Washington State’s “Washington Cares Fund” (WCF; Revised Code of Washington 50B.04) imposes an uncapped 0.58 percent employee-paid payroll tax ($580 for each $100,000) to fund a $36,500 lifetime pool (intended to inflate, beginning in 2027, according to the Washington consumer price index) for long term care received in WA by vested taxed employees. To qualify, a claimant must require help with at least three activities of daily living. The WCF website lists 11 such activities, one of which is cognitive functioning. In private LTCI, cognitive functioning is a separate trigger, sufficient to justify a LTCI benefit rather than accounting for only one of three required ADL deficiencies.
The bill was signed by Governor Inslee on May 10, 2019, but people who purchased qualifying private stand-alone or combination LTCI by November 1, 2021 could file to be exempt from the tax permanently. As of June 13, 2022,* the state of WA had received 478,173 applications for exemption, approximately 1/8 of the employed population. (*The private LTCI had to be purchased by November 1, 2021, but the exemption request can be filed as late as the end of 2022.)
The repercussions of WCF will be watched closely. When working to get the law passed, proponents expressed confidence that WCF would stimulate a significantly increased future market for private LTCI because WCF would educate consumers regarding their need for LTCI. As WCF is clearly insufficient coverage, consumers would be motivated to supplement WCF coverage. However, the following factors make it questionable that the market will be positively stimulated in the (near) future. (Note: some of these aspects may still be subject to change):
- Confusion. Even outside WA, most advisors and consumers consider LTCI to be a confusing product and difficult sale. It is hard for people to remember the triggers and which providers’ services are covered. Selling private LTCI to complement WCF is much more complicated. WCF uses different triggers than the HIPAA-defined triggers used by private LTCI and pays different providers. To the degree that it is hard to remember trigger definitions and provider qualifications, it becomes much more difficult when faced with conflicting definitions.
It is also hard to complement WA-only coverage with national coverage. People who expect to relocate out of WA are more likely to be interested in private LTCI. For them, there is no coverage to complement.
In addition to these major difficulties, there are other complexities. For example, WCF has no daily or monthly maximum nor does it qualify for the state Partnership program.
- Dried-Up Stream of Sales. Because Washingtonians wanted to be exempt from the WCF tax, the industry sold more than 90 times as many WA policies with LTCI features in 2021 than in 2020. Because of the avalanche of 2021 sales, demand is likely to be greatly muted for the next several years.
However, a lot of buyers purchased coverage that was less robust than typical previous sales in WA or 2021 sales in other states, so there will be a market to supplement or replace small policies that were purchased. Unhealthy individuals are more likely to want to add to their existing LTCI, likely resulting in a higher decline rate. Such sales require more effort but generate lower-than-average commissions.
Rather than devoting disproportionate attention to WA’s small, unattractive LTCI market, insurers, brokers, employers, and others might sit on the sidelines for an extended period.
- Lack of Perceived Need. Many Washingtonians seem likely to think they need no additional coverage. Unfortunately, rather than educate Washingtonians regarding the value of supplemental coverage, the state promotes WCF with messages such as “We no longer have to worry about how we will afford long term care as we age.”
Even those Washingtonians who understand the limitations of WCF coverage may presume the WCF program will be enhanced by the time they might need care, hence not feel motivated to purchase private insurance.
- Denigration of the Private LTCI industry. In addition to suggesting that WCF is all the coverage Washingtonians need, WA officials spread inaccurate and misleading comments denigrating private LTCI. If I failed to mention this issue, I would be intentionally suppressing relevant information. I can substantiate this statement, but I don’t want to dwell on this negative point.
Even if WA officials change their tune, a negative impression has been planted in the minds of many current Washingtonians and the inaccurate and misleading information is likely to continue to be quoted and found in internet searches.
- Financial advisor hesitance. For several reasons, advisors are reluctant to stray from their areas of expertise. Because of the complications introduced by WCF, financial advisors seem more likely to be hesitant to raise the issue of LTCI with their clients.
The reduced likelihood of a sale also discourages what may be fruitless discussion, and more work for less compensation is not very motivating.
Furthermore, disclosures will be more confusing. Advisors might err or clients might misunderstand or forget what they were told. The resultant increased risk of personal liability for errors or omissions will also discourage some advisors.
Employers and employee benefit managers also seem less likely to be interested. Thus, much of the private LTCI industry might sit on the sidelines for at least several years.
- Increased Total Cost. WCF intends to increase benefits, if possible, according to the WA CPI (consumer price index). Historically, the cost of long term care services have increased faster than the CPI. WCF is projected to cover about three months of nursing home care, probably less in some circumstances and over time. The likely shortfall is exacerbated because the CPI factor does not get applied in the first three years of the program and because the initial intended CPI adjustment was delayed 18 months when program implementation was delayed.
As more than 90 percent of LTCI-related policies have a 90-day elimination period (EP), people might conceptually view WCF as covering the elimination period. That’s not accurate, particularly as WCF covers more than 90 days of home care and ALF care. But people want simplifying sound bites. So, the nursing home coverage might cause WCF to be seen as covering the private insurance elimination period.
The combined cost for LTCI (WCF plus private insurance) will increase significantly compared to prior to WCF for two reasons:
- Buyers are forced to have a zero-day elimination period which increases the price (but provides additional value).
- People who can afford private LTCI tend to be healthy high-earners, who are overcharged for WCF coverage to subsidize less affluent and less healthy Washingtonians.
The market is not likely to respond favorably to the high combined cost. Opting for 180-day EPs is not likely to release the price pressure because the industry traditionally has not lowered prices very much for a 180-day or longer EP compared to a 90-day EP. Longer EPs make insurer results more volatile. A 180-day EP also increases volatility (risk) for the consumer, particularly if they receive long term care services outside WA.
It appears that the WCF is going to be primary coverage, so insurers won’t have to pay benefits for services covered by the WCF. That is appropriate and suggests that insurers might be able to lower premiums. Alas:
- To the degree that WCF benefits cover services during the insurer’s EP, there is no cost savings for the insurers. Au contraire, there could be a negative impact because long term care costs are usually lower when the insured bears some of the risk. With a diluted elimination period, the later costs (covered by private LTCI) could be higher.
- If claimants are not in Washington, there are no savings.
- If claimants are cognitively impaired but don’t satisfy WCF’s criteria, there are no savings. (In private LTCI, cognitive impairment is sufficient to qualify for claims.)
For the above reasons, WCF seems likely to shrink future LTCI sales significantly, particularly stand-alone LTCI sales.
Future sales may migrate heavily toward life insurance or annuities with LTCI features. The life insurance or annuity side of the contract is less confusing and guarantees a pay-out. Because the life/annuity portion predominates, less attention is given to the LTCI elements, which in some cases are incidental additional features. The guaranteed pay-out also causes the buyer to be less concerned about the details regarding LTCI.
A key question relative to the value of LTCI is “How much coverage will insureds have when they need care, which is not likely to occur until they are in their 80s?” The 2021 private LTCI sales in WA were less likely to include automatic compound benefit increases. In addition to providing less coverage up-front, the shortfall is likely to increase over time. Some policies have rights to “future purchase options” (FPOs) to try to maintain the purchasing power of the benefits. I wonder if anyone will compare the future election rate of FPOs on 2021 WA sales to typical industry FPO election rates.
In addition to its impact on future LTCI sales in WA, WCF has encouraged other states to consider state-run LTCI programs. In California, a task force is exploring creation of a state LTCI program. Most observers think a CA-run program is nearly certain. The task force has expressed interest in a program with stronger benefits than WCF. New York (SB 9082), MN (HF 4461) and Pennsylvania (House 2779) have bills. If readers are aware of activity in other jurisdictions, I’d like to be informed.
Before discussing ways in which those programs may differ from WCF, I must poke fun at myself. I told my friends at Milliman that I thought they had overstated the impact of exemptions from the WCF. My argument was that the insurance industry is not very effective in leveraging such opportunities. I was incorrect because I did not appreciate the deluge of demand that WCF created from individuals and employers. I’ve never seen anything like it in my 50 years in the industry. As of June 13, 2022, WA had received 478,173 applications for exemption, which was equivalent to 13.6 percent of WA’s non-farm population. Because people with exemptions are heavily weighted to high earners and young people (who would have paid into the fund many years; or paid fewer years, then left WA without benefits), the cost of the exemptions may exceed Milliman’s estimates.
Other state programs will differ from WCF in terms of exemptions.
- To avoid the problem WA experienced, other states will have a much stricter window for exemptions. For example, the NY bill says an individual can qualify for an exemption only if they purchased LTCI prior to January 1 of the year the bill is signed.
- The WCF law does not require people to keep their private LTCI in place after they receive their permanent exemption. Other states are likely to close this loophole.
- Other states might be more selective as to which policies would qualify for exemption. For example, they might require that the policy qualify for §7702(B). (Washington allowed policies with §101(g) provisions to qualify.) It is less likely, but possible that they might require a compound benefit increase feature.
I expect other states to allow exemptions for people with private LTCI for the following reasons:
- It is the right thing to do. Government should encourage citizens to take personal responsibility and reward them for having done so.
- By backdating the date that the policy must have been purchased in order to qualify for exemption and by requiring on-going certification, the states avoid giving a tax break to people “gaming” the system.
- By allowing exemption, proponents of a state program reduce political opposition to their intended program.
- A lot of people who have bought LTCI in the past are retired. It costs nothing to give them an exemption because they wouldn’t be eligible for the program anyway.
- Many other people with private LTCI are close to retirement. It might save the state program to allow them to be exempt because they would pay the state LTCI tax for only a few years.
Other jurisdictions may differ from Washington in other respects as well, such as triggers, total coverage, compounding, benefits, vesting, etc.
Hopefully, other jurisdictions will involve the insurance industry in discussions about all aspects of a state-run LTCI program throughout the development process. Such involvement should include front-end salespeople as well as insurance company home office personnel. It should include careful consideration of the insurance industry’s comments, not just token participation.
Increased complexity if multiple states have different programs. Will insurers be interested in complementing state programs if those programs vary by jurisdiction? Will financial advisors consider such complexity worth their effort? Will employers and employee benefit advisors consider LTCI programs if they must vary by employee resident state? What will happen to individuals who move from one state to another? Will inconsistencies increase pressure for a uniform national program? Will consumers, employers, advisors and insurers sit on the sidelines in what they might view as a turbulent market with a questionable future?
Might the history of the state Partnership programs serve as an example? The industry largely spurned the state Partnership programs until DRA 2005 established national standards.
Conclusion: I have no crystal ball to predict the future. Even the WCF itself may change. It will be interesting to see what actually develops.