Jan 6, 2022

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TO OPT-OUT OR NOT TO OPT-OUT: THAT IS THE QUESTION

Louis H. Brownstone

Louis H. Brownstone
Louis H. Brownstone
Louis H. Brownstone
Louis H. Brownstone

The California Long Term Care Insurance Task Force has been charged with “exploring the feasibility of developing and implementing a culturally competent statewide insurance program for long-term care services and supports.” A major issue is whether to grant citizens an option to opt-out of such a program and avoid a mandatory tax by doing so.

The Task Force Committee of fifteen members represent the California Department of Insurance and caregiving organizations. Its members have met four times, have scheduled a dozen meetings during 2022, and must report its findings to the Legislature by the beginning of 2023.

The California Committee is trying to solve a very complex set of issues and recommend a plan that will be acceptable to all the stakeholders. Most of its discussions have centered on adapting the model of the Washington State Cares Act. This Act imposes a mandatory payroll tax of .58 % on all W-2 earners in the State. This will give workers a lifetime benefit of up to $ 36,500, adjusted annually for inflation, and offer a wide range of benefits.

The concept here is that the California state program would become a motivator, providing a small long-term care benefit to most citizens and encouraging those who can afford it to buy wrap-around private long-term care insurance. This would provide many citizens with good protection and save the State many millions of future Medi-Caid dollars.

One way to encourage citizens to buy private long-term care insurance is to allow a citizen to opt-out of paying the mandatory tax by doing so. The State of Washington decided to offer a very limited six-month opportunity ending November 1, 2021, for citizens to opt-out of the program.

This decision created a huge mess. There was a rush to purchase private long-term care insurance, especially by high income earners. Many believed they could purchase insurance with small benefits, cancel it within a few months, and still avoid the tax. The insurance carriers were unable to cope with the volume of applications, and soon decided to stop accepting them.

Other provisions of the Act seemed to be unfair, and created opposition to the entire Act. People who lived in neighboring states but were paid by entities domiciled in Washington would have to pay the tax but would have to move to Washington in order to receive benefits. The same would be true of those who retired and then moved out of state. The self-employed would have to opt-into the program, and spouses of W-2 earners would have to do the same, creating questions of how to tax them fairly and administer their accounts. Other concerns were fair treatment of the military, Indian tribes, and green card holders.
As of this writing, Washington’s Governor Inslee has delayed the imposition of the tax from January 1st to April 1st. The Washington Legislature will receive revised recommendations from the Cares Act committee members and may well determine the fate of the entire enterprise.

Given these significant issues in Washington, the California Task Force Committee knows that it must make a different decision on the opt-out issue. Most members have voiced strong opposition to any opt-out at all. Why have they reached this conclusion?

DON’T ALLOW AN OPT-OUT

There would be many administrative issues if an opt-out were allowable, including the need for continual recertification of private insurance and notification of employers of any changes in a person’s status. What if a person drops their private long-term care insurance? The administrative complexity increases as citizens change jobs or become self-employed or work remotely outside of California or work for an employer who is either not domiciled in California or moves their domicile out of California.

But the main reasons to not permit any opt-out option are financial. The tax is progressive based on income. The citizens who would opt-out would be the ones with the highest income. For them, private long-term care insurance is the better value. Their opting-out would substantially reduce the revenue of the state fund. The very limited opt-out window in Washington was utilized by close to a half a million people. The population of California is more than five times the population of Washington, so a large number of Californians might opt-out.

The Task Force could be forced to substantially raise the tax rate in order to allow an opt-out provision. This raise could be partially offset by making the opt-out requirement that a private long-term care insurance policy have a certain minimum range of benefits, thus would reducing the number of citizens who would choose to purchase such a plan. Still, the decrease in revenue could be very large.

ALLOW AN OPT-OUT

On the other hand, the main goal here is to enable citizens to protect themselves from a long-term care event and give their families peace of mind. Furthermore, Medi-Cal costs will not be substantially reduced unless many purchase private long-term care insurance. Therefore, the Task Force Committee needs to find a way to encourage the sale of private long-term care insurance. How do you encourage this?

One way is to admit that the state program only provides small benefits which in most cases will not come close to paying for a long-term care event. This is true, but It’s very unlikely that a state would market the shortcomings of its program in such a way. The California Task Force needs a good public relations campaign as it is to gain the support of California’s citizens to urge the Legislature to enact the program.
The other way to do this is to offer a financial incentive for those who purchase private long-term care insurance. An opt-out or a partial opt-out could be such an offer.

This would create an alternative for those who are opposed to paying taxes and for those who believe for any reason that they are being discriminated against. This would create a program which would be considered by many to have an element of fairness and not just be a way for the State to collect more money from its citizens.

The many administrative issues discussed above would have to dealt with. These would be in addition to the many administrative issues even without an opt-out. There would be additional administrative costs that would have to be justified.

However, the economic costs could be offset in several ways, which I would advocate in any event.

1. Allow the fund to place a small portion of its investments in non-fixed instruments.
2. Create an elimination period or 30 or 45 days in order to receive benefits.
3. Settle a person’s account upon retirement who resides out of state by refunding their tax amount but retaining any investment growth.
4. Allow benefits to be paid only if the employee receives those benefits in California.

These four offsets would cushion the loss of revenue of those who choose to opt-out. I would advocate that an opt-out would have basic minimum benefits, including at least a $ 150 daily benefit, a two-year benefit period and 3 % compound inflation. Similar minimums should be set for hybrids and for life insurance and annuities with long-term care riders. These basic minimum benefit requirements would increase in future years.

To opt-out or not to opt-out? There are strong arguments in either case. Stakeholders, including the insurance industry, need to make their positions known to the Task Force Committee. Their hearings have time for public comment, and the Committee can benefit from outside counsel in reaching their very complicated decisions.

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