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Federal Document Clearing House
Congressional Testimony
September 13, 2000, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 9112 words
COMMITTEE:
SENATE special aging
HEADLINE:
TESTIMONY RISE IN LONG-TERM CARE INSURANCE COSTS
TESTIMONY-BY: CHARLES N. KAHN III , PRESIDENT OF THE
AFFILIATION: HEALTH INSURANCE ASSOCIATION OF AMERICA
(HIAA)
BODY:
September 13, 2000 Statement of
Charles N. Kahn III Introduction Chairman Grassley, Members of the Committee, I
am Charles N. Kahn III, President of the Health Insurance
Association of America (HIAA). HIAA is the nation's most prominent trade
association representing the private health care system. Its 294 members provide
health, long-term care, dental, disability, and supplemental coverage to more
than 123 million Americans. It is the nation's premier provider of self-study
courses on health insurance and managed care. I appreciate this
opportunity to speak to you today about HIAA's longstanding efforts to help
Americans protect themselves against the financial risk of long-term care needs
- and to improve their long-term care choices - through private insurance. The
long-term care insurance market has grown an average of 21 percent each year
between 1987 and 1997. To date more than 100 companies have provided long-term
care coverage to more than 6 million Americans. Quality private insurance
coverage is offered through a variety of mechanisms, including individual
coverage, employer- sponsored arrangements, and riders to life insurance plans.
Before I go any further, I want to thank you emphatically, Mr. Chairman, for
your leadership on long-term care insurance issues - and particularly for your
sponsorship of the "Long-Term Care and Retirement Security Act of 2000." I also
want to express my sincere gratitude to the other Members of this Committee -
Senators Jeffords, Hagel, and Bayh - for their cosponsorship of this measure.
Let me begin by summarizing the most important points of my testimony: Long-term
care is the largest unfunded liability facing Americans today, and despite the
tremendous need for long-term care protection, most Americans remain unprepared
to meet their future long-term care needs. There is a growing and critical role
for private insurance to provide a better means of financing long- term care for
the vast majority of Americans who can afford to protect themselves. Continued
growth of the market will protect millions of Americans against the financial
risk of long-term care need, enhance their long-term care choices, and help
reduce reliance on scarce public dollars. The long-term care insurance market is
growing and the products that are available today are affordable for many middle
class Americans and of high quality. Both the federal and state governments have
a key role to play - through tax policy, consumer protection, and public
education - in improving access to quality long-term care insurance coverage.
HIAA has joined with AARP in calling on this Congress to enact legislation to
provide a tax credit to individuals and families with current
long-term care need and to encourage private long- term care coverage against
future need through an above-the-line deduction. HIAA supports Senator
Grassley's legislation to enact these proposals, which would also strengthen
federal long-term care insurance consumer protections. HIAA has an extensive
history of supporting public policies aimed at maximizing the benefits that
long-term care insurance can bring to consumers, caregivers, and government
treasuries - including the development and implementation of long-term care
insurance consumer protections. HIAA supports all the mandatory provisions of
the 2000 National Association of Insurance Commissioners (NAIC) Long- Term Care
Model Act and Regulation. HIAA also supports the adoption of the 2000 Model by
the states. We believe the 2000 Model will go a long way toward addressing the
long-term care insurance rate stability concerns of our industry, regulators,
consumers, and this Committee. In conjunction with the establishment of an
above-the-line federal income tax deduction for long-term care insurance
premiums, HIAA supports updating the long-term care insurance consumer
protection provisions of the Health Insurance Portability and
Accountability Act (HIPAA) of 1996 by reference to the appropriate components of
the 2000 NAIC Model. It is imperative, however, that the incorporation of
components of the 2000 NAIC Model preserve the appropriate and distinct role of
the states in the regulation of insurance. Background Long-term care is the
largest unfunded liability facing Americans today, and despite the tremendous
need for long-term care protection, there is a clear lack of adequate planning
for it. Unless Congress begins now to take steps to address the looming
long-term care crisis, an aging "boomer" generation will overwhelm our nation's
patchwork long-term care system and leave millions of Americans unprepared for
the heavy financial and emotional burden of long-term care. In 2020, one of six
Americans will be age 65 or older - 20 million more seniors than today. By 2040,
individuals 85 and older (the group most likely to require long-term care) will
more than triple to over 12 million. Today, fully 30 percent of long-term care
costs in this country are paid for by the individuals who need long-term care or
their families. But without substantial assistance, the full cost of long-term
care is out of reach of most families. The average cost of a one-year nursing
home stay is over $46,000 - and growing. Helping people pay for these services
directly and helping them purchase quality insurance products should be part of
our nation's answer to this long-term care need. The Private Long-Term Care
Insurance Market Today The long-term care insurance market is growing, and the
policies that are available today are affordable for many Americans, including
middle income Americans. And the benefits offered are of very high quality.
There is a critical role for private insurance to provide a better means of
financing long-term care for the vast majority of Americans who can afford to
protect themselves. Continued growth of the market will protect millions of
Americans against the financial risk of long-term care need, improve their
long-term care choices, and help reduce reliance on scarce public dollars. HIAA
estimates reveal that, to date, more than 100 companies have sold over 6 million
long-term care insurance policies, and the market has experienced an average
annual growth of about 20 percent. These insurance policies include individual,
group association, employer-sponsored, and riders to life insurance policies
that accelerate the death benefit for long-term care. A recent survey of
long-term care insurance purchasers reveals positive trends in the long-term
care coverage being purchased today: Middle income Americans continue to find
long-term care insurance coverage affordable. More than a third of purchasers
had annual incomes under $35,000. Coverage being purchased today is much more
comprehensive than it was just a few years ago. The proportion of dual-coverage
policies (i.e., those that cover both institutional care and home care) grew
from 37 percent in 1990 to 77 percent in 2000. Over the past five years, the
average daily nursing home benefit has increased by 28 percent, which is higher
than the rate of inflation. The difference between the daily benefit paid in
institutional settings and that paid in home care settings has narrowed
significantly. The average daily benefit for home care has grown by 36 percent
over the five-year period. There is also a growing trend toward the purchase of
compound inflation protection. This trend probably reflects the increase in
younger buyers, who are more likely to need inflation protection. The
Employer-Sponsored Long-Term Care Insurance Market The growth in
employer-sponsored plans during recent years is particularly promising. Employer
plans offer the opportunity to reach a large number of people efficiently during
their working years when premiums are more affordable. Enrollment experience
shows that the average age of employees electing this coverage is 43. This is
strong evidence that with education and availability, younger people can and
will purchase long-term care protection. Most of these plans offer coverage to
the elderly as well by including retired employees and their spouses and parents
of the employee or employee's spouse. By the middle of 1998, more than 2,100
employers were offering a long-term care insurance plan to their employees and
retirees. There were more than 600 employer-sponsored plans introduced in 1997
and the first half of 1998. Since June 1990, many small employers (between one
and 500 employees) have started offering long-term care insurance. This number
has increased dramatically, rising from 58 in 1990 to more than 1,200 by
mid-1998. This group represents over 60 percent of all employers offering
long-term care coverage to their employees and/or retirees. There also have been
substantial increases in the number of medium- and large- sized employers that
offer long-term care coverage. The employer-sponsored long-term care insurance
market got a very significant boost this year with the recent congressional
passage of "The Long-Term Care Security Act" (H.R. 4040). HIAA applauds Congress
for passing this important measure. The Long-Term Care Security Act will help
millions of federal employees, military personnel, retirees, and dependents meet
their long-term care needs through quality private insurance coverage. The
measure will also make the federal government - the nation's largest employer -
a model for private sector employers by encouraging them to offer long-term care
coverage to their employees and dependents. Long-Term Care Insurance Rate
Stability and Lapse Rates The vast majority of companies currently offering
long-term care insurance have not increased premiums on policies that they have
developed and priced. There have been cases of long-term care insurance rate
instability. However, these have generally occurred in instances where an
insurer has continued coverage of products acquired from other companies that
have left the long- term care insurance market. Although long-term care
insurance rates have generally been stable, limited cases of rate instability
have raised the concerns of consumers, regulators, and lawmakers. Therefore,
HIAA has taken a leadership role in working with the NAIC, other industry trade
groups, and consumer representatives to craft improvements to NAIC Long-Term
Care Models to address these issues. For more than ten years, HIAA has worked to
improve long-term care insurance products and protect long-term care insurance
consumers. HIAA has carried out research to provide crucial information for
long-term care insurers as they develop new policies or revise their assumptions
about the future. HIAA has completed three major consumer surveys to determine
the factors and reasons behind consumer decisions to buy - or not to buy -
long-term care insurance coverage. These surveys have been instrumental in the
development of NAIC suitability provisions that provide standards for
appropriate long-term care insurance purchases. HIAA fully supports the NAIC
suitability provisions. Moreover, it is critically important that each company
develop and follow some criteria so that policies are not sold in cases where
there is no need, insufficient ability to maintain premium payment, or some
other reason why a purchase may not be suitable. HIAA has also published
actuarial data regarding long-term care insurance lapse experience in both the
individual and employer- sponsored markets. This information has been an
important source for tracking and understanding the improvements in long-term
care insurance lapse rates. HIAA estimates that actual lapse rates for
individual long-term care insurance policies are below five percent annually.
For employer-sponsored coverage we estimate lapse rates below three percent
annually. These figures exclude the roughly one to two percent of policy lapses
due to the death of the policyholder. Current pricing of long-term care
insurance, as we understand it, generally reflects assumptions that 70 percent
or more of policies issued will still be in force after eight years. A
substantial portion of the 30 percent of "terminated policies" will have lapsed
because of the death of the policyholder. It is important to note that the
average lapse rates of individual long- term care insurance policies are
comparable to, if not lower than, those for most individually sold life and
health insurance products. Helping Americans Through Long-Term
Care Tax Relief The enactment of the long-term care insurance tax clarifications
in The Health Insurance Portability and Accountability Act
(HIPAA) of 1996 were very helpful, but they are not enough. HIPAA's long-term
care insurance tax benefits for premiums apply primarily to employer-sponsored
long-term care coverage. But 80 percent of long-term care insurance is
individual coverage. Under current tax law, an individual purchasing a long-term
care policy, who is not self-employed, gets to deduct premiums only if he or she
itemizes deductions and only to the extent medical expenses exceed 7.5 percent
of adjusted gross income. Only about 4.5 percent of all tax returns report
medical expenses as itemized deductions. Under current law, tax benefits can
range from a full exclusion from income if one's employer pays the premiums to
no tax benefit if an individual pays and does not have sizeable medical
expenses. These disparities lead to inequitable results. For many, the current
law's tax deduction is illusory. Strengthening federal tax incentives for
private long-term care insurance would help expand private long-term care
insurance coverage and reduce the burden on public programs. Last year, HIAA
commissioned researchers Marc A. Cohen, Ph.D. of LifePlans, Inc. and Maurice
Weinrobe, Ph.D. professor of economics at Clark University, to examine the
impact that a 100 percent "above-the line" federal income tax deduction for
long-term care insurance premiums would have on the net cost of long-term care
coverage to taxpayers, the expansion of coverage, and Medicaid spending for
long-term care. Cohen and Weinrobe concluded that the above-the- line federal
tax deduction would significantly increase long-term care insurance coverage and
that the resulting savings in Medicaid spending would more than pay for the
foregone tax revenues. Specifically, they estimate that the above-the-line
deduction would: reduce long-term care insurance premium costs, on average, by
19 percent; spur the purchase of additional long-term care coverage by 14 - 24
percent above current growth; and generate more than enough future Medicaid
savings from the expansion of private long-term care coverage to offset the cost
of the tax deduction for these policies. Thus, as individuals are encouraged to
assume greater personal responsibility for meeting their future long-term care
needs by purchasing private insurance, the fiscal pressures on the federal
government and state governments will decline. This will help assure that the
private sector piece of the long-term care financing puzzle will play an
ever-growing and critical role in helping to address this important social
policy issue. What Difference Does Private Long-Term Care Coverage Make? In
addition to the peace of mind of knowing that there will be sufficient resources
to pay for long-term care if needed, private long-term care coverage can bring
significant improvements in quality of life. Recent studies of policyholders,
claimants, and informal caregivers show that the presence of long-term care
insurance can: delay or prevent institutionalization; afford a greater choice of
long-term care services and providers; enable easier access home care and/or
assisted living; ease the financial, physical, and emotional burdens on families
providing care in the home; and preserve assets for heirs. Earlier this year,
the U.S. Department of Health and Human Services (HHS), Office of Disability,
Aging, and Long-Term Care Policy (DALTCP) made public "A Descriptive Analysis of
Patterns of Informal and Formal Caregiving among Privately Insured and Non-
Privately Insured Disabled Elders Living in the Community." This analysis is
based on interviews with nearly 700 long-term care insurance claimants and
informal caregivers. It presents the first systematic study of the practical
benefits of private long- term care insurance coverage to policyholders and
their families. Among the findings: The vast majority of claimants (86 percent)
is satisfied with their policy and most (75 percent) had no difficulty
understanding what their policy covered. About 90 percent of all individuals
filing claims had no disagreements with their insurance companies or had a
disagreement that was resolved satisfactorily. About 60 percent of claimants
indicated that without their policy they would not be able to afford their
current level of services and would have to consume fewer hours of paid care.
Many also indicated that without their policy benefits, they would have to rely
more on informal supports. About half of all claimants and informal caregivers
indicated that without private insurance, they would have to seek institutional
alternatives - nursing home care or assisted living facilities. About two in
three informal caregivers indicate that the presence of private insurance
benefits has reduced their level of stress. HIAA/AARP Cooperation to Strengthen
Access to Long-Term Care and Long-Term Care Insurance Consumer Protections In
March, HIAA joined AARP in calling for federal legislation to enact both an
above-the-line deduction for long-term care insurance premiums and a tax
credit of up to $3,000 for those with long-term care needs (or their
caregivers). Working with HIAA and AARP, Senators Charles Grassley (R-IA) and
Bob Graham (D- FL), along with Representatives Nancy Johnson (R-CT) and Karen
Thurman ( D-FL) in the House of Representatives, introduced the Long-Term Care
and Retirement Security Act of 2000 (S. 2225/H.R. 3872). This legislation would:
phase-in a 100 percent above-the-line tax deduction for long-term care insurance
premiums; phase-in a $3,000 tax credit for those with current
long-term care needs (or their caregivers); allow long-term care insurance to be
offered under cafeteria plans and flexible spending arrangements (FSAs); and
strengthen federal long-term care insurance consumer protections. HIAA strongly
supports the Long-Term Care and Retirement Security Act of 2000 and we continue
to work for its enactment this year. NAIC Long-Term Care Insurance Model
Regulation HIAA has a long history of working closely with the NAIC on models
for long-term care insurance regulation. We supported all of the mandatory
provisions of the Long-Term Care Insurance Model as it stood before the recent
changes were adopted. HIAA also supported, back in 1996, the incorporation of
the relevant components of a previous version of the model into the long-term
care insurance consumer protection provisions of HIPAA. Since the enactment of
HIPAA, we have continued to support NAIC efforts in three areas: protecting the
equity of policyholders in the event of a premium rate increase; reducing the
potential for premium rate increases; and improving consumer disclosure
regarding the history of premium rate increases for a particular company and
more clearly alerting applicants about the potential for future rate increases.
Based on work begun in the early 90's, in 1998 the NAIC added to the Long-Term
Care Model a requirement to protect the equity of policyholders in the event of
a significant premium rate increase. The requirement, known as "contingent
benefit upon lapse," afforded those applicants who declined the nonforfeiture
benefit (and the premium cost that the nonforfeiture benefit adds) some recourse
in the event of a substantial increase or series of increases (e.g. decreasing
the amount the policy pays per day of care or converting to a policy with a
shorter duration of benefits) in the face of a significant increase in their
policy premiums. HIAA was involved throughout the development of the contingent
benefit upon lapse Model requirement and supported its addition to the Model. On
August 17, the NAIC adopted an updated Long-Term Care Insurance Model
Regulation. The updated model offers states a new regulatory mechanism intended
to guarantee stable long-term care insurance premiums. In brief, with respect to
a state's regulation of premium rates, the recently updated NAIC Long-Term Care
Insurance Model Regulation: Eliminates the use of loss ratio requirements on
initial rate filings in order to increase margins to economically appropriate
levels, thereby reducing the potential for future rate increases. Substantially
increases the portion of any additions to the initial premium that must be paid
out as LTC benefits by the insurer. Requires reimbursement to policyholders of
premiums paid for unnecessary rate increases. Authorizes review and approval by
the state insurance commissioner of a company's administration and claim
practices. Provides that companies can be required to provide policyholders with
the option to escape rate spirals by replacing or converting existing coverage,
without underwriting, to a comparable product currently being sold. Authorizes a
state's insurance commissioner to ban a company from the marketplace for up to
five years if the company persistently files inadequate initial premium rates.
Requires a company to provide actuarial certification that no rate increases are
anticipated. In addition, the revised model adds the following provisions for
disclosure to consumers regarding the potential for premium rate increases:
Requires disclosure of rate increase histories for the past 10 years. Specifies
information that companies must provide to applicants for long-term care
coverage. Requires signed acknowledgement by applicants of potential rate
increases. Strengthens requirements for agent training and licensure. HIAA
worked alongside the NAIC throughout the development and adoption of these
amendments to the Long-Term Care Insurance Model Regulation. Just in the past
three months, HIAA has consulted with the working group that has developed a
guidance manual to assist states in their review of the required disclosure
information. The manual includes standards for language and examples of
acceptable and unacceptable disclosures. HIAA supports the mandatory provisions
of the 2000 NAIC Model and its adoption by the States. We expect formal
endorsement when our Board of Directors meets later this year. HIAA also
supports the use of the appropriate components of the 2000 NAIC Model to
strengthen the consumer protection provisions of HIPAA. However, as members of
this Committee - and others in Congress - consider linking the 2000 NAIC Model
to federal law, HIAA urges that you take care to preserve the appropriate and
distinct role of the states in the regulation of insurance. NAIC Long-Term Care
Insurance Model Provisions As Federal Tax Requirements HIAA believes that
legislation to strengthen tax incentives for long-term care insurance is a key
step the federal government should take to help Americans plan for and protect
against future long-term care needs. In conjunction with strengthening federal
tax incentives for long-term care coverage, HIAA is willing to support the
incorporation into HIPAA's long-term care insurance consumer protections of the
appropriate components of the 2000 NAIC Long-Term Care Insurance Model. When
HIPAA established a federal tax definition of a "qualified long-term care
insurance contract" (QLTCI), this legislation specified consumer protection
requirements that had to be satisfied in order for a policy to be qualified, and
also imposed a penalty tax on persons failing to meet certain consumer
protection standards. These consumer protection requirements were largely
imposed through cross-references in the Internal Revenue Code to provisions of
the Long-Term Care Insurance Model Act and Long-Term Care Insurance Model
Regulation , as promulgated by the NAIC. Model Rules Incorporated by HIPAA. Most
of HIPAA's consumer protection rules for QLTCI contracts establish ground rules
relating to fairness. These rules specify certain minimum requirements for
policies and on company actions in their relationship with the consumer. For
example: requiring policies to be at least guaranteed renewable; specifying the
circumstances when coverage could be canceled or rescinded, such as when the
applicant lied to obtain coverage; limiting the circumstances where benefits
need not be provided, such as in the case of alcoholism or drug addiction;
requiring free-look periods immediately after issue and grace periods for
premium payments; requiring numerous disclosures, including an outline of
coverage, and building in notice and other safeguards to prevent unintended
lapses of policies; establishing minimum standards for home health benefits; and
requiring offers of inflation protection and non-forfeiture benefits. Model
Rules Not Incorporated by HIPAA.In addition to addressing the relationship
between insurers and consumers, the Long-Term Care Insurance Models also include
rules providing for the regulation of insurance companies by state insurance
departments. The Models, for example, authorize state insurance departments to
impose limitations with respect to the pricing of policies (e.g., loss ratio
requirements), and also authorize state insurance commissioners to impose
sanctions or require remedial action in certain instances. These Model
provisions were not incorporated by HIPAA as federal tax requirements since they
relate more to the state's regulation of the insurance company than to the
fairness standards that should be met with respect to a QLTCI contract.
Recommendation for Update of the Consumer Protection Standards. HIAA will
support the 2000 NAIC Model provisions, and hopes for their speedy adoption by
the states. In addition, HIAA believes it is appropriate that federal
legislation enhancing the tax treatment of QLTCI contracts include components of
the 2000 NAIC Model the extent they establish ground rules relating to fairness
or otherwise define minimum standards in the relationship between an insurer and
consumer. As an example, HIAA recommends that the new Model provisions relating
to contingent nonforfeiture benefits provided on lapse be included as new
requirements relating to the definition of a QLTCI contract. In addition, HIAA
recommends that the required disclosure to consumers relating to rate stability
be added as a requirement. We would also note that HIAA supports the addition of
the changes to the prescribed "Outline of Coverage" that is to be given to
applicants, thereby providing an explanation of the value of these provisions to
the consumer. Similar to the framework of HIPAA, it would not be appropriate to
include as federal tax requirements those provisions of the revised NAIC Models
that relate more to the manner in which a state regulates an insurance company.
The McCarren-Ferguson Act and the more recently enacted Gramm-Leach-Bliley (GLB)
Act of 1999 affirm that the proper regulation of insurance companies resides
with the states rather than with the federal government. HIAA strongly supports
the continued separation of these roles, as maintained by HIPAA and by GLB.
While disclosures to consumers, such as of an insurer's history of price
increases, may be appropriate as uniform federal tax requirements, the federal
government should not take on the role of state insurance departments with
respect to the regulation of the amount charged for policies. To do so would
create very substantial coordination problems, since the methods for regulating
prices in the Models will in many instances be inconsistent with the regulatory
methods actually applied by states. As a result, states often would either need
to defer to the federal regulatory scheme and forego their preferred method of
regulation, or they would effectively have to prohibit the offering of QLTCI
contracts in their State. In addition, HIAA believes that the federal government
should not authorize actions by state insurance departments that have not been
authorized by the state in question, as this would similarly represent an
intrusion on the state's proper role in the regulation of insurers. HIAA also
believes that it would be inappropriate to take these regulatory powers away
from the states. Summary and Conclusions Long-term care insurance coverage
continues to grow and market competition and innovation continue to bring
quality and value to consumers. Federal and state public policies will have a
crucial role in determining how fully private long-term care insurance realizes
its potential to protect Americans against the financial risk of long-term care
need, to improve their long-term care choices, and to relieve the burden on
public programs. The combination of enhanced federal consumer protections,
combined with state adoption of the 2000 NAIC Models, will improve long- term
care insurance rate stability and ultimately make long-term care insurance a
better product. This, combined with appropriate tax treatment of long-term care
insurance, will substantially enhance the appeal of such insurance as a way for
Americans to address the possible long-term care needs they could face with
advancing age. Thank you Mr. Chairman and Members of the Committee. We look
forward to working with you for the enactment of legislation to help Americans
meet their long-term care needs with quality long- term care insurance coverage.
LOAD-DATE: September 15, 2000, Friday
