Partnership Long-Term Care Policies
4-Hour Refresher Course
Chapter 2
Program Benefits
Partnership plans, while preserving assets also have many other components. Just like a non-partnership policy, the applicant must make decisions regarding the type and quantity of benefits he or she wishes to purchase. Just like traditional long-term care policies, the applicant must medically qualify for the Partnership plans. Since insurers underwrite the policies, even asset protection models must be an acceptable risk.
Not every person will feel they need the same policy benefits in their long-term care insurance policy. While most states mandate some types of coverage, such as equality among the levels of care, there are other options that may be purchased or declined. A trained and caring insurance producer can help the consumer understand those options and make wise choices.
Making Benefit Choices
Some choices are made for consumers by the insurers, such as the minimum daily benefit available. Other choices fall on the applicant, such as whether to purchase a $250 per day benefit or a $300 per day nursing home benefit. Regardless of the choices consumers make, all policies must follow federal and state guidelines. In fact, insurers will not offer a policy that does not meet minimum state and federal standards. For example, in some state’s insurers must offer no less than a specified dollar amount per day of nursing home benefit and all three levels of care must be covered equally (skilled, intermediate, and custodial, also called personal care). Policies following federal guidelines will be tax qualified. Non-partnership policies following state guidelines might be non-tax qualified plans. Many states mandate specific insurance producer education prior to being able to market or sell non-partnership LTC policies. Insurance producers selling Partnership policies must certainly acquire additional education to market partnership plans. In both cases, the goal is to have educated field staff relaying correct information to consumers.
All policies offer some options, which may be purchased for additional premiums. Obviously, consumers may refuse any optional coverage offered. When refusing some types of options, a rejection form must be signed and dated by the applicant. In some states, an existing policy may be modified; in others, an entirely new policy would be required when changes are desired.
When a consumer decides to purchase a long-term care (LTC) policy, several buying decisions must be made. These might include:
1. Daily benefit amounts: this is the daily benefit that will be paid by the insurer if confinement in a nursing home occurs.
2. The length of time the policy will pay benefits: this could range from one year to the insured’s lifetime. Of course, the longer the length of policy benefits, the more expensive the policy will be.
3. Inclusion of an inflation guard: Non-partnership plans will not require this, while Partnership plans have inflation protection guidelines that must be followed. Inflation protection protects against the rising costs of long-term care by providing an increasing benefit according to contract terms. Partnership plans have two types: an increase based on a predetermined percentage and an offer at specific intervals allowing the insured to increase benefits without proof of insurability.
4. The waiting period also called an elimination period, must be selected. This is the period of time that must pass while receiving care before the policy will pay for anything. It is a deductible expressed as days not covered. The option can range from zero days to 100 days. A few policies may have a choice of a longer time period.
5. Either a federally tax-qualified long-term care policy or a state non-tax-qualified plan must be chosen. Partnership plans are always tax-qualified policies.
As every field producer knows, clients often prefer to have their insurance producers make selections for them, but this is not wise. Although the producer will be valued for the advice he or she gives, the actual benefit decisions need to be made by the consumer. Therefore, insurance producers must fully cover each option so the consumers can make informed choices.
Just as traditional LTC policies must be underwritten, so too must Partnership policy applications. Applicants must medically qualify to purchase Partnership plans. Why? Because it is the insurance companies that will be paying out benefits for long-term care services. Obviously, only the sickest consumers would apply if there were not any qualification requirements.
Daily Benefit Options
While there are many policy options, the daily benefit amount is usually the first policy decision, with the second choice being the length of time the benefits will continue. Both strongly affect the cost of the policy, but they also affect something else that is very important: the amount of assets that will be protected from Medicaid spend-down requirements. The total benefit amount (daily benefit multiplied by the length of benefit payouts) determines the amount of assets protected in dollar-for-dollar Partnership plans. For example, if Connie Consumer buys a long-term care policy that pays $200 per day for three years, she has protected approximately $219,000 in assets (365 days multiplied by $200 per day times three years).
The type of policy being purchased will affect how the daily benefit works. For example, a non-partnership policy may be purchased that covers home health care only (not institutionalized care). The daily benefit is based on the type of policy selected. Policies that cover institutional care in a nursing home will have options that may vary from policies that cover only home care benefits. Integrated policies will vary from those that pay a daily indemnity amount. Many states have mandatory minimum limitations ($100 per day minimum benefit for example). Insurance companies will determine the upper possibilities. Obviously, the consumer cannot select a figure higher than that offered by the issuing company. Nor can an insurer offer a daily indemnity amount that is lower than those set by the state where issued. At one time insurers offered as low as a $40 per day benefit in the nursing home. By today’s standards that would be extremely inadequate for nursing home care.
This daily benefit can have variations. Some policies will specify an amount (not to exceed the actual cost) for each nursing home confinement day. Other policies (called integrated plans) offer a more relaxed benefit formula. These policies have a ‘pool’ of money, which may be used however the policyholder sees fit, within the terms of the contract. As a result, this pool of money could be spent on home care rather than a nursing home confinement, as long as the care met the contract’s requirements. Benefits will be paid as long as this maximum amount lasts regardless of the time period. The danger in having a pool of money, however, is that the funds may be used up by the time a nursing home confinement actually occurs. If the funds have been previously used up, there will be no more benefits payable. Since people prefer to stay at home, this may work out well, but it can also quickly deplete funds in a wasteful manner.
The amounts paid will usually vary depending upon whether they are going towards a nursing home confinement, home health care, adult day care, and so forth. The pool-of-money type is gaining popularity where offered since consumers see it as a way to make health care choices more freely. Integrated policies are generally more expensive than indemnity contracts. As in all policy contacts, integrated plans have benefit qualification requirements, exclusions, and limitations. They do not simply hand the insured individual money to be used in any manner desired.
Determining Benefit Length
While the daily benefit is typically the first choice made, the second choice is just as important to the policyholder: the length of time for which benefits will be paid. This may apply to a single confinement or it can apply to the total amount of time spent in an institution. An indemnity contract offers benefits payable for a specified number of days, months, or years (depending upon policy language). An integrated plan pays whatever the daily cost happens to be unless the contract specifies a maximum daily payout amount. When funds are depleted, the policy ends.
While statistics vary depending upon the source, most professionals feel a policy should provide benefits for no less than three years of continuous confinement. Some people will only be in a nursing home for three months while others may remain there for five years. While it does not make sense to over-insure, it is also important to have adequate coverage. Since the majority of consumers will not be willing to pay the price for a lifetime benefit, three- or four-year policies are likely to do a good job for them and still be affordable.
Asset Protection in Partnership Policies
A primary reason for purchasing a Partnership long-term care policy is the asset protection it provides. There were initially two asset protection models, although a third variety developed:
1. Dollar-for-Dollar: Assets are protected up to the amount of the private insurance benefit purchased. If policy benefits equal $100,000, then $100,000 of private assets are protected from the required Medicaid spend-down once policy benefits are exhausted and Medicaid assistance is requested.
2. Total Asset Protection: All assets were protected when a state-defined minimum benefit package was purchased by the consumer. In this case, as long as the individual bought the minimum required benefits under the state plan, all his or her assets were protected from Medicaid spend-down requirements even if the assets exceeded the total policy benefits purchased. Only New York and Indiana initially had this option. Total asset protection is not offered in any of the new Partnership plans.
3. Hybrid: This Partnership program offered both dollar-for-dollar and total asset protection. The type of asset protection depended on the initial amount of coverage purchased. Total asset protection is available for policies with initial coverage amounts greater than or equal to a coverage level defined by the state.
With the passage of DRA 2005, all states in the Partnership program offered only dollar-for-dollar protection. Total asset protection was no longer available.
Policy Structure
We have seen legislation passed by many states regarding long-term care policies. Even the federal government has been involved in this with the tax-qualified plans. It is important to note that tax-qualified plans always come under federal legislation whereas non-tax qualified plans come under state legislation. Each state will have specific policy requirements. Partnership plans come under federal requirements and are tax qualified. The states will assign descriptive names in an effort to identify policies in a way that consumers can comprehend. Such terms as Nursing Facility Only policy, Comprehensive policy, or Home Care Only policy will be used. Each state will have its specific way of labeling policies. Long-term care policies often do not pay benefits for years after purchase. An error on the part of the insurance producer can have devastating consequences that will not be known for many years and, by that time, may be irreversible.
Home Care Options
While it is very important to cover the catastrophic costs of institutionalization in a nursing home, most Americans would prefer to remain at home. It is often possible to obtain both nursing home benefits and home care benefits in the same policy. In such a case, home care is typically covered at 50 percent of the nursing home rate. Therefore, if the nursing home benefit is $400, the home care rate would be $200. This may not be adequate funding for home care. If home care is a primary concern, it may be best to purchase a separate policy for this if financially possible. Some home care policies carry additional benefits such as coverage for adult day care.
Inflation Protection
Industry professionals generally recommend inflation protection, but the cost can be high. Individuals who purchase coverage at younger ages are especially encouraged to add this feature since the cost of long-term care is certain to increase over time. The cost of providing long-term care has been increasing faster than inflation. At older ages, the consumer must weigh the cost of the additional premium option with the amount of increase in benefits that will be produced.
The rising costs of institutional care surpass the increase in the Consumer Price Index. There is little doubt that costs are rising so whatever the cost is today, costs are likely to be more tomorrow. Few retired people could afford to pay for nursing home care for several years out-of-pocket, so they turn to nursing home policies. Since such policies can be expensive, consumers might not purchase features that are designed to keep the coverage adequate. While traditional policies still give the applicant the choice of having or not having inflation protection, Partnership policies are structured differently.
Partnership policies have specific inflation protection requirements under the Deficit Reduction Act of 2005:
· applicants under 61 years old must be given compound annual inflation protection,
· applicants 61 to 76 years old must be given some level of inflation protection, and
· applicants 76 years old or more must be offered inflation protection, but they do not have to accept it.
Traditional long-term care plans continue to make inflation protection an option, which may be rejected by the applicant. Many in the health care field state that the amount of increase offered is not adequate, but it will help to offset the rising costs of long-term care. The inflation protection, usually a 5 percent compound yearly increase, may eventually become part of all policies, but currently, it is most likely to be just an option that the consumer must accept or reject. Some states require the consumer to sign a rejection form as proof that their insurance producer offered the option.
Simple and Compound Protection
Inflation protection based on percentages is offered in one of two ways: simple increases in benefits or compound increases in benefits. Like interest earnings, the benefits increase based on only the original daily indemnity amount or on the total indemnity amount (base plus previous increases). Some states mandate that all inflation protection options offered must be compound protection; others allow the insurers to offer both types. Under a simple inflation benefit, a $100 daily benefit would increase by $5 each year. Under a compound inflation benefit, the protection increases by 5 percent of the total daily benefit payment. This is called a compound inflation benefit because it uses the previous year's amount rather than the original daily benefit amount. This is the same basis used with interest earnings on investments. Compound interest earnings are always better than simple interest earnings. The following graph more clearly illustrates how compounding works with the inflation protection riders:
|
|
Year 1 |
Year 5 |
Year 10 |
Year 15 |
Year 20 |
|
Base Policy |
$100 |
$100 |
$100 |
$100 |
$100 |
|
Simple |
$100 |
$120 |
$145 |
$170 |
$195 |
|
Compound |
$100 |
$121 |
$155 |
$197 |
$252 |
Required Rejection Forms
The individual state insurance departments generally recommend inflation protection riders to their citizens. Inflation protection plans must continue even if the insured is confined to a nursing home or similar institution. Many states are now requiring a signed rejection form if the insured does not accept the inflation protection option. Although this is intended to be consumer protection, it is also producer protection. It assures that the family of the insured will not later try to sue the insurance producer who sold the policy for failing to sell the inflation protection.
Elimination Periods in LTC Policies
In auto insurance and homeowner’s insurance, higher deductibles are recommended as a way of reducing premium costs. The point is catastrophic coverage - not coverage for the small day-to-day losses. The same is true when it comes to health insurance. In long-term care contracts, there is a variety of waiting or elimination periods available in policies. Basically, a waiting or elimination period is simply a deductible expressed as days not covered. The choice is made at the time of application. Policies that have no waiting period (called zero elimination days) will be more expensive than those that have a 100-day wait. Fifteen to thirty elimination days are most commonly seen, although the zero-day elimination period has gained popularity.
As one might expect, the longer the elimination period, the less expensive the policy; the shorter the elimination period, the more expensive it is. Therefore:
Zero-day elimination = higher cost.
100-day elimination = lower cost.
All the variables between the two extremes will have varying amounts of premium; a 30-day elimination period will cost less than a 15-day elimination time period, and so on.
When considering which elimination period is appropriate, one should consider the consumer's ability to pay the initial confinement. For example, if a thirty-day elimination period is being considered with confinement (and the daily benefit chosen) costing $200 per day, by multiplying $200 by 30 days, it is possible to see what the consumer would first pay: $6,000 before his or her policy began. If this is something the consumer is comfortable with, then it may be appropriate to choose the 30-day elimination period. Again, a larger elimination (deductible) period will mean lower yearly premium costs.
Policy Type
The specific type of policy to purchase can be a harder choice. Many of the nursing home policies are basically the same, with differences being hard to distinguish. It is very important that the insurance producer fully understand what those differences are before presenting a policy. Some policies will offer coverage only in the nursing home while others offer a combination of possibilities. The insurer will mark their policy types in some specific way. The insurance producer has the responsibility of understanding the differences.
Many policies offer extra benefits, which insurance producers may refer to as "bells and whistles" since they give additional features, but those features are not vital to the effectiveness of the policy. Even so, consumers may find value in them.
Restoration of Policy Benefits
Some policies have a restoration benefit in their policy. This means that part or all used benefits renew after a specific length of time and under specific circumstances. During this period of time, the policyholder must be claim free.
Preexisting Periods in Policies
Obviously, as we age it is more likely that our health will not be perfect. High blood pressure, arthritis, or other ailments are likely to develop. It is possible that conditions existing at the time of application could present claims soon after the policy is issued. Because of this, companies have what is called a preexisting condition period.
A preexisting condition is one for which the policyholder received treatment or medical advice within a specified time period prior to policy issue. Under federal law, that period of time prior to application is six months. Failure to disclose conditions that were known to the applicant can result in claims being denied when benefits are applied for or result from that condition. Medication, it should be noted, constitutes treatment. In some cases, the insurance company will even rescind the policy due to failure to disclose all requested medical history. Some policies cover all conditions that were disclosed but apply the preexisting period to any that were not listed as a means of encouraging full disclosure.
When the preexisting period has passed, all medical conditions are then covered. Not all policies will impose a preexisting period. If the condition were disclosed at the time of application, all claims would be honored in such policies. Other policies do impose preexisting periods, but usually no more than six months from the time of policy issue (which may be mandated by state statute). Policies tend to specifically list preexisting conditions in a separate paragraph in the policy.
Prior Hospitalization Requirements for Skilled Care
Under Medicare, hospitalization must have occurred for the same or related condition to receive Medicare’s skilled care benefits (additional criteria for skilled care also exists). With traditional LTC policies, sometimes prior hospitalization is required to collect nursing home benefits, and sometimes it is not. Some states do not allow insurers to require prior hospitalization; others allow it. In states that allow prior hospitalization, policies may still offer a non-hospitalization option for extra premiums.
When prior hospitalization is required in a policy, typically the patient must have been there for three or more days. They must also have been admitted to the nursing home for the same or related condition for which they were hospitalized. The nursing home admittance may have to be anywhere from 15 to 30 days following discharge from the hospital.
Deciding Between Federal Tax-Qualified or State Non-Tax (Non-Partnership) Qualified Policies
For individuals who desire asset protection, there would be no consideration of non-tax qualified policies since all Partnership plans have tax-qualified status. The only reason an individual would be seeking a non-tax qualified plan would be for the additional ease of collecting benefits, based on the use of additional ADLs in the policy.
One might easily assume that everyone would want a tax-qualified plan, but that is not necessarily the best choice for every individual. Of course, if asset protection is the goal, there is no choice available – it must be tax qualified. The major difference has to do with benefit triggers. Benefit triggers are the conditions that "trigger" benefit payment from the insurance company. If a person needs to enter a nursing home, but his or her policy will not pay because the policyholder has not met the criterion for collecting benefits, he or she will not be able to access their policy’s benefits. The difference directly relates to the activities of daily living (ADL). In the non-tax qualified policy forms, ambulation tends to be the primary difference. Ambulation is the ability to move around without help or supervision from another individual. This daily activity is often the first to deteriorate as we age.
Tax-qualified plans come under federal legislation. Federally qualified long-term care policies providing coverage for long-term care services must base payment of benefits on specified criteria:
1. All services must be prescribed under a plan of care by a licensed health care practitioner independent of the insurance company.
2. The insured must be chronically ill by virtue of either one of the two following conditions:
a. being unable to perform two of the following activities of daily living (ADL): eating, toileting, transferring in and out of beds or chairs, bathing, dressing, and continence, or
b. having a severe impairment in cognitive ability.
There are differences in the tax-qualified and non-tax-qualified long-term care plan ADLs. These differences are important because they relate to the benefit triggers. Tax-qualified plans have eliminated the ADL of ambulation (the ability to move around independently of others).
Nonforfeiture Values
State regulators are giving nonforfeiture values a hard look. With rising premiums, many long-term care clients are finding they can no longer afford to keep their policy. When a consumer has held a long-term care policy for many years, never claiming any benefits, a lapse of the policy means wasted premium dollars that were paid out over several years. This obviously means that insurers have benefited while consumers have merely wasted premium dollars. If they are forced, through rising costs, to abandon their policies as they approach the age of needing the benefits insurers have benefited unfairly. Federal law requires that companies at least offer a nonforfeiture provision to the prospective policyholder in tax-qualified plans. Non-tax qualified plans do not need to offer this additional benefit unless state law requires it. The importance of nonforfeiture values is often overlooked by consumers in favor of lower policy premiums. Even insurance producers often fail to realize the importance of nonforfeiture values.
Waiver of Premium
Waiver of premium is offered in most policies. Some make this benefit part of the policy for no added premium while others view it as an option that must be purchased. Waiver of premiums occurs when the policyholder is in the nursing facility or other contractually covered facility, as a patient. At a given point, he or she no longer needs to pay premiums, but policy benefits continue. The point of time when the waiver kicks in will depend upon policy language. Some policies specify that the waiver starts counting only from the time the company is actually paying benefits; other policies let it begin from the first day of confinement. This is an important point unless the policyholder has selected a zero-elimination period. If a zero-elimination period were selected there would be no difference between the two types.
If the policy waiver of premium begins from the day the insurer actually pays benefits and the policy contains a 30-day elimination period, it would look like this:
30 days + benefit days = waiver of premium satisfaction.
While the period of time can vary, it is common to begin after 90 benefit days. Therefore, it would be 30 days plus an additional 90 benefit days before the waiver actually becomes effective. If the confinement stops, the premiums are reinstated, but the policyholder would not have to pay premiums for the previously waived time period.
If the policyholder is paid ahead, most companies will not refund the premium, even though the waiver of premium has kicked in. The policyholder would have to wait until premiums were actually due to utilize this feature. Some of the newer policies will, however, make refunds on a quarterly basis for paid-ahead premiums during qualified waiver of premium periods.
Unintentional Lapse of Policy
Forgetting to pay a bill can happen to anyone, but as people age, forgetfulness is common. Many states now have provisions for unintentional lapses of policies. Both regulators and insurers have realized that this may especially be a problem in the older ages and especially when illness has developed. A long-time policyholder, without meaning to, can allow a policy to lapse for nonpayment of premiums. It can happen when coverage is most needed because illness or cognitive impairment has developed. Therefore, many states have provisions that allow the policyholder to reinstate without having to go through new underwriting. Of course, past premiums will need to be paid.
The length of time that may pass while still allowing reinstatement varies. Typically, insurance companies allow a 30-day grace period anyway, but some reinstatement periods can be for as long as 180 days (again, past-due premiums must be paid). It is the waiver of new underwriting that is most important since illness or cognitive impairment may be a factor in the lapse. Obviously, having to underwrite a new policy could mean rejection for the insured. The existing policy is simply reinstated as it was before the lapse.
Policy Renewal Features
It is now common for nursing home policies to be either guaranteed renewable or non-cancelable.
Guaranteed renewable means the insured has the right to continue coverage as long as they pay their premiums in a timely manner. The insurer may not unilaterally change the terms of the coverage or decline to renew. The premium rates can be changed.
Non-cancelable means the insured has the right to continue the coverage as long as they pay their premiums in a timely manner. Again, the insurer may not unilaterally change the terms of coverage, decline to renew or change the premium rates. Please note non-cancelable policies may not change premium rates. Such LTC policies would be rare, if available at all.
Items Not Covered by the LTC Policy
All policies have exclusions (items that are not covered by policy benefits). While states will vary to some extent on what may be excluded, some items are fairly standard in the industry. These include, but may not be limited to:
1. preexisting conditions, under certain circumstances,
2. mental or nervous disorders, except for Alzheimer's and other progressive, degenerative and dementing illnesses,
3. alcoholism and drug addiction, and
4. treatment resulting from war or acts of war, participation in a felony, riot, or insurrection, service in the armed forces or auxiliary units, suicide, whether sane or insane, attempted suicide, or intentional injury, aviation in the capacity of a non-fare-paying passenger, and treatment provided in government or other facilities for which no payment is normally charged.
Extension of Benefits
If an insured is receiving benefits and for some reason, the policy cancels, most states have provisions that require benefits to continue. This is called Extension of Benefits. It does not cover an individual whose benefits under the policy simply run out or are exhausted.
Affordability of Contracts
No matter how important asset protection might be, if the policies are not affordable, they will not accomplish what was intended. The individuals who developed the Partnership programs recognized that the consumers most likely to buy long-term care Partnership coverage were also going to be sensitive to rate and premium increases. The goal was to give Partnership policies economic value to those insured, both when issued and at the time a claim occurs. Of course, they also wanted to encourage a competitive marketplace since that tends to keep prices down and values high. Low lapse rates were also a priority since a policy that is purchased but not maintained does not benefit anyone. It is necessary to have a long-term commitment to LTC policies since they are typically purchased many years prior to need. Since Partnership plans were an experiment in the four states that initially offered them, Federal law actually discouraged other states from enacting them through restrictive language. That changed in 2005 (signed into law in 2006) with the Deficit Reduction Act of 2005.
Standardized Definitions
As is so often the case, definitions need to be standardized to avoid misunderstandings. No policy may be advertised, solicited, or issued for delivery as a long-term care Partnership contract that uses definitions more restrictive or less favorable for the policyholder than that allowed by the state where issued.
Minimum Partnership Requirements
Long-term care Partnership policies do, of course, have minimum standards, which must be met. Standards are based on the state where issued. Since each state may have different state requirements, plans may vary from state to state. In all states, an insurance producer would be acting illegally if he or she told a prospective client that the policy he or she was demonstrating for sale was a Partnership policy when, in fact, it did not meet partnership criteria.
The minimum standards set down by each state are just that: minimums. They do not prevent the inclusion of other provisions or benefits that are consumer favorable, as long as they are not inconsistent with the required standards of the state where issued.
Benefit Duplication
It is the responsibility of every insurance company and every insurance producer to make reasonable efforts to determine whether the issuance of a long-term care Partnership policy might duplicate benefits being received under another long-term care policy, another policy paying similar benefits, or duplicate other sources of coverage such as a Medicare supplemental policy. The insurance company or insurance producer must take reasonable steps to determine that the purchase of the coverage being applied for is suitable for the consumer's needs based on the financial circumstances of the applicant or insured.
Partnership Publication
Every applicant must be provided with a copy of the long-term care Partnership publication (which was developed jointly by the commissioner and the Department of Social and Health Services) no later than when the long-term care Partnership application is signed by the applicant.
On the first page of every Partnership contract, it must state that the plan is designed to qualify the owner for Medicaid asset protection. A similar statement must be included on every Partnership LTC application and on any outline or summary of the coverage provided to applicants or insured.
Policy Abbreviations
The reader will see many abbreviations. To fully understand the long-term care program, it is necessary to understand the abbreviations commonly used:
ADL = Activities of daily living
ACS = American Community Survey
CBO = Congressional Budget Office
CMS = Centers for Medicare & Medicaid Services
DOI = Department of Insurance
DRA = Deficit Reduction Act of 2005
GAO = The United State’s Government Accountability Office
HHS = Department of Health and Human Services
HIPAA = Health Insurance Portability and Accountability Act of 1996
HRS = Health and Retirement Study
IADL = Instrumental activities of daily living
LTC = Long Term Care
NAIC = National Association of Insurance Commissioners
OBRA ‘93 = Omnibus Budget Reconciliation Act of 1993
RWJF = The Robert Wood Johnson Foundation
UDS = Uniform Data Set
Truly a Partnership
The Partnership program is well named since it is exactly what it says it is: a partnership. The states have partnered with the private insurance sector to provide consumers with an incentive to purchase insurance coverage that will cover the costs of long-term care services. The goal is to ease Medicaid’s financial burden. Medicaid gets its funding from taxes, so every individual who pays taxes has a stake in the success of the Partnership program. This is especially true of the baby boomer’s children and grandchildren who will be shouldering a tremendous cost as this segment of the population ages and needs long-term care services.
Medicaid does not grant asset protection for long-term care insurance policies purchased outside of the Partnership programs. Medicaid is jointly operated by the states and the federal government so both have a financial stake in the Partnership plans.
DRA provisions are intended, in part, to allow states to provide an incentive for individuals to take responsibility for their own long-term care needs rather than financially relying on the taxpayers.
The term “Partnership policies” refers to long-term care insurance policies purchased through Partnership programs.
The term “traditional long-term care insurance” refers to long-term care insurance policies that are not purchased through these programs.
When referring to both Partnership and traditional long-term care insurance policies the phrase “long-term care insurance” is generally used.
A state plan describes the state’s Medicaid program and establishes guidelines for how the state’s Medicaid program will function.
While “assets” may be defined in various ways, this text uses the Partnership program’s definition of assets. Therefore, when referring to assets, we mean savings and investments, excluding income. For Medicaid eligibility purposes, the Medicaid program considers both income and assets.
Medicaid defines income as anything received during a calendar month that is used (or could be used) to meet food or shelter needs, including resources such as cash and anything owned, including but not necessarily limited to savings accounts, stocks, or property that can be converted to cash.
Another objective of OBRA ‘93, as expressed in the accompanying House of Representatives Budget Committee report, was to close a loophole permitting wealthy individuals to qualify for Medicaid through asset transfer and other financial moves.[1] Although there are no firm statistics on how many consumers moved assets out of their name with the intention of transferring the cost of their long-term care costs to taxpayers, DRA addressed this issue by extending the time period people had to legally reposition their assets (usually putting them in their children’s names).
Saving Assets from Medicaid Qualification
According to the National Association of Health Underwriters, prior to the enactment of DRA, there was legislative activity in 19 additional states to begin developing a Partnership-type program. At that time, there were only four states with active Partnership programs: California, Connecticut, Indiana, and New York.
Long-term care insurance is used to help cover the costs associated with long-term care needs. Individuals can purchase long-term care insurance policies directly from insurance companies, or through employers or other groups.
Long-term care insurance companies generally structure their long-term care insurance policies around certain types of benefits and related options:
· A policy with comprehensive coverage pays for long-term care in nursing facilities as well as for care in home and community settings, while a policy with coverage for home and community-based settings pays for care only in these settings.
· A daily benefit amount specifies the amount a policy will pay on a daily basis toward the cost of care, while a benefit period specifies the overall length of time a policy will pay for care.
· A policy’s elimination period establishes the length of time a policyholder who has begun to receive long-term care has to wait before his or her insurance will begin making payments towards the cost of care.
· Inflation protection increases the maximum daily benefit amount covered by a policy and helps ensure that over time the daily benefit remains commensurate with the costs of care.
Accessing Policy Benefits
There can be a substantial gap between the time a long-term care insurance policy is purchased and the time its policyholder begins using the purchased benefits. During this time, the costs associated with long-term care can increase significantly. A typical gap between the time of purchase and the use of benefits is 15 to 20 years: the average age of all long-term care insurance policyholders at the time of purchase is 63, and in general, policyholders begin using their benefits when they are in their mid-70s to mid-80s. That is why many professionals feel inflation protection is so important.
Purchasing automatic inflation protection increases the benefit amount by 5 percent annually on a compounded basis. A $150 per day benefit would be worth approximately $400 per day 20 years later if it has a 5 percent inflation rider. Another means to protect against inflation is a future purchase option. This option allows the consumer to increase the dollar amount of coverage every few years at an extra cost. Some future purchase options do not allow consumers to purchase extra coverage once they begin receiving their insurance benefit and the opportunity to purchase extra coverage may be withdrawn should the consumer decline a predetermined number of premium increases. A policy with a future purchase option may be less expensive initially than a policy with compound inflation protection. However, over time the policy with a future purchase option may become more expensive than a policy with compound inflation.
The process of reviewing medical and health-related information furnished by an applicant to determine if the applicant presents an acceptable level of risk and is insurable is known as underwriting. Examples of medical conditions that may not disqualify an individual from obtaining insurance but that can result in a substandard rating during the underwriting process include osteoporosis, emphysema, and diabetes. However, the severity and the ability to control and treat the medical condition are all factors that can also impact how a non-disqualifying medical condition impacts an underwriting rating.
Regulation of the insurance industry, including those companies selling long-term care insurance, is a state function. Those who sell long-term care insurance must be licensed by each state in which they sell policies, and the policies sold must be in compliance with state insurance laws and regulations. These laws and regulations can vary but their fundamental purpose is to establish consumer protections that are designed to ensure that the policies’ provisions comply with state law, are reasonable and fair, and do not contain major gaps in coverage that might be misunderstood by consumers and leave them unprotected.
Individuals who purchase policies that comply with HIPAA requirements, which are, therefore “tax-qualified,” can itemize their long-term care insurance premiums as deductions from their taxable income along with other medical expenses and can exclude from gross income insurance company proceeds used to pay for long-term care expenses. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) specified conditions under which long-term care insurance benefits and premiums would receive favorable federal income tax treatment. Under HIPAA, tax-qualified plans must begin coverage when a person is certified as:
· Needing substantial assistance with at least two of the six ADLs for at least 90 days due to a loss of functional capacity, having a similar level of disability, or
· Requiring substantial supervision because of a severe cognitive impairment.
HIPAA also requires that a policy complies with certain provisions of the National Association of Insurance Commissioners (NAIC) Long-Term Care Insurance Model Act and Regulation adopted in January 1993. This model act and regulation established certain consumer protections that were designed to prevent insurance companies from:
1. Not renewing a long-term care insurance policy because of a policyholder’s age or deteriorating health, and
2. Increasing the premium of an existing policy because of a policyholder’s age or claims history. In addition, for a long-term care insurance policy to be tax-qualified, HIPAA requires that a policy offer inflation protection.
Medicaid coverage for long-term care services is most often provided to individuals who are aged or disabled. To qualify for Medicaid coverage for long-term care individuals must meet both functional and financial eligibility criteria. Functional eligibility criteria are established by each state and are generally based on an individual’s degree of impairment. To meet the financial eligibility criteria, an individual cannot have assets or income that exceed thresholds established by the states and that are within standards set by the federal government.
Generally, the value of an individual’s primary residence and car, as well as a few other personal items, are not considered assets for the purpose of determining Medicaid eligibility. Individuals with assets that exceed state specified thresholds can “spend down” their assets by paying for their long-term care services. If their incomes are also high (though perhaps not high enough to fund the entire cost of long-term care) spending down their assets may bring their income qualification requirements below the state-determined income eligibility limits. For purposes of obtaining Medicaid eligibility, individuals are allowed to deduct medical expenses, including those for long-term care, to bring their incomes below the state-determined thresholds. It is important to realize that this text is talking in general terms; insurance producers and consumers must always explore their own state’s specific requirements for Medicaid eligibility.
According to www.longtermcare.gov when states determine an individual’s Medicaid eligibility some assets are counted, and others are not. Assets that count include checking and savings accounts, stocks and bonds, certificates of deposit, real property other than the residence, and any vehicles when there are more than one.
The primary residence, personal property, and household belongings, one vehicle, life insurance with a face value that is below a specified amount, limited burial funds, some types of burial arrangements, and assets held in specific kinds of trusts will not be counted towards Medicaid eligibility.
Just because the residence is not specifically counted towards the Medicaid eligibility does not mean it is not factored in. If Medicaid is sought for help paying long-term care services, it can be part of the equation. If home equity exceeds a certain level, Medicaid will not pay for the person’s long-term care. The equity value is determined by the fair market value (in other words, the amount it would currently sell for) less any debts against the home such as home equity loans.
The applicant’s equity interest is most important and that depends on whether he or she owns the home entirely or owns it jointly with another person. This would include the spouse.
Medicaid Estate Recovery
Even though Medicaid may pay for long-term care expenses, assuming the applicant meets eligibility requirements, that does not mean that Medicaid coverage is free. There are debt recovery measures that will probably be taken once the beneficiary dies. This is referred to as “estate recovery.” Estate recovery relates to noncountable assets when determining eligibility.
It should not surprise anyone that Medicaid attempts to be repaid if assets exist that can pay for the benefits that were collected for long-term care services. After all, Medicaid benefits come from American taxpayers.
The federal government established policies requiring the individual states to recover the costs paid on behalf of people who received Medicaid benefits. As a result, all states try to recover long-term care costs, which include home health care services paid for by Medicaid. Individuals who are eligible for Medicaid benefits receive a notice that their state has the right to recover Medicaid-paid medical costs upon his or her death.
States vary in how recovery efforts are made, based upon state laws, but no matter what the state, recovery efforts must be made. There are two ways of recovering Medicaid expenditures for medical care: seizing the deceased person’s estate or putting liens on the beneficiary’s property. One or the other may be used, or both may be implemented.
Upon the beneficiary’s death, it is common for the state to seek repayment from the estate. Each state defines the term “estate” based on state law. The state’s definition, therefore, determines what the government’s rights of property attachment are. Some states may be conservative while other states may have broader rights. Property must be within the deceased person’s legally defined “probate estate.” A probate estate includes property that is deemed to legally belong to the deceased person, where there is no joint ownership involved, or where the portion of an asset is deemed to legally belong to the deceased if there is joint ownership. Typically, financial accounts or contracts that have a designated beneficiary are not included in probate estates. That is why annuities listing a beneficiary other than the estate are protected assets. If the annuity’s listed beneficiary names the estate, then that protective benefit is lost.
As stated, states term “estate” differently with some being more difficult than others for recovery. When there is a broad definition, the government may be able to take more assets. In some cases, even assets that were attempted to be assigned to someone else may be attached. These assets may include joint tenancy, tenancy in common, survivorship, life estates, and living trusts. The state would file a claim in the probate courts, just as any other creditor would. Under the more expansive definitions of estate, the state would notify heirs of its rights under state law. Liens on real estate would be processed in the same manner as any other lienholder.
Of course, there are cases where a state is unable to recover its costs. Although states are required to recover Medicaid dollars when possible, there are certain prohibitions too on the recovery of funds. If there is a surviving spouse, for example, the residence home would not be taken by the state. The same is true if there is a minor (under age 21), blind or disabled child living in the home. In both cases, assets are protected from seizure.
Additionally, if a sibling caregiver lives in the home of the deceased and has for one year or more and continues to live there, he or she is considered to have equity in the home. The same is true for a child who has lived there for at least two years and can show that he or she provided care and either delayed or prevented institutionalization because of the care they provided.
There is also a chance that the state may waive recovery, meaning not try to collect repayment of benefits, when the deceased person’s heirs can prove that recovery of Medicaid costs would cause an undue hardship. While “undue hardship” can vary by state, usually it means the inheritors have limited income and the estate would be their sole income-producing asset. This most often relates to a family farm or other family business that produces income that other family members rely upon. In these cases, usually, the state notifies the person’s inheritors of its recovery rights and then the inheritors claim an exemption from estate recovery.
The state may also waive recovery if the cost of doing so is greater than the available assets. It would not make sense to spend more on obtaining the assets than they are worth. Each state may establish its own rules on what is not cost-effective, so it can vary from state to state.
States are not allowed to recover more than was received in Medicaid benefits.
Some assets that are considered might surprise people. For example, a joint checking account would be considered available in full for long-term care expenditures since either person can legally withdraw 100 percent of the funds it holds. Therefore, children that are listed on a checking account with their parents might want to remove themselves, especially if they financially contribute to it. It would be wiser to have separate accounts.
Asset Repositioning for Medicaid Qualification
To meet Medicaid’s eligibility requirements, some individuals choose to reposition their assets. For example, individuals may believe that transferring assets to their spouses or other family members will qualify them for Medicaid. For asset transfer purposes, Medicaid defines the term “assets” to include income and resources, such as bank accounts. However, those who transfer assets for less than fair market value during a specified look-back period (the period of time before an individual applies for Medicaid during which they look for illegal asset transfers) may incur a transfer penalty.
Medicaid long-term care applicants may not have sold under fair market values or given away assets in the 60 months (five years) prior to applying for Medicaid benefits. In short, it is not possible to sign over an asset to a child or sell an asset for less than fair market values and still qualify for Medicaid benefits. California and New York have shorter look-back time periods.
If that has happened, Medicaid benefits are not available for the length of time that the asset could have covered the cost of long-term care, including care at home. The state will look at the value of the asset and refuse Medicaid coverage until the length of time has passed.
Partnership Participation Does Not Guarantee Medicaid Qualification
The Partnership long-term care programs are public-private partnerships between states and private insurance companies. The programs are designed to encourage individuals, especially moderate-income individuals, to purchase private long-term care insurance in an effort to reduce future reliance on Medicaid for the financing of long-term care.
Partnership programs attempt to encourage individuals to purchase private long-term care insurance by offering them the option to exempt some or all their assets from Medicaid spend-down requirements. It is important to understand, however, that Partnership policyholders are still required to meet Medicaid income eligibility thresholds before they may receive Medicaid benefits. Those who purchase long-term care Partnership policies must still qualify both financially and physically for Medicaid just as individuals without Partnership long-term care plans must. The term “accessing Medicaid” is typically used to describe the point at which long-term care policyholders first begin receiving Medicaid payments for their long-term care.
End of Chapter 2