This brief is the first in a series of articles exploring actuarial considerations related to public long-term care (LTC) programs using a social insurance framework. We will use the recently proposed federal program—the Well-Being Insurance for Seniors to be at Home (WISH) Act—as a reference point to help highlight considerations. These types of public LTC programs are complex in nature with many different questions to answer when constructing program features and benefits. Plan-specific parameters, geographic assumptions, and program eligibility requirements are just a few factors that influence the required revenue for public LTC programs.
This article discusses at a high level the features of public LTC programs and actuarial considerations surrounding these features. Upcoming articles in this series will continue our journey as we dive deeper into certain topics. Our next article will focus on sensitivity testing and how changes to assumptions can affect the projected solvency of a program.
Key Features of Public LTC Programs
Public LTC programs can take on many forms. For the purpose of this article, we will not be looking at a full universe of public program ideas. Instead, we focus on features of the recently proposed public program, the WISH Act,1 as a case study to compare to other insurance programs (such as private LTC insurance).
The proposed WISH Act would create a new federal LTC social insurance plan financed by a 0.6% payroll tax on wages. Revenue would be placed in a new federal LTC Insurance Trust Fund that would pay benefits to individuals for the “catastrophic” period of LTC needs. Benefit highlights include a $3,600 monthly cash benefit indexed to wages, unlimited benefit period, and an elimination period2 of one to five years (depending on lifetime income earned).
In 2016, the American Academy of Actuaries (Academy) published an issue brief describing essential criteria for considering long-term care financing proposals.3 The first criteria in the issue brief considers the important decision of who will be covered and receive benefits under a potential reform. The answers to the following questions will impact the demographics, health status, and wealth and income characteristics of the population covered under a program.
- Is participation in the program voluntary or mandatory?
One of the biggest distinctions between a public program and the private market is that, while the private market is voluntary, public programs tend to be mandatory (or mostly mandatory). Voluntary public programs can contain significant challenges with respect to selection risk (i.e., that the most risky people apply for coverage), while mandatory public programs can avoid some of the selection issues thanks to broader pooling of risk. Some programs might implement a structure that is mostly mandatory with some voluntary aspects, such as provisions allowing certain individuals to opt out of an otherwise mandatory program. The WISH Act features a mandatory design where all workers would help fund the program and after a number of years be eligible to receive benefits.
- Will the covered population be underwritten?
Underwriting needs to be determined hand-in-hand with expected participation. In general, the private market is underwritten, with some exceptions. Many public program designs (especially mandatory public program designs) will have no underwriting, as is the case with what is proposed in the WISH Act. Under a voluntary program, having some form of underwriting may be important to avoid adverse selection. This could take the form of “full underwriting,” similar to the private market, or an “underwriting alternative” that still could help prevent adverse selection, such as an actively-at-work requirement or waiting period requirements.
- At what age will individuals be eligible to participate or to qualify for benefits?
In the private LTC insurance market, generally policies are only issued to those aged 18 through 79, with most policies issued to those between the ages of 55 to 64.4 Eligibility age could be defined several ways for a public program, where individuals are eligible at birth or only those above a certain age (for example, 18, 40, or 65) are eligible to receive benefits. Under the WISH Act, only individuals that have reached the Social Security retirement age would be eligible to receive benefits.
- Do individuals need to contribute to program revenue before being eligible for benefits?
Many proposed public programs utilize this concept, commonly referred to as “vesting.” While the concept of vesting is less applicable in the private market, the most comparable requirement is that an individual must continue to pay premiums (i.e., they cannot lapse coverage) before receiving benefits. The structure of vesting requirements for a public program is dependent on the revenue source. In the case of the WISH Act, workers must work and contribute to the program for 10 years to be eligible for full benefits. Individuals who have worked between five quarters and 10 years are eligible for prorated partial benefits.
- Will covered individuals retain vesting if they move out of the coverage area?
Related to vesting is the concept of divesting or portability, which considers whether an individual could be eligible for benefits upon moving out of the program’s coverage area (for example, moving out of state for a state-based program). In the private market, there are typically no restrictions on portability of benefits within the United States. For a public program, the relevance depends on whether the program is federal or state-based. Because the WISH Act would establish a federal program, individuals’ benefits would not be affected by moving across state lines within the country. It is not clear whether, under the WISH Act, benefits would be paid for those who vest but move out of the country. However, as the benefits are cash-based it may be more administratively feasible than if the program reimbursed for services.
Many of the plan design features of proposed public programs have been borrowed from the private LTC market, so many of the design elements can look very similar to private market plans. When structuring a program’s benefit design, the following questions need to be considered.
- What services and benefits are covered?
The majority of private market plans have comprehensive coverage, meaning they cover care in both facility and home care settings. Some plans, however, offer facility-only or home-care-only coverage. The question of benefit coverage can also be irrelevant depending on how the benefit is administered. Most private market plans are administered under a reimbursement structure, where the program reimburses the cost of covered services up to a maximum daily, weekly, or monthly amount. Conversely, under a “cash” structure, the beneficiary receives a benefit payment regardless of services rendered. While the title of and language in the WISH Act highlights home care services, the benefit would be administered under a cash structure and therefore could be used (or not used) on services in any care setting at the discretion of the beneficiary.
- What triggers an individual’s benefit eligibility?
In the private market, most plans are structured so that individuals are eligible to receive benefits if they require assistance with two of six activities of daily living (ADLs) for a period that is expected to last at least 90 days, or if they have severe cognitive impairment. This is commonly referred to as the “HIPAA eligibility trigger.” Public program designs could use the same or similar triggers (for example, three of six ADLs), or borrow eligibility definitions from other programs, such as state Medicaid programs. The WISH Act, like most private market LTC plans, uses the HIPAA eligibility trigger.
- Will the program feature a “front-end” or “back-end” design?
Most LTC insurance can be categorized as either front-end or back-end coverage. Front-end coverage typically has a smaller pool of money with a shorter elimination period, where the intention is usually to provide a more limited benefit to a larger number of beneficiaries. Back-end, or catastrophic coverage, typically involves a larger pool of money with a longer elimination period (potentially multiple years), where the intention is usually to provide a more robust benefit to a smaller number of “catastrophic” beneficiaries. The WISH Act is more consistent with a catastrophic design, with no lifetime maximum and an elimination period ranging from one to five years, depending on lifetime income.
- How will the program coordinate and interact with existing coverage?
Private LTC insurance policies include specific rules on how the coverage coordinates with other programs, such as other insurance policies and Medicare. Public programs need to consider whether or how its coverage may interact with other coverages as well. This could include decisions such as opt-outs (for example, allowing opt-outs if an individual already has a private policy or coverage through a government policy, such as the Federal LTC Insurance Program or California’s CalPERS LTC program), setting rules on benefit coordination, designing features that have consistency with private market or Medicaid program benefits, and treatment of savings arising from government programs. The WISH Act still needs final rules on some of these elements, but it does state that the program does not allow opt-outs. The WISH Act also includes the HIPAA eligibility trigger for consistency with the private market.
- How is the claims risk priced?
Claims risk refers to the likelihood of individuals becoming benefit-eligible and the amount of benefits they will use once eligible. Through tools like underwriting and rating structures, the private market more closely prices for the claims risk of an individual. In general, public programs tend to be priced with the same rate for everyone (often as a percentage of wages, which results in a different dollar amount for each individual), where the needed revenue considers the claims risk of the entire covered population instead of being tied to a subset of individuals. The WISH Act would charge everyone earning wages the same rate—a 0.6% payroll tax, with 0.3% from employees and 0.3% from employers.
- What are the sources of program revenue?
Private market policies are generally funded through annual premium payments from policyholders (for life) and through interest earned on reserve funds. Typically, in the early years for a group of LTC polices, insurance companies collect more in premiums compared to benefit payments and expenses. This “extra” money is set aside in reserves that earn interest. The combination of premiums and interest earned is used to fund benefits and expenses over the life of a policy. Public programs could be funded through taxes, subsidies, premiums, Medicaid savings, or some combination of those sources (for example, payroll tax with a modest premium for retired individuals who are no longer earning wages). The public program can set the rate(s) such that there is little to no reliance on the accumulation of funds, or it can use a structure similar to the private market. The WISH Act states that taxes collected and benefits paid will utilize a dedicated trust fund.
- What is the framework for measuring and managing financial risk?
The aforementioned Academy brief discusses the importance of risk management and cost control in a potential reform. Even when sound actuarial assumptions are used in modeling, it is likely actual experience will emerge differently from expected. Depending on the structure of the program, “small” deviations from expected assumptions can have meaningful impacts on a program’s financial soundness. The private market is subject to laws and regulations governing the pricing and evaluation of insurance business. The WISH Act does not lay out the details of how the program will be monitored or actions to be taken when corrections are needed. Subsequent briefs in this series of articles will explore the importance of sensitivity testing for establishing program rates and ongoing monitoring of the program.
What’s Up Next?
Constructing, pricing, and monitoring public LTC programs involves many decision points. This first brief sets the stage for some of the key questions to address. Future briefs in this series will dive deeper into a few topics, such as the sensitivity of pricing to changes in key assumptions and program features. We will also explore how the experiences of covered participants vary, given the structure of the program features. We welcome other ideas to explore more in depth in this series.
1U.S. Congressman Thomas Suozzi. (July 6, 2021). Suozzi introduces legislation to transform American elder care, create federal long-term care insurance program. Press release. Retrieved September 28, 2021, from https://suozzi.house.gov/media/press-releases/suozzi-introduces-legislation-transform-american-elder-care-create-federal-long.
3Long-Term Care Criteria Work Group (November 2016). Essential Criteria for Long-Term Care Financing Reform Proposals. American Academy of Actuaries. Retrieved September 28, 2021, from https://www.actuary.org/sites/default/files/files/publications/Essential_Criteria_for_Long-Term_Care_Financing_Reform_Proposals_112916.pdf.
4Thau, C., Schmitz, A., & Giese, C. (July 1, 2020). 2020 Milliman Long Term Care Insurance Survey. Broker World. Retrieved September 28, 2021, from https://brokerworldmag.com/2020-milliman-long-term-care-insurance-survey/.