For an employer self-funding long-term care (LTC) employee benefits, cost is typically the biggest concern. There are several cost-saving features that can be implemented such as waiting and vesting periods, cost sharing and underwriting, to name a few. However, there is another implicit element that could have a large impact on program costs.
In a program where the employer is paying for the benefit and employees have a choice of continuing to participate in the program upon termination (what we refer to as “porting” coverage) the porting rate has a critical impact on plan costs. If all departing employees decide to port the benefits upon termination, this is significantly more expensive for the employer than if no one ports the coverage.
If employees are paying for the program, we would expect porting rates (and therefore cost) to be high among participants, although participation rates would most likely be lower.
What is a porting rate?
Porting rates represent the probability that an individual will choose to continue to participate in the LTC coverage upon employment termination. This also implies that the employee will be financially responsible for part or all of the premium from then on. This is the main reason why porting rates are generally very low for employer-paid coverage.
The following issues may impact employees' decision on whether to port their LTC coverage upon termination:
- employee education on the subject of long-term care
- cost of the coverage for separating employees
- convenience of making the transition to ported coverage
- health status and age at the time of departure
At termination, an employee in an employer-paid LTC program has to make a decision on whether to drop or pay for LTC coverage. For employees not porting their LTC coverage, obtaining new coverage on the market would be priced based on the older age at which the coverage is now sought. Note also that full underwriting would be required, resulting in some applicants being denied coverage. Waiting until the need is imminent will generally result in coverage becoming unavailable as applicants can not pass underwriting. Despite this, due to the lack of financial commitment to the benefit, many employees drop the coverage.
The never-ending tradeoff
Porting rates tend to increase with employment longevity and age due to the greater value of the benefit priced at younger ages, as well as greater awareness of the importance of long-term care coverage. Additionally, an increase in porting rates indicates that the benefit will have greater value to the employees. Porting rates represent the most sensitive assumption in estimating the financial needs of an employer-sponsored LTC program, and is the most critical distinguishing element between a voluntary product and an employer-paid benefit. Correctly reflecting low levels of future benefit porting can reduce plan costs significantly as compared to pricing that does not account for this. Incorrectly reflecting higher levels of porting, however, is a risk in setting the contribution rates. Careful monitoring of this experience is critical.
Since there is a fine balance between providing meaningful benefits and paying a reasonable cost, one compromise is for employers who self-fund to explore ways to encourage longer-term employees to port the coverage more than shorter-term employees. :Concentrating: the benefits this way can keep the costs down some, but still encourage the most valued employees to make the best use of the benefit since this coverage becomes truly useful after retirement age.
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.