The Wall Street Journal

States Draw Fire for Pitching Citizens On Private Long-Term Care Insurance

By JENNIFER LEVITZ and KELLY GREENE
Tuesday, February 26, 2008

Last year, six million letters bearing Gov. Arnold Schwarzenegger's name and official state seal went out to Californians.

The missives, sent by a direct-mail company called Senior Direct Inc., were pitch letters, urging many low- and middle-income residents to buy long-term care insurance to cover any future nursing home bills.

Behind the plug: California, like many other states, is trying to curb the high costs of long-term care paid under Medicaid, the joint federal-state health insurance program for low-income people. Last year, total Medicaid expenditures for older adults' nursing-facility and other long-term care bills hit $100 billion.

So, more states are encouraging such citizens to buy private insurance. Along with California, 14 other states are now promoting long-term care policies under marketing partnerships with the insurance industry. More than a dozen others are getting started.

The state endorsements are "the single best thing that has happened to the long-term care industry," says Jesse Slome, executive director of the American Association of Long-Term Care Insurance. Total premiums collected for long-term care, or LTC, policies were $10 billion in 2007, up 21% from $8.2 billion in 2004.

Critics are sounding alarm bells. They argue that the financial benefits of LTC insurance for many target customers are negligible to nonexistent. Their income and assets are so low that they would quickly qualify for free care under Medicaid.

Patricia White, a director of the National Association of Free Clinics, which provides medical care to the needy, says many people of modest means are already struggling to pay for prescription drugs and other essentials. "They can't even buy medicine, why should they buy a [long-term care] insurance policy?"

Some states, including Iowa, are floating the partnership concept even as residents complain about steep premium increases.

Mike Niday, a bricklayer who says he has a moderate income, bought a policy in 2003, costing $1,368 a year, from Guarantee Trust Life Insurance Co., of Glenview, Ill. "It was a sacrifice to buy it," says the Carlisle, Iowa, resident.

He says he now realizes he probably doesn't need the coverage and is sorry he bought it. His monthly payments started out at $114, then rose to $146 in 2005. Last fall, he was told the monthly rate on his policy would jump to $410 a month, or $4,920 a year -- a 260% increase.

Tom Alger, spokesman for the Iowa Insurance Division, confirms that Guarantee Trust has imposed a "substantial" price hike on policyholders, raising the annual cost of certain riders to policies by as much as 700%.

"How can they expect common, ordinary working people to try to budget to keep something like this in force?" says Mr. Niday. When he complained to Guarantee Trust, he says, the company told him he could keep his policy rate -- with a caveat. He'd have to give up several benefits such as inflation protection. That policy feature is considered crucial, as it helps to protect benefits against rising health-care costs.

Rather than trade down, he recently dropped the policy. After arguing, he says, he got a partial refund. The company kept $4,000 of the total $7,000 he had paid in premiums, he says.

A spokesman for Guarantee Trust said no one was available to comment.

Even for middle-income people, say consumer advocates, concerns about LTC insurance loom. Rising consumer complaints indicate that it is increasingly tough to collect on benefits.

Prudent Approach

State officials stand behind their approach. In a climate of rising health-care costs, they view it as a prudent way to broach an emotionally difficult topic. Raul Moreno, a spokesman for the California partnership, says the state sees nothing wrong with "asking people to take personal responsibility" for planning their long-term care.

"We would never suggest you must buy it," he adds. "Our focus is merely to educate Californians to plan ahead for long-term care, and to consider [LTC] insurance as a way to fund it."

Some states are promising consumers that if they exhaust benefits from their LTC policies and eventually need to apply for Medicaid, the state will make it easier for them to qualify.

Of all the insurance types on the market, long-term care is among the most complex -- and expensive -- forms of coverage.

Typically sold to people well in advance of need, it promises to pay for care when a policyholder can no longer perform certain basic activities on his or her own. Premiums are determined by the length of coverage and the age of the insured, among other factors. Rates are also affected by the policy's daily benefit allowance, an amount capped by most insurers, as well as the waiting period before benefits kick in. The cheapest policies often carry the longest waiting periods -- 90 days or more is common.

"These policies are very difficult to use, and the payouts and benefits are difficult to get," says Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, Calif. He calls the partnerships "sort of an unholy alliance between the state and these corporate titans to sell products that will supposedly save the state money on health care later."

LTC policies also carry some of the highest commissions in the insurance business, with lucrative payments to the individual agents who sell the policies. Agents often pocket between 30% and 65% of the first year's total premium payments, then receive annual commissions between 3% and 5% for a set period after that.

When President Bush signed the sprawling Deficit Reduction Act in 2006, he lifted a decadelong ban on states partnering with the insurance industry to sell long-term care insurance.

Rep. Earl Pomeroy, a North Dakota Democrat, was a lead co-sponsor of the LTC partnership bill, and was instrumental in lifting the ban in 2006. During the 2007-08 election cycle, Mr. Pomeroy received the second-largest amount -- $115,150 -- in Congress from insurance-industry political action committees, according to the Center for Responsive Politics, a Washington, D.C., nonprofit.

The contributions, says Mr. Pomeroy, had no influence on his support for the partnerships. He argues that the programs will curb Medicaid spending. Echoing many states' complaints, he says Medicaid is strained partly because people are artificially impoverishing themselves by transferring assets to relatives in order to qualify for free benefits. "To me, this is a version of welfare fraud," he says.

Few Transfer Assets

Last March a study by the Government Accountability Office of Medicaid applicants for long-term care in three states showed only relatively few -- 9.2% -- had transferred assets to relatives in the prior three years. GAO studies in 2005 and 1993 also found no widespread evidence of asset transfers.

In another study last May, the GAO questioned whether there was a compelling public-policy reason for states to hawk LTC insurance, saying the partnerships are "unlikely to result in Medicaid savings."

Undeterred, Nebraska Gov. Dave Heineman named November "long-term care partnership awareness month." Virginia sent out DVDs touting LTC insurance to 200,000 people. In all, states sent about 11 million letters on the subject last year.

More marketing efforts are on tap. Earlier this month, New York launched a $1.75 million direct-mail and media campaign to promote the purchase of long-term care insurance. In March, Pennsylvania will kick off its partnership with a mailing to a million people. Ohio's governor will send letters to 1.7 million residents, inviting respondents to a Web site where they can be linked with insurance agents.

Other states are partnering with insurers that have run into trouble with regulators.

In South Dakota, insurance officials intervened in the case of Rudolph Heyd. A former grain farmer who was 92 years old and living in a nursing home, Mr. Heyd received a letter in 2005 from his insurer, Penn Treaty Network American Insurance Co., stating that "no further benefits would be payable on his claim."

After nearly four years of paying benefits, the company in May of 2006 told state regulators that Mr. Heyd, "despite his diagnoses and letters indicating otherwise from his attending physician," was "cognitively intact." Mr. Heyd stayed at the facility, but had to use his own savings to foot the bill. Last July, Penn Treaty settled a lawsuit filed by Mr. Heyd in South Dakota's U.S. District Court, Northern Division, for an undisclosed sum. He died in October.

Months earlier, Matthew Fonder, division counsel for the state's Division of Insurance, had written to Penn Treaty saying "the South Dakota Division of Insurance is concerned that Penn Treaty may be wrongfully denying legitimate claims." The division says it has an "ongoing investigation" into Penn Treaty.

Cameron Waite, executive vice president of strategic operations at Penn Treaty, says the company enjoys a good relationship with South Dakota. "Complaints are few and far between, but the reality is that they do periodically arise," he says.

In a March 2006 regulatory filing to investors, Penn Treaty said a company review "is showing us that our policyholders...appear to be living longer than we had previously anticipated..." To compensate, said the filing, Penn Treaty would "seek appropriate premium rate increases" among other solutions.

Nevertheless, when South Dakota unveiled its long-term care partnership plan last June, it recommended 14 "approved partnership" insurers -- including Penn Treaty. The state is currently holding dozens of community meetings at churches and senior centers to discuss long-term care options.

Merle Scheiber, director of South Dakota's division of insurance, says its regulatory probe doesn't disqualify Penn Treaty from joining the partnership. "Currently, the long-term care partnership certification process is separate from enforcement issues," he says.

Complaints to Regulators

Congress is taking note. In October, Sen. Charles E. Grassley, senior Republican on the Senate Finance Committee, wrote to 10 insurers involved in partnerships and demanded information about how claims are processed.

He began his inquiries following a report by the National Association of Insurance Commissioners that cited a 74% increase in complaints to state regulators related to claim denials on LTC policies between 2003 and 2006. NAIC also said that insurers overturned more than 70% of LTC claim denials after the complaints were made -- a "pattern of error" that it said isn't found with other types of health insurance.

Betty Hoff, an 87-year-old widow in Fowler, Calif., says it was a "battle" to get benefits under her policy with Bankers Life & Casualty, which she bought after an agent promoting the California partnership visited her home.

She was paying a yearly premium of $4,080 from her $19,200 income when, in late 2004, she took a fall at home and was unable to get up. After crawling to the phone for help, she was evaluated by her doctor. He determined that she couldn't meet several needs of daily living, including bathing herself and getting out of bed. The doctor declared it unsafe for her to live alone at home and recommended institutional care.

Ms. Hoff filed a claim under her policy, which says benefits are payable 90 days after proving need. But Bankers Life denied Ms. Hoff's claim, saying in a letter that she wasn't impaired enough. She drew on her savings to pay for assisted living for seven months until California Health Advocates, a Sacramento nonprofit, took up her case. Bankers Life decided to pay.

Bankers Life & Casualty is currently the subject of 10% of California's LTC insurance complaints with only 3.6% market share, according to 2006 state data.

A spokeswoman for Bankers Life, a unit of Conseco Inc. of Carmel, Ind., says there was confusion concerning Ms. Hoff because she had recently switched from one policy to another. She said Bankers Life aims to pay off claims in a timely manner in accordance with policy terms.

Sometimes, the confusion begins before a consumer picks up the phone. California's LTC pitch letters go out under California Department of Health Services letterhead emblazoned with the state logo. They urge recipients to return a reply card or call a toll-free number to be connected to one of "our agents."

The letters are signed by Brenda Bufford, director of California's LTC partnership program. But inquiries are routed to Senior Direct, the Texas marketing firm hired by the state. Operators at its call center in Minnesota answer a toll-free line by saying, "Thank you for calling the California Partnership for Long-Term Care."

Ms. Bufford says citizens often express surprise that the state is involved in marketing insurance. "Some consumers have asked, 'Is this fraud?'" she says. "We say, 'No, it isn't. It's the state of California.'"

Write to Jennifer Levitz at jennifer.levitz@wsj.com and Kelly Greene at kelly.greene@wsj.com