Steven D. Forman, LTC Associates
On their heels from a barrage of negative publicity, defenders of WA Cares find themselves redrafting provisions of a program they thought had been settled. Now the only question is how fast changes are coming. Within the last week, lawmakers have suggested everything from postponing WA Cares for two years, to repealing it altogether. Allow me to make a case for the latter.
Readers are familiar with the recently-filed class action (Pacific Bells LLC v. Inslee). Off the bat, if the District Court rules that payroll taxes must be escrowed pending litigation, that would “leave the program in a high state of uncertainty for years.” The Idaho State AG has chipped in with a cease and desist demand raising similar “constitutional questions of discrimination.” We warned the Legislature nearly two years ago that WA Cares would face objections over its “discriminatory pricing”—charging drastically different rates per $1 of insurance to individuals of the same age and health—but as you will read, Washington believes it’s on solid legal footing to do so.
Initiative 1436 may not be receiving the attention it deserves, but it could unwind WA Cares from the bottom up. By reversing the polarity of the program from “opt-out” to “opt-in” this initiative would effectively doom the program. If its petition is signed by more than 324,516 registered voters by year’s end, I-1436 will go before the Legislature. Since that’s less than the number of opt-outs (so far), there’s a decent chance that’ll happen, at which point the Legislature will have three choices. It can adopt the measure; reject it and put it on the 2022 ballot for the voters to decide; or create a counterproposal and put both versions on the ballot.
Just as opponents tried for nearly a decade to unwind the Affordable Care Act after its passage, WA Cares would seem destined to face similar, annual repeal efforts.
The Next Class Action
A particularly caustic accusation leveled against some insurers has been that they knowingly underpriced their policies, but sold them anyway in a bid for market share, counting on the ability to raise rates later.
The State of Washington could have a difficult time defending against a similar allegation. During the period WA Cares and the private LTC insurance market were competing (the “opt-out” window that ran from July 25th – Nov 1st) the State advertised a rate it knew to be too low to support the program and which would not allow for informed comparison: 0.58%. Unless or until a constitutional amendment is passed allowing the WA Cares Fund to invest in equities, the payroll tax ought to start at 0.66%.
That higher rate doesn’t even account for the State’s elimination period “blunder,” or the cognitive impairment trigger “accident.” Worse, the Fund still hasn’t added any margin for safety as we do in the private market (“When considering rate setting, one of the most important items that needs to be explored beyond feasibility studies is the appropriate level of cushion or ‘margin’.”—2020 LTSS Actuarial Study) Going ahead with 0.58% was reckless.
Then there’s inflation protection, one of the biggest components of a long-term care plan’s premium, and an influential driver of rate increases (“Changes to benefit indexing have the largest impact on the premium rate out of all the alternatives tested as part of this study,” (2020 LTSS Actuarial Study). The State’s plan is based on the central tenet that over time, wages will rise faster than the cost of healthcare. You buy this? To hedge against this dubious bet, WA Cares made its inflation protection entirely discretionary. Were it to index its $36,500 benefit to the actual LTC inflation rate, the payroll tax rate needed would nearly double.
As the tide of public opinion began turning against WA Cares, we noticed a shift in the framing. What had been discussed as an entitlement fully-funded through 75 years grew shorter and shorter in an attempt to maintain the publicized tax rate:
“We estimate the Base Plan will require a 0.52% payroll surtax rate over the 75-year period 2022 through 2096. The 0.52% tax rate can be viewed as the average rate needed for generating income to cover expected payments (benefits and expenses) over the 75-year window.” (2018 Report to the Legislature)
“We estimate the 2020 Baseline will require a level payroll premium assessment between 0.53% and 0.69% to cover program expenditures over the 75-year period 2022 through 2096.” (2020 Report to the Legislature) “Assuming the continuation of the current maximum premium rate of 0.58 percent, the program will have sufficient projected assets to pay 100 percent of program expenditures through 2075…” (January 2021 Key Financial Metrics Update)
“We essentially have reserves to pay benefits, we’re taking in much more revenue than spending for the first three decades of the program, and we’re—there’s no danger of us missing a payment any time between now and 2050, and we’re fully solvent until 2070-something.” (July 2021 Trust Commission Meeting)
It's a clever game to fool the public. Or maybe it was an honest mistake? There’s a helluva lot of numbers being thrown around. What you’ll read next was not a mistake.
One of the positives to emerge from class action complaints has been a renewed emphasis on clear and transparent policyholder communications. Ironically, even as the NAIC was in the process of adopting “best practices” communication principles, WA State was unapologetically propagating misinformation.
Over the summer, the Office of the Insurance Commissioner (“OIC”) put out a fact sheet to make its position clear: it does not regulate WA Cares. When asked why not, there were a number of legitimate, if arguable, answers the Insurance Department could have provided, but it instead offered an explanation that defied credulity. The OIC said the Legislature wouldn’t allow it. No, really.
Over and over we asked, but the answer was the same: the Legislature explicitly named only four state agencies when assigning WA Cares job responsibilities, and since the new law didn’t name which agency was responsible for regulating insurance, no one had to do it. Exhausting, right?
As absurd as that argument was, we finally received a different “official” official answer, and it’s the one we’d been expecting Washington to make eventually. The OIC explained that WA Cares is not subject to Insurance Department oversight because the State’s program [emphasis added]:
“does not meet the legal definition of insurer [or threshold of an issuer]”
“is not considered to be an insurance contract”
“is not an insurance policy, contract, or rider that is advertised, marketed, offered or designed to provide coverage for at least twelve consecutive months for a covered person”
“is a trust program and not a similar insurance entity authorized by the Insurance Commissioner to transact the business of LTCI”
“is funded by taxpayers and not insurance premiums”
Seems pretty clear: WA Cares is not long-term care insurance.
Well, this is awkward: the legislation itself says WA Cares is a long-term care insurance benefit (it’s not), it’s been advertising itself to the public as long-term care insurance (it’s not), and it says it assesses premiums (it doesn’t).
As WA Cares was cautioned, there’s a law on the books that applies not only to insurers and issuers, but to every entity marketing long-term care insurance, even trusts. There’s a reason for this, as we’ll read below. WA Cares is a serial violator of this Washington Administrative Code, repeatedly and duplicitously marketing itself as “long-term care insurance” in spite of the fact that it has been declared neither.
While the Insurance Department disputes that WA Cares markets coverage lasting twelve months, it’s hard to take assertions like this any other way: “WA Cares Fund can provide complete financial relief for families who are paying out of pocket for in-home long-term care for a full year.” Agree to disagree, I guess.
Since WA Cares will not stop using the term, and there is no oversight mechanism to enjoin the State from doing so, we are left with a commercial market in Washington unlike any other in the nation:
As far as consumers understand, some “long-term care insurance” is OIC-regulated, and some “long-term care insurance” is not.
What a mess! If WA Cares was actually insurance, it would not be allowed to advertise itself as LTC insurance; but, since it’s not insurance, it can advertise as LTC insurance. Who had that on their bingo card? By using a term which not even similar insurance products are legally allowed to use, WA Cares is needlessly confusing the public and undermining decades of work the NAIC has invested in the LTCI Model Act.
The Elephant in the Room
Calling itself LTC insurance was weird anyway. The professional nomenclature for coverage like WA Cares is “short-term care” (“STC”), though synonyms abound. Both LTC insurance and STC insurance can be suitable solutions for someone under the right circumstances, but apples are not oranges.
Comparing apples to oranges (LTC vs STC) is precisely what WA Cares did throughout the competitive shopping window—and continues to do. The comparisons were cherry-picked, the rates were misleading, the narrative was wrong. It was all wrong.
This mislabeling—and misunderstanding of what the State had built—was telling. Residents of around two dozen states can already purchase private-market versions of the WA Cares Fund—that is, STC insurance—and have been able to for decades. Washingtonians looking to do the same cannot: for the last twenty years, our OIC has frowned on these solutions.
When the State began its LTSS Trust Act research several years ago, one obvious approach would have been to open up Washington’s private market to these STC solutions. Besides being more affordable and accessible than traditional LTC insurance, they are portable and have demonstrated an outstanding rate increase history. This was not investigated. Instead, the State built its own inferior product from the ground up, then began falsely advertising it as something else.
If it’s not yet clear that the agencies tasked with running WA Cares are out over their skis, allow me to share one final case study.
The Employment Security Department (“ESD”) created the conditions for this Summer’s bottleneck of private LTC insurance applications. Insurers had no choice but to suspend sales in a bid to meet the Department’s ill-advised “purchase date” rule. Though fixable with a pen stroke—as ESD unilaterally did with another WA Cares rule—its obstinance cost tens of thousands of Washingtonians their opportunity to opt-out.
As producers and consumers contacted ESD to inquire how its employees would distinguish policies meeting the definition of RCW 48.83.020 from those that didn’t, it deferred to the OIC. When the OIC was asked, it declined, and sent inquiries back to ESD.
That’s when we knew no one was in charge.
Readers will be alarmed to know preventable mistakes have already occurred. ESD determined that Department of Veteran Affairs benefits paid to some disabled service members meet the definition of regulated, commercial long-term care insurance contracts under RCW 48.83.020. However well-intentioned, this is terrifyingly wrong.
At several junctures, OIC was asked to correct the misinformation: it refused, maintaining its regulatory arm’s length. Remember, the Insurance Department has been emphatic that—because of its legislative non-interference mandate—it will not even voluntarily assist WA Cares, whether the program makes the right calls or wrong. When asked to confirm or deny the existence of any Dept. of Veteran Affairs-issued LTC insurance policies under its regulatory jurisdiction, the OIC would not comment.
The unfortunate outcome here is that employees from both DSHS and ESD have been encouraging Washingtonians who did not purchase LTC insurance policies to apply for an exemption (and attest that they did purchase a qualifying policy). The Washington Attorney General’s office is aware of the potential misconduct.
All the Fixin’s
Planning began on WA Cares about six years ago—are we sure another two will make a difference? If the past is any guide, let’s see what the Legislature did since we warned them of the following nearly two years ago:
The “lack of clarity around qualifying coverage” is a recipe for chaos The “ability of consumers to make informed comparisons is impaired by lack of clarity surrounding the benefits, limitations and premiums, etc.”
Because “underwriting can take as long as 90 days… some insurance applications may still be in underwriting when opt-out period ends” The State should “contemplate enforcement mechanisms, e.g. ACA-style mandate-or-penalty or annual verification of minimum essential coverage” WA Cares “coordinates poorly with LTC insurance” Large corporations may not respond well, esp those with true group LTC in place or those with employees who transition in/out of state.
It could “face challenges of anti-discrimination” since solvency is not dependent on participation of individuals of better health, but those of higher incomes” There are “no Medicaid-wide savings, only shifting of funds from one beneficiary to another”; that is, the Trust Act was drafted in such a way as to only expand, not reduce, the State’s Medicaid program Let’s finish on that last point. Last month, the Office of the State Actuary re-affirmed how poorly a job WA Cares does at saving Medicaid money—being generous, it “saves” the State about 2 percent per year of its Medicaid LTC budget (not total Medicaid budget, just Medicaid long-term care budget). This number is in line with previous forecasts. It never really “saves” anything though, because WA Cares requires that any savings be plowed back into expanding Medicaid. As we argued from the start, WA Cares can only make Medicaid larger, not smaller.
The choice presented in the title (“killing or curing” WA Cares) is, of course, metaphorical hyperbole. But this is no small program: on January 1st, Washington State will birth a “long-term care insurance” block roughly 1/3rd the size of the entire US market to date. We won’t get many more warnings before it’s too late to pull the ripcord.
Stephen D. Forman, CLTC of Long Term Care Associates, Inc. is co-author of “The Advisor’s Guide to Long-Term Care” (2nd Ed.), published by National Underwriter. Reach him at firstname.lastname@example.org.