Other faces in LTC self-funding

The concept of self-funding employee benefits, and long-term care in particular, is not that new. In 1990, the Long-Term Care Act enabled CalPERS (California Public Employee’s Retirement System) to offer LTC insurance to CalPERS, STRS, and County Employees’ Retirement Law of 1937 members, which then later (1996) expanded to include all California public employees and retirees. Ten years earlier, in 1987, the State of Alaska established its self-funded LTC program for retirees. These plans are distinct in their approaches, benefits offered and implementation techniques. There are, however, common themes and goals that are worth a discussion.

CalPERS manages pension, health, and other benefits for more than 1.4 million California public employees, retirees, and their families and for more than 2,500 public employers. CalPERS began offering a long-term care insurance program in 1995 and currently has 174,000 members. The program has had its ups and downs over the course of the last 10 years. Satisfaction surveys indicated highly positive feedback regarding the claims payment process. This can be partially attributed to the fact that claims denial rate is quite low in CalPERS, approximately half of the 25% reported by the California Department of Insurance.

It should be noted that the LTC fund is a separate fund from the CalPERS pension fund. Premiums may be raised from time-to-time in order to keep the LTC fund solvent. And indeed they were. In April 2007, premiums increased 33.6% on average, which was the second increase in the last five years. Because CalPERS is a self-funded entity, the Department of Insurance does not require CalPERS to seek approval for rate increases, as is required in the private market. CalPERS and other insurers suggest that shortfalls due to the stock market downturn in the early part of this decade eroded investment returns. In some cases, miscalculation of cost trends, and failure to anticipate a high rate of policy renewals and/or medical advances that increased life expectancy, compounded the problem.

Alaska's self-funded program began offering LTC coverage in 1987 on a one-time only basis at the time of retirement. Since all of Alaska’s state retirees' health plans are self-funded, the state was able to leverage its financial resources to add to the LTC insurance benefit. Today, about 35 percent of 54,000 eligibles are covered.

One of the most significant considerations in any insurance program is participation. This is primarily because of the necessity to achieve the program objective of providing a meaningful safety net for eligible employees and dependents. CalPERS currently experiences approximately 12% participation in the LTC program, which is a typical rate at which convenience long-term care is purchased at a workplace (6% to 15%). Alaska’s retiree program is closer to 35% participation, which is to be expected given the more restricted pool of eligibles. Alaska State officials say the plan is popular for several reasons. First, the state's retirees are younger than most retirees. Second, employees and retirees have confidence in the state's self-funded plan and believe it will be there for them when it is needed. Third, the plan provides good value at reasonable cost. Lastly, most plan participants elect to have their premium contributions deducted automatically from their pension checks.

For a true group long-term care plan, high plan participation is very important. High participation also reduces potential risk by avoiding adverse selection. True group long-term care will target much higher participation rates than typical convenience plans. Depending on the level of employer contribution, we expect to see at least 50% participation. The more the employer contributes, the higher the expected participation. This feature is not being utilized in either CalPERS’ or Alaska’s self-funded programs.

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.