Long Term Care Insurance: An Opt-Out Solution

At least a dozen states are exploring the feasibility of developing and implementing statewide insurance programs for long term care services and supports. A major issue is whether to grant citizens an option to opt-out of such a program and avoid a mandatory tax by doing so.

California, Michigan and Wisconsin are among the states that appear to be serious about enacting legislation to create such a program. Most of the discussions in these states have centered on adapting the model of the Washington State Cares Act. This Act imposes a mandatory payroll tax of .58 percent on all W-2 earners in the state. This will give workers a lifetime benefit of up to $36,500, adjusted annually for inflation, and offer a wide range of benefits.

The concept here is that a state program would become a motivator, providing a small long term care benefit to most citizens and encouraging those who can afford it to buy wrap-around private long term care insurance. This would provide many citizens with good protection and save a state many millions of future Medicaid dollars.

One way to encourage citizens to buy private long term care insurance is to allow a citizen to opt-out of paying the mandatory tax by doing so. The State of Washington decided to offer a very limited six-month opportunity ending November 1, 2021, for citizens to opt-out of the program.

This decision created a huge mess. There was a rush to purchase private long term care insurance, especially by high income earners. Many believed that they could purchase insurance at small cost with small benefits, cancel it within a few months, and still avoid the tax. The insurance carriers were unable to cope with the volume of applications, and soon decided to stop accepting them.

The Act is full of other complexities which need not be discussed here, except to note that Governor Inslee has delayed its implementation by three months and if the House enacts HB 1732, it could be delayed by eighteen months.

Given this history in Washington, other states know that they must make a different decision on the opt-out issue, including the possibility of not having any opt-out option at all. Let’s discuss the pros and cons of this issue, and then I would like to propose a solution.

Don’t Allow an Opt-Out
There would be many administrative issues if an opt-out were allowable, including the need for continual recertification of private insurance and notification of employers of any changes in a person’s status. What if a person drops their private long term care insurance? The administrative complexity increases as citizens change jobs or become self-employed or work remotely out of state or work for an employer who moves their domicile out of state.

But the main reasons to not permit any opt-out provision are financial. Assuming that the tax is progressive based on income, as it is in Washington, the citizens who would opt-out would be the ones with the highest income. For them, private long term care insurance is the better value. Opting-out of high-income citizens would substantially reduce the revenue of the state fund and eventually require a big increase in the tax rate for everyone else.

Allow an Opt-Out
On the other hand, the main goal of a state program is to reduce Medicaid costs by encouraging citizens to protect themselves from a long term care event and give their families peace of mind. Medicaid costs would not be substantially reduced unless many purchase robust long term care insurance plans. How can a state encourage this?

One way is to admit that the state program only provides small benefits which in most cases will not come close to paying for a long term care event. This is true, but it’s very unlikely that a state would market the shortcomings of its program in such a way. A state needs to gain the support of its citizens to urge its legislature to enact the program.

The other way to do this is to offer a financial incentive for those who purchase private long term care insurance. An opt-out could be such an offer. This could create an alternative for those who are opposed to paying taxes and for those who believe for any reason that they are being discriminated against.

An opt-out option would involve complex and expensive administrative costs in addition to those in the program even without an opt-out option. However, these costs could be offset in several ways, which I would recommend in any event.

  1. Allow the fund to place a small portion of its investments in non-fixed instruments.
  2. Create an elimination period of 30 or 45 days in order to receive benefits.
  3. Settle the account of a person who resides out of state by refunding their tax amount but retaining any investment growth.
  4. Allow benefits to be paid only if the employee receives those benefits in the state involved.

A Proposed Solution
May I be so bold as to propose an opt-out solution? An opt-out for everyone at one time is simply not workable, especially when a program is just beginning to be implemented. A far better solution is to allow citizens to opt-out at various stages of their lives over a long period of time.

My vision is to give citizens the opportunity to opt-out as they reach ages 25, 35, 45 and 55. They would have to prove that they possess an issued private long term care insurance policy with certain minimum benefits, which would have to be recertified at least every two years.

To begin with, these minimum benefits would include at least a $150 daily benefit, a two-year benefit period and three percent compound inflation. The daily benefit would have to be adjusted over time for new opt-out policies as long term care costs rise. Similar minimums should be set for hybrids and for life insurance and annuities with long term care benefits. These minimum benefits would eliminate those who either cannot afford such protection or who are merely trying to evade the tax.

Citizens could very well not want to opt-out in their younger years but may change their minds as they age. If they opt-out at age 25 they would only have paid the tax for a few years, and that may prove to be a good incentive to purchase private protection. Conversely, if they wait until age 55 they may have paid the tax over a far longer period, but might feel a greater long term care need at that age. They might even want to purchase a private wrap-around long term care insurance policy and not opt-out, keeping the state plan in force.

I envision that the state would retain any taxes collected because citizens are covered with the state insurance until such time that they opted-out. This would increase the state’s revenue because it would not have to pay any benefits for those who opted-out as they would no longer be covered.

Admittedly, such a plan would create a huge problem for the actuaries because it would be so difficult to predict opt-out behavior over such a long period of time. Legislatures would have to retain the ability to adjust the tax amount up or down in light of actuarial experience.

In my view such an opt-out program could be workable for everyone, including the insurance industry. It could motivate citizens to buy good protection and save the states many millions of Medicaid dollars. We are currently at an inflection point. It may become accepted public policy, as it is in other developed countries, to protect citizens from the devastating costs of long term care. Whatever your view, this is the time for members of the insurance industry to make their views known.

Louis is Chairman of California Long-Term Care Insurance Services, Inc., located in Burlingame, CA. California Long-Term Care is the largest independent specialist long term care insurance agency in California, and is broker for a group of high-producing long term care specialist agents.

Brownstone is also past chairman of the National LTC Network, an association of some twenty-five brokerages nationwide which together place about ten percent of all long term care insurance premium. This production makes the Network the nation’s largest independent distributors of long term care insurance.

He is also very active in the National Association of Insurance and Financial Advisors (NAIFA), the largest and oldest group of its kind in the insurance industry. One of his goals is to revive the California Partnership for Long-Term Care in order to insure more Californians and save the State of California billions of dollars in future Medi-Cal expense.

Brownstone is a native San Franciscan and fourth generation Californian. After graduating from Andover and Stanford, he became an executive in a retail menswear apparel business, Grodins of California. He entered the insurance industry in 1989 and became a long term care insurance specialist in 1991. Louis founded California Long- Term Care Insurance Services in 1997.

Brownstone may be reached by telephone at 650-692-5202. Email: louis@cltcinsurance.com.