Long-Term Care Insurance: Proposals To Link Private Insurance and Medicaid Need Close Scrutiny

Published by the Government Accountability Office on 1990-09-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                     United   States General Accounting OffIce

GAO                  Testimony

For Release            IONG-TERN CARE INSURANCE:
on Delivery            Proposals   To Link Private  Insurance
Expected at            and Medicaid   Need Close Scrutiny
11:30 a.m. EDT
September 14, 1990

                       Statement of
                       Lawrence H. Thompson
                       Assistant Comptroller    General
                       Human Resources Division
                       Before the
                       Subcommittee  on Health and
                         the Environment
                       Committee on Energy and Commerce
                       House of Representatives
Mr.     Chairman            and Members of the                   Committee:

         I am pleased                to be here           today         to discuss             our report,               Lonq-
Term Care Insurance:                       Pronosals             to Link         Private             Insurance             and
    . caid Need Close                   Scrutiny.1               The report            discusses                  proposed
state       demonstration               projects          that       would       coordinate                private          long-
term     care    insurance             with      Medicaid            to    finance            long-term             care      costs.
The purpose            of the         proposed           projects          is    to examine                whether          we can
provide       more adequate                long-term             care      protection            without              increasing
public       sector          costs      through          the     promotion           of       long-term             care
insurance        for         the     elderly.

         Both the            government          and consumers                  can benefit                potentially
from     an expanded               long-term           care      insurance           market.               The government
can benefit            if     middle-income               elderly          no longer            rely         on Medicaid
for     assistance            in paying          for      extended           long-term               care         services,           and
consumers        can benefit               by delaying               or avoiding               the     financial
hardships        that         so often          result         from       catastrophic                long-term             care
costs.        However,             many long-term                care      insurance            policies              are
deficient        in such matters                   as coverage,                 eligibility                 for     benefits,
and inflation                protection.               Further,           policies            tend     to be too
expensive        for         most elderly              to purchase.

         The Robert            Wood Johnson               Foundation             gave planning                     grants        to
eight       states          to address          the      concerns          about       costs          of     long-term            care

lGAO/HRD-90/154,                   September           10,     1990.
and the        limitations               of        insurance            coverage.                The proposed
demonstration              projects            we will             discuss            today       are an outgrowth                    of
these       planning        grants.                 While      the        projects            vary       significantly,
most propose              allowing            persons          who purchase                   a qualifying             private
long-term          care     policy            to become Medicaid-eligible                                   after      the      policy
pays     for      a period          of long-term                   care        costs.            Participants             would        not
have to        "spend       down'@ or deplete                        as much of their                     assets      as is       now
required          to meet Medicaid                     eligibility                 thresholds.                Implementing                 the
projects,          however,             requires            that        the     Department               of Health         and Human
Services           (HHS) be given                   legislative                authority            to waive         certain
Medicaid          requirements.

         We believe              that     the        proposed             projects            could       significantly
reduce       the    financial             hardships                that        some elderly               endure      as a
result       of catastrophic                   long-term                care       costs.          Additionally,                the
projects          could     provide            a key source                   of      information             on the       use of
long-term          care     services               experienced                by project              participants.               This
could      help     state         regulators               develop             (1)     better         standards           and
oversight          mechanisms             to        increase            consumers'               protection          and (2)
educational           campaigns               to     inform         consumers             of the          appropriate            role
of long-term              care      insurance              options.

         On the       other        hand,           risks      are         involved          if     the     Congress          gives
HHS authority              to     implement             projects              that      link       private          insurance
coverage       with        Medicaid.                 The Medicaid                  program         could       experience
cost     increases,             while         consumers             risk        not     receiving             the    benefits

they     expected.            Any problems             that        might      arise       can have significant
effects,        because           the    8 states       with         planning         grants         account       for
nearly        45 percent           of all      Medicaid            expenditures             nationwide.
Further,        while        the    projects         are considered                demonstrations,                 their
commitments            to project           participants              may require             that      they     operate
for    20 or more years.                    Such a long              operating         time      frame         is more
characteristic               of    programs         than      of demonstrations.                      Consequently,
authorizing            the    demonstrations               would          represent         a significant               policy

         Today I will              discuss      the     nature            of the      risks      involved          in
making        such a decision               and the minimum safeguards                           that     would         be
warranted         to avoid          their      being       realized.


         The proposed              demonstrations                 should     not      become vehicles               for
higher        income     persons          to protect              their     incomes         and assets           through
the    Medicaid         program.            The risk          of this        occurring           could      be
significant          because            long-term       care         insurance         is     presently
affordable         to only          a relatively              small        number of elderly                persons
with     higher        incomes.           For example,               a recent         study      examining          the
cost     of policies              from nine         companies             found    that       policies          offering
a basic        range     of services            averaged             in excess         of     $1,300      for      a 67-
year-old.          Policy          prices      escalate            with     a person's           age,     and by age

77 premiums             averaged          $3,200.               Reportedly,               less     than      20 percent              of
persons         between        the       ages of             65 and 79,            the      target        market        for      most
long-term          care       insurers,               could       afford         such policies.

          If    higher        income           individuals                predominate             among the          projects'
participants,             they          could         add to Medicaid                   rolls      and hence            to
overall         Medicaid         costs.               For one project                we reviewed,               such risks
were particularly                  significant                  because          over       70 percent          of the
participants             are expected                   to be higher               income         persons       (that         is,
have incomes             more than              5 times           the      poverty          level).          Projects            that
mitigate         this     risk          are those              that       incorporate             features         to    (1) make
insurance         more affordable                       to     lower       income persons                 and (2)        limit          the
amount         of assets         that          individuals                can protect             from Medicaid's
spend-down          requirements.


          These projects                 would          involve           the    states          in an activity               that
itself         has risks--         promoting                 long-term           care insurance               products.
These are          relatively             new products                    that    are evolving               rapidly--
often      more rapidly                 than         states'          regulatory           and oversight
mechanisms.              As    little           as two years                 ago, for           example,        many long-
term care insurance                      products              included          provisions,              such as the
exclusion         of coverage                  for      Alzheimer's              disease,          that      today       are
widely         viewed     as     overly              restrictive.

         Because the            projects          will      involve          states        in promoting                private
long-term          care     insurance           products,           states         that     seek the            necessary
Medicaid         waivers        will      assume an even greater                          regulatory
responsibility              than       other      states.           For      the    projects            we reviewed,
the     state      will     provide         a seal        of approval              to the      policies               of
insurers         electing        to participate.                    States         also     will        undertake
advertising           campaigns           to encourage              the purchase              of these            products.
Given      these      circumstances,               should          subsequent             problems            arise        with
the     products          because       of such factors                   as coverage          restrictions                   or an
insurer's          financial           difficulties,               project         participants                may look            to
the     states      to provide            the     coverage          that      was expected               of the
insurer.           Accordingly,             we believe             that      any legislation                   authorizing
these      demonstrations               should         stipulate           that     a state        demonstrate                    to
HHS, prior          to being           granted         necessary           waivers,         that        its     laws        and
regulations           meet at          least      the National               Association           of         Insurance
Commissioner's              (NAIC's)           minimum standards                   and that        it         has the
capability          to enforce            them.


         By virtue          of their           involvement            in the        promotion            of private
long-term          care     insurance,            states         would       also assume added
responsibilities                to ensure          that      consumers             understand            any risks
associated          with       the     policies          offered          under     these      projects.                   The

policies       could          lessen,       but      may not           eliminate,           an individual's                  risk
of    impoverishment              as a result               of catastrophic                 long-term            care

          For example,            consumers            who choose               to participate                in such
projects       by buying               approved        long-term           care         insurance        would
continue       to be at risk                for      high     out-of-pocket                 costs.            These could
include       payments           for     services           not       covered       under      their          insurance
policy,       or the          difference            between           what the       policies           pay and billed
charges.            Additionally,                  individuals           would       need to understand                      that
the     added protection                 afforded           by the        projects          will       only      continue           as
long      as they      maintain            their       long-term           care      policies           in      force.        If
an insurer          elects        to     increase           long-term            care     policy        premiums          in the
future,       existing          NAIC standards                allow        it     to do so on a class                     basis.
If     a policyholder             is unable            to continue               paying      these       increased
premiums,       he or she would                     lose     coverage,            along      with       their       entire
prior      investment            in premiums.                Thus,       we believe            that      any
legislation           authorizing             these         demonstrations                should        stipulate            that
a state       demonstrate               to HHS, prior                 to being       granted           necessary
waivers,       that      it     will       provide          the       information           and counseling
consumers        need to make informed                        decisions.


          Further,          states      would         need to collect                and evaluate
substantially               more data          than      is now routinely                   collected           through
their      oversight          programs          to     (1)    adequately             monitor           insurers'
compliance           with      regulatory            standards,             and (2)         assess       whether           the
demonstration               projects          are successful.                 Heretofore,               much of the
information           needed to assess                  the       adequacy          and role         of private
long-term        care        insurance          in a public-private                        partnership           has been
unavailable,           except          to the         insurers.             Such information                would
include       demographics              of policyholders,                    the     numbers         of persons
denied      coverage          or benefits,              and the        numbers             of and reasons                 for
policy      cancellations.

         These kinds            of data         are essential,                for      both     the      private
sector      in developing               the     long-term            care     insurance           market         and the
public      sector          in instituting              appropriate            regulatory               controls.
Thus,      we believe           that     any legislation                 authorizing              these
demonstrations               should      stipulate            that     a state             demonstrate           to HHS,
prior      to being          granted       necessary              waivers,          that      states       and insurers
have agreed           to     (1)     collect         sufficient         data,          and (2)          share       all

research           and tracking              data      on program             participants            with          HHs.        In
this       way,     HHS can monitor                  the      projects         and the         data      can become a
matter           of public       record.

           In summary,           the        proposed          projects         could        reduce       the        financial
hardships           that      some elderly              endure         as a result             of catastrophic
long-term           care      costs.           On the         other      hand,        risks     would        be involved
if     the      projects       are given             authority           to link         private         insurance
coverage           with      Medicaid.              Consequently,              if     the     Congress         wishes           to
give       HHS authority               to    approve          demonstrations                such as those
proposed           by the      Robert          Wood Foundation                 grantee         states,         it     should
consider           including           in the        legislation,

           --     Statutory       requirements                 to minimize             the     financial             risks       to
                  the     Medicaid          program        and to consumers                   and

           --     Requirements              that     the      Secretary             of Health        and Human
                  Services      prepare             interim         reports          to the     authorizing
                  committees           on whether             the     statutory         requirements                 are
                  meeting      their         intended          purposes.

           Mr.     Chairman,         this          concludes          my prepared             statement.              I will
be happy           to answer         any questions                  you may have at this                     time.