Short Term Care vs. Long-Term Care Insurance
by Phyllis Shelton
Which is better for the consumer? At first glance, policies that pay for short-term episodes like broken hips and mild strokes and benefit triggers that are easier to hit seem to be more beneficial to the client. For example, policies that do not contain a requirement for a 90-day certification and/or policies that pay benefits if help is needed with one ADL instead of two may appear to be best for the consumer. Or, policies with a medical necessity trigger may seem better because a doctor just has to say the patient has an illness or an injury that warrants care, or maybe a condition, like severe arthritis. Of course, policies that meet any of these characteristics are non-tax qualified policies.
Moving to tax-qualified policies, however, which is better - a policy in the lower third of premiums available for a specific benefit plan compared to other policies? Or a 0-elimination period when most of the policies written for that specific company are issued without a waiting period? (Perhaps the only options are 0 or 100 day, and the common choice is 0.) Or a policy with a company that accepts a large number of substandard risks?
Three years after the Health Insurance and Portability Act of 1996 (HIPAA), concern over the TQ vs. NTQ controversy seems to be relaxing. "The IRS isn't taxing anyone who has received benefits from a non-qualified policy," I'm starting to hear from companies and agents -- like the mouse who ventures out of the mousehole with some trepidation, then gets increasingly braver as he looks around and sees no cat.
Has the IRS forgotten that there is no ruling on NTQ benefits, even though letters have gone out to a number of taxpayers questioning the difference between an individual tax return and a 1099 from an insurance company? Was it an accident that the federal tax forms related to long-term care insurance consistently affirm that qualified policies are exempt from income taxation, and that all of these forms introduce the word "qualified" in bold?
(For the record, insurance companies are required to send 1099's to policyholders who receive benefits from any type of long-term care insurance policy, TQ or NTQ. Policyholders who receive benefits are required to report benefits on Form 8853, Medical Savings Accounts and Long-Term Care Policies with individual tax returns. Taxation of benefits from policies issued 1/1/97 or later that do not meet the benefit criteria established by the Health Insurance Portability and Accountability Act of 1996 is uncertain since HIPAA only clarified that benefits from qualified policies will not be taxed as income. LTC policies effective prior to 1/1/97 are grandfathered and out of danger of income taxation unless a benefit increase after 1/1/97 resulted in a material change; e.g. adding inflation coverage, increasing the benefit period or daily benefit, or shortening the elimination period.)
But is taxation of benefits the real issue? I think not. I think the non-clarity of this point is the velvet hammer from the government to preserve LTC insurance for the long-term by preventing payment of short-term claims and payment of claims too quickly due to lax benefit triggers, such as one ADL, medical necessity or the "policyholder's discretion" benefit trigger that is in a few policies. That one means "you say you want to go to a nursing home, we'll pay your claim" -- and the part you don't hear -- "as long as we're in business".
In other words, I see HIPAA as a consumer protection measure that instead of making TQ policies less beneficial to consumers, that HIPAA may be the very thing that preserves LTC insurance for future claimants by ensuring reasonable payout terms instead of lenient terms that will likely result in serious rate increases in the future. (By the way, "future claimants" is a diplomatic way of saying baby boomers - and that's us, folks!) I think the forces behind HIPAA were trying to avoid repeating the marketing mistakes of disability income and health insurance products due to easy benefit triggers, liberal underwriting, low rates and yes, even inappropriately high agent commissions!
Another impetus for HIPAA, I believe, came from the provider side of the equation. Prior to HIPAA, home health agencies and skilled nursing facilities that specialized in short-term, rehabilitative care (physical, speech, occupational therapy, etc.) were pushing hard for payments from LTC policies. LTC payments look even more desirable now since the cuts from the Balanced Budget Act deeply affected Medicare's benefits for nursing homes and home health agencies. (For the record, consumers normally have coverage for this short-term, skilled care. It's the beyond 90 day stuff that constitutes the largest concern, as neither conventional health insurance nor Medicare pay for chronic, maintenance care with no progress, such as paralysis or coma due to an automobile or sporting accident.) However, taking care of short-term rehabilitative care on the front end will break the reserves of any insurance company on the back end as the millions of baby boomers enter the fray.
HIPAA set the pace for preserving LTC insurance for the future, and many insurance companies are contributing with conservative benefit features. Most policies today are reimbursement, not indemnity, which means they don't pay more than the actual charge and most sales today (about 85%) are tax-qualified products which don't pay for short-term care due to the 90-day certification requirement. A third HIPAA requirement is non-duplication of Medicare benefits in keeping with the intent to conserve benefit dollars - TQ policies are not allowed to make a payment when Medicare pays, even on days 21-100 of nursing home care when there is a $97 copayment for the consumer. (Think about it - most people already have coverage for that copayment with a Medicare supplement policy, retiree health insurance, HMOs, etc.) A few LTC policies are beginning to coordinate with any other health coverage, including other LTC policies. These product trends exist due to the intense need for rate stability for a product that no one in the year 2000 has the proverbial "actuarial handle" on.
Or another way to make the point - ever hear of the goose that laid the golden eggs?
©1999 Shelton Marketing Systems, Inc.
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