Currently, most employers offer long-term care coverage as a voluntary benefit, in which employees bear the entire cost. This approach leads to extremely low participation rates, generally in the single digits. A true group long-term care plan with features like vesting, waiting periods, and employer contributions encourages high employee participation, although with employer's cost at a level similar to that of a group dental plan.
What are the savings with a true group long-term care design?
To observe the employer costs associated with implementing a true group plan, let us start with a typical convenience LTC product from The Federal Employee Health Benefits Program (FEHBP). Table 1 shows the cost comparison of two convenience benefit plans with and without a true group design:
- A $100/day plan with a three-year maximum, and inflation limited to future offers of increased coverage; and,
- a richer plan that has an unlimited lifetime benefit, $150/day, and 5% compound inflation indexing.
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The costs per month are shown for a number of ages at the time of purchase for the plans.
What modifications to a voluntary plan would lead to such a dramatic cost change?
If an employer were to pay 100% of the cost as long as someone is employed, the costs would actually go up further. This is due in part to changing the assumption that a degree of lapsing would occur when an employee leaves the employer. We estimate that this would increase the above costs by 46%. Further, the benefits would be funded by the time an individual reached retirement age giving way to an additional 33% increase in costs. Thus, if we consider Plan 2 with an average cost of $140.14, these increases result in the overall cost of $272 per employee per month.
There are some elements of the plan which would change with greater employer control. This may result in the removal of profit charges, perhaps about 5%. This could bring the monthly cost down to $258. There might be other assumptions in the pricing development that are conservative, such as low investment earnings rate, limited improvements in future morbidity, or conservative lapse assumption. These items could be significant, yet we will round the monthly cost down to around $235 based on moving this to an alternate-funded arrangement.
Next, a number of benefit design changes could bring the cost down further. Suppose that the daily benefit is reduced to $120, and the elimination period is increased from 30 days to 90 days. Both elements could be changed while still maintaining a safety net purpose. This gets us to about $166 per employee per month.
If the employer contributed only 50% of the cost instead of 100%, the arrangement would bring the employer cost down to $83 per employee per month (assuming everyone participated in the plan). 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 these options would save an additional 50% for a bottom line cost of $25, which is similar to the cost of a dental plan. Now, the employer can offer and fund a reasonably rich benefit for a cost that is a very low percentage of overall compensation. Furthermore, if we apply a similar analysis to Plan 1 from the above table, the employer cost could be reduced to about $4.62 per employee per month.
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.