term care insurance may

play in meeting those challenges. Long-term care includes an array of

health, personal care, and social and supportive services provided in a

range of settings including nursing homes, assisted living facilities, and

people’s own homes. While much care is provided by family members,

paying for purchased services presents a significant financial burden for

many individuals and for public health care programs. Of the nation’s

approximately 35 million elderly people aged 65 and older, an estimated

5.2 million—or over one-seventh—have some form of long-term physical

or mental disability for which they require assistance, such as help with

bathing, dressing, eating, preparing meals, or taking medicines. For those

needing nursing home or other extensive continuous care, the costs can be

substantial. On average, nursing home care currently costs $55,000

annually, with many nursing home residents paying much of that out of

their own pockets.

Long-term care financing will be an increasing concern as the 76 million

baby boomers age and begin, in just over a decade, to turn 65 and become

Medicare eligible. Over the next 30 years, the number of elderly individuals

is expected to double as the baby boom generation enters its senior years.

Similar growth is expected for the number of individuals needing longterm care. With baby boomers living longer and greater numbers reaching

age 85 and older, this generation is expected to have a dramatic effect on

the number of people needing long-term care services and will challenge

these individuals, their families, and public programs to finance and

furnish that care.

My remarks today focus on (1) the increased demand the baby boom

generation will likely create for long-term care, (2) an overview of current

spending for long-term care of the elderly, including recent changes in

Medicaid and Medicare financing of long-term care, and (3) the potential

role of private long-term care insurance in helping finance this care,

including who buys this insurance, its affordability, and the critical need

for consumer information and protections. My comments are based on our

previous work and other published and ongoing research. A list of related

GAO products follows my statement.

In summary, estimates of the magnitude of the baby boomers’ future longterm care needs vary, with estimates of the number of disabled elderly

when the baby boom generation becomes elderly ranging from 2 to 4 times

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the current number. Estimates of cost are even more imprecise due to the

uncertain effect of several important factors, including how many will be

needing care, the types of care they will need, and the availability of public

and private sources to pay for that care. Nonetheless, the confluence of

the aging baby boom generation, longer life expectancies, and evolving

options for providing and financing long-term care services will require

substantial public and private investment in long-term care and the

development of sufficient capacity to serve the growing number of

disabled elderly.

Spending for long-term care for the elderly, including post-acute and

chronic care in nursing homes and home care, is an estimated $123 billion

this year. Medicaid and Medicare will pay for nearly 60 percent of these

services, contributing $43 billion and $29 billion respectively. Medicaid

funds go primarily to nursing homes and other institutional settings of

long-term care, but home and community-based services represent a

growing share of Medicaid spending and recipients. Medicare primarily

covers acute care services, and thus plays a lesser role in financing nursing

home care—by paying only for short-term stays following a

hospitalization—but has grown to play a significant role in covering longterm care through its home health benefit. Recent federal legislative

changes in response to rapid and inexplicable growth in spending for longterm care services in Medicare have already resulted in a reduction in

home health spending, but it remains uncertain how much Medicare will

be spending for long-term care services in the future. In part, this is

because the new Medicare prospective payment system provides

incentives to control home health services, but it also is based on an

increased number of visits per user than currently provided, thereby

making funding available for a large expansion of home health services.

Public programs pay for the majority of long-term care expenditures, but

out-of-pocket costs paid by individuals and their families are substantial,

representing 30 percent of total long-term care expenditures ($43 billion in

2000). These amounts, however, do not include many hidden costs of longterm care because nearly 60 percent of the disabled elderly living in the

community rely exclusively on their families as caregivers and other

unpaid sources for their care.

Private long-term care insurance has been viewed as a possible means of

reducing catastrophic financial risk for the elderly needing long-term care

and of relieving some of the financing burden currently falling on public

long-term care programs. Given concerns about the long-term financial

solvency of the Medicare program, the additional financial stress created

by the forthcoming eligibility of the baby boom generation, and the

potential costs of proposed new benefits for prescription drugs,
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congressional interest in stimulating long-term care financing through

private means has grown. Several recent congressional initiatives,

including establishing a program to make group long-term care insurance

available to federal employees and proposals to provide tax subsidies to

individuals purchasing long-term care insurance, aim to expand the role of

private long-term care insurance. Yet private long-term care insurance

represents a small fraction of long-term spending—about $5 billion. Less

than 10 percent of the elderly and an even lower percentage of nearelderly individuals have purchased long-term care insurance, although

these numbers are increasing. Questions remain about the affordability of

policies and the value of the coverage relative to the premiums charged. If

long-term care insurance is to have a more significant role in addressing

the baby boom generation’s upcoming chronic health care needs, the

policies offered must be viewed by consumers as good, affordable

products that are easily understandable. To that end, the National

Association of Insurance Commissioners has recently strengthened its

model regulation for long-term care insurance, including recommending

that states enact laws requiring additional disclosure to consumers about

the potential for future policy rate increases and better ensuring that longterm care insurers accurately price their policy premiums.

Long-term care includes many types of chronic care services needed

because of physical or mental disability. Individuals needing long-term

care have difficulty performing some functions involved in normal daily

living, such as bathing, dressing, toileting, eating, and moving from one

location to another without assistance. They may also have mental

impairments, such as Alzheimer’s disease, which may require supervision

and assistance with tasks such as taking medications. Although a chronic

physical or mental disability may occur at any age, the older an individual

becomes, the more likely a disabling condition will develop or worsen.

Nearly one-seventh of the nation’s current elderly population—an

estimated 5.2 million—have a limitation in either activities of daily living

(ADL), instrumental activities of daily living (IADL), or both. More than

one-third of these have limitations in 2 or more ADLs.

Long-term care for the elderly has often been misunderstood to mean only

institutional care provided by nursing homes for individuals with chronic

care needs, but it is more than that. Nearly 80 percent of the elderly

requiring assistance with ADLs or IADLs live at home or in communitybased settings, while more than 20 percent live in nursing homes or other

institutions. The majority of long-term care is provided by unpaid family

caregivers to elderly individuals living either in their own homes or with

their families. However, a growing minority receives paid assistance from

Background
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various sources. For example, Medicare pays for home care for a small

percentage of beneficiaries who received home health services for longerterm care. In addition alternatives to nursing home care, such as assisted

living arrangements, are developing. An estimated 1 million individuals live

in residential settings, such as assisted living facilities, that have long-term

care services available. As the baby boom demand for long-term care

grows, so must the capacity for providing long-term care in individuals’

homes and other appropriate settings.

The baby boom generation, about 76 million people born between 1946

and 1964, will contribute significantly to the growth in the number of

elderly individuals who need long-term care and the increased amount of

resources required to pay for it. The oldest baby boomers are currently in

their fifties. In 2011, the first of the baby boomers born in 1946 will turn 65

years old and become eligible for Medicare. The Medicaid program, which

pays for many health care services for low-income elderly, including

nursing home care, will also begin to feel their impact. The effect on longterm care demand is expected to grow even more after 2030 when the first

baby boomers reach 85 years of age, the age at which the need for longterm care services is greatest.

Today’s elderly comprise 12.7 percent of our nation’s total population.

That percentage will increase by nearly one-third to 16.5 percent in 2020.

At that time, one in six Americans will be 65 years old or older and will

represent nearly 20 million more seniors than today. By 2040, the number

of seniors aged 85 years and older, the age group most likely to require

long-term care, will more than triple to 14 million (see fig. 1).

The Baby Boom

Generation Will

Greatly Expand

Demand For LongTerm Care
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Figure 1: Estimated Number of Elderly Individuals in 2000, 2020, and 2040

0

10

20

30

40

50

60

70

80

90

2000 2020 2040

85+

65 to 84

4.3

14.3

62.9

30.5

6.8

47.0

In Millions

Source: U.S. Census Bureau, “Projections of the Total Resident Population by 5-Year Age

Groups and Sex With Special Age Categories: Middle Series,” selected years 2000 to

2040, January 2000.

Besides their numbers, the extended life spans of the baby boom

generation will have an impact on long-term care. Life expectancy has

grown over the last decades, increasing more than 6 years since 1965 when

life expectancy at birth was 70.2 years to 76.5 years in 1997. With aging

individuals who reach 65 today expected, on average, to live to 80.9 years

for males and 84.2 years for females, many baby boomers can expect to

survive well into their eighties. The increasing proportion of baby boomers

who will live to 85 and beyond will be most likely to need long-term care

services.

Estimating the exact number of baby boomers who will need long-term

care services is complicated by several factors. While experts agree that
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population aging will increase the number of disabled elderly needing

long-term care over the next several decades, no consensus exists on the

size of that increase. Long-range estimates of the magnitude of the baby

boomers’ long-term care needs vary with estimates of the number of

disabled elderly ranging from 2 to 4 times the current number.

Conclusions differ concerning the effects of better health care and

healthier lifestyles on the baby boomers’ need for long-term care. Some

researchers contend that medical advances have increased life expectancy

but have not changed the age at onset of illness and therefore the need for

long-term care may have increased. Others contend that better treatment

and prevention could decrease the number of years long-term care is

needed. How these factors will translate into the need for long-term care

services and actual spending also will depend on the types of care used

and the public and private resources devoted to purchasing long-term

care.

Baby boomers in general are expected to be wealthier in retirement than

their parents. Those who are single, have less education, or do not own

homes, however, may not do as well. While many baby boomers will have

greater financial resources, they will have fewer social resources because

a smaller proportion of this generation will have a spouse or adult children

to provide unpaid caregiving. The geographic dispersion of families and

the large percentage of women who work outside the home also may

reduce the number of unpaid caregivers available to elderly baby boomers,

thus creating greater need for purchased long-term care services.

For women of the baby boom generation, long-term care needs are an

especially significant concern. More than 7 out of 10 unpaid caregivers are

currently women, three-quarters of nursing home residents 65 years and

older are female, and two-thirds of home health care users are female.

Given their longer life expectancies and the fact that married women

usually outlive their spouses, many women face a higher risk of needing

long-term care and not having a spouse to serve as a caregiver.

Over the next 40 years, between 2000 and 2040, the Congressional Budget

Office estimates that long-term care expenditures for the elderly, adjusted

for inflation, will grow annually by 2.6 percent. In 1998, long-term care

spending for nursing home and home health care was estimated at more

than $117 billion. Individuals needing care and their families paid for

almost 30 percent of these total expenditures out-of-pocket, Medicaid and

Medicare funded 57 percent, private health insurance accounted for about

7 percent, and other sources paid the remaining 6 percent (see figure 2).

These amounts, however, do not include the many hidden costs of longLong-Term Care

Expenditures

Estimated to Double

in 25 Years
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term care, because an estimated 60 percent of the disabled elderly living in

their community rely exclusively on their families as caregivers and other

unpaid sources for their care. CBO estimates $123 billion in total long-term

care spending for the elderly in calendar year 2000, projecting that these

expenditures will reach $207 billion in 2020 and $346 billion in 2040. Based

on these projections, long-term care expenditures would roughly double in

25 years.

Figure 2: Elderly Long-Term Care Expenditures, by Source of Payment,

1998

Other

6.3%

Out-of-Pocket

29.5%

Medicaid

39.0%

Private

Insurance

7.4%

Medicare

17.8%

Source: Office of the Actuary, National Health Statistics Group, Personal Health Care

Expenditures, HCFA, Department of Health and Human Services, 2000.

Medicaid, a joint federal-state health financing program for low-income

individuals, continues to be the largest public funding source for long-term

care. Within broad federal guidelines, states design and administer

Medicaid programs that include coverage for certain mandatory services,

such as skilled nursing facility care, and other optional coverages, such as

home and community-based services. Although most Medicaid long-term

care expenditures are for nursing home care, in the last two decades there

has been a shift to more home and community-based care. The result is a

significant change in the proportion of people with the need for long-term

care that are receiving Medicaid-financed services and in the average costs

Medicaid
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of those services. By fiscal year 1998, the number of Medicaid recipients

receiving home health or home and community-based services was similar

to the number of Medicaid recipients receiving nursing facility services.

State Medicaid programs have, by default, become the major form of

insurance for long-term care, but only after individuals have become

nearly impoverished by “spending down” their assets. Medicaid eligibility

for many elderly results from having become poor as the result of

depleting assets to pay for nursing home care, the average price of which

is $55,000 per year.1

In most states, nursing home residents without a

spouse must have less than $2,000 in countable assets to become eligible

for Medicaid coverage. About two-thirds of nursing home residents in 1998

relied on Medicaid to help pay for their care, and just over half (58

percent) of Medicaid expenditures for long-term care were for institutional

care in nursing homes.2

States historically limited coverage of in-home services under Medicaid

due to concern about the potential cost of covering services for the large

number of disabled who were being cared for by their families. However,

as part of the Omnibus Budget Reconciliation Act of 1981, the Congress

established the home and community-based service waiver program. The

waiver program gave states the option of applying for Medicaid waivers to

fund home and community-based services for people who met Medicaid

eligibility requirements for nursing home care. These waivers also gave

states the ability to restrict the number and costs of eligible individuals to

be served under Medicaid in home and community-based settings. All

states now have home and community-based waivers, and more than 200

waiver programs served more than 450,000 individuals nationwide in fiscal

year 1998. Medicaid expenditures for home and community-based waivers

have increased an average of 25 percent per year from 1993 to 1999,

reaching a level of $10.5 billion in 1999.

During the 1990s, costs for both skilled nursing facility services and home

health care became the fastest growing components of Medicare spending,

1The MetLife Mature Market Institute survey also found that nursing home costs vary widely by region

of the country, from nearly $33,000 per year in Hibbing, Minnesota to more than $100,000 per year in

Manhattan.

2An additional 17 percent of Medicaid long-term care expenditures were for intermediate care facilities

for people with mental retardation, with the remaining quarter of Medicaid long-term care

expenditures for noninstitutional care provided through home health, personal care services, and

home and community-based service waivers.

Medicare
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although changes introduced by the Balanced Budget Act of 1997 (BBA)

have significantly altered this situation. In contrast to Medicaid, which is

estimated to pay about 46 percent of total nursing home and other

institutional care expenditures in 2000, Medicare plays a relatively small

role, paying only about 12 percent of total nursing home and other

institutional care expenditures. Medicare primarily covers acute health

care costs, and therefore limits its nursing home coverage to short-term,

post-acute stays of up to 100 days per spell of illness following

hospitalization. Medicare nursing home spending increased from $1.7

billion in 1990 to $10.4 billion in 1998.

Since 1989, Medicare became a significant funding source of home care,

financing $10.4 billion in care—or more than one-third of the home care

purchased for the elderly—in 1998. Court decisions and legislative

changes in coverage guidelines essentially transformed the Medicare home

health benefit from one focused on patients needing acute, short-term care

after hospitalization to one that also served chronic, long-term care

patients. By 1994, only about one-fourth of home health visits covered by

Medicare occurred within 60 days following a hospitalization. As a result,

Medicare, on a de facto basis, has financed an increasing amount of longterm care through its home health care benefit. Both the number of

beneficiaries receiving home health care and the number of visits per user

more than doubled from 1989 to 1996. From 1990 to 1997, the average

annual growth rate for Medicare home health care spending was 25.2

percent—more than 3 times the growth rate for Medicare spending as a

whole. The increase in the use of these services cannot be explained by

any increase in the incidence of illness among Medicare beneficiaries.

In response to concerns about the growth in spending for Medicare

services, including skilled nursing facility and home health services,

Congress enacted the BBA which included provisions to slow growth. The

Act required prospective payment systems to be implemented for

Medicare services provided through home health care agencies and skilled

nursing facilities, replacing the retrospective, cost-based reimbursement

that did not provide adequate incentives to control costs. The skilled

nursing facility prospective payment system began to be implemented in

July 1998 and will be completely phased in by 2001. Even though nursing

home use has continued to increase during the phase-in of the new

payment system, a temporary increase in Medicare payments to nursing

homes caring for certain high-cost patients, pending the inclusion of a

refined case-mix adjustment for payments to nursing homes, was enacted

in response to complaints from the industry that payments were

inadequate.
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For home health, rather than immediately introducing a prospective

payment system, an interim home health care payment system was

implemented in October 1997, pending development of a case-mix

adjusted prospective payment system. Between 1997 and 1998, Medicare

home health spending fell by nearly 15 percent, while home health visits

dropped sharply by 40 percent, and this decline continued in 1999.3

The

home health prospective payment system (PPS), scheduled to be in place

by October 1 of this year, is expected to be a more appropriate payment

tool than the interim payment system because it is designed to more

closely align payments with patient needs.4

The PPS rates are based on a

higher number of home health visits per user than those currently being

provided. As a result, the new payment system can support a large

expansion of services. However, PPS incentives are intended to reward

efficiency and control use of services. Because criteria for what

constitutes appropriate home health care do not exist, it may be difficult

for Medicare to ensure that patients receive all necessary services. How

home health agencies respond to the PPS and its incentives could have

major implications for the amount of future Medicare funding for home

health care and the services provided.

While many baby boomers will have more financial resources in

retirement than their parents and may be better able to absorb some longterm care costs, long-term care will represent a catastrophic cost for a

relatively small portion of families. This type of situation can be ideal for a

private insurance program because it spreads risk among many

individuals. Private long-term care insurance has been viewed as a means

of both reducing potential catastrophic financial risk for the elderly

needing long-term care and relieving some of the financing burden

currently falling on public long-term care programs. Some observers also

believe private long-term care insurance could provide individuals greater

choice in selecting services to satisfy their long-term needs. However, less

than 10 percent of elderly individuals and even fewer near-elderly

individuals have purchased long-term care insurance to protect against the

financial risks of the potential high costs of future care. The National

Association of Insurance Commissioners reported that in 1998

approximately 4.1 million persons were insured through long-term care

3See Medicare Home Health Care: Prospective Payment System Could Reverse Recent Declines in

Spending (GAO/HEHS-00-176, Sept. 8, 2000).

4See Medicare: Refinements Should Continue to Improve Appropriateness of Provider Payments

(GAO/T-HEHS-00-160, July 19, 2000).

Private Long-Term

Care Insurance

Represents A Very

Small But Growing

Share of Long-Term

Care Expenditures
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insurance policies, compared with 1.7 million persons in 1992.5In contrast,

about two-thirds of the elderly—about 23 million individuals—have

private Medicare supplemental insurance policies to cover other nonMedicare covered expenses such as copayments, deductibles, and

prescription drug costs.

Private long-term care insurance is still a little known product with

insurance providers seeking to build a larger market. Barriers to

purchasing long-term care policies still exist. Many baby boomers

continue to believe they will never need such coverage. A recent survey of

the elderly and near elderly found that only about 40 percent believe that

they or their family will be responsible for paying for their long-term care.

Some mistakenly believe that public programs, including Medicaid and

Medicare, or their own health care insurance will provide comprehensive

coverage for the services they need. This lack of awareness decreases

people’s perceived need for protection, thus decreasing demand for longterm care insurance. Others may be concerned about whether they can

afford such insurance now or in the future when their premiums may

increase and their retirement incomes may have decreased.

Some employers offer their employees a voluntary group policy option for

long-term care insurance, but this market remains small and is offered

predominantly by large employers. Usually employers do not pay for any

of the costs of these policies, but group policies have lower administrative

costs than individually-purchased policies which can result in lower

premiums for those employees choosing to purchase a policy. The

American Council of Life Insurance reported in 1998 that only 29 percent

of long-term care insurance policies in force were group policies. Studies

estimate that 6 to 9 percent of eligible active employees took advantage of

employer-provided group long-term care insurance where it was available.

The House and Senate have recently passed legislation that would offer

group long-term care insurance to federal employees and retirees

beginning by fiscal year 2003, an initiative that, if enacted, would likely

establish the largest group offering of long-term care insurance and could

significantly expand this market.6

5The accuracy of these policy numbers is dependent upon the accuracy of the information filed by the

insurers themselves with the National Association of Insurance Commissioners.

6The House and Senate passed the Long-Term Care Security Act, H.R. 4040 and S. 2420, on July 27,

2000. The legislation awaits further action.
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The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

extended tax deductibility of some premiums and tax exemptions for

certain benefits to qualified long-term care insurance policies. Qualified

policies have to satisfy certain requirements including consumer

protection standards.7

The consumer protection standards are deemed

satisfied if a policy complies with the National Association of Insurance

Commissioners’ (NAIC) Long-Term Care Model Act. As of July 1998, the

Health Insurance Association of America reported that all 50 states (which

have primary responsibility for regulating insurance policies) required

policies adhere to at least 3 NAIC long-term care insurance standards.

These three standards require policies to not require prior

institutionalization as a condition for coverage, to have an outline of

coverage provided by the policy, and to be guaranteed to be renewable

and non-cancelable. In addition, all but one state adheres to the NAIC

definition of long-term care insurance (policies providing coverage for at

least 12 months for necessary services provided in settings other than

acute care hospital units), and all but two states adhere to the pre-existing

conditions standard. Overall, 14 of the 19 HIPAA long-term care insurance

standards had been adopted by at least 35 states as of July 1998.

Questions exist about the affordability of policies for many elderly and

near-elderly, and the value of the coverage relative to the premiums

charged. The affordability of long-term care insurance has a large effect on

its marketability, and is a key factor in individuals’ decisions to purchase

and retain a long-term care insurance policy. Although assessing whether

individuals can afford a policy is a subjective judgement, some studies

estimate that long-term care insurance is affordable for only 10 to 20

percent of elderly individuals. Affordability is even more difficult for

married couples who must each purchase coverage. While some insurers

offer discounts to married couples when both purchase long-term care

coverage, elderly couples are likely to pay at least several thousand dollars

annually for long-term care coverage. Individuals who consider and then

7A qualified long-term care insurance plan is defined as a contract that covers only long-term care

services; does not pay for services covered under Medicare; is guaranteed to be renewable; does not

provide for a cash surrender value or other money that can be paid, assigned, or pledged as collateral

for a loan, or borrowed; applies all refunds of premiums and all policy holder dividends or similar

amounts as a reduction in future premiums or to increase future benefits; and meets certain consumer

protection standards. Also, payments received from a qualified plan are considered medical expenses

and are excluded from gross income for determining income taxes. Per diem policies that pay on the

basis of disability rather than reimbursing for services used are subject to a cap of $180 per day per

person in 1998. Out-of-pocket expenses for long-term care are allowed as itemized deductions along

with other medical expenses, if they exceed 7.5 percent of adjusted gross income.

Long-Term Care Insurance

Affordability of Concern to

Many Elderly Individuals
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decide against purchasing long-term care insurance cite skepticism about

whether private policies will provide adequate coverage. Those who do

find long-term care insurance affordable may later decide it is not

affordable because their financial circumstances have changed or the

premiums have increased. An industry group estimates that only 55 to 65

percent of all long-term care insurance policies sold as of June 1998

remain in force.

Insurers try to convince individuals that it is prudent to decide to buy longterm care insurance early in life rather than later because policy premiums

are based largely on an individual’s age when the policy is purchased. A

policy purchased when a person is in his or her 40s or 50s has much lower

premiums than a policy purchased later in one’s life; however, those

premiums will be paid over a longer period. A person purchasing a longterm care policy with inflation protection at age 65 may pay premiums as

high as $2,000 annually for the policy. If an individual waits until age 79 to

purchase a policy, the premiums are typically about 2.5 times higher than

if the same policy had been purchased when the individual was 65 years,

and about six to ten times higher than if the policy was purchased at age

50.

The unfamiliarity and uncertain value of long-term care insurance may

deter some individuals from purchasing a policy. A low premium at age 45

may seem high for a risk that may not be realized for 40 years. Individuals

need to determine if they can afford the long-term care policy premium

both now and in the future when their retirement income may be lower

and their policy premiums may have increased. Concerns about premiums

relative to the value of policies may be a factor, especially when premiums

for a similar policy for the same individual can vary widely. For example, a

65-year-old in Wisconsin could pay $857 to $2061 per year for a long-term

care insurance policy from different carriers with similar terms.8

8Annual premiums for individual basic long-term care insurance policies marketed in Wisconsin with

$100 per day nursing home benefit, $50 per day home health benefit, lifetime benefits, a 90 or 100-day

elimination period, and no optional benefits as of October 1999.
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While consumers deserve complete and accurate information about any

insurance product they purchase, sales of long-term care policies are not

likely to increase significantly unless consumers have adequate and

understandable information to assess them. If long-term care insurance is

to have a role in addressing the baby boom generation’s upcoming longterm care needs, individuals need to be able to understand clearly what

they are buying at the time of purchase and what changes, if any, they may

face in their policy’s coverage or premiums in the future. We have

previously reported on a number of problems in the long-term care

insurance market, including those related to disclosure standards,

inflation protection options, clear and uniform definitions of services,

eligibility criteria, grievance procedures, nonforfeiture of benefits, options

for upgrading coverage, and sales commission structures that potentially

create incentives for marketing abuses.9

Long-term care insurance policies are not standardized by law as are

Medicare supplemental (Medigap) policies, making comparisons among

different policies difficult. Although long-term care policies provide many

options for individuals to choose among to create a policy to meet their

perceived needs and financial situation, these choices can complicate the

purchasing decision. If people do not fully understand their options, they

may not make the best choices. Further, for some prospective purchasers,

the cost of some options, such as inflation protection, can compromise the

affordability of the policy.

Several checklists exist to help individuals considering a policy purchase

determine the options they should buy to create a policy that best fits their

needs. However, the specific policy information required to make these

reasoned decisions may not be readily available, and the decisions

themselves may be too daunting. Among the questions an individual

should try to answer when purchasing a long-term care insurance policy

are:

• What is the probability that long-term care services will be needed in the

future and for how long will they be needed?

• How much coverage can the individual afford, will the premium remain

affordable over time, and will the coverage provide sufficient services?

9Health Care Reform: Supplemental and Long-Term Care Insurance (GAO/T-HRD-94-58, Nov. 9, 1993).

Consumer Information and

Protection Is Necessary,

Especially If Private

Insurance Is to Assume a

Larger Role in Financing

Long-Term Care
Long-Term Care Insurance: Better

Information Critical to Prospective

Purchasers

Page 15 GAO/T-HEHS-00-196

• Should the policy cover only nursing home care, or also home care, or

other alternatives such as assisted living?

• Should the individual purchase a less expensive policy that has a waiting

period before the policy begins paying for services received?

• What level of coverage for specific services should be purchased? For

example, what per day amount (such as $100 or $130 per nursing home

day) should be stipulated for nursing home care? For home health, what

per month or per visit amount is adequate? Should total coverage be

provided for 3 years, 5 years or for lifetime coverage?

• Should inflation protection be purchased (for an additional 25 to 40

percent of the premium) to preserve more of the policy’s future value?

• Should optional nonforfeiture protection be purchased (for an additional

10 to 100 percent of the premium) to allow the purchaser to retain some

coverage if he or she stops making premium payments?

Particularly important for many consumers is a clear understanding of the

current price of the policy and whether that price is subject to future

increases. This concern was highlighted by a recent class action lawsuit

involving long-term care policyholders in North Dakota, which was

brought against two insurers who sold individual, guaranteed renewable,

level premium policies. To the policyholders, level premium policies

meant that the amount of their premiums at the time of purchase would

remain at the same level. They believed that the premiums would not

increase as long as they held their policies, which they were guaranteed

could be annually renewed. To the insurers, level premiums meant an

individual’s policy premiums would not be increased unless the entire

class holding the same type of policy had a premium increase. After the

insurers stopped selling these policies to new purchasers in 1990,

premiums for existing policyholders began increasing—for some by more

than 700 percent. For example, one female policyholder’s annual policy

premium at purchase was $829.86 and increased to $6,638.42. As a result,

some policyholders were unable to afford the increases and were forced to

drop their policies at a time when their age made buying another policy

very expensive. Others at high risk of needing coverage had to continue

paying very high premiums to maintain their policies. The class action suit

contended that the insurers did not explain to purchasers that a level

premium policy could result in premium increases for an entire class of

policyholders and did not appropriately determine the initial premium rate

for the policy. In 1999, the class action in North Dakota was settled along

with class actions in several other states for monetary payments to former
Long-Term Care Insurance: Better

Information Critical to Prospective

Purchasers

Page 16 GAO/T-HEHS-00-196

policyholders, premium rate reductions for those still holding policies, and

agreement by two insurers to have no future rate increases for these

policies.

In August, the National Association of Insurance Commissioners amended

its Long-Term Care Insurance Model regulation to strengthen consumer

disclosure to address problems such as those highlighted by the class

action suit. In states that adopt the Model regulation amendments as part

of their insurance regulations, insurers will have to provide written

information to prospective purchasers explaining

• that a policy’s premium may increase in the future,

• why premium increases may occur,

• what options a policyholder has in the event of an increase, and

• what the 10-year rate history for their policies has been.

Consumers will also have to specifically acknowledge that they

understand their policy’s premiums may increase, and insurers must

explain any contingent benefit available to policyholders who let the

policy lapse due to a substantial rate increase. Additionally, the NAIC

adopted amendments to better ensure that long-term care insurers

accurately price their policy premiums to be sufficient over the lifetime of

the policy, so as to minimize the need for future premium increases. As a

further consumer protection, these amendments require insurers to

reimburse policyholders when any rate increase is found to be

unnecessary and allow state insurance commissioners to ban insurers

from the long-term care market if they have a pattern of offering initial

policy purchasers inadequate premium rates.

In conclusion, the aging of the baby boomers will lead to a very large

increase in this nation’s elderly population in the next 3 decades, and an

even greater increase in the number of individuals aged 85 and over who

are likely to need long-term care services. Recent Congressional

proposals, including the passage of legislation that would authorize a new

federal employees’ long-term care insurance offering and proposed tax

subsidies for the purchase of private long-term care insurance, aim to

increase the role private insurance plays in financing long-term care.

Increased consumer information about and confidence in long-term care

insurance and the availability of affordable, reliable products are also

Concluding

Observations
Long-Term Care Insurance: Better

Information Critical to Prospective

Purchasers

Page 17 GAO/T-HEHS-00-196

crucial components of private insurance if it is expected to play a larger

role in financing future generations’ long-term care needs.

Mr. Chairman, this concludes my statement. I would be happy to answer

any questions that you or Members of the Committee might have at this

time.

For more information regarding this testimony, please contact William J.

Scanlon or Kathryn G. Allen at (202) 512-7114. John Dicken and Opal

Winebrenner also made key contributions to this statement.

GAO Contacts and

Acknowledgments
Page 18 GAO/T-HEHS-00-196

Medicare Home Health Care: Prospective Payment System Could Reverse

Recent Declines in Spending (GAO/HEHS-00-176, Sept. 8, 2000).

Medicare and Medicaid: Implementing State Demonstrations for Dual

Eligibles Has Proven Challenging (GAO/HEHS-00-94, Aug. 18, 2000).

Medicare: Refinements Should Continue to Improve Appropriateness of

Provider Payments (GAO/T-HEHS-00-160, July 19, 2000).

Low-Income Medicare Beneficiaries: Further Outreach and Administration

Could Increase Enrollment (GAO/HEHS-99-61, April 9, 1999).

Long-Term Care: Baby Boom Generation Presents Financing Challenges

(GAO/T-HEHS-98-107, March 9, 1998).

Health Care Reform: Supplemental and Long-Term Care Insurance

(GAO/T-HRD-94-58, Nov. 9, 1993).

(201049)

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