AHIP HI-WIRE

April 13, 2010

Ratings agency A.M. Best recently released a market review of the long-term care industry and AHIP HI-WIRE took the opportunity to ask the report's two lead authors about long-term care costs, sales, and the CLASS Act.

Carl Austin Jr. is an Assistant Vice President at A.M. Best. Mr. Austin joined A.M. Best in 1991 and has been a team leader and a standing member of the Life/Health department's rating committee for the past nine years—following a variety of life and health insurers, with an emphasis on companies in the employee benefits, worksite, senior health, and supplemental health markets. Jeffrey Lane is a Senior Financial Analyst who joined A.M. Best in 2001 and works as a member of Mr. Austin's analyst group.

AHIP HI-WIRE: A key point in your report is that the cost of providing long-term care has increased much more than expected. What has contributed to this increase in costs?

Carl Austin: The rate of inflation for nursing home and assisted living facilities has not really abated in recent years. Going back over 10 years ago, assisted living facilities were not nearly as prevalent as today. Many people that in the past would not have gone into facilities have opted to do so now because they have become a lot more attractive from a quality of life perspective than traditional nursing homes. Additionally, many facilities today have multiple levels of care which did not exist as much a decade ago.

AHIP HI-WIRE: So some of these higher costs are being driven by an evolution in long-term care services. Have there been other cost drivers?

Carl Austin: Thanks in part to the many new prescription drugs introduced to help manage seniors' ailments, Americans are also living longer and staying in facilities for greater lengths of time.

Story Continues Below Advertisement

There likely is also some spillover in rising facility costs due to increases in health care costs throughout the U.S. health care system. Other items—such as the shortage of nurses—have also played some role as unexpected higher costs.

AHIP HI-WIRE: You point out in the report that LTC insurance has not been as in demand as one would think given the nation's aging population. You mention the economy as one possible factor but what less obvious causes could be in play?

Carl Austin: The weak U.S. economy definitely has had an impact on LTC over the past two years. However, even prior to the second half of 2008, sales were weaker than expected.

Additionally, A.M. Best believes that there are fewer agents actively selling the product today than a few years ago. LTC has always been a complicated, time consuming sale and some agents are probably concentrating on selling other insurance products.

AHIP HI-WIRE: One piece of the national health reform legislation you discuss in your report is the CLASS Act. What is your overall assessment of the CLASS act?

Jeff Lane: The CLASS Act provides very modest benefits, in addition to a 5-year waiting period to be paid. The program is more for those individuals who are uninsurable or can only afford a policy offering limited benefits.

The CLASS Act is scheduled to take effect in January 2011 and administrators have yet to establish eligibility requirements, premiums, and how to make it available to self-employed and to those with nonparticipating employers. The government may have to underprice the policies in order to be successful. (The Secretary of Health and Human Services has the responsibility to annually adjust premiums and benefits.) The premiums are deducted from payroll and few will want to or be able to spend the amount, which should be the sustainable cost.

The CLASS Act does not include sufficient funding to market the program and will likely have a low participation rate. Estimates from the Centers for Medicare & Medicaid Services and the Congressional Budget Office project between 2.5% and 5% of the population will sign up. However, those who enroll would be more likely to need care and will be more expensive to cover than those who buy private insurance. This could force the program to eventually charge more than private insurers. There is even potential for an "insurance death spiral," in which premiums become so high, only those who know they will need coverage sign up, driving up premiums even further until they are unaffordable for everyone.

AHIP HI-WIRE: Do you see the CLASS act having an impact on the private long-term care market?

Jeff Lane: Jesse Slome, Executive Director of the American Association for Long-Term Care Insurance, has stated that the long-term care insurance industry is not concerned about the competition from the CLASS Act. A.M. Best agrees with Mr. Slome in that the private insurance marketplace provides better long-term care coverage for less money to healthy potential policy holders.

The CLASS Act will also make millions of Americans aware that Medicare and Medicaid will pay little, if any for long-term care services. With further publicity surrounding the government program, the awareness of the need for long-term coverage should increase. We believe that more education is needed about this product line and its importance going forward.