HEALTH CARE/Joan Retsinas

Long-Term Care Insurance: The Folly of Wall St.

Sometimes entrepreneurial geniuses fail; and their businesses plummet, leaving customers, shareholders, and employees adrift. In this campaign season of anti-government fervor, we hear lots about government ineptitude, little about the failures of titans. Mr. Trump, in particular, wants us to trust him, not the bureaucrats behind Uncle Sam. The entrepreneurial genius that built hotels can save the day for so many of our nation’s problems. So he promises.

This is the time for a case history – one that won’t make it into the Harvard Business School’s archive of successes. Once upon a time, private long-term care insurance seemed a sure bet. Medicare paid for very little long-term care (only care linked to special services, like wound care or rehabilitation); and while Medicaid paid most of the nation’s nursing home tab, recipients would need to “spend down” assets to qualify for Medicaid’s bounty. Not surprisingly, people who hoped to bequeath nest eggs to heirs wanted to protect family assets.

Long-term care insurance, backed by Wall Street, seemed a perfect solution for those asset-rich families. Paying a monthly premium while you were healthy would guarantee you care when you needed it. Presto! – a way to safeguard assets.

For insurers, long-term care insurance was another sure-fire winner. If people could be encouraged to enroll early enough, the premiums would be low, almost negligible; but over the active life course, the enrollee would have paid into the pot thousands of dollars. Plus, unlike life insurance (where, however the actuaries juggle the figures, everybody will die), many enrollees might never need long-term care. Or might need just a few months. In the meantime, that pot of money would earn interest. When interest rates were high, the earnings offered a comfortable margin.

States glommed onto these policies. If people bought policies, those policies would compensate for a set amount of care. After that, Medicaid would step in – but would spare some of the patient’s assets. The Robert Wood Johnson Foundation spurred 5 states (“partnerships”) to adopt this approach; today most states encourage residents to buy long-term care insurance, expecting to spare their Medicaid budgets.

Unhappily for the titans, their marketing predictions were flawed. The policies did not draw hordes of enrollees. In 2014, only 4.8 million people held these policies.

In the early days, scams – or what looked like scams – arose. Agents sold policies to people who had no real assets to protect, and/or who couldn’t afford the premiums. Agents sold very restrictive policies, with waiting periods in lieu of deductibles, even though in 6 months, before the policy took hold, the person might have died. Some policies restricted benefits to people almost bed-bound. Some restricted benefits to nursing homes. And the not-so-fine print allowed insurers to raise premiums annually, with no caps. Many states’ insurance offices enacted some consumer safeguards.

Recently, interest rates dropped – the once-comfortable margin eroded. Some companies looked at their revenue sheets and dropped this unprofitable line. The remaining companies took on those enrollees. The upshot for enrollees: markedly higher premiums. Enrollees lured into buying policies 20 years ago, with low premiums, now face a dilemma: should they pay high premiums, to safeguard the money already invested? Should they accept a lower level of services? Should they recover a modest sum from the money invested? And, if they agree to a higher premium this year, how much should they budget for next year’s premium increase? (Enrollees who simply let their policies lapse recover nothing; in fact, insurers benefit.)

Today’s annual rates are steep: $4,400 for a 55-year-old woman, $2,300 for a 55-year-old man. Most enrollees, though, enrolled years ago, at far lower rates. Genworth, a company still in the business (though it loses $100-150 million a year from this product), has asked Pennsylvania for permission to increase rates by 130%. CALPERS, the California pension-fund, wants to raise rates by 85%. To compound the companies’ woes, new enrollees are not flocking to sign up.

The titans made two crucial errors. One: they did not foresee the need for long-term care. Most of us will live longer, with diseases that demand costly oversight. Two: they did not heed the axiom of freshman economics: high interest rates will eventually fall.

Many business models fail. Private long-term insurance soon will fall into that arsenal of “terrific” ideas that did not prove terrific. In this instance, though, the nation grasped onto private insurance as a partial solution for the problem of expensive long-term care.

Today the need for long-term care persists – a mounting societal crisis. But so does the problem of how to finance that care. The Republican candidates have screeched that we need Wall Street savvy to solve our country’s problems. “Government” cannot save the day. We need private sector titans.

For long-term insurance, Wall Street did step in. But a profit-driven industry did not save the day.

Joan Retsinas is a sociologist who writes about health care in Providence, R.I. Email

From The Progressive Populist, May 1, 2016

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