Private pay solutions bridge LTC funding gap

The United States is in the midst of a perfect storm of converging economic and demographic pressure systems. The global financial crisis has continued to churn unabated since 2008, and an aging population in demand of long-term care services is growing at a rapid pace. This “silver tsunami” hit at the worst possible time because an underperforming economy deprives much needed tax dollars to feed the ever increasing need to sustain Medicare and state Medicaid budgets.

THE FRAYING MEDICAID SAFETY NET

More than 10 million Americans now require long-term care annually, and Medicaid is the primary payer of LTC services in the U.S. According to the Kaiser Family Foundation, Medicaid spent $427 billion in 2011, paying for 43 percent of all LTC services while 31 percent was covered by private pay. CMS cut all LTC-related reimbursements 11.1 percent starting in 2012, and the American Health Care Association (AHCA) reports that due to major state budget deficits and adjustments to Medicare and Medicaid reimbursements, LTC facilities will see historically low Medicaid reimbursements. Their findings estimate that unreimbursed Medicaid funding for nursing homes exceeded $6.3 billion in 2011—a $19.55 shortfall per patient, per day. 

Federal and state governments are looking for alternatives in the private market to pay for long term care. Political leaders across the country understand that it is impossible for Medicare and Medicaid to keep pace with demand for LTC services. Private pay has become the holy grail of long-term care, and a powerful combination of industry leadership and political action is opening up access for the consumer to new funding options. In 2010, the National Conference of Insurance Legislators (NCOIL) passed a consumer protection model law entitled, The Life Insurance Consumer Disclosure Model Law, mandating that insurance companies inform their policy owners that they have alternatives to the lapse or surrender of a life policy, and one of those options is to convert the policy into a “Long Term Care Benefit Plan.” Every owner of a life insurance policy has the legal right to convert their policy to pay for long-term care while still alive—but too few consumers and LTC industry professionals are aware of this fact.

PRIVATE PAY OPTIONS

Billions worth of life insurance policies are abandoned by seniors in the last two or three years of life because they no longer want to pay premiums on a policy they have kept sometimes for decades. Also, a life insurance policy is a disqualifying asset for Medicaid eligibility and seniors are typically advised to abandon any policies as part of a Medicaid spend-down plan. But now, by converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered as a private pay patient by the LTC benefit plan over an extended time frame. Converting a life insurance policy into a LTC “Assurance Benefit” plan is a Medicaid qualified spend-down. Instead of abandoning the policy and going immediately onto Medicaid, the time a person remains private pay is extended while the present day value of the life insurance asset is spent down in a Medicaid-compliant fashion. 

This conversion option, known as an Assurance Benefit plan, is not an LTC insurance policy. It is an actual benefit plan that a life insurance policy owner can enroll in by converting his or her death benefit into a living benefit to help pay for the costs of senior housing and long-term care. Any type of life insurance will qualify for conversion to pay for any form of senior living and long-term care. Once the policy is converted, the family is no longer responsible for premium payments, there is no wait period, there are no fees for the applicant or for the nursing home or assisted living community, and the entire process can be completed in less than 30 days. Once enrolled, the benefit plan is administered on behalf of the family and the benefit payments are made directly to the facility on a monthly basis, and a funeral expense portion is reserved for the family.

POLITICAL ACTION DEVELOPS

Understanding the implications of billions of dollars in asset value that could be converted and spent on long-term care instead of just being abandoned, state legislatures across the country have begun taking action to educate the consumer about their legal rights to convert a life insurance policy. 

• In 2011, the state of Connecticut introduced study bill SB 1153, as “an act establishing a task force to study life insurance policy and annuity conversions and the provision of certain notifications by life insurance companies.”
• In 2012, the state of Florida passed HB 5001, “to examine methods to allow an insured under a life insurance policy or the contract holder of an annuity, to convert the policy or annuity to a long term care benefit. The agency shall submit a report of findings and activities of the workgroup, including recommendations and proposed legislation, no later than January 15, 2013.”

Also, so far this year Louisiana passed study bill SCR-66 and Hawaii passed study bill SB-2455,both similar measures to the Connecticut and Florida study bills. More states are preparing to take similar action.

In January 2012, the Center for Economic Forecasting and Analysis (CEFA) of Florida State University analyzed the tax savings impact of converting life insurance policies into LTC benefit plans on the Florida Medicaid budget. In their analysis, CEFA “scored” the annual savings for Florida’s tax payers at approximately $150 million. The savings come from extending the time Medicaid applicants with a life insurance policy can remain private pay, delaying entry onto Medicaid by first converting their policy to a private, LTC benefit account. 

CONSUMER AWARENESS GROWS

Not only are people unaware of their legal right to convert any type of life insurance to a LTC benefit plan, but they are woefully unprepared and uniformed about how to pay for senior living and long-term care. People need to arm themselves with information about how the system works and what kind of funding options (and limitations) they have to work with. In one form or another (home- or facility-based), as people age and/or become frail they will need someone to help care for them. That care will cost money and that money has to come from somewhere. As the government’s ability to pick up the tab becomes more limited, people need to prepare to bear much of the financial burden on their own. To ensure quality of life and dignity when the time for long-term care arrives; people must make the effort today to understand what kind of private pay financial options are out there.

For people to come even close to meeting their expectations for accessing senior housing and long-term care, it will require a firm grasp of the various options available to pay for it.  Converting a life insurance policy into a LTC assurance benefit plan is one funding option that is quickly growing across the industry—and the country.

Chris Orestis is President and founder of Life Care Funding Group; a 15-year veteran of both the life insurance and LTC industries; and a frequent speaker, featured columnist and contributor to a number of industry publications. His blog on senior living issues can be found at www.lifecarefunding.com/blog. He can be reached at (888) 670-7773 or chris@lifecarefunding.com.