Friday, October 7, 2011

Long Term Care Coverage: Reducing Cost & Increasing Coverage

Long Term Care Coverage: Reducing Cost & Increasing Coverage

The insurance industry is minor league preparation for government employment. (Instead of hoarding Oxycotin to commit suicide, just stand outside a major insurer’s headquarters at 4:20 PM in the afternoon and by 4:30 PM you’ll be stampeded to death).
The insurance industry never been accused of being a bastion of innovation. (Actuaries, some say, are accountants without personalities). Due to patent structural barriers to trade, if anything, the industry has encouraged theft of the little innovation that has occurred without recourse. The larger insurers just take the second bite of the apple knocking off the smaller insurer’s innovation and plays chicken daring the innovator to sue with the threat of deep pocketing them.
So the suggestion below relative to matching needed long term care coverage with reducing the ever escalating costs long term costs (only rivaled by higher education cost theft and health insurance inflation) will probably go on deaf stampeding ears. And the suggestion below assume continuation of the same failed long term care model of care which in itself is unsustainable.


In the late 80’s the geniuses in the life insurance business to reduce premiums engaged in a practice called lapse supported premiums. Lapse supported premiums are akin to a Tontine (an investment or insurance plan in which contributors pay equal amounts into a common fund and receive equal dividends and benefits from it, with the final surviving contributor receiving everything). Thus, in the life insurance tontine, the surviving policyholders reap all the benefits of the premiums and dividends forfeited by the lapsing policyholders.
Given that up to 70% of all ‘permanent’ life insurance is gone by the 10th year, for those who stick it out – dividends just magically increased (lowering the comparative premium costs for competitive comparison sake.
Well, the brilliant actuaries did lapse supported pricing on long term care. But insured didn’t lapse but nursing home and at home care costs skyrocketed. (And they say actuarial is a science!)
No wonder so many entered and exited long term care. Yet, the insurers, having learned their lesson from pricing disability insurance on a guaranteed price and renewal basis, issued long term care guaranteed renewal but the price was not guaranteed. (And they still are eating their lunch but at least not canabolizing themselves as they can raise premiums)
Result – long term care premiums have gone out of sight – where life time coverage for most is unaffordable.

Reframing The Problem and Reinventing The Long Term Care Policy

10,000 deaths is a statistic; 1 death is a tragedy

Everybody wants to go to heaven but nobody wants to die
Comedian Timmie Rogers

National Nursing Home 1999 Survey: According to the data the average length of stay for current residents is 2.44 years and for discharged residents is 272 days.
The length of stay in nursing homes as long as 3 years was 5% of women and 3% of men or 97% of men and 95% of women were in nursing homes less than 3 years.
However, in National Nursing Home Survey, the cognitive impairment among the 65+ age population was 40%. Assuming even 100% of those in nursing homes are 65 and older (it is less) and 40% of those in more than 3 years (1.2% of males and 2% of females) are likely to have cognitive disorder.
So given these probabilities and escalating nursing home costs 300%-400% of consumer price index, would it not make more sense to offer 3, 5 or 7 year policies but with a lifetime rider for cognitive impairment? The underwriting would rate the cognitive impairment rider based on family history (Alzheimers etc.)
Accordingly, overall cost for LTC would come down as exposure to claims (other than cognitive) would be for a shorter duration matching probabilities BUT allowing for lifetime on cognitive.
Of course, the probability of being stampeded to death 4:20PM in front of an insurer’s home office is 10,000% higher than adoption of the aforementioned policy suggested.

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