Mike Smith

Q: Anxiety about large rate increases and “use it or lose it” are two of the biggest obstacles in making the stand-alone LTCI sale.  How can agents address these objections?

Hughes
I am wondering if that is the biggest obstacle for consumers or advisors? As advisors, we definitely have to be comfortable with talking about rate increases. Whether it is legacy blocks of business or new carrier entrance into the long term care space, we need to understand why this happens. As for consumer, they need to understand that LTCI is a health insurance product—and just like all other health lines, these can take increases. The great thing is that LTCI policies don’t take rate increases every year, but when they do it is all at one time or maybe spread out over three years as we are seeing today. Now I will admit, a policy sold in 2007 that takes a 90 percent rate increase is effectively about a 13 percent increase each year, and that’s hard to stomach, but a policy sold in 2000 that takes a 15 percent increase over three years (45 percent total increase) is effectively a 2.6% increase annually. What we should be telling our consumers is that if we had to mentally factor in a two to three percent increase every year, would that still be “doable”? Most of the time you should get a yes. If not, then maybe we should question the suitability. We’ve seen carriers come out with step-rated inflation and why that hasn’t taken off is interesting to me. Wouldn’t this be a win-win to the carrier and client, where they can control the stopping point if they wanted to freeze the growth and freeze the premium? I find reassurance in a Society of Actuaries pricing study that shows policies sold in 2000 had a 40 percent likelihood of a future rate increase compared to policies sold in 2007 with a 30 percent likelihood and in 2014 with a 10 percent likelihood. And here we are in 2017. 

As for the “use it or lose it,” that objection is easily overcome today since we have some wonderful solutions based around life insurance that offer a death benefit if you never need long term care—because we all know with 100 percent certainty that life is fatal. 

Smith
Use it or lose it is not really lose it anymore, it is more like you get what you paid back in the form of benefits.  This may ease some of the regret, knowing you have paid LTCI premiums for years, only to discover you may no longer be able to afford the policy.  So, you either drop the coverage or reduce the benefits to fit your budget.  Keeping the plan in force, even at a reduced rate, is a smart thing to consider.  Something is always better than nothing when it comes to LTCI.

Hogan
Large Rate Increases—We point to the latest study from the Society of Actuaries, Long-Term Care Insurance: The SOA Pricing Project, showing agents that the potential rate increases on products sold today is very slim as well as discuss the past and why we have large rate increases on the older products. The conclusion “New Policy Pricing: Today’s Environment” (on pg. 8) states that:

“Carriers that are considering entering the LTC market or have discontinued selling LTC products should welcome the current pricing environment. To be clear, this paper does not claim that today’s LTC products will not need future rate increases. Rather, based on an analysis of pricing assumptions and historical experience, we conclude that LTC policies priced today are significantly less likely to need future premium rate increases than any earlier product generation.”

You can find the full study at https://www.soa.org/Files/Sections/ltc-pricing-project.pdf.

Use it or Lose it—We address this primarily with the use of the Shared Care Rider or showing, side-by-side, a comparison of traditional LTCI with a GUL compared to a hybrid.  The traditional with a GUL is likely to be similar cost, yet if the insured goes on claim he will not cannibalize the death benefit.

The Affordable Care Act (ACA) has brought about a big shift for brokers—a shift that has meant new challenges, frustrations and unknowns. However, the ACA has opened new doors that allow brokers to retain clients and attract small business prospects. How? Let’s explore an idea to keep brokers relevant in the health insurance conversation by advising small businesses about ways to control their employee benefits budgets.

Consider: Only 35 percent of employers offer a health insurance option. The 2011 Statistics of United States Business from the Census Bureau suggest that approximately 33 million people work for small employers (5 to 99 employees). The majority (25.4 million) work for firms that employ 5 to 49 workers. Referring to 2013 data from the Supplemental Health Care Exhibit, about 8.9 million small group policies were underwritten last year, which amounts to an estimated 35 percent.

But these statistics don’t mean small businesses are abandoning health benefits altogether. Instead, they are looking for new approaches to offering health benefits that allow for predictable health benefit costs.

The challenge: Unpredictable premium costs. The number one challenge small businesses face in offering health benefits is cost. To combat premium cost increases, employers of all sizes have shifted more costs to employees, decreased coverage or networks, and/or implemented consumer-driven health plans. Others have dropped group health insurance altogether because they cannot absorb the premium increases.

According to the Kaiser Family Founda­tion, the nationwide average group health insurance premium cost for small businesses in 2014 was $6,025 per year, with the business paying $4,944 per employee. Over the last 15 years, the cost to cover employees with traditional health insurance has increased 174 percent (for single coverage).

Consider a new health benefits financing approach for more predictable premium costs. Whether your clients offer health insurance now or have recently canceled due to the cost, you may feel like traditional group health insurance is the only way to offer quality health benefits.

New, affordable alternatives are rapidly being adopted by small businesses, such as:

 • The Small Business Health Options Program (SHOP) Marketplace and Small Business Healthcare Tax Credits.

 • Co-ops or professional employer organizations (PEOs).

 • Individual health insurance (with or without a premium reimbursement contribution).

What’s the most budget friendly option? An individual health insurance policy with a premium reimbursement contribution is one option. Why? Because, on average, individual health insurance may cost up to 60 percent less and businesses can control the cost completely.

As an alternative to purchasing group health insurance, businesses all over the nation are reimbursing employees for their individual health insurance. With new rules and regulations, however, businesses need to go about it the right way to avoid costly fees and penalties.

Ask: Is the employer reimbursing employees directly, or paying for employees’ premiums directly?

 • If Yes—If the employer is reimbursing employees directly or paying employees’ premiums directly to the insurance company, this is considered a type of “employer payment plan.” Under the new market reforms, employer payment plans are out of compliance. The employer must adopt a compliant plan by June 30, 2015, to avoid penalties.

 • If No—If the employer is providing a bonus or stipend (taxable), no action is needed. Your arrangement complies.

Ask: Does the employer have a formal reimbursement plan? As more and more employees purchase health insurance coverage on their own, it is common for businesses—especially small businesses—to help employees with their premium cost. Are employers reimbursing employees’ health insurance correctly?

When a business has a formal reimbursement plan, the business has official plan documents outlining how the reimbursement plan works. A formal reimbursement plan is a type of group health plan. In many cases, reimbursements are tax deductible to the business and received tax-free by employees.

Ask: Does the reimbursement plan comply with the new market reforms? As of January 1, 2014, the ACA introduced new market reforms that impact all group health plans, including reimbursement plans. To comply with the market reforms (PHS Act 2711 and PHS Act 2713), reimbursement plans must: 1) not place an annual or lifetime limit on essential health benefits, and 2) cover basic preventive care 100 percent.

Types of reimbursement plans that generally comply include:

 • Section 105 Healthcare Reimbursement Plans (HRPs).

 • Stand-alone Health Reimbursement Arrangements (HRAs), with only one participant.

Types of reimbursement plans that generally do not comply include:

 • Stand-alone HRAs with two or more participants.

 • Employer payment plans.

If Yes—If the plan complies with the new market reforms, no action is needed. The employer’s arrangement complies.

If No—If the plan does not comply, the employer must adopt a compliant plan by June 30, 2015, to avoid penalties.

If the plan does not comply with the new market reforms, the employer does not have a formal reimbursement plan.

Conclusion: Take control of escalating premium costs. Escalating premium costs do not have to be the end for employee benefits. By adopting individual health insurance reimbursement, your clients may gain better control of health benefits costs and break the cycle of unpredictable annual premium cost increases.

Employee benefits specialists are not going to earn their commissions in the next two decades the same way they have in the past two decades. The Affordable Care Act has turned the world we have known upside down. Someone “moved our cheese.” The question is, where will you get your cheese now?

Defined benefit plans are essentially where a broker helps an employer decide the best benefit plan to fit the employer’s budget and bring value to the employees. The main problems with defined benefits are twofold: The employer has little or no control over future rate increases, and the employees are forced to take the benefits whether they are the proper fit or not.

A better, more cost-efficient and effective way to provide employee benefits may be to utilize a defined contribution strategy. With this strategy, an employer determines the employee benefits budget; employers also control increases to their budget. In a defined contribution strategy, employees shop for insurance products custom-­designed to fit their personal household needs.

Perhaps the best part of a defined contribution strategy is the increased need for an employee to seek help and advice from a licensed broker. Because each employee’s needs are different from house to house, a professional broker’s services and knowledge are more in demand. In defined contribution, brokers now have a built-in reason to interview all employees in a one-on-one meeting. This interview is critical to complete a fact-finder, determine needs and make customized recommendations for the employees and their dependents.

In today’s world, the employee benefits specialist has a relationship with the human resources (HR) person and the boss. Together they decide what is best for all. In tomorrow’s world, the employee benefits specialist will have a relationship with each employee. Instead of having a 10 life group, the future broker will have 10 households.

Also in today’s world, brokers collect paper applications for a health plan, perhaps a dental plan, and maybe if they are lucky they get a third line of coverage in place, such as a voluntary benefit product. When the paper applications are collected, a 10 life group now has up to 30 different applications missing information (NIGO—not in good order!).

In tomorrow’s world, a broker will sit down and interview each employee (each household) with the assistance of a cutting edge, single data entry, cloud-based, client relationship management software package in which all of the applications are 100 percent IGO (in good order) for submission.

Additionally, brokers will be likely to sell more insurance because they no longer treat the small group as a single relationship but instead they view it as an opportunity to advise 10 households. Surely a proper interview will reveal many gaps in coverage and other needs from life insurance to supplemental sales.

Put another way, a single group may be good for a single referral, whereas a group of 10 households may breed 10 new referrals.

The future for employee benefit specialists is very bright. Over the past few years I have preached the following: Health insurance is the only thing in America required by federal law to be owned, and if you can’t afford it, we will help subsidize your premiums; if you don’t own health insurance you will be penalized.

What other widget in America makes these claims? None.

The Great Unintended Consequence

If an employer “offers affordable coverage” to an employee, the employee—and his dependents—are no longer eligible for subsidies. This consequence is real, and brokers (not navigators) are best equipped to solve this dilemma.

The solution may include a recommendation to drop the employer-sponsored group health plan. By not having access to an affordable health plan, the employee may now be eligible for subsidies—for the entire family. If you present a $1,200 qualified health plan (QHP) with a $12,500 maximum out-of-pocket to an employee (with a spouse and two kids) making $50,000 a year, you are not going to pick up an application. You will not make a sale because the coverage is too expensive, and who can meet a $12,500 out-of-pocket when they may only be putting $3,000 per month in the bank?

Instead, the employer should consider taking the cost of the employee-only coverage and designate this amount to a defined contribution, where the employer gives this amount to the employee and allows the employee to purchase their QHP via a health insurance marketplace (HIM). An HIM is just a website that you may use to place your link to your online QHP application. This very same HIM may also include links to your other online applications, such as dental, critical illness, life insurance and other insurance products you make available.

The Winners

In the defined contribution strategy there are no losers—only winners. The employer wins by gaining control over one of their most challenging expenses—employee benefits. The employees win because they are allowed to own insurance products that are tailored for their needs. The brokers win because they are able to increase their prospect base, improve their commissions through increased sales, improve their retention strategies with multiple products in one house, and pick up more referrals simply by exposing their services and knowledge to more people.

As a society, our ability to get information is measured by a nano-second. People are demanding more solutions that custom fit their needs. Dealing with an HR director and a business owner is no longer good enough. Addressing needs within a household puts the conversation on the kitchen table, not the board room table. Delivering predictable rate increases to employers satisfies their budget concerns. There are no losers in this defined contribution strategy.