Tax Legislation Debate
Following is an excerpt from an editorial (regarding the recent Johnson-Thurman Bill) which appeared in the June 21, 1999 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 reservations about the bill.
Unkept Promises Must Not Blight LTC Opportunities
Editorial Comment—National Underwriter
It is only rarely that legislation comes along that can be embraced unreservedly, without qualm or carping. Such a bill—the Long-Term Care and Retirement Security Act—was just introduced in the House.
Sponsored by Reps. Nancy Johnson, R-Conn., and Nancy Thurman, D-Fla., the legislation gives a big boost to the long-term care business by phasing in a 100 percent tax deduction for private LTC insurance premiums.
This page has long been a fervent advocate of long-term care insurance as a key building block for retirement security. We have also continually stressed the need for an educational campaign by both industry and government so that the public would begin to understand how vital it is to prepare now for the long-term. It is for these reasons that we wholeheartedly welcome this bill, which would provide support in both these areas.
Senior organizations as well as an impressive roster of insurance groups have already lined up in support of the legislation. The industry, in particular, has promised an all-out lobbying campaign to get the bill enacted.
The legislation would give individuals who pay 50 percent or more of the cost of a qualified long-term care policy a tax deduction. This would start at a 50 percent tax deduction in the first year and increase to 100 percent in the sixth year.
For those over 60 years of age, the phase-in schedule would be accelerated, reaching 100 percent in only four years.
In addition, like the Clinton LTC initiatives unveiled earlier this year, the Johnson-Thurman bill would give individuals with LTC needs or their caregivers a $1,000 tax credit to help cover expenses.
A final provision of the bill would launch a massive public education campaign on long-term care through the Social Security Administration, providing people with information about the limitations of LTC benefits under Medicare and Medicaid.
SSA would also provide information on what to look for in LTC policies and the tax benefits. This information would be sent along with routine Social Security mailings.
The impulse behind this bill is a combination of reason and compassion.
Rep. Johnson expressed the reason aspect at a briefing. "This is going to be a key family issue as more baby boomers approach retirement," she said. "And we need to help families meet their long-term care needs."
Rep. Thurman spoke for compassion, saying the bill would encourage people to buy LTC insurance, so they would not have to lose all their assets to qualify for Medicaid nursing home coverage. "It's hard enough for a wife or husband to put their lifelong companion in a nursing home," she said, "without having to deal with the hardships of poverty."
To take advantage of this wonderful opportunity, however, the industry had better make sure it delivers the goods. Some ominous signs of a consumer backlash against long-term care are starting to surface. The industry needs to act before these brush fires explode into a self-destructive conflagration.
In the main, these warning signals have to do with increasing premiums that consumers were told or believed they were told would stay level for the life of the policy.
A class action suit in North Dakota, while comprising a relatively small group of people, stands a good chance of besmirching the industry's reputation because the average age of the policyholders represented in the class is 88 years old!
Another, and potentially more damaging, development for the industry is a California senate bill that would place strict limitations on the ability of insurers to raise premiums.
This bill allegedly came about when a long-term care policyholder felt he was misled about the policy and the way it was sold to him and went to California state senator Joseph Dunn, D-Garden Grove, with his complaint.
As far as products go, long-term care is still in its infancy. When the industry first began to market the policies it had little or no experience to go on and had to make its best guesses. Even the lawyer for the North Dakota class told national Underwriter that LTC insurance contracts were still "experimental" in 1988 and 1989 when most of the policies were sold told the class.
However, 10 years later the industry is still getting blasted for not keeping promises. Regulators at the recent summer meeting of the National Association of Insurance Commissioners excoriated the business.
There is evidence, said Tom Foley, a life and health actuary with the Kansas insurance department, that "a significant number of companies are marketing products that offer tremendously rich benefits, have low prices and sloppy underwriting. This is a fraud on consumers. We can't take a consumer's money for 10 years and then run."
It would be a shame if, at the time when rationality regarding LTC has crystallized in the form of the Johnson-Thurman bill, the industry became haunted by the ghosts of unkept promises, past and present.
If consumers are indeed getting snookered by lowball rates, their rage is going to have an outlet at some point. And justified or not, that rage is going to bring down the judicious underwriting along with the "sloppy" ones.
A cynic might say, "When is the industry going to learn?" We say, "It's not too late if the industry starts now."
Samuel X. Kaplan's response to the above editorial:
TO THE EDITOR:
While I applaud your enthusiastic support of long-term care (LTC) tax deductions, I believe you should have one serious reservation concerning the Johnson-Thurman Bill. This legislation specifies tax relief only for a "qualified long-term care policy," not all long-term care policies. Today, 75% to 80% of all LTC policies sold are Non-Tax-Qualified (NTQ) because NTQ policies offer broader and more accessible benefits. "Qualified" LTC policies have a number of onerous requirements that can actually prevent policyholders from ever accessing the benefits they paid for.
For example, the Tax-Qualified (TQ) requirement for a 90-day letter of certification is a real barrier to the payment of any claim for confinement or home care that lasts less than 90 days in duration. According to Health Care Financing News, Summer 1993, 77% of all nursing home cases and 83% of Medicare home health care cases last for less than 90 days. This requirement places the financial burden for LTC services of shorter duration on those who can ill afford to pay for them.
In addition, TQ policies have strict benefit trigger requirements: A policyholder must be chronically ill with (1) severe cognitive impairment; or (2) be unable to perform 2 or more ADLs for at least 90 days without substantial assistance of another person, as certified by a health care professional
If TQ plans existed in 1995, 86% of Medicare's patients age 65 and older would have received no benefits from their plans because their recovery care lasted less than 90 days (e.g., 94% of 1,242,664 Medicare patients in skilled nursing facilities, plus 83% of 3,182,000 Medicare home health care patients ages 65 and over).
You are "embracing unreservedly" the Johnson-Thurman bill, which will, despite good intentions, actually perpetuate another "fraud on consumers." You should support broadening the bill to cover all LTC policies.
SAMUEL X. KAPLAN
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