Long Term Care Insurance, Part 3: Public Policy Overview

Introduction

The previous two posts in this series examined the rising cost of long term care insurance (LTCI) and the wider long term care (LTC) financing crisis. This final post outlines how LTCI is regulated in Massachusetts, including the basics of government premium rate approval.

(Our office does not provide legal advice and we do not intend for this post to be used as a legal resource.)

As the primary regulators of LTCI, states are challenged to develop a policy response to the challenges facing the industry that must manage sometimes competing public interests.

• There is a public interest in ensuring that carriers remain solvent and able to continue offering coverage to existing policyholders. Government should protect policyholders from the disruption and uncertainty caused by a carrier being unable to meet its obligations.
• There is also a public interest in ensuring carriers have a sufficient financial incentive to offer LTCI products. Doing so helps provide greater choice for consumers and encourages competition to offer better coverage.
• However, a market for LTCI that is profitable for carriers but prohibitively expensive or inaccessible for all but a few consumers is likely not in the public interest. Long term care insurance should allow people to privately finance their LTC needs without exhausting their savings or needing government assistance. There is therefore a public interest in ensuring that LTCI is as affordable and accessible as possible.

Regulatory Framework

Long term care insurance is primarily regulated by the states; however, there is coordination across state lines. Since 2012, Massachusetts has increasingly adopted common standards used by other states.

Under federal law, most insurance products are regulated at the state level. Because major insurers usually do business in different jurisdictions, states have created forums for coordination. The National Association of Insurance Commissioners (NAIC) serves as a coordinating body that helps standardize regulation. While the NAIC does not have regulatory authority itself, it retains legal and policy expertise that helps inform best practices for states.

The challenges related to the LTCI industry are national, not limited to individual states. A national policy response is therefore needed. Accordingly, the NAIC has drafted various model laws over the years to help states adopt similar standards for regulating LTCI.

Since 2012, Massachusetts law regarding LTCI has more closely resembled the standards set by the NAIC. The legislature added new consumer protections, as well as reforms to the premium approval process in the interest of stabilizing prices.

Massachusetts currently establishes standards for LTCI in Massachusetts General Law (MGL) Chapter 176U and 211 Code of Massachusetts Regulations (CMR) 65. The law requires certain features of LTCI plans and prohibits others.

To protect consumers from unfair business practices, the law prohibits LTCI plans from conditioning or restricting eligibility and coverage in certain ways. Prohibitions of certain eligibility requirements are meant to ensure that products are accessible and carriers do not unfairly discriminate. Prohibitions of certain conditions for coverage are meant to ensure that policyholders may access benefits on fair terms once eligible.

Some relevant prohibitions include:

1. Discontinuing coverage due to a person’s age or deterioration of their mental or physical health;
2. Limiting coverage to institutional settings or providing greater coverage for such settings;
3. Excluding benefits because of the presence or history of nervous or mental disorders, substance dependency, or Alzheimer’s disease; and
4. Conditioning benefits on improvement or recuperation.

Similarly, LTCI plans offered in Massachusetts must include certain features and protections. Key among them is the requirement that policies be offered as “guaranteed renewable” or “noncancelable.” Under these designations, carriers generally cannot cancel coverage for any reason except failure to pay premiums. Massachusetts law requires LTCI products to have these provisions to prevent companies from dropping coverage once policyholders become eligible for benefits.

“Guaranteed renewable” must mean:

1. The policyholder has a right to continued coverage if they make timely payments;
2. The carrier has no unilateral right to make changes to the policy’s coverage once benefits are being paid; and
3. The carrier may change rates for certain groups of policyholders (“risk classes”) but cannot cancel coverage on that basis (antidiscrimination protections and other exceptions may apply).

“Noncancellable” must mean:

1. The policyholder has a right to continued coverage if they make timely payments; and
2. The carrier has no unilateral right to change the policy’s provisions or premium rates.

It is important to note that while these provisions make it harder for carriers to drop coverage once policyholders receive benefits, carriers are given the freedom to restrict eligibility for initial coverage through tools like medical underwriting. For example, carriers may deny coverage for LTCI products based on preexisting conditions more easily than many health insurance products.

Rate Approval Process

Massachusetts subjects LTCI carriers to a rate approval process to ensure that premiums are both fair and viable. While the rate approval process for a given LTCI product can vary in practice, statutory requirements provide parameters for DOI to decide if rates are acceptable.  

When LTCI products are first issued, their premium rates generally must be approved by DOI. Any increase to that rate must also be approved. Carriers submit actuarial materials demonstrating their need for the proposed rate or increase. These materials are reviewed by a third-party actuary contracted by DOI to determine if the carrier’s projections are accurate. The materials then undergo a second evaluation by DOI staff. Ultimately, DOI judges whether the rate may be approved based on certain standards set in statute. Criteria of particular interest include the standards that apply to insurance rates generally, as well as the loss ratio requirement for LTCI products specifically.

Massachusetts law requires that insurance rates not be excessive, inadequate, or unfairly discriminatory.  In other words, rates must be high enough to be financially viable for the carrier (adequate), but not so high as to be predatory to the consumer (excessive). At the same time, they must not disproportionately impact groups of policyholders in ways that are considered unfairly discriminatory under the law.

Massachusetts law also requires LTCI carriers use a certain portion of premium revenues for paying claims. The technical term for this requirement is a “loss ratio requirement.” Loss ratio requirements vary by line (form) of insurance. In Massachusetts, the loss ratio requirement for LTCI products is 60%. Put simply, carriers must project to spend at least 60% of the money they earn from premiums on paying claims. Massachusetts has this requirement to ensure policyholders receive a minimum amount of benefits for the premiums they pay.

Conclusion

States have generally valued balancing competing public interests in the LTCI space. Massachusetts’ current regulatory scheme reflects that approach.

The Division of Insurance has a duty to both monitor the solvency of its licensees and protect consumers. The statutory requirement that rates not be excessive or inadequate exists in this context. Inadequate rates threaten the solvency of carriers. It might be tempting for a carrier to offer low premiums to entice customers, but this impulse can ultimately lead to harmful outcomes for all involved. If carriers initially set rates too low, they may find themselves unable to meet their financial obligations down the road. The policy response to this situation must be carefully calibrated. Over-emphasizing keeping prices low or protecting carriers’ finances may lead to undesirable outcomes. If carriers are forced to keep rates too low, they will incur losses potentially large enough to threaten their solvency. If carriers are allowed to raise rates in response excessively, policyholders will pay an unfairly high price for their carriers’ miscalculations.

The cost of LTCI will persist as a policy issue in Massachusetts. Accordingly, the question of how to address LTCI rate increases will continue to be a policy issue in the Commonwealth.

Long term care insurance is expected to remain expensive. Generally, policies have either become more expensive over time or been issued with high prices to begin with. Older products have seen dramatic price increases over time. Newer products have generally been priced higher to begin with, as carriers more accurately assessed risk. Prices may also vary depending on the type of product; hybrid plans tend to be priced higher than traditional, standalone products.

The policyholders are likely to continue to see rate hikes, although the likelihood of increases varies by product. Policyholders of traditional, standalone plans are often more likely to see premiums fluctuate than hybrid products; hybrid products are more likely to have “guaranteed premiums” that do not change throughout the life of the policy.

The Division’s approach to regulating these products continues to evolve, and our office is monitoring the continuing challenge of rising LTCI prices.  

Isaac Gibbons is Senator Brownsberger’s Legislative and Policy Analyst,