BY LOUIS H. BROWNSTONE
By the time you read this, AB 2604 will have been passed by the California Legislature and signed by Governor Newsom. This will give California long-term care insurance policyholders under the California Partnership for Long-Term Care the ability to reduce and even eliminate rate increases.
The California Partnership for Long-Term Care, begun in 1994, was one of the original four partnership states. (There are now partnership plans in 44 states.) Its purpose was to provide long-term care protection for Californians with moderate income and assets. The program was designed to encourage public/private partnerships linking insurance carriers with California’s Medi-Cal program and allowing purchasers to protect assets from Medi-Cal spend down rules.
AB 2604 was originally proposed by Assemblywoman Lisa Calderon and supported and amended by a group of interested parties. It has been unopposed because of the obvious need to update partnership regulations.
The passage of AB 2604 will enable many thousands of partnership policyholders to retain their policies. For the vast majority, they can afford to lower their benefits and therefore their premiums and still keep significant benefits in their policies. They will not have to either cancel their policies or accept a non-forfeiture agreement after paying premiums for many years.
Among other consumer protection rules originally enacted, to ensure that policyholders would be able to afford this insurance, partnership rate increases were limited to a maximum of 40% over a three-year period. This rule has cushioned the blow of rate increases under the partnership, but nevertheless, most policyholders now have had a rate increase of 50% or greater over their original premiums.
In addition, to ensure that the benefits would keep pace with inflation, partnership policyholders had to purchase 5% compound inflation riders. Insurance carriers have now priced 5% compound inflation riders so high in comparison with other inflation riders that no one would want to purchase a partnership policy. Sales have cratered.
It’s difficult to predict the future of the partnership. It may be dependent on the result of the work of the California Task Force for Long-Term Care and whether its recommendations for a mandatory program become law.
To make sure that partnership policies would be robust, the nursing home daily benefit had to be a minimum of 70% of the average California semi-private nursing home benefit. This cost is now $360 per day, so that the minimum daily benefit is $260 per day, far more than the cost of most home care and all assisted living facilities. Most people today resist going into nursing homes until absolutely necessary, and prefer to receive care in other less expensive settings. AB 2604 is designed to give policyholders options to reduce coverage and lower premiums but retain partnership certification. A policyholder can elect to reduce benefit levels to as little as $100 per day with a lifetime maximum of at least $73,000. In addition to 5% compound inflation, a policyholder can choose either 3% compound inflation or 5% simple inflation. These options can be exercised at any time.
Insurers who file for a rate increase must also allow policyholders to elect from a list of “available options,” which can include some or all of the following:
1. Reduce the daily benefit by 50%
2. Reduce the daily benefit by 25%
3. Reduce the benefit duration to the lowest duration on the insurer’s rate schedule, but not below 12 months
4. Reduce the benefit duration to the next highest duration on the insurer’s rate schedule, but not below 12 months
5. Increase the elimination period up to 90 days
6. Convert a policy to minimum coverage of $100 per day for a lifetime maximum of $73,000 (two years);
7. Reduce the inflation option to either 3% compound or 5%simple inflation. However, if a policyholder is 70 years old or older and has had a 50% or more rise in their original premium, they would also have a 1% inflation option.
The “available options” would be a part of any filing for a rate increase, and would have to be added to any pending rate increase filings. However, these options should not involve much time to add onto a filing. The rates should be easy for insurers to calculate except for either the 3% compound or 5% simple inflation riders, as for these, new rate tables would have to be created. However, all insurers have calculated at least one of these inflation tables in their non-partnership policies, and it should not be difficult to use these tables and their claims experience as guides.
Many partnership policyholders have benefited from the growth in their daily benefits because of the strength of the 5% compound inflation option, and now enjoy daily benefits of $300 or much more. They could still retain a very robust policy if they choose either 3% compound or 5% simple inflation. It’s hard to tell which option is the stronger one, as it takes 34 years for the benefit of 3% compound inflation to catch up with 5% simple inflation. I would think that for most policyholders, who have aged since they purchased their plans, the 5% simple inflation option would yield a greater benefit.
For those who now have a daily benefit of $300 or more, a 40% or even 50% reduction in the daily benefit would still cover the cost of either an assisted living facility or up to five hours per day of a home health aide. Thus, there is plenty of flexibility for most policyholders to substantially reduce their premiums, either by the use of these new inflation riders, reducing their daily benefit, or a combination of both.
All of this having been said, it’s difficult to predict the future of the partnership. It may be dependent on the result of the work of the California Task Force for Long-Term Care and whether its recommendations for a mandatory program become law. If their work succeeds, I can envision carriers filing policies with wrap-around benefits under the partnership. That would be a win-win for California’s citizens.
LOUIS H. BROWNSTONE is chairman of California Long Term Care Insurance Services, Inc., a large specialist long-term care insurance brokerage, located in San Francisco.
Brownstone is currently a member of the executive committees of the National LTC Network and the National Alliance of Insurance Agencies. He is also active in NAIFA, the National Association of Insurance and Financial Advisors.
A graduate of Andover and Stanford, he has been a long-term care insurance specialist for over thirty years. Contact: 650-231-4591