Given an employer's limitations regarding cost, how can an LTC plan be designed to provide the best protection against future catastrophic losses for as many employees as possible? In fact, implementing self-funded LTC program with several true group features can result in employer costs very similar to a dental benefit.
Average issue age monthly LTC premium
Let's consider a relatively rich plan that has an unlimited lifetime benefit, $150 per day, and 5% compound inflation indexing. We will assume a group composed of the typical labor force distribution in the United States, and that the employer is limited to an expenditure averaging $25 per employee per month, possibly what an employer would contribute to a dental plan.
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The Federal Employee Health Benefits Program (FEHBP) offers an average monthly premium (for a 47-year-old) of $140.14 (A). FEHBP rates are 10-20% lower than typical individual long-term care products, because of the reduced marketing expenses, as well as other possible economies of scale. We use this product as a reference point when considering how much a long-term care offering might cost an employer.
If an employer would choose to give one of these plans to all its employees, paying 100% of the cost as long as someone is employed, the costs would actually go up further. First, lower policy lapse would cause the costs to increase by 46% (B). Further, if an employer were paying 100%, benefits would need to be funded by retirement age, further increasing costs by an additional 33%. This brings up the monthly cost per employee per month to $272 (C). That's a rather hefty amount!
How might that price change if explicit insurer margins were removed? We can expect to remove profit charges, perhaps about 5% (D), as well as other layers of conservatism such as investment earnings rate assumption, limited morbidity improvement, and lapse assumption. Monthly cost can be brought down to around $235 (E), based on moving this to either a self-funded or alternate-funded arrangement, and it would still be consistent with "moderately adverse" pricing regulation.
A number of benefit design changes could bring the cost down further. If the daily benefit is reduced to $120, and the elimination period is increased from 30 days to 90 days, the cost goes down to $166 per employee per month (F). If the employer contributed 50% of the cost, this would bring the employer cost down to $83 per employee per month (G), assuming everybody participated in the plan. At the resulting contribution rates, however, we would expect that a percentage of the employees would choose not to participate, perhaps 40%. Only providing coverage to the remaining 60% would reduce our cost to $50 per employee per month (H).
This is where waiting periods and vesting come into play. Suppose you had a one-year waiting period before employees could sign up, and a ten-year period before an employee is vested. We estimate that this would save an additional 50%, for a bottom-line cost of $25 (I). Thus, the employer can offer and fund a reasonably rich benefit for a cost that is a very low percentage of overall compensation.
As the above example demonstrates, there are a significant number of cost drivers that can cause a true group long-term care plan to have a wide range of possibilities. The factors described above represent only a partial list. Further consideration should be given to such factors as specific employee characteristics, the company's general investment philosophy, expense charges, preferred funding vehicle, underwriting, and selection.
Note: The costs in this example are presented for illustrative purposes only and should be not assumed for an actual group, as many other considerations come into play.
Why is true group long-term care so important?
- Many Americans will have no way to pay for long-term care services when they are needed.
- Insurance for long-term care will not become widespread if only available on an individual basis, which means that the change will need to come first from employers.
- Group coverage needs to include employer contributions to make it affordable to employees and vesting to make it affordable to employers.