The High Cost of Individual Insurance and Barriers to Group Insurance | Long Term Care Insurance

Unlike most acute health care insurance, almost all long-term care insurance is sold on an individual rather than on a group basis. Moreover, those insured must pay all the premiums themselves. By contrast, most acute care group insurance is employment based and largely paid by the employer. Only about 10 percent of the elderly, however, are still working, and only a minority have any employer-sponsored health benefits. Although it is possible to market long-term care insurance to groups other than employers (for example, to senior citizen groups), that has generally not been done. The main exception is the policy developed by Prudential, which is being marketed as a group policy to members of the AARP.

The overwhelming dominance of individual products substantially increases the overhead costs. Administrative and marketing costs are high because sales have to be made one at a time. Advertising material must be developed and viewed by a large number of people, most of whom may never buy the product. Insurance representatives report that it takes an average of three to four separate visits with potential purchasers for them buying long-term care insurance policy. Thus agent commissions must be high per policy sold.

Group insurance especially geared to the non-elderly population would potentially address the problems of high cost and adverse selection. Premiums should be lower in employer-based group policies because administrative and marketing costs are lower and people would be able to contribute over their entire working careers, allowing reserves to build. Adverse selection would also be reduced because the under 65 age group has a very low disability level and both high-and low-risk people would be covered by the insurance. Several insurance companies, including Aetna and Travelers, are experimenting with offering long-term care insurance through employers. A few employers had instituted policies, including American Express, the Alaskan state government, Procter and Gamble, and Ford and General Motors in a demonstration project. The federal government is planning to offer a long-term care insurance policy to its employees.

Employers’ interest in offering long-term care insurance is growing, but their interest in paying for the insurance is not. Employers see long-term care insurance as financially risky because the costs are uncertain, potentially large, and sure to grow as the baby boom population ages. Moreover, benefits are not likely to be used until employees have been retired for twenty or more years and have little, if any, connection with the firm. Nevertheless, as employers face labor shortages caused by the changing age structure, they may begin to offer new benefits to keep older employees in the work force. Employer-based long-term care insurance, however, is not likely to exceed that of employment based insurance (acute), which covers only a substantial minority of the elderly and is concentrated among former employees of large corporations or governments.

In addition, because of the lack of awareness of the need for long-term care, few employees and unions have bargained for long-term care insurance. Furthermore, many labor unions are having difficulty holding onto the benefits they have instead of expanding into new areas. But employee interest may be rising. A survey of 1,000 employees in large companies found that 5 percent of those surveyed were very interested and 32 percent somewhat interested in trading some current fringe benefits for new nursing home benefits.

Even if employers were so inclined, there are many barriers to employer-sponsored long-term care benefits. First, insurance premiums can still be high, despite discounts for large groups of younger people. For example, the Social Security Administration actuaries estimate that the annual premium for a policy that after a 90-day deductible paid an inflation-indexed nursing home benefit of $50 a day up to a maximum of six years would be $412 if issued at age 30, and would rise to $950 if issued at age 60.50

Second, in part because of recent efforts to shift some medicare costs to employers and because of court cases involving retiree health benefits, the general movement has been to restrict rather than to expand elderly health benefits. Both the Tax Equity and Fiscal Responsibility Act of 1982 and the Consolidated Omnibus Budget Reconciliation Act of 1985 make medicare the second payer for the employed elderly, increasing the share of elderly health care costs paid by employers. Courts have ruled both for and against employers on discontinuing or modifying health benefits for retired employees.51 Where they have ruled against employers, the implication is that retirees have vested rights to health insurance and that employers cannot unilaterally alter or terminate those benefits.

A third barrier pertains to the difficulties of pre-funding retiree health benefits. In financing health plans, in contrast to pension plans, employers are not required by law to pre-fund benefits; instead they generally use a pay-as-you-go strategy. As a result, there is a very large unfunded liability for health benefits for current retirees and workers aged 40 and over, the value of which was $98 billion in 1983. Companies fear that the Financial Accounting Standards Board may change reporting requirements so that future liabilities for retiree health benefits are reflected in the annual financial statement, a change that could make some large corporations look financially unstable.

Very few companies pre-fund their retiree health benefits, partly because the tax code does not provide incentives to do so. The two principal vehicles for pre-funding post retirement medical benefits under the Internal Revenue Code are 501(c)(9) welfare trusts (so-called voluntary employee benefit trusts, or VEBAs) and 401(h) trusts in pension plans. The Deficit Reduction Act of 1984 placed many restrictions on VEBAs. Although employer contributions to future retiree health benefits are tax deductible, earnings on life insurance investment income are taxable. 54 In 401(h) trusts, income from employer contributions does accumulate tax free. But the potential for pre-funding long-term care benefits under 401(h) is limited; only 25 percent of the aggregate employer contribution to the pension plan can be for “incidental benefits,” including life insurance, death benefits, disability insurance, and health insurance.

For most employers these limits are too low to adequately cover existing incidental benefits, much less long-term care benefits. Other ways of pre-funding long-term care benefits are through defined-contribution plans or tax-deferred savings arrangements such as 401(k) plans. Obviously, employers could pre-fund health and long-term care insurance without specific tax advantages, but the marginal cost would be higher.