Steven D. Forman, LTC Associates
From the start, WA Cares Fund advocates promised that the public program would supercharge the development and purchase of so-called “wraparound” products by the private market. It was a selling point: “The private LTC insurance market is currently failing, but a new LTC Trust could spur [a] new LTC wrap market, similar to what happened with Medicare and gap plans.” By design, a new “LTC Supplement” product would have to be more affordable than today’s comprehensive offerings, making it more attractive to Washington consumers. Unfortunately, by barreling ahead without consulting with insurance carriers, distributors, consumers, or the Washington Insurance Department before making this pronouncement, proponents got out over their skis.
The WA Cares Fund is practically unwrappable.
Not all of the issues below are equally serious, but each should have been considered before—not after—the Fund was drafted into law. Wrapping the WA Cares Fund well takes more than just an “off-the-shelf” product sold with a long elimination period.
Although the wage tax is owed by anyone who earns income “localized” in Washington, the $36,500 nominal WA Cares Fund benefit is payable only to state residents. (Private LTC insurance pays anywhere in the US, almost always Canada, and usually globally.) From a wraparound standpoint, a carrier would have to price a product with a $36,500 deductible that exists only for care incurred in one state, but not in the other 49… or a universal deductible of $36,500 in all states that a resident clearly understood would be met by the WA Cares Fund at home, but would be their responsibility for care received outside the Evergreen State.
We say “nominal” because the Fund’s $36,500 benefit will change unpredictably over time. What will it be in 15 or 30 years, when beneficiaries need care? No one can say, which makes inflating a wrap product in synch a challenge. The Fund’s benefit units may rise or fall each year depending on the vote of an 8-person Trust Council. Wrapping this deductible will be like riding a bucking bronco—and for its inflation rate the State didn’t even select the correct CPI standard required for Washington LTC Partnership Qualification (not that they had to, but c’mon, it was right there).
If pressure were to be put on the tax rate in the future, it was suggested during a presentation on public LTC design that the first “cut” would be to lower the inflation rate.
Speaking of the Partnership Program, the WA Cares Fund may spell its end (about 6 in 10 policies sold in Washington qualify now). By protecting assets from Medicaid spenddown and estate recovery, Partnership Qualified policies are ideally-suited for broad-market Washingtonians. But the WA Cares Fund was billed first and foremost as a Medicaid replacement, with Fund beneficiaries receiving no protection from asset spenddown and estate recovery.
To be Partnership Qualified, your policy must first meet the requirements for Tax Qualification: if “LTC Supplements” can’t thread this needle, they’ll be less appealing to their target market.
Speaking of tax qualification, the WA Cares Fund doesn’t use Tax-Qualified triggers. Instead of the nearly 25-year old federal standard, Washington is going with its own Medicaid standard (3 or more ADLs), and no 90-day chronic illness certification.
A beneficiary risks qualifying for benefits under the Fund, but not under their private policy (or vice-versa). Or, they may find a benefit or service covered under one program, but not the other (as has happened with assisted living under Medicaid). These risks exist so long as programs like the Cares Fund can be amended twice a year through legislative action: neither the premiums nor benefits nor eligibility triggers are predictable or certain. Wrap that.
The analogy to Medicare Supplements is built on the idea of co-insurance. The general principle is that Medicare foots 80% of the cost, and an optional private policy picks up the 20% “gap” left over. An LTC Supplement built to cover these small “gaps” should be more affordable, right? We’ve hit our first snag: the analogy misfires. MedSupp is for care used soon and regularly; LTC is for care often used later and claimed infrequently.
The WA Cares Fund doesn’t work like an 80/20 co-insurance plan; instead, it’s a “first payor” plan, and its $36,500 is a deductible. Your LTC insurance “gap” policy would step in at the $36,501st dollar and cover everything catastrophically to follow. How stimulated would the market have been for Medicare Supplements if the original cost-sharing had been reversed from 80/20 to 20/80?
Advocates of the Cares Fund emphasized that many residents lack even a modest emergency account for healthcare expenses—the Fund has even been called a “structured savings account” by its primary sponsor—and for this reason, benefits must be payable from the first day. They got their wish. When the LTC Trust Act was passed, it included “no elimination period in either Title 50B RCW or the administrative rules,” as the Employment Security Department put it.
There’s just one problem: the 0.58% payroll tax pays for only a 45-day elimination period.
The Fund will have to raise its payroll tax by 0.12%, to 0.70%, to support its existing no-elimination period structure (all else being equal).
This discrepancy—one of the greatest threats to Fund solvency, greater than the private insurance opt-out—is well-known to the Trust Commission (“the cost of the program will go up significantly if there is a 0-day elimination period, compared to the baseline assumption of 45 days.”)
When a Constitutional Amendment is re-introduced this fall in an attempt to remedy the ($14.7 billion) projected actuarial deficit—a number that does not include the elimination period problem—would the public continue to support the Fund if they learned about this omission? It’s not clear voters support it now, having rejected Advisory Vote 20 and SJR 8212.
During public testimony in favor of the WA Cares Fund, our Insurance Department declared the private LTC market “broken.” Adding injury to insult, for decades consumers around the country have been able to purchase short-term care coverage (“STC”) akin to the WA Cares Fund—but ironically, our Insurance Department frowns on it.
LTC insurance has been rate-stabilized in Washington since 2009, then in 2016 the Society of Actuaries reported on the significantly reduced risk of rate increases on newly-issued plans. No one listening to WA Cares Fund proponents would know this—the rate increases in the articles they cited were on twenty-year old policies, the conclusion of a gloomy market they described as “imploded” as though we’d brought it on ourselves.
What’s “broken” might be Medicaid, itself a driver of higher insurance rates (private payers subsidize Medicaid’s below-cost reimbursements to providers).
If “affordability” were the obstacle some say has prevented LTC insurance sales from flourishing, then 100 carriers would be selling short-term coverage today to take advantage of the insatiable demand. Let’s suggest “crowd-out” plays a larger role than you’d like to admit. Award-winning research suggests Medicaid replaces 80% of the market for LTC insurance because consumers don’t wish to pay for something the government gives them already (even if they’re only aware of it unconsciously). The WA Cares Fund risks exacerbating crowd-out, and—rather than invigorating sales—could further desensitize the public to the risk of needing to pay for care.
Insurance or Not
The program is “damned if it is, and damned if it isn’t,” and the Washington Insurance Department may have painted itself into a corner. (We always found it strange how the Cares Fund describes itself as being overseen by three state agencies, but never mentions the fourth agency it is regulated by: the Insurance Department.)
The Fund borrows from the insurance world (“premium allowance”) when it wishes to avoid the politically perilous term “payroll tax.” It has advertised itself to the public as “long-term care insurance” in nearly all of its consumer-facing materials, though it is not permitted to do so without following the RCWs and WACs that adhere to the term.
I’d admit to compiling a list of RCWs and WACs the WA Cares Fund has been violating, but the fact is: the Washington Insurance Department has been compiling this list—it’s their job. Further, the Department has made it a point of emphasis the past two years to crack down on any entity that acts like insurance, no matter the label. Semantics has been no defense.
The Department’s advice to consumers who need help determining if their policy qualifies as LTC insurance is to “contact your insurance company.” Since the WA Cares Fund—in the text of the law—calls itself “long-term care insurance”— which company should consumers call? Is it AM Best Rated “A+” (Superior)?
Questions like these make me wonder whether the WA Cares Fund will exist a few years from now, and questions like that make me wonder whether insurers will feel motivated to invest time, energy, and expense, developing, filing, and marketing “wrap products” here after the traumatic experience we’ve just all just shared.
When Fund proponents began their makeover of the state’s private LTC insurance market, they included no one from the private LTC insurance market in their discussions, and this lack of outreach is reflected in the morass described above. Their resistance was so entrenched, it took the State Legislature passing a law to literally compel WA Cares Fund commission to “work with insurers.”
The ACLI expressed concerns about the viability of wrap products to the Trust Commission as well—perhaps their diplomatic influence will advance the success of this market. Had the insurance community been included earlier, we’d have been more optimistic. One thing’s for sure: if private LTC insurance is indeed broken in Washington State, we’ve got a good idea who broke it.
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.