Long-Term Care Insurance: Partnership Programs Include Benefits That Protect Policyholders and Are Unlikely to Result in Medicaid Savings
Published: 2007-05-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Partnership programs allow individuals who purchase Partnership long-term care insurance policies to exempt at least some of their personal assets from Medicaid eligibility requirements. In response to a congressional request, GAO examined (1) the benefits and premium requirements of Partnership policies as compared with those of traditional long-term care insurance policies; (2) the demographics of Partnership policyholders, traditional long-term care insurance policyholders, and people without long-term care insurance; and (3) whether the Partnership programs are likely to result in savings for Medicaid. To examine benefits, premiums, and demographics, GAO used 2002 through 2005 data from the four states with Partnership programs--California, Connecticut, Indiana, and New York--and other data sources. To assess the likely impact on Medicaid savings, GAO (1) used data from surveys of Partnership policyholders to estimate how they would have financed their long-term care without the Partnership program, (2) constructed three scenarios illustrative of the options for financing long-term care to compare how long it would take for an individual to spend his or her assets on long-term care and become eligible for Medicaid, and (3) estimated the likelihood that Partnership policyholders would become eligible for Medicaid based on their wealth and insurance benefits.
section_title: What GAO Found
paragraphs: California, Connecticut, Indiana, and New York require Partnership programs to include certain benefits, such as inflation protection and minimum daily benefit amounts. Traditional long-term care insurance policies are generally not required to include these benefits. From 2002 through 2005, Partnership policyholders purchased policies with more extensive coverage than traditional policyholders. According to state officials, insurance companies must charge traditional and Partnership policyholders the same premiums for comparable benefits, and they are not permitted to charge policyholders higher premiums for asset protection. Partnership and traditional long-term care insurance policyholders tend to have higher incomes and more assets at the time they purchase their insurance, compared with those without insurance. In two of the four states, more than half of Partnership policyholders over 55 have a monthly income of at least $5,000 and more than half of all households have assets of at least $350,000 at the time they purchase a Partnership policy. Available survey data and illustrative financing scenarios suggest that the Partnership programs are unlikely to result in savings for Medicaid, and may increase spending. The impact, however, is likely to be small. About 80 percent of surveyed Partnership policyholders would have purchased traditional long-term care insurance policies if Partnership policies were not available, representing a potential cost to Medicaid. About 20 percent of surveyed Partnership policyholders indicate they would have self-financed their care in the absence of the Partnership program, and data are not yet available to directly measure when or if those individuals will access Medicaid had they not purchased a Partnership policy. However, illustrative financing scenarios suggest that an individual could self-finance care--delaying Medicaid eligibility--for about the same amount of time as he or she would have using a Partnership policy, although GAO identified some circumstances that could delay or accelerate Medicaid eligibility. While the majority of policyholders have the potential to increase spending, the impact on Medicaid is likely to be small because few policyholders are likely to exhaust their benefits and become eligible for Medicaid due to their wealth and having policies that will cover most of their long-term care needs. Information from the four states may prove useful to other states considering Partnership programs. States may want to consider the benefits to policyholders, the likely impact on Medicaid expenditures, and the income and assets of those likely to afford long-term care insurance. The Department of Health and Human Services commented on a draft of the report that our study results should not be considered conclusive because they do not adequately account for the effect of estate planning efforts such as asset transfers. While some Medicaid savings could result from people who purchase Partnership policies instead of transferring assets, they are unlikely to offset the costs associated with those who would have otherwise purchased traditional policies.

section_title: Letter
paragraphs: In 2004, national spending on long-term care, which includes care  In 2004, national spending on long-term care, which includes care  provided in nursing facilities, totaled $193 billion and nearly half of that  provided in nursing facilities, totaled $193 billion and nearly half of that  was paid for by Medicaid, the joint federal-state program that finances  was paid for by Medicaid, the joint federal-state program that finances  medical services for certain low-income adults and children. In contrast,  medical services for certain low-income adults and children. In contrast,  private insurance paid for about $14 billion worth of long-term care— private insurance paid for about $14 billion worth of long-term care— about 7 percent of the total cost. The demand for this type of care is likely  about 7 percent of the total cost. The demand for this type of care is likely  to increase as the proportion of those in the population age 65 and older— to increase as the proportion of those in the population age 65 and older— those most likely to need long-term care—increases. With Medicaid  those most likely to need long-term care—increases. With Medicaid  financing nearly half of the long-term care costs nationwide, policymakers  financing nearly half of the long-term care costs nationwide, policymakers  are concerned that, without changes in how long-term care is financed, the  are concerned that, without changes in how long-term care is financed, the  growing demand for this type of care will continue to strain the resources  growing demand for this type of care will continue to strain the resources  of federal and state governments.  of federal and state governments.
In the late 1980s the Robert Wood Johnson Foundation provided start-up  In the late 1980s the Robert Wood Johnson Foundation provided start-up  funds for programs in eight states—California, Connecticut, Indiana,  funds for programs in eight states—California, Connecticut, Indiana,  Massachusetts, New Jersey, New York, Oregon, and Wisconsin—aimed at  Massachusetts, New Jersey, New York, Oregon, and Wisconsin—aimed at  helping to shift some of the responsibility for financing long-term care  helping to shift some of the responsibility for financing long-term care  from Medicaid to private long-term care insurance. Four of the states that  from Medicaid to private long-term care insurance. Four of the states that  received funds—California, Connecticut, Indiana, and New York— received funds—California, Connecticut, Indiana, and New York— established the programs. These four state-run long-term care programs,  established the programs. These four state-run long-term care programs,  which are known as Partnership programs, encourage individuals to  which are known as Partnership programs, encourage individuals to  purchase long-term care insurance by providing an incentive—specifically,  purchase long-term care insurance by providing an incentive—specifically,  allowing those who purchase long-term care insurance policies through  allowing those who purchase long-term care insurance policies through  the program to exempt some or all of their personal assets from Medicaid  the program to exempt some or all of their personal assets from Medicaid  eligibility requirements should the policyholders exhaust their long-term  eligibility requirements should the policyholders exhaust their long-term  care insurance benefits and need to continue financing their long-term  care insurance benefits and need to continue financing their long-term  care. Without the exemption, before individuals could receive Medicaid  care. Without the exemption, before individuals could receive Medicaid  benefits they would typically have to spend their assets on their long-term  benefits they would typically have to spend their assets on their long-term  care until the assets met or fell below certain Medicaid thresholds.  care until the assets met or fell below certain Medicaid thresholds.
Medicaid does not allow for asset protection for long-term care insurance  policies purchased outside of Partnership programs. In order to  implement their Partnership programs, the four states with Partnership  programs had to obtain approval from the Centers for Medicare &  Medicaid Services (CMS), the agency within the Department of Health and  Human Services (HHS) that oversees Medicaid, and amend their state  Medicaid plans to allow them to exempt the assets of Partnership program  participants from Medicaid eligibility requirements.
Since the early 1990s, the treatment of Partnership programs under federal  law has changed. Although a number of states established, or were  authorized to establish, programs prior to the enactment of the Omnibus  Budget Reconciliation Act of 1993 (OBRA ‘93), OBRA ‘93 prohibited  additional states from establishing similar programs. The legislation was  enacted, in part, because of concerns about potential costs to Medicaid,  but allowed California, Connecticut, Indiana, and New York to maintain  their programs. More recently, the Deficit Reduction Act of 2005 (DRA)  authorized all states to establish Partnership programs that meet certain  criteria and required the original 4 participating states to maintain the  existing consumer protections in their Medicaid plans. DRA provisions are  intended, in part, to allow states to provide an incentive for individuals to  take responsibility for their own long-term care needs rather than relying  on Medicaid. According to the National Association of Health  Underwriters, prior to the enactment of DRA, there was legislative activity  in 19 additional states to begin development of a Partnership program. As  of October 2006, the only states with active Partnership programs were the  original 4 states: California, Connecticut, Indiana, and New York.  However, HHS indicated that as of February 2007, CMS had approved  Partnership program state plan amendments in 6 states: Florida, Georgia,  Idaho, Minnesota, Nebraska, and Virginia. Although the program appears  to be expanding beyond the original 4 states, concerns about the potential  cost to Medicaid of expanding the program remain an issue. In 2005, the  Congressional Budget Office (CBO) estimated that repealing the  moratorium on new Partnership programs could increase Medicaid  spending by $86 million between 2006 and 2015.
States are responsible for overseeing Partnership programs and regulating  the Partnership programs as well as the traditional long-term care  insurance policies sold in their states. As more states consider establishing  Partnership programs, there is interest, on the part of Congress and others,  in understanding how the four states with Partnership programs designed  and regulate their Partnership programs, who purchases Partnership  policies, and how these programs will impact Medicaid financially.
You asked us to analyze the experience of the four states with Partnership  programs. In August 2005, we provided you with a briefing, which  summarized aspects of the design of these Partnership programs and  included demographic information on Partnership policyholders. In this  report, we updated our briefing information and provided a more detailed  analysis of the Partnership programs. Specifically, we examined (1) the  benefits and premium requirements of Partnership policies as compared  with those of traditional long-term care insurance policies, including  information on benefits purchased by policyholders; (2) the extent to  which states oversee Partnership policies as compared with their  oversight of traditional long-term care insurance policies; (3) the  demographics, including asset and income levels, of Partnership  policyholders, traditional long-term care insurance policyholders, and  people without long-term care insurance; and (4) whether the Partnership  programs are likely to result in savings for Medicaid.
To compare the benefits and premium requirements of Partnership and  traditional long-term care insurance policies, we reviewed state  regulations, and interviewed Partnership program officials and department  of insurance (DOI) officials in each of the four states with Partnership  programs–California, Connecticut, Indiana, and New York. To compare  the benefits purchased by Partnership policyholders and traditional long- term care insurance policyholders, we obtained data from 2002 through  2005 from two sources. Our data source for benefits purchased by  Partnership policyholders was the Uniform Data Set (UDS)—a data set  with information on Partnership policyholders compiled by officials in  each of the four states with Partnership programs from data provided by  participating insurers. Our data source for benefits purchased by  traditional long-term care insurance policyholders was from a survey we  conducted of five of the largest long-term care insurance companies in the  individual long-term care insurance market.
To examine the extent to which states oversaw Partnership policies  compared with state oversight of traditional long-term care insurance  policies, we reviewed state regulations and Partnership program  documents, and interviewed officials from Partnership programs, long- term care insurance companies, and each Partnership state’s DOI, the  entities that are responsible for regulating insurance policies, including  long-term care insurance policies, that are sold in the states. We reviewed  state regulations, Partnership program documents, and conducted  interviews about how training requirements for insurance agents who sell  Partnership policies compared with training requirements for agents who  sell traditional long-term care insurance policies.
To examine the demographics, including income and assets levels, of  Partnership policyholders, traditional long-term care insurance  policyholders, and individuals without long-term care insurance, we used  data from three sources. First, to calculate the household income and  assets of Partnership policyholders, we used available survey data from a  sample of Partnership policyholders in California and Connecticut. We  restricted our analysis to the income and asset data from these two states  because Indiana’s data were not sufficiently detailed to include in our  analysis, and New York was not able to provide us with data from recent  years. We combined multiple years of these data in order to increase the  sample size. To estimate the household income of individuals without  insurance in California and Connecticut, we used data from the American  Community Survey (ACS) for 2004 published by the U.S. Census Bureau.  Finally, we used national data from the Health and Retirement Study  (HRS) for 2004, to compare household income and household assets for  those individuals with traditional long-term care insurance and those  without long-term care insurance. The HRS is a national survey  sponsored by the National Institute on Aging and conducted by the  University of Michigan of individuals over the age of 50. The HRS  collected information about retirement, health insurance, savings, and  other issues confronting the elderly. To examine the age, marital status,  and gender of Partnership policyholders, traditional long-term care  insurance policyholders, and individuals without long-term care insurance,  we used data from the UDS and the HRS.
To examine whether the Partnership programs in the four states are likely  to result in savings for Medicaid, we assessed (1) available state survey  data of Partnership policyholders and (2) the options an individual has for  financing long-term care and the time it would take for the individual to  become eligible for Medicaid under three illustrative scenarios. We used  the illustrative scenarios because the Partnership programs in the four  states have only been operating since the early 1990s, and as yet there are  no available data describing when or if Partnership policyholders would  have accessed Medicaid. As a result, there are insufficient data available to  directly measure whether the Partnership programs are associated with  increased or decreased Medicaid spending. We used available survey data  in California, Connecticut, and Indiana to determine what Partnership  policyholders report they would have done to finance their long-term care  needs if there had not been a Partnership program in their state. In  addition, we assessed three scenarios that represent the three main  options an individual has for financing long-term care: financing using a  Partnership policy, financing using a traditional long-term care policy, and  self-financing without any long-term care insurance. The latter two  scenarios describe the financing options that a Partnership policyholder  could use if the Partnership programs did not exist. We used the three  scenarios to explore how long it would likely take before the individual  depicted in our scenarios would become eligible for Medicaid with a  Partnership policy and–-in the scenarios in which Partnership programs  did not exist—with the other two financing options. In the scenarios, if, in  the absence of a Partnership program, an individual using a traditional  long-term care insurance policy or relying on self-financing is likely to  become eligible for Medicaid sooner than the same individual would have  using a Partnership policy, we consider the Partnership programs to be a  potential source of savings for Medicaid. In contrast, if the same individual  delays Medicaid eligibility using a traditional long-term care insurance  policy or self-financing, when compared with the time it would take the  individual to become eligible for Medicaid using a Partnership policy, we  consider the Partnership program to be a potential source of increased  spending for Medicaid. To develop our scenarios, we made several  simplifying assumptions. These include the following:    The individual depicted in the scenarios has $300,000 in assets, and in two  of our scenarios a long-term care insurance policy worth $210,000—assets  and benefits that are typical of many individuals with long-term care  insurance—and the individual receives long-term care in a nursing facility  with costs for a year of care of $70,000, about equal to average nursing  facility costs nationwide in 2004.
The individual has assets that are no less than the value of the individual’s  Partnership policy—that is, the individual does not overinsure his or her  assets.
The individual is unmarried. While most Partnership policyholders are  married at the time they purchase a Partnership policy, they are unlikely to  require long-term care for many years, and their marital status can change.  Most individuals who are admitted to a nursing facility are unmarried.
Where possible, we use data from surveys of Partnership policyholders to  support our assumptions. We also explored whether adjusting the  assumptions changed the conclusions we could draw. Although our  scenarios represent the choices facing a single individual, the results of  this analysis are applicable beyond this individual. For example, the  relative impact on Medicaid spending across the scenarios is independent  of the amount of assets owned by the individual or the level of the  individual’s insurance coverage.
As part of our efforts to examine whether the Partnership programs are  likely to result in savings for Medicaid, we also examined the likelihood  that the population of Partnership policyholders will ever become eligible  for Medicaid. To assess this likelihood, we examined the long-term care  insurance benefits and income of Partnership policyholders. We also  assessed the number of people with Partnership policies who accessed  Medicaid as of October 2006.
Based on discussions with state officials and reviewing documentation on  uniformly collected insurer data and surveys of policyholders, we  determined that the information we used was sufficiently reliable for our  purposes. We also examined reports on the Partnership program from the  CBO, the Congressional Research Service, and other research  organizations. Appendix I provides information on the data and methods  used for our analyses of long-term care insurance benefits, policyholder  income, assets, age, gender, and marital status. Appendix II provides more  information about the illustrative scenarios, the simplifying assumptions  underlying the scenarios, and the effect on our analysis of adjusting these  assumptions. We conducted our work from September 2005 through May  2007 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: Long-term care comprises services provided to individuals who, because  of illness or disability, are generally unable to perform activities of daily  living (ADL)—such as bathing, dressing, and getting around the house— for an extended period of time. These services can be provided in various  settings, such as nursing facilities, an individual’s own home, or the  community. The typical 65-year-old has about a 70 percent chance of  needing long-term care services in his or her life. Long-term care can be  expensive, especially when provided in nursing facilities. In 2005, the  average cost of a year of nursing facility care was about $70,000. In 1999,  the most recent year for which data were available, the average length of  stay in a nursing facility was between 2 and 3 years.
subsections: section_title: Long-Term Care Insurance
paragraphs: Long-term care insurance is used to help cover the cost associated with  long-term care. Individuals can purchase long-term care insurance policies  directly from insurance companies, or through employers or other groups.  The number of long-term care insurance policies sold has been small– about 9 million as of 2002, the most recent year for which data were  available. About 80 percent of these policies were sold through the  individual insurance market and the remaining 20 percent were sold  through the group market.
Long-term care insurance companies generally structure their long-term  care insurance policies around certain types of benefits and related  options.
A policy with comprehensive coverage pays for long-term care in nursing  facilities as well as for care in home and community settings, while a  policy with coverage for home and community-based settings pays for care  only in these settings.
A daily benefit amount specifies the amount a policy will pay on a daily  basis toward the cost of care, while a benefit period specifies the overall  length of time a policy will pay for care. Data from 2002 through 2005  show that the maximum daily benefit amounts can range from less than  $100 to several hundred dollars per day, while benefit periods can range  from 1 year to lifetime coverage.
A policy’s elimination period establishes the length of time a policyholder  who has begun to receive long-term care has to wait before his or her  insurance will begin making payments towards the cost of care. According  to data from 2002 through 2005, elimination periods can range from 0 to at  least 730 days.
Inflation protection increases the maximum daily benefit amount covered  by a policy, and helps ensure that over time the daily benefit remains  commensurate with the costs of care.
There can be a substantial gap between the time a long-term care  insurance policy is purchased and the time when policyholders begin  using their benefits, and the costs associated with long-term care can  increase significantly during this time. A typical gap between the time of  purchase and the use of benefits is 15 to 20 years: the average age of all  long-term care insurance policyholders at the time of purchase is 63, and  in general policyholders begin using their benefits when they are in their  mid-70s to mid-80s. Usually, automatic inflation protection increases the  benefit amount by 5 percent annually on a compounded basis. A policy  with automatic 5 percent compound inflation protection and a $150 per  day maximum daily benefit in 2006 would be worth approximately $400  per day 20 years later. Another means to protect against inflation is a  future purchase option. This option allows the consumer to increase the  dollar amount of coverage every few years at an extra cost. Some future  purchase options do not allow consumers to purchase extra coverage  once they begin receiving their insurance benefit and the opportunity to  purchase extra coverage may be withdrawn should the consumer decline a  predetermined number of premium increases. A policy with a future  purchase option may be less expensive initially than a policy with  compound inflation protection. However, over time the policy with a  future purchase option may become more expensive than a policy with  compound inflation.
Without inflation protection, policyholders might purchase a policy that  covers the current cost of long-term care but find, many years later, when  they are most likely to need long-term care services, that the purchasing  power of their coverage has been reduced by inflation and that their  coverage is less than the cost of their care. For example, if the cost of a  day in a nursing facility increases by 5 percent every year for 20 years, a  nursing facility that costs $150 per day in 2006 would cost about $400 per  day 20 years later in 2026. A policy purchased in 2006 with a daily benefit  of $150 without inflation protection would pay $150 per day—or   38 percent—of the daily cost of about $400 in 2026. The remaining $250 of  the daily cost of the nursing facility care would have to be paid by the  policyholder.
Long-term care insurance policies may also include other benefits or  options. For example, policies can offer coverage for home care at varying  percentages of the maximum daily benefit amount. Some policies include  features in which the policy returns a portion of the premium payments to  a designated third party if the policyholder dies. Some policies provide  coverage for long-term care provided outside of the United States or offer  care-coordination services that, among other things, provide information  about long-term care services to the policyholder and monitor the delivery  of long-term care services.
Many factors impact the premiums individuals pay for long-term care  insurance. Notably, long-term care insurance companies typically charge  higher premiums for policies with more extensive benefits. In general,  policies with comprehensive coverage have higher premiums than policies  without such coverage, and policyholders pay higher premiums the higher  their maximum daily benefit amounts, the longer their benefit periods, the  greater their inflation protection, and the shorter their elimination periods.  For example, in Connecticut, if a 55-year-old man decided to buy a 1-year,  $200 per day comprehensive coverage policy, in 2005 it would have cost  him about $1,000 less per year than a comparable 3-year policy. Similarly,  the age of an applicant also impacts the premium, as premiums typically  are more expensive the older the policyholder at the time of purchase. For  example, in Connecticut, a 55-year-old purchasing a 3-year, $200 per day  comprehensive coverage policy in 2005 would pay about $2,500 per year,  whereas a 70-year-old purchasing the same policy would pay about $5,900  per year. Health status may also affect premiums. Insurance companies  take into account the health status of an applicant to evaluate the risk that  he or she will access long-term care services. If an applicant has a medical  condition that increases the likelihood of the applicant using long-term  care services, but does not automatically disqualify the applicant from  purchasing insurance, the applicant may receive a substandard rating from  an insurance company, which may result in a higher premium.
section_title: Long-Term Care Insurance Regulation
paragraphs: Regulation of the insurance industry, including those companies selling  long-term care insurance, is a state function. Those who sell long-term  care insurance must be licensed by each state in which they sell policies,  and the policies sold must be in compliance with state insurance laws and  regulations. These laws and regulations can vary but their fundamental  purpose is to establish consumer protections that are designed to ensure  that the policies’ provisions comply with state law, are reasonable and fair,  and do not contain major gaps in coverage that might be misunderstood by  consumers and leave them unprotected.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA)  specified conditions under which long-term care insurance benefits and  premiums would receive favorable federal income tax treatment.  Individuals who purchase policies that comply with HIPAA requirements,  which are therefore “tax-qualified,” can itemize their long-term care  insurance premiums as deductions from their taxable income along with  other medical expenses, and can exclude from gross income insurance  company proceeds used to pay for long-term care expenses. Under HIPAA,  tax-qualified plans must begin coverage when a person is certified as:  needing substantial assistance with at least two of the six ADLs for at least  90 days due to a loss of functional capacity, having a similar level of  disability, or requiring substantial supervision because of a severe  cognitive impairment. HIPAA also requires that a policy comply with  certain provisions of the National Association of Insurance  Commissioners’ (NAIC) Long-Term Care Insurance Model Act and  Regulation adopted in January 1993. This model act and regulation  established certain consumer protections that are designed to prevent  insurance companies from (1) not renewing a long-term care insurance  policy because of a policyholder’s age or deteriorating health, and   (2) increasing the premium of an existing policy because of a  policyholder’s age or claims history. In addition, in order for a long-term  care insurance policy to be tax-qualified, HIPAA requires that a policy  offer inflation protection. The NAIC, which represents insurance  regulators from all states, reported in 2005 that 41 states based their long- term care insurance regulations on the NAIC model, 7 based their  regulations partially on the model, and 3 did not follow the model.
section_title: Medicaid
paragraphs: Medicaid is the primary source of financing for long-term care services in  the United States. In 2004, almost one-third of the total $296 billion in  Medicaid spending was for long-term care. Some health care services, such  as nursing facility care, must be covered in any state that participates in  Medicaid. States may choose to offer other optional services in their  Medicaid plans, such as personal care.
Medicaid coverage for long-term care services is most often provided to  individuals who are aged or disabled. To qualify for Medicaid coverage for  long-term care, these individuals must meet both functional and financial  eligibility criteria. Functional eligibility criteria are established by each  state and are generally based on an individual’s degree of impairment,  which is measured in terms of the level of difficulty in performing the  ADLs and IADLs. To meet the financial eligibility criteria, an individual  cannot have assets or income that exceed thresholds established by the  states and that are within standards set by the federal government.  Generally, the value of an individual’s primary residence and car, as well  as a few other personal items, are not considered assets for the purpose of  determining Medicaid eligibility. Individuals with high medical costs and  whose income exceeds state thresholds can “spend down” their income on  their long-term care, which may bring their income below the state- determined income eligibility limit. In all four states with Partnership  programs, for the purpose of obtaining Medicaid eligibility, individuals are  allowed to deduct medical expenses, including those for long-term care, in  order to bring their incomes below the state-determined thresholds.
In order to meet Medicaid’s eligibility requirements, some individuals may  choose to divest themselves of their assets—for example, by transferring  assets to their spouses or other family members. However, those who  transfer assets for less than fair market value during a specified “look- back” period—a period of time before an individual applies for Medicaid  during which the program reviews asset transfers—may incur a penalty,  that is, a period during which they are ineligible for Medicaid coverage for  long-term care services. Evidence of the extent to which individuals  transfer assets for less than fair market value to become financially  eligible for Medicaid coverage for long-term care is generally limited and  often based on anecdote. However, our March 2007 report on asset  transfers suggests that the incidence of asset transfers is low among  nursing home residents covered by Medicaid. Nationwide, about   12 percent of Medicaid-covered elderly nursing home residents reported  transferring cash during the 4 years prior to nursing home entry, and the  median amount transferred was very small ($1,239). The percentage of  nursing home residents not covered by Medicaid who transferred cash  was about twice that of Medicaid-covered nursing home residents.  However, the median amount of cash transferred as reported by non- Medicaid covered residents and Medicaid-covered residents did not vary  greatly. In addition to the nationwide analysis, our report summarized an  analysis of a sample of approved Medicaid nursing home applicants in  three states who generally applied to Medicaid in 2005 or before, and  found that about 10 percent of applicants had transferred assets for less  than the fair market value during the 3-year look-back period before  Medicaid eligibility began. The median amount transferred was about  $15,000. DRA tightened the requirements on Medicaid applicants  transferring assets by extending the look-back period for all asset transfers  from 3 to 5 years. In addition, DRA changed the beginning date of the  penalty period. Prior to enactment of DRA, the penalty period started on  the first day of the month during or after which assets were transferred.  DRA changed this so that the penalty period now begins on the first day of  the month when the asset transfer occurred, or the date on which the  individual is eligible for medical assistance under the state plan, and is  receiving institutional care services that would be covered by Medicaid  were it not for the imposition of the penalty period, whichever is later. The  extension of the look-back period and the redefinition of the penalty  period may reduce transfers of assets.
section_title: Long-Term Care Partnership Programs
paragraphs: The Partnership programs are public-private partnerships between states  and private long-term care insurance companies. Established in 1987 as  programs funded through the Robert Wood Johnson Foundation, the  programs are designed to encourage individuals, especially moderate  income individuals, to purchase private long-term care insurance in an  effort to reduce future reliance on Medicaid for the financing of long-term  care. As of October 2006, the original four Partnership programs in  California, Connecticut, Indiana, and New York remained the only active  Partnership programs.
Partnership programs attempt to encourage individuals to purchase  private long-term care insurance by offering them the option to exempt  some or all of their assets from Medicaid spend-down requirements.  However, Partnership policyholders are still required to meet Medicaid  income eligibility thresholds before they may receive Medicaid benefits. In  the four states with Partnership programs, those who purchase long-term  care insurance Partnership policies generally must first use those benefits  to cover the costs of their long-term care before they begin accessing  Medicaid. In 2006, there were about 190,000 active Partnership policies,  out of the approximately 218,000 Partnership policies that had been sold  since the inception of the Partnership programs. Between September  2005 when we last reported on the Partnership programs, and August 2006,  the number of Partnership policies in the four states combined increased  by about 10 percent.
The four states with Partnership programs vary in how they protect  policyholders’ assets. The Partnership programs in California,  Connecticut, Indiana, and New York have dollar-for-dollar models, in  which the dollar amount of protected assets is equivalent to the dollar  value of the benefits paid by the long-term care insurance policy. For  example, a person purchasing a long-term care dollar-for-dollar insurance  policy with $300,000 in coverage would have $300,000 of assets protected  if he or she were to exhaust the long-term care insurance benefits and  apply for Medicaid. However, New York’s program also offers total  protection. That is, those who purchase a comprehensive long-term care  insurance policy, covering a minimum of 3 years of nursing facility care or  6 years of home care, or some combination of the two, can protect all their  assets at the time of Medicaid eligibility determination. In Indiana, in  addition to the dollar-for-dollar models, the Partnership program offers a  hybrid model that allows purchasers to obtain dollar-for-dollar protection  up to a certain benefit level as defined by the state; all policies with  benefits above that threshold provide total asset protection for the  purchaser.
Under DRA, any state that implements a Partnership program must ensure  that the policies sold through that program contain certain benefits, such  as inflation protection. DRA also requires that Partnership policies  provide dollar-for-dollar asset protection. Insurers are not allowed to offer  Partnership policies that provide the total asset protection feature found  in Partnership policies in New York and Indiana. DRA also requires  Partnership policies to include consumer protections contained in the  NAIC Long-Term Care Insurance Model Act and Regulation as updated in  October 2000. DRA established specific requirements for Partnership  policies that do not apply to traditional long-term care insurance policies  sold in the Partnership states, such as inflation protection and dollar-for- dollar asset protection. DRA prohibits states from creating other  requirements for Partnership policies that do not also apply to traditional  long-term care insurance policies in the four states with Partnership  policies. The Partnership programs in California, Connecticut, Indiana,  and New York, which were implemented before DRA, are not subject to  these specific requirements, but in order for those programs to continue,  they must maintain consumer protection standards that are no less  stringent than those that applied as of December 31, 2005.
section_title: Partnership Policies Must Include Certain Benefits Not Required of Traditional Policies, and Insurance Companies Cannot Charge Higher Premiums for Asset Protection in Partnership Policies
paragraphs: The four states with Partnership programs require that Partnership  policies include certain benefits—such as inflation protection and  minimum daily benefit amounts—while traditional long-term care  insurance policies may include these benefits but are not generally  required to do so. Compared with policyholders of traditional long-term  care insurance policies, a higher percentage of Partnership policyholders  purchased policies with more extensive coverage. In the four states,  insurance companies are not allowed to charge policyholders higher  premiums for policies with asset protection, and Partnership and  traditional long-term care insurance policies with comparable benefits are  required to have equivalent premiums.
subsections: section_title: The Four States Require Partnership Policies to Include Certain Benefits Not Required for Traditional Long-Term Care Insurance Policies
paragraphs: In general, the four states with Partnership programs require that  Partnership policies sold in their states include certain benefits that are  not required for those states’ traditional long-term care insurance policies.  A state DOI official told us that they have these benefit requirements for  Partnership policies in order to protect policyholders by helping to ensure  that benefits are sufficient to cover a significant portion of their  anticipated long-term care costs and to protect the Medicaid program by  reducing the likelihood that policyholders will exhaust their benefits and  become eligible for Medicaid.
In addition to asset protection, which by definition Partnership policies  include, all four states require Partnership policies to include inflation  protection. Three of the four Partnership states—California, Connecticut,  and New York—require that Partnership policies include inflation  protection that automatically increases benefit amounts by 5 percent  annually on a compounded basis. The four states do not require  traditional long-term care insurance policies to include inflation  protection, though insurance companies in these states are required to  offer inflation protection as an optional benefit. While policies with  inflation protection may include coverage that is more commensurate with  expected future costs of care, these policies can be two or three times as  expensive as policies without inflation protection. For example, in 2005 a  long-term care insurance policy with a $200 daily benefit, a 3-year benefit  period, and inflation protection cost about $3,000 per year for a 60-year-old  male; the same policy cost about $1,350 per year without inflation  protection. An insurance company official told us that the additional cost  of inflation protection is the primary reason individuals do not buy a  Partnership policy.
The four states with Partnership programs also require minimum daily  benefit amounts for all Partnership policies, while in three of the  Partnership states, traditional long-term care insurance policies are not  subject to this requirement. According to Partnership and DOI officials in  California and Connecticut, minimum daily benefit amounts are required  for Partnership policies in order to prevent consumers from purchasing  coverage that would be insufficient to cover a substantial portion of the  cost of their care. According to Partnership program materials from New  York, for example, the average daily cost of long-term care in a nursing  facility in New York was about $263 per day in 2004. Anything less than  New York’s 2004 minimum daily benefit amount of $171 for nursing facility  care would therefore have required out-of-pocket payments for  policyholders of more than one-third of the cost of their nursing facility  care. In 2006, the required minimum daily benefit amounts for nursing  facility care in Partnership policies ranged from $110 per day in Indiana to  $189 per day in New York.
In the four states with Partnership programs, Partnership policies are  subject to minimum nursing facility benefit period requirements  established by the states, but some traditional long-term care insurance  policies are not subject to these same requirements. In California and  Indiana, Partnership policies are required to have dollar coverage that  provides for at least 1 year of care in a nursing facility, while traditional  long-term care insurance policies are not subject to a minimum benefit  period requirement. In New York, Partnership policies are required to  have minimum nursing facility benefit periods ranging from 18 months to   4 years, depending on the type of coverage an individual purchases, while  certain traditional long-term care insurance policies are required to have   1-year minimum nursing facility benefit periods. In Connecticut,  Partnership and traditional long-term care insurance policies are both  required to have 1-year minimum benefit periods for care provided in  nursing facilities.
Partnership and traditional long-term care insurance policies both  typically include elimination periods, which establish the length of time a  policyholder who has begun to receive long-term care has to wait before  receiving long-term care insurance benefits. The four states with  Partnership programs limit the length of the elimination periods that can  be included in Partnership policies. Two of the four states, Connecticut  and New York, also generally limit the elimination period included in  traditional long-term care insurance policies. In 2006, the elimination  period for Partnership policies in California was no more than 90 days,  while New York had a 100-day limit and Indiana had a 180-day limit. In  Connecticut, the elimination period limit for both Partnership and  traditional long-term care insurance policies was 100 days. According to a  New York Partnership program staff member, in New York the elimination  period for traditional policies was generally no more than 180 days. The  effect of increasing the elimination period is to increase the out-of-pocket  costs policyholders incur in paying for their long-term care. One official  from an insurance company that sells long-term care insurance policies  told us that having long elimination periods could quickly deplete an  individual’s assets, which might make the asset protection under the  Partnership program less valuable.
Unlike traditional long-term care insurance policies, Partnership policies  in the four states must cover or offer case management services. Case  management services can include providing individual assessments of  policyholders’ long-term care needs, approving the beginning of an  episode of long-term care, developing plans of care, and monitoring  policyholders’ medical needs. According to a Partnership program official,  by helping policyholders assess their medical needs and develop a plan of  care, case management services can help policyholders use their benefit  dollars efficiently. Partnership program officials in California,  Connecticut, and Indiana explained that their states require that  Partnership policies cover case management services provided through  state-approved intermediaries that are independent of insurance company  control. Partnership program officials in New York told us that  Partnership policyholders have the option to seek case management  services from independent case management service providers, but they  can also elect to receive case management services from their own  insurance company. Traditional long-term care insurance policies are not  required to cover case management services, though some may offer them  as an optional benefit. In addition, some insurance companies that sell  traditional long-term care insurance policies may directly provide case  management services.
Insurance companies in the four states with Partnership programs are  subject to restrictions on the types of coverage they can offer in  Partnership policies, while they are allowed to offer traditional long-term  care insurance policies with more coverage options. In California,  Connecticut, and Indiana, insurance companies can only offer Partnership  policies with two types of coverage: an option that covers only nursing  facility care, and a comprehensive option that covers nursing facility care  as well as care provided in the home and in community-based facilities.  In New York, insurance companies may only offer Partnership policies  that cover comprehensive care. The four states do not allow insurance  companies to offer Partnership policies in their state that exclusively  cover care provided in the home and in community-based facilities.  However, in the four states, insurance companies can offer traditional  long-term care insurance policies with nursing facility care only, home and  community-based facility only, and comprehensive coverage options.
section_title: Partnership Policyholders Purchased Policies with Benefits That Were More Extensive Than Those Purchased by Traditional Policyholders Nationwide
paragraphs: In the four states with Partnership programs, traditional long-term care  insurance policies can include—and individuals can therefore choose to  purchase—generally the same benefits found in Partnership policies.  However, Partnership policyholders tended to purchase benefits that are  more extensive than those purchased by traditional long-term care  insurance policyholders. We found that from 2002 through 2005, a higher  percentage of Partnership policyholders purchased policies with more  extensive coverage compared with policyholders who purchased  traditional long-term care insurance nationally. Specifically, more  Partnership policyholders purchased policies with higher levels of  inflation protection and coverage that includes care in both nursing facility  and home and community-based care settings. See table 1 for a summary  of the benefits purchased by Partnership and traditional long-term care  insurance policyholders. For example, while all Partnership policyholders  had policies from 2002 through 2005 with the required inflation protection  that generally increases daily benefit amounts by 5 percent annually, about  76 percent of traditional long-term care insurance policyholders had  policies with some form of inflation protection. Similarly, during this  period, 64 percent of all Partnership policyholders had policies that  included daily benefit amounts of $150 or greater, while 36 percent of  traditional long-term care insurance policyholders nationwide had policies  that provided daily benefit amounts at this level or greater. While these  differences may reflect the benefit requirements found in Partnership  policies, they may also reflect the incentive offered by the asset protection  benefit of Partnership policies, which may influence consumers deciding  whether to buy a Partnership or traditional long-term care insurance  policy. The differences may also reflect the demographic and financial  characteristics of the people living in the four states with Partnership  programs relative to other states.
section_title: Insurance Companies Cannot Charge Partnership Policyholders Higher Premiums for Asset Protection, and Premiums for Partnership Policies Must Be Equivalent to Premiums of Traditional Policies That Have Comparable Benefits
paragraphs: According to state officials, the four states with Partnership programs  require Partnership and traditional long-term care insurance policies to  have equivalent premiums if the benefits offered—except for asset  protection—are otherwise comparable. According to information from  one state’s Partnership program, one reason for this requirement is that,  unlike other insurance company benefits, insurance companies do not  provide asset protection to Partnership policyholders. Instead, the four  states with Partnership programs provide the asset protection benefit by  allowing Partnership policyholders to protect some or all of their assets  from Medicaid spend-down requirements. However, because Partnership  policies are required to have inflation protection and other benefits that  traditional long-term care insurance policies are not required to have,  Partnership policies are likely to have higher premiums. According to a  Connecticut state official, in 1996, before the state required that  Partnership and traditional long-term care insurance policies have  equivalent premiums for the same benefits, Partnership policies were 25 to  30 percent more expensive than traditional long-term care insurance  policies with comparable benefits. The official further explained that after  the requirement was established, sales of Partnership policies in  Connecticut more than tripled.
section_title: Compared with Traditional Long-Term Care Insurance Policies, Two of Four States Subject Partnership Policies to Additional Review, and All Four States Require Additional Agent Training
paragraphs: State officials told us that, while both Partnership and traditional long- term care insurance policies undergo reviews by the DOI in each of the  four states with Partnership programs, Partnership policies in California  and Connecticut also undergo another review by state Partnership  program officials. California and Connecticut Partnership program staff  review Partnership policies to determine whether the policies include the  benefits mandated by Partnership regulations, and whether the insurance  companies can meet additional data reporting and other administrative  requirements. The programs’ staff also try to ensure that the policies can  be easily understood and contain all of the required language. The  Partnership program offices in California and Connecticut perform their  review of policies first, and then pass the application on to the DOI for  further review.
DOI officials in California and Connecticut told us that the Partnership  office review of Partnership policies tends to be lengthier for insurance  companies than the DOI review. A DOI official explained that when  insurance companies add new benefit options to policies, the Partnership  review can take longer. Other factors that may slow the Partnership  review process include the time spent coordinating between the  Partnership program and the state DOI, and the time it takes for insurance  companies to learn how to complete the Partnership review process for  the first time. State officials in Indiana and New York—where reviews of  new Partnership policies are conducted by the DOI and not a separate  Partnership program office—told us that it generally takes the same  amount of time for Partnership and traditional long-term care insurance  policies to pass through the review process.
Before they can sell Partnership policies, insurance agents are subject to  additional state training requirements compared with agents who sell only  traditional long-term care insurance policies. Although each of the four  states with Partnership programs has somewhat different requirements, in  general the states require Partnership agents to undergo about a day of  training specific to the Partnership program in addition to the training that  the states require for those who sell traditional long-term care  insurance. Partnership program training typically includes information  on topics such as long-term care planning, Medicaid, Medicare, the  specific benefits required by the Partnership program, and how  Partnership policies differ from traditional long-term care insurance  policies. According to some state officials, agents need training on the  Partnership program and Medicaid in order to understand the program  and provide appropriate advice to their clients. In 2006, in three of the four  states all Partnership program training was conducted in person, rather  than via correspondence or on the internet; however, in New York agents  completed an online internet-based course as well as classroom training as  part of the Partnership program training. According to state officials, all  four Partnership states require that the provider of this specialized  Partnership training be approved by the state DOI, and in Connecticut, the  training is provided exclusively by Partnership program staff.
Despite the complexity of long-term care insurance products, DOI officials  in three states with Partnership programs reported that long-term care  insurance policies, including Partnership policies, garner few complaints  from policyholders. For example, from 1998 to 2005 the New York  Insurance Department received an average of two to three complaints  about Partnership policies each year (there were 51,262 active Partnership  policies in the fourth quarter of 2005 in New York). During this time  period, according to data from the New York state DOI, complaints about  all long-term care insurance policies in New York related to issues such as  the interpretation of policy provisions, premium amounts, and refusals to  issue policies.
section_title: Long-Term Care Insurance Policyholders Are Generally Wealthier than Those Without Such Insurance, and Partnership Policyholders Are Typically Younger than Traditional Long- Term Care Insurance Policyholders
paragraphs: Long-term care insurance policyholders—that is, both Partnership  policyholders and traditional long-term care insurance policyholders—are  more likely to have higher incomes and more assets than people without  long-term care insurance. On average, Partnership policyholders are  younger than traditional long-term care insurance policyholders. Those  with long-term care insurance policies are also more likely to be female  rather than male, and married than unmarried.
subsections: section_title: Long-Term Care Insurance Policyholders Generally Have Higher Incomes and More Assets than Those Without Long-Term Care Insurance
paragraphs: In examining Partnership policyholders in two states, traditional long-term  care insurance policyholders nationwide, and those without long-term  care insurance nationwide, we found that Partnership and traditional long- term care policyholders are more likely to have higher incomes than those  without such insurance. In California and Connecticut—the two states  with Partnership programs for which we had data—at the time they  purchased a policy, 55 percent of Partnership policyholders over age 55  had monthly household incomes of $5,000 or greater. In comparison,   43 percent of all households with people over age 55 in these states had  monthly household incomes at this level at the time they were surveyed.
Similarly, at the national level, when surveyed, 46 percent of traditional  long-term care policyholders over age 55 had monthly household income  of $5000 or greater, whereas 29 percent of those individuals over age 55  without long-term care insurance had such incomes. We also found that  more than half (53 percent) of Partnership policyholders had household  assets of $350,000 or more in California and Connecticut. Data on the asset  levels of all households in those states were not available for our  comparison. Nationwide, 36 percent of traditional long-term care  insurance policyholders and 17 percent of people without long-term care  insurance had household assets exceeding $350,000 (see table 2).
section_title: Partnership Policyholders Are Younger on Average than Traditional Long-Term Care Insurance Policyholders and People Without Long-Term Care Insurance
paragraphs: In our analyses, we found that Partnership policyholders in California,  Connecticut, Indiana, and New York are younger on average than  traditional long-term care insurance policyholders nationally and those  without long-term care insurance nationally (see table 3). We also found  that those who purchase long-term insurance policies—both traditional  and Partnership—are more likely to be women than men, and married  than unmarried.
section_title: Partnership Programs Unlikely to Result in Savings for Medicaid Largely Because of the Asset Protection Benefit of Partnership Policies
paragraphs: Surveys conducted in some states with Partnership programs and our  illustrative financing scenarios together suggest that in the four states with  Partnership programs, the programs are unlikely to result in Medicaid  savings and could result in increased Medicaid spending. Survey data  show that in the absence of a Partnership program in their state,   80 percent of Partnership policyholders would have purchased a  traditional long-term care insurance policy and may represent a potential  source of increased spending for Medicaid. Data are not yet available to  determine the extent to which the 20 percent of individuals who would  have self-financed their care will access Medicaid in the absence of a  Partnership program. However, our scenarios suggest that an individual  could self-finance care and delay Medicaid eligibility for about the same  amount of time as he or she would have with a Partnership policy,  although we identify some circumstances that could delay or accelerate  the time to Medicaid eligibility. Because of the amount of insurance  Partnership policyholders generally purchase and their typical income and  assets, few Partnership policyholders are likely to ever become eligible for  Medicaid, which suggests that the Partnership programs are likely to have  a small impact on Medicaid spending.
subsections: section_title: Most Partnership Policyholders Would Have Purchased Traditional Long-Term Care Insurance in Absence of Partnership Program, Suggesting an Increase in Medicaid Spending
paragraphs: The four Partnership programs are unlikely to result in savings for their  state Medicaid programs and may result in increased Medicaid spending.  Based on surveys of Partnership policyholders conducted by state  Partnership programs in California, Connecticut, and Indiana, we estimate  that, in the absence of a Partnership program in their state, 80 percent of  Partnership policyholders would have purchased traditional long-term  care insurance policies instead, while the other 20 percent would have  self-financed their care. To assess the impact Partnership programs may  have on Medicaid savings in the four states with Partnership programs, we  explored, under three different illustrative financing scenarios and using  certain assumptions, how long it would take before an individual using a  Partnership policy would become eligible for Medicaid and how long—in  the absence of a Partnership program—it would take for the same  individual to become eligible for Medicaid using the other two financing  options depicted in the scenarios. Our financing scenarios indicate that  with a Partnership policy, an individual with assets and benefits typical of  many policyholders becomes eligible for Medicaid sooner than if the  individual financed his or her long-term care with a traditional long-term  care policy. Because a Partnership policy, unlike a traditional long-term  care insurance policy, exempts the individual in the scenario from  spending his or her protected assets on long-term care before the  individual becomes eligible for Medicaid, the individual with a Partnership  policy becomes eligible for Medicaid sooner than if the individual had a  traditional policy, which is likely to increase the amount of time Medicaid  finances the individual’s long-term care. The scenarios also suggest that if  the individual would have self-financed his or her long-term care in the  absence of the Partnership program, the individual would become eligible  for Medicaid at about the same time as he or she would have with a  Partnership policy.
The three financing scenarios we compared were  financing using a Partnership policy, financing using a traditional long-term care insurance policy, and   self-financing without any long-term care insurance.
For illustrative purposes, our scenarios are based on an individual with  assets that are typical of many of those who have long-term care  insurance—that is, an individual who holds assets of $300,000. In two of  our scenarios, the individual holds long-term care insurance benefits of  $210,000, which will cover a nursing facility stay of about 3 years—the  average nursing facility stay is between 2 and 3 years. We also make  several simplifying assumptions, such as that the individual is not  overinsured (i.e., does not have insurance that exceeds the value of the  individual’s assets) and is unmarried at the time long-term care is required.
Specifically, scenario A (see fig. 1) depicts a Partnership policyholder with  $300,000 in assets who purchases a policy valued at $210,000 (worth about  3 years of nursing facility coverage), automatically receiving $210,000 in  asset protection. When the individual requires long-term care, the  Partnership policy will pay for the first $210,000 worth of care—the total  amount of his or her insurance benefits. After these Partnership benefits  have been exhausted, the individual will have to spend down the $90,000  of unprotected assets on long-term care and then, assuming the individual  meets state Medicaid income eligibility requirements, Medicaid will begin  to finance the individual’s long-term care. As depicted by scenario B, if this  same individual purchases a traditional long-term care insurance policy  worth $210,000 instead of the Partnership policy, insurance will pay for the  first $210,000, and the individual will then have to spend down the  unprotected assets—all $300,000—before he or she is eligible for  Medicaid. Scenario C describes how this same individual would finance  his or her long-term care without any long-term care insurance. As  scenario C shows, if the individual had $300,000 in assets, these would  have to be spent before the individual would be eligible for Medicaid. In  both this scenario and in the scenario in which the individual owns a  Partnership policy, Medicaid begins paying for the individual’s long-term  care at about the same time, with the difference being whether long-term  care costs prior to Medicaid eligibility are paid by long-term care  insurance or by the individual.
We found some circumstances when adjusting the assumptions underlying  our scenarios resulted in delaying or accelerating Medicaid eligibility, but  most did not change the outcomes related to Medicaid savings. For  example, to construct our scenarios, we assumed an individual who had  $300,000 in assets, $210,000 in insurance coverage, and who used this  coverage for long-term care that cost about $70,000 per year. When we  changed these amounts—as long as the amount of insurance coverage did  not exceed the amount of assets—the scenarios still showed that the  individual became eligible for Medicaid sooner with a Partnership policy  than with a traditional policy, and became eligible for Medicaid at the  same time with a Partnership policy and self-financing.
Our scenarios also assumed that the individual with a Partnership policy  or a traditional long-term insurance policy was not overinsured—that is,  had more insurance coverage than the value of his or her assets. When we  modified this assumption, we found that one portion of our finding still  held true—the individual in the scenarios using the Partnership policy still  became eligible for Medicaid sooner than he or she did using a traditional  long-term care insurance policy. However, the individual also became  eligible for Medicaid later using the Partnership policy than when the  individual self-financed his or her own long-term care. This suggests that if  individuals overinsure their assets, those who finance their long-term care  using Partnership policies could represent a source of savings for  Medicaid when compared with those who self-finance their care. However,  the number of policyholders that this applies to is unlikely to be large  enough to offset the number of Partnership policyholders who represent a  potential source of increased Medicaid spending. While we do not have  information about the amount of assets that Partnership policyholders  have at the time they use their benefits, survey data from California and  Connecticut indicate that when Partnership policyholders purchased their  policies, they tended to purchase policies that were equal to or lower than  the value of their household assets. This suggests that most individuals are  unlikely to overinsure their assets at the time of purchase, though their  status could change over time. In California and Connecticut combined,  in 2004, 53 percent of Partnership policyholders had at least $350,000  worth of household assets at the time of purchase, while only about   32 percent of these Partnership policyholders have more than 5 years of  coverage equal to about $350,000.
Our scenarios also depicted an unmarried individual. While most  Partnership policyholders are married when they purchase a Partnership  policy, by the time most individuals require long-term care services, they  are unmarried. Our analysis of 2004 HRS data of individuals entering a  nursing facility who are age 65 or older showed that about 66 percent are  widowed, and more than 75 percent are not married. However, there are  likely some individuals who will be married when they require long-term  care services. In general, after applying the Medicaid spousal exemption, if  the individual’s assets remain higher than the value of his or her insurance,  being married does not change the result that compared with a  Partnership policy, the individual’s time to attain Medicaid eligibility is  accelerated with a traditional policy and is the same as with self- financing. However, if the amount of the Medicaid spousal exemption  brings the individual’s eligible assets below the value of the insurance  policy, then the individual would fall into an overinsured category. Being  overinsured means the individual would become a source of savings for  Medicaid; however, this only applies to the 20 percent of individuals who  would have self-financed their care in the absence of a Partnership  program. The 80 percent of individuals who would have purchased a  traditional policy still represent potential increased spending, whether  they are overinsured or not.
We also explored what would occur if we modified our assumption that an  individual is equally likely to transfer assets in all three of our scenarios.  We found that if the individual who would have self-financed care  transfers his or her assets, it would likely take less time for the individual  to become eligible for Medicaid than it would with a Partnership policy.  This could result in some savings to Medicaid for those individuals who  purchase Partnership policies instead of transferring assets. We also found  that for an individual who would have purchased traditional insurance, the  amount of assets transferred would have to be at least as much as the  value of the insurance policy purchased in order for the Partnership  program to result in Medicaid savings. While we do not know how many  individuals would have transferred assets in the absence of the  Partnership program, one of our recent reports suggests that asset  transfers may not be that prevalent. In March 2007, we reported that few  applicants who were approved for Medicaid coverage ultimately  transferred assets. In addition, the asset transfer standards established  under DRA increased the look-back period to 5 years, which reduces the  opportunity for individuals to transfer assets to establish Medicaid  eligibility.
Overall, our scenarios suggest that in the aggregate the savings potential  from the Partnership programs of the 20 percent of individuals who would  have self-financed their care is outweighed by the 80 percent of individuals  who will likely result in increased Medicaid spending. For more  information on our simplifying assumptions and the impact of adjusting  these assumptions on our findings, see appendix II.
section_title: Few Partnership Policyholders Are Likely to Become Eligible for Medicaid, Limiting the Impact on Medicaid Expenditures
paragraphs: Although our survey data and scenarios show that about 80 percent of  Partnership policyholders who become eligible for Medicaid are likely to  do so sooner than they otherwise would have without a Partnership  program, we also expect that few Partnership policyholders will actually  become eligible for Medicaid and turn to the program to finance their long- term care. There are two reasons for this expectation. First, most  Partnership policyholders purchase policies that are likely to cover all or  most of their long-term care expenses during their lifetimes, thereby  reducing the likelihood that the policyholders will require financing from  Medicaid for their long-term care. We found that 86 percent of Partnership  policyholders had benefits covering 3 or more years, while the average  nursing facility stay lasts between 2 and 3 years. One study of traditional  long-term care insurance policyholders with lifetime benefits found that  only about 14 percent of policyholders used their benefits for more than   3 years, and fewer than 5 percent of all policyholders used their benefits  for more than 5 years. These data suggest that if Partnership policyholders  continue to purchase policies with benefit periods that cover their long- term care needs, the percentage of Partnership policyholders who exhaust  their benefits and then become eligible for Medicaid is likely to be limited.  While some experts have reported that there is a recent trend for  traditional long-term care insurance policies to be sold with shorter  benefit periods, the minimum benefit requirements that applied to  Partnership policies could result in Partnership benefits remaining more  stable over time.
The second reason we estimate that few Partnership policyholders are  likely to turn to Medicaid for their long-term care financing is that, in  general, Partnership policyholders have incomes that exceed Medicaid  income eligibility thresholds. Although Partnership policyholders can  purchase varying amounts of asset protection, they must still meet state  Medicaid income thresholds in order to become eligible for Medicaid. In  2006, the monthly income eligibility thresholds for all states were required  to be no higher than 300 percent of the Supplemental Security Income  standard, which was $1,809 in 2006. However, only 1 percent of the  Partnership policyholders in California and Connecticut had household  incomes less than $1,000 per month at the time they purchased their long- term care insurance policies. Our analysis of HRS data also indicates that  wealthy individuals continue to have a high level of assets at the time  they are admitted to a nursing facility, which suggests that many  Partnership policyholders will continue to be relatively wealthy and  unlikely to meet Medicaid eligibility thresholds, even at the time they enter  a nursing facility. For example, of all people who entered a nursing facility  in 2004, the average asset value for the 25 percent of people with the  highest assets was over $334,000 in 1992, and by 2004, 12 years later, their  assets had grown to almost $430,000. Similarly, the average monthly  income for the 25 percent of people with the highest incomes who were  admitted to a nursing facility in 2004 was about $5,600 in 1992, and about  $3,700 in 2004—more than double the threshold for Medicaid eligibility in  any of the four states with Partnership programs.
The income levels of Partnership policyholders may reflect the fact that  the cost of purchasing a long-term care insurance policy—including a  Partnership policy—may exceed what most elderly households can afford.  According to guidelines published by the NAIC, a person should spend no  more than 7 percent of his or her income on long-term care insurance. A  traditional long-term care insurance policy covering 3 years of care, with  inflation protection, a $200 daily benefit allowance, and comprehensive  coverage, costs about $3,000. In order to afford such a policy, an individual  would need an annual income of about $43,000. However, data from the  2004 HRS show that about half of elderly households nationwide had  annual incomes below $43,000. A survey of Connecticut Partnership  policyholders suggested that cost was the most important factor in  policyholders’ decision to let their policies lapse. Sixty-two percent of  surveyed individuals in Connecticut who let their Partnership policy lapse  said that they dropped their Partnership policy because it was too costly.
As of 2006, few Partnership policyholders in the four states with  Partnership programs had accessed Medicaid to finance their long-term  care. Of the approximately 218,000 Partnership policies sold since the  program was first introduced in the late 1980s, approximately 190,000  were still active as of August 2006. In addition, as of that same date, a total  of 3,454 Partnership policyholders—less than 2 percent of all Partnership  policyholders—have accessed long-term care benefits since the  Partnership programs began. Of that group, 292 Partnership policyholders  exhausted their long-term care insurance benefits, and 159  policyholders—approximately 54 percent of those who exhausted their  benefits—subsequently went on to access Medicaid benefits. The number  of Partnership policyholders who access benefits and also access  Medicaid is likely to grow, because people typically use long-term care  services 15 to 20 years after they purchase a policy, and the first  Partnership policies were established less than 20 years ago. We do not  know why some of the 292 individuals who exhausted their long-term care  insurance benefits did not access Medicaid. It is possible that their income  was higher than Medicaid eligibility thresholds, or they may have had  unprotected assets that they had to spend down. Alternatively, they may  have preferred to self-finance their care, they may have died, or they may  have stopped using long-term care services.
section_title: Concluding Observations
paragraphs: With DRA authorizing all states to implement Partnership programs,  information on the Partnership policies and policyholders from the four  states with Partnership programs may prove useful to other states  considering implementing such programs. In particular, states may want to  consider the trade-offs that come with implementing a Partnership  program. First, a Partnership program’s potential impact on Medicaid  expenditures should be considered. Based on our scenario comparison  and survey data, we anticipate that Partnership programs in California,  Connecticut, Indiana, and New York are unlikely to result in savings for  their state Medicaid programs and could result in increased Medicaid  expenditures. This is largely due to the modifications of state Medicaid  eligibility requirements states have to make in order to offer asset  protection to Partnership policyholders and survey data showing that the  majority of Partnership policyholders would have purchased traditional  long-term care insurance had the Partnership program not existed.  However, given the amount of long-term care insurance benefits and  income and asset levels of current Partnership policyholders, we also  anticipate that relatively few policyholders will access Medicaid in the  four states with Partnership programs. Therefore, the impact of  Partnership programs on state Medicaid programs will likely be small.
While Partnership programs are not likely to reduce states’ Medicaid  expenditures, the programs do offer some benefits to some consumers.  The asset protection feature, which states require Partnership policies to  offer at no additional premium cost, can benefit policyholders who  exhaust their Partnership benefits and who access Medicaid. Even if  individuals do not end up using their Partnership insurance or Medicaid,  the availability of asset protection may provide peace of mind for those  who fear the risk of having to spend their assets on their long-term care.  However, states that implement Partnership programs should recognize  that, because of their cost, Partnership policies generally do not benefit all  consumers. The cost of annual premiums for long-term care insurance  may not be affordable to individuals with moderate incomes, and as a  result long-term care insurance policyholders, including Partnership  policyholders, tend to be wealthier than those without such insurance.
section_title: Agency and State Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from HHS (see  appendix III) and from the four states with Partnership programs,  California, Connecticut, Indiana, and New York (see appendix IV).
HHS commented that the results of our study should not be considered  conclusive because the results do not adequately account for the effect of  estate planning efforts such as asset transfers. Specifically, HHS was  concerned that the simplified scenarios were flawed in that they did not  account for individuals who engage in estate planning activities prior to  expending all of their own funds on long-term care costs. HHS further  noted that the data sources used in our report would not likely yield  accurate data on asset transfers and criticized the report for not  incorporating a review of the literature on this issue and reporting on  analyses of the experience of the four states with Partnership programs.  The four states with Partnership programs disagreed with our conclusion  that the Partnership programs are unlikely to result in Medicaid savings  and, like HHS, commented that our scenarios did not adequately account  for the impact of asset transfers. California, Connecticut, and New York  raised concerns about our methodology for estimating the financial impact  of the Partnership program on Medicaid. California and Connecticut noted  that we had excluded two Partnership policyholder survey questions from  our analysis that they consider in their own analysis of the Partnership  program.
We maintain that the evidence suggests that the Partnership program is  unlikely to result in savings for Medicaid, despite limited data and program  experience. We agree with HHS and the four states with Partnership  programs that Medicaid savings could result from those individuals who  would have transferred assets in the absence of the Partnership program.  However, our scenarios suggest that the savings associated with asset  transfers are likely to offset the potential costs associated with  policyholders who would have purchased traditional long-term care  insurance in the absence of the Partnership programs. Further, the  assumptions used by California, Connecticut, and Indiana to predict  savings could underestimate the percentage of Partnership policyholders  that represent a cost to Medicaid and overestimate the percentage that  represent savings to Medicaid. We did not provide an overview of the  literature on asset transfers in our draft report because, as we noted in our  March 2007 report, the evidence on the extent to which individuals  transfer assets to become financially eligible for Medicaid coverage for  long-term care is generally limited and often based on anecdote. We did  not comment on states’ analyses of their experience with the Partnership  programs because, according to our analysis, their methodology overstates  potential savings and understates potential costs.
subsections: section_title: Impact of Asset Transfers on Medicaid
paragraphs: In appendix II of our draft report we acknowledged that some savings  could result for Medicaid if, in the absence of a Partnership program, an  individual would have self-financed his or her long-term care and  transferred assets. We also acknowledged how a Partnership program can  result in Medicaid savings if, in the absence of the Partnership program, an  individual would have purchased a traditional long-term care insurance  policy and transferred assets that were at least equal to the value of the  traditional long-term care insurance policy. However, our analysis  suggests that these savings would be limited to those individuals who,  prior to requiring long-term care, would have transferred assets to become  eligible for Medicaid in the absence of the Partnership program. Further,  the larger percentage of policyholders who represent a potential cost to  Medicaid are likely to offset savings attributable to asset transfers.
While the literature on the extent of asset transfers is generally limited and  anecdotal, in March 2007, we published a report that included an analysis  of asset transfers by nursing home residents using HRS data. We  complemented that analysis by examining a sample of Medicaid  applications in three states to identify the extent of asset transfer activity.  Both of these analyses suggested that about 10 to 12 percent of individuals  transferred assets before applying for Medicaid, and the median amount  transferred based on analysis of the HRS data and state Medicaid  applications was $1,239 and $15,152, respectively. The relatively low  incidence of asset transfers and the small amounts transferred relative to  the costs associated with long-term care suggest that the impact of asset  transfers on Medicaid may be limited. While the results of this study are  not specific to Partnership policyholders, we found no other credible  evidence suggesting that Partnership policyholders would transfer  sufficient assets to offset the costs to Medicaid associated with the large  number of individuals who would have purchased traditional long-term  care insurance in the absence of the Partnership program. Also, although  the overall impact of DRA on Medicaid eligibility is uncertain, DRA  reduces the opportunity for people to transfer assets in order to become  Medicaid eligible by increasing the period Medicaid programs can “look- back” at an individual’s assets to 5 years. In response to HHS’ comments  about asset transfers, we have amended our draft report to make the  discussion of asset transfers more prominent in the body of our report and  to include reference to our March 2007 study.
section_title: Methodology for Assessing Medicaid Savings
paragraphs: California, Connecticut, and New York raised concerns about our  methodology for estimating the financial impact of the Partnership  program on Medicaid. California and Connecticut noted that we had  excluded two Partnership policyholder survey questions from our analysis  that they consider in their own analysis of the Partnership program. These  questions asked Partnership policyholders whether they would have  transferred assets to become eligible for Medicaid in the absence of the  program and whether the Partnership program influenced their decision to  buy long-term care insurance.
We maintain that our methodology is sound and that the methodology  California, Connecticut, and Indiana use underestimates the potential for  Medicaid costs and overestimates the potential for Medicaid savings. We  relied on a question that asked Partnership policyholders whether they  would have purchased traditional long-term care insurance in the absence  of the Partnership program. We disagree with California, Connecticut,  and Indiana regarding the appropriateness of including additional survey  information because of concerns about ambiguous wording and these  states’ assumption that policyholders’ responses can be used to predict the  likelihood of future asset transfers. We did not present the states’ analyses  for evaluating Medicaid spending in our draft report because we believe  the states’ analyses overstate potential savings and understate potential  costs.
In our analysis, we estimated that about 80 percent of policyholders would  have purchased traditional long-term care insurance in the absence of the  program, and we estimated that these individuals generally represented a  potential cost to Medicaid. Our 80 percent estimate was based on analysis  of the survey question about how Partnership policyholders would have  financed their long-term care in the absence of the Partnership program.  The methodology that California, Connecticut, and Indiana use to estimate  potential costs is based on a policyholders’ response to the following  criteria, obtained from three survey questions:  1.  The policyholder would have purchased traditional insurance in the  absence of the Partnership program;   2.  the Partnership program had no influence on the policyholders’  decision to purchase insurance; and  3.  the policyholder would not have transferred assets in the absence of  the Partnership program.
By adding the two additional criteria to determine whether an individual  represents a potential cost to Medicaid, the states’ estimate of the  percentage of policyholders who fell into this category was more  restrictive than ours. We have several concerns with the wording of the  survey questions used to define the additional two criteria. In addition,  according to our analysis, the criteria that define costs are not correctly  specified because there are some circumstances when the second  criterion would represent a cost to Medicaid whether or not the  Partnership program had an influence on the policyholder’s decision to  purchase insurance.
The wording of the survey question about whether the Partnership  program influenced the policyholder’s decision to purchase insurance was  not specific with regard to how the decision was influenced. In particular,  the Partnership programs’ influence could have been to influence the  policyholder to purchase a different benefit package, to change the timing  of the policyholder’s purchase, or to change the policyholder’s decision to  purchase at all. Given the ambiguity of the question, it is not clear how a  response should be interpreted. Moreover, how this question is interpreted  could influence the outcome of an analysis of the likely impact of the  Partnership program on Medicaid spending. Our analysis suggests that  even if the Partnership program influenced policyholders to purchase  enhanced benefits, the Partnership program still represented a potential  cost, just a smaller cost. Adding this criterion incorrectly narrows the  number of policyholders who represent potential costs to Medicaid.
We also disagree with the states’ assumption that policyholders’ responses  to the asset transfer question can be used to approximate the extent to  which individuals would or would not transfer all of their assets in the  future and—in the absence of the program—become eligible for Medicaid.  The respondents were asked about events that are unlikely to occur for 15  to 20 years, and to speculate on what their actions would be in the future if  there was no Partnership program. California, Connecticut, and New York  reported that about 25 percent of respondents said they would have  transferred assets to become eligible for Medicaid. All of these individuals  are excluded from the pool of policyholders who represent a potential cost  to the program in the state cost estimates. The assumption that all of these  individuals would have transferred all of their assets is inconsistent with  our March 2007 report regarding the incidence of asset transfers and  amount of assets transferred for the purposes of becoming eligible for  Medicaid. We agree that some individuals would have transferred assets in  the absence of the program, but do not agree that this question provides  an adequate measure of the extent to which it occurs. Therefore, we  believe using the responses to this question may overstate the extent to  which respondents would actually transfer all of their assets.
We have similar concerns with the methodology California, Connecticut,  and Indiana used to estimate savings, because it is based on the same  three questions, two of which we view as inadequate. We assumed in our  scenarios that individuals who would have self-funded their long-term care  without insurance were likely to be budget neutral, but acknowledged  there were several circumstances that would cause these individuals to  become a potential source of savings. However, we did not attempt to  quantify the percentage who would become a source of savings because of  data limitations and because the savings were likely to be outweighed by  the larger percentage of policyholders who likely represented a cost to the  program. In contrast, California, Connecticut, and Indiana consider a  policyholder to represent savings if:  1.  the policyholder would have purchased a Partnership policy as an  alternative to transferring assets; and  2.  (a) the Partnership program influenced their decision to purchase  insurance, or   (b) the policyholder would not have purchased long-term care  insurance in the absence of the Partnership program.
As we noted in the discussion above regarding the states’ methodology for  estimating Medicaid costs, we disagree with the reliance on the asset  transfer question as a measure of the extent to which individuals would  have transferred assets. We also believe it was incorrect to predict  Medicaid savings for those respondents who said the Partnership program  influenced their decision to purchase a policy. Even if the Partnership  program influenced the policyholder’s decision to purchase enhanced  benefits, our analysis suggests the Partnership program would not result in  savings but would rather result in a reduction of costs to Medicaid.
New York commented that our analysis was not applicable to their state.  They cited preliminary results of a 2006 survey that estimated the number  of recent Partnership policyholders who would have financed their care  with a traditional policy in the absence of the Partnership program. Their  estimates were considerably lower than the 80 percent we estimated based  on our results from California, Connecticut, and Indiana. New York used  different questions in their survey than California, Connecticut, and  Indiana. As such, their results were not comparable to those of the other  states. We believe New York’s question was less direct for the purposes of  our analysis than the question used by California, Connecticut, and  Indiana in their survey of Partnership policyholders. New York’s question  asked policyholders—using a multiple choice format—how they would  pay for long-term care in the future, if they had not purchased a  Partnership policy. One of the possible responses was that they would  purchase traditional insurance. This required policyholders to speculate  about future behavior, and to respond to a more complex question and  answer format. California, Connecticut, and Indiana asked directly about  decisions made in the past—whether the Partnership policyholder would  have purchased long-term care insurance in the absence of the Partnership  program, with a simple yes or no response.
section_title: Impact on Medicaid Savings of Purchasing Different Levels of Benefits by Partnership and Traditional Policyholders
paragraphs: California, Connecticut, and New York also commented that our finding  that Partnership policyholders tended to have more extensive benefits  than traditional policyholders was inconsistent with our scenarios that  assumed that the policyholder would have purchased comparable benefits  in the absence of the Partnership program. Assuming comparable benefits  in our scenarios allowed us to assess the impact of the Partnership  program on Medicaid savings in a simpler framework. As we explain in  appendix II, some Partnership policyholders may have more coverage than  if they had purchased a traditional policy. We show that if the value of the  insurance policy is less than the amount of assets owned by the  policyholder, the person will still take longer to become Medicaid eligible  with a traditional long-term care insurance policy with a lesser value than  with a Partnership policy. However, the amount of additional time it would  take for the individual with a traditional policy to become eligible for  Medicaid would be less than if the two policies had the same amount of  benefits.
HHS, the Indiana Partnership program, and the New York Department of  Insurance provided us with technical comments and clarifications, which  we incorporated as appropriate.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  issue date. At that time, we will send copies of this report to the Secretary  of Health and Human Services, congressional committees, and other  interested parties. We will also make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have questions about this report, please contact me at  (202) 512-7119 or dickenj@gao.gov. Contact points for our Office of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in Appendix IV.
section_title: Appendix I: Data and Methods for Analysis of Long-Term Care Insurance Benefits and Demographics
paragraphs: In this appendix we describe the data and methods that we used to  examine the benefits of Partnership and traditional long-term care  insurance policyholders. We also describe the data and methods we used  to assess income, assets, age, gender, and the marital status of Partnership  program long-term care insurance policyholders, traditional long-term  care insurance policyholders, and people without long-term care  insurance.
subsections: section_title: Examining Long-Term Care Insurance Benefits Purchased by Partnership Policyholders and Traditional Long-Term Care Insurance Policyholders
paragraphs: We examined the benefits purchased by Partnership long-term care  policyholders and the benefits purchased by traditional long-term care  policyholders, using 2002 through 2005 data from two sources. Our data  source for the benefits purchased by Partnership policyholders was the  Uniform Data Set (UDS)—a data set supplied to us by each of the four  states with Partnership programs that contained information on all  Partnership policyholders who had purchased long-term care Partnership  policies. The UDS was developed collaboratively among the four states  with Partnership programs, insurers, the National Program Office at the  Center on Aging, University of Maryland, and the Program Evaluator,  Laguna Research Associates. The UDS contains information submitted by  insurers with Partnership policyholders and summarized by each of the  states on a quarterly basis. Insurers are required to submit data to the state  Partnership program on: (1) newly insured people, (2) people who  dropped their policies, (3) applicants for insurance who were assessed for  long-term care insurance eligibility, and (4) the amount of payments for  services and utilization. We used the data set for newly insured people to  analyze the benefits purchased by Partnership policyholders. These data  contain information on daily benefit amounts, the length of the benefit  period, the length of the elimination period, and the type of coverage,  including whether the coverage is comprehensive coverage or for facilities  only. To obtain data about the benefit characteristics of insurance policies  purchased by traditional long-term care policyholders, we surveyed five  large insurance companies selling long-term care insurance. We selected  these five insurance companies on the basis of the total number of policies  and amount of annualized premiums in effect in the individual market, as  of December 31, 2004. The five insurance companies were AEGON USA,  Bankers Life and Casualty Company, Genworth Financial, John Hancock  Life Insurance Company, and Metropolitan Life Insurance Company. All  five insurance companies sold policies in the individual market, and two of  the five carriers—John Hancock Life Insurance Company and  Metropolitan Life Insurance Company—were also among the five largest  carriers that sold products in the group market. We requested data on the  number of enrollees in the individual market who chose selected benefit  options for new long-term care insurance policies sold from July 1, 2002,  to March 31, 2005. We collected data on coverage types, daily benefit  amounts, elimination periods, benefit periods, inflation protection options,  and optional benefits offered.
section_title: Examining Income and Asset Distributions Among Partnership Policyholders and Comparison Populations in Two Partnership States and Nationally
paragraphs: We used three data sources to examine the income and assets of  Partnership policyholders, traditional long-term care insurance  policyholders, and people without long-term care insurance: Partnership  program surveys of Partnership policyholders; the 2004 American  Community Survey (ACS); and the 2004 Health and Retirement Study  (HRS).
To examine the household income and household assets of Partnership  policyholders, we used data from Partnership program surveys of a sample  of Partnership policyholders at the time they first purchased insurance  coverage. We restricted our analysis of the income and assets of  Partnership policyholders to surveys conducted by the California and  Connecticut Partnership programs because the Indiana Partnership  program’s data were not sufficiently detailed to include in our analysis,  and the New York Partnership program was not able to provide us with  data from recent years. In addition, because the surveys were of a sample  of Partnership policyholders—40 percent of Partnership policyholders in  California and 50 percent of Partnership policyholders in Connecticut—we  increased the number of observations by analyzing more than 1 year of  data. We included data from 2003 and 2004 for California, and data from  2002 through 2005 for Connecticut.
To approximate the household income of individuals without long-term  care insurance in California and Connecticut, we used the 2004 ACS.  Household asset information was not available in these states. The ACS is  conducted by the Census Bureau, as a part of the Decennial Census  Program, and provides information about the characteristics of local  communities. The ACS publishes social, housing, and economic  characteristics for demographic groups, including household income and  assets, covering a broad spectrum of geographic areas in the United States  and Puerto Rico. It is the largest household survey in the United States,  with an annual sample size of about 3 million. In order to make  appropriate comparisons between the income data from the California and  Connecticut Partnership program surveys and the ACS, we restricted our  calculations in the income analysis to respondents who were aged 55 and  over, when we calculated our household income ranges. In our analysis,  we used the ACS state population data as a proxy for people without any  long-term care insurance. Approximately 12 percent of people over age 55  have long-term care insurance, so our measure is likely to contain  approximately 88 percent of people without long-term care insurance.
To examine national-level data on household income and assets of  individuals with and without long-term care insurance, we used  information from the 2004 HRS, the most recent year available for that  survey data set. The HRS is a longitudinal national panel survey of  individuals over age 50, and is sponsored by the National Institute on  Aging and conducted by the University of Michigan. The HRS includes  individuals who were not institutionalized at the time of the initial  interview and tracks these individuals over time, regardless of whether  they enter an institution. Researchers conducted the initial interviews in  1992 in respondents’ homes and conducted follow-up interviews over the  telephone every second year thereafter. HRS questions pertain to physical  and mental health status, insurance coverage, financial status (including  household income and assets), family support systems, employment  status, and retirement planning. We used data from the HRS to calculate  the household income distribution nationally for people with long-term  care insurance and for people without long-term care insurance. To make  our income analysis of HRS data consistent with the income analysis of  Partnership policyholders and individuals without long-term care  insurance in California and Connecticut, we restricted the HRS income  analysis to individuals age 55 and over. The HRS data for people with  insurance do not differentiate between Partnership and traditional  insurance policyholders and approximately 2 percent of people with long- term care insurance nationwide have Partnership policies. Therefore,  although the HRS data may contain a small number of Partnership  policyholders, about 98 percent of all long-term care policyholders are  likely to have traditional long-term care insurance.
section_title: Examining Demographic Characteristics—Age, Gender, and Marital Status—of Partnership Policyholders and Other Populations in Partnership States and Nationally
paragraphs: To compare the age, gender, and marital status of Partnership  policyholders and other populations in Partnership states and nationally,  we used data from the UDS from 2002 through 2005 and the HRS data from  2004. The UDS data contain information on Partnership policyholders,  while the HRS was used to calculate estimates for traditional  policyholders and for those people without long-term care insurance.
section_title: Data Reliability
paragraphs: We took several measures to ensure the reliability of the data used in this  report. For the UDS and Partnership policyholder surveys conducted by  the states with Partnership programs, we interviewed the officials at the  state offices familiar with these data in order to establish whether the data  were reliable and suitable for the purposes of our report. For the GAO  survey of traditional long-term care insurance carriers, we interviewed  each of the carriers about their data to ensure the accuracy and reliability  of the data provided. For the ACS and HRS data sets, we collected and  examined the data documentation and sought information from the  providers of the data. In addition, we took steps to ensure that the data  were valid and within reasonable ranges. To do this, where appropriate,  we examined the distribution of our key variables, calculating estimates of  central tendency, ranges, and frequencies, missing values, and sample size.  We determined that these data sets were sufficiently reliable for the  purposes of this report.
We performed our work from September 2005 through May 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Explanation of the Simplifying Assumptions Used in the Illustrative Scenarios
paragraphs: To analyze the impact of the Partnership programs on Medicaid, we used  scenarios that are illustrative of the options individuals have to finance  their care. This appendix provides additional information on the  construction of the three scenarios and how adjusting the simplifying  assumptions affects the length of time it takes for the individual to become  eligible for Medicaid in the scenarios.
subsections: section_title: Illustrative Scenarios for Time Taken to Become Eligible for Medicaid
paragraphs: We developed three illustrative scenarios based on the three basic options  that are available to an individual for financing his or her long-term care:  (1) self-financing without any long-term care insurance, (2) financing using  traditional long-term care insurance, and (3) financing using Partnership  long-term care insurance. For illustrative purposes, our scenarios are  based on an individual who owns assets worth $300,000. If the individual  has a long-term care insurance policy, this policy covers 3 years of nursing  facility care at a cost of $70,000 per year: that is, the policy covers $210,000  of nursing facility care costs. We then used the scenarios to compare the  time it would take for the individual to become eligible for Medicaid using  each of the three financing options.
Self-financing Without Any Long-term Care Insurance   (Scenario C): The calculations underlying the self-financing scenario are  the simplest. If the individual self-finances in the absence of the  Partnership program, the individual pays for his or her own care,  essentially spending his or her assets down to Medicaid eligibility  thresholds before becoming eligible for Medicaid. In this case, the number  of years it takes for the individual to become eligible for Medicaid equals  the total assets divided by the cost of a year of nursing facility care. In our  example, this is $300,000 in assets divided by $70,000 in nursing facility  costs per year, or about 4.3 years until the individual is eligible for  Medicaid. The equation for this calculation can be expressed as  Equation 1: Self-financing time to Medicaid  = Assets / cost per year    Traditional Long-term Care Insurance (Scenario B): Next we  calculated the time it would take to become Medicaid eligible if the same  individual has a traditional long-term care insurance policy. In this  scenario, the insurance policy pays for care up to the limits of the policy.  After the insurance policy is exhausted, the individual spends his or her  own assets to pay for long-term care. Once the assets are exhausted, the  individual is eligible for Medicaid. In our example, the individual has a  traditional long-term care insurance policy worth 3 years of care in a  nursing facility or $210,000. The time to Medicaid in this example is  $210,000 in insurance coverage plus $300,000 in assets, all divided by  $70,000 in nursing facility costs per year, or about 7.3 years. The equation  for this calculation can be expressed as Equation 2: Traditional insurance time to Medicaid  = (Insurance policy value + assets) / cost per year    Partnership Long-term Care Insurance (Scenario A): Finally, we  calculated the time it would take to become Medicaid eligible if the same  individual has a Partnership policy. In this scenario, the insurance pays for  care up to the limits of the policy, and then the individual has to self- finance using unprotected assets. Once those assets are exhausted, the  individual is eligible for Medicaid because protected assets do not have to  be spent on care. In a dollar-for-dollar model, the protected assets are  equivalent to the value of the insurance policy. The time to become eligible  for Medicaid in this example is $210,000 in insurance coverage plus  $90,000 in unprotected assets, all divided by $70,000 in nursing facility  costs per year or 4.3 years. The equation for this calculation can be  expressed as Equation 3: Partnership insurance time to Medicaid  = (Insurance policy value + unprotected assets) / cost per year  Under the assumptions of our illustrative scenarios, with a dollar-for- dollar policy, the sum of the insurance policy and the unprotected assets is  equal to total assets: the same as for the self-financing scenario. Therefore,  the time to Medicaid is the same for the individual in both the Partnership  and self-financing scenarios, and it is greater if the individual purchases a  traditional policy than if he or she purchases a Partnership policy. These  relationships are shown graphically in the report in figure 1.
section_title: Evaluating the Effects of Adjusting the Assumptions Underlying the Illustrative Scenarios
paragraphs: Underlying our illustrative scenarios were several simplifying  assumptions. When we adjusted these simplifying assumptions, we found  that some resulted in no change, some resulted in accelerated Medicaid  eligibility, and some resulted in delayed Medicaid eligibility. Overall, we  believe that the survey data showing that 80 percent of Partnership  policyholders would have purchased a traditional long-term care  insurance policy in the absence of the Partnership program represent  compelling evidence that, as currently structured, the Partnership  programs are unlikely to result in Medicaid savings.
While some of the 20 percent of Partnership policyholders who would  have self-financed their care and become eligible for Medicaid may  represent a source of savings, others may represent a source of increased  spending and still others will result in neither savings nor spending. We  believe that in the aggregate the savings potential from the Partnership  programs of these 20 percent of individuals is outweighed by the   80 percent of individuals who will likely result in increased Medicaid  spending. Specifically, we made the following simplifying assumptions in  our scenarios and discuss the effect on our results of adjusting these  assumptions:    The individual depicted in the scenarios has assets and benefits  that are typical of many individuals with long-term care insurance.  The individual depicted in the scenarios has $300,000 in assets and 3 years  of long-term care insurance—assets and benefits that are typical of many  individuals with long-term care insurance. The individual also receives  long-term care in a nursing facility with costs for a year of care of $70,000  that are roughly equivalent to average nursing facility costs nationwide in  2004. In our example, the individual has assets of $300,000 and, in two of  our scenarios, a long-term care policy worth $210,000. The cost of a year of  nursing facility care is $70,000. As long as the individual has assets that are  greater than the value of the insurance policy, we can insert any numbers  into equations (1), (2), and (3), and the individual becomes eligible for  Medicaid at the same time as with a Partnership policy and if he or she  self-finances, but it takes longer if the individual has traditional insurance.
The individual spends eligible assets to zero as a condition for  Medicaid eligibility. While states allow individuals to keep a small  amount of assets, these assets are in addition to anything that needs to be  spent to become eligible for Medicaid. Including these assets has little  impact on the scenarios since the individual can keep the same assets in  all three scenarios, and these assets are outside of any spend-down  requirement. Using our examples above, we decrease the assets in  equations 1 and 2, and decrease the unprotected assets in equation 3 by  the amount of assets the individual is allowed to keep. We find that having  a traditional policy will still result in more years to Medicaid eligibility  than having a Partnership policy or self-financing, and the Partnership and  self-financing scenarios still result in the same time to Medicaid eligibility.
The individual purchases the same amount of insurance benefits  under the Partnership and traditional long-term care insurance  scenarios. While this is our simplifying assumption, we recognize that the  Partnership policyholder might have more coverage than if he or she had  purchased a traditional policy because of the extra benefit requirements of  Partnership policies, such as inflation protection, that are not required of  traditional policies. Provided the individual has assets that are no less than  the value of the insurance policies, the Partnership policyholder will still  not take as long to reach Medicaid eligibility as he or she will with a  traditional policy, although the difference is narrower than if the benefits  are the same. For example, if we change the value of the benefits in the  traditional policy to $150,000 (and keep the value of the Partnership policy  at $210,000 and the value of assets at $300,000) the equation for the  traditional policy becomes ($150,000 + $300,000)/$70,000, which is about  6.4 years and is still longer than the approximate 4.3 years with the  Partnership policy but less than the approximate 7.3 years expected if the  policies in the traditional and Partnership scenarios were the same.
The individual has income below Medicaid eligibility thresholds. We  made this assumption because Medicaid income eligibility thresholds vary  across states. However, increasing the individual’s income up to Medicaid  eligibility thresholds has no impact on the scenarios since the individual  can keep the same income in all three scenarios. If the income exceeds  Medicaid eligibility thresholds, the individual is ineligible for Medicaid in  all three scenarios.
The individual’s assets are greater than the value of the insurance  policy. We assumed that most individuals would have assets that are  worth more than the value of the insurance policy. Individuals have a  disincentive to purchase long-term care insurance with a value exceeding  their assets because it might increase their premium unnecessarily. While  we do not have information about the amount of assets that Partnership  policyholders have at the time they use their benefits, available evidence  suggests that most individuals do not overinsure the value of their assets  at the time of purchase, though their status could change over time. Survey  data from California and Connecticut show that while 53 percent of  Partnership policyholders have more than $350,000 worth of household  assets at the time of purchase, only about 32 percent of these Partnership  policyholders have more than 5 years of coverage equal to $350,000.
However, it is possible that some policyholders will spend some or all of  their assets by the time they require long-term care and will have more  insurance than assets. If we modify our example above, and assume the  individual’s insurance policy has greater value than the assets in our  scenarios, we see that with a Partnership policy, the individual will still  become eligible for Medicaid sooner than with a traditional policy, but  later than if he or she self-financed. Therefore, for the 20 percent of  individuals who would have self-financed their care in the absence of a  Partnership program, and who have more insurance than assets, the  Partnership program results in savings to Medicaid. Specifically, if we  assume the insurance policy is worth $210,000, and the individual has  assets equal to $150,000, we obtain the following results from our  scenarios:  Self-finance: assets / cost per year = $150,000 / $70,000 = 2.1 years  Traditional insurance: (insurance + assets) / cost per year = ($210,000 +  $150,000) / $70,000 = 5.1 years  Partnership insurance: (insurance + unprotected assets) / cost per year =  ($210,000 + 0) / $70,000 = 3 years    The individual is unmarried. In our illustrative scenarios, we assume  the individual is unmarried—the most likely marital status of  policyholders at the time nursing home care is required. On the other  hand, if the individual is married, Medicaid allows spouses to keep a  certain amount of jointly owned assets (i.e., half of the value of the assets  up to a maximum amount that was approximately $100,000 in 2007). In  general, the spousal exemption that is deducted from assets would be the  same across all three scenarios and would not affect the basic  relationships among the three scenarios unless the net assets after the  spousal exemption are of less value than the insurance policy. If the  amount of insurance exceeds the value of assets net of the spousal  exemption, there is a potential for Medicaid savings for a Partnership  policyholder who would have self-financed. If that individual would have  purchased a traditional policy, Medicaid spending would increase. Our  scenarios illustrate this point. If we assume the individual is married and  the spouse has already taken the spousal exemption such that the  individual’s assets are $300,000, the results do not change and our original  formulas remain intact. Alternatively, if we assume the individual’s spouse  is entitled to half of the household assets of $300,000, up to the maximum  of $100,000, then our results do change and the policyholder becomes  overinsured. In this instance, if the individual self-finances, the spousal  exemption would be $100,000, leaving the individual with $200,000 in  assets. If the individual has traditional insurance, the spouse is also  entitled to $100,000. However, if the individual has a Partnership policy,  $210,000 of the assets are protected, leaving $90,000 in unprotected assets.  The spouse would be entitled to half of the $90,000, or $45,000. The  formulas are presented below.
Self-finance: assets / cost per year = $200,000 / $70,000 = 2.9 years  Traditional insurance: (insurance + assets) / cost per year = ($210,000 +  $200,000) / $70,000 = 5.9 years  Partnership insurance: (insurance + unprotected assets) / cost per year =  ($210,000 + $45,000) / $70,000 = 3.6 years    The individual uses the same long-term care services in all three  scenarios. An individual who self-finances might have an incentive to use  fewer or less expensive services than if he or she were insured by either a  Partnership or traditional policy because the individual would be paying  for services. If the individual uses fewer services when self-financing, the  assets last longer, enabling the individual to pay for care longer and  postponing Medicaid eligibility. In this situation, the cost per year of self- financing would be smaller than if he or she had either Partnership or  traditional insurance. This would result in an increase in the time it takes  to become Medicaid eligible for a person who self-finances relative to  what it would have taken if he or she had purchased either a Partnership  or traditional insurance policy.
The individual does not save premiums paid if he or she would have  self-financed their care such that assets are equal in all three  scenarios. We made this assumption to make our scenarios easier to  understand. Premium payments may be substantial—potentially as much  as $3,000 per year—so it is possible that if the individual would have saved  their premium payments by instead self-financing his or her long-term  care, the individual would have more assets than either Partnership or  traditional policyholders would when they begin to use their benefits. If  this is the case, by self-financing, the individual would have more assets to  pay for long-term care before becoming eligible for Medicaid, which would  delay the time to Medicaid. Therefore, individuals who purchase  Partnership policies would have saved their premium dollars and not  purchased long-term care insurance represent a potential cost to the  Medicaid program. Using our examples above and assuming 15 years of  payments saved at $3,000 per year, by self-financing, the individual would  save $45,000 in additional assets that would otherwise have been spent on  Partnership premiums. Therefore, the self-financing individual has assets  of $345,000. Using our equation we see that the time to Medicaid is delayed  ($345,000 / $70,000 = 4.9 years) if the individual self-finances, while  relative to this option a Partnership policy would accelerate the  individual’s time to Medicaid by 0.6 years. In this case, the Partnership and  traditional policy scenarios would not change because premiums are  required to be identical for the Partnership and traditional polices.
The individual is equally likely to transfer assets in all three  scenarios. An individual who self-finances or uses traditional insurance  might be more likely to transfer assets to a spouse or other family  members than he or she would with a Partnership policy, because assets  are protected under Partnership policies. If the individual self-finances and  transfers assets, he or she would likely take less time to become eligible  for Medicaid than with a Partnership policy (and assuming no transfers  with the Partnership policy), resulting in Medicaid savings. If the  individual would have purchased traditional insurance, the amount of  assets transferred would have to be equal to at least the value of the  insurance policy purchased in order for the Partnership program to result  in Medicaid savings. If the amount of asset transfer is less than the value of  the insurance policy, the increase in Medicaid spending attributable to the  Partnership program would be less than without the asset transfer, but  would still be an increase.
section_title: Appendix III: Comments from the Department of Health & Human Services
section_title: Appendix IV: Comments from the Four States with Partnership Programs, California, Connecticut, Indiana, and New York
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: Christine Brudevold, Assistant Director; Krister Friday; Michael Kendix;  Julian Klazkin; Elijah Wood; and Suzanne Worth made key contributions  to this report.