Going Ahead of the CLASS: The Advantages of Private Long-Term Care Coverage

(National Healthcare Reform)

As Baby Boomers age and shoulder the responsibility for their parents’ deteriorating health, many are facing the reality that the need for long-term care is both pervasive and costly in post-retirement years. When they look in the mirror, they know their turn is next.

That haunting reality can make one portion of the Patient Protection and Affordable Care Act very attractive. The Community Living Assistance Services and Support Act – better known as CLASS – is designed to spread insured long-term care coverage to a larger base of the nation’s population. The conduit for delivering this insurance product is the workplace.

Because of serious problems with the way CLASS is designed, however, its primary benefit may be surfacing long-term care as an issue that should be addressed, as well as driving awareness of other, more suitable options. Both employers and employees can benefit from understanding the advantages of products on the market today, particularly in comparison to CLASS.

By taking a fact-based approach to decisions about long-term care insurance, everyone emerges a winner. Employees can have policies that provide realistic coverage; employers can have a powerful cost-effective tool for attracting, retaining and rewarding employees; and brokers can have one more option in their portfolio that gives employers the value-added service they are looking for.

Need is Growing

Rather than beginning with the product, the place to start this story is with the need for long-term care. Statistics from the National Clearinghouse for Long-Term Care Information operated by the U.S. Department of Health and Human Services demonstrate the need already prevalent today and give a strong indication of the future that lies ahead. These statistics include:

• About 9 million Americans over the age of 65 will need long-term care services this year – a number that is expected to increase to 12 million by 2020.
• About 70 percent of individuals over age 65 will need some type of long-term services during their lifetime. More than 40 percent will need care in a nursing home.
• The cost of long-term care services across the United States, as calculated in 2005, totaled more than $200 billion.While 49 percent is paid for by Medicaid after individuals have exhausted their personal assets, much of the cost falls upon private resources. Medicare pays only about 20 percent, usually under very specific circumstances and for limited periods.

Other statistics from the National Alliance for Caregiving make clear why helping employees with long-term care obligations makes sense for employers. These include:

• Of the 65 million family members who provide care for someone over the age of 18 for an average of 20 hours per week, 66 percent say it has affected their job by such things as getting to work late or having to quit. One in five caregivers has had to take a leave of absence.
• One study estimates that employees taking care of family members over the age of 50 cause as much as $34 billion in lost productivity at worksites nationally.

The CLASS Act

As part of an effort to reduce Medicaid costs over time, legislators wanted a way to transition long-term care spending from the publicly funded program to an insurance-based system. The CLASS Act does that by creating an employment-based system that uses payroll deductions to cover premiums.

After a waiting period of five years, the anticipated benefitfor the covered person is $50 per day, with growth in that payment based on the increase in the Consumer Price Index. Benefits, which are tax-free, are expected to be payable based on the person’s level of need, even if formal services are not received.

Because the program does not begin until 2014, federal regulators are not expected to finalize specifics until 2012 or 2013. In the meantime, different sources have offered a range of likely premiums. The American Academy of Actuaries estimates a 60-year-old enrollee should pay between $160 and $240 per month. The Congressional Budget Office has suggested $123 per month, while the Centers for Medicare and Medicaid Services is using $180 per month as its estimate.

At the moment, the expectation is that employers will be able to opt in or out. If they opt in, they will be required to handle administration, including collecting the premiums through payroll deductions and remitting them to the program. Employees who choose not to participate if their employer offers CLASS will have to opt out individually.

While the opportunity to opt out at the employer level exists, many believe federal regulators are leaning towards requiring employers to opt in if at least one employee wants to participate.

Where CLASS Falls Short

Unfortunately, the promise of CLASS falls far short of what is already on the market today. The primary problem is that the program was not designed to cover the full price of care. In fact, it creates a significant gap in coverage that employees may only recognize after they have paid premiums for years and it comes time to use the benefits.

As the Table 1 below illustrates, a $50-per-day benefit may pay about half of needed home care, but will not even cover a quarter of the cost of nursing home care. The government’s own website recognizes this. The National Clearinghouse for Long-Term Care Information lists average daily costs in the United States of $198 for a semi-private room in a nursing home; $104 for assisted living in a one-bedroom unit; $84 for an average of four hours of care by a home health aide at $21 per hour; and $67 for care in an Adult Day Health Care Center. 

(Source: American Association for Long-Term Care Insurance, 2008, LTCi Sourcebook)

In sharp contrast, private long-term care plans already on the market typically pay significantly higher benefits. As the table below illustrates, only 15 percent of plans pay less than $100 per day. Two-thirds of them pay between $100 and $200 per day. One comparison of the monthly cost and benefits of CLASS vs. private long-term care insurance indicates that a 59-year-old would pay very similar premiums -- $152 vs. $157 per month – under both programs, but would collect $150 per day, up to $400,000, with the private coverage.

(Source: American Association for Long-Term Care Insurance, 2008, LTCi Sourcebook)

Another drawback of the CLASS Act plan is that premiums are collected for five years before any payout can be made. Most currently offered private plans have a 90-day elimination period, after which the insured is eligible for payments based on their condition and care needs.

Why Employers Want Options

Although the CLASS Act is new, the concept of offering long-term care insurance through the workplace is not. Between 1995 and 2007, the number of employers offering plans grew almost eight-fold. A 2007 Mercer Benefits Survey indicated that 50 percent of large employers (20,000-plus employees) offered long-term care insurance, and roughly one-third of companies with 5,000 to 20,000 did so.

One factor that makes long-term care an attractive benefit for employers to offer is that they can customize coverage to meet their goals. Unlike health insurance, federal laws allow them to provide coverage at different levels for various groups of employees. They can choose a no-cost option of offering a voluntary program where employees pay the full premium; they can have an employer-paid base coverage and offer employees the option of “buying up” to higher benefits by paying extra; and they can create an executive carve-out to reward valued employees with an employer-funded, more generous benefit.

Besides using long-term care insurance as a tool for retaining employees, employers can view this benefit as a way to protect worker productivity. Because the policies typically include care coordination, the time an employee spends on the job during business hours trying to arrange for or monitor care is reduced.

In addition, long-term care insurance provides tax benefits to both the employer and the employee. Assuming that the employer is a C-corporation the premiums are tax deductible, there is no imputed income for employees and the benefit is tax free when it is paid out.

Finally, the administrative burden imposed by CLASS is not an issue when employers opt to offer employees private long-term care insurance.  Instead, the carrier handles tasks such as enrollment.

Making the Case for Long-Term Care Coverage

Waiting for CLASS to take effect has several drawbacks, the biggest being that employees will not be eligible for benefits until five years after the first premiums are collected in 2014. In the meantime, they are at risk of becoming disabled and finding the cost of necessary care beyond their reach.

People who would not think of going without fire insurance on their home or accident coverage for their car are probably unaware that they are far more likely to be faced with paying for long-term care. In fact, out of every 1,000 Americans who are over the age of 65, five will have their home burn to the ground and 70 will have an automobile accident serious enough to file a claim. But 600 – well over half – will need some form of long-term care.

Employers who make getting long-term care coverage easy are providing a valuable benefit to their employees. By working closely with a broker who understands private long-term care insurance offerings, employers can offer their workforce almost immediate benefits, without the regulatory uncertainty and time delay imposed by CLASS. The advantages, to both employer and employee, make going ahead of CLASS worthwhile.

About The Author

Samuel H. Fleet is President of AmWINS Group Benefits, a leading wholesale broker of comprehensive group insurance programs and administrative services. With more than 20 years of health and benefit experience, Sam has guided the rapid rise of AmWINS Group Benefits from a small regional organization to one of the most successful wholesale brokers and group insurance administrators in the country.  Responding to the crisis of rising medical care and health insurance costs over the past few years, Fleet has positioned AmWINS Group Benefits as an industry leader that can offer innovative solutions to help benefit brokers assist their clients.  Sam can be reached at sam.fleet@amwins.com or 401.734.4121.