Is a Backlash Brewing in LTC?

Beware of low-priced nursing-home policies. They might be designed to fail.

By Jane Bryant Quinn

Boomers, dears, I know you hate to remember that you're middle-aged. But what else could be fueling your growing obsession with long-term care? Maybe your parents are on your mind. Then again, maybe you're (ahem) sneaking a peek ahead.

This issue's emotional tug is strong, especially for the millions of people caring for relatives who are frail, confused or ill. Formal long-term-care services cost $115 billion in 1997, of which the government paid two thirds. Medicaid handled the lion's share (that's custodial care for older people who can't afford it themselves). Medicare picks up skilled nursing, in limited amounts.

Voters want much more help than this but, as usual, haven't thought about how it should be financed. To keep you happy, the pols have been pumping out pocket-size ideas. For example, the proposed tax-cut package gives an extra personal exemption to people caring for relatives at home. It would also let you deduct the full cost of buying your own long-term-care (LTC) insurance.

Scandal blooms: Private insurance seems to be the best solution for people who don't want to spend their own savings on long-term care. But the LTC industry is letting a scandal bloom. Some of its policies are fatally flawed. Instead of protecting you when you're old, they'll squeeze you out before you can make a claim.

When you buy LTC insurance, you're told that you'll pay a "level premium." To buyers, that means that the price of the policy won't go up. If you start at $200 a month, that's where you'll stay.

The fine print, however, says something else. Although the insurer can't raise the price of your policy alone, it can charge higher prices for all the policies like yours that it sold within your state.

This has spawned a dirty game. The insurer (often a small one) will tout a new policy at a bargain rate. It will carry rich benefits, and might accept people who are in poorer health. The sales commissions paid to agents might be unusually high. Both buyers and agents think they're getting a terrific deal.

Two years later, however, premiums might jump by 15, 20 or 50 percent. In another two years, they'll jump again. At that point, the policy won't be competitive anymore. The healthy customers will switch to something newer and cheaper. Those left behind — the older and sicker — make claims at a higher rate, so premiums will rise again. One by one, most of those older policyholders will let their coverage lapse, because they can't afford to pay. Bye-bye to the old-age protection they had hoped for most

Some state insurance departments have the power to challenge premium hikes. Most, however, are rubber stamps.

When consumers have no other voice, they call the lawyers in. A North Dakota class action goes to trial in October, against Acceleration Life and Commonwealth Life (whose business was bought by Aegon in 1997). Attorney Allan Kanner of New Orleans filed a similar case in Florida. He'll sue in Wyoming and Washington, too.

According to a memo produced for the North Dakota case, these LTC policies weren't going to make any money. The proposed solution: "file large rate increases to encourage higher lapses." In other words, deliberately drive people out.

One of the dropouts was Harold Hanson, 94. When he bought his level-premium policy in 1987, he paid around $1,094 a year, Kanner says. Nine years later, his cost had soared to $3,603, which he couldn't afford to pay. Nellie McIlroy, 93, saw her premiums leap from about $830 in 1987 to $6,638 this year. McIlroy now has Alzheimer's disease, according to the complaint. She's paying the high premium because she knows she needs the coverage. Of more than 2,000 people who bought these policies in North Dakota, fewer than 130 are still insured, Kanner told the court.

A spokesperson for Aegon says its predecessor, Commonwealth Life, has stood behind the policies at issue.

I heard a similar, sad story from Larry Blau, 72, and his wife, Janet, 67, of Garden Grove, Calif. Two years ago they bought a level-premium policy from American Travellers Life (ATL), paying $3,499 a year. That's the most they thought they could afford. Recently, however, their cost jumped to $4,132. The Blaus tape-recorded the sales presentation. They say there's no mention of the risk that premiums would rise.

Aggressive price: David Larson of the Larson Long Term Care Group in Bothell, Wash., who has surveyed LTC rate increases in 35 states, says that ATL is one of the most aggressive price hikers in the business. ATL spokesperson Jim Rosensteele says, for these policies, claims were higher than anticipated.

A well-managed LTC policy needn't rise in price, says Tom Foley, the Kansas Insurance Department's divisional director of accident and health. Travelers Life & Annuity says it has never raised premiums on existing policyholders. GE Financial Assurance, Unum and John Hancock Mutual Life say the same. They charge more at the start than the "bargain" companies do, but you'll pay less in the end. Even with a rate hike, you wouldn't be driven out.

The National Association of Insurance Commissioners (NAIC) has twice tried to regulate the low-priced buccaneers. It's a hapless enterprise. In earnest meetings, the commissioners struggle to write model laws. But due to industry opposition, these laws are rarely, if ever, adopted by the states. Foley says that, in 1997, the LTC industry promised to work for rate stability, provided that NAIC watered down its model law. NAIC did, but "on the evidence, the industry reneged," Foley says. The commissioners will meet again this week, but they're probably just flapping their lips.

None of this means that you shouldn't buy LTC insurance. For a good shopper's guide, try "Long-Term Care Planning," $18.50 from the United Seniors Health Cooperative (800-637-2604). But steer clear of low-priced policies, says Bonnie Burns of California Health Advocates in Santa Ana. Get a history of the insurer's rate increases. And tape-record the sales pitch. You never know.

Newsweek, August , 1999