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Tax Legislation Debate

Following is an article which appeared in the February 28, 2000 edition of National Underwriter and, in response, a Letter to the Editor from Samuel X. Kaplan, Founder and Chairman, U.S. Care, Inc. voicing his point of view.

HIPAA Really Is Good For The LTC Market

By Phyllis Shelton—National Underwriter

Today's long term care insurance producers are continually having to ask, "Which LTC policy is better for the consumer?" 

It is a question that is becoming compounded by access to increasing numbers of products, introduction of rapidly-changing policy designs, open questions stemming from federal long term care legislation, and the ever-present drumbeat of competition, including rate competition. 

We'll look at some of those pressures here to see what really is the best choice. 

At first glance, LTCs that pay for short-term episodes like broken hips and mild strokes and that have easy-to-hit benefit triggers might seem to be more beneficial for the clients. 

Examples include:

  • LTCs that don't require a 90-day certification;
  • LTCs that pay benefits if the insured needs help with only one activity-of-daily living (instead of two);
  • LTCs that have a "policyholder's discretion" benefit trigger, which amount to saying, "if you say you want to go to a nursing home, we'll pay your claim"; and 
  • LTCs with a medical necessity trigger (because the doctor just has to say the patient has an illness or injury warranting long term care or maybe a condition like severe arthritis).
Of course, policies meeting any of those characteristics are non-tax qualified LTCs. 

In the tax-qualified LTC field, meanwhile, a producer might well wonder if a long term care policy having a premium that falls in the lower third of premiums available for a specific benefit plan would be better for a client than the higher-priced plans. Or maybe an LTC with only zero- or 100-day elimination options (making it so that the common choice is zero, inviting high claims activity)? Or maybe a policy written with a company that accepts a large number of substandard risks? 

More questions will come from this surprising turn of events: Now, three years after the Health Insurance and Portability and Accountability Act of 1996, companies and agents are starting to tell me that "the Internal Revenue Service isn't taxing anyone who has received benefits from an NQ-LTC." If true, this certainly complicates matters for producers who want to make responsible recommendations. 

(For the record, insurers are required to send 1099s to policyholders who receive benefits from any type of LTC policy, Q or NQ. These policyholders must report benefits on Form 8853, Medical Savings Accounts and Long-Term Care Policies, with individual tax returns. Taxation of benefits from LTCs issued on Jan. 1, 1997 or later that do not meet HIPAA's benefit criteria is uncertain. This is because HIPAA only clarified that benefits from Q-LTCs will not be taxed as income. LTCs effective before that date are grandfathered and out of danger of income taxation unless a subsequent benefit increase after Jan. 1, 1997 resulted in a material change.) 

But is taxation of benefits the real issue? I think not. 

I think the non-clarity here is the government's velvet hammer, the purpose being to preserve LTC insurance for the long-term by encouraging purchase of Q-LTCs. This, in turn, prevents payment of short-term claims and payment of claims too quickly via lax benefit triggers, such as under the NQ-LTCs cited above. 

In other words, I believe HIPAA has effectively created a market environment that makes the agent's decision, about which policy is best for the consumer, much easier. Indeed, it may be the very thing that preserves LTC insurance for future claimants. 

That's because HIPAA has made LTCs more beneficial to consumers—by ensuring reasonable payout terms instead of lenient terms that will likely result in high future rate increases. 

I think the forces behind HIPAA were trying to avoid repeating the marketing mistakes of disability income and health insurance products, which suffered enormous market disruptions in the past due to easy benefit triggers, liberal underwriting, low rates and, yes, even inappropriately high agent commissions! 

Another impetus for HIPAA, I believe, came from the provider side of the equation. 

As you may recall, prior to HIPAA, home health agencies and skilled nursing facilities that specialized in short-term, rehabilitative care (physical, speech, occupational therapy, etc.) were pushing hard for payments from LTC policies. (The Balanced Budget Act, which put deep cuts into Medicare benefits for nursing homes and home health agencies, has only intensified this.) However, picking up short-term rehabilitative care on the front end will break the reserves of any insurance company on the back end, especially as baby boomers enter the fray. So HIPAA addressed this issue, with its emphasis on the long-term focus (i.e., the 90-day certification requirement). 

(Note: Consumers normally have coverage for short-term, skilled care. It's the beyond-90-day stuff that constitutes the largest concern, as neither conventional health insurance nor Medicare pays for chronic, maintenance care with no progress, such as paralysis or coma due to an auto or sporting accident.) 

In sum, HIPAA has set the pace for preserving LTC insurance for the future. 

Many insurers are contributing by designing Q-LTCs with conservative benefit features. For instance, most policies today are reimbursement contracts, not indemnity, so they don't pay more than the actual charge. 

Significantly, most LTC sales today (about 85 percent) are for Q-LTCs, which don't pay for short-term care due to the 90-day certification requirement. 

The HIPAA requirement calling for non-duplication of Medicare benefits is also in keeping with the intent to conserve benefit dollars. Q-LTCs are not allowed to make a payment when Medicare pays, even on days 21-100 of nursing home care when there is a $97 copayment for the consumer. (Think about it: most people already have coverage for that copayment with a Medicare supplement policy, retiree health insurance, HMO, etc.) In line with this, a few LTC insurers have started issuing policies that coordinate with any other health coverage, including other LTCs. 

Changes like this that help preserve LTC insurance and the LTC market, should help producers make the right choice for their clients. The long-term design is what is best for the long term care insurance consumer. By contrast, the short-tem designs will kill the market, and the biggest loss would be to consumers, who would no longer have choice. 

Samuel X. Kaplan's response to the above article: 


Linda Ruthardt, Insurance Commissioner of Massachusetts, states that "Long-term care insurance is a product that is in desperate need of something... when [consumers] are not buying a product they should be buying, then the product doesn't work." (National Underwriter—Life/Health Edition, July 31, 1995). And why doesn't it work? Because the industry is loaded with thinkers like Shelton. Their big beef is that LTCI should not pay for "short term claims" resulting in "payment of claims too quickly." 

They totally disregard the dramatic change in our health care system. The Fall 1996 issue of Health Care Financing Review stated the problem consumers are facing in simple terms: "Because Medicare reimburses [hospitals] on a fixed fee basis, the shorter the patient's stay, the more money the hospital gets to keep." So hospital patients are being released "quicker and sicker." The average hospital stay for patients age 65 and older has been reduced from 10.1 days before 1990 to 6.6 days in 1996. So instead of staying in a hospital for recovery before going home, older people and those who cannot care for themselves have to go to a nursing home. According to the Health Care Financing Review 1997 Statistical Supplement, 94.2% of these patients stayed less than 90 days (69.1% stayed less than 30 days). 

Who covers the shortfall? The consumer—the same people who are buying LTC policies in fewer and fewer numbers because they are not finding value in benefits designed to protect the insurer. The day is coming when people will demand the right to buy a policy to cover their nursing home short stay when they are discharged "sicker" and need to access benefits that they can use in real life rather than in theory. 

One year after Commissioner Ruthardt's statement, the situation facing those who need LTC services deteriorated even further when HIPAA 1996 was pushed through by insurance industry lobbyists. They pushed the idea that Tax-Qualified LTC plans are better than Non-Qualified Plans because "premiums are deductible as a medical expense," knowing full well that only 4.5% of taxpayers of all ages itemize to take a deduction for medical/dental expenses. It is estimated that only 2% of seniors will qualify for any type of tax deduction under current regulations. 

Insurers and some LTC insurance "experts" push the idea that "benefits are received tax-free" even though HIPAA has made benefit triggers very restrictive. Shelton and most insurers think this is good "for preserving LTC for the future." Tell that to the 83% of Medicare's home health care cases that last less than 90 days and to 77% of all new nursing home admissions for recovery care following the patient's discharge from a hospital. The need for these services lasts an average of just 36 days (Health Care Financing Review 1997 Statistical Supplement). These individuals are receiving no benefits under a TQ plan, but probably feel great that "HIPAA has set the pace for preserving LTC insurance for the future." They are probably even happier that the claim dollars saved—by refusing to pay for care that they now have to pay for out of their own pockets—may (or may not) be available for their children or grandchildren—you bet! 

How about the strict benefit requirements for TQ plans: chronically ill, severe cognitive impairment, substantial assistance of another person, certification by healthcare professionals annually? With all of these restrictions and barriers to accessing benefits, the insurance companies just may be able to save enough premiums to that they can continue to make the same restrictive LTC "coverage" available to the great-grandchildren. But will anyone be buying? 

Every agent who reads Shelton's article and pushes TQ plans without fairly laying out the alternatives available through NQ plans faces a real danger when claims are denied by insurance companies due to TQ restrictions. These agents and these LTC insurance companies will be caught in a public relations nightmare. Who will policyholders blame? Uncle Sam? Or insurance companies and their agents? 

Shelton says, "HIPAA has made LTC more beneficial to consumers" avoiding "high future rate increases." Amazing foresight! But if this is the case, how come at least 44 insurers increased LTC rates last year, including 4 of the 5 largest writers? Shelton says, "Consumers normally have coverage for short-term skilled care" and "neither conventional health insurance nor Medicare pays for chronic maintenance care with no progress." She can do a great service by enlightening the public concerning the source of this coverage. Where is it available and how can they buy it? 

Shelton says, "but is taxation of benefits the real issue? I think not"—and she is probably right. She quotes agents telling her "the Internal Revenue Service isn't taxing anyone who has received benefits from a NQ-LTC" policy and bemoans the fact that "this certainly complicates matters for producers who want to make responsible recommendations." The IRS has never taxed a NQ policy and the fact of the matter is, it probably never will. How can telling people the truth about TQ vs. NQ policies complicate matters? It may make it harder for insurance companies to continue to sell benefits that aren't working for the consumer. But it will help people to access the benefits they paid for when they need them. 

"Responsible insurers and agents should be: 1) offering both TQ and NQ policies; 2) owning up to the truth about the non-taxation of both; and 3) building flexibility into NQ policies so that if the IRS every does decide to tax LTC benefits, people with NQ policies can simply roll their benefits into a TQ policy. It's not rocket science and it won't line the pockets of insurance companies, but it makes sense. Maybe that's the real issue. If LTC insurers continue to sell benefits that don't work when put to the test, they won't be around long enough to worry about insuring their current policyholders' great-grandchildren. 

Founder and Chairman
U.S. Care, Inc.
Santa Monica, CA

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