Long Term Care Insurance: Not a Solution

I’d like to digress from my equity and eligibility series for a post to discuss a bad solution to the massive problem alluded to my the prior post – the custodial care of the frail elderly. The government is faced with very difficult issues. At what point is custodial care necessary? How can you be sure, for a given person, that point has been reached? What are the responsibilities of the senior citizen in question, to provide or pay for that care, or his or her children, particularly as the generation that decided not to stay together, or even get together, to benefit those children reaches deep old age? Faced with these issues and potentially massive public expenses, some advocate advising, mandating, or requiring private long-term care insurance, in effect converting the public policy problem to a fight between families and insurers. But I would neither purchase nor advise the purchase of long term care insurance, either for family members or as a matter of public policy.

Long-term care insurance, like all insurance, involves having many people pay in a small amount of money up front, an insurance company investing the money, and that company paying a much larger amount out to just some of the people later, using everyone’s premiums plus the investment returns. Obviously lots of people would rather be the ones receiving the larger amount of money out, rather than nothing, which is one reason that such a large share of the money everyone pays in for, say, automobile insurance goes for fraudulent claims. In the case of long-term care insurance, as for Medicaid, it is likely that many people will decide their level of disability requires someone to take care of them far sooner than is absolutely necessary. But sharp insurance practices cut both ways. Insurers can increase profits, and executive bonuses, by denying or delaying legitimate claims as easily as by ferreting out illegitimate ones. Sometimes, when deciding who does and does not get money back from an insurance company, as Clint Eastwood put it, “deserve has nothing to do with it.” Just as in government programs.

Lots of auto insurance money is both collected and distributed every year. For a growing field like long-term care insurance, in contrast, lots of money is being collected today that won’t have to be paid out for years, if not decades. So the rate of return on the insurance company’s investments (which cannot be known in advance) can have a huge effect. If a company assumes a higher rate of return, it can promise more benefits in exchange for lower insurance premiums, attracting more customers, all while paying higher executive bonuses and stock options. But if the actual rate of return turns out to be lower, years after the executives have taken their bonuses and gone, there may not be enough money to pay the benefits, and the company may go broke. Do the executives care?

Based on the importance of expected returns, long-term care insurance is a lot like pensions. And most U.S. retirement benefits are vastly under-funded. Lots of executives took advantage of the 1990s stock boom to cut the amount they contributed to their company pension funds, thus reporting higher “profits” and getting more stock options and bonuses. When the temporary stock bubble collapsed, vastly higher pension contributions were required, and lots of companies went under, with workers getting reduced pensions. Politicians pulled the same stunt with public employee pensions, handing out enhanced pension benefits that public employees neither worked nor bargained for in exchange for union support, cutting pension contributions and thus taxes, all while becoming more popular. All they had to do is assume higher returns. In New York State, they assumed a future 8% per year investment return from 2000, at the peak of the stock market bubble. That would put the S&P 500 at about 2,400 today. It is at about 1,450 in reality, and we are all suffering as a result, with more and more of our tax dollars going to the pension funds rather than to services, and lower compensation for new public employees.

And the politicians who cut those deals? A former State Comptroller capitalized by running for Governor in 2002. A former Governor considered running for President, and a former Mayor is doing so. And the heads of the two houses of the state legislature are still in office. Meanwhile, none of the 1990s-era corporate executives are giving back their bonuses.

In fact, long-term care insurance is far more vulnerable to having not enough money put in (or too much sucked out) today, leaving not enough to pay benefits tomorrow, than auto insurance, life insurance, or pensions. That is because for these types of insurance there is an extensive history of claims rates, and death rates, that insurance regulators can check against to ensure reserves are adequate. Contrary to popular belief, the purpose of insurance price regulation is not to keep insurance rates low, it is to make sure both those rates and the reserves they support are high enough to ensure benefits.

What share of the population, on the other hand, will require home health care or nursing home care twenty years from now, and for how long? Experts are all over the map, and it is impossible to say. But it is easy for insurance executives to make campaign contributions, and to accuse regulators who require higher premiums and reserves of stifling the market and denying older people insurance. My guess is that insurance companies will use that uncertainty to charge too little (to grow the business) and take out too much (to grow their own bank accounts).

Given this, I guarantee that in many cases there won’t be enough money to provide long-term care benefits for those who have paid premiums. At that point, insurance companies will start looking for any excuse to deny claims to stay afloat, or perhaps will not stay afloat, paying diminished claims after going through bankruptcy.

In fact, based on some articles I have read, it may already be happening 10 to 15 years sooner than I would have expected. According to a New York Times article from last March, Conseco insurance has been fighting making payments on long term care policies, claiming in one case that an 81-year-old woman who paid premiums for years was not sufficiently disabled to required care “despite her early-stage dementia and the 37 pills she takes each day.” According to the Times “thousands of policyholders say they have received only excuses about why insurers will not pay.” “They’ll do anything to avoid paying, because if they wait long enough, they know the policyholders will die.” If this is happening now, when (because long-term care insurance is a relatively new product) there are lots of people in their 50s and 60s paying in but relatively few in their 80s and 90s receiving benefits, what will happen later when the number of beneficiaries soars?

The worst part is this – people are encouraged to start paying into long-term care policies in their 50s, when the chances they will actually need care are low, but are promised their premiums will remain low when they pass age 70s, and the odds of disability increase. But what if they find out, after having paid in for 15 or 20 years, that their current insurer either has been trying to get out of paying benefits, or is in financial difficultly and may not be able to honor claims? They cannot switch, because now that they are older, a new insurer would see them as a much higher risk and, not having collected all those premiums from their younger days, would charge vastly more. They would be trapped. And millions will be trapped, as insurance companies run into shortages of money after years of recording fat profits and paying fat salaries and bonuses. The cost of custodial care will be shifted back to the taxpayer and family members. Privatize the profits now, socialize the losses later.

To be fair to the insurance companies, it may be that some of those protesting could get by without care, though with extensive difficulty. That is the very problem I described in my prior post. Privatizing it doesn’t solve the problem; it just shifts it to the marketplace while opening up more possibilities for abuse.

Can’t people rely on the reputation and financial strength of huge companies with extensive resources? That’s what some relatives of mine thought when they started paying into a long-term care policy with GE Capital many years ago, when they were in their 50s. Surely a massive company like GE isn’t going bust? Well, GE Capital sold its long-term care insurance business. To Conseco. And how much did Conseco pay GE Capital for the business, and what assumptions were behind the price? The assumption that the insurance plan had lots of “excess” cash that wouldn’t be needed to pay claims later, and could be “liberated” to pay for the purchase now? So what are my relatives to do if they are worried Conseco won’t pay claims? Age 70 is approaching, and the cost of starting a new policy from scratch would be enormous – unaffordable. So they might as well keep paying, for another ten years, and hope for the best.

What about purchasing a long-term care policy from a mutual insurance company, owned by the policyholders, like New York Life? From New York Life’s website: “The primary responsibility of a mutual insurance company is to ensure that the long-term benefits promised to its policyholders are secure and protected. By remaining a mutual, New York Life can continue to manage for the long term, instead of the quarter-to-quarter orientation of the investment community.” In fact, this company was the one someone pointed to when arguing with me in favor of long-term care insurance a while back. Surely, a huge 100—plus-year-old company like this one is not going away? Surely you can trust New York Life?

Well, what if New York Life decides to de-mutualize, paying its executives massive, massive bonuses in the process? The current executives wouldn’t do that? Well, who will be running the company 20 years from now, when someone might actually need long term care? Even if you are sure about today’s leadership, what about tomorrow’s? The State of New York will not allow it? How about if New York Life were to make a massive payment to the state as part of the deal, with the payment to be used for more money for members of Local 1199, and if New York Life made lots of political contributions to the New York State legislature while petitioning to de-mutualize? It worked for Empire Blue Cross Blue Shield, didn’t it? (I can just hear the $ca-ching, $ca-ching going off in the mind of Sheldon Silver, Joe Bruno and Denis Rivera. Get that New York Life CEO on the phone!) Even if tomorrows politicians didn’t respond to bribes, they might respond to threats. What if the future CEO of New York Life threatens to move to New Jersey unless “excessive” regulations were loosened up to make New York more like “business friendly” states?

There is no getting around the following problem. If you buy auto insurance this year, you are insuring against an auto accident this year. If you buy life insurance this year, you are insuring against a premature death this year, which is why life insurance is so much more expensive for the very old, who fortunately have few dependents and do not really need it. But if long-term care insurance were priced the save way, no one in their 80s, when they are most likely to end up needing long-term care, would be able to afford it, which would make the whole idea infeasible. So long-term insurance pricing, in effect, encourages people to pre-pay in their 50s and 60s to pay less later. But that means giving a company and its executives money in the hopes that 20 to 35 years in the future some other set of executives, and perhaps some other company, will keep their promises.

To further digress, former Mayor Giuliani has proposed making it easier to by cheap individual health insurance policies as his program for the uninsured. It sure would have suited me a decade ago, when I was in my 30s and not consuming any health care, to have purchased a cheap individual policy. Unfortunately, I was an employee of the City of New York and thus required to take some of my compensation in the form of group health insurance, which in reality went to the very expensive health care required to keep the much older Mayor Giuliani alive at a time when he had cancer. However his every-age-group-and-health-level for itself program, if implemented in 2009, would be just in time for him to become eligible for Medicare and thus unaffected. I’ll be closing in on age 50. It would be the perfect continuation of the effect of his generation on mine, and those after. Aside from the blessing of business casual and casual Fridays, of course. You’ll hear more from me on health care (or rather health care finance, as I have little knowledge of medicine, as the Presidential election approaches).

As my discussion of Social Security shows, given the values and practices of the generations now in charge people cannot really rely even on the federal government to keep its promises 20 years from now, let alone a private company – however large, whatever its form of organization and history. For some people, and with some companies, long-term care insurance will work. But there is no way to predict which companies, and there is no guarantee for any one of us. Private long-term care insurance is not a long-term care solution the government should be pushing.