Lesson1The Need for LTC

• List the objectives that many senior citizens say they have for their retirement. • Explain why many senior citizens need to work even after they reach retirement age. • Explain what is meant by the term “role reversal” in the context of elder care. • Discuss the consequences of “role reversal” for both the caregiver and senior citizen. • Explain the financial problems that senior citizens face as they age.

Caregiver - A person providing assistance to a dependent person due to medical reasons or the inability to conduct routine activities of daily living.

Long Distance Caregiving - A difficult position in caring for a family member while located in another area and not available for day-to-day assistance.

Medicaid - The joint federal and state welfare program administered by the states to provide payment for health care services, including long-term care, for those meeting minimum asset and income requirements.

Role Reversal - Where aging parents become as dependent on their adult children as the children were when they were growing up. This can have a severe emotional impact on both parent and adult child.

Sandwich Generation - This term was coined when describing individuals caring for both dependent children and an aging parent or relative.

he population of the United States is rapidly aging. With advances in medical science and the resulting longer life spans,

it is no longer unusual for a person to live well into his or her 80s. Also, we are entering into a new era for the elderly. In the past, the image of the senior citizen was someone who was frail, sick, and dependent on others. Now the image we have of many senior citizens is a picture of active, independent individuals who participate in many social and recreational activities, feel 15 years younger, and have plenty of money set aside for their retirement years. Primary Concern For Senior Citizens However, despite the image that senior citizens have plenty of money set aside for retirement, the fact is that nearly 6 in 10 workers reach retirement age with no pension. For these seniors, financial issues are their primary concern. An example is the 73-year-old man in Tennessee who works five days a week stocking and delivering food for the Chattanooga school district. He would rather be at home attending his 67-year-old wife who is home alone with her oxygen bottles and tubes. He is one of 3.7 million Americans who does not work because he wants to, but because he needs to in order to make ends meet. And as a 73-year-old white male, he can expect to live another 11 years, with no alternative but to work to supplement his Social Security checks. Senior Citizens’ Retirement Objectives Recent surveys have shown that most seniors’ retirement objectives are the following:

1. To not be a burden on their families 2. To remain physically and financially independent 3. To provide for their spouse

For many seniors though, these are not goals as much as they are fears and many seniors are determined to live up to these objectives. An 84-year-old retired disability insurance agent put it this way:

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“What we dream will be a storybook retirement of foreign travel, great golf outings, and days spent lovingly dispensing aid to our children and grandchildren, instead threatens to become a harrowing tale of a rapidly dwindling nest egg.” Unexpected expenses can affect a senior’s finances as well. More than four million children live with their grandparents. There is a 63-year-old grandmother in South Florida who has bought 4 washing machines in the last 10 years while doing laundry for the 14 grandchildren she is raising. With that kind of responsibility, it is easy to see why she might have trouble putting money away for her retirement and for other financial needs. Longer life spans can also dramatically affect inheritances. As senior citizens live well into their 80s and 90s, the money that was intended to be passed on to their children is instead consumed by rising health care costs. Also, as the population ages and people live longer, more attention will be paid to diseases that affect the elderly, such as Alzheimer’s disease. Role Reversal Another effect of the aging population is a role reversal that occurs within a family involving a senior citizen and the senior citizen’s adult children. As many seniors get older, they eventually become as dependent on their children as their children were once dependent on them. For example: A 51-year-old man living in North Carolina picked up his mother from a hospital in Charlotte. The mother was suffering from a degenerative neurological disorder that had left her unable to walk or to use her hands. Unfortunately, the father was not capable of taking care of his wife, so it was decided that she would live with her son and his family. To avoid a charge for an additional day in the hospital, the parents were waiting in a hallway in a hospital. The son arranged and paid for home health aides to visit his mother daily, he took her to the doctor’s office on a regular basis, and juggled his family’s weekend schedule around the tasks of caring for his mother. This new arrangement obviously turned into a complete change of lifestyle for him and his entire family. Another example shows how determined some senior citizens are to maintain their independence. A 65-year-old Illinois man who was living alone in his own home was doing his normal Saturday morning

grocery shopping. While he was transferring the grocery bags from his cart to the trunk of his car, he lost his balance and fell. The fall caused him to break three fingers and his wrist. He is told that he will be required to wear a cast on his right hand for a little over a month. Unfortunately, he is right-handed, and because of the cast he is not able to write with his right hand. As a result, he does not pay the bills that are due at the beginning of the next month. While he has a daughter, she is living in New York, so he feels she really can’t help him. Plus, he has enough groceries in the house to last a few weeks. As it turns out, however, his hand does not heal as quickly as he was first told. Because of an old war injury, his current injury requires surgery. By this time, second notices have arrived and the next months’ bills are also due. While his daughter calls him periodically, he doesn’t tell her of his difficulties. A month later, when she visits him at Thanksgiving, she is shocked at what she finds. Her father has lost a significant amount of weight, dishes are piled up in the kitchen sink, past due bills are laying on his desk, the telephone company has threatened to turn off his telephone, and letters from the electric company and bank warn of similar consequences. While his hand is healing, his cast won’t come off for another five or six weeks. What this last example illustrates is that even though as seniors age, they may become more dependent on their children, many do not want to admit they need help. While a child may have no expectation of independence, someone who has been independent all his or her life may firmly resist any help offered by his or her children. It can also be difficult for children to see their parents in a dependent role, since they were dependent on their parents during the most formative years of their life. The inability of many seniors to remain independent can many times have dramatic consequences for those seniors who are unable to cope mentally with that lifestyle change. More than 25 percent of all suicides are by those who are over age 65. Those most likely to commit suicide are seniors who are ill or impaired, who also have feelings of social isolation and loneliness. In addition to the emotional state of seniors, the younger caregiver may also feel an emotional strain from caring for an older relative. While an individual caregiver may expect gratitude from the person she is caring for and empathy from other siblings who live a distance away, it is very likely she will receive neither. As one woman caregiver says, “I have brothers and sisters, but there’s nobody here to

help. They’ll call and say what they think I should be doing, and at times I get really upset. They don’t know what it’s like. They’re not here. They don’t have to change her diaper. They don’t have to give her a bath. They don’t have to listen to her verbal abuse.” Sandwich Generation The term “sandwich generation” has been coined to describe those who are taking care of both their own children and one or both parents. A government study revealed that the average U.S. woman will spend 17 years raising her children, and 18 years caring for her aging parents. Newsweek magazine used the term “daughter tracker” to describe this type of woman. Insurance Professional These are the kinds of problems that an insurance professional should try to help his clients through. A long- term care insurance policy may help out financially, but some of the emotional issues and difficult decisions still remain. Recognizing these difficulties and playing a small, but important, role through advanced planning can make a world of difference when a long-term care situation arises. Financial Problems in Aging While aging can cause extreme emotional issues for senior citizens and close family members, the financial issues can be just as pronounced. The cost of a nursing home can easily exceed $55,000 a year. Costs like that can quickly deplete a person’s life savings. Consider the case of a woman whose husband passed away when she was 80 years old. As she said, “we weren’t millionaire wealthy,” but she had a decent trust fund that she thought would last her for the rest of her life. At the age of 97, she was living in a nursing home. The nursing home cost her over $33,000 a year and after she had spent a few years in the nursing home, the trust fund was depleted. The employees of the nursing home helped her to apply for Medicaid, which is the joint state and federal medical program for those living near or below the poverty level. While her trust fund may have had a lot of money 17 years ago, the longevity of her life and her nursing home costs created a situation that forced her to become dependent on welfare.

As a result of these types of financial issues, the need for long-term care has been called “the biggest threat to most Americans’ wealth,” topping inflation, recession, real estate or other investment-related danger. About 60 percent of married Americans age 40 to 65 with household incomes above $50,000 say their greatest fear is not having enough money to live comfortably. Because of this concern, 48 percent of these people plan to work after they reach retirement age. And most of these people have not taken into account medical spending that may be needed during their retirement years. Statistics show that medical costs for those aged 60-74 are almost double that for people aged 45-59. Adding to the cost of medical care for seniors is the cost of a stay at a nursing home. These costs can range from just under $100 to nearly $300 a day. With costs like that, it is easy to see how many people can exhaust their funds even if they stay in a nursing home for a year or less, and many stay in a nursing home for much longer than one year. A report in The New England Journal of Medicine estimated that 43 percent of individuals who reach age 65 will spend some time in a nursing home before they die. Of those who do enter a nursing home, over 20 percent will stay in one for more than 5 years. And it is not just nursing homes that contribute to the high cost of long-term care. Thanks to advances in medical science, more services than ever can be delivered to a patient in the patient’s home. Generally, the costs associated with home care are less than those associated with care in a nursing home. However, that is not the case if 24-hour care is needed. Full-time around-the-clock home health care can sometimes cost $250 a day or more. If the elderly do not have the funds for these services, where do they go? For many seniors, their children will help pay for their care. If their children are unable to help out financially, then usually the only other alternative is Medicaid. However, as will be more thoroughly discussed in Module 5, Medicaid is a welfare program that is available only to those who spend down their income and assets.

n this age of information, there is plenty of data available that can be overwhelming and confusing. The information associated with

the “graying of America” is no different.

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• Since 1900, the percentage of all Americans over 65 has more than tripled (4.1% in 1900 to 12.7% in 1993). The most rapid increase is expected from 2010 to 2030 when the last of the baby boom generation reaches age 65. • The number of people over the age 65 is increasing 2-1/2 times faster than the overall population. • The U.S. has more people over the age of 65 (33 million plus) than Canada has in its entire population (31 million). • About 70 percent of married people ages 51 to 61 have four-generation families - including elderly parents and children who have had children. • The over-age-50 population will grow by 74 percent in the next 30 years. Conversely, the under-age-50 population will achieve only a one- percent growth. • The number of over-age 85 Americans projects to be 18 million (4.6 percent of the U.S. population) by the year 2050. • More than 90 million people in the U.S. currently live with chronic diseases, which account for 70 percent of all deaths. • 36 percent of 65 year-old males and 50 percent of 65 year-old women will eventually need nursing home care. • Households with at least one adult providing elder care have risen to 22.4 million in 1997 from only 7 million ten years earlier. • There are currently 33 million (one in every five registered voters) members of AARP, the American Association of Retired Persons. Membership age begins at 50. Since baby boomers started turning 50 on January 1, 1996, AARP will gain a prospective new member every eight seconds for the following 18 years. • After two consecutive years of declining sales, the long term care (LTC) insurance market rebounded in 1995 to post its highest yearly total of policies sold. 517,000 individuals purchased LTC insurance in 1995, bringing the cumulative policies sold total since 1987 to 4.35 million.

WHAT DO THESE NUMBERS MEAN? Obviously, this country is aging - rapidly. Advances in medical science and the resulting longer life spans are well documented. No longer is it unusual for a person to live well into his 80s. We are entering a new era for the elderly in this country. The image of a senior citizen as frail, sick and dependent on others, is rapidly transforming into a more accurate picture of active, independent individuals who participate in many social and recreational activities, feel 15 years younger and have enough money set aside for the years ahead. When someone told 89-year-old poet Dorothy Duncan that she had lived a full life, she responded tartly, “Don’t you past-tense me!” The elderly do not think of themselves as “old,” something that agents should remember as they market products in the future. A woman in

Texas celebrated her 117th birthday in January 1997. Rutherford B. Hayes was president when she was born; twenty-two presidents have followed. She has witnessed the birth of the automobile, radio, airplane and television. While proud of her longevity, she has also spent the last seven years in a nursing home. The financial issue is the primary focal point for senior citizens today. A 73 year-old Tennessee man reports to work five days a week, stocking and delivering food for Chattanooga’s schools. He’d rather be home tending his 67 year-old wife who is home alone with her oxygen bottles and tubes. He is one of the 3.7 million Americans over age 65 who work because they have to, not as a choice. Nearly 6 in 10 workers in the private sector reach retirement age with no pension to show for their years of toil. A 73 year-old white male can expect to live another 11 years, with no alternative but to work to supplement those Social Security checks. In an attempt to balance the budget, Washington has addressed two key issues - Medicare (health care for the elderly) and Medicaid (nursing home and long term care services). Discussion on how to deter the rise in Social Security benefits in anticipation of the swift aging of our population has yet to be accomplished due to the tremendous backlash from the senior population who not only count on benefit payments but also feel a certain entitlement to these benefits. How easy will it be to change the Social Security program when the senior population doubles? Several years ago, a retired disability insurance agent contacted the author to discuss the health industry. Retired for 23 years, he was a wealth of information on Social Security and reminisced about the wage freezes during World War II and other issues that he dealt with while selling disability income insurance. Inevitably, though, the conversation turned to his own health and the cost of home health care he requires at age 84. The financial worry, attributed to the high cost of medical care, was of great concern to him. “What we dream will be a storybook retirement of foreign travel, great golf outings, and days spent lovingly dispensing aid to our children and grandchildren instead threatens to become the harrowing tale of a rapidly dwindling nest egg.” This idealistic view of retirement is shattered by the realization that financial concerns are still paramount for the aging population. The negative impact of financial and emotional concerns that the elderly experience is emphasized even more by the fact that in today’s world a person lives longer.

Further, while 72 percent of Americans are saving for retirement, they are not taking the financial risks to make the golden years truly golden. Conservative investing could leave millions of Americans facing many years ahead without enough income to maintain a reasonable standard of living. There is always the unexpected, too. More than 4 million children currently live with their grandparents. A 63-year-old single grandmother in Miami, Florida has replaced four washing machines in the past 10 years, doing laundry for the 14 grandchildren she’s raising. Who can think about putting money away for retirement and other financial needs with that kind of responsibility? THE CONSEQUENCES OF AGING America is just beginning to see the effects of an aging population. On the one hand, it is wonderful that our children will know our parents. As a child, I only knew one of my grandparents and I still treasure her memory. She never missed listening to a Boston Red Sox baseball game on the radio. Her lifelong experiences taught me a lot and I was fortunate to have spent time with her. It was my first exposure to a nursing home, where my “Nana” spent the last couple of years of her life. Seeing people in poor health, unable to care, feed or dress themselves was very traumatic. Yet, this is to be expected of longer life spans. Simply because one lives longer doesn’t guarantee the quality of life one leads. Our aging parents or relatives may live longer, but many will need our help both physically and financially. There has been a substantial rhetoric war waged in Washington, D.C. for some time over balancing the budget. Finally, starting in 1998, for the first time since the Nixon presidency the federal budget did not run a deficit. However, it is possible that these surpluses will not last. The demographics in this country are about to permanently change to the point where - in the not too distant future - one elderly American will be supported by only two working people. Factor in both health and retirement costs for the senior population, and we have a real problem that’s already begun to affect millions of us. In the April 9, 1992 edition of USA Today an article featured a story about role reversal between mother and daughter. The daughter, who was 59 years old and the youngest of eight children, was now caring for her 93-year-old mother. The daughter, her own children now grown, made a conscious decision to move back to her mother’s house to be a companion and care giver to her mother. As it turned out, it wasn’t how she had pictured it. “Taking care of a 93-year-old

lady who has been independent all her life is really hard. I’m 59, and we’re switching roles. In reality, I am her baby, but she’s more or less my baby now.” Because of her mother’s declining health, the time spent together was similar to that spent taking care of her own children when they were young. Longer life spans also affect inheritances dramatically. As seniors live well into their 90s, their capital that was once intended to be passed on to the next generation will be consumed by the rising costs of health care. For example: The World Health Organization recently forecasted a 30 percent worldwide increase in the number of cancer cases, much of it due simply to longevity. The income set aside for retirement purposes will have to come primarily from one’s own resources. As the population ages, attention will be paid more to diseases that generally affect the elderly. Alzheimer’s will garner the “lion’s share” of attention especially now as the whole country watches how this illness affects former President Ronald Reagan. Alzheimer’s today is responsible for a significant number of nursing home institutionalizations, the cost for which is being paid by private money or, when that runs out, Medicaid. Today, more than four million older Americans depend on Medicaid for coverage of, among other health care concerns, nursing home and community-based long term care. The consequences of aging can be poor health and/or poor finances. As insurance agents and financial planners we must help our clients prepare for the possibility of living a longer life. We must assist them in planning for their retirement years by helping to ensure some measure of financial security. We can help create resources that won’t leave them or their future generations tapped-out if infirmity strikes. GENERATIONS Our first concern should be our own family. Regardless of what stage our own lives are in, the aging of America in some way or another will doubtless touch us. Look around you. How old are your parents? Grandparents? Children? Yourself? Are you prepared in the event a long term care situation arises? Before we can do a proper job for our clients, we must first understand the consequences of aging in our own lives. When my father passed away in 1989, my mother quickly learned much about

finances she did not know before. Writing checks and balancing her accounts was new ground for her. She had read an article about long term care insurance and decided she wanted to know more about it. She bought a policy for herself in 1990 and is satisfied that she has taken a large step towards protecting her finances from most long term health problems that might arise. Analyze your own family situation first. Who is close to retirement? Are they financially ready? How is their health? Is there a role for long term care insurance? This course will provide a greater insight in the lessons that follow on who are the best candidates for this product. There may be an important sale for you within your own family circle. American Demographics magazine identified a group of individuals known as the “Post-War Cohorts.” These individuals were born between 1928 and 1945, during the Depression and World War II. This group, about 41 million strong, went through tough times early on but survived to find peace and prosperity in the 1950s and beyond. They were security-conscious individuals who often sought out financial planning to ensure their preparedness for another cataclysmic-type event similar to what they had experienced. These individuals were ideal candidates for disability income insurance during their working years. Disability income protection provided replacement of a portion of their earnings if they were unable to work due to an injury or illness. The purchase of this product was in character as it provided financial security for themselves and their families with continued income despite not being able to work. This group of people is now older and currently between the ages of 51 and 68. Formerly ideal candidates for disability insurance, they are now ideal candidates to approach to discuss the consequences of aging. They will likely be the first group of people to uniformly benefit from the advances in medical science and can expect to live longer. Financial security is an issue and the threat of a long term illness jeopardizing their retirement is a danger they won’t easily ignore. If you have any clients in this age group, a discussion of the consequences of aging is in order. Now factor in the aging “baby boomers.” This generation, approximately 30 percent of the nation’s population, is poised to completely change the way we think about the elderly. Boomers have

a better lifestyle awareness, higher fitness levels and a more prudent consideration of both diet and health than any preceding generation. There are 82 million people born between 1946 and 1965 whose parents are now getting older. The boomers themselves are getting older. After all, this is the group that embraced the song “My Generation” by The Who as its anthem with lyrics like “I hope I die before I get old.” This group, now turning age 50 in large numbers, is hardened by the burden of credit card debt, raising young children and coping with aging parents all at the same time. Women today think nothing of having children at age 40 - the same age that their mothers had college-age children. As a result, boomers will be facing college education costs and possibly parents needing long term care. Who could retire with those financial burdens? A recent survey of baby boomers labels them as being time-impoverished. Among the findings:

• 87 percent will pay for their children’s college education • 37 percent who have a parent living with them expect to support that parent • 45 percent do not expect an inheritance • 45 percent will not rely on Social Security.

Boomers are well educated, affluent and the healthiest generation in our nation’s history. They have redefined marriage, education, work and family. Ultimately, this group will change the way in which the last third of life is lived and are prime candidates to talk to about the issues of aging and care giving. The “X Generation” will have their own say about retirement. Surprisingly, unlike boomers, generation X’ers show sophistication about the intricacies of planning, saving and investing for retirement. Not only are they not counting on Social Security, they are convinced that they will be on their own for health care costs, too. They have watched boomers spend their money as fast as they can make it and know that ultimately this exacts a high price. According to a recent study by Kemper Financial Services, generation X’ers are willing to hold off on personal consumption and instead concentrate on saving for retirement.

Long term care insurance, especially in an employer-sponsored setting, has a growing appeal to generation X’ers. Now that tax consequences have been resolved, sales will further increase with this group. They have read much about the aging of America and will continue to be inundated with information on the importance of planning ahead. Finally, Generation Y may ultimately impact the financial consequences of aging. In each of the years from 1989 to 1993, U.S. births exceeded four million for the first time since the early 1960s. Today, there are around 57 million Americans under age 15 and more than 20 million between ages four and eight. They will reach the work force at about the same time the boomers start turning age 65, although it is still unknown as to the potential assistance this will lend toward the consequences of aging. OTHER ADULT LIFESTAGE EVENTS The insurance industry is slowly awakening to the marketing potential of the “aging” of our country. Financial planning is critical in stretching the retirement dollar. A major reason for purchasing life insurance is to pay significant estate taxes and with the sophisticated life and annuity products on the market today, the insurance industry is in a good position to serve the needs of aging America. However, there are a number of key adult lifestage events unique in our lives that are not being addressed. Situations unique to today’s society fit squarely into the demographic changes happening around us. Ken Dychtwald, author of The Age Wave, a ground breaking book on the aging population, notes several significant events. In the age group of over 50 years old, there are 6.6 million single men and 16.1 million single women, Dychtwald advises. Single mature women are a huge, untapped market and represent individuals interested in protecting their finances in the future. Significant portions of the Generation Y population will spend at least part of their childhood in a single-parent home. Another key event is caregiving. With one-third of all working adults already involved in some type of a caregiving environment, clearly this is an area of immediacy for many Americans. With the bulk of our nation’s women having joined the workforce, caregiving responsibilities represent an overwhelming burden in addition to working all week. The need for some type of insurance protection that can pay for someone else to do the caregiving while the family member is working has become critical.

The “sandwich generation” is the term used for individuals who are typically female and who must raise children while caring for an aging relative. Delayed parenting has made this more of a reality and the financial setback accorded this type of arrangement can be devastating to the retirement hopes of the person caught in the middle. Insurance companies and agents, in striving to assist individuals plan financially and emotionally, for the future, must be more aware of these types of trends. THE BUSINESS OF AGING Marketing to the elderly is the future for many industries. When the demographic shift created by the baby boomers happens, it will tilt marketing angles to senior needs. Many industries are already in the process of centering their future plans around this population change. The Meditrust Companies, the nation’s largest health care real estate investment trust, completed $562 million of real estate investments in 1997. $377 million of it went into retirement and assisted living facilities, while another $100 million was invested in nursing homes. The American Retirement Corporation is a national senior living and health care services company, currently operating 23 senior living communities in 12 states for 6,800 residents. Aging baby boomers are starting to influence home design changes. They are adding unobtrusive wheelchair ramps to accommodate future needs and to meet requirements of elderly parents. These are just a few examples. Marketers have to think more in terms of elderly needs, and their message should be one that positively reflects today’s situations. A 1997 survey found that 39 percent of 61 to 65-year-olds and 33 percent of those age 66 and older found television ads aimed at older women and men to be either silly or offensive. Today’s senior is different in many ways and those agents preparing to market long term care should be prepared for a better informed consumer. For years, seniors have been targets of scams and inappropriate investments. Increasingly, many older investors are scouring financial publications, surfing the Internet and pestering brokerage houses in an effort to achieve higher returns and quality investments. Long term care insurance will be reviewed in much the same manner, especially

in light of prior Medicare Supplement fiascoes seniors have experienced. THE PROSPECTIVE PAYMENT SYSTEM The Medicare program, passed in 1965, was conceived as part of John F. Kennedy’s campaign platform for the 1960 presidency and was implemented during the Johnson administration. This program was to provide older Americans with some form of guaranteed health care, thus, preventing poorer older Americans from bankrupting themselves due to illness or injury. The aging of our population has certainly taken Medicare to its breaking point. As more and more Americans qualified for “Part A” of Medicare at age 65, the resources set aside to fund the Medicare program began to deteriorate. Finally, in the early 1980s, faced with the increase in expenditures at an accelerating rate, Congress approved a prospective payment system designed to contain skyrocketing health care costs. One feature of this system was the diagnostic-related groups (DRGs). Essentially, each medical condition treatable under Medicare was measured, on average, and a series of rules established identifying length and cost of each treatment. One outcome of the DRGs was to significantly curtail the amount of time spent in the hospital per condition with Medicare only paying for a stated number of days. If the hospital treated the patient in less than the time specified by Medicare, the institution would still be reimbursed for the number of days the DRG specified. If it took more time, the hospital was then expected to sustain the extra cost. Most hospitals did not keep Medicare patients beyond the DRG-stated days. However, many patients were not well enough to leave the hospital. An interim stopgap measure evolved whereby the patient would receive skilled, intermediate or custodial nursing care in a different setting, usually in a nursing home facility. As a result, an awareness of the cost of a nursing home stay grew quickly among senior citizens. During the first 18 months following the introduction of Medicare’s Prospective Payment System, nursing home admissions increased by 40 percent. Many of these medical situations were short term but they did raise fears about the most significant loophole in the Medicare program - coverage for a long term or chronic illness. According to AARP, Medicare covers approximately seven percent of the average nursing home bill.

Most older people have at least one chronic condition and many have multiple conditions. The costs to treat long term chronic conditions can erode even the most substantial asset base. Traditionally, seniors have placed a lot of faith in Medicare, but their confidence in this government program has been eroded by their own nursing home experiences. The DRG program placed nursing homes center stage and created an even greater concern about the seniors’ financial futures. But even AARP acknowledges that Medicare will have to change in order to survive. This has created an audience of seniors primed to talk with an insurance agent or financial planner who can help them prepare properly for retirement. These seniors have all heard that many people propose reforming Medicare by requiring seniors to spend more of their own money on their medical bills. They also are increasingly aware of the costs long term care represents. Working with seniors in the long term care market is one of the most exciting prospects for an agent in terms of potential. THE EMOTIONAL BURDEN OF AGING As insurance agents and financial planners we ask ourselves, what is long term care? What exactly does long term care cover? What do we hope to accomplish by addressing this need with our clients? Long term care decisions involve both emotional and financial issues. While we are used to designing programs to assist our clients financially, the planning of long term care also requires us to understand the emotional dynamics involved. Understanding the emotional implications of long term care will help us better communicate the importance of advanced planning to our clients. What types of situations could our clients face? LONG TERM CARE SCENARIOS Scenario #1 A 51-year-old North Carolina man picked his mother up from the hospital in Charlotte. To avoid being charged for another day in the hospital, his parents were waiting for him in the hallway. His mother was suffering from a degenerative neurological disorder that had left her unable to walk or use her hands. He knew his father was not

capable of taking care of his mother so it was decided that she would live with her son and his family. Her son arranged and paid for home health aides to visit daily, took his mother regularly to the doctor’s office and juggled his family weekend schedule around the tasks involved in the caring for his mother. This arrangement proved to be a complete change of lifestyle for his entire family. Scenario #2 A woman lives and works in Washington, D.C. and was visiting her ailing mother in South Carolina. With her mother’s health steadily declining, what was to be a “short leave of absence” turned out to be several weeks. Unable to convince her mother to come stay with her in D.C., she returned to work. Although she calls her mother three or four times a day to check on her, she feels guilty and the inability to see her mother everyday is emotionally devastating. Her worries over her mother’s illness have caused concern over her own health, specifically her high blood pressure that her physician attributes to nerves. The most favorable solution is not always the most logical or feasible solution. It is not easy to simply leave a job and home and move back home when a parent or relative becomes ill. Scenario #3 A 45-year-old California man recalls that placing his 86-year-old mother in a nursing home was the most difficult thing he has ever had to do. Although his mother seems to have adjusted reasonably well, he still feels guilty. He visits twice a week and calls every day. His sister lives closer and visits three times a week. While their mother is doing fine, the emotional toll on them is high. The nursing home cost is about $45,000 a year and is paid from their mother’s savings. The children realize their inheritance is being spent, but they want the best care available for their mother. Scenario #4 A man living in North Carolina moved his mother to a facility that accepted Medicaid. The nursing home was close to his house so he could visit every day and provide the kind of emotional support she needed. This arrangement seemed to go well for all involved until his niece in Florida intervened. She did not want her great-aunt to be in a

nursing home and if her uncle would not take her into his own home, she would move her great-aunt to Florida to stay with her and her family. So she moved her great-aunt to Florida. Even though he had no access to his mother, the son felt that she would be well taken care of in his niece’s home rather than in the nursing home facility. It certainly had to be a better situation. Unfortunately, after two months, his niece realized she could not cope with the frail, elderly woman and arranged for her to move into a Medicaid certified nursing home that was in a nearby Florida town. The result of this emotional tug-of-war was the ultimate placement of his mother in a facility that was a nine-hour drive for him. Scenario #5 A 65-year-old Illinois man living alone in his own home was doing his normal Saturday morning grocery shopping. While transferring bags from a grocery cart into the trunk of his car, he lost his balance and fell breaking three fingers and fracturing his wrist. He has to wear a cast on his right hand for at least a month. At the beginning of the next month, his bills came due. He is right-handed and cannot write the checks so he lets the bills sit. He has a daughter living in New York but what can she do for him living out of state? He has enough groceries in the house to last a couple of weeks. His hand does not heal as quickly as he had hoped. Complicated by an old war injury, his current injury requires surgery. By this time, second notices have arrived and the next months’ bills are due. Although his daughter calls him periodically, he does not tell her of his difficulties. A month later, when his daughter visits for Thanksgiving, she is shocked to find her father has lost a significant amount of weight. His dishes are piled up and past due bills still lay on his desk. The phone company has threatened to turn off the telephone service and letters from the bank and electric company warn of a similar disaster. His hand is now healing, but the cast won’t come off for another five or six weeks. ROLE REVERSAL Do these scenarios sound far-fetched? They are not. All of them are documented cases and are representative of thousands of similar situations across the country.

Very few people are prepared. The aging process carries with it an increased dependency, similar to that of a baby. Many elderly need assistance with eating, getting dressed and walking to name just a few activities. The patience one exercises with a child must apply in an even greater measure for an aging parent or relative. A child has no expectations yet; an adult has already performed all of these functions capably for years and the loss of these simple abilities carries an emotional price. This life cycle pattern carries a heavy burden for the aging adult. There are more aged dependent people alive today than ever before in history. Every retiree is economically dependent on dollar transfers from Social Security, savings and return on assets. They are also more dependent on others for various services. While the aging person copes with these adjustments, so too must their children. It is difficult to see your parents in a dependent role. After all, you were completely dependent on them as a child. This role reversal has a great impact on the lives of Americans everywhere. There is no rehearsal, no preparation. Longer life spans are something of a recent phenomenon and an aging parent or relative in his or her 80s is no longer the exception but the rule. If you have not been around your parents for some time, you may be surprised at the differences when you do see them again - changes that are not obvious from a regular phone call. The female baby boomer who has had a child at the age of 42 may look forward to bringing their new grandchild home to her parents only to discover that her parents do not have the patience for a young child any longer. Various surveys taken over the last few years along with the personal experience of working with seniors have shown these to be most seniors’ goals:

1. Not being a burden on their families. 2. Remaining physically and financially independent. 3. Providing for their spouse.

These are not goals as much as they are fears, and the elderly are more determined than ever to live up to all three objectives. An insurance agent recalls taking the arm of his aging father to help him out of the car. His father shook his elbow from his son’s grasp, giving him a glare that said he could get out of the care himself without assistance. The agent’s father was proud that he was still managing his own affairs at age 85. He was a strong athlete as a youth and was

now particularly pleased about having won a gold medal in the State senior track and field championships in his 80+ age group. Far be it for him to now admit he might need a little help getting in and out of a car. The inability to remain independent, forcing a situation in which they are completely dependent on their families, can have drastic consequences for those unable to cope mentally with this lifestyle change. More than 6,500 Americans over age 65 take their own lives each year, accounting for 25 percent of all suicides each year. The white male rate is four times higher than the average. Those most likely to take this action are those who are ill or impaired. This condition, coupled with an adverse financial situation, no spouse, social isolation, loneliness, feeling unwanted or useless, unneeded or unloved hasten the desire to cease living. This fragile emotional state of the elderly places a substantial strain on the younger adult who is attempting to help. Individuals who put themselves in the role of caregiver may expect gratitude from the individuals they are taking care of and empathy from siblings who live a distance away. Very likely, they will receive neither. As one female caregiver laments, “I have brothers and sisters, but there’s nobody here to help. They’ll call and say what they think I should be doing, and at times I really get upset. They don’t know what it’s like. They’re not here. They don’t have to change her diaper. They don’t have to give her a bath. They don’t have to listen to the verbal abuse.” Try to imagine the fear that an aging person has in losing independence. Think about it. Many of us treasure the control we have of our own time and space. Now, in a caregiving situation, both caregiver and caretaker lose that control. In life’s role reversal that is the centerpiece of an aging America, the elderly need help doing all of the things they have done for themselves and their children must rearrange their own lives to care for their elderly relative. The emotional burden on both sides can further be magnified by any past resentments or family squabbles that are sure to surface with the responsibilities of caregiving. Guilt is only one of the emotions that children will feel when trying to make the emotional decision of what to do about their parents. A nursing home placement is likely to leave a permanent emotional scar that no amount of visitation can heal. Trying to maintain the delicate balance within one’s own household while making room for a new

“boarder” is often a lost cause. Family members know they will lose some of the caregiver’s attention and resent having to give up time and space to an elderly relative. Long distance caregivers battle different problems. Guilt is still the primary feeling combined with the inadequacy one feels when a situation is out of control. Hard as it is for the direct caregiver, the long distance caregiver will likely spend an inordinate amount of time on the phone to compensate for being away. The result is a similar loss of time for the caretaker’s own immediate family. Add to that the common symptoms of loss of appetite and insomnia due to worrying, long distance caregiving exacts its own emotional toll. These are problems that we must help our clients work through. A long term care insurance product may help financially, but some of the emotional battering and the making of tough decisions will still be necessary. Recognizing these difficulties and playing a small, but important, role through advanced planning can make a world of difference when a long term care situation arises. THE SANDWICH GENERATION For the first time in history, an entire generation may find themselves “sandwiched” between caring for growing children and aging parents. A recent government study reveals that the average U.S. woman will spend 17 years raising children and 18 years caring for aging parents. Newsweek coined the term “daughter tracker” to describe this type of woman. Despite some societal progress, the role of caregiving will still fall to women. Roughly 75 percent of all caregivers today are women. Because women traditionally have longer life spans, the person that requires care is likely to be female. The combination of younger children and the fact that more females than ever before have joined the workforce is bound to create emotional fireworks in the future. Studies of female caregivers show that about 15 percent have given up their jobs to care for an aging parent, and between 25 and 40 percent have rearranged their work schedules or reduced work hours. Another 25 to 30 percent have taken time off from work without pay. About 80 percent of caregiving in total is by family members. A study done by the National Council on Aging focusing on people who live more than an hour from their elders suggests even distant family members spend time and money on elder care. These

caregivers commit 35 hours a month - equal to one workweek - providing or arranging housekeeping, meals and other services for their elders. They spend $196 a month on these services, and have done this type of caregiving for an average of 5.1 years. An AARP study shows that households involved in caregiving now number 22.4 million, up from 7 million in 1987. The presence of younger children and aging parents are unique to the baby boomer generation. This group waited to have children and a woman giving birth in her 40s is quite common today. The unexpected consequence of this delayed parenting is that the raising of children is coincident to a need for assistance on the part of parents who are in their 70s and 80s. Juggling a work schedule, having kids in school and day care, and parents at home or in day care themselves (adult day care centers are a growing industry) requires an enormous amount of planning and organization. There will be days when you have promised an adult to take them shopping only to have to cancel because it conflicts with a PTA meeting. Or vice versa - you can’t make it to your child’s piano recital because your mother needs to go to the doctor’s office. But what is a sandwich generation to do? The most traumatic decision to be made is deciding whether a parent will go into a nursing home or move in with you. There is no ducking the issue. It must be faced without regard to readiness. The key to a successful transition is to face the issues before something does happen. It is easier said than done. When it comes to communicating about future planning and making decisions, neither child nor parent is exceptionally good at addressing the issues. Because both sides dread the possibility of illness that is associated with aging, it is easier to avoid the subject than to talk about it. Take the situation of Florence. One summer day, she brought a dish of ice cream sandwiches out to the backyard where her mother and mother-in-law sat in lawn chairs. Florence passed out the sandwiches, then sat down to enjoy one herself. The sun melted the ice cream quickly and Florence’s mother could not eat it fast enough, the vanilla dripping down her hands. Florence immediately responded with a paper towel. Florence remembered her mother’s look as she helped clean her up, a thankful glance that appreciated Florence responding quickly without the need for verbal communication. It was a turning point for Florence. She knew then that her mother would need her and that she would always be there for her. It did not get easier however. One evening Florence was helping her mother out of her chair when

the older woman’s legs gave out. Her hip had fractured and, as Florence tried to catch her mother, the woman’s arm broke as well. “You broke my arm,” her mother said. It was the last verbal conversation they had. COMMUNICATION Planning ahead of time requires good communication between parent and adult. There is no better time to do it than when everyone is healthy and putting the plans into action seems a long way off. Talking about long term care will elicit a parent’s wishes in this regard. The child may be surprised when parents say they would prefer a nursing home facility to being dependent on their children. Without a discussion of long term care needs a parent would not ordinarily volunteer this information. The ideal situation would be to have a parent taken care of by a home health care nurse or aide in his or her own home. Leaving parents in familiar surroundings rather than disrupting them with a move to an institution or another family member’s home is a preferred arrangement for all concerned. If it can be done financially, it is likely to be the first choice. Medicare may or may not cover the expense, but a long term care insurance policy today would handle the majority of the costs. Keep in mind that a person has to qualify for the policy and, as such, must apply for it before the necessity for long term care services arises. Unless there are early discussions about planning for this possibility, long term care insurance is unlikely to be an option considered. In addition to insurance, there are a variety of resources available to seniors that can be of help during a time of need. It is much easier to learn about these resources in advance of needing them. A listing can be compiled and kept in a safe place for consultation purposes when a long term care plan of action is put into effect. Those “sandwiched” between children and a dependent adult need to realistically assess their abilities to handle both should it be needed. For someone who works, it would be impossible to do it all. Much as one may want to take on the entire burden, the “Superwoman” label will wear thin before too long. Communicating in advance about what can be done practically will be critical to organizing a plan that will actually work.

There will be arguments. Discussing a parent’s future situation only serves notice as to one’s own eventual needs. Unless prior communication is done about possible long term care situations, the entire family will be placed in the position of having to make rash decisions at a most difficult and emotional time. Decisions made under these circumstances are usually not the best decisions. The agent and financial planner should know this. The same considerations - emotional and financial - used when planning in the event of a death should also be used in planning for long term care. Advanced planning is what our jobs are all about. EMOTIONAL ASSISTANCE A person should not feel he or she is battling this alone. In the scenarios outlined above, individuals seemed to be making decisions entirely on their own but were unsure if they were doing the right thing. This concern created feelings of guilt, leading to their own health complications. There are so many emotional issues. How does one handle becoming a parent to one’s own parents? How does one help them maintain their self-dignity and self-image while avoiding burnout? In example #5, the man could have avoided angering creditors by assigning his daughter durable power of attorney which would have given her the ability to pay his bills until his injury had healed. The long distance caregiver from Washington, D.C. in example #2 may have felt better about the situation if she was able to interview and hire a geriatric case manager in the weeks she spent in South Carolina with her mother. A geriatric case manager may be the solution even if the caregiver is only a few miles away especially since so many couples today are dual income earners and can not afford the time away from work to care for an elderly parent. These case managers are licensed professionals and include social workers, nurses, gerontologists and others who can provide an assessment of the long term care situation and develop a plan to meet the needs of the person needing assistance. It may be easier for an unbiased third party to come in and help bridge the communication gap between the parent and child. If nothing else, one does not have to communicate the difficult choices alone. These managers can handle every aspect of an aging adult’s care from interviewing and hiring household help, paying the bills and managing the financial accounts, arranging transportation as needed

and calling on community resources that might be otherwise unknown to the children. Geriatric case managers charge fees for their services ranging from an initial assessment charge from $500 up to $3000 or more and a monthly fee for ongoing services. They are the child’s “eyes and ears” when the child can not be there. Attempting to make arrangements for a homemaker-helper long distance would not be effective and the possibility of neglect could become a reality without the child’s knowledge. The case manager monitors the situation regularly to ensure the right person is on the job. The responsibilities and costs associated with the geriatric case manager can be discussed as part of the advanced preparations the family makes for such situations. If there is any distance between children and parents, the subject (and how to pay for it) should be addressed. While it may be unusual for the insurance agent or financial planner to become involved in the caregiving process of a client, there will be times when this assistance will be welcomed. A National Family Caregivers Association Study found that 65 percent of caregivers do not receive help from other family members. Moreover, 69 percent consider frustration to be the emotion they most associate with caregiving. Thus, any information you can impart that assists the caregiver will typically be well received. Even though there may be cooperation from all parties in the beginning, do not assume that this harmony will continue when the actual time arrives. It is common for an older person to deny that assistance is necessary even though it seems obvious to everyone else. There may be some resistance in implementing these plans. A third party can be of great emotional assistance here. Whether it is a case manager or a doctor or a social worker, nurse, insurance agent or friend, enlisting help should be part of the planning process. PLANNING It all comes down to planning. As an insurance agent and financial planner, your role in long term care planning with a family involves both emotional and financial planning. Often the emotional issues dictate the financial choices that are made. Above all, the agent should remember that there is the likelihood of the same situation happening in one’s own family. There is a need to

plan your actions and those of aging parents and relatives in the event a long term care situation arises. The emotional aspect of what to do with one’s own parents will be followed by the financial situation and consequences of each action. As a plan is formed, it is important to note the financial impact of each decision. It can create its own emotional burdens on family members. Feeding, grooming and toileting an ill or incapacitated adult, often for years on end, is one of life’s most challenging and difficult tasks. What a difference an understanding and well-prepared insurance agent can make. THE FINANCIAL STRAIN OF AGING No one expects to outlive his or her money. Yet that is exactly what is happening to many Americans around the country. Take central Floridian Elsie Ryan, for example. Elsie’s husband passed away in 1978 when she was 80 years old. “We weren’t millionaire-wealthy,” she says but she had a decent trust fund that she figured would last her the rest of her life. At 97, she was living in a nursing home in Orlando. The nursing home cost Elsie over $33,000 a year and after a few years in the nursing home, the trust fund was depleted. The nursing home personnel assisted Elsie in applying for Medicaid, the joint state-federal program for those living at or below poverty level. Her mind still sharp, Elsie has endured a hip replacement, is crippled with arthritis, no longer has the use of her right leg and is legally blind. “I’ve lived much too long,” she says. Her trust fund was a lot of money seventeen years ago, but longevity of life and nursing home costs created a situation that forced her to become dependent on welfare. THE FINANCIAL BLACK HOLE One investment publication calls the need for long term care “the biggest threat to most Americans’ wealth” topping inflation, recession, real estate or other investment-related danger. Let’s say you retired at age 67 with a retirement income of $40,000 a year. You have money in the bank, no debts and nothing but a comfortable lifestyle ahead. But then...

Your spouse is diagnosed with Alzheimer’s and is in the early stages of the disease. Anticipation of days of relaxation are now filled with taking care of your spouse, trips to the doctor and pharmacy, general housekeeping and preparing meals. You can no longer leave your spouse alone, so every trip is a joint trip. You realize you can not cope with it alone and you hire a home health aide. The aide is there during the day while you have night duty, but even that is getting to be too much of an emotional strain for you. Your finances are almost exhausted because the cost for the home health care is $80 per day. The only alternative left is a nursing home and even at a reasonable rate it will likely run $105 a day or $38,000 a year. The $75,000 in savings will be exhausted in less than two years. Although your spouse’s condition is slowly deteriorating, it is more than likely he or she will live longer than two years. The retirement you were so looking forward to has been sidelined by the financial (and emotional) realities of long term care. Today, 7.3 million Americans require long term care services. Of this, 5.6 million are in their own home and 1.7 million in nursing homes. In the next 30 years, the number of elders needing long term care is expected to double. Skilled nursing home care costs average $4,000 to $5,000 a month, depending on the state and the medical condition of the patient. Privately hired home care can average about half that cost. But even $20,000 a year for live-in help can quickly deplete financial resources. What do you do when you are suddenly faced with an additional expense of $25,000 to $60,000 per year? How does this affect your retirement? What about your children or heirs? These questions should be asked by an insurance agent and financial planner when assisting individuals with their retirement and estate planning. If they are not addressed early on, the alternatives are limited and decisions to be made will inevitably be unsatisfactory and potentially financially devastating. NUMBERS THAT CANNOT BE IGNORED About 60 percent of dual-career couples (married Americans age 40 to 65 with household income above $50,000) say their greatest fear is not having enough money to live comfortably. Due to this concern, 48 percent of these folks plan to work after retirement age.

Now, factor in medical spending during retirement. Many people do not, by the way, when they plan the amount of money they will need to live on after giving up that regular paycheck. But the amount of spending on health care costs increases dramatically with old age. Statistics show that spending starts to take off after 45, and costs for men and women, ages 60-74, are nearly double that of people ages 45-59. Nursing home and other long term care costs certainly contribute to higher medical expenses among the senior population. As the body ages and begins to weaken, the recovery period is longer and results in higher costs for medical services provided. Aside from higher medical costs, there are millions of Americans already unprepared for a lengthy, healthy retirement. A Rand Corporation survey of financial assets showed that the median white household with members between the ages of 51 and 60 had less than $18,000 in cash and assets, not counting their homes. What would long term care costs do to that picture? What are some long term care costs? Looking first at nursing homes, the following is a 1996 survey of the daily costs of a nursing home facility stay, state by state.

NURSING HOME COSTS BY STATE STATE AVERAGE DAILY COSTS

Alabama $100 Arizona 130

Arkansas 79 California 142

Connecticut 195 Colorado 119 Delaware 132 Florida 124 Georgia 99 Idaho 115 Illinois 102 Indiana 129

Iowa 91 Kansas 84

Kentucky 127 Louisiana 85

Maine 184 Maryland 136

Massachusetts 184 Michigan 121 Minnesota 124 Mississippi 106

Missouri 94 Montana 109 Nebraska 99 Nevada 136

New Hampshire 192 New Jersey 170 New Mexico 144 New York 192

North Carolina 121 North Dakota 113

Ohio 135 Oklahoma 94

Oregon 136 Pennsylvania 142 Rhode Island 159

South Carolina 104 South Dakota 98

Tennessee 143 Texas 94 Utah 112

Vermont 135 Virginia 128

Washington 156 Washington, D.C. 192

West Virginia 125 Wisconsin 94 Wyoming 100

These costs, as you can see, range widely with each state. It is important to keep in mind that while these are average daily costs of a nursing home, where your client lives will ultimately be the measurement used to determine the cost of a nursing home facility. In Florida, for example, the daily average of $124.00 is representative of nursing home costs in Orlando or Tampa. A stay in a nursing home in Tallahassee would likely be less than the average, while a nursing home confinement in South Florida would range significantly higher. It is easy to see how someone like Elsie Ryan can run out of money even if she was reasonably financially set when her retirement began. According to the Employee Benefit Research Institute, two-thirds of single people and one-third of married people exhaust their funds after just 13 weeks in a nursing home. Another source cited the state of Connecticut where the average time it takes married couples to reach the Medicaid poverty level is just 52 weeks. The information you can turn up while conducting some research can be substantial. To obtain the latest long term care cost data for Central Florida, I contacted the Agency for Health Care Administration in

Tallahassee and I received a listing of the nursing home facilities in eleven counties. One listing in Hillsborough County was for the Arbors at Tampa facility in Tampa, Florida. In addition to the address and phone number, the information listed:

• Owner - For profit • Licensed Beds - 120 total, 60 of those set aside for Medicare patients, 40 for Medicaid • Payment Forms Accepted: Medicare, Medicaid, Private, Insurance/HMO and Hospice. • Not accepted were Workers’ Comp., CHAMPUS or VA payments. • Last Inspection Date was 4/95 and given a Standard rating. • Daily Semi-Private room rate - $105. • Special Services were available for: Alzheimer’s, comatose, dialysis, I.V. services, paraplegic, quadriplegic, tracheotomy, tube feeding, unit dosage system and ventilator dependent.

That same source also has a listing for the Canterbury Tower facility, also in Tampa. Their data:

• Owner: Non-profit • Licensed beds: 60; there were Medicare beds available but not Medicaid • Payment Forms Accepted: Medicare and private pay only. • Last inspection date was 4/95 and a rating of Superior assigned. • Daily semi-private room rate: $130 • Special services were available for: Alzheimer’s, tube feeding and unit dosage system

This information can help eliminate some of the potential facilities someone would be interested in for a dependent adult. While the latter facility is higher and accepts only Medicare and private-pay patients, a choice might be made to view the facility due to its Superior rating. One should not assume that long term care needs are confined to the elderly. According to the General Accounting Office, nearly 40 percent of those needing long term care were under the age of 65. It is just that once long term care is necessary for an elderly person, the need seldom ceases. Making the best arrangement for the elderly dependent is often the last choice a child helps make for a parent.

Typically, the elderly spend more money and require longer periods for recovery. A February, 1991 report by The New England Journal of Medicine (still the most-quoted source of reliable long term care probabilities) cited that of the 2.2 million people turning age 65 in 1990, 43 percent of those (or 946,000 people) could expect to spend some time in a nursing home before they died. Of that group, 21 percent (approximately 200,000 people) would stay at least five years in a nursing home facility. The article further stated an estimated average cost of $25,000 to $50,000 annually for a typical nursing home stay, nationwide. That means at least 200,000 of the “Seniors Class of 1990” should plan on spending between $125,000 to $250,000 for a nursing home confinement. How many of our clients can absorb that cost during their retirement years? These are sobering numbers. In 1993, according to a University of Missouri-Columbia study, more than 1,500,000 people lived in the nation’s 20,000 nursing homes. As noted earlier, that number has now risen to 1.7 million. The report projected the number of nursing home residents to rise to 3,000,000 by the year 2020 when more than 55 million Americans will be over age 65. Long term care is also starting to affect employer costs. A May, 1997 report compiled through the combined efforts of the National Alliance for Caregiving, AARP and Glaxo Wellcome, Inc. indicated that nearly $11.5 billion dollars represented employers’ aggregate costs due to caregiving demands on their employees. That broke down as:

Replacing employees: $4.9 Billion Workday interruptions: $3.7 Billion Eldercare crises: $1.0 Billion Supervisor’s time: $800 Million Partial absenteeism: $488 Million Absenteeism: $400 Million

As these costs are felt, the market for employer-sponsored long term care insurance is sure to increase dramatically, especially given the tax clarification of the product in the Health Insurance Portability and Accountability Act of 1996. Finally, the impact of baby boomers on long term care will be felt all too soon. This generation has already been impacted as the “sandwichers,” with caregiving tasks falling to them in unprecedented

numbers. But they worry, too, about their own retirement age future. A USA Today/CNN/Gallup Poll found that 47 percent of the boomers surveyed worried about poor health when they reach senior age. Moreover, 31 percent feared financial shortfalls in retirement. The threat of long term care has now extended back to our 40- and 50-year-olds. LONG TERM CARE IS MORE THAN JUST A NURSING HOME Nursing homes are not the only contributor to the high costs of long term care. Only a small percentage of those needing long term care services actually receive the care in a nursing home. Today, more than ever, advances in medical science have permitted medical technology to be transported right into one’s own living room. Nurses and aides can provide the same type of care as one would receive in a nursing home. Since many people prefer the convenience and familiarity of their own surroundings, a large part of long term care services are provided in this fashion. Typically, the costs are not as high as for those staying in a nursing home unless 24-hour care is needed. Full-time home health care can run as high as $250 a day. The average cost of a home health aide visit is substantially less than a daily nursing home rate, if the visit is for a brief period of time such as one to two hours. Those patients requiring skilled nursing care will incur higher costs than the people that need more basic help. A nurse’s aide can assist the individual at home with the basic activities of daily living (ADLs). Alzheimer’s patients and those with severe arthritis are usually in need of this kind of assistance. The simple tasks of bathing and dressing are particularly difficult to do if you have any type of infirmity. The home health aide can also assist in the essential household chores and even grocery shop for the homebound patient. Adult day care centers, serving the same purpose as day care centers for children, are becoming more common today. Couples who are working and have a dependent adult staying with them use these facilities, much as they use day care centers for dependent children. The average daily costs run about 30-50 percent of nursing home rates. Adult day care centers are further explored in Lesson 2, “Types of Care.”

Assisted living facilities are growing in popularity also. Assisted living facilities offer full-time adult day care with apartment-type living and aides on staff to assist with ADLs. (In addition to bathing and dressing, these can include eating, mobility or transferring positions and continence.) The cost of the average assisted living facility runs about 40-60 percent of daily nursing home rates. COSTS, COSTS AND MORE COSTS In addition to the expected health problems that occur with age, out-of-pocket expenses can have a severe impact on retirement. Health care costs for seniors that are paid for by public funds are substantially higher than any other age group. Skepticism about the future of Medicare and Social Security have sent the younger generations looking for other financial outlets that will be their source of future retirement income. Today’s age-50-plus population has fewer options than the youth of America. Social Security and Medicare are focal points of their retirement planning. There is not much room for the additional expenses of long term care. The necessity of a nursing home stay can financially ruin a retired couple in a relatively short period of time. Today’s seniors are conservative with their investments and are afraid to do anything aggressive for fear of losing their “nest egg.” They deal with premium increases to their Medicare Supplements each year as Medicare raises deductibles and co-payments annually. They are cautiously optimistic about the Balanced Budget Act of 1997, which gave them more choices for their health care needs. Typically, HMOs have provided greater benefits for long term care needs than the standard medical plan, but only time will tell if these managed care plans can support the claim costs associated with this more generous coverage. States are certainly feeling the pinch of providing long term care services for their elderly populations who no longer have assets to spend. In 1997, Arizona lawmakers gave some fiscal relief from long term care costs to their 15 counties. These counties have been complaining for years that the escalating costs of the Arizona Long Term Care System were slowly pushing them to bankruptcy. The annual cost for long term care there had ballooned to $450 million, with increases averaging about 10 percent a year, contrasted with county revenue growth increases of 6 percent. Arizona is not the only state dealing with these monetary pressures, and it illustrates the financial squeeze long term care is making.

WHERE DO THE ELDERLY TURN FOR HELP? The obvious answer is their children. When financial help is necessary, what else can they do? That answer is Medicaid (see Lesson 5, “Government Programs.”) However, the repercussions from this underfunded government program are not widely understood by those who encourage their parents to qualify for Medicaid benefits. Medicaid is only available to those that spend down their income and assets, running through the inheritance money in short order. And if the loss of this projected revenue is not enough, there are some states that allow nursing homes to use a child’s assets to pay for the long term care costs of a parent. This is a shock to the adult child who may see funds for his or her children’s education and own retirement used to pay for a parent’s nursing home stay. What is the financial responsibility of an adult child for his or her parents? To what length can the state go to attach a child’s assets to help pay for long term care costs for his or her parents? It may take several years to arrive at answers. Public funds are diminishing and the reluctance to pay more taxes may result in other alternatives such as requiring an adult child to participate in paying the cost of a parent or relative’s long term care. PLANNING AHEAD While it is difficult for family members to discuss these issues, talk they must. Fortune magazine recently listed the eight biggest mistakes parents might be making right now with their finances. These were:

1. There is no will, it is unsigned, or nobody knows where it is. 2. They have not drawn up a financial or medical power of attorney. 3. The trust the parents set up is not properly safeguarded. 4. The trust is outdated. 5. Fearful that a long illness in a nursing home might eat up everything, parents have put assets in their children’s name. 6. To elude creditors, Dad has put everything in Mom’s name. 7. Parents are giving away as much as they can or should. 8. Parents automatically hand over control of their money to the kids.

The insurance agent and financial planner can be a key conduit in facilitating important financial conversations between parents and

children. These discussions must take place to enable long term care needs to best be met. The numbers in this lesson give you a familiar ground with which to approach existing and potential clients about the importance of planning ahead. The financial impact of long term care is already being felt by millions of Americans. Countless more await a similar fate unless some advanced preparation is done.

Lesson2Types of Care

• Describe the levels of health care a patient may receive. • List the long-term care services available to a patient. • Define the activities of daily living associated with custodial care. • Explain why care at home is preferable to care in an institution. • Explain the purpose of adult day care. • Define respite care.

Activities Of Daily Living (ADLs) - Functional routines that relate to one’s ability to live independently. These activities consist of bathing, dressing, feeding, toileting, continence, and mobility.

Adult Day Care - Services provided to individuals who cannot remain alone, including health and custodial care and other related support. This care is rendered in specific centers on a less than 24-hour basis.

Custodial Care - The most common type of long-term care service rendered, it provides assistance with activities of daily living and is generally performed by a trained aide in a variety of settings, most often in the home.

Home Care - This is a type of long-term care service, provided in the home, which generally consists of activities of daily living assistance and is rendered by a trained aide.

Home Health Care - A program of professional, paraprofessional, and skilled care usually provided through a home health care agency to a person at home. This care is often prescribed by a physician as medically necessary and can include nursing services, physical, speech, respiratory, and occupational therapy.

Intensive Care - The type of medical care given for the most serious of medical situations. The patient is monitored on a 24-hour basis.

Intermediate Care - Occasional nursing services, preventive or rehabilitative, performed under the supervision of skilled medical personnel.

Respite Care - Services provided for caregivers to permit temporary periods of relief or rest in caring for a person. These services can be provided by a home health care agency or other state licensed facility and may be reimbursable under a long-term care insurance policy.

Skilled Nursing Care - A professional type of nursing assistance performed by trained medical personnel under the supervision of a physician or other qualified medical personnel. It is the only type of care eligible for reimbursement in a skilled nursing facility under Medicare.

hen people think of long-term care services or services for the elderly, the first thing that usually comes to mind is

custodial care in a nursing home. The fact is, however, that most people who utilize long-term care services do so in a setting outside of a nursing home. As an insurance professional, it is important to understand all of the long-term care services available in order to understand what the needs are of someone purchasing a long-term care policy. Before discussing the different types of long-term care services that are available, it is important to understand the different levels of health care that an elderly patient might receive. The level of health care a patient might receive will, of course, depend upon the severity of his or her health problem. We will also discuss the different settings where these different levels of care might be received. Levels of Care The first level of care is intensive care. Intensive care is where the patient is monitored at all times and is reserved for the most serious of medical situations. A person may also be placed in intensive care following surgery to be monitored for a 24-hour period in case the patient’s condition displays any negative signs following the surgery. Intensive care is most commonly provided in a hospital setting. Acute care is for those patients who do not require intensive care, but who may still need to be monitored periodically in a hospital setting. Hospital personnel may spend up to eight hours in a 24-hour period with a patient undergoing acute care. Skilled care involves less monitoring than acute care, and usually requires medical personnel to spend about one-half of the time with a patient than would be spent with a patient requiring acute care. Skilled care can be administered in a hospital, an assisted living facility, or even the patient’s home. Intermediate care is similar to skilled care except that it is provided on a periodic basis. An example of intermediate care might be the changing of a bandage every eight hours. Even though a patient requiring intermediate care does not need continuous care, intermediate care requires skilled medical personnel to deliver it.

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Custodial care is care that consists of assisting individuals in activities of daily living. The phrase “activities of daily living” is sometimes shortened to “ADLs.” The ADLs that custodial care is concerned with include bathing, dressing, toileting, mobility, continence, and eating. A nurse’s aide usually performs custodial care. As people age, custodial care becomes more common, although certain medical conditions, such as spinal cord injuries, may also require custodial care. Short vs. Long-Term Care Services Of the levels of care, intensive care and acute care are generally short term in nature and are often covered by major medical insurance. HMOs and other types of managed care organizations may also provide coverage for intensive care and acute care. The other three levels of care--skilled, intermediate, and custodial care--are considered long-term levels of care. The objective of these longer-term levels of care is to prevent the patient’s health from deteriorating any further. These longer-term levels of care are also sometimes called maintenance care. These maintenance levels of care are often not covered by major medical insurance coverage, nor does an elderly patient’s primary medical program, Medicare, cover these types of care. Long-term Care Services The lack of medical coverage for skilled, intermediate, and custodial care leaves a gap that long-term care insurance can fill. As the population in the United States continues to age, more and more people will need both the longer-term levels of care, as well as long-term care insurance to help pay for these levels of care. There are three different types of long-term care services:

1. Skilled nursing care 2. Intermediate nursing care 3. Custodial care

After talking briefly about skilled nursing care and intermediate nursing care, most of our discussion of long-term care services will be about custodial care. Skilled nursing care is care provided on a regular basis by a licensed medical professional, such as a registered nurse or professional therapist, usually working under the direct supervision of a physician. Some patients need skilled nursing care for only a short period of time following an illness. Skilled nursing care is usually provided to a patient who needs some monitoring and skilled care, but who is not sick enough to require acute care. A person needing skilled nursing care is often given a treatment plan detailing the specifics of the treatment needed, both in description and frequency. Skilled nursing care is often given in a facility that specializes in such care. Skilled nursing care should not be confused with a custodial nursing home. Skilled care usually has a goal of full recovery for the patient with the care given for a relatively short period of time, such as a few days to a couple months, while custodial care is usually delivered over a longer period of time. Intermediate nursing care is provided to patients in a stable condition who, while requiring daily medical assistance, require the assistance on a less frequent basis than skilled nursing care. Intermediate nursing care can generally be done in a patient’s home. Custodial care is the most common long-term care service. The purpose of custodial care is to assist a patient with everyday activities of daily living such as bathing, eating, and dressing. While custodial care is generally less intensive and complicated than either skilled nursing care or intermediate nursing care, the person providing custodial care must have some training to become proficient in assisting someone in necessary daily activities. Therefore, even if a family member were to become the primary provider of custodial care, that family member would be well advised to seek training in activities of daily living (ADLs) even if the training requires a small fee. Activities Of Daily Living (ADLs)

The ADLs that are most often associated with requiring custodial care are bathing, dressing, toileting, mobility, continence, and eating. The descriptions are as follows: Bathing involves the ability to wash in a bathtub or shower, including getting in and out of the bathtub or shower. Bathing also involves the ability of a person to give himself or herself a sponge bath. The ability to do any of the above activities constitutes independence from assistance. Bathing is probably the most problematic ADL for elderly persons. If an elderly person has trouble with his or her sense of balance, or has an unsteady gait, he or she may need assistance to get in and out of the bathtub or shower. Also, a wet surface and the frailty of an older person can be a hazardous combination. Dressing involves the ability to get clothes from a closet or dresser and to dress one’s self, and, if necessary, to attach a brace or prosthesis without any assistance. Dressing requires dexterity of the hands and motor coordination. It is easy to take for granted the simple tasks of buttoning a shirt or tying a shoelace. It is even more difficult to perform these tasks with decreased motor skills, or with arthritis of the hands. Toileting is the act of going to and from the bathroom, getting on and off the toilet and performing the necessary hygiene associated with going to the toilet, all without assistance. The location of the bathroom may have some impact on a person’s ability to perform the activity of toileting. If access to the toilet is difficult, assistance may be needed. The need for toileting assistance is the benchmark by which many doctors measure the need for ongoing long-term care services. While an older person may need some help with bathing and dressing activities, this assistance does not necessarily mean the person is severely disabled and in need of significant assistance. However, the need for toileting assistance is usually a warning sign for future loss of other ADLs, eventual total dependence, and the need for around-the-clock care. Mobility, which is also called transferring positions, is the process of walking without the assistance of a mechanical device, such as a cane or wheelchair. Mobility also involves the ability of moving from

a bed to a chair without assistance. To adequately perform this activity requires a considerable amount of strength in the arms and legs. Continence refers to the ability to control bowel and bladder function voluntarily and to maintain a reasonable level of personal hygiene. Continence is independent of the physical activity of toileting and may involve the mental capacity of an individual to recognize the need to use the bathroom. Eating involves the process of getting food from the plate to the mouth without assistance. Eating requires the coordination of at least one of the hands. A person could use a straw or a modified eating utensil and still remain independent. Finally, administering medication is also considered an activity of daily living. Requiring assistance in taking the prescribed amount of medication at the designated time and in the proper manner is considered a loss of independence. Many of the long-term care services that have been previously discussed can be performed in the patient’s home. Doctors often recommend that care be performed at home as it is important to the emotional well being of the patient in need of care to be in a home setting as opposed to an “institutional” setting. While long-term care at home is usually preferred, nearly 85 percent of people using home health care services use these services for less than one year. Care at Home The reason that long-term care is ideally provided in the home is that home-based care has the following positive factors associated with it:

• The patient has more control over his or her own lifestyle including the designated times for daily activities and social life. • The patient is within his or her own environment. • The patient has emotional and physical security, as well as more independence. • The patient has more privacy and can maintain his or her own space. • The patient has personal memories that are magnified in the presence of his or her home. • The patient will have more of a sense of financial security with care in his or her own home.

Care in the home can be divided into two categories:

1. Home health care 2. Home care

Home health care, much like the name suggests, is health care given at the patient’s home, and may include skilled nursing care, physical and speech therapy, lab services, and intermediate care. Home care involves assistance with ADLs and everyday activities such as shopping, meal preparation, and light housekeeping. Other Long-term Care Services An option for someone caring for an older relative is adult day care. An adult day care center is similar to a child day care center. An adult in an adult day care center is supervised, fed, administered medication, and can sometimes receive skilled nursing care. While adult day care is not designed to replace a nursing home, it can be the perfect place for an adult who is not able to stay at home and function on his or her own during the day. Some adult day care centers provide activities with speakers, music, and even field trips. This is important for many elderly adults, because even though they may have diminished physical capacities, they are still sharp mentally. It is also important for many seniors to have socialization opportunities with others their own age. Another long-term care service is respite care, where temporary professional care is employed to give the primary caregiver some time off. The primary caregiver might need a break as often as once a week to run errands. Respite care can also go longer than a week so as to give the primary caregiver a chance to take a vacation.

hat long term care services might an individual need? It was mentioned in Lesson 1, “The Need for Long Term

Care,” that long term care goes well beyond the need for nursing home care. In actuality, more people access long term care services outside of a nursing home setting. It is important to understand exactly what constitutes long term care. As an insurance agent, you must understand exactly what a long term

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care insurance policy will cover. This should include an intimate understanding of the various types of long term care services. LEVELS OF HEALTH CARE The type of care accessed is generally based on the severity of the health problem. The health care service administered is divided by the length of time a patient is monitored. The type of long term care, whether it is maintenance, ADL assistance, or therapy, can be provided in a variety of settings. Intensive care: This is the most serious of medical situations where a patient is monitored at all times. A person may be placed in intensive care following surgery and is monitored for any negative signs usually on a 24-hour basis. A hospital-type setting is the most common facility for this type of care. Acute care: For those individuals who are no longer on the critical list and do not need 24-hour care, there may still be a need to be monitored periodically to warrant remaining in a hospital-type setting. In a 24-hour period, medical personnel may spend up to eight hours with a patient. Skilled care: A decrease in the monitoring levels of acute care, skilled care may be needed up to half the time necessary at the acute care level. This type of care can be administered in the home, an assisted living facility, nursing home or hospital. Intermediate care: This type of care is similar to skilled care except it is provided on a periodic basis. The changing of a bandage every eight hours, for example, is considered intermittent treatment. Skilled medical personnel would deliver or monitor this type of care also. Custodial care: This care involves assisting individuals in activities of daily living (ADLs). These ADLs include, but are not limited to, bathing, dressing, eating, and walking. A trained nurse’s aide usually performs this type of care. As people get older, this type of care is common. Spinal cord injuries may also require this type of care. Intensive care and acute care are short-term in nature and are often covered by comprehensive major medical insurance. HMOs and PPOs and other managed care programs also provide benefits for this type of care. Skilled, intermediate and custodial care are considered long term levels of care. The objective of this type of care is to prevent a

patient’s health from deteriorating any further. This “maintenance” care is often not covered to any degree in a comprehensive major medical insurance policy, nor by the elderly’s primary medical program, Medicare. The lack of coverage available for skilled, intermediate and custodial care has left the door open for the emergence of long term care insurance. As the population continues to age, the chance that more individuals will have a need for this form of medical treatment will increase dramatically. Care for the elderly is still burdened with risk. It is easy for a long term care situation to escalate into an acute or intensive care need. For example: A 92-year-old woman with severe arthritis and bad circulation was on long term care maintenance when she developed a foot ulcer. She had two medical alternatives - amputation, a “simple” procedure with a high degree of success, but resulting in the loss of her foot or an operation where healthy blood vessels are grafted in an attempt to save her foot. Doctors make difficult choices for elderly patients, an oppressive situation compounded by having to deal with well-intentioned family members. Whichever alternative was selected, there was only a limited chance of walking normal. Her family, of course, wanted the foot saved. The 92-year-old woman had little say in the matter. During the operation she suffered a heart attack. She was taken to intensive care and placed on a respirator. The grafting on her foot soon became infected and was treated with antibiotics which triggered debilitating diarrhea. The long hours of anesthesia also led to prolonged post-operation mental confusion. The surgery only worsened the woman’s already declining health and she still had the foot ulcer. The only other alternative was amputation. LONG TERM CARE SERVICES Skilled Nursing Care Skilled nursing care is care provided on a regular basis by licensed medical professionals such as registered nurses (RNs) or professional therapists, working under the order or direct supervision of a physician. Some people need skilled care for only a short period of time following an illness. In Lesson 1, “The Need for Long Term Care,” Medicare’s prospective payment system illustrated this type of skilled care. The

person was not sick enough for acute care, but was still in need of skilled care and some monitoring. The recognition of skilled care became widespread as more and more Medicare patients were discharged from the hospital only to go into another type of facility, such as a nursing home to receive skilled care. A person in need of skilled nursing care other than on an acute basis often receives a treatment plan. This program details the specifics of the treatment needed, both in description and frequency. Today, retirement communities include independent living and personal/health care assistance. In Cartersville, Georgia, for example, Felton Place and Felton Manor represent both independent living and a personal care facility at the same location. The independent residence has 48 one-level, one or two-bedroom patio apartments with a single car garage, for $550 to $650 a month. The personal care residence has 38 private and semi-private bedroom suites. The residents receive three meals a day, medication assistance, and a nurse call system and services with a 24-hour staff. The buildings have kitchenettes, a library, fireplace, beauty/barber shop and screened porches for $1,125 to $1,800 a month. Intermediate Nursing Care Intermediate nursing care is provided for stable conditions that require daily medical assistance on a less frequent basis than skilled nursing care. The type of care to be administered is ordered by a physician and normally carried out under the supervision of a registered nurse. While intermediate nursing care is less specialized than skilled care, it is often administered over longer periods of time. With skilled care, you are often working towards a stated goal. In a long term care scenario, that objective isn’t always full recovery. More likely, it may be to bring the patient to a level where the care needed is only intermediate, allowing more independence from supervised medical scrutiny. Intermediate care could be as simple as giving medication to a group in physical therapy once a day. Intermediate nursing care is generally in the patient’s home. Custodial Care Custodial care provides assistance with every day activities of daily living (ADLs). While less intensive and complicated than skilled or intermediate care, the individual providing it must have some training in order to become proficient at assisting someone in necessary daily

activities. Even a family member who might provide this assistance at home would be wise to seek training in ADLs for a small fee. Custodial care may also be called personal care. It is usually defined by the actual ADLs that require help - bathing, dressing, eating, walking, getting in and out of bed, continence and taking medication are the more common ADLs defined. ADLs originated more than 30 years ago from The Index of Independence in Daily Activities. Daily activities are defined by a person’s ability to perform normal functions. This book also linked the ability to achieve the normal function with a person’s behavioral level. There is a unique correlation between childhood and the elderly stage. The lack of independence and inability to function is the same during childhood as it is in the elderly stage of life. Children generally learn and perform the following functions independently in this order:

• eating - first with hands and then with utensils; • walking - first crawling and then culminating with baby’s first steps; • using the toilet; and • bathing.

As people age, the inability to perform normal functions follows the adage “last learned - first lost”:

• needs assistance to bathe; • needs assistance in performing the task of going to the toilet, including getting undressed; • mobility becomes more and more difficult for an elderly person slowed by arthritis and other ailments; and • eating - inability to hold a utensil or feed themselves.

The definition of each of these activities of daily living is more complex than one might think. The majority of long term care insurance policies measure eligibility for benefits on the basis of the ability to perform, or not perform, the usual ADLs. The following definitions are important: Bathing - washing oneself in a bathtub or a shower, including getting in and out of the bathtub or shower or giving oneself a sponge bath, constitutes an independence from any assistance.

Bathing is the most problematic ADL for an elderly person. A lack of balance or an unsteady gait may necessitate assistance in getting in and out of a bathtub or shower. A wet surface combined with the fragility of an older person can be a hazardous combination. Dressing - ability to get clothes from the closet or drawer and dress one’s self, or attaching a brace or prosthesis without any assistance. These activities require a certain dexterity of the hands and motor coordination. It’s easy to take for granted the simple tasks of buttoning a shirt or tying a shoelace. And it is even more difficult to perform these tasks with decreased motor skills, or even arthritis of the hands. Toileting - the act of going to and from the bathroom, getting on and off the toilet and performing the necessary hygiene associated with going to the toilet without assistance. The location of the bathroom will have some impact on a person’s ability to perform this daily activity. If access is difficult, assistance may be required. Bathing and getting dressed are activities easily lost or made more difficult for an older person. It is not unusual to require assistance as one gets older and it does not necessarily mean the individual is severely disabled and in need of significant assistance. The need for toileting assistance, though, may well be the benchmark by which doctors measure the need for ongoing long term care services. Toileting is the critical point in the typical ADL hierarchy. Lack of independence in performing this function is the warning sign for future loss and eventual total dependence and often results in the need for around-the-clock care. Mobility (also called transferring positions) - the process of walking without the assistance of a mechanical device (from cane to wheelchair) and moving from the bed to the chair without assistance. A considerable amount of strength in the arms and legs is necessary to adequately perform this function. Continence - refers to one’s ability to control bowel and bladder function voluntarily and to maintain a reasonable level of personal hygiene. This is independent from the physical ability to use the toilet and may involve the mental capacity of an individual to recognize the need to use the bathroom. Eating - means the process of getting food from the plate into one’s mouth without assistance. It requires the coordination of at least one

of the hands. A person can use a straw or a modified utensil and still remain independent. Administering medication is an activity of daily living and requiring assistance in taking the prescribed amount at the designated time and in the proper manner is a loss of independence. It has taken several decades of gerontological and health research to place these ADL measurements into universal, standardized categories by which their loss can be calculated and diagnosed and medical assistance can be prescribed. This medical assistance is often in the form of long term care. The loss of independence in performing these ADLs is often irrecoverable at an advanced age. Unless a person has had a specific trauma that renders him temporarily unable to perform some of these functions, the loss may be permanent. Thus, the individual may require assistance for the rest of his life. The concept of medical assistance does not necessarily mean “hands-on.” Standby assistance can still constitute the loss of an ADL. If the patient’s condition warrants a nurse or nurse’s aide close by to supervise the performance of an ADL in the event the individual cannot successfully perform it, this may still be considered an ADL loss. This type of care oversight has taken on added importance with the passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). A more detailed discussion can be found in Lesson 4. The Following lists ADL losses per 1,000 persons at older ages.

ADL Age Total Male Female Bathing 65-74

75-84 85 +

35.2 80.9

217.2

33.4 68.2

194.9

36.7 88.8

227.9 Dressing 65-74

75-84 85 +

29.3 50.8

132.3

32.5 56.6

126.5

26.8 47.3

135.7 Mobility 65-74

75-84 85 +

17.7 36.7 89.6

17.4 28.8 66.7

17.9 41.8 99.1

Toileting 65-74 75-84 85 +

12.4 29.3 82.8

13.6 22.7 56.4

11.4 33.4 95.3

Eating 65-74 75-84 85 +

6.3 15.3 27.4

8.5 17.6 23.9

4.7 13.9 29.0

Loss of 1 or more ADLs 65-74 75-84 85 +

47.4 95.2

238.8

48.1 89.5

218.8

46.7 98.6

247.7

These statistics are used by actuaries to compute long term care morbidity rates and benefit eligibility when pricing a long term care insurance policy. Bathing and dressing are the overwhelming loss leaders in ADLs. The inability to perform these functions qualifies a person for long term care insurance reimbursement. In 1994, 28 percent of older persons assessed their health as fair or poor, compared to 10 percent for all persons. These results have much to do with restricted ADLs due to injury or illness. Seniors averaged 35 restricted ADL days in 1994. The table below illustrates the number of people needing assistance with these activities of daily living. The need for assistance in personal care will grow dramatically in correlation to the increasing number of people living longer lives.

Age 1980 1990 2000 2010

30 yr percent change

65-74 737,139 869,412 863,487 996,042 35.1% 75-84 735,990 945,052 1,142,015 1,159,308 57.5% 85 + 553,386 779,486 1,106,664 1,462,926 173.2% TOTAL 2,008,515 2,593,949 3,112,166 3,618,276 80.1%

Between 1980 and 2010, the increase in the number of people needing long term care assistance is projected to be a phenomenal 30 year growth of 173.2 percent among the 85-and-older crowd. This type of care is usually associated with assistance in performing activities of daily living. A 1992 National Health Interview Survey found that more than half of the older population (53.9%) reported having at least one disability that limited their ability to carry out ADLs. The report divided ADLs up into ADLs (bathing, dressing, eating, mobility) and Instrumental ADLs (IADLs - preparing meals, shopping, managing money, using the telephone, doing housework, taking medication). The instrumental ADLs are more commonly referred to in the insurance industry as “homemaker services.” The chart below illustrates the percentage of each age group that needed ADL or IADL assistance.

Percentage of age group needing assistance Age Group % with IADL % with ADL

assistance needs assistance needs 65-69 5.0% 2.3% 70-74 7.5% 4.4% 75-84 13.9% 8.6% 85 + 22.3% 20.0%

Custodial care is the most common type of long term care assistance needed. This type of care will become more commonplace in the future and the need for funding, other than current sources available, will certainly be needed. Long term care insurance can fill this gap. CARE AT HOME All of the long term care services mentioned above can be performed within the familiar confines of one’s home. Physicians often recommend this care at home as it provides an important foundation to the emotional well-being of the person in need of care. Care at home, if it can be provided, is important to all ages but particularly to the elderly. There wasn’t a large need for home care prior to 1984. People (especially elderly) with medical problems generally stayed in the hospital for indeterminate periods of time. But Medicare’s prospective payment system changed the rules, and when a patient is now discharged, quite often medical treatment accompanies this person to the next destination. Often, that destination is home. According to the United States Health Cooperative, 84.5 percent of the people who use home health care services do so for less than 365 days. After that, one of three things happens: (1) the person gets better; (2) the person dies; or (3) the person moves to a higher care level that requires a facility stay. Whatever the length of time, home is obviously a preferred site for care. Long term care in the home is associated with the following positive factors:

• control of one’s lifestyle including the designated times for daily activities and social life; • being within one’s own environment; • emotional and physical security; • independence; • privacy and the maintaining of one’s own space; • memories, magnified by being in the presence of personal history;

• source of financial security; and • extension of one’s self-expression.

All of these positive factors can have a profound effect on a person’s health. Thus, if care can be delivered in the home, the person receiving long term care often prefers it. The advances in medical science bode well for the future of home health care. Most care, from custodial care (assistance with ADLs) to the highly skilled care performed by an RN, can be provided at home. For example: A stroke or an accident renders a person temporarily incapacitated and in need of hospitalization. Both bed rest and assistance with household chores and common ADLs are needed. Where better to obtain the needed bed rest than in your own bed? A home health aide or family member can perform the rest of the assistance necessary. Care in the home can be divided into two categories: home health care and home care. Home health care may include skilled nursing care, physical and speech therapy, lab services and intermediate care. Home care is a supportive service that includes assistance with ADLs and everyday activities such as shopping, meal preparation and light housekeeping. These services are provided by home health care agencies that may be independent or affiliated with a nursing home or hospital. Private duty nurses operating independently can perform many skilled care functions for the individual patient at home. Home health and home care have already been incorporated into long term care insurance policies. With a July 7, 1997 Los Angeles Times report that 40 percent of home health care costs reimbursed by Medicare should not have been paid, rules tightening is bound to follow. This further underscores the potential importance of long term care coverage. Finally, the health care industry has seen little to compare to the phenomenal growth of the home care market. News reports each day detail more about the expansion of home care services nationwide. For example: A January 7, 1998 release announced that National HealthCare Corporation (NHC), one of the nation’s largest long term health care companies, was opening three more home care programs. These new programs will provide skilled nursing care, intravenous therapy, wound care, pain management, patient education, speech, physical and occupation therapy, nutrition counseling, medical social

services and personal aide services. The home health care beat goes on. OTHER LONG TERM CARE SERVICES Adult day care centers are becoming more and more common with more than 3,000 programs nationwide in operation today. An adult day care center functions similar to that of a child day care center. With the majority of couples working, the likelihood of needing a place providing day care for a dependent adult is increasing. A dependent adult in a day care center is supervised, fed, administered medication and, in some cases, receives skilled care. Adult day care is not designed to replace the nursing home environment where a significant amount of skilled care is required, but it is a perfect place for an adult who cannot stay home alone and function on his or her own during the course of the day. Many working adults try to assume the caregiver role personally. Often, it is simply too much, especially if one is also raising children. Yet it is difficult for many to take the step of placing a loved one into a day care center, even as they do so with their children. It helps that some adult day care centers provide activities with speakers, music and even field trips. Many dependent adults may have diminished physical capabilities but are still sharp mentally and this type of stimulation is both healthy and helpful. As one adult day care center director put it, “Socialization is an important element in everyone’s life.” The center provided an alternative to simply staying at home and napping in front of the television. Respite care is a service whereby temporary professional care is employed to give the caregiver some time off. With so many adults today providing care for a dependent parent or relative, the need for a break can be as often as once a week to run errands or perhaps to take a vacation. Home health care agencies are a common source for providing personnel such as a nurse, home health aide or personal care attendant who can be retained depending on the level of need for the patient for short periods of time. Call centers are becoming the norm in today’s managed care health environment. A Medicare HMO, for example, may often have an 800 number staffed by nursing personnel to answer medical questions posed by its members. The elderly, in particular, seem to have a need

for this support, and these help-lines stay busy. In addition, company employees may also receive advice and guidance on long term care issues, including insurance, through a similar arrangement. As an example: Care Counsel LLC offers its services to employee groups under its Healthcare Assistance Program. Here, employees are encouraged to call with varying medical questions, including long term care. Employees can call for themselves or on behalf of their aging relatives. This type of information support can be helpful. Geriatric services are also becoming commonplace, as the health care industry prepares for America’s aging future. Companies like Geriatric Services of America (GSA), work with insurance companies, Medicare, AARP, third-party administrators, pharmaceutical suppliers, home health care agencies and visiting nursing associations to provide special expertise in dealing with the elderly. Much of this support is in regard to long term care. A recent program involved the coordination of delivery of medications and home health care services to the homes of respiratory patients. The improvement in medical technology will likely keep people alive much longer than ever before as the nation goes into the new millennium. Advances in the study and treatment of Alzheimer’s disease alone, a common condition for nursing home patients, may mean the postponement of a nursing home stay, but the need for other, simpler forms of long term care treatment. Long term care services will continue to evolve, but there will be cost - necessitating the need for some form of long term care insurance coverage. The various types of long term care discussed in this lesson are the primary long term care services being provided today. Remembering the various definitions and context of these services will be important for you when analyzing a long term care insurance policy. The type of care, the eligibility requirements for benefits, and specific types of assistance are all tied into the care provided in a long term care setting.

Lesson3Product Features

• List and describe the key features of a long-term care policy. • Define benefit coordination and describe how it applies to long-term care policies. • Describe the different ways a person could become eligible for benefits under a long-term care policy. • Define the following terms as they relate to provisions in a long-term care policy: o Waiver of premium o Restoration of benefits o Cognitive reinstatement o Third party notification o Spousal discount • Describe the ways to protect against inflation when purchasing a long-term care policy.

Benefit Period - The length of time for which benefits under a long-term care insurance contract will be paid.

Chronically Ill - To qualify for favorable tax treatment for long-term care expenses, a person is considered to be chronically ill if he is unable to perform two of six activities of daily living for at least 90 days or suffers a severe cognitive impairment.

Cognitive Impairment - One of the measurements used to determine eligibility for long-term care benefits in a policy. It is the deterioration or loss of one’s intellectual capacity, confirmed by clinical evidence and standardized tests, in the areas of: (1) short and long-term memory; (2) orientation as to person, place and time; and (3) deductive or abstract reasoning.

Daily Benefit Amount - The specified amount of benefit payable for long-term care services. The dollar amount may vary by service such as $100 a day payable for a nursing home confinement and $75 a day payable for home health care.

Elimination Period - In a long-term care insurance policy, this is a period of time during which no benefits are payable and is sometimes referred to as a deductible. Examples of elimination periods are 15 and 100 days.

Expenses-Incurred - A method under which daily benefit amounts are paid based on the actual expenses incurred for the necessary long-term care service.

Guaranteed Renewable - The renewal provision of a long-term care insurance policy, ensuring that the policy cannot be canceled by the insurer nor can policy provisions be changed without the insured’s consent. Policy premiums, however, may be adjusted upward based on the company’s experience for an entire class of business.

HIPAA Health Insurance Portability and Accountability Act. This federal legislation, enacted in 1996, clarified how long-term care insurance premiums and benefits are treated for income tax purposes.

Inflation Protection Benefit - This optional benefit is designed to help preserve the value of the daily benefit amount. It automatically increases the daily benefit annually on a simple or compounded basis either by a stipulated percentage amount or an index measurement.

Life Insurance-Based Long-Term Care Insurance - This is a form of long-term care coverage where benefits are wrapped inside a life insurance policy. Benefits can be provided for both long-term care insurance and death, with cash values also available for withdrawal.

Pool Of Money - Under a long-term care insurance program, this is a variation on the typical benefit period. Rather than designate a period of time over which benefits can be payable, this concept creates a lump sum of money to be used as needed during a long-term care claim. The claim ceases when services are no longer needed or the lump sum of money runs out.

Triple Trigger - This describes the three ways that an insured will qualify for benefits under a long-term care insurance policy, including assistance with activities of daily living, cognitive impairment, or medical necessity. This definition is not available in tax-qualified plans.

Waiver Of Premium - A policy provision of a long-term care insurance contract that suspends premium payment after a specified period of time during which the insured is receiving policy benefits for

long-term care services. The suspension continues until recovery at which resumption of premium payment is expected.

n this lesson we will discuss the features of a typical long-term care insurance policy, including some optional benefits that a few

insurance companies offer.

The key features of a long-term care policy are the

• Daily benefit • Elimination period • Benefit period

In choosing the amount of the daily benefit, the average daily cost of nursing homes in the insured’s area should be the criterion that is used. Information should be available in writing on the average costs of nursing homes and the specific costs of particular nursing homes in the area. It is also important to visit several nursing home facilities in

the area to eliminate any nursing homes that fall below standards Daily Benefit In some long-term care policies the daily benefit amount is also used to determine the benefit that is payable for other long-term care services, such as home health care. Many policies use a percentage of the daily benefit amount to determine the benefit amount that will be paid for home health care or adult day care, which generally costs less

than the cost of a stay at a nursing home For example: If Miss Smith chooses a $100 a day daily benefit amount for nursing home care, the policy might provide that it will pay for 50 percent of this amount, or $50 a day, for home health care services and 25 percent, or $25 a day, for adult day care. Different policies have different percentages, which allow flexibility when the

insured selects a policy Some policies offer daily benefit amounts without regard to the service needed. Thus, Miss Smith might choose a daily benefit amount of $100, and this amount will be paid regardless of the service that Miss Smith needs, whether it is custodial nursing home care, home health care, adult day care, or some other long-term care

service

The daily benefit can be paid in one of two payment methods. Under the first method, the insured is paid the full daily benefit amount regardless of the actual charges for the long-term care services he or

she receives For example: If a $75 a day benefit amount was selected, and home health care costs $60 a day, the insured receives the $75 a day

amount Under the second method, the insurance company pays the actual charge incurred for long-term care services up to the daily benefit

amount For example: If a $75 a day benefit amount was selected, and the insured requires home health care that costs $60 a day, the policy pays $60 a day. If the insured was in a nursing home that cost $80 a day, he or she would receive the $75 a day benefit amount and would

be responsible for the additional $5 a day Some long-term care policies allow an optional benefit to have the

daily amounts indexed annually to offset the effects of inflation Elimination Period The elimination period is the amount of time that will pass between the time the insured first qualifies for the benefits and when the policy

is required to start paying benefits For example: Assume Mr. Jones purchases a policy with a 20-day elimination period. If Mr. Jones meets the qualifications for benefits on June 1, the insurance company is not required to start paying

benefits until June 20 If Mr. Jones selects a zero-day elimination period, the policy starts paying benefits on the day he meets the qualification for benefits. The elimination period can be looked at in much the same way as adeductible, because it represents the amount of long-term care

expenses that the insured is expected to cover Benefit Period

The benefit period refers to how long benefits are paid to the insured. There are generally two different types of benefit periods that

most insurance companies offerThe first type of benefit period is the more traditional benefit period. It pays benefits for a specified number of months or years. These policies typically have benefit periods that range from 12 months up to 6 years. Many states require a minimum benefit period of either 12

or 24 months There are also policies that have an unlimited benefit period, where the insurance company will pay benefits for as long as the insured needs covered long-term care services. This unlimited benefit period is a popular choice even though it has higher premiums in comparison

to policies with shorter benefit periods The second type of benefit period is not measured in days, but instead is measured in a dollar amount. This is sometimes called a “pool of money concept” and has become more popular in recent years Instead of a specified maximum period of time over which benefits are paid, benefits are paid from a single lifetime maximum number of dollars. Benefits are paid for as long as this maximum amount lasts,

regardless of the time period The lifetime maximum is calculated by multiplying the selected daily benefit amount by a specified number of days. The number of days that might be selected could be 1,000, 2,000, or 3,000, or quite possibly 365, 730, or some other multiple of 365. An example of a lifetime maximum might be a $100 a day daily benefit amount multiplied by 2,000 days to reach a maximum “pool of money”

amount of $200,000 Pool Of Money Plans Pool of money plans pay expenses as they are incurred in an amount up to a daily benefit amount, much like the second method of daily benefits described earlier. Because of this, expenses that are below the daily benefit amount will likely mean a longer payout period than the number of days used to calculate the lifetime maximum. Now let’s go over some other provisions that may be part of some long-

term care policies

Benefit Coordination Long-term care policies that pay benefits based on the amount of expenses incurred sometimes coordinate their policy benefits with benefits under Medicare. Medicare coordination is generally a dollar for dollar offset. For example: If a service covered under a long-term care policy costs $120 a day and Medicare reimburses $100 a day of the cost, the long-term care policy will pay the $20 a day difference. Policies that pay a daily benefit amount regardless of expenses

incurred do not coordinate benefits with Medicare Renewability Another important provision in a long-term care policy is therenewability provision. The minimum renewal provision called for by the National Association of Insurance Commissioners (NAIC) is

guaranteed renewability Guaranteed renewability means that the policy may not be cancelled except for nonpayment of premiums. Also, policy provisions may not be altered in any way unless the alteration results in better coverage for the insured. That being said, insurers do possess the right to

impose a rate increase on a specific class of long-term care business The term “class” means a specific policy or policy series. State insurance departments will allow reasonable and justifiable rate increases on a policy form because it affects all purchasers of the

product Definition of Disability The definition of disability provision is the policy feature that determines whether or not a policyholder qualifies for benefits. Until the passage of the Health Insurance Portability and Accountability Act of 1996, which clarified the rules regarding the taxation of long-term care policies, many long-term care policies used what was called a “triple trigger” to determine whether the insured qualified for benefits. Even after the passage of this legislation, some companies

still use the triple trigger in their new policies Under the triple trigger the insured qualifies for benefits in one of

three ways. These three ways are

1. The inability to perform a certain number of listed activities of daily living, or ADLs 2. Suffering from a cognitive impairment, such as Alzheimer’s disease or Parkinson’s disease 3. A medical need, as prescribed by a physician, for long-term care services

Most Commonly Listed ADLs The most common way that a policy owner qualifies under the triple trigger is the inability to perform a certain number of listed ADLs. The most commonly listed ADLs are bathing, dressing, eating, toileting, transferring (mobility or transporting), continence, and

taking medicine A policy usually provides a list of which ADLs are considered. This list may have as few as four different ADLs or it may have as many as seven different ADLs. Also, some insurance companies may combine two ADLs into one, such as combining bathing and dressing

into one ADL The insured must have the inability to perform a certain number of ADLs, and generally a minimum of two ADLs must be lost, although some policies require the loss of three ADLs while others require the

loss of only one ADL to qualify for benefits Health Insurance Portability and Accountability Act of 1996 Instead of the triple trigger, policies issued after the passage of the Health Insurance Portability and Accountability Act of 1996 require the insured to be “chronically ill” in order to receive the tax advantages afforded in the legislation. A person is considered

chronically ill if he or she meets one of two different sets of criteria The first way an insured is considered chronically ill is if he or she isunable to perform, without substantial assistance from another individual, at least two out of six ADLs due to loss of functional activity. This inability to perform the ADLs must last at least 90 days. The six ADLs that are considered are eating, toileting,

transferring, bathing, dressing, and continence “Chronically Ill”

The second way an insured may be treated as chronically ill is if the insured requires substantial supervision to protect himself or herself from threats to health and safety due to a severe cognitive

impairment Module 4 contains a more thorough discussion of the taxation of long-term care policies and also a more thorough discussion of the

Health Insurance Portability and Accountability Act of 1996 Long-term Care Benefits Most comprehensive long-term care policies cover the long-term care

services described in Module 2. To review, these services include

• Skilled care • Intermediate care • Custodial care • Home health care • Home care • Adult day care • Respite care • Hospice care

Other Policy Provisions There are other provisions that may be included in a company’s long-term care policy. A waiver of premium provision is designed to eliminate the burden of premium payments by the insured while the

policy is paying benefits Under this provision, if the insured is eligible to receive benefits from the policy, the policy’s premium is waived. If the insured recovers to the point where he or she is no longer eligible for benefits, premiums

are again required to keep the policy in force Some waiver of premium provisions will waive the premium for the rest of the insured’s life if the insured is ever in a nursing home for at

least 90 consecutive days

A restoration of benefits provision will restore claim days that have already been used if the insured is claim-free for a certain amount of

time, such as for six or twelve months For example: Assume Miss Jones has used up two of the three years of the benefit period in her policy. After using up the two years, she recovered to the point where she was claim-free for one year. In this case her entire three-year benefit period is restored, as if she had not

made any claims on her policy Under a cognitive reinstatement provision, if a premium payment was missed due to forgetfulness or a cognitive impairment, reinstatement of the policy can be made up to several months after the

policy would normally have lapsed Note that the payment of any back premiums is required to reinstate the policy. This type of provision may also include a third party notification provision, where an individual other than the insured, such as a family member, receives lapse notices. This way the family member can inquire about the missed payment and keep the policy in

force Some companies offer discounted premiums if spouses apply for long-term care insurance together. This discount is generally 10 to 15 percent. Most companies that offer a spousal discount will let one spouse use the discount even if the other spouse is turned down for

insurance because of health reasons Some long-term care policies have the optional benefit of inflation protection. Inflation protection can be an important benefit considering the rises in health care costs that have occurred over the

last 10 to 15 years The types of inflation protection that are available vary, with some provisions consisting of a flat percentage of increase in benefits from year to year, and other provisions basing the increase upon the consumer price index. Generally, increases to the daily benefit are not

available once the insured has reached the age of 85 Another option that is sometimes used to provide protection against

inflation is a guarantee of insurability option

Under the guarantee of insurability, the insured has an option to increase the daily benefit level by $25 a day or even $50 a day every two to three years. These increases in benefits do not require renewed

evidence of insurability and also require no health questions However, the increase in a daily benefit will generally cause the premiums to rise based on the company’s rates and the attained age of

the insured Combination Policies Finally, some insurers offer long-term care products that combine life insurance policy features and long-term care policy features. These policies are generally single-premium policies that provide a death benefit and also provide a “pool of money” long-term care policy with a pool of money that may be up to twice the amount of the

policy’s death benefit These policies were developed to overcome the objection of some potential purchasers who did not want to pay premiums on a long-term care policy and then never make a claim against the policy

because they did not need long-term care services before their death

he key design parameters of a long term care insurance policy are daily benefits, elimination periods, and benefit periods.

Recommendation of these policy elements is based on the agent’s own research combined with the financial analysis completed on each

prospect Daily Benefits The cost of care in a nursing home is generally the criterion used to initially choose the benefit amount. Information should be available in written form on the average cost and specific costs of nursing homes in a given area. A visit to several nursing home facilities is also important in eliminating those that fall below standards. In some policies, the daily benefit amount selected is used to determine the coverage payable for other long term care services such as home health care. Often a percentage of the daily benefit amount can be chosen to dictate the amount paid for home health care and

adult day care, two reimbursements that are usually less than the cost of staying in a nursing home. For example: If your client has chosen a $100 a day benefit based on local nursing home costs, the policy may pay 50 percent of this amount (or $50 a day) for home health care services and 25 percent ($25 a day) for adult day care that is needed. These percentages can vary, allowing flexibility in selection. Home health care can be 50, 75 or even 100 percent of the daily benefit amount selected for nursing home confinement. In some cases, a higher benefit level can be elected for home health care instead of a skilled nursing facility. Many policies offer level daily benefit amounts without regard to the service needed. For example: If an individual chooses a daily benefit of $100, the coverage, whether it is for a nursing home stay, home health care, adult day care, or other covered services, would be $100 a day. Other plans allow a selection of individual daily benefit levels for primary services. The daily benefit amount can be paid two different ways:

1. Pay the full daily benefit (or appropriate percentage) selected regardless of the actual charges for long term care services provided, or 2. Pay the actual charge incurred for long term care services that are provided up to the daily benefit amount selected.

There is a difference, and the policy language should be reviewed to determine how the daily benefit is paid. The first option pays the insured the specified amount elected under the policy for long term care services provided regardless of the actual cost (higher or lower) of the services rendered. For example: If an insured receives home health care at a cost of $60 a day, the selected daily benefit amount of $75 is paid to the insured regardless of the actual cost. The second option pays either the daily benefit amount elected or actual cost if it is lower than the daily benefit. Using the same example, if the selected daily benefit amount is $75 and the actual cost for home health care is $59, the policy will pay $59 since the actual cost is lower than $75. If the actual cost is higher than the daily benefit amount, the policy will pay $75, the maximum daily benefit amount selected.

Daily amounts should also be indexed annually to offset the effects of inflation. This is usually an optional benefit for the policy and will be discussed below. Zero Day Elimination Periods The zero day elimination period remains one of the best deals in the long term care insurance market. When balanced against a policy that offers reasonable benefits, the zero day elimination period has so far withstood the test of time. A zero day elimination period allows benefit payments to begin immediately and many insurers have not yet experienced the anticipated adverse claims. A word of caution to anyone considering the zero day elimination period - a few insurers have experienced adverse claims. If it is sold in combination with a remarkably easy qualification for benefits provision, the results will undoubtedly be high claims and equally high rate increases. The downside is for those policyholders who are now in their late 60s or early 70s (when the likelihood of long term care increases). If they have had the policy for some time but not yet made a claim, they will soon be facing a rate increase which may render the policy unaffordable. What kind of service does the agent and the industry provide when a policyholder has to drop the plan or significantly modify the coverage at a time when the product is most needed?If you will recall, this happened with health insurance and it almost brought us a national health insurance program run by the government. The disability insurance industry expanded benefits and reduced prices in the early 1980s and has been paying for it in steady losses every year since 1986. The result is a marketing atmosphere that is suffocating sales. So, use caution when recommending the zero day elimination period. Benefit Periods There are two types of benefit periods available today. The first type is the traditional benefit period where policy benefits can be paid within a specified number of months, or years. Typically, 12 months, 2, 3, 4, 5 and 6 years are examples of benefit periods. Policies can also be sold with an unlimited benefit period - as long as the insured needs covered long term care services, benefits will be paid. This is a popular benefit period despite its higher cost in comparison to the potential payout with shorter benefit periods. Historically, the choices in benefit periods began with a six-month maximum introduced in CNA’s first long term care policy in 1965.

Today, many states require a minimum of 12 to 24 months for payout of benefits. The second type of benefit period available is not measured in days, months or years, but rather in dollars. This is called a “pool of money concept” and is becoming popular among insurers, agents and consumers. Rather than specify a period of time, benefits for long term care services are paid from a single lifetime maximum number of dollars. Benefits are payable for as long as the maximum amount lasts, regardless of the time period. The lifetime maximum amount is calculated using the daily benefit selected multiplied by a specific number of days elected by the person buying the coverage. The specified days may be 1,000, 2,000, 3,000 or 365, 730, 1,095, 1,460, etc. The following are examples of the lifetime maximum: $100/day × 2,000 days = $200,000$100/day × 1,460 days = $146,000 It can be compared to purchasing a lump sum amount except the benefits will be disbursed over an unspecified period of time instead of all at once. Pool of money plans pay expenses as they are incurred in an amount up to the daily benefit level (see #2 in the daily benefit explanation above). Thus, expenses that are consistently below the daily benefit amount would likely mean a longer payout period than the number of days used to calculate the lifetime maximum. The pool of money concept integrates the benefits so the prospect does not have to choose a benefit percentage for home health care or other long term care services. When the need for long term care arises and it is a covered service, the payout will come out of the lifetime maximum pool. This flexible approach allows consumers to generally receive the type of long term care they wish in the setting they prefer. Benefit Coordination Insurers who pay daily benefits based on an expense-incurred method must coordinate their policy benefits with Medicare. Those insurers that pay the policy daily benefit regardless of the long term care expenses incurred do not need to co-ordinate with Medicare.

Medicare coordination is easy to explain in the pool of money concept where dollar for dollar offsets can be achieved. If a service, for example, costs $120/day and Medicare reimburses $95.50/day of the cost, the policy would pay the additional $24.50. As noted earlier under the description of “daily benefit,” read the policy language closely, since how the policies pay benefits also affects whether benefits are coordinated with Medicare. PRODUCT DEFINITIONS Renewability Once the agent has recommended the basic policy selections to the insured, careful review of the various policy provisions is necessary. The first discussion should be about renewability. This policy provision is usually found on the face page of the policy itself. The minimum renewal provision called for by the NAIC is guaranteed renewability. This means that the policy cannot be arbitrarily canceled (except for non-payment of premiums) and any policy provisions cannot be altered in any way except for the betterment of provisions. However, insurers do possess the right to impose a rate increase on a specific class of long term care business. The term “class” consists of a specific policy or policy series. State insurance departments will allow reasonable and justifiable rate increases on a policy form since it affects all purchasers of this product. Nearly all comprehensive long term care policies have this type of renewal provision. This makes it easy to compare this product feature. To my knowledge, there are no non-cancelable renewable policies (i.e., the premium is guaranteed for a specified period of time) for long term care. Given the recent troubles of the non-cancelable renewable provision in disability income policies, it is not likely to be a policy feature offered in the near future. Be wary of policies not written on a guaranteed renewable basis. Policies that pay for a specified service rather than taking a more comprehensive approach may offer renewability on a conditional basis. This type of renewal, while keeping premium costs low, also gives the insurance companies the opportunity to refuse to renew the policy form based on poor claims experience. Policies that provide benefits for nursing home coverage only or for home health care could contain this type of provision.

Definitions Of Disability This product feature dictates how a prospect qualifies for benefits. The definitions of disability, are the key measurements of a long term care policy. Until the passage of HIPAA, long term care policies utilized a “triple-trigger” means of qualifying for policy benefits. This approach gave the insured three possible ways of qualifying for benefits. The insured’s ability to function independently is the framework for benefit eligibility. The three definitions for benefit eligibility are:

1. Inability to perform a certain number of activities of daily living (ADLs). 2. Suffering from a cognitive impairment, such as Alzheimer’s or Parkinson’s disease. 3. A medical necessity, as prescribed by a physician, for long term care services.

This triple-trigger feature allows the insured to qualify for benefits by meeting the requirements under any one of these definitions. The primary definition is the inability to perform a certain number of routine activities of daily living (ADLs). The most common activities of daily living are bathing, dressing, eating, toileting, transferring (mobility or transporting), continence, or taking medicine. Insurers generally list and define these qualifying activities of daily living in their policies. The total number of required activities can range from four activities to all seven activities. Some insurers combine bathing and dressing into one ADL called personal care. To qualify under the primary definition, the inability to perform a certain number of ADLs, usually a minimum of two must be evident. Thus, this definition was usually written as “the inability of the insured to perform two or more activities of daily living.” Some insurers required the loss of three, while a few insurers required the loss of only one ADL to activate a claim. The requirement that an insured lose three or more ADLs was strict and undercompetitive, while the loss of only one activity made it too easy to qualify for benefits. Insurers marketing the latter were, in effect, competing by policy liberalization, and were probably making

the same mistake the disability insurance industry did in policy liberalization. The ease of qualification could lead to higher than expected claims experience and necessitate the application for an increase in policy rates. In my opinion, this was a risky definition (remember - there was still very little claims experience in long term care) and given the experience of the disability insurance industry, should not have been done. This is a great definition of disability to use during a sales interview, but the client could be subject to a heavy rate increase later that could leave him in a vulnerable position if premium affordability becomes an issue. The loss of two ADLs may be liberal enough if bathing and dressing are among those activities listed. According to UNUM, a long term care insurer, in over 85 percent of long term care cases, bathing and dressing are the first ADLs requiring assistance. Think about it. Getting in and out of the bathtub can be dangerous because of a slippery surface. A fall can immobilize an already frail person or compound problems for someone who already has health problems. Likewise, dressing requires being somewhat limber when bending down to tie shoelaces or simply buttoning a shirt. Arthritis can significantly hamper one’s ability to get dressed. The insurers that combine bathing and dressing into one ADL (personal care) were trying to avoid the easier qualification of a separate listing. Most insurers kept them apart and, as such, the loss of these two ADLs first triggers benefit payments quicker than the other activities. One of the quirks of aging is that the ability to perform activities of daily living is lost in the reverse order in which each activity is learned. The last activity a parent lets a child do independently is bathing. The chances of an accident are too numerous to mention. Dressing, such as buttoning a shirt or tying shoelaces, also requires a parent’s help for some time. Yet these same two activities, last learned, are the first activities lost for the elderly. The importance of how the inability to perform activities of daily living is defined has prompted much speculation. Initially, most companies preferred to take a “black and white approach” to claims adjudication. An insured was either independent, needing no assistance, or dependent, requiring assistance. The problem was that a number of people received long term care assistance because of an activity which they could still occasionally perform themselves. A person could put on clothes without assistance but needed help tying

shoelaces. This is not independence - this person cannot leave the house without shoes (although one could buy shoes without laces). But is it truly dependence since other articles of clothing can be negotiated?There is an interim level of care between dependence and independence which most insurers were slow to recognize. However, when some insurers enlisted long term care providers to help them understand the nature of a long term care claim, it became evident that there was a “partial” gap through which a number of claims were falling. Partial assistance with certain activities of daily living was more commonplace than believed and, as such, should generate a partial claim payment. Similarly, it took disability income insurers many years to acknowledge the importance of residual disability. Residual disability pays a portion of the total monthly disability benefit upon the insured’s return to work and is based on the percentage of loss of earnings incurred as a result. Partial assistance, the middle ground between independence and dependence, was introduced into a few long term care policies prior to the enactment of HIPAA. The federal law identified this claim trend as “standby assistance,” a term insurers had to define in the new “tax-qualified” policies. (See Lesson 4 for more details on “standby assistance.”) Its appearance in HIPAA indicated the importance of including this type of care in long term care policies. The second definition is usually an alternative to the primary definition. One of the most severe disabilities affecting the elderly is Alzheimer’s disease, an organic brain disorder. As millions of Americans battle this difficult disease, the condition poses a difficulty for insurers using the “ability to perform ADLs” test. Under the primary definition of disability, it is necessary for the insured to suffer a continuing inability to perform two or more ADLs. Alzheimer’s patients may enjoy days they function normally, and are thus disqualified from satisfying the continued loss of an ADL requirement. In addition, as part of the NAIC Model Act, it was mandated that insurers cover Alzheimer’s disease, Parkinson’s and other organic brain disorders that occur after the policy has been purchased. To do this, a second definition of disability, cognitive impairment, was developed where the insured automatically becomes eligible for benefits. Policy language for this definition may read: “Cognitive impairment means the deterioration in or loss of the insured’s intellectual capacity and may include exhibition of:

1. abusive or assaultive behavior; or 2. poor judgment; or 3. bizarre hygiene or habits, which requires continual supervision to protect the insured or others.

Cognitive impairment is measured by clinical evidence and standardized tests and is based on the insured’s impairment as indicated by loss in the following areas:

1. his/her short or long term memory; or 2. his/her recognition of who or where he/she is, or time of day, month or year; or 3. his/her deductive or abstract reasoning.”

There was no universal definition of cognitive impairment recognized by insurers so terminology differed from policy to policy. Recent breakthroughs in the research of brain disorders will help future victims. A gene believed to cause 40 percent of all Alzheimer’s cases has been identified as “apo E4.” A genetic test is available that will help solidify the diagnosis of Alzheimer’s in people who are starting to show signs of dementia. This will help to qualify an individual who will need long term care assistance for benefits. Nearly 4 million Americans have Alzheimer’s disease and it is believed that without a cure or method of prevention, that number will grow to 14 million by the middle of the 21st century. Approximately 10 percent of people age 65 years or older are affected by the disease, rising to 47.2 percent of those 85 or older. This explains the government’s insistence in including a special qualifying definition to recognize conditions like Alzheimer’s disease. The onset can often be long after the policy is purchased, and a means of benefit qualification was needed to be sure long term care expenses needed to treat the disease were covered. Many of these individuals end up in some type of long term care facility since family caregivers find it difficult to care for loved ones with this condition. While virtually all plans use the first two definitions to qualify an insured for benefits, a growing number of insureds needing long term care were not meeting these definitional requirements for policy payment. If, according to a doctor, the insured needs long term care

services, but does not meet either of the first two definitions, what happens? Providers assisting insurers with product design pointed out that this situation was more common than believed. Providers helped develop a third definition under which insureds could qualify for long term care benefits. This gave the newest long term care plans three methods of benefit eligibility. For those policies with the triple-trigger definitions, this third method of qualifying is called medical necessity. This definition allows eligibility for benefits to be established if the need for long term care services is substantiated by a physician, usually the insured’s own physician. It is, in essence, a fall back provision if the need for long term care services is warranted, but neither the first nor second method of qualifying for benefits can be achieved. Under “medical necessity,” if an illness or injury occurred and it necessitated the use of long term care services, verified by a physician, benefits were payable. Some insurers required that the medical condition precipitating the need for long term care be the same as the original injury or illness. Other insurers required the physician to certify the need for the care. Continuous verification of the long term care need from the physician was necessary for benefits to continue under the medical necessity definition. The HIPAA legislation effectively disposed of this third method of benefits qualification. Tax-qualified plans are defined by two benefit triggers - loss of two of six ADLs and cognitive impairment. This was a substantial setback to provider-aided advances in long term care policy design. (See Lesson 4 for a more in-depth discussion of this change.) These definitions were a fair and flexible approach in qualifying for benefits and seemed to satisfy most insurers and insureds. These “triple-trigger” policies were certainly far more generous in qualifying for benefits than earlier policies. The HIPAA legislation has rendered these plans outside the definition of “tax-qualified” plans. But these policies are still available, although they come with “warning labels” as to possible adverse taxation. At this point, the future of the “medical necessity” trigger lies in doubt. LONG TERM CARE BENEFITS

Lesson 2 identified the types of long term care services offered today. Now let’s see how the following benefits are treated in long term care policies:

skilled nursing car� intermediate car�custodial car� home health car�home car� adult day car�respite car� hospice car�

Most comprehensive policies cover these services in some fashion. Look for references to them and their definitions in every policy. Skilled care - Requires the service of trained medical personnel with the authorization of a physician. Skilled care can be administered in a skilled or intermediate nursing facility, a hospital, at home, or in an assisted living facility. These various settings may not be in every policy and actual reimbursement can vary based on where the services are rendered. Intermediate care - Requires the skill of trained medical personnel on a less frequent basis than skilled care, and with the authorization of a physician. Intermediate care is generally administered to patients who need medical care or therapy to resume their ADLs. In a skilled or intermediate care nursing facility, the nursing home daily rate would likely be paid. Home health care, adult day care centers, and assisted living facilities would also receive reimbursement, possibly at a different payment level. Custodial care - Primarily assisting with ADLs, this level of care does not have to be authorized by a physician or require trained medical personnel. Most often custodial care is received at home and delivered by qualified home health aides. If care is received in a custodial care facility, the nursing home rate would likely apply. Reimbursement at a different level for care received in an assisted living facility is also possible. Home health care - Medically necessary skilled or intermediate care with the authorization of a physician and performed by trained medical personnel. Benefits could be paid as a percentage of the nursing home daily benefit, at the same level, or a larger reimbursement depending on the complexity of the product.Home care - This is custodial care - assistance with ADLs and household chores. Benefits could be paid as a percentage of the nursing home daily benefit amount, at the same level or a greater amount. This care is usually delivered by a home health care aide or possibly a licensed practical nurse.

Adult day care - This long term care service is considered custodial care or intermediate care provided in a licensed adult day care facility. Caregivers who work during the day will find this a convenient alternative. The policy may have a specific rate for adult day care reimbursement or could pay from the pool of money at rates up to the daily benefit level. Respite care - This benefit provides temporary relief for those in a caregiving role by hiring temporary help to care for a dependent adult. Depending on the policy language, more than one temporary helper can be hired at the same time. This help is reimbursed up to the limits of the policy. Typically, the policy pays for a specified period, such as “up to 21 days” for temporary help. The substitute can most often be obtained from a local home health care agency. Hospice care - Many long term care policies provide some benefit for hospice care, a program primarily designed for pain and symptom control for terminally ill patients. Benefits could be paid as a percentage of the nursing home daily benefit, at the same level, or a larger reimbursement depending on the complexity of the product. In addition, an amount may be paid for bereavement counseling for other family members. Medicare also provides some assistance for bereavement, and policies paying daily benefits on an incurred-expense basis may involve coordination with Medicare. Some policies place a six-month benefit limitation on this type of care coverage. These are the most common services and reimbursement structures in long term care today. It is vitally important to be as accurate as possible in choosing the daily benefit since virtually all benefit services and reimbursements are based on this selection. It is important to do your homework in the areas of long term care you plan to market so that the proper recommendations are made. Alternate Plans of Care The focus of early long term care policies was on reimbursing the costs of qualified nursing home stays. Later, home health care was added as a coverage feature. But long term care services today are delivered in a variety of settings, and long term care insurance policies have responded accordingly. Because of the number of potential facility settings, most long term care policies today contain a provision which allows claim payments for long term care services delivered outside the scope of the usual

policy definitions. Most insurers recognize that most of these “non-covered” services are less expensive to cover than the services defined in the policy, making it easier for them to provide a means for the insured to receive this care without penalty (withholding of benefit payments). Several examples are described below: A person confined in a skilled nursing area of a nursing home was transferred to a “home for the aged” type facility. This type of facility was not defined in the long term care policy as a setting for policy benefit reimbursement. Medical documentation received from the physician substantiated the need for consistent intermediate care and some skilled care. The “home for the aged” staff verified that the services rendered were similar to those received in a skilled nursing facility. Benefits were paid under the policy. A 71-year-old man has a medical condition where the pressure of fluid builds up inside his head, causing violent hallucinations and behavior management problems. He is also legally blind. His wife could not effectively care for him on a daily basis. While a nursing home confinement was recommended, his wife argued for an alternative that would allow her husband to receive care at home, feeling it would be better for him. She would do as much of the caregiving as possible but would need some help. Working together with family members, the physician and a home health care agency developed a schedule for where he would have adult day care twice a week, respite care for his wife, and home care as needed. The result was a lower reimbursement - $38 per day for adult day care rather than the $105 a day for a nursing home, and no pressure on the spouse for full-time care. The spouse requested very little respite care or home care assistance - two days of adult day care per week seemed to be enough. The idea of basing reimbursement on the benefit triggers, rather than more narrowly defining the types of services and facilities for which payment is eligible, leads to easier claims adjudication and the recognition that claims will vary considerably depending on the individual and circumstances. Those who are familiar with disability income claims know that every case is different even if two people suffer a similar ailment. People adjust differently to adverse medical circumstances and what works for one may not necessarily work for another. Long term care insurers have been contracting case managers to assist in fully evaluating each claim, making recommendations based on the most effective treatment at the most reasonable cost, taking into account the wishes of the family, and the circumstances which would either speed

recovery or make one more comfortable. Not all of this can be defined in the policy language, so carriers include “alternate plans of care” to cover other, non-contract options. Under this option, a number of assisted living facilities like adult congregate living facilities (ACLFs) are recognized by the insurer as a setting for receiving long term care services. Whether it is a “home for the aged” or the most expensive nursing home in the area, alternate plans of care can encompass the entire range of services. Growing at a phenomenal rate, the variety of long term care services and facilities is expanding far beyond the capacity of an insurance policy to include the latest service or type of facility. The terminology for the policy option, alternate plans of care, alleviates the burden to keep up with the trends on paper. Insurers are always looking for ways to improve coverage, and careful monitoring of long term care trends is constant. An agent speaking today with people in their 50s may find that they are involved in a caregiving experience. This “hand on” experience has likely meant a difficult emotional and financial situation for the caregiver. As a result, those who have cared for someone at home know the problems associated with this type of long term care scenario. These individuals are more likely to inquire about the variety of facility options available in the policy. They do not want to be the same burden to their children. The inclusion of policy language that offers care in a number of settings will cater specifically to these individuals. Insurers have begun recognizing that many people receive care from a family member or friend. As a result, benefits like caregiver training have been incorporated into the basic plan design. This feature pays a set amount (a multiple of the daily benefit) to provide training lessons for the informal caregiver. Since circumstances often dictate that family or friends adopt the caregiver role, this benefit can be especially helpful. In addition, there are policies that pay benefits when a non-licensed individual is providing the caregiving. This is often in the form of household chores, but may involve duties such as administering medication. The non-licensed individual cannot be a family member nor can he be living in the household. A neighbor or friend, for example, would qualify and benefits would be paid. OTHER POLICY PROVISIONS Waiver of Premium

This policy feature is designed to eliminate the burden of premium payments by the insured during the time of claim. Depending on the insurance company, waiver of premium can begin on the first day the claim commences (which may be immediately under a zero day elimination period) or, for example, after 90 days. Some insurance companies will waive the premium after a stipulated period of time in a nursing home. The best waiver of premium provision is the premium that is waived after the elimination period (even zero day). If care is essential, why add further to difficulties by requiring premium payments? Read this policy feature carefully, however, as many insurers will only waive premiums during a nursing home confinement. This means receiving home health care does not qualify for the waiver of premium benefit. Other insurers have enhanced the waiver of premium feature. For example: One insurer “rewards” those claimants who are in a nursing home for at least 120 days, with a lifetime waiver of premium, meaning that no further premium payments need be made even if the insured recovers and resumes the normal activities of daily living. Restoration of Benefits When an insured selects a benefit period other than “unlimited” or “lifetime” periods, this policy provision will restore claim days already used. If the insured has a claim, then recovers, and is claim-free for a set period (6 to 12 months), the claim period can be fully restored. For example: An individual with a three-year benefit period uses the entire period for a claim, eventually recovers and goes treatment-free for a year. The three-year benefit period may be restored in whole or in part for the individual. This concept is popular with true benefit period policies. There is generally no corresponding provision for the “pool of money” benefit. Bed Reservation Benefit A person in a nursing home, assisted living facility, or a hospice facility may need to be hospitalized for several days due to a medical condition. If the facility he lives in charges to hold the bed until his return, the policy can reimburse the insured up to a specific number of days, usually with a maximum limit of 21 to 31 days. This allows for continuous care and ensures that an insured will have a bed at the same facility, providing a consistency of treatment that is important.

Otherwise, the insured runs the risk of having to change facilities if no beds are available after the hospital stay is completed. Cognitive Reinstatement Traditionally, insurance policies, by law, have a 31-day grace period beyond the premium due date. This allows the insured to make a late payment without any interruption or change in the coverage. Long term care policies have extended grace periods. If it is satisfactorily demonstrated that the missed payment was due to forgetfulness or even a cognitive impairment, reinstatement of the lapsed policy can be made several months after policy lapse. The payment of back premiums is required to reinstate the policy. This allows individuals a maximum range of flexibility under which to continue the policy in good faith. This provision may also be written in conjunction with a third party notification provision under which an individual, often a family member, receives lapse notices. This ensures that another individual can inquire about the missed payment and keep the policy in force. Pre-Existing Conditions There are situations that are specifically excluded from claims consideration under a long term care policy. Most states require that a complete list of policy exclusions, including pre-existing conditions, be displayed on any sales material that is published. A pre-existing condition is one that is not disclosed on the policy application and for which the person received treatment or medical advice within a specified period of time (usually six months) before the policy went into effect. This means that if the individual was aware of a medical condition and treatment or advice was sought in the months prior to obtaining the long term care insurance and did not disclose this condition on the application, it is considered pre-existing and there is no coverage. If the pre-existing condition is disclosed on the application and the policy is approved with or without restriction, it is no longer considered a pre-existing condition. Other more common exclusions from coverage are:

1. War, or act of war, declared or not declared. 2. Intentionally self-inflicted injury or attempted suicide. 3. Injuries sustained while attempting to commit or committing a felony. 4. Services rendered for treatment of drug, alcohol or chemical dependence. 5. Non-organic brain disorders. (Alzheimer’s is an organic brain disorder.)

6. Care covered by any state or federal workers’ compensation, employer’s liability or occupational disease law. 7. Care provided by a member of the insured’s family. 8. Care received for which a charge would not have been assessed except for the presence of insurance, such as a free service provided by a church organization for which no obligation to pay would be the normal course of affairs. 9. Care provided outside the United States, U.S. possessions or Canada. 10. Care provided free of charge in a federal governmental facility, such as in a Department of Veterans Affairs facility.

Each policy may have other exclusions and should be evaluated on its own merit to see if it is legitimate. Care Advocates/Coordinators Today’s long term care policies are doing more to provide education for those needing care and (especially) their families. The need for long term care services is often a difficult decision. Moreover, the care itself may be complex, with a number of health professionals participating in the delivery of these services. Many policies now reimburse the consultations a family and claimant have with a qualified professional like a registered nurse or social worker. A specific claims counselor coordinates claims. Fees for program counselors that furnish information on a number of aging issues (even in advance of a claim) may be reimbursed. While not potentially significant in cost to the insurer, these programs are valuable for the insured and family and can help to ease the burdens of long term care decision-making. Spouse Discounts Many companies offer a 10 to 15 percent discount if both spouses apply for long term care insurance. The reasoning behind this offer is a clear relationship between the amount of time spent in a nursing home and marital status. In 1995, only 30 percent of noninstitutionalized older persons lived alone (7.6 million women, 2.3 million men). The majority of the 70 percent not living alone were living with a spouse (77 percent of women, 48 percent of men). Most companies who offer this provision will let one spouse keep the discount even if the other is turned down for coverage because of health reasons. Policy Upgrades Although most companies do not state it in the policy, these carriers offer improvements in coverage than can be added retroactively to the

policyholder’s current coverages. In most cases, there is no charge to do this. Other states require a premium although evidence of medical insurability is not required. This helps the insurer by having the policy replaced by newer plans and better benefits. For policyholders, it is a simple way to keep the policy up to date without changing carriers. If clear direction is ever received from the Treasury Department regarding the taxation of long term care policies that do not conform to HIPAA legislation, insurers will likely let insureds exchange their tax-qualified plans for other policies if the coverage is improved. For more details on tax-qualified plans, see Lesson 4. Non-Forfeiture Benefits This is a recent addition to many companies’ policies. The NAIC added a mandated non-forfeiture provision to its policies in 1993. This feature requires insurers to preserve some of the policy benefits even if the insured stops paying premiums. HIPAA legislation also addressed the non-forfeiture feature of long term care policies. Today, policies offer non-forfeiture benefits on an optional basis. This feature can add a substantial amount of cost to the overall premium in exchange for having a “paid up” policy should the insured have the plan for a certain period of time and then stop paying premiums. In life insurance, after a certain number of years, the premiums paid have achieved some ownership or vesting in the policy. In long term care, the insured can elect to take a paid-up policy where the money paid in has been calculated to refigure the benefit level to allow coverage to continue for the same length of time with the same elimination period at a reduced daily benefit amount. In a “pool of money” concept, the amount of the maximum total benefit is re-figured at either a multiple of the daily benefit amount or the total amount of premium paid for the policy, whichever is greater. This provision ensures that premiums paid have some significance if the insured should decide to stop paying the premium. Otherwise, although the money was paid and the protection was present, the insured has little to show for that investment when premium payments cease. Medical Help Benefit Some policies will reimburse all or a portion of the cost to maintain a medical help system in the home. For some individuals who prefer home to a nursing facility, this is an extra feature that can provide the

necessary emergency means of contacting someone should the need arise. There are numerous stories of people found hours and days after a medical emergency because they were unable to reach a phone to call for help. Premiums The cost for a long term care policy fluctuates between insurers, issue ages, and benefit levels. This makes it difficult to compare premium cost between two plans. For example: Two quotes are ordered from two different insurance companies with the premiums ranging from $1,000 annually for one plan to $1,350 annually for the other plan. The differences in the coverages must be reviewed before recommending the lower premium plan. It may be that the $1,000 plan does not include inflation protection. Or, the $1,350 plan allows the insured to receive care in virtually any setting while the $1,000 plan limits coverage to a nursing facility or in the home. There are some basic assumptions regarding premiums in general. Individuals in their 40s and 50s can expect to pay relatively low premiums for long term care coverage. Typically, this age group will not file a claim for some time. The premiums begin to accelerate each year around age 65. Rates increase dramatically for those buying coverage in their 70s and 80s. The relationship between premium and age underscores the need to plan ahead and consider coverage in pre-retirement years. Since the insurer can increase premiums in the years after purchase, a premium starting out low will be less affected by any change. For example: If a prospect was paying $405 for a policy and the insurance company raised the rates by ten percent, the increase would be $40.50 annually, for a new annual premium of $445.50. If a prospect was paying $1,086, the increase would be $108.60 annually, for a new annual premium of $1,194.60. For a $4,372 annual premium, the rate increase would be $437.20 annually, for a new annual premium of $4,809.20. The chart below illustrates the rate increase relationship.

Premiu� Rate Increas� Dollar Increas� New Premiu�

$405.0� 10� $40.5� $445.0�

$1086.0� 10� $108.6� $1194.6�

$4372.0� 10� $437.2� $4809.2�

In addition to age, other factors can increase the amount of premium:

• Elimination Period - the shorter the elimination period (0, 15, 20 days), the higher the premium. • Benefit Period - the longer the period of time benefits are paid, or the higher the lifetime maximum benefit in a pool of money plan, the higher the premium. • Daily Benefit - the higher the daily benefit, the higher the premium. • Gender - insurers generally charge the same rate for male and females (some states require this), so this is not usually a factor. • Health Risks - some insurers have tiers of risk classification and those applicants with health conditions may pay a higher rate than those who are relatively healthy. • Optional Benefits - if additional coverages such as inflation protection and return of premium are selected, the cost of the policy will be higher.

Earlier policies often had rate bands for certain ages and the premiums automatically went up when one moved from one rate band to another. The grouping of ages were typically 40-49, 50-54, 55-59, 60-64, 65-69 and so on.For example: If a policy was purchased at age 47, the premium would automatically change at age 50, again at age 55, at age 60, and so on. This increase was in addition to any other rate increases the insurer levied based on overall claims experience. The NAIC (and many states) outlawed this rate banding practice for comprehensive long term care policies several years ago. Now, when a policy is purchased, the only rate increases filed by the insurer will be based on claims experience. These increases may happen periodically or they may not happen at all. Policy Review Here is a checklist of questions for reviewing the basic policy design when evaluating a long term care insurance program:

1. What long term care services are covered? Does the policy cover skilled, intermediate care, custodial, home health care and adult day care and respite care? 2. When do benefits start? What elimination period choices are available? 3. How long will the policy pay benefits? How is the pool of money maximum amount calculated? 4. Will the policy pay for care in all settings? Nursing homes, one’s own home, assisted living facilities, adult day care centers?

5. What is the minimum and maximum daily benefit that can be purchased? Is the daily benefit reimbursed on an indemnity or incurred expense basis? 6. How are pre-existing conditions defined? What are the specific policy exclusions? 7. Is the policy tax-qualified? 8. Is the policy guaranteed renewable?

This brief checklist can help you identify the key features of the policy for your clients and ensure that you are keeping up to date with the latest policy trends in the long term care marketplace. In addition, be sure the company for your client is one that has a strong financial rating and some years of experience in this market. Long term care insurance claims may be paid 10, 20 or more years after the policy is purchased. This makes the financial longevity of the insurer that much more important. A recently established consumer long term care insurance shopping service can be an agent’s competitor. It gives anyone the opportunity to make a toll-free phone call to receive information that compares prices and features of the top long term care insurers. Called Long-Term Care Quote, individuals dial 1-800-587-3279 and obtain, after answering some basic questions, a printout of the three best long term care insurance options based on the computer data available. This can serve as a guide to the best policies available. Agents might wish to call to get information on their own lives to see how the service functions. OPTIONAL BENEFITS One of the many tasks of the insurance agent when working with a client is to structure the proper planning program that will specifically meet the individual’s financial and emotional needs. It may mean modifying coverage to suit a budget to pay premium. Or it might mean working around existing financial alternatives already in place. There are times when an agent must look beyond the scope of the basic policy to answer particular needs. During the fact-finding and presentation interviews, the agent will be listening to what the prospect has to say. This feedback will indicate what the client is trying to accomplish in addressing protection against potential long term care expenses. This discourse may require the agent to look beyond the basic insurance plan for additional coverage. The basic long term care policy does a reasonable job of providing comprehensive coverage. There are additional benefits, however, that

can enhance the basic program and tailor a long term care program to an individual’s specific needs. The optional benefits available in a long term care policy are few but are considered extremely important. BASE COVERAGE OR OPTIONAL RIDER? The structure of a long term care portfolio varies from company to company. Tax-qualified plans may have equalized the policy benefit triggers, but the balance of features may vary in location. For simplicity, most plans have loaded most key features in the base plan. But others strip down the base plan to provide minimum coverage at an affordable cost. Then, through the use of optional benefits, the policy can be built with as few or many of the features as the client wants or needs. For that reason, benefits like home health care and alternate care plans may not be a part of the base plan. If not, these extra options must be reviewed thoroughly and the client given the opportunity to add them. Home health care benefits must be offered to a client. While this is a requirement for comprehensive long term care plans, the coverage may not be part of the base coverage. If it is a rider, it is almost essential to add it. Nursing homes still carry a stigma for many adult Americans and less than 20 percent of long term care services, as previously noted, are delivered in this environment. The home is the ideal, if not always practical place, to care for a loved one. Long term care is an emotional ordeal for a family. The decision to have a parent or relative be cared for by someone else is a traumatic one. To take someone from a home they have lived in for 25 years, pack a lifetime of memories and possessions and place them in three drawers and a closet in a nursing facility is often too much. Remaining at home, even under the care of another person, helps the individual retain one’s independence that much longer. This is why home care continues to be the fastest-growing segment of the U.S. health-care industry. In 1998, this market was forecasted to yield nearly 400 million patient visits and to continue this growth at an approximate rate of 20-22 percent annually through the year 2000. There is no reason this growth will not continue at a rapid pace as the population gradually gets older over the next 30 years. Still, agents should be careful about their presentation of home care benefits. While the daily benefit level should be set at least the same

as that reimbursable for nursing home care, a substantial need for home health care may be more costly than a stay in a facility. The more care needed, the more varied the specialists, the greater the number of visits necessary, the higher the daily costs. The policy benefits may not be enough to cover all that is needed, but can reimburse a significant portion of it. There will be more pressure on home health care benefits depending on the future of home care under Medicare. At present, Medicare has capped the amount it will reimburse home health agencies to care for patients, regardless of how sick individual patients are and how much care they need. This means a lot of the sicker patients may not receive the care they need. If they have a long term care policy, they will turn to that for reimbursement. Sicker patients will require substantial care that could prove far more expensive than the policy benefits available. Agents need to discuss this with the client and set the home care benefit as high as possible, based on policy limits and affordability. If offered as an optional rider, the agent must stress its importance during the sales presentation. Many carriers have generally added alternate care benefits to the basic policy provisions. The primary purpose of this feature is to provide benefit reimbursement in non-traditional settings. Assisted living facilities may be the wave of the future. This type of housing provides care between home and a nursing facility. Not all policies offer this as part of basic coverage, but generally have this feature available as an option. With its growth rate and affordable (for now) costs, this is an important facility to have included in the policy. The assisted living residence today allows residents to live independently within a community of others. As such, agents should emphasize its importance in overall long term care planning. It gives clients (and their families) yet another choice to make when the need arises. Having these options available can help to ensure that the best decision will be made on behalf of the chronically ill adult. INFLATION PROTECTION Between 1985 and 1995, nursing home prices increased annually at an average of 9.7 percent. This is significantly higher than the Consumer Price Index, which has consistently been under 5 percent for years. For example: In 1995 general inflation increased by 2.8 percent while nursing home prices moved ahead by 8 percent. In Florida, a quick look at Orange County nursing facilities shows increases between 1993 and 1996. In 1993, the semi-private room

rates for the SunBelt Health Care Center and Palm Garden facility were $87 and $90/day respectively. In 1996, those rates were $106 and $118, growth rates over three years of 21.8 and 31.1 percent in total. SunBelt stayed below the national average annual growth rate, while Palm Garden raised prices at a faster pace. Based on the average cost of nursing homes in a given area, a $100 a day cost today will be $230 a day in ten years at a 9.7 percent growth rate. If the basic policy benefit is not changed, the insured will have just a $100 a day benefit to pay a $230 a day cost. Insurance policies of every type have alternatives in keeping benefit levels from eroding due to inflation. Long term care insurance is no different. The best time to buy a long term care policy, from a premium and an insurability standpoint, is when a person is in his 50s, even though it may be many years before benefits are actually needed. It is very important to consider inflation protection as an optional feature for long term care coverage. One alternative for providing inflation protection is to buy a much larger daily benefit amount than the average local cost of a nursing home at the time application is made. For example: If the current average nursing home rate in the area is $100 a day, the purchase of a $175 a day benefit (the per diem cap under HIPAA) would provide some protection against rising long term care costs for a few years. Of course, the premium would be substantially higher with this example, but if the policy is purchased early on, the cost should be affordable. A better approach is to add an inflation rider that will automatically increase the benefit amount by a specific percentage each year. This percentage, for most companies, is fixed at five percent. The NAIC has required that this option be offered two ways:

1. increases made on a simple basis, and 2. increases made on a compounded basis. This has an effect on both the daily benefit and the premium for this option. The figure below illustrates the effect of the inflation rider for a $100 a day benefit.

Policy Yea�

Daily Benefi� (no inflation�

Simple 5% Inflation

Ride�

Compounded Inflation Ride�

� $10� $10� $100.0�

$10� $10 $105.0�

� $10� $11� $110.2

� $10� $11 $115.7

$10� $12� $121.5

$10� $12 $127.6

� $10� $13� $134.0�

� $10� $13 $140.7�

� $10� $14� $147.7

1� $10� $14 $155.1�

1� $10� $15� $162.8�

1 $10� $15 $171.0�

1� $10� $16� $179.5�

1� $10� $16 $188.5

1 $10� $17� $197.9�

1 $10� $17 $207.8�

1� $10� $18� $218.2�

1� $10� $18 $229.2�

1� $10� $19� $240.6

2� $10� $19 $252.6�

While differences in the daily benefit increases are more obvious in the later years, a couple of dollars difference in the early years can make a substantial difference in the daily benefit. The figure below illustrates the differences in an annual payout based on 365 days.

Yea�5%

simpl�5%

compounde�Annual

Differenc�Cumulative Differenc�

� $10� $100.0� � �

$10 $105.0� � �

� $11� $110.2 $91.2 $91.2

� $11 $115.7 $277.4� $368.6

$12� $121.5 $565.7 $934.4�

$12 $127.6 $956.3� $1890.7�

� $13� $134.0� $1463.6 $3354.3

� $13 $140.7� $2084.1 $5438.5�

� $14� $147.7 $2828.7 $8267.2

1� $14 $155.1� $3697.4 $11964.7�

1� $15� $162.8� $4704.8 $16669.5

1 $15 $171.0� $5850.9 $22520.5�

1� $16� $179.5� $7150.3 $29670.8

1� $16 $188.5 $8599.4� $38270.2

1 $17� $197.9� $10216.3 $48486.6�

1 $17 $207.8� $12004.8 $60491.4

1� $18� $218.2� $13975.8 $74467.3�

1� $18 $229.2� $16133.0� $90600.3�

1� $19� $240.6 $18490.9� $109091.2�

2� $19 $252.6� $21056.8 $130148.0

These numbers show the difference between the simple and compounding effects on increasing the daily benefit. Though the simple inflation rider provides adequate protection, the compounded inflation rider provides better coverage, and keeps the policy benefit closer to the current annual nursing home inflation rate. However, the premium cost for the rider may influence the option selected. A simple inflation rider will increase the premium by 20 to 30 percent or more. The compounded inflation rider option will likely double the simple inflation rider premium.While the compounded inflation rider is the ultimate protection, every client should seriously consider adding at least the simple inflation rider. It will increase the cost somewhat, but the resulting increase in protection will be vital when the policy benefits are needed. While the cost of the compounding inflation rider is prohibitive for most, the simple inflation rider is still considerably better than leaving the daily benefit on a level basis. There may be a few inflation riders available that increase daily benefits based on the Consumer Price Index (CPI). With the CPI consistently under five percent in the last few years, and well under the nursing home inflation measurements, the CPI increases will not keep pace effectively with long term care inflation. It is still better, however, than buying a level daily benefit without an option to increase the daily benefit amount. Unlike the cost of living options available under disability income insurance policies, the inflation rider for long term care insurance increases the daily benefit each year the policy is in force. For disability insurance, the insured has to be on a claim first before any increases are made. A 50-year-old who purchases a long term care policy with an inflation benefit rider, and who does not use the benefits for 20 years, will have 19 increases in the daily benefit amount before a claim is filed.

Generally, increases to the daily benefit under this policy are not available past the age of 85. At that point, the daily benefit stays at the attained level. GUARANTEE OF INSURABILITY The guarantee of insurability option increases the daily benefit at specified option dates. Also called the guaranteed purchase option, the increases can be significantly larger than the increases under the inflation option. For example: The insured may have the option to increase a $100 daily benefit level by $25 a day or $50 a day every two or three years. This increase can be taken in one step, bringing the daily benefit to $125 a day or $150 a day. A five percent simple inflation rider would increase the daily benefit to $110 a day by the third year. The guarantee of insurability option has a notable effect on the daily benefit increase. In addition to larger daily benefit increases, this option requires no evidence of insurability. Once the original policy is issued, there are no health questions involved when an increase in the daily benefit occurs. As the insured grows older, this option becomes more and more important. The cost for the increases, when exercised, is based on company rates and the attained age of the insured. The additional benefit amount is subject to new rates and the original benefit remains as issued and rated. The insured can waive the option to increase the daily benefit only once. If, for example, an increase is scheduled every three years, the insured can exercise the option at that time or waive the option - once. In addition, these increases are not available past a certain age, usually age 80 or age 85. The guarantee of insurability option can be an alternative to the inflation protection rider or the purchase of a higher daily benefit than needed at time of application. It is important to remember that if a client owns a long term care insurance policy with this optional feature purchased prior to January 1, 1997, exercising this option may result in a disqualification of the policy as a tax-qualified plan. All policies placed in force before January 1, 1997 were grandfathered into the law without regard to their benefit triggers and how they were defined.

This gives these policies increased value at present. But Treasury guidelines state that a material change to the policy will change the tax status of the policy unless it has the HIPAA-specified language. Increasing the policy with this option will be considered a material change. It would be better for the insured to consider an additional policy, rather than alter anything about the present plan. RETURN OF PREMIUM Prior to the inclusion of non-forfeiture benefits in NAIC’s model policy and HIPAA federal law, a few insurers offered a return of premium benefit to give individuals something in exchange for the premiums paid - especially policy benefits that were never utilized. The drawback to this option was that the policy had to be surrendered or the insured had to die before the premium was returned. The amount of premium returned may vary depending on the language of the rider. Some insurers return all of the premiums paid beyond a certain date less any policy benefits utilized. Others may pay a stipulated percentage (30 percent, 50 percent, 80 percent) depending upon the year the insured surrenders the policy or upon the insured’s death, less any claims benefits paid. Examples of each type are:

Annual premium: $1,125.0

Policy kept for 11 years before surrende

No claim Calculation: $1,125 x 11 = $12,375 - benefits (0) =$12,375

Annual premium: $1,125.0

Policy kept for 11 years before surrende

No claim

Percentage returned in year 11: 80 Calculation: $1,125 x 11 = $12,375 x 80% = $9,900 - benefits (0) = $9,900 The additional premium for this option is exceptionally high (50 - 100 percent more than the base policy cost) and may not be worth the money, especially if the option of selecting non-forfeiture benefits is available. An insured may be better off to take the extra money that would have been used to purchase this option and invest it in another

vehicle that earns interest rather than let the insurer hold it for future payout. The insured would collect the money if the policy is surrendered which would also leave him without coverage at an age when benefits may be needed. If the insured is changing insurers for some reason, there could be some return of premium from the original policy that can be applied to the new plan. However, any substantial return of premium would accumulate only after a number of years of the policy being in force. Changing policies and paying a significantly higher premium due to the age change makes little sense despite a return of premium. The insured may be better off buying additional coverage than investing in this option. In addition, the insured who is concerned with a return on investment should policy benefits not be used might consider the life insurance-based long term care insurance approach. MANAGED CARE Although this benefit is not an option, it is worth mentioning because there are only a few insurers using this concept. A long term care claim can be a fairly complex matter. This is partly due to a variety of services and treatments provided by a number of different health care personnel. A treatment plan may consist of a skilled nursing facility stay, follow-up treatments at home, or adult day care. To coordinate these types of care and effectively manage the claim to maximize recovery at the most efficient cost, insurers are turning to claims managers (often third party) who can meet with the insured’s physician to map out a plan of care. Flexibility is the buzz word in long term care today and the inclusion of coverage for alternate plans of care in the basic long term care policy makes the managed care approach more sensible. Carriers are now more likely to assign care coordinators. Care coordinators are health care professionals who play an integral part in assessing needs and ensuring that treatment prescribed is as closely aligned to policy benefits as possible. The initial assessment done for the insured is typically part of today’s long term care claim procedures. Managed care eliminates the multitude of claim forms that the insured (or a family member) would have to provide the insurer. It is also clear from the beginning what the treatments consist of, when they

are scheduled, and the cost. The treatment plan can be modified as necessary depending on the course taken for recovery. Some companies attempt to establish a claims file long before any benefits are needed. For example: My mother’s long term care insurer, CNA, contacted her in the second year of the policy to obtain some basic information about her that would be forwarded on to a claims manager if and when a claim occurred. Her past medical history, any current medications, her personal physician and other health preferences are already noted within her claim file to make it easier to discuss treatment plans with her doctor. Also, it does not require my mother’s input, which she may or may not be able to give at time of claim. Some insurers have set up relationships with nationwide nursing home and home health care agency chains to obtain preferred rates for their long term care charges. Use of these facilities (an option) may have an advantage for the claimant if the daily benefit level normally would not be high enough to cover the usual costs of care. The insured can review a booklet listing the carrier’s preferred providers of long term care services, just as one reviews the same information about his health insurance program today. Some carriers are providing value-added services to their insureds following purchase of a long term care insurance. One carrier packages a kit with the policy that gives the policyholder access to a 24-hour telephone number to obtain information and counseling about retirement planning, lifestyle and aging topics. Policyholders who never have a claim (or do not have one for years) will likely receive some benefit from this program. Intracorp, a case management and call center company, has initiated a program that has 24-hour phone access for employees to give them answers to questions about, among other issues, elder care. Employers can purchase this service as a benefit for their employees. Education is a key element of managed care and is starting to take prominence in an insurer’s long term care marketing plans. Managed care is an integral part of health insurance today and is becoming an important part of long term care insurance. Look for more product wrinkles using managed care components in the months ahead.

Lesson4Taxation of LTC Policies

• Describe how the Health Insurance Portability and Accountability Act of 1996 affected the tax treatment of long-term care insurance policies. • List the requirements of a qualified long-term care insurance policy. • Define the term “chronically ill.” • Explain why many people who own long-term care policies are not able to take advantage of the deductibility of their premiums. • Explain how benefits from a qualified long-term care insurance product are treated for tax purposes. • Explain the difference between a qualified long-term care insurance policy and a non-qualified long-term care insurance policy.

Chronically Ill - To qualify for favorable tax treatment for long-term care expenses, a person is considered to be chronically ill if he is unable to perform two of six activities of daily living for at least 90 days or suffers a severe cognitive impairment.

HIPAA Health Insurance Portability and Accountability Act. This federal legislation, enacted in 1996, clarified how long-term care insurance premiums and benefits are treated for income tax purposes.

90-Day ADL Certification - A requirement under HIPAA requiring certification by a licensed health professional that the loss of at least two of six activities of daily living will last a minimum of 90 days. The certification must be made to facilitate insurer claim payments.

Non-Qualified Plans - This term refers to all long-term care insurance policies that do not meet the required definitions under HIPAA federal legislation. There could be adverse tax consequences for these plans sold from January 1, 1997 forward.

Per Diem - A method for paying the daily benefit amount that is based on an elected amount and not on the actual expenses incurred.

Tax-Qualified Plans - These are long-term care insurance policies that meet the definition required by HIPAA and are therefore eligible for favorable tax treatment.

ven though long-term care insurance policies had been in existence in one form or another for nearly 30 years, until

1996, the tax ramifications of these policies were uncertain. It was unclear whether the premiums paid on these policies were tax deductible. It was also not known whether the benefits that a policy paid to the insured receiving care were considered taxable income. There were some private letter rulings from the Internal Revenue Service regarding the tax treatment of long-term care policies. However, these rulings applied only to the particular taxpayer requesting the ruling, and it was often difficult for other taxpayers to know the status of their particular policy without receiving a private ruling from the IRS. Despite this uncertainty, long-term care policies continued to be sold. In the late 1980s, employers started providing long-term care policies to their employees, and agents were advising their clients that the deductibility of long-term care premiums was sure to be allowed by the IRS. Health Insurance Portability and Accountability Act of 1996 (HIPAA) Then in 1996, Congress enacted the Health Insurance Portability and Accountability Act of 1996. This legislation clarified the tax treatment of certain long-term care insurance policies. The Act, also known as HIPAA, provided that long-term care policies that meet certain requirements are considered qualified long-term care policies and these qualified policies are eligible for favorable tax treatment. This favorable treatment includes the following:

• Premiums are deductible by individuals as medical expenses for those who itemize their deductions, subject to some limitations. • Benefits received by an insured are tax-free, subject to some per diem limitations. • Employers who pay premiums on behalf of an employee are entitled to deduct those premiums as a business expense, just as for medical insurance. • Premiums paid by an employer on behalf of an employee are not treated as income to the employee.

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In order to be treated as a qualified long-term care policy and to take advantage of the favorable tax treatment, the long-term care contract must include the following provisions:

• The policy’s only protection is the coverage of qualified long-term care services. • The policy may not provide benefits that would duplicate benefits payable under Medicare, but the policy may coordinate its benefits with Medicare benefits. • The policy must be guaranteed renewable. • All premium refunds and policyholder dividends must be applied to reduce future premiums or increase future benefits. • The contract must have certain consumer protection provisions regarding, among other things, disclosure and nonforfeiture provisions. • Any refund based upon a surrender or cancellation of the contract cannot exceed the aggregate premiums paid under the contract.

Long-term Care Services Qualified long-term care services are defined as necessary:

• Diagnostic • Preventative • Therapeutic • Curing· Treating • Mitigating • Rehabilitative services • Maintenance or personal care services

These qualified long-term care services are required by a chronically ill person, and which are provided under a plan of care prescribed by a licensed health care practitioner. Chronically Ill A chronically ill person is someone who has been certified by a licensed health care practitioner as:

• Unable to perform at least two activities of daily living (ADLs), without substantial assistance from someone else, for a period of at least 90 days due to loss of functional capacity. • Someone who requires substantial supervision to protect himself from threats to his health and safety due to a severe cognitive impairment.

• Someone who has a disability that is described in future treasury regulations.

Licensed Health Care Practitioner A licensed health care practitioner may be a physician, nurse, or even a social worker. Long-term Care Insurance Contract The long-term care insurance contract must take into account at least five activities of daily living (ADLs). The Internal Revenue Code lists six activities that are considered an activity of daily living. These six activities are:

1. Eating 2. Toileting 3. Transferring 4. Bathing 5. Dressing 6. Continence

Activities of daily living are discussed in more detail in Module 2. Deductibility of Premiums While individuals may deduct the amount of premiums paid on a qualified long-term care policy; there are some limits on deductibility. First, in order to take advantage of the deduction for qualified long-term care premiums, the taxpayer must have itemized deductions that exceed the standard deduction. Also, qualified long-term care premiums are considered medical expenses, which may be itemized only to the extent that the taxpayer’s total medical expenses exceed 7½ percent of the taxpayer’s adjusted gross income. Thus, for example, assume a taxpayer had an adjusted gross income of $100,000 and medical expenses of $8,000. This taxpayer could itemize only the amount of expenses that exceed $7,500, and so his or her medical expense deduction would be $500. In fact, the IRS has reported that less than 5 percent of all taxpayers itemize their medical expenses. Also, the deductibility of qualified long-term care insurance premiums is limited based on the age of the taxpayer as of the end of

the year in which the premiums are paid. These limits are as shown below.

Deductibility of Premiums--2002: Age 40 or less

$240 per year

Age 41 to 50

$450 per year

Age 51-60 $900 per year

Age 61-70 $2,390 per year

Age 71+ $2,990 per year

These amounts are subject to change each year based on changes in the medical care component of the Department of Labor’s Consumer Price Index. A person who is self-employed may be able to deduct qualified long-term care premiums without the need to itemize his or her deductions. Qualified long-term care premiums may be added to other medical care expenses of a self-employed taxpayer. These medical care expenses may then be deducted by a self-employed taxpayer subject to the following limitations: For taxable years 2000 – 2001 60 percent of medical care expenses For taxable year 2002 70 percent of medical care expenses For taxable years 2003 and thereafter 100 percent of medical care expenses. Tax Treatment of Benefits Benefits received under a long-term care insurance policy are treated as amounts received for personal injuries and sickness and are also treated as a reimbursement for medical care expenses. Under general rules of federal taxation, amounts that are received for personal injuries and sickness are generally not includable in a person’s income. However, there are limits on the amount of benefits that may be received tax-free from qualified long-term care policies.

Generally, if a qualified long-term care policy pays a per diem benefit that exceeds the per diem amount ($200 per day in the year 2001), the excess is included in the recipient’s gross income for income tax purposes. This amount is indexed in future years based upon changes in the medical care component of the Department of Labor’s Consumer Price Index. However, if the qualified long-term care policy pays for long-term care services incurred by a person for long-term care services, those amounts will not be includable in the person’s income. For example: Assume Ms. Jones owns a qualified long-term care insurance policy that is paying her benefits while she resides in a nursing home. The cost of the nursing home and other long-term care services she receives is $150 a day. Her policy pays her a flat $200 a day benefit while she is in the nursing home. Assuming that the per diem limit for the year in question is $190 a day, Ms. Jones will be taxed on the $10 a day difference between the $200 a day she receives and the $190 a day per diem limit. Another resident of the same nursing home, Ms. Smith, requires more medical services than Ms. Jones, incurring $210 a day in long-term care expenses. However, Ms. Smith has a reimbursement type policy; one that pays benefits based on the long-term care expenses that she incurs instead of paying a daily per diem amount, like Ms. Jones’ policy does. Thus, even though Ms. Smith’s policy pays her more than $190 a day, none of the $210 a day that she receives is taxable income. These rules for what constitutes a qualified long-term care policy are effective for policies that were issued after 1996. HIPAA has a grandfather rule providing that a long-term care policy with an issue date before 1997 will be treated as a qualified long-term care policy if the policy met the requirements for long-term care insurance of the state at the time it was issued. Non-Qualified Long-term Care Plans Long-term care insurance plans that are not considered qualified long-term care policies are simply called non-qualified long-term care insurance policies. These policies include policies issued after 1996 that use the triple trigger that was discussed in Module 3.

Some insurance companies still issue nonqualified policies due to their belief that nonqualified policies are more beneficial to policyholders even without the favorable tax treatment of qualified policies. While the tax consequences for nonqualified long-term care policies are not as clear as they are for qualified long-term care policies, it is believed by many observers that a nonqualified policy will not receive the tax benefits that a qualified long-term care policy currently enjoys.

y 1996, product development in the long term care market had evolved through several policy generations. There was no

resemblance between the initial policies introduced back in the mid- to late-1960s covering some nursing home expenses and the products of the 1990s providing numerous reimbursements in virtually any long term care setting. Contribution Limitations Section 143. What the products lacked was a place in the Internal Revenue Code. Simply, there was no formal clarification of the tax consequences of long term care. Were benefits payable under these policies taxable to the claimant? Could employers deduct any long term care premium contribution made on behalf of employees? Nobody knew. Yes, there were private letter rulings that seemed to indicate an IRS tendency to give long term care policies the same tax favorability as health insurance, but those letters applied only to the taxpayer that requested clarification. They were not indicative of any broad policy on the part of the IRS. Despite this lack of guidance, long term care policies were sold. Employer-provided long term care began in the late 1980s, and agents were advising that deductibility of premium was sure to be sanctioned by the IRS. Moreover, some agents recommended long term care’s inclusion in Section 125 cafeteria plans, guessing that if long term care was treated as health insurance then this product could certainly be part of a Section 125 menu. There were many attempts at tax clarification of long term care insurance in the two decades leading up to 1996. Numerous legislative proposals were put forth in Congress, most suggesting that

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long term care insurance be treated as health insurance for the purposes of taxation. All of these bills died natural deaths. Either Congress did not get around to it in a given year or the proposal was tacked on to other legislation that was either rejected or tabled. The insurance industry regularly lobbied the federal government to define long term care expenses and insurance in the tax code. Send a message to the American public, we said, about taking financial responsibility for this problem. Encourage the consumer to consider long term care insurance as a solution to this potential difficulty. There are times when we should be careful what we wish for. In 1996, Congress finally passed legislation on the taxability of long term care insurance. It was folded into broad legislation primarily regarding health insurance that was initiated by Senators Nancy Kassebaum (R-KS) and Ted Kennedy (D-MA). This seemingly incongruous pairing of two legislators of different perspectives was Congress’ way of attaining bipartisan support for health legislation that was “on the ropes” after the Clinton health plan debacle of 1993-94. On the surface, Congress appeared to give the insurance industry everything they wanted on long term care taxation - and more. Tax clarifications had finally arrived:

• Premiums are deductible to individuals as a medical expense for those who itemize, subject to limitations • Benefits received by a claimant are tax-free to the recipient, subject to some per diem limitations • Employers who pay premiums on behalf of an employee are entitled to deduct those premiums as a business expense, just as they do for medical insurance • Premiums paid by an employer on behalf of an employee will not be treated as income to that employee

These rules were well received. Actually, the individual premium deductibility was a bonus. Contrast these new rules for long term care insurance with disability income coverage. With disability income, if a tax deduction of the premium is taken, benefits when received will be taxable to the recipient. With long term care, if either the individual is able to utilize the premium deduction or the employer buys long term care coverage for employees, there is no taxable effect on the benefits when they are paid. Premium deductibility and tax-free benefits? Surprise!

Naturally, there was a catch for individual premium deductibility. The taxpayer had to itemize medical expenses to claim the premium as a deduction. This meant expenses had to exceed 7.5 percent of one’s adjusted gross income. According to the Internal Revenue Service, only about five percent of taxpayers are able to itemize medical expenses. Even if the individual is one of the lucky five percent, there are some limitations:

Attained Age Limitation (in 2001) Less than 41 $230

41-50 $430 51-60 $860 61-70 $2,290 71+ $2,860

Obviously, premium deductibility plays better as a sound bite than in reality. But so what? This was a throw-in anyway. What everyone wanted - and received - was the tax-free distribution of benefits. If you could deduct the premium, too, you were a leg up on the IRS. Agents would have to deal with high expectations from prospects regarding tax deductibility. The news that they probably are not one of those able to deduct the premium would probably not play well in the hinterlands, but it would place agents in front of potential buyers. If the agent properly demonstrated a need for the coverage, many more sales would be made than existed currently. Self-employed individuals, long overlooked for health insurance premium deductibility, were now able to add long term care insurance to their ever-increasing percentage of premium deductibility. Passed under HIPAA, clarified under the Taxpayer Relief Act of 1997, and amended in 1998 were the new deductibility rules for the self-employed, who were allowed to add long term care insurance premiums to their overall health costs:

For taxable years beginning in Deductible percentage 1997 40% 1998 45%

1999-2001 60% 2002 70%

2003 and thereafter 100%

Of course, there is plenty of time for Congress to amend these rules in a future tax bill, but for now this deductibility is a plus for these business people. It has at least opened up a new market of long term care prospects for the insurance agent. This part of the HIPAA legislation regarding long term care seemed to send a clear message to the American public with its tax incentives and favorable treatment. Long term care, the Act said, is the personal responsibility of each citizen. Left at that, the industry would have been elated. Products had been improved, with assistance from long term care service providers, and the market was growing daily with individual prospects in need of protection. Insurers were becoming more comfortable with the risk as it was presently known, and some state education requirements with regard to long term care were signaling agents to learn this product well before presenting it to the consumer. But tax clarification is never simple, as our convoluted tax code has often proven. The HIPAA legislation went much further than anyone expected. More rules were added to “define” long term care insurance for the purposes of standardizing what long term care expenses (including distributions from a long term care insurance policy) would qualify under this new tax status. These rules included: 1. Per diem cap. Here, Congress capped the amount of long term care expenses that are deductible at $200 per day in 2001. Indemnity long term care insurance products that pay daily benefits regardless of the actual expense incurred will create a taxable event for policyholders who purchase daily benefits in excess of $200. The exception to this will be if actual long term care expenses exceed this amount. If a policyholder owns both a per diem and expense-incurred contract, the $200 per diem amount will be reduced by the amount of benefits paid under the expense-incurred contract. Since per diem contracts are paid without regard to actual expenses, Congress wanted to cap the total daily benefit that could be received in the event it exceeded expenses incurred. 2. Cafeteria plan. Long term care insurance is excluded from a Section 125 cafeteria plan. Contrary to some insurance agents’ earlier beliefs and despite its favorable tax treatment as a health insurance product, employees will not see the benefit of adding long term care insurance to their flexible benefits menu. 3. Medicare coordination. Long term care policies paying on an expense-incurred basis are allowed to coordinate their benefits with

Medicare to avoid duplicative reimbursement. This overrides a Health Care Financing Administration initiative calling for long term care insurance to be considered primary and pay first before Medicare. Now, Medicare will pay and the policy benefits will be reduced accordingly. The law “grandfathered” this coordination for long term care policies issued since 1990. 4. Non-forfeiture benefits. Insurers must offer a non-forfeiture benefit for plans to be considered as qualifying for favorable tax treatment under this legislation, if the policy has no cash surrender value in the event of policy lapse or death. Some insurers already had this provision included in their contracts. 5. Form 1099-LTC is the Treasury Department’s non-verbal answer to the pre-HIPAA plans that do not conform to the new long term care definitions. The Treasury Department has said that it was Congress who was silent about “non-qualified” plans by not addressing their specific status in the HIPAA legislation. Hence, it is Congress who should address this oversight, according to the Treasury Department. From the Treasury Department instead comes Form 1099-LTC. Instructions to insurers are to file the form when paying any benefits under a long term care insurance policy. Policyholders are told in their copy that this is important tax information being furnished to the IRS. If the insured is required to file a return, there are sanctions for not reporting this income. The form points out that amounts paid under a qualified long term care insurance plan are excluded from your income. However, if payments are made on a per diem basis, the amount excluded is limited ($200 per day in tax year 2001 and indexed thereafter). While no reference is made to non-qualified long term care coverage, the inference from the form is that only amounts distributed under qualified plans are excludable from income. Non-qualified plans remain a risky sale for avoiding adverse tax consequences. Some insurers who continue to offer non-qualified plans have the policyholder sign a waiver form regarding the potential taxation of benefits.

a. being unable to perform, without substantial assistance from another individual, at least two out of six activities of daily living (ADLs) due to a loss of functional activity that will last at least 90 days in length;

1. requiring substantial supervision to protect the individual from threats to health and safety due to a severe cognitive impairment; or

2. having a similar level of disability as determined by the Secretary of the Treasury in consultation with the Secretary of Health & Human Services.

The six activities of daily living are eating, toileting, transferring, bathing, dressing and continence. After a review of these benefit triggers, it became clear that insurers who had enhanced their long term care products to provide a triple-trigger option of qualifying for benefits would have to re-file their policies. Simply, these plans no longer conformed to this federal legislation. What happened? Insurers’ triple-triggers were:

1. inability to perform 2 of 5 ADLs; 2. suffers a cognitive impairment; or 3. doctor prescribed due to medical necessity.

(See Lesson 3.) Under HIPAA, the law expanded the ADLs to six and added a 90-day requirement to the first trigger, added the word “severe” to the second trigger, and eliminated the “medical necessity” trigger entirely, replacing it with a yet-to-be-defined trigger that would be drawn up in collaboration between the Treasury and HHS departments. Essentially, the new law trimmed the eligibility options from three to two. Moreover, one of the two triggers left standing was significantly modified with a 90-day expectancy requirement. The elimination of “medical necessity” from the benefit triggers was particularly bothersome, since its inclusion was due primarily to provider input about the gaps left by using only the first two triggers for legitimate claimants. Now, in one sweep, this product development work was eradicated. REPERCUSSIONS The insurance industry was stunned by this news. The cheers concerning tax favorability had barely subsided when this new definition of long term care silenced the celebration. Questions immediately ensued such as how much time will it take to prepare, price and file one of the new tax-qualified plans? Insurance agents specializing in long term care were angered by this turn of events. Having fought for competitive products and pricing for

so long, one congressional act had undone that hard work in short order. The loss of “medical necessity” rankled even the most loyal agent. There had been some industry rumbling that this trigger was the most problematic for insurers. It left the potential claims loss ratio wide open for these products since physician certification of a long term care need might be generally easy to obtain. Some agents saw the HIPAA legislation as a Faustian bargain between the federal government and insurers to eliminate this popular benefit trigger. It is unlikely that the medical necessity trigger was on the chopping block when HIPAA passed in 1996. Claims results were (and are) still in their infancy and it was premature to draw conclusions about the potential claims results under this eligibility option. Some insurers were even angrier about its loss than agents. They saw the loss of “medical necessity” as unfair, but were even more upset about the new 90-day requirement under the ADL trigger. This language revision made it imperative that a licensed health practitioner certify the loss of 2 of 6 ADLs as likely to last at least 90 days for benefits to be payable. This effectively eliminated any short-term claims for long term care services. For at least one long term care insurer, claims lasting less than 90 days represented 25 percent of all long term care claims. Insurers offering elimination periods of less than 90 days were also in a quandary. Does this 90-day certification effectively dispose of elimination periods of 0, 15, 20, 30, 45 and 60 days, among others? Further, what if an insurer began paying benefits after an elimination period of 30 days based on a 90-day certification, but the claimant recovered after 70 days? Do the benefit payments have to be repaid by the insured? The setting of ADLs at a total of six also defied state legislation in at least three jurisdictions - Kansas, Texas and California, the latter two requiring a listing of at least seven ADLs from which an insured could qualify. Would the states revise their laws to accommodate the new federal legislation even though it appeared less beneficial to the consumer? Questions, questions. What did the terms “substantial supervision” and “substantial assistance” mean? What constituted a “severe” cognitive impairment? When will the third benefit trigger be defined? Congress did anticipate one problem with this legislation. Most insurers would not have long term care insurance policies that conformed to this new law. Premium tax-deductibility was effective

beginning in January of 1997, but tax-qualified plans would not likely be available until the spring at the earliest. These difficulties were addressed as follows: 1. There was a “grandfathering” period where any long term care insurance contract sold would be considered “tax-qualified” if it was purchased and put in force prior to January 1, 1997. This included all the plans sold prior to HIPAA’s enactment in August 1996. 2. Long term care policies issued on or after January 1, 1997 could be written on the old basis until the new tax-qualified plans are approved for that insurer in the insured’s state. The insured had one year - until January 1, 1998 - to exchange this old policy for a new tax-qualified one. The insured must be guaranteed the ability to make this exchange. If a claim occurred after the policy was purchased but before the exchange, the benefits would be considered tax-free. This applied to policies issued after January 1, 1997 and for claims beginning prior to January 1, 1998. This “grandfathering” had multiple effects. First, insurance agents went into “fire-sale” mode, selling as many of the triple-trigger plans as possible to insureds that wanted the seemingly better policy and favorable tax treatment. This motivated many prospects that were hedging about long term care insurance into action. Second, after January 1, 1997, long term care prospects felt like they could wait until the tax-favored plans were available. After all, why buy a policy you will have to exchange later anyway? The problem, of course, is the potential loss of insurability before the tax-qualified plans are approved for sale. If the individual can qualify for coverage, it made more sense to obtain it - even on the old policy form - and convert it later. Most insurers were trying to make this process as easy as possible for the insured. THE ESSENTIAL QUESTION But the overriding question everyone has was and is, “What about the tax status of plans written after January 1, 1997 that do not conform to the new legislation and are not exchanged for plans that meet these new specifications?” That is a difficult question to answer and one that the Treasury Department ducked in post-HIPAA questioning. Some analysts maintain that the status of these “non-qualified” plans is the same as it was prior to HIPAA - uncertain. Private letter rulings before HIPAA were primarily favorable towards beneficial tax treatment. Why wouldn’t this still be the case?

The quick answer to this question is that prior to HIPAA nothing was clarified about the tax treatment of long term care insurance. Now, there is clearly a policy form that would achieve a positive tax result. An IRS representative deciding the tax fate of a non-qualified long term care insurance plan could point to the tax-qualified plan as the one singled out by HIPAA for tax-friendly treatment. Insurers and policyholders cannot plead ignorance or point out that there is nothing on the books about long term care. However, some analysts take the lack of Treasury Department clarification to mean that HIPAA’s primary purpose was to create a safe harbor for tax-qualified plans, and not to render pre-HIPAA plans as an endangered species. HIPAA did not, in its language, draw a distinction between pre- and post-HIPAA long term care insurance policies. The issue remains unclear. Insurers began to line up on either side of the argument. Some insurers feel strongly about not selling non-qualified plans at all in the event of adverse tax consequences for the policyholder. Other insurers who are still championing the benefits of non-qualified plans feel that the tax-qualified plans hurt the consumer and those marketing only HIPAA-approved plans are, by inference, doing the consumer a disservice. Whereas some insurers were positive about HIPAA, citing tax favorability, fewer agents were supportive of the legislation. They bemoaned the loss of medical necessity and the new 90-day certification and argued that seniors were worse off after HIPAA than before any clarification had been made. As tax-qualified plans began to emerge from the insurers’ shelves, the expected lowered premiums (since benefit triggers were reduced) did not materialize. Now, agents observed, consumers were paying the same price for less coverage. That the Treasury Department was slow to comment and respond to these questions makes the issue more difficult. Consumer questions to agents and insurers have gone unanswered. Policies were sold - especially in the last four months of 1996 during the grandfathering period - but 1997 results slowed as everyone waited for more clarification. The legislation that was supposed to shed light on long term care insurance had smothered it in darkness. THE TREASURY DEPARTMENT SPEAKS In mid-1997, the Treasury Department finally broke radio silence. Issuing IRS Notice 97-31, they intended to provide interim guidelines to clear up the questions the HIPAA legislation had provoked.

HIPAA was intended to clarify not only long term care insurance taxation, but also to provide guidance for those individuals who were self-insuring their long term care expenses. Certainly there were far more people in this situation than those that had purchased insurance and they, too, had been in limbo as far as understanding what the tax ramifications were for their dollars spent on long term care expenses. One must remember that the legislative climate in Washington in 1996 was focused on a balanced budget. Spending legislation had to be accompanied by details of where the dollars would come from and there was a great reluctance to do anything that might derail the balanced budget express. HIPAA gave a number of opportunities for a long term care expense tax deduction and in so doing was reducing the revenue opportunities for the Treasury Department. It was therefore expected that they would try to curtail their losses if possible. Short-term medical expenses of the chronically ill and the simplicity of a physician’s certification were seen as tax deductions that could be abused. “Chronically ill,” to the IRS, implied a longer term of illness. Short-term claims and even doctor-prescribed services did not fit neatly into the “chronically ill” definition. Moreover, ease of qualification for the deduction meant potential significant revenue loss and thus guidelines were imposed to attempt to ensure that only expenses for the truly chronically ill would be deductible. By avoiding “medical necessity” as a qualifier and adding a 90-day certification requirement, Congress was able to reduce the potential deductions and reduce the revenue loss, arguably, making it easier to get the bill passed. Insurance policies, which were not the intended target of these rules, were unfortunately lumped together with the personal long term care expense deductions. HIPAA was complex enough, so the rules for insured and self-insured situations were equalized. As a result, the new benefit triggers that define long term care insurance are less liberal than those triggers currently available in long term care policies. But the Treasury Department was not likely to change the rules at this point. Instead, they offered clarification of some of the terminology used in the law. 1. “Substantial assistance,” part of the ADL trigger, means either hands-on assistance or standby assistance. “Hands-on assistance” is defined as the physical assistance of another person without which the

individual would be unable to perform the ADL. This is consistent with insurers’ interpretations. But it is “standby assistance” that is an unexpected break. This is defined as the presence of another person within arm’s reach of the individual that is necessary to prevent, by physical intervention, injury to the individual while the person is performing an ADL. An example of this is a person who is ready to catch an individual if he or she falls while getting out of the bathtub. Or, as being ready to remove food from someone’s throat if the individual chokes while eating. These situations will qualify an individual as being unable to perform the ADLs of bathing and eating. That people not necessarily need physical assistance with an ADL is a welcome liberalization and can conceivably make it easier for an insured to meet the 90-day certification requirement. 2. The 90-day certification requirement must be made at time of claim. Any licensed health care practitioner can make the certification, including social workers with the proper credentials. The health professional is merely giving an educated opinion that the two ADL losses will likely last at least 90 days. If the disability turns out to be shorter, benefits paid are not affected. This breathed new life into the shorter elimination periods. 3. Severe cognitive impairment, the second trigger, is defined. It means a loss or deterioration in intellectual capacity that is (a) comparable to (and includes) Alzheimer’s disease and similar forms of irreversible dementia, and (b) measured by clinical evidence and standardized tests that reliably measure impairment in the individual’s short-term or long-term memory, orientation as to people, places, or time, and deductive or abstract reasoning. Substantial supervision also needed clarification under this benefit trigger. It is defined as meaning continual supervision (which may include cuing by verbal prompting, gestures, or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering). These definitions can now be added to the tax-qualified policies. They are not, at any rate, significantly different than the pre-HIPAA claims handling of cognitive impairment claims. Now, at least, tax-qualified policies have a means to define these new terms to ensure conformity with the tax code. 4. Questions surrounding the issue of changes to grandfathered policies arose during the four-month fire sale of pre-HIPAA long term care policies that would be grandfathered in on a tax-favored basis. If a change is made to one of these grandfathered policies after January 1, 1997, will it remove the qualified status from the policy? The Treasury’s answer is “yes.” If a material change is made to an

existing policy, it will be considered issuance of a new contract. One type of material change is the alteration of the timing or amount of any item payable by the policyholder, the insured or the insurance company. While a change that results in an increase in benefits for the insured is arguably the target of this guideline, the Treasury Department takes the position that even changes that result in the same or less benefits still constitute a material change and the probable loss of tax-favored status. This seems unfair to someone who, for example, wishes to reduce the daily benefit from $125 to $100. This would be a material change and unless the policy itself conformed to HIPAA language, tax-favored status would be lost. The Health Insurance Association of America felt this clarification to be unacceptable and dashed off a letter to the Treasury Department to reinterpret the term “material.” 5. Form 1099-LTC is the Treasury Department’s non-verbal answer to the pre-HIPAA plans that do not conform to the new long term care definitions. The Treasury Department has said that it was Congress who was silent about “non-qualified” plans by not addressing their specific status in the HIPAA legislation. Hence, it is Congress who should address this oversight, according to the Treasury Department. From the Treasury Department instead comes Form 1099-LTC. Instructions to insurers are to file the form when paying any benefits under a long term care insurance policy. Policyholders are told in their copy that this is important tax information being furnished to the IRS. If the insured is required to file a return, there are sanctions for not reporting this income. The form points out that amounts paid under a qualified long term care insurance plan are excluded from your income. However, if payments are made on a per diem basis, the amount excluded is limited ($200 per day in tax year 2001 and indexed thereafter). While no reference is made to non-qualified long term care coverage, the inference from the form is that only amounts distributed under qualified plans are excludable from income. Non-qualified plans remain a risky sale for avoiding adverse tax consequences. Some insurers who continue to offer non-qualified plans have the policyholder sign a waiver form regarding the potential taxation of benefits. One insurer published the potential tax-impact for individuals who receive benefits under a non-qualified plan. If two individuals each earn $24,000 annually and receive long term care claims benefits of $36,500 for the year, the person receiving benefits from the qualified long term care contract would continue to be taxed on an adjusted gross income of $24,000. However, the individual who received payments under a non-qualified plan may have to ultimately include

that in his adjusted gross income figure, for an AGI total of $60,500 for the year. Taxes for the owner of the qualified plan would be $2,471 (based on the federal income tax rates and standard deductions applicable at that time) while the non-qualified purchaser would pay taxes in the amount of $11,713. This means a net of $27,258 to help pay long term care expenses instead of $36,500. This is why some insurers are not even offering non-qualified plans. Proponents of non-qualified plans contend that it cannot possibly be the intent of Congress or the IRS to tax a benefit that merely serves to reimburse the insured for the cost of long term care services. It is difficult to disagree with this statement but why then the need for the 1099-LTC form at all? If no distributions from a long term care insurance plan are to be taxable, the form does not seem necessary. From the “non-qualified” corner, though, comes the obvious thought that if Congress intended to tax non-qualified plans, why didn’t the legislation address it? If it is ultimately Congress’ intention for people to buy only qualified contracts, this will emerge in a later technical corrections bill. Trying to guess what Congress was thinking is as easy as dancing with Jell-O. They may have overlooked this issue entirely. They may have known what they were doing but thought it easier to deliver the message in a smaller, less publicized bill later. They may have been addressing concerns about self-insured taxpayers that would potentially deduct long term care expenses and did not think about the effect on the insurance industry. Congressional leaders have already begun receiving letters from constituents regarding this non-qualified situation and will likely have to respond at some point. The IRS, battling an image problem as it is, refuses to be the bearer of bad news. A random sampling of IRS offices actually reveals a genuine lack of knowledge about the issue. THE MARKET Insurers have split on the entire qualified/non-qualified issue. A recent survey of 37 insurers selling long term care insurance reveals the following:

• Nine insurers are selling both qualified and non-qualified plans. • Six companies are selling only non-qualified plans. • Twenty-two carriers are selling only qualified contracts.

If this survey is representative of the industry, the majority of companies have decided to work only with qualified plan contracts right now. Their tax status is known and therefore places all parties to the agreement on safe ground. Some carriers are adding benefit enhancements to the new qualified contracts, while still including all the language required by HIPAA. One carrier added the term “mobility” to its “transferring” ADL for purposes of better defining it for coverage purposes. A lack of mobility, the insurer contends, could quickly qualify a person for benefits because a loss of bathing and transferring will be evident immediately. Another carrier expanded home care coverage to pay for multiple services on a given day that would otherwise have exceeded the daily benefit. For example: A visit from both a nurse to change a bandage and a physical therapist in the same day would be reimbursed separately, potentially doubling the daily benefit payment based on actual expenses incurred. Still another carrier actually introduced a new, non-qualified plan in mid-1997, despite the controversy surrounding the policy’s taxation. State insurance departments, not concerned about possible tax consequences, approved the product for sale in many jurisdictions. As long as agents are explaining the possibility of taxation and having waiver forms signed, these non-qualified plans will continue to be of interest to people. If and when Congress clarifies the non-qualified plan’s status, conversion can likely be made or, if the interpretation is favorable, the policy can be kept in force. This carrier also markets qualified plans apparently at a 10 percent rate reduction. Product development activity has been high in the recent years. While much of the focus is on new qualified contracts, design of new non-qualified plans continues. Since the deductibility of qualified plan premium is unlikely for most, these HIPAA-based plans primarily offer the attraction of tax-free distributions. Non-qualified plans still provide more eligibility options, although without the assurance of tax-free status. These contracts will continue to duel until more is known about non-qualified plans. EFFECTS ON THE MARKET Rates are still widely spaced despite the similarity in benefit triggers for qualified plans. Below is a sampling of annual premiums for several insurers for a preferred risk based on a $150 per day benefit, an unlimited benefit period and a five percent compounded inflation benefit:

Age 42: 0 day elimination period: $1,455 and $1,890

7 day elimination period: 20 day elimination period: 30 day elimination period:

$1874 $2,306 and $1,292 $1,353 and $1,683

Age 52: 0 day elimination period: 7 day elimination period: 20 day elimination period: 30 day elimination period:

$2,040 and $2,115 $2,321 $2,949 and $1,820 $1,897 and $2,066

Age 62: 0 day elimination period: 7 day elimination period: 20 day elimination period: 30 day elimination period:

$3,480 and $3,615 $3,685 $4,178 and $3,381 $3,236 and $3,277

Age 72: 0 day elimination period: 7 day elimination period: 20 day elimination period: 30 day elimination period:

$7,365 and $7,425 $7,892 $8,505 and $7,197 $6,849 and $7,025

Some of this rate disparity stems from varying elimination periods. This does not explain all of the difference, however, and agents would be wise to scour these policies for additional benefits that warrant significantly higher premiums. As noted earlier in this course, long term care pricing has involved much educated guesswork, so pricing differences can also reflect varying thoughts regarding the risk. Agents are strongly cautioned to be wary of those products dramatically lower in price than their competitors. Low rates now could mean substantial rate increases in the future. This practice did not succeed in health insurance and will likely fare poorly with this product line. There are some that predict slower sales because of this tax confusion. There have been unconfirmed estimates of a lower number of policies sold in 1997 than 1996, with similar anemic results in 1998. The message to the public about taking personal responsibility for its own long term care finances was diluted by the new definitions imposed in the policies the government presumably wants the consumer to buy. While 1996 was a banner year, thanks to the grandfathering provision that created a sales frenzy previously lacking in this market, future years should improve with or without congressional relief for non-qualified plans. A number of elder care attorneys and even CPAs have begun obtaining their insurance licenses in order to market long term care insurance themselves. Many see it as the only way to avoid losing one’s assets to the health industry to pay for these critical expenses. HIPAA lent this notion of using insurance as a financial tool some

credible press, and many senior advisors are taking advantage of the opportunity. The truth is that the product is needed. Even qualified plans, despite their aforementioned shortcomings, still provide valuable protection in many long term care situations. The new definition of “standby assistance” seems sure to assist in getting claims certified. Rather than go without, these plans do furnish asset and retirement income protection. Even “taxed” non-qualified benefits (the worse case scenario) provide more dollars than not owning any coverage at all. Congress will eventually resolve the uncertainty the market faces today. In a recent essay, Democrat Ron Wyden cited concerns over busting the Medicaid budget (something long term care could certainly do) as the reason for encouraging private insurance sales. This weighs heavily in the debate about long term care and anything that encourages use of private funds to pay these costs will probably receive bipartisan support. Congress knows how old the country is getting. More work lies ahead. In the interim, there may be more situations like the one in the state of California. After HIPAA was announced, the state insurance department, relying on statutory language, advised insurers that they could only sell policies with more liberal benefit triggers than the new federal law. This meant qualified plans were not being accepted, let alone approved, in the state. In December of 1996, the Insurance Commissioner issued a bulletin that would have allowed qualified plans to be marketed and sold in the state. However, he was immediately sued by two consumer groups claiming qualified long term care plans violate existing state laws. A subsequent superior court ruling rescinded the commissioner’s order. In October of 1997, the state senate finally passed a new law allowing the sale of qualified plans only if insurers selling them also marketed policies that conform to the original state standards - non-qualified plans. The law required that full disclosure of the tax consequences of both be fully explained to the consumer.

Lesson5Medicare & Medicaid

• Define Medicare and Medicaid and their roles in long-term care. • Describe the three different Medicare Parts and the differences between the three Parts. • List the requirements to become eligible for skilled nursing reimbursement from Medicare. • Explain how Medicare pays for skilled nursing care services. • Explain the limitations of Medicare supplements. • Describe how people become eligible for Medicare and Medicaid. • Contrast the differences between the Medicare and Medicaid programs. • Describe how a spouse is protected financially when the other spouse enters a nursing home with Medicaid paying for the nursing home care.

Asset Spend-Down - A procedure in which an individual’s income and assets are diminished in order to attain the required levels of a state’s eligibility requirements for Medicaid assistance.

Centers For Medicare and Medicaid Services - The federal agency that administers Medicare, Medicaid, and other federal government health programs.

Medicaid - The joint federal and state welfare program administered by the states to provide payment for health care services, including long-term care, for those meeting minimum asset and income requirements.

Medicare - Federal program that provides hospital and medical expense benefits, including some long-term care services, for those individuals over age 65 or those meeting specific disability standards.

Spousal Impoverishment Protection - Medicaid changes made as part of legislation passed in 1989 that provide an income and shelter allowance for the at-home spouse of a nursing home resident receiving benefits under the Medicaid program.

Transfers - In qualifying for Medicaid, transfers are moving assets to someone other than a spouse or to a trust for the purposes of qualifying for Medicaid. Transfers must be made 36 months before Medicaid application (or 60 months if a trust is involved) to avoid transfer penalties.

f you ask many older Americans how they plan to pay for the costs associated with long-term care, most will reply that they

expect Medicare or their Medicare supplement to pay for these costs. However, this answer shows that many people misunderstand the Medicare program. It is Medicaid, and not Medicare, that is the federal government program that funds most long-term care costs today. Medicaid accounts for more than half of all nursing home costs paid for in this country, serving over 67 percent of all those in nursing homes. Medicare was not intended to pay for long-term custodial care. Instead, the Medicare program was designed to pay for care that is provided for a short period of time for people who are age 65 and older, and for those who are considered disabled for Social Security purposes. The Medicare program pays for hospital and physician services that are needed on a relatively short-term basis. Medicare Medicare has three different parts, named simply:

1. Part A 2. Part B 3. Part C

Medicare Part A, or Hospital Insurance, covers institutional care including:

• Inpatient hospital care • Limited skilled nursing care • Some home health care expenses • Hospice care

Part A is financed almost exclusively by federal payroll taxes. A senior citizen is generally eligible for coverage under Part A if he or his spouse was in the workforce for at least 10 years. Medicare Part B, or Medical Insurance, is an optional program. Coverage includes:

• Physician services • Outpatient hospital care • Physical therapy

I

• Other miscellaneous medical expenses

Twenty-five percent of the cost of Part B is financed by premiums paid by Part B enrollees, while the other 75 percent, is paid by the federal government from general revenues. For 2002, the monthly premium is $54.00. This premium is usually deducted from the Social Security benefit check that is paid to the Medicare-eligible individual. The individual over age 65 is not required to elect Part B coverage and has an option of enrolling in the program within the first three months of each year. Part C, or Medicare+Choice, began in November 1999. Medicare beneficiaries may choose between the traditional Medicare fee-for-service program and the new Medicare+Choice program. Medicare+Choice offers beneficiaries a number of health delivery models, including:

• Health maintenance organizations • Preferred provider organizations • Provider sponsored organizations • Medical savings accounts • Private fee-for-service Medicare

It is important to remember that the Medicare program was not intended to pay for long-term custodial care and chronic care needs, but instead was designed to pay for care that is needed for shorter term acute care-type needs. Nevertheless, Medicare does pay for some nursing care and home health care. Skilled nursing care in a skilled nursing home is the only type of nursing care in a nursing home that Medicare will cover. Medicare will pay for either skilled nursing care or skilled rehabilitation care. Individuals needing intermediate care or custodial care in a nursing home are not covered and will not receive any financial assistance from Medicare. To be eligible for reimbursement from Medicare for care in a skilled nursing facility, the patient must meet the following requirements:

• A consecutive three-day hospital stay must precede entry into a skilled nursing facility and the same medical cause must exist for both the hospital and the skilled nursing facility admission. Note that the date the patient is discharged from the hospital

does not count toward the three days. Also, the nursing facility admission must occur within 30 days of hospital discharge. • A physician must certify that the patient is in need of skilled care or skilled rehabilitation services on a daily basis. • The skilled nursing home facility must be certified by the Centers for Medicare and Medicaid Services, which administers the Medicare program. According to the Centers for Medicare and Medicaid Services, only about 50 percent of skilled nursing facilities are certified.

All of these requirements must be met in order to be eligible for Medicare coverage of skilled nursing or rehabilitative care that is received in a skilled nursing facility. If these requirements are not met, Medicare will not pay the claim. If all of these requirements are met, up to 100 days of skilled nursing care benefits are provided. Here is what Medicare will pay for skilled nursing care in a certified facility: 2002 Number Of Days Payment Amount 1-20 100% of the cost 21-100 all but $101.50 per day 100+ nothing The amount that Medicare will pay for the first 20 days is based on a rate schedule for the patient’s particular geographical area. In order to receive Medicare certification the skilled nursing facility agrees to accept Medicare’s payment amount for the patient’s first 20 days in a skilled nursing facility. The second benefit phase, days 21 through 100, requires the patient to pay a somewhat sizable daily co-payment. In skilled nursing facilities with an average cost of care of about $150 a day, a patient will receive less than one third of the cost from Medicare during days 21 through 100. If the patient has a Medicare supplement, the patient may be reimbursed for the co-payment depending upon the type of coverage offered in the Medicare supplement policy. After 100 days in the facility the patient is responsible for the entire cost. Medicare or a Medicare supplement will not cover skilled nursing care after the 100th day.

It is important to note that many skilled nursing facilities do not accept Medicare patients. Thus it is important to ask if the facility that is under consideration accepts payments from Medicare so that the resident will be eligible for reimbursement by Medicare. If a patient needs custodial care, Medicare will generally pay the claim only if the custodial care is given in a home setting. There are four requirements that must be satisfied before Medicare will approve a home care claim:

1. The care must be part-time or intermittent care. Medicare will not pay for 24-hour care. Intermittent care is defined as care provided for fewer than seven days each week, or less than eight hours each day for 21 days or less. Extensions are allowed in exceptional circumstances such as when the need for additional care is finite and predictable. Individuals requiring daily skilled nursing care at home, even if it is not on a full-time basis, may have difficulties with their claim. 2. The patient must be considered house bound. House bound is defined as a medical condition restricting the ability to leave the house except with assistance. The patient is also considered house bound if it is medically inadvisable to leave the house. 3. The patient must be under a physician’s care and the physician must certify the need for home health care. 4. The home health care agency providing the services must be certified by Medicare. Like skilled nursing facilities, about 50 percent of the home health agencies in the United States are Medicare certified.

Unlike skilled nursing care provided in a certified skilled nursing facility, home health care reimbursements do not have co-payments, except for durable medical equipment, such as wheelchairs and hospital beds. Medicare pays 80 percent of the cost of durable medical equipment. The following are not covered under Medicare’s home health care package:

• Full-time nursing care • Meals delivered to the home • Prescription drugs • Homemaker services that are primarily needed to assist in meeting personal care or housekeeping needs

The home health care benefits under Medicare are intended for part-time, medically necessary care that is associated with a skilled need. Thus, while custodial care is covered, it is important to understand

that if it is 100 percent custodial care without any skilled nursing care, the claim may be denied. Medicare supplements (Medigap Policies) Many seniors believe that their Medicare supplements, also known as Medigap policies, will cover expenses that Medicare does not cover. However these policies are generally designed to pay the co-payments and deductibles that Medicare does not pay. For example: As discussed earlier, Medicare will pay for the first 20 days that a patient receives care from a skilled nursing facility. A co-payment for the next 80 days is required from the patient, with Medicare paying the rest. Most Medicare supplements will cover the skilled nursing co-payment. However, after 100 days of skilled nursing care, neither Medicare nor a Medicare supplement will pay anything. Supplements are not designed to add extra benefits to what Medicare already pays, but are intended to supplement the existing Medicare benefits. (See chart on the next page) Medicare supplements (Medigap Policies) Designed to pay the co-payments and deductibles that Medicare does not pay 2002

Medicare pays

Patient’s co-payment

Medicare supplement

First 20 days

100%

Next 80 days

Amount > $101.50

Patient pays $101.50

May reimburse co-payment

After 100 days

0 All 0

Medicaid Medicaid is an entirely different program from Medicare. Other than the fact that both Medicare and Medicaid are government programs financed by taxes, there is little in common between the two.

Medicare is a health care program for Social Security-eligible individuals who automatically qualify for benefits when they reach age 65 or become disabled. Medicaid is a joint federal-state program that pays health care expenses for low-income individuals. Established in the 1960’s, Medicaid is funded by state and federal funds, with about 57 percent of the funds coming from the federal government. Medicaid is a welfare assistance program for low-income individuals. Many low-income elderly have come to rely on Medicaid to pay for their custodial long-term care costs. Medicaid assures health care to 37.5 million low-income Americans, including more than five million Americans who are over the age of 65. For these elderly, Medicaid pays for:

• Nursing home costs • Home health care • Prescription drugs

In a recent year, Federal and state government spending on Medicaid was 30.6 percent of all public spending on health care. Two-thirds of all nursing home residents rely on Medicaid, making this program an important source of financial assistance for those needing long-term care. While there are federal guidelines concerning the Medicaid program, it is important to remember that each state may design its own program within these guidelines. This results in a diversity of eligibility and plan benefits among the states. Generally, a person’s assets must be at or near the poverty level to qualify for Medicaid. Many states set this poverty level somewhere between $2,000 and $3,000 of assets. Legislation passed in 1989 affected the Medicaid program by installing safeguards for the spouse of the person requiring Medicaid to pay for long-term care services. Prior to this legislation, the at-home spouse was included in the eligibility requirement of low-income and assets in order for the person requiring assistance to qualify for Medicaid. This often left the healthier spouse in a near-bankruptcy situation.

The new legislation established a minimum monthly income and shelter allowance for the at-home spouse. For the at-home spouse the monthly income and shelter allowance can go as high as $2,200 per month. The at-home spouse is also allowed to retain one-half of the couple’s assets up to about $85,000, varying by state and indexed for inflation. While Medicaid requires individuals to exhaust their income and assets, a few items are not counted, such as a house, regardless of value, while the spouse is still alive, one automobile, household and personal belongings, and wedding and engagement rings. For the single individual, the need for long-term care services precludes the necessity of retaining assets above $2-3,000. The nursing home resident is also permitted a personal needs allowance that is generally very low and that varies from state to state. There are 19 states, including Florida and Texas, where a patient cannot qualify for Medicaid nursing home assistance at all if his or her income exceeds a certain monthly level, even if he or she has no other assets. Medicaid Eligibility In the past, attorneys specializing in elder law often used elaborate plans to transfer assets to someone else, typically a child. The object of the transfer was to see how many assets could be legally moved and how fast Medicaid eligibility could be achieved once the senior client became ill. In doing so, the client could speed up his or her eligibility for Medicaid assistance by avoiding spending those assets. Legally, the client no longer had assets and could qualify for Medicaid. With the passage of legislation in 1993, regular transfers of assets must occur 36 months prior to applying for Medicaid and transfers out of a trust must occur 60 months prior to applying for Medicaid. If a transfer occurs within these time frames, Medicaid eligibility could be delayed. Transfers to a spouse are exempt from the Medicaid transfer rules.

hat’s a government health program to do? The expenditures continue to climb for both Medicare and Medicaid and, as

the population continues to age, we are constantly reminded about the W

increasing cost pressures that will drive both of these programs into bankruptcy. Certainly the odds appear against these programs’ survival. Yet, given some changes, Medicare and Medicaid could be “shored up” for future beneficiaries. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) made some strides in helping out these government plans. Tax clarification of long term care insurance was a subtle message to the under-age-65 crowd to look to private long term care insurance for future potential needs. If the incentives are sufficient to motivate people to protect themselves in this fashion, rather than rely on Medicare, or more significantly, Medicaid, some of the fastest growing health care costs in these programs may be harnessed. Up until now, the assumption most commonly made about long term care costs by the elderly is that it is not a problem. If you ask the average senior citizen how will he pay for his costs associated with his long term care needs, the reply most often heard is “Medicare and my Medicare supplement.” Unfortunately, this illustrates how little people understand the purpose of Medicare and Medicare supplements. Medicaid, not Medicare, is the federal government program that funds most long term care costs today. Medicaid accounts for more than half of all nursing home costs paid for in this country, serving over 67 percent of all those in nursing homes. Many people confuse Medicare and Medicaid. This lesson will define these programs, the coverages provided, the qualifications required for reimbursement, and discuss how a future balanced national budget might affect these government benefits. Here are two important points in understanding these programs: 1. In 1996, Medicare’s long term care payments for nursing homes were less than five percent of its expenditures, while payment for home health care expenditures were less than eight percent of its budget. A recent survey by the American Association of Retired Persons (AARP) showed that 60 percent of its members believe that Medicare will be the primary source of financing for their long term care needs. Medicare, on the other hand, specifically points out in its guidebook of benefits that a person should not depend on Medicare as a primary source for long term care assistance. 2. Medicaid is a welfare program that is based on poverty-level qualifications, not age eligibility. Medicaid pays the costs of long

term care only after individuals have exhausted their personal assets, including their income. Because of this qualification, one of the major sources of revenue for providers of long term care is the joint federal-state funded program, Medicaid. With this understanding, it will be easy to communicate to your client the differences in these two programs. As an agent, you must identify potential sources of available funds that an individual might draw upon for the financing of his long term care needs. Medicare and Medicaid are two such sources. MEDICARE In 1960, John F. Kennedy, a presidential candidate, presented a program as part of the Democratic platform that would help elderly Americans pay for health care expenses without having to go into bankruptcy. Even though there were far fewer seniors in 1960 than there are today, a greater percentage of the elderly lived close to the poverty line. Some analysts feel that by using the approach of a federally funded program to subsidize health care costs, Kennedy used the senior vote to propel himself into the White House by a narrow margin. President Kennedy did not live to see this idea come to fruition. That was left to his successor, Lyndon Johnson, who witnessed the birth of Medicare in 1965 as an amendment to the 1935 Social Security Act. As one solution to the problem of the elderly in poverty, this program has helped to reduce the percentage of elderly who are below the poverty level to less than 11 percent. The Medicare program design was based on an acute care oriented medical model which reimbursed people age 65 and over for hospital and physician services. The acute care model was designed to reimburse acute-type expenses, such as those often associated with hospital stays. It was never intended to reimburse disability-based stays, which utilize more long term care services. Thus, from the beginning, the idea that Medicare would cover long term care expenses was never intended. Also eligible, without regard to age, were qualified disabled individuals (under Social Security’s definition), and those suffering permanent kidney failure. Medicare is administered by the Health Care Financing Administration (HCFA). There are three parts to Medicare - Part A, Part B and Part C. Part A benefits cover institutional care including inpatient hospital care,

limited skilled nursing home care, some home health care expenses and hospice care. Part A is financed almost exclusively by payroll (FICA) taxes (1.45 percent of all income earned). There is no additional premium cost to those eligible for Medicare coverage. Part B is a supplemental and an optional program. Coverage includes physician services, outpatient hospital care, physical therapy and other miscellaneous medical expenses. Twenty-five percent of the premium is paid by the Medicare beneficiary and 75 percent from taxpayer general revenues. In 2001, the monthly premium for Part B is $50.00. This premium is usually deducted from the Social Security benefit check that is paid to the Medicare-eligible individual. The individual over age 65 does not have to elect Part B coverage and has an option of enrolling in the program within the first 90 days of each year. Part C is known as Medicare+Choice. Beginning in November 1999, all Medicare beneficiaries may choose between the traditional Medicare fee-for-service program and the new Medicare+Choice program. Medicare+Choice will offer beneficiaries a number of health delivery models, including HMOs, preferred provider organizations (PPOs), provider sponsored organizations (PSOs), Medical Savings Accounts (MSAs), and private fee-for-service Medicare. MEDICARE AND LONG TERM CARE This lesson is intended to discuss Medicare only as it relates to coverage of long term care expenses. As an insurance agent and financial planner, your knowledge of the long term care aspect of the Medicare program is vital to properly designing and communicating a solution to your client’s or prospect’s long term care needs. Medicare is the most misunderstood government program in identifying what is actually covered for long term care services. As noted above, the Medicare program was primarily designed for acute medical care needs. But the health problems the elderly are faced with today are related to the inability to perform activities of daily living (ADLs). This treatment model is primarily a disability model, not an acute medical care model. The expectation level for comprehensive long term care coverage under Medicare should not be high since Medicare is not designed to cover chronic care conditions.

Medicare Part A addresses two primary areas of long term care - nursing home and home health care. Nursing Home Coverage Skilled care in a nursing home environment is the only type of care that Medicare will cover. It can be either skilled nursing care or skilled rehabilitation care. Individuals needing intermediate care or custodial care (assistance with activities of daily living) are not covered and will not receive any financial assistance from Medicare. To be eligible for reimbursement for skilled care in a nursing home facility, the patient must meet four requirements:

1. A consecutive three-day hospital stay (not including day of discharge) must precede entry into a skilled nursing home facility (providing the nursing home admission occurs within 30 days of hospital discharge) and the same medical cause must exist for both hospital and skilled nursing facility admission. 2. The care needed by the patient must be skilled nursing or skilled rehabilitation services. 3. The skilled nursing home facility must be certified by Medicare. According to the Health Care Financing Administration, only about 50 percent of skilled nursing facilities are certified. 4. A physician must certify the need for this skilled care on a daily basis.

All four of these requirements must be met in order to become eligible for coverage for skilled nursing or rehabilitative care received in a skilled facility. If these requirements are not met, Medicare will not pay the claim. It happens. In New York, a nursing home resident required eye surgery and transferred to a hospital for two days for the procedure. She returned to the nursing home where she requested and received skilled nursing care. The patient felt that with her age, overall condition and ongoing arthritis therapy, skilled care was necessary because of the potential for complications following surgery. Medicare, however, denied the claim since her hospital stay was under the three-day requirement and skilled care was not needed on a daily basis. The woman took the case to court but her request for reversal was denied. Medicare’s decision to deny the claim was based on the fact that her primary care need was for custodial, not skilled care. If all four requirements have been met, up to 100 days of skilled nursing care benefits are provided. However, it is not as simple as it

may seem. Here is what Medicare will pay for skilled nursing care in a certified facility in 2001:

Days Amount 1 - 20 100% of the cost

21 - 100 all but $99 per day 101 + nothing

The second benefit phase, days 21 through 100, requires the patient to pay the first $99 per day. As you can see, Medicare’s financial responsibility diminishes significantly. In Orange County in Central Florida, the average cost of a nursing home stay is about $106 per day. So a person staying in a nursing home facility that charged the average rate would receive little reimbursement from Medicare during this period ($7 per day). The sizable co-payment required for days 21 through 100 reduces the payout from Medicare. If the patient has a Medicare supplement, the patient could be reimbursed $99 a day depending upon the type of coverage offered in the Medicare supplement policy. After 100 days, the patient is responsible for the entire cost. Medicare or a Medicare supplement will not cover skilled nursing care after this period. A better description of Medicare’s skilled nursing “Under Medicare, one might receive benefits for up to 20 days for certified skilled care rendered in a skilled nursing facility if one meets certain conditions. One might also receive a small amount of money during the next 80 days of skilled care provided in a certified skilled nursing facility.” The Guide to Health Insurance for People with Medicare further cautions individuals about distinguishing a skilled nursing facility from a nursing home facility. The purpose of a skilled nursing facility is to dispense skilled nursing and rehabilitation services, not custodial care as most nursing home facilities provide. A skilled nursing facility, for example, could be part of a hospital. Today, more and more medical centers are branching out and offering a multitude of services. It is important to note that many skilled nursing facilities specifically do not accept Medicare patients. This becomes an important question

to ask the management of the facility that is being considered so that the resident is assured eligibility for Medicare reimbursement. An example might clarify the extent of Medicare’s skilled nursing care coverage. Assuming that a Medicare patient met all of the previous requirements to be eligible for Medicare reimbursement for a skilled nursing facility stay, how much would Medicare cover for a 180-day stay at $110 a day in a skilled facility?

Days Medicare Daily Coverage Total Patient Daily Fiscal Responsibility Total

1- 20 $110.00/day $2,200.00 0 0 21-100 $11.00/day 1,040.00 $99.00 $7,920.00

101-180 0 0 $110.00 $8,800.00 $3,240.00

(16%) $16,720.00

(84%) The coverage for a skilled nursing home facility stay is limited. The gaps in this coverage are:

1. A $99 daily co-payment beyond the initial 20 days of treatment. 2. No coverage for skilled care beyond 100 days. 3. No coverage for intermediate or custodial care. 4. No coverage if the three-day hospital stay requirement is not satisfied or if the patient is not transferred to a skilled nursing facility on a timely basis (within 30 days of the hospital stay).

Home Health Care Long term care services usually involve custodial care. If custodial care is administered, Medicare can pay the claim as long as it is in a home setting. Medicare will pay the costs of medically necessary home health visits. There are requirements that need to be satisfied before Medicare will approve a claim: 1. Part-time or intermittent home health care is covered. Medicare will not pay for 24-hour care. Medicare defines intermittent care as skilled nursing care provided on fewer than seven days each week or less than eight hours each day (combined) for 21 days or less (with extensions in exceptional circumstances when the need for additional care is finite and predictable). Individuals requiring daily skilled

nursing care at home, even if not on a full-time basis, may have difficulties with their claim. 2. The patient must be housebound. This is defined as a medical condition restricting the ability to leave the house except with assistance. The patient is also considered housebound if it is medically inadvisable to leave the house. 3. The patient must be under a physician’s care and the physician must certify the need for the home health care. 4. The home health care agency providing the services must be certified by Medicare. Like skilled nursing facilities, approximately 50 percent of the home health agencies in the country are certified by Medicare. Unlike skilled nursing care provided in a certified skilled nursing facility, home health care reimbursements do not have co-payments. The only exception is the need for durable medical equipment (wheelchairs, hospital beds, etc.). In this case, Medicare pays 80 percent of the cost. Covered services include:

• part-time or intermittent skilled nursing care • physical therapy • speech therapy • occupational therapy • medical social services under the direction of a physician (for example, counseling for emotional problems) • medical supplies • part-time or intermittent services of a home health aide • durable medical equipment

Medically necessary use of durable medical equipment, such as wheelchairs, oxygen equipment, artificial limbs, braces, ostomy supplies and hospital beds, is covered at 80 percent. The patient must pay for 20 percent of the cost. A bathroom grab-bar, for example, is not covered because it is not medical in nature. Neither are elevators or lift devices since people who are not sick or injured use them. Medicare adheres to its requirements and the slightest infraction can result in the non-payment of a claim. An 82-year-old woman suffering from heart disease, weight problems, and other conditions was denied home health care coverage because she was not

housebound. She was able to leave her house for a few hours a week to do errands and attend church. She had a frequent need for a walker, but not enough to warrant being housebound. Although her physician prescribed home health care services, Medicare denied the claim based on her failure to meet the housebound requirement, a decision that was upheld by a court of appeals. Medicare specifically does not cover the following under its home health care package:

• full-time nursing care • meals delivered to the home • prescription drugs • twenty percent of the cost of durable medical equipment or charges in excess of the Medicare-approved amount for such equipment • homemaker services that are primarily needed to assist in meeting personal care or housekeeping needs

The home health care benefits under Medicare are intended for part-time, medically necessary care that is associated with a skilled need. Thus, while custodial care is covered, it is important to note that if it is 100 percent custodial care without any skilled care needed, the claim runs the risk of being denied. While coverage for nursing care is very limited, Medicare’s reimbursements for home care, despite the aforementioned requirements, are soaring. From 1990-1995, growth rates for Medicare home health spending were, respectively, 52.7 percent, 44.6 percent, 37.8 percent, 31.5 percent, 30.2 percent and 35.8 percent. The average home care patient gets 80 visits a year - nearly quadruple the frequency of a decade ago. In addition, Medicare pays as much as $90 per visit and home care is now utilized by 10 percent of Medicare beneficiaries. Medicare fraud has been particularly abusive in the home health care industry. There have been controls put in place over the last eighteen months to reduce the $2.2 billion annual fraudulent payments. Effective controls can help bolster Medicare’s reserves. Home Care of North Central Tennessee, Inc., paid $1.2 million back to the Medicare program as part of a January, 1998 settlement for billing Medicare for home care reimbursement for patients who did not meet the housebound requirement.

Under provisions of the Balanced Budget Act of 1997, more than $16 billion in home health services will be deleted from projected Medicare expenditures over a five-year period (1998-2002). There are concerns on the part of states that this may place pressure on the Medicaid program because seniors close to the poverty line will switch to Medicaid if denied Medicare benefits for home care. If this happens consistently, the government will only be reshuffling the money, passing along more liability to states through Medicaid. The Clinton Administration is concerned. Medicare has essentially not changed the home health care eligibility rules, but has altered the way home health agencies are reimbursed. Instead of being paid visit by visit virtually without limit, a new annual limit has been imposed on home health care agencies. The limits are based on the number and average cost of patients served in the past. Home health agencies, with an eye to their budgets, have begun cutting back on home care services. However, HCFA recently notified agencies that the new method of payment should not mean that people who qualify and need home care should have services cut. There is a delicate balance between quality care and budgets, as managed care has illustrated. The government cannot be faulted for making its most recent policy decisions with an eye on the upcoming large volumes of new Medicare beneficiaries. Medicare’s contribution to overall long term care costs is currently minimal and there is every expectation that it will continue to promote funding alternatives to salvage the program for future beneficiaries and cover what its creators initially intended - acute care. The requirements needed to receive benefits from Medicare eliminate many of the standard claims that would otherwise be filed. Long term care insurance was designed to cover these types of claims. THE BALANCED BUDGET ACT OF 1997 The Balanced Budget Act of 1997 will have an impact on Medicare. As noted above, a new method of reimbursing home health care agencies has already led to cutbacks in long term care provided. In addition, the Act places heavy emphasis on encouraging Medicare beneficiaries to choose managed care health plans. The new Medicare+Choice plans give seniors the option to select an alternative method of receiving health care other than the traditional

Medicare program. Choices include Health Maintenance Organizations (HMOs), Preferred Provider Organization (PPOs), Point-of-Service (POS) plans and Provider-sponsored organizations (PSOs). It is not clear to what extent long term care will be affected. In the current Medicare select program, which gives Medicare beneficiaries a choice of enrolling in an HMO, long term care coverage had typically been more extensive than in the traditional Medicare program. This has changed somewhat over time, as HMOs experienced more intensive claims in this area than expected. Medicare+Choice may also attempt to attract seniors with more attractive long term care benefits, including home care. These new plans may eliminate the need for a Medicare supplement much as the Medicare select program has done. MEDICARE SUPPLEMENTS Do Medicare supplements help? Some. But these policies, so familiar to seniors, only fill in the gaps of those services Medicare designates to be paid. Supplements do not add much to those gaps Medicare has left behind. For example: For a patient receiving skilled nursing care in a skilled facility, Medicare will pay the first 20 days up to its approved amount. A co-payment of $99 (in 2001) for the next 80 days is required from the patient, with Medicare paying the difference. The Medicare supplement will pay the $99 co-payment. However, after 100 days, neither Medicare nor a Medicare supplement will pay anything. Supplements are not designed to add extra benefits to what Medicare already pays, but to supplement the existing benefit. Medicare supplement policies are sold in ten standard, but specific plans, labeled A through J. Not every insurance company selling Medicare supplements offers ten plans. Some insurance companies do not offer the same number of plans in every state. Neither plan A or plan B offers coverage for the co-payment of $99 for the skilled nursing facility. Plans C through J, however, do cover co-payments. If your client has Medicare supplement plan A or plan B, the lack of co-payment coverage should be identified.

Medicare supplement plans D, G, I and J assist with home care benefits. Here, the coverage, labeled at-home recovery benefits, pays up to $1,600 per year for short-term, at-home assistance with activities of daily living for those recovering from illness, injury or surgery. The assistance must be in the form of Medicare-covered home health care services and must be ordered by a physician. There may be limits on the number of visits and dollar amounts. For example: Some plans pay up to $40 a visit for up to seven visits a week for a period of up to eight weeks after Medicare-covered home health care benefits cease. A supplement will not duplicate Medicare coverage. However, insurers have the option of offering expanded benefits under these plans. The majority of seniors believe that Medicare or a Medicare supplement will pay for long term care costs. As an agent it is your responsibility to explain the gaps in these coverages. There is an increasing skepticism with which the elderly view Medicare in light of the Balanced Budget Act of 1997, and the heated discussions on Capitol Hill that revolve around the Medicare Program. Discussing Medicare and what is covered is important to your client. MEDICARE DISCLOSURE For those individuals who own a Medicare supplement policy and wish to buy a long term care insurance policy (or any other type of health insurance that offers coverage for long term care services), a disclosure form is required by the Social Security Amendments of 1994. The form, adopted by the National Association of Insurance Commissioners in 1995, is as follows:

IMPORTANT NOTICE TO PERSONS ON MEDICARE. THIS INSURANCE DUPLICATES SOME MEDICARE

BENEFITS.

This is not a Medicare Supplement Insurance Policy.

Federal law requires us (insurer) to inform you that this insurance duplicates Medicare benefits in some situations.

• This insurance provides benefits primarily for covered nursing home services.

• In some situation Medicare pays for short periods of skilled nursing home care and hospice care.

• This insurance does not pay your Medicare deductibles or

coinsurance and is not a substitute for a Medicare Supplement insurance policy.

Neither Medicare nor Medicare Supplement insurance provides benefits for most nursing home expenses.

Before You Buy This Policy

• Check the coverage in all health insurance policies you already have.

• For more information about long term care insurance, review the Shopper’s Guide to Long Term Care Insurance, available from the insurance company.

• For more information about Medicare and Medicare Supplement insurance, review the Guide to Health Insurance for People with Medicare, available from the insurance company.

For help in understanding your health insurance, contact your state insurance department or state senior insurance counseling program.

The intent of this is to avoid scandals such as the one that plagued insurers and insurance agents several years ago when elderly individuals purchased several Medicare supplement policies that duplicated benefits. Many state insurance departments have been carefully regulating and monitoring the sale and marketing of long term care insurance to avoid any future problems. MEDICAID Medicaid is a different program entirely. Other than the fact that both Medicare and Medicaid are government programs financed by taxes, there is little relationship between the two. Medicare is a health care program for Social Security-eligible seniors who automatically qualify for benefits when they reach age 65. Medicaid is a joint federal-state plan that pays health care expenses for low-income individuals. There is a significant difference in eligibility requirements: Medicare - Individuals become eligible by reaching age 65 (Part A) and paying a monthly premium (Part B (optional)). Medicaid - Individuals become eligible by having income and assets at or below poverty level (amounts vary by state). Medicaid is a welfare assistance program for low-income individuals. Many low-income elderly have come to rely on Medicaid to pay for long term care costs. Funded with state and federal money, it assures

health care to 37.5 million low-income Americans, including more than five million over the age of 65. For these elderly, Medicaid pays for nursing home costs, home health care and prescription drugs. In 1996, Federal and state government spending on Medicaid was $147.7 billion, 30.6 percent of all public spending on health care. Two-thirds of all nursing home residents rely on Medicaid, making this program an important source of financial assistance for those needing long term care. Established in the 1960s, Medicaid is funded by state and federal funds, with approximately 57 percent of the costs funded federally, and 43 percent by the states. Congress has paid close attention to Medicaid in recent years, because it must account for slightly more than half of the funding of any new program involving Medicaid. This has led to complaints from the individual states about unfunded mandates. Unfunded mandates require local governments to find the dollars to support federal legislation. Legislation passed in 1995 at the federal level is intended to prevent this from happening in the future. While there are some federal guidelines concerning Medicaid, every state designs its own program. This creates a diversity of eligibility and plan benefits from state to state. Services covered under the Medicaid program include:

• inpatient hospital care • inpatient skilled nursing facility care • home health care • physician services • outpatient hospital services • transportation costs to medical facilities • laboratory services • x-ray services • Medicare deductibles, co-payments, coinsurance and premiums

Steps in qualifying and applying for Medicaid are:

1. The individual needs long term care and receives it from a nursing home, at someone’s home, or in an assisted living facility. 2. The patient files for Medicare benefits in the event Medicare will reimburse some of the cost. 3. If private insurance coverage exists, the patient must file a claim with the insurance company. 4. The patient begins spending and then exhausts all of his money. 5. The patient files a claim for Medicaid benefits.

How common is this scenario? Today, almost 90 percent of the costs for long term care services are paid for by either the individual in need of care or by Medicaid. Medicaid is available to any American who can satisfy the eligibility requirement of low-income and little or no assets. This eligibility requirements differ for single persons and married persons thanks to the Medicare Catastrophic Act of 1989. Each state has its own income and asset eligibility guidelines. Generally, a person’s assets must be at or near poverty level to qualify. Many states set the poverty level at $2,000-$3,000 of assets. The Medicare Catastrophic Act of 1989 also affected Medicaid by installing safeguards for the spouse of the person requiring long term care services. Prior to the Act, the at-home spouse was included in the eligibility requirement of low-income in order for the person requiring assistance to qualify for Medicaid. This often left the healthier individual in a near-bankruptcy situation. The Act established the minimum monthly income and shelter allowance for the at-home spouse to prevent bankruptcy. While Medicaid requires individuals to exhaust their income and assets, a few items are exempt from this financial free-fall:

1. The house (while spouse is living), regardless of value. 2. One automobile 3. Household and personal belongings 4. Wedding and engagement rings. 5. Life insurance. 6. Burial plots and funeral expenses up to $2,500.

For the at-home spouse the monthly income and shelter allowance can go as high as $2,000 per month. The community spouse is also allowed to retain one-half of the couple’s assets up to $80,000, varying by state and indexed by inflation. For the single individual, the need for long term care services precludes the necessity of retaining assets above $2-3,000. The nursing home resident is also permitted a personal needs allowance that is extremely low and also varies by state. There are 19 states, including Florida and Texas, where one cannot qualify for Medicaid nursing home assistance at all if income exceeds a certain monthly level ($1,536 in 1999), even if one spends down assets.

These numbers magnify the importance of planning ahead. To lose the bulk of one’s assets and income due to the need for long term care services can be devastating. However, since the majority of people are not planning ahead for the long term care contingency, many of these individuals are finding Medicaid at the end of the financial road. This has placed a heavier burden on government, which passes that encumbrance on to taxpayers. In 1995, average daily nursing home rates for Medicare were almost 50 percent higher than those for Medicaid. While Medicare was paying $120/day for the nursing home bed, Medicaid was paying only $85. Small wonder that many quality nursing homes do not accept Medicaid patients - they can’t afford them. Higher dependence on Medicaid for reimbursement of nursing home costs is at odds with closing the reimbursement gap. New York recently passed a law that encourages up to 50,000 Medicaid beneficiaries to enroll in a managed long term care program in an attempt to slow costs. The law stimulates the creation of more affordable Continuing Care Retirement communities. The state is hoping to strike deals with long term care providers to treat these patients. To determine eligibility, Medicaid reviews the income and assets of the applicant and his or her spouse. The types of assets that Medicaid looks at, and which must be disposed of if a person applies for Medicaid assistance, are a second car, vacation home, investment properties, savings and certificates of deposit, bonds, IRAs and other retirement vehicles. It is possible to transfer some of these assets to another person. Transferred properties are not considered assets when qualifying for Medicaid. Although Medicaid was not designed to aid the wealthy, a growing number of Americans have been making arrangements to transfer their assets to avoid spending their own money. THE TRANSFER GAME Attorneys specializing in elder law often used an elaborate plan called reconfiguration. This involved transferring assets to someone else, typically a child. The object of the transfer game was to see how many assets could be legally moved and how fast Medicaid eligibility was achieved once the senior client became ill. In so doing, the client stepped up his eligibility for Medicaid assistance by avoiding spending those assets. Legally, the client no longer had assets.

However, Medicaid had a catch. The 1989 Medicare Catastrophic Act required that these assets be transferred 30 months before filing for Medicaid. This necessitated planning ahead. A Harvard University study found that nearly two-thirds of the inhabitants of one of Boston’s wealthiest suburbs were eligible for Medicaid immediately. As a result, Medicaid expenditures soared. States began having difficulties balancing their budgets. Long term care expenses were identified as the area largely responsible for the substantial increase in Medicaid costs. When it became clear that many middle-class and wealthier Americans were using the Medicaid program to pay for long term care expenses, the federal government acted. The passage of the Omnibus Budget Reconciliation Act of 1993 (OBRA), in effect, eliminated most of the transfer game pieces by imposing more stringent requirements on qualifying for Medicaid assistance. With the passage of OBRA ‘93, regular transfers of assets must occur 36 months prior to applying for Medicaid and transfers out of a trust must occur 60 months prior to applying for Medicaid. In addition, the law stated that individual states had to enact, by 1995, legislation concerning estate recovery. As a result, Estate Recovery or Lien Recovery Acts have been enacted in all states. Medicaid was intended to be a true welfare program, not an artificial one. People who do not wish to spend their own assets have legally avoided doing so and are now siphoning dollars away from the legitimate poor who need care. The Medicaid program is simply running out of money. An attempt by the government to reduce costs by cutting back reimbursements to medical providers, for example, has not helped either. Unfortunately, by reducing medical reimbursement, it has forced many providers to not accept Medicaid patients. It is worth noting that the transfer game did have some unexpected outcomes from those who played it. Many people who transferred their assets found themselves in the unwanted position of having to ask their children or relatives for money. Many nursing facilities and home health care agencies do not accept Medicaid assignment so individuals who otherwise would have had the choice of a nursing home facility or home health care agency were limited to facilities that accepted Medicaid. The nursing home facilities that did accept Medicaid patients often crowded them three to four in a room. In short, the final results from the transfer were financially acceptable but emotionally difficult.

For those desiring to transfer assets, this must be done 36 or 60 months prior to applying for Medicaid. OBRA ‘93 also penalized those who transferred assets during this period. The ineligibility period is extended based on both the amount transferred and the cost of the average daily nursing home rate in one’s geographical area. For example: Let’s say our Mrs. Barnes transferred assets of $250,000 and then applied for Medicaid within the 36 month eligibility period. Since the local average monthly nursing home rate is $2,500, this transfer and subsequent application will disqualify the individual for 100 months ($250,000 divided by $2,500) instead of 36 months. The Health Insurance Portability and Accountability Act of 1996 raised the ante on the transfer game even more. HIPAA made asset transfers, in certain cases, a federal crime if the transfer was done in an attempt to qualify for Medicaid. There are many in government who feel the Medicaid program can survive if benefits are confined to aiding only those who are truly needy. There is little patience with the individual who has achieved the poverty level on paper. There are three conditions that raise the red flag:

1. Assets are transferred to someone other than a spouse. 2. The transfer is done willingly and purposefully to qualify for Medicaid. 3. The transfer triggers an “ineligibility” period (see reference to 36 and 60 months above).

The penalty was possible jail time and/or a fine levied for the person who assets were transferred. This had the effect of scaring the wits out of senior citizens. A Newsweek article that ran September 30, 1996 was headlined “Medicaid is Getting Tough with Granny.” The Balanced Budget Act of 1997, however, exonerates the person whose assets are transferred and instead directs the jail and/or fine at the planner who assists in the transfer. This had a chilling effect on elder law attorneys. A lawsuit challenging the constitutionality of Balance Budget Act of 1997 provisions resulted in a settlement with The Justice Department agreeing not to enforce these planner provisions. However, if transferring assets is desired as a planning technique, it is probably better to consider long term care insurance instead. SUMMARY

Medicare and Medicaid are two separate and distinct programs that can provide payment for long term care services. But there are drawbacks to each program. In general: Medicare - This program covers some skilled nursing care in a nursing home or at home if specific qualifications are met. Home health care is available but is subject to stringent eligibility rules. There is no coverage for true custodial care, the most common of the long term care services needed. Medicaid - This program pays the costs for many long term care services for individuals at or below the poverty level. Medicaid benefits are usually not available until the individual’s savings have been depleted.

Lesson6Alternate Funding Sources

• List various alternatives to funding long-term care expenses with an individual long-term care insurance policy. • Describe what accelerated death benefits are and how policy owners can access these benefits. • Explain how long-term care riders on life insurance policies can help finance long-term care expenses. • Describe how a viatical settlement works. • Describe how group long-term care policies are treated differently by employers than other employer-provided benefits.

Accelerated Death Benefits - An option in a life insurance policy where the insurance company will pay all or part of the policy death benefit prior to death. This benefit can pay the cost associated with catastrophic medical conditions that can include the need for nursing home confinement.

Advocacy Programs - Advocacy programs provide individuals to assist convalescing seniors. Advocates work with needy seniors by visiting them in their home and accompanying them to medical appointments. Advocates may also help out seniors in other areas as the need arises.

Annuity An annuity is a systematic liquidation of principal and interest over a specified period of time. An annuity can be measured by a fixed duration (e.g., 20 years) or by the lifetime of one or more persons.

Long-Term Care Rider - This is an optional benefit that can be added to a life insurance, annuity or disability income policy to provide benefits for long-term care.

Viatical Settlements - The purchase, on a reduced basis, of a life insurance policy by an investor.

hile much of the discussion in this course has centered on individual long-term care policies, it is important that you

realize there are other ways to finance the long-term care risk. These additional methods give consumers choices in meeting their long-term care needs. Among these alternatives are:

• Accelerated death benefits • Long-term care riders • Viatical settlements • Group long-term care insurance • Annuities

Accelerated Death Benefits Accelerated death benefit options were developed because of the common complaint of life insurance policyholders that those who suffered from a catastrophic or terminal injury or illness struggled physically and financially while a substantial death benefit was in force but not accessible. While there was easy access to the cash value if the policy was not term insurance, the cash value was not nearly as high as the actual face amount of the policy. An accelerated death benefit option gives the policyholder access to at least a portion of the death benefit before he or she dies. This money can be used for a variety of expenses before death actually occurs, including long-term care expenses such as home health care or a nursing home stay. The accelerated death benefit is a policy option that was first added to life insurance policies at an additional premium charge. Today, however, few insurers charge for this benefit until the policy owner exercises his or her right to withdraw the money, at which time an administrative fee is assessed. Most insurers place a limit on the amount that can be withdrawn as an accelerated death benefit, with amounts varying from 25 to 50 percent. While a few companies allow a higher amount, sometimes up to the entire face amount, the 25 to 50 percent limits are more common. For example: A policy with a $250,000 face amount and a 50 percent accelerated death benefit will permit the early withdrawal of

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$125,000 to be used for medical and other expenses due to an illness or other condition that requires the need for additional funds. Long-Term Care Ordinarily, most consumers do not consider buying long-term care insurance until they reach age 65. These consumers typically associate the long-term care need with post-retirement concerns. However, by the time long-term care coverage is sought, the premiums may be too high or the coverage unattainable because of the applicant’s health. Buying long-term care coverage before age 65 results in a lower cost and usually easier attainment because of medical history. Thus, the purchase of a long-term care rider added to a life insurance policy can accomplish this early purchase objective. The need for a larger face amount in a life insurance policy usually diminishes with time as children grow up and move on, the mortgage is paid off, and other debt is reduced. With a potential long-term care need looming, the use of the larger death benefit can be applied to long-term care expenses. However, if the insured is forced to rely on a policy’s cash value, the money available may not be adequate to pay the cost of long-term care services. Long-Term Care Riders Some long-term care riders allow direct access to the policy face amount at a stipulated percentage each year. Typically, the long-term care rider pays two percent of the face amount of the policy each month for long-term care expenses. For example: A $100,000 policy might yield a $2,000 monthly payout for long-term care expenses, or about $66 a day. Payments generally continue until the policy reaches the rider’s payout limit, which might be 50 to 75 percent of the total face amount. Some policies allow the payout to use the entire face amount, in which case it would take 50 months at two percent per month to use up a $100,000 policy. With nursing home costs averaging nearly $110 a day, a policy face amount of $165,000 would generate this daily amount at two percent a month. Viatical Settlements Viatical settlements are another way to use a life insurance policy to help pay for long-term care expenses. A viatical settlement

arrangement involves an exchange with a terminally ill patient transferring ownership of a life insurance policy to an investment company in return for a smaller amount of cash. The individual receives the much-needed cash and the investment company receives the policy death benefit upon the death of the insured with the hope of a substantial high rate of return. Typically, the individual receives anywhere from 60 to 80 percent of the death benefit of the life insurance policy. There has been a great deal of controversy regarding viatical settlements. State insurance regulators, while acknowledging the benefits of viatical settlement funding of medical costs for many people, are trying to find a balance between desperation and greed. Too often, a viatical settlement will involve a policy that is exchanged for far below its death benefit simply because the patient sees no other way to obtain the money needed for living and health care expenses. For example: A woman dying of breast cancer, and too ill to work following a last-ditch bone marrow treatment, cashed in her life insurance policy for less than its face value using a viatical settlement. She took the money and invested a substantial portion of it, earning interest back and restoring some of the face amount. She used the balance to travel to see her family and to pay for medical expenses, including one prescription that cost $350. “People just don’t want to talk about their death at all,” she said. “But you have to look at every option.” Annuities Many deferred annuities contain a provision that allows the annuitant to withdraw funds to pay for long-term care expenses, while avoiding any applicable surrender charges or penalties. Access to this money, which could represent a significant amount of retirement assets, may meet most of the annuitant’s long-term care costs depending on the amounts of the annuity. If the annuity owner needs care in a nursing home and there is little chance of recovery or release from the facility, these proceeds might be more appropriately used to fund long-term care needs rather than retirement needs. Many agents and financial planners recommend variable annuities because of their tax deferral and potentially substantial interest rate. The interest earned may be withdrawn to pay the premiums for a

long-term care policy. This alternative preserves the original asset, creates an alternate funding vehicle for a long-term care policy, and still results in a large asset that can be used to meet a variety of other needs, including retirement funding. History Historically, group coverage predated individual policies in the insurance marketplace. For example: Both group life and group disability policies were forerunners of individual policies. However, for long-term care policies it was different, with individual policies introduced before group policies. Group Long-Term Care Growth in the group long-term care market was steady from its beginning in 1987 to the early 1990s. However, in 1991 group long-term care sales peaked. Since then, a steady decline in group sales limited further progress of this type of insurance model. A couple of factors led to the decrease in the sale of group long-term care. First was the lengthy congressional debate surrounding the national health care program proposed by President Clinton. Employers were not only concerned how long-term care would be affected by a national health care program, but the uncertainty of the impact on an employer’s overall health care costs brought employee benefit expansion to a halt. Second, the tax ramifications of long-term care coverage were not clear. This not only made employers reluctant to consider this coverage; it relegated group long-term care to a voluntary status, with premiums paid by employees. The passage of legislation in 1996, clarified the tax rules for group long-term care provided by employers. They are allowed to deduct premiums as a business expense. The premiums that the employer pays are not considered compensation to the employee. In addition, benefits received under a group long-term care policy are free of income taxation. Many employers see group long-term care as a “leading edge” benefit and are offering long-term care coverage to improve recruiting and retention. The top recruits carefully review a company’s benefits before choosing where to work.

Employers pay for many employer-sponsored benefit plans. However, this is not the case with the majority of group long-term care programs. The employee selects the plan and premium amount that best fits his or her situation. If the employer contributes at all, it is generally in the form of a subsidy, covering only a portion of the employee’s costs. Cost Of Group Long-Term Care The cost of group long-term care, while less expensive than individual long-term care, is still higher in relation to the premiums for individual plans than group life and disability are to their individual counterparts. While group long-term care is less than individual coverage, the rate reduction is in the 30-40 percent discount range rather than the 50-70 percent range that might be found in the disability income market. Others Alternatives An insurance professional should be aware of as many alternative financing arrangements as possible. Some potential clients may not always qualify for long-term care coverage and some others may not be able to afford the necessary coverage. Discount Programs At least one organization has a nationwide Preferred Provider Organization of nursing homes and home health care agencies. Subscribers receive a discount card to utilize the services of the organization’s members. If the need for care exists, the individual contacts one of the member providers, shows the discount card, and receives the discount. There is a small annual fee for the service, but the discounts are typically in the 20 percent range. Advocacy Programs The use of an advocate to assist a convalescing senior can help to reduce long-term care costs and improve the health of seniors. The St. Patrick Seniors Center in Detroit uses advocates, who are often seniors themselves, to work with needy seniors by visiting them in their home and accompanying them to medical appointments. Advocates can also help to complete paperwork, assist with errands, and help lead seniors to available resources.

One participant who suffered a stroke in 1993 was given a poor prognosis with a nursing home stay as the only likely option. Since entering the advocacy program, the man is now walking and exercising and his speech has improved dramatically.

hile most of the product discussion in this course has centered on individual long term care policies sold on a

stand-alone basis, it is important to note that there are other ways to finance the long term care risk. These additional methods give consumers other choices in meeting their long term care needs. In this lesson, the focus will be on the various hybrids of long term care coverage being marketed today. An outline of the most common benefit provisions for an individual long term care policy appears in Lesson 3, “Product Features.” Group coverage marketed through employers, a long term care market ripe with opportunity, is also covered in this lesson. LIVING BENEFITS For years insurance companies focused on death benefits and how important it was to protect against premature death, estate tax, debt settlement as well as to provide income for the surviving family members. While most people know that life insurance is an important financial tool, many dreaded reviewing these plans since the central issue was about death. There also was an emphasis on cash values which were receiving only four percent interest while the market rate was closer to 20 percent. In the late 1970s the life insurance industry was hit hard with huge losses and competitive products on the market. The shift to pure death benefit protection in the form of term insurance began in earnest. This shift significantly altered the premium flow of the life insurance industry. Ironically, at the same time, a growing realization concerning the impact of substantial advances in medical science started to take hold. Life spans were increasing with regularity. Many were living into their 80s, especially women. The financial services industry not only had to deal with premature death but all of a sudden it was confronted with people living longer. The new era of living benefits was ushered in. This aspect of life insurance was appealing to the insurers - what life insurance can do during one’s lifetime added a positive spin to the subject. It had the same attractive aspect that disability income offered - providing income during the lifetime of the policyowner. With mixed reviews

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on universal life insurance to ponder, the industry set about adding features to the life insurance policy that highlighted living benefits as a new approach in sales. The idea of emphasizing living benefits played well with customers. They preferred to focus on accumulation of value for use at a later date by the policyholder and not the beneficiary. Protection of that accumulation became a second focus in which the consumer also showed interest. The first living benefits idea launched successfully was the accelerated death benefit concept. Accelerated Death Benefits The living benefits approach was based on the universal complaint of life insurance policyholders that those who suffered from a catastrophic or terminal injury or illness struggled physically and financially while a substantial death benefit was in force but inaccessible. While there was easy access to the cash value (if the policy was not term insurance), the amount was not nearly as high as the actual face amount of the policy. An accelerated death benefit gives the policyholder access to at least a portion of the death benefit before he dies. The money can be used for a variety of expenses before death actually occurs. Included in these expenses are nursing home stays or home health care expenses. The accelerated death benefit is a policy option that was first added to life insurance policies at an additional premium charge. Today, few, if any insurers charge for this benefit until the policyowner exercises his right to withdraw the money. At the time of payout, an administrative fee is assessed. In 1996, 205 insurers were offering some sort of advanced death benefit pay-out, according to the American Council of Life Insurance. Initially, certain terminal or catastrophic illnesses such as a stroke, renal disease and heart failure qualified for accelerated death benefits. However, most insurers today have broadened their categories to include a stay in a nursing facility or, in some cases, any type of long term care expense. The popularity of accelerated death benefits has grown dramatically. The growth of the viatical settlement industry has set competitive standards for insurers, many of whom have responded by liberalizing

their accelerated death benefit provisions. Most insurers offered it to existing as well as new policyholders and may well have added the option to existing policies since there is no additional premium needed for this feature. Today’s new product offerings usually find an accelerated death benefit option as a regular policy feature. Most insurers place a limitation on the amount of the withdrawal, varying from 25 to 50 percent. While a few companies will allow a higher amount (up to the entire face amount), the limits are more common. For example: A policy with a $250,000 face amount and a 50 percent accelerated death benefit will permit the early withdrawal of $125,000 to be used for medical and other expenses due to the illness or condition that precipitated the need to exercise this provision. The accelerated death benefit can be used, depending on the amount of benefit allowed, to fund long term care expenses. But at what cost to other income needs that life insurance was intended to satisfy? If the policy was purchased, for example, to specifically pay estate taxes, a mortgage balance, and provide income for the family, there will be little or no money available to handle financial problems if the accelerated death benefit option is exercised to pay for long term care expenses. If long term care expenses were budgeted into the face amount calculation, then it is another way to meet long term care needs. Agents assessing total financial needs can keep in mind long term care expenses as part of an accelerated benefit when determining policy face amount, if not addressing the long term care need in another manner. The trend of offering accelerated benefits and expanding the list of conditions is increasing. Advisor Today, published for members of the National Association of Insurance and Financial Advisors, periodically prints a survey of companies marketing this feature in their life insurance products. The passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) also provided needed tax clarification for this type of benefit payment. If the triggers for payment of the accelerated death benefit for long term care expenses match the language required by the law (see Lesson 4 on tax-qualified plans), the benefits are paid tax-free. The agent and consumer need to check the policy language carefully to ensure the provision conforms to HIPAA’s requirements. This should not necessarily be considered a substitute for long term care insurance. Read the accelerated benefits feature carefully to ascertain the flexibility involved in using the death benefit to cover long term care expenses. If the accelerated death benefit feature is

adequate, increase the death benefit by a substantial amount. This can be done by calculating the annual long term care costs and multiplying this amount by at least two (for the average length of stay of two years) and more likely five (based on the five-year length of stay cited in the previously noted New England Journal of Medicine report). Long Term Care Riders Accelerated death benefits were originally intended for terminal or catastrophic illnesses. Today, there are a number of long term care riders that are being offered as living benefits on a life insurance policy. Since the agent is reviewing pre-retirement estate planning with the client, if both living and death needs can be met using the same policy, this convenience may be attractive for the consumer. Historically, consumers have not considered buying long term care coverage before age 65. They typically associate the long term care need with post-retirement concerns. However, by the time the coverage is sought, the premiums may be too high or the coverage unattainable due to health conditions. Buying long term care coverage before age 65 results in a lower cost and (perhaps) ease of attainment due to medical history. Consideration of a long term care rider added to a life policy would accomplish this early purchase objective. The need for a larger face amount in a life insurance policy usually diminishes with time - children grow up and move on, the mortgage is almost paid off and other debt is reduced. With a potential long term care need looming, the use of the larger death benefit can be applied to long term care expenses. If forced to rely on cash value, the money available may not be adequate to pay the cost of long term care services. Some long term care riders allow direct access to the policy face amount at a stipulated percentage each year. Typically, the rider pays two percent of the face amount of the policy each month for long term care expenses. For example: A $100,000 policy would yield a $2,000 monthly payout for long term care expenses, or approximately $66 a day. Payments would continue until a policy payout limit is reached (50-75 percent of the total face amount) or the entire face amount is paid, which would take 50 months at two percent. With nursing home costs averaging closer to $110/day, a policy face amount of $165,000 would generate this daily amount.

Initially, this type of rider paid the flat percentage of face amount out each month for a nursing home stay only, but now more and more of the long term care services previously described are eligible for this type of funding. A policy might offer a different percentage of monthly payout depending upon the type of long term care service needed. For example: A nursing home confinement yields four percent of the policy face amount each month up to 25 months, while the standard two percent payout is made for home health care or adult day care expenses. Using the example of a $150,000 policy, the nursing home pay-out would be $6,000 per month or $200/day, while the pay-out for home care would be $3,000 per month or $100/day. The agent and client should be careful in the amount selected, since the nursing home rate in this example would exceed the $190/day per diem cap unless actual expenses were higher. Similarly, home health expenses could be even greater than nursing home fixed daily costs, depending on the care that is needed. The selection of the amount should be consistent with planning done using a stand-alone long term care policy. This option can also be enhanced by allowing an extension of benefits. In one insurer’s version, after the 50-month period of paying two percent of the face amount exhausts the policy death benefit, an extension of benefits creates a continuing monthly flow of the same benefit amount for another 50 months or as long as needed. In effect, this option creates a second face amount to be similarly paid out at the conclusion of the first payout. The cost to do this is relatively low since the initial payout period would have to be exhausted first before carrying over into the benefit extension time frame. Still, with more and more people able to function (although not independently) due to advances in medical science, this option reduces or eliminates the likelihood of outliving the benefits. A second version of this rider functions similarly to a stand-alone individual long term care policy, paying a separate daily benefit with an elimination period and benefit period. This option has its own pool of benefits and the face amount of the life policy remains untouched. The cost is much higher than the version which reduces the face amount, but it allows both coverages - life insurance and long term care - to be independent of each other while encompassing all benefits under one policy. Tax treatment of this early payout of life insurance benefits is covered under the HIPAA legislation. Language in the long term rider must conform to the tax-qualified requirements of defining “chronically ill” to achieve the tax-free distribution.

A convenient way to obtain long term care insurance and at the same time incorporate it into one’s financial plan is a long term care rider in a life insurance policy. Young buyers are targeted for this type of insurance because it allows insurers to effectively spread the risk since it is more likely that the elderly will utilize this coverage in greater numbers. The ease of purchase, low cost, and better chance of eligibility make this option potentially attractive to future long term care insurance buyers. Annuities The growth in annuity sales for the past several years has been phenomenal. Many deferred annuity policies now contain a provision that allows the annuitant to withdraw funds, avoiding any applicable surrender charges or penalties, to pay long term care expenses. Access to this money, which could represent a significant amount of retirement assets, may meet most of the long term care costs on an immediate basis depending on the amount of the annuity. If the annuitant needs care in a nursing home and there is little chance of recovery or release from the facility, these proceeds might be more appropriately used to fund the long term care need rather than funding retirement needs, generally. Many agents and financial planners recommend variable annuities because of the product’s tax deferral and potentially substantial interest rate. The interest earned may be withdrawn to pay the premium for a long term care policy. This alternative preserves the original asset, creates an alternate funding vehicle for a long term care policy and still results in a large asset that can be used to meet a variety of other needs, including retirement funding. Variable products may not be considered suitable for the older client, so caution should be exercised in discussing this option with a potential long term care buyer. If interest on the principal of an investment is sufficient to pay long term care premiums, fine. But is there room for the interest generated to decrease and still pay the premium? Is there enough margin in the interest received to cover any rate increases that might be levied by the insurer on the long term care policy? Be sure everyone is satisfied with the answers to these questions before proceeding. Since discussions about annuities often focus on retirement, what better time to talk about the serious threat of long term care that can affect retirement income and assets? STATE PARTNERSHIPS

In the May, 1991 issue of The Disability Newsletter, the following statement appeared at the conclusion of an article on long term care insurance: Many people believe that the private sector will not be able to fill the entire void (for long term care), and that the only means to address all consumer needs is some sharing of coverage between the public and private sectors. As such, the most popular scenario for the long term care market is that sometime in the late 1990s, the public sector will become more active in providing long term care coverage to our society. That prediction has not materialized. The ill-fated, sweeping overhaul of the nation’s health care system led by Hillary Rodham Clinton’s task force was “faced down.” The reality of long term care costs and coverage for this need was all but eliminated by the final proposed version. Current Medicare and Medicaid reforms are almost certain to result in less long term care coverage, not more. These aforementioned statements may yet be prophetic as public and private sector cooperation has been reaching new heights with programs designed to encourage consumers to purchase long term care coverage rather than rely on Medicaid funds after assets are either spent or transferred. In 1987, the Robert Wood Johnson Foundation funded a study done by the state of Connecticut to assess the chances of a collaboration between insurers, consumers and the state to solve both the financing of long term care and the preservation of a Medicaid program, teetering on the edge of distinction. The result was the creation of the Connecticut Partnership for Long Term Care. This partnership resulted from efforts put forth following a conclusion that the chances of the insurance industry or the government shouldering alone the burden of providing long term care coverage for a continually aging U.S. population was unrealistic. Private insurance would be appropriate and affordable for some, the study concluded, but would not ease the strain on the Medicaid budget created by the growing need for long term care funding for poor Americans. Connecticut’s purpose, as then stated by Kevin J. Mahoney, project director for the Connecticut partnership, was to provide people with the chance to plan ahead to meet long term care needs without impoverishment and to rein in Medicaid expenditures. Connecticut estimated long term care payouts under Medicaid would reach $1.4 billion by the year 2000.

On August 28, 1991 Connecticut received formal approval from the federal government for its Long Term Care Partnership program. This was a much-needed endorsement since the partnership would affect Medicaid rules. The program involved the sale of a specified state approved policy form sold by insurers, which provided long term care coverage in a lump sum amount. Upon entry into a nursing home, costs would be reimbursed from this lump sum amount until the individual recovered or the funds were exhausted. The key point here is that for every dollar of coverage paid under the policy, the insured could protect a similar dollar amount in assets that would not have to be spent or transferred to become eligible for Medicaid. For example: A $50,000 policy paying benefits in full would enable the individual to shield an additional $50,000 of assets from Connecticut’s current Medicaid rules (assets of $2,000 are allowable) without divesting assets in other ways - an obvious advantage for residents of Connecticut. The state benefits, too, since the $50,000 policy benefits must be exhausted first (including any assets over and above $50,000) before any Medicaid funding is needed. Some people will not outlive the policy benefits and thus will not file for Medicaid. Here are examples of asset sheltering:

Personal Assets Long Term Care Insurance Payouts

Medicaid Countable Assets

Person #1 $65,000 $65,000 0 Person #2 250,000 250,000 0 Person #3 500,000 250,000 $250,000 Person #4 500,000 0 500,00

Each of these individuals represents a different scenario. Person #1 has used the entire policy benefit and completely preserved the $65,000 assets owned without transfer. Without the partnership allowing a dollar for dollar exclusion, the assets would have had to be exhausted. Person #2 also accomplished the same goal but with a greater benefit need and a matching policy benefit. Person #3 purchased a lump sum amount below the fully countable assets. If the entire $250,000 lump sum is spent and a need for benefits still exists, $250,000 of assets preserved and $250,000 is subjected to payout (unless already transferred) before application for Medicaid can be made.

Person #4 chose not to participate in the partnership, leaving the full $500,000 asset base potentially exposed to Medicaid countable assets. Since the start of Connecticut’s private cooperative effort, a number of Connecticut residents have elected to purchase long term care coverage through this partnership program. In the first version of the policy, a 65-year-old buying a $50,000 policy would pay a premium of approximately $960 a year. Currently, there are several insurers participating in the Connecticut Partnership program offering residents a variety of carriers to choose from. A variety of long term care services are covered in the current policy version available. Plans have been refiled to conform to HIPAA regulations to ensure tax-free distribution. The policies are available through an insurance agent. The partnership allows for preservation of wealth - and the Medicaid program. Three other states have received funding and have started their own partnerships - Indiana, New York, and California. Indiana and California’s plans imitate Connecticut’s but New York has even more liberal provisions. A New York resident who buys a partnership long term care policy with at least a three-year benefit period will be able to shield all assets from Medicaid after that period (six years of home care benefits). New York does not bother with the dollar-for-dollar calculation of asset protection as do the other states. Five additional states - Colorado, Florida, New Hampshire, Oklahoma and Vermont - were awarded grants through the Robert Wood Johnson Foundation, but Federal laws have discouraged them from enacting these partnership plans. The essential drawback of the plans is moving to another state. The policy is still valid, but the Medicaid protection is not. Insureds would have to move back to their partnership state to achieve the Medicaid protection. This is inconvenient at best if, for example, the person moved to Florida or Arizona to retire. These plans have proven that the public and private sectors can work together to provide this important protection. To preserve Medicaid, alternate long term financing will have to happen. Far too many people spend all of their assets and then move to Medicaid for future care. Easing of Federal law to allow other states to develop similar programs may open up now that HIPAA has been passed and the federal government has, for now, abandoned efforts to create universal long term care coverage for everyone, administered in Washington, D.C. Interestingly, the United Kingdom is exploring a nationwide partnership-type of program for its residents. The particulars of the

proposed program would protect 1.50 pounds of assets for every 1.00 pound of long term coverage purchased. Estimates are that 40,000 people each year have to sell their homes to pay for long term care expenses. The program was met with mixed reaction. Some people suggested this plan was not necessary as not enough people needed long term care services, while proponents wanted a two for one asset/coverage exchange. The future of partnerships could increase the public’s exposure to private long term care insurance. If the government is truly sending a message of personal responsibility through HIPAA, this is a great start down that road. VIATICAL SETTLEMENTS A number of long term care policies contain benefits payable while receiving hospice care. Hospice care is provided for those with terminal illness. Medicare provides substantial coverage for hospice care. Terminal illness can also necessitate the need for long term care services as part of treatment. As mentioned earlier, accelerated death benefits can be used to fund some of these expenses in the last days and months of life. Viatical settlements are another method used to obtain funding to pay long term costs. Derived from the word viaticum, meaning communion given to Christians who are dying, a viatical settlement arrangement calls for an exchange. The terminally ill patient transfers ownership in a life insurance policy in return for a smaller amount of cash. The individual receives the much-needed cash and the company bestowing the dollars receives the policy death benefit upon the death of the insured at a substantial high rate of return. Typically, the individual receives 60 to 80 cents (and possibly higher) on the dollar for the policy. Most commonly, people with AIDS have sought viatical settlements to help fund their final months and expenses. Cancer and Alzheimer’s patients have also received dollars under this type of program. State regulators, while acknowledging that this source of funding of medical costs has been beneficial to many, are trying to find a balance between desperation and greed. Too often, these policies are exchanged for far below their value, simply because the patient sees no other way to obtain money needed for living and health care

expenses. Several states have passed regulations concerning the registration of viatical companies and their agents. The public perception of viatical settlements is mixed. Those that need the money are obviously in favor of them and many have had the opportunity to “die with dignity.” Others believe these organizations “rip off” needy individuals for more of the face amount than necessary since they know the seller of the policy proceeds is desperate. Writer Lawrence Block in his 1997 book “Even the Wicked” writes of a man who is buying up policies and then murdering the sellers to ensure a quicker payoff. Is this a new twist to a mystery plot or a social commentary on these types of policies? The Securities and Exchange Commission (SEC) also examined these transactions at length to decide whether they should be registered securities. Typically, an organization has several outside “investors” putting up the money to buy the policies. They then wait for death to occur to receive the return on their investment. Is it a security or not? Some organizations voluntarily registered their product. One company securitized $35 million in life insurance policies, followed by an additional $15 million securitization and a $21.7 million initial public offering in 1996. Another company that was fractionalizing its policies (multiple investors into one policy) was ordered to cease this method of viatical settlements, although the sale of full policies was not considered a violation of SEC rules. The state of Florida passed the Viatical Settlement Act in 1996, giving the power of their regulation to the state insurance department. The act defined the role and the licensing requirements of both the viatical settlement provider and the viatical settlement broker. The provider could only use properly licensed personnel to complete the viatical transactions and a non-affiliated escrow agent also had to be in on the transaction completion. By mid-1997, Florida had authorized five viatical settlement providers. In the meantime, the National Association of Insurance Commissioners (NAIC) developed a model policy for viatical settlements. But it was HIPAA that added further endorsement to the whole issue of viatical settlements. In this federal legislation, people are allowed to exclude from their income certain payments received in a viatical settlement. Until that time, viatical payments were taxable events. The HIPAA regulations were called “an enormous victory” for millions of people financially devastated by illness.

One woman dying of breast cancer, and too ill to work following last-ditch bone marrow treatment, cashed in her life insurance policy through a viatical transaction. She took the money and invested a substantial portion of it, earning interest back and restoring some of the face amount she traded in by selling her policy for less than its face value. She has used the balance for medical expenses (one prescription as high as $350 and specialist co-pays) and to travel to see her family. “People just don’t want to talk about their death at all,” she said. “But you have to look at every option.” Viatical sales jumped in 1997, following the effective date of tax-free viatical transactions. One viatical company called January, 1997 the biggest month it had ever had. With progress being made in the life extension of AIDS victims, people with heart disease and cancer have become the fastest-growing segment of the market. By mid-1997, twenty-one states had viatical regulations in place and nine others had legislation pending. Banks, given some new freedoms to venture into the insurance markets, have looked carefully at viaticals as a new product offering. The viatical market continues to grow - between $450 and $500 million over the past three to four years, according to the Washington, D.C.-based Viatical Association of America. Even insurance carriers have formed affiliations with a viatical partner. Those investing, however, should be cautious since a number of viatical firms have folded in recent years. As a means of funding long term care services, viaticals may have some merit. There are a number of competent viatical firms today and, without a long term care insurance policy, the financial alternatives available to individuals who need long term care services are few. While disposal of the life insurance policy may defeat other financial objectives originally intended, a viatical settlement will mean cash when it is needed. A person must apply for a viatical settlement (some applications are quite lengthy) and answer questions in regard to one’s medical history. Obviously, the more advanced the illness, the more likely a settlement. Viatical companies do not need the money right away, but the longer the wait, the lower the investment return. Individuals like the woman with breast cancer mentioned above are the type of candidate viaticals are seeking. Those individuals with high medical costs are likely to have long term care medical expenses that need payment. Viatical funds can provide these dollars.

GROUP LONG TERM CARE Historically, group coverage predated individual policies in the insurance marketplace. Both group life and group disability were forerunners of individual policies. This is not the case with group long term care. The individual product for long term care surfaced first. After the introduction of Medicare, a few companies led by CNA introduced nursing home coverage for skilled care on a short-term basis. The year was 1965. The first group long term care plan would not be developed until 1987. The reason it took so long to develop a group long term care product was the claims experience needed to price a product. Group plans carry a lower premium cost than individual policies do, yet if actuaries felt uncomfortable with the pricing of an individual policy, how easy could it be to lower the premium for a group plan? Moreover, long term care was not a primary concern in the 1960s and 70s. It is only a recent trend as the population starts to age more rapidly and has forced employees to become caregivers for the aging adult. Thus, there was no employer motivation to offer this type of coverage - there was no market demand for group long term care. It was employers that first realized the issue of group long term care was becoming a reality. A number of large corporations, including IBM and AT&T went to insurers offering this coverage and requested the design of a group long term care policy. The problem for insurers had not altered much since 1965. How do you price this type of policy when the data remains scarce? Reluctant to pursue group long term care, the earlier group policies were developed specifically for larger firms. For example: John Hancock worked with IBM’s benefits team to assemble a voluntary group product. A 16-page brochure announcing the program was mailed to all employees, including an offer to receive a free videotape about the new product. In addition, premiums were published for ages 20 to 95 and were divided into three program options: $50 a day, $100 a day, and $150 a day. A further departure from the traditional group insurance product, this voluntary program gave access to coverage not only to employees but to employee’s parents and relatives. Employees that were around 25 years old felt they had little need for this product but had parents in their 50s and even grandparents in their 70s and 80s that might have

an interest in this type of program. Retirees of the company also had an opportunity to buy this coverage and many seized the opportunity to purchase long term care benefits. In February of 1991, a New York Times article indicated that AT&T started mailing out long term care product announcements to 119,000 managers. By this time, companies like Ford Motors, American Express, Monsanto, Proctor & Gamble, and the states of Maryland and Nevada had already ventured into the group long term care product market. Growth in this new group market was steady in the beginning. In 1988, group long term care represented 1.8 percent of all long term care policies sold. According to the Health Insurance Association of America, by mid-1990, there were 153 employer-sponsored plans. By that time, some 700,000 employees were offered the opportunity to purchase coverage as a voluntary employee benefit. At that time, 79,500 people were covered, 60 percent of them active employees, and the balance was retirees or family members. Thus, by 1991, group long term care was up to 8.7 percent of all long term care policies sold. However, in 1991, group long term care sales peaked. Since then, a steady decline in results has limited further progress of this type of insurance model. Outside analysts like the Life Insurance Marketing Research Association (LIMRA) have determined the reason for the decrease in the sale of group long term care based on a couple of factors. First was the lengthy Congressional debate surrounding the Clinton national health care program. Employers were not only concerned how long term care would be affected by a national health care program, but the uncertainty of the impact on an employer’s overall health care costs brought employee benefit expansion to a grinding halt. Second, the status of the tax ramifications of long term care coverage was not at all clear - let alone the tax effect of the employer providing this benefit for employees. This not only made employers reluctant to consider this coverage, it relegated group long term care to a voluntary status, with premiums paid solely by the employee. The result was a four percent sales decrease in 1993 followed by a 79 percent drop in 1994. According to some estimates only about 1,000 employers nationwide had made long term care coverage available to their employees. Obviously, the uncertainty documented above had much to do with this reversal in the growth of group long term care.

The passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) clarified the rules for employers. They were allowed to deduct premiums as a corporate expense (self-employed individuals get a 45 percent deduction in 1998). These premiums paid would not be considered compensation to the employee. In addition, benefits when received were free of income taxation. For employers sitting on the fence wondering what the tax consequences would be, it was time to act. Employers see long term care as a “leading edge” benefit. Factors affecting the addition of long term care coverage to the employees portfolio are reflected below from a 1997 William Mercer survey:

Factors Extremely important Very important Want to offer leading edge benefits 39% 31% Could be offered at lower employee cost 36% 33% A good fit for our workforce 14% 20% Employees/retirees wanted it 21% 6% Senior management wanted it 13% 5% Helped achieve an HR objective 6% 9%

Competitors offered it 3% 11%

Employers may be offering long term care coverage to improve recruiting and retention. The top employees carefully review their benefits before choosing a firm. Long term care coverage may also be of more importance to the single employee rather than the employee with family since the caregiving role is less likely to be shared with another. GROUP PREMIUMS The employer usually pays for employer-sponsored plans. This is not the case with the majority of group long term care programs to date. The employee selects the plan and premium amount that best fits his situation. If the employer contributes at all, it is generally in the form of a subsidy, covering only a portion of the employee’s costs. Still, employee benefit dollars remain lean despite some progress in reducing health care costs through managed care type programs. Additionally, the cost of group long term care, while less expensive than individual long term care, is still higher in relation to the premiums for individual plans than group life and disability is to their individual counterparts.

A comparison of group versus individual premiums is illustrated below:

Group Versus Individual Premiums Age 50

$100/day coverage 5 year benefit period

Inflation option included

Monthly Premium Elimination Period Individual Group 20 days $86.89 $50.80 60 days 82.40 49.00 100 days 77.82 47.50

While group long term care is less than individual coverage, the rate reduction borders on the 30-40 percent discount range rather than the 50-70 percent one might find in the disability income market. Group long term care premiums, like individual plans, vary dramatically with age. Younger buyers (under 40) will be likely looking at this coverage for older relatives, rather than for their own protection. Young people do utilize long term care services, even though on a less infrequent basis. But utilizing the benefits is of little concern to the 25-year-old. What might be more motivating is the knowledge that expenditures over a lifetime for this product, due to its low cost early on, are not as high as for those who choose to buy it an older age.

“Buy Now” Motivation $80/day, 60 day elimination period, 5 year benefit period

Age Annual Premium Years To Age 70 Total Premium Pd. Total Benefits 25 $108.48 45 $4881.60 $219,000 35 $168.96 35 $5913.60 $219,000 45 $325.44 25 $8136.00 $219,000 55 $666.25 15 $9993.60 $219,000

Due to the lower premiums, the potential outlay over a period of time is still much lower than if one chose to wait, say, 20 years to purchase the coverage at age 45 when it seems more relevant. This chart does not factor in rate increases that may be made, but would not alter the

overall picture much since the rate increases at the younger ages will be made to lower premiums, lessening the impact. The average age of the buyers for group long term care will continue to be in the age 40 to age 60 range. The policy is still an excellent buy at these ages and the sense of urgency is greater than for the younger individual early in a working career. Rates will continue to be adjusted as insurers evaluate their group claims experience. Until more policies are sold, however, the validity of their results is still suspect. Insurers, however, are clear in their message: long term care can be important irrespective of age. Protecting your income and assets is essentially what insurance is all about. Long term care is another cog in the protection wheel. The Kroger Company is the nation’s largest grocery store chain. For several years, it has offered long term coverage to its 204,000 workers and their dependents in 28 states. It feels the program is under-subscribed and that employees do not clearly see the need for long term care coverage yet. It is working with its insurance carrier to better educate its employees and encourage them to act before the need arises. Since HIPAA, product development has increased in the group area. One carrier introduced a new group long term care product (aimed at groups of 50 to 300 lives) to a large bank, where there was some base employer contribution and employees could contribute additional premium for coverage if they wanted. The program enjoyed a 20 percent initial enrollment, well above the usual 5 to 15 percent noted earlier. Another insurer introducing group long term care to employers found employers paying all premiums to be 60 percent of their sales now. Could this signal a new group long term care trend? Government employees are getting opportunities to purchase long term care on a group basis. In Georgia, new proposal bids were requested for group long term after it was learned the state’s carrier since 1993 was selling its long term care business. Under the current program, nearly 1,500 of the more than 80,000 employees eligible had taken out long term care coverage. GROUP POLICY PROVISIONS Traditionally, group coverage has maintained a streamlined approach to benefits. Interviews to enroll employees into a group program have

typically been much shorter in length than the time one would spend with an individual for individual coverage. The employee enrollment is usually done on company time, while the individual appointment may be over a meal or the kitchen table. As such, benefits must be easy to explain in a short period of time. Rather than give the employees a wide variety of choices that must be carefully explained, group plan parameters are often pre-set. In group life insurance, the amount is fixed at, for example, $15,000. In group disability income, the product may call for 60 percent coverage of salary, beginning on the 91st day and continuing to age 65. Group insurance plans are not usually voluntary. Payment of premium can be made by either the employer paying the full premium, or a requirement of a certain level of participation. Group long term care may also be streamlined, but generally the benefits are not unlike the typical individual program. Since the passage of HIPAA, tax-qualified plans have ensured that benefit triggers will be identical especially since the employee knows the favorable tax consequences of this program. Only one of the plan design choices may be pre-set. For example: The elimination period may be fixed at 30 days, but the employee can choose the daily benefit and the length of time benefits are payable. Or the benefit period is set at four years and the employee chooses the daily benefit amount and the elimination period. Many features of individual policies also appear in group versions of long term care coverage. However, there are a few provisions that may be different. Coordination of benefits - One would be more apt to find a coordination of benefits provision in a group plan than in an individual plan. HIPAA did determine that expense-incurred individual policies could include a Medicare coordination provision. Group policies have typically had this provision. Benefits in the policy are often offset by dollars received from Medicare or other group long term care plans. This primary coverage versus secondary coverage is typical of group plans. As an example: An employee could be covered at work and also on a spouse’s group long term care plan. At claim time, if the employee needed long term care, the policy at his or her place of employment would be the primary coverage and the spouse’s coverage secondary, paying for costs not covered by the primary plan.

Portability - Group plans often offer a conversion privilege for employees to have the option of exercising if they should leave their place of employment. The conversion would be made to a different policy that normally would not be as generous in benefits as the original plan. So far, however, group long term care plans are more likely to offer a portability rather than a conversion feature. This means the employee can elect to take the identical coverage when departing the firm and continue to pay for it on some basis other than payroll deduction. This made sense up until now, especially since most premiums are paid for by the employee. Thus, the employee in a sense already owns the coverage. Portability simply lets the employee keep the coverage. COBRA requires employers to offer the continuation of health insurance coverage for terminated employees. This does not apply to long term care policies. The portability provision of many group long term care programs eliminates the need for any type of COBRA consideration. Nonforfeiture - Since many of the larger group long term care plans were not off-the-shelf products, they contained features that a company may have specifically desired. One of these benefits was non-forfeiture. For example: A nonforfeiture feature might allow an employee who has paid premiums for ten consecutive years and then ceases payment to retain 30 percent of the original daily benefit amount. With the passing of HIPAA, non-forfeiture benefits will be found regularly in long term care policies, both individual and group. Product hybrids - As time progresses, more companies will begin designing unique products that can be sold to large employer groups. One carrier has introduced a voluntary universal life plan that not only pays a death benefit, but advances up to 75 percent of the face amount for specific “life event” categories. One of these categories is the need for long term care. The plan’s popularity, however, may not be so much in the long term care coverage as in its multiple range of benefit possibilities. Still, there are intriguing ways in which more employees can become interested in long term care insurance. SUMMARY A recent report published by the Hudson Institute called Workforce 2020 noted that by the year 2020, one American in five will be over 65. With life expectancies rising past age 80, more workers are

expected to continue laboring past age 65, the current retirement age benchmark. They will have different employee benefit needs, likely preferring a choice of long term care insurance since they will not be spending their benefit dollars on coverages like dependent medical premium. This will certainly impact the addition of long term care to employee benefit options in the future. But it might not take that long to see a dramatic upswing. According to estimates, nearly 1,500 employers offer some form of long term care insurance. And younger buyers may yet take an interest. According to the National Council on Aging, 44 percent of generation X-ers had provided hands-on care and 20 percent had given financial assistance to a relative. Moreover, the number of insurers offering long term care insurance is increasing, too, as a result of HIPAA. Employers want employees and retirees to take control of their own finances. Combining a 401(k) plan with a group long term care plan is a significant step in shifting responsibility for financial security retirement to the employee. The 401(k) plan, a popular retirement program, allows the employees to build up substantial amounts of retirement income. Long term care is the protection of the retirement income from the high cost of health care services, most often needed during the retirement years. In the meantime, more and improved group coverages are desirable. Agents do not feel that insurers have yet come up with a true group product yet for the small- to medium-size business. As experience in the market develops, the chances of true group coverage being developed increase. For now, continued sales of voluntary long term care will likely still dominant the market. MISCELLANEOUS ALTERNATIVES Agents should be aware of as many of the alternative financing arrangements as possible. Their clients may not always qualify for long term care coverage and some may not be able to afford the coverage necessary. Discount programs - At least one organization has a nationwide Preferred Provider Organization (PPO) of nursing homes and home health care agencies. Subscribers receive a discount card to utilize the services of these PPO members. If the need for care exists, the individual contacts one of the member providers, shows the card, and receives the discount. This is not insurance, really, but anything that saves long term care expense dollars might be useful to some clients.

There is a small annual fee for the service, but the savings can add up (discounts are typically in the 20 percent range). Advocacy Programs - The use of an advocate to assist a convalescing senior can help to reduce long term care health costs. For example: The St. Patrick Seniors Center in Detroit uses advocates (often senior themselves) to work with needy seniors by calling on them in their home, accompanying them to medical appointments and completing paperwork, assisting with errands, and linking the senior to primary resources available. One participant had suffered a stroke in 1993 and was given a poor prognosis with a nursing home stay the only likely option. Since entering the advocacy program, the man is now walking and exercising and his speech has improved dramatically. The program was initially funded by a grant and now draws its revenues from its general fund. Reversionary Annuity - This insurance plan pays not a face amount but a monthly life income. The beneficiary receives payments for as long as he lives. If a beneficiary is uninsurable for long term care coverage, this might be a reasonable alternative. Because the life expectancy of the beneficiary may be modified due to the condition that prevents the purchase of long term care insurance, the policy premium is lower. The older the beneficiary, the lower the premium for the same life expectancy reasons. This income can be used to help pay long term care expenses if necessary. Having many options open to the client makes the agent more valuable as people do their pre-retirement estate planning. Depending on the health budget of the prospect, any one of the alternatives mentioned in this chapter could be a viable method for long term care expenses.