Factors Affecting the Demand for Long-Term
Care Insurance: Issues for Congress

Janemarie Mulvey
Specialist in Aging and Income Security
May 14, 2010
Congressional Research Service
7-5700
www.crs.gov
R40601
CRS Report for Congress
P
repared for Members and Committees of Congress

Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Summary
As the 78 million baby boomers approach retirement, many are concerned they will not have
sufficient savings to sustain their standard of living in retirement. Few, however, may be focused
on another risk to their retirement security—the potential cost of financing often expensive long-
term care (LTC) services. LTC services include help with a either a functional or cognitive
impairment and generally include assistance with activities such as bathing, eating, and dressing.
For the majority of older Americans, the cost of obtaining paid help for these services may far
exceed their financial resources in the future.
Private long-term care insurance (LTCI) is available to provide some financial protection for
persons against the risk of the potentially high cost of LTC. Yet, only 7% of LTC spending was
paid by LTCI in 2007. This low rate of financing reflects relatively low demand for LTCI over the
past few decades. Moreover, most policy owners have not yet reached the age where they may
need services.
A number of factors have adversely affected the demand for LTCI. The cost and complexity of
LTCI policies have been cited as major deterrents to purchasing LTCI. In addition, increased
concerns have arisen about the adequacy of consumer protections for LTCI as a result of
inconsistencies in LTCI laws and regulations across the states. More recently, adverse publicity
about potential problems with claims denials and heightened concerns about the future solvency
of LTCI insurers in the current economic environment have further dampened demand.
The private LTCI market has undergone significant changes in the past three decades. For
example, the employer-sponsored market has grown as a share of total LTCI sales and the overall
market has become more concentrated in terms of the number of companies selling the product.
Further, policies have become more comprehensive in terms of services covered and inflation
protection, but this has also increased LTCI premiums. Finally, a number of newer product lines
have been introduced that combine LTCI with other retirement and life-insurance products.
The 111th Congress has introduced a number of legislative proposals aimed at increasing
participation in the voluntary LTCI market. These include proposals to
• increase tax incentives to lower the after-tax cost of policies;
• improve consumer protections to boost consumer confidence in the product;
• provide a publicly administered long-term care insurance product; and
• expand consumer education.
In addition, the recently enacted Patient Protection and Affordable Care Act (PPACA; P.L. 111-
148) establishes a publicly administered voluntary LTCI program entitled the Community Living
Assistance Services and Supports (CLASS) program. PPACA creates a new Title XXXII of the
Public Health Service Act (PHSA) titled Community Living Assistance Services and Supports.
This report discusses the role of LTCI in financing LTC costs and current trends in the LTCI
industry; factors affecting the demand for LTCI, including cost and complexity of the product and
adequacy of consumer protections; and key features of legislative proposals in the 111th Congress
to address these issues.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Contents
Introduction ................................................................................................................................ 1
Private Long-Term Care Insurance .............................................................................................. 1
Current Financing of LTC Services ....................................................................................... 2
LTC Insurance Industry Trends ............................................................................................. 3
Factors Affecting the Demand for Private LTCI........................................................................... 4
Cost and Complexity of Long-Term Care Insurance .............................................................. 5
The Type of Coverage ..................................................................................................... 6
Dollar Amount of Coverage and Annual Inflation Adjustments........................................ 6
Duration of the Benefit.................................................................................................... 8
Elimination Period .......................................................................................................... 9
Adequacy of Consumer Protections For LTCI Policyholders ................................................. 9
State Oversight................................................................................................................ 9
Federal Oversight.......................................................................................................... 10
Premium Instability....................................................................................................... 11
Inappropriate Sales Practices......................................................................................... 12
Inappropriate Denial of Claims...................................................................................... 13
Solvency of LTC Insurers.................................................................................................... 14
Key Features of Legislative Proposals in the 111th Congress ...................................................... 15
Expand Tax Incentives to Improve Affordability of LTCI .................................................... 15
Current Tax Treatment of LTCI Premiums..................................................................... 15
Legislative Proposals To Expand Tax Incentives For LTCI ............................................ 16
Other Provisions ........................................................................................................... 18
Improve Consumer Protections for LTCI............................................................................. 18
Expand Consumer Education .............................................................................................. 19
LTCI in the Context of Health Care Reform ........................................................................ 20

Figures
Figure 1. Percentage Change in Active LTCI Policies, 1995-2008................................................ 3
Figure 2. Illustration of Compound vs. Simple Inflation Adjustments .......................................... 8

Tables
Table 1. Average Annual Age-Specific LTCI Premiums, By Purchase Year .................................. 5
Table 2. Characteristics of LTCI Policies Purchased Since 1995 .................................................. 7
Table 3. Summary of Consumer Protections for LTCI Specified By Different Versions of
the NAIC Model Provisions ................................................................................................... 10
Table 4. Advantages and Disadvantages to Taxpayers of Alternative Tax Incentives for
LTC Insurance Premiums ....................................................................................................... 17
Table 5. Estimates of Average Monthly Premiums Under CLASS Program................................ 21

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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Contacts
Author Contact Information ...................................................................................................... 21
Acknowledgments .................................................................................................................... 21

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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Introduction
As the 78 million baby boomers approach retirement, many are concerned they will not have
sufficient savings to sustain their standard of living in retirement. Few, however, may have
focused on another risk to their retirement security—the potential cost of financing often
expensive long-term care services. The cost of long-term care (LTC) services for the majority of
older Americans may far exceed their financial resources in the future. Although private long-
term care insurance (LTCI) is available to provide some financial protection for persons against
the risk of the potentially high cost of LTC, less than 10% of individuals aged 50 and older own a
policy.1
This report discusses
• the role of LTCI in financing LTC costs and current trends in the LTCI industry;
• factors affecting the demand for LTCI, including cost and complexity of the
product and adequacy of consumer protections; and
• key features of legislative proposals in the 111th Congress to improve
affordability and participation, strengthen consumer protections, and expand
consumer education.
Private Long-Term Care Insurance
Services provided by a LTCI policy may include a broad range of services and supports to help
people with a limited capacity for self-care due to a physical, cognitive (such as Alzheimer’s
disease), or mental disability or condition.2 Health and long-term care services are different.
Health care services typically treat specific acute and chronic medical conditions in a medical
setting by a medical profession. Long-term care services, on the other hand, include a wide range
of health and health-related support services provided on an informal or formal basis to people
who have functional disabilities or cognitive impairments over an extended period of time with
the goal of maximizing their independence.3 Unlike medical treatments, long-term care services
and supports primarily assist individuals in their day-to-day activities. These “activities of daily
living” (ADLs) include bathing, dressing, eating, toileting, and transferring (from a bed to a chair
or vice-versa). Generally, LTCI policyholders are eligible to begin to receive benefits if they have
at least two of the ADL limitations.
LTCI policies may be sold to an individual directly or to a group as part of an employer-
sponsored policy. The premiums charged for LTCI vary by age of purchase, with higher
premiums charged to those purchasing at older ages. This age differential reflects the higher risk

1 Judith Feder, Harriet L. Komisar, and Robert B. Friedland, “Long-Term Care Financing: Policy Options for the
Future,” Georgetown University, June 2007.
2 See CRS Report RL33919, Long-Term Care: Consumers, Providers, Payers, and Programs, Long-Term Care:
Consumers, Providers, Payers, and Programs,
by Carol O’Shaughnessy, Julie Stone, Thomas Gabe and Laura
Shrestha.
3 Connie J. Evashwick, “The Continuum of Long-Term Care: An Integrated Systems Approach,” 2004.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

of needing LTC services at advanced ages. One study has estimated that over two-thirds of
individuals who turn 65 years old will require LTC services at some point before they die.4
Current Financing of LTC Services
Although private LTCI is available to finance LTC costs, only 7% of LTC spending was paid by
LTCI in 2007.5 The majority of LTC spending (49%) is financed by the Medicaid program, which
is funded jointly by the federal government and states.6 Medicaid is not available to everyone. To
be eligible, individuals must meet certain functional criteria as well as state-specified income and
asset thresholds.7 Medicare (which currently provides health care to older Americans) financed
22% of long-term care spending, but these funds were predominantly for post-acute care for
short-stays in a skilled nursing home following hospitalization or for skilled home health care.
Individuals who seek paid LTC services but do not qualify for public funding or do not have
private LTCI must pay for these services directly out-of-pocket. In 2007, about 18% of LTC
spending was paid out-of-pocket.8 The magnitude of out-of-pocket costs will depend on the
setting, intensity (including the skill level of the provider), and the duration of long-term care
services. For example, the setting of care can include care provided in one’s own home, in a
community-residential care setting such as an assisted living facility, or in an institutional setting
such as a nursing home. For those receiving care at home, the cost will vary depending on the
skill level of the paid caregiver. In 2009, the cost of personal unskilled care at home (such as
bathing, dressing, and transferring) was $19 an hour, whereas skilled care from a visiting nurse
was $46 an hour.9 In addition, the annual cost of care will also vary by intensity and duration of
care. Studies have found that individuals use on average about 17 hours a week of informal care,
which would result in an annual cost of about $16,800 a year in 2009. Assisted living facilities
that provide hands-on personal care for those who are not able to live by themselves (but do not
yet require constant care provided by a nursing home) cost on average $33,900 annually in 2009.
Nursing home care, on the other hand, generally costs more in that it provides LTC assistance 24
hours a day and includes the cost of room and board. In 2009, the annual cost of a nursing home
stay was $66,886 for a semi-private room and $74,208 for a private room.10 These estimates are
national averages and can vary widely by geographic region.

4 P. Kemper, H.L. Komisar, and L. Alecxih, “Long-Term Care Over An Uncertain Future: What Can Future Retirees
Expect?” Inquiry 42, winter 2005-2006.
5 CRS estimates based on National Health Expenditures by Type of Service and Source of Funds: Calendar Years
1960-2007. Data on hospital-based home health and nursing home spending by Medicare and Medicaid, including
section 1915(c) Home and Community Based Services (HCBS) waivers spending provided to CRS by the Centers for
Medicare & Medicaid Services for 2006, Office of the Actuary, National Health Statistics Group.
6 Ibid.
7 The income and asset criteria vary by state. See CRS Report RL33593, Medicaid Coverage for Long-Term Care:
Eligibility, Asset Transfers, and Estate Recovery
, by Julie Stone.
8 See footnote 5.
9 Genworth Financial 2009 Cost of Care Survey, April 2009.
10 Ibid.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

LTC Insurance Industry Trends
The private LTC insurance market has undergone significant changes in the past three decades.
The employer-sponsored market has grown as a share of total LTCI sales and the overall market
has become more concentrated in terms of the number of companies selling the product. Further,
a number of newer product lines have been introduced that combine LTCI with other retirement
and life-insurance products. The following discussion provides greater details on these trends.
There are currently about 6 million to 7 million policies active (often called “in-force”).11 The
growth in the number of LTCI policies in both the individual and group markets increased at
double-digit rates from 1995 to 2002 before slowing in more recent years (see Figure 1). The
composition of the market has also changed as employer-sponsored LTCI has grown as a share of
the total LTCI market. In 2007, employer-sponsored LTCI represented one-third of all active
policies, compared with less than 3% in the mid-1990s. Employer-sponsored LTCI is distinct
from employer-sponsored health insurance in that employers typically do not contribute to LTCI
premiums. Rather employer-sponsored LTCI provides the advantage of a larger risk pool and
generally lower premiums than if LTCI is purchased in the individual market. Among employer-
sponsored LTCI, the federal government is one of the largest employers offering group LTCI.
Figure 1. Percentage Change in Active LTCI Policies, 1995-2008
30%
Individual
Group
25%
20%
15%
Change
%
10%
5%
0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Year

Source: LIMRA International Inc.
Over the past decade, the number of companies selling LTCI has declined significantly. Between
1987 and 2002, more than 100 companies were selling LTCI. A downturn in sales beginning in
2003 prompted many insurers to exit the market or merge with other firms.12 As a result, by 2006,
there were only 45 LTC insurers, with 10 of them representing nearly 80% of new sales.13 The
consolidation of the LTCI industry reflects several factors, including high administrative expenses

11 Estimates by Marc Cohen reported in Testimony before the U.S. House Committee on Energy and Commerce
Subcommittee on Oversight and Investigation, Long-Term Care Insurance: Are Consumers Protected for the Long-
Term?
July 24, 2008.
12 U.S. Government Accountability Office, “Long-Term Care Insurance: Federal Program Compared Favorably with
Other Products, and Analysis of Claims Trend Could Inform Future Decisions,” March 2006.
13 C. Pfau and S. Pummer, “Ninth Annual Individual Long-Term Care Insurance Survey,” Broker World Magazine,
July 2007.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

for policies relative to premiums, lower than expected terminations (i.e., lapse rates) that
increased the number of people likely to submit claims, low interest rates that reduced the
expected return on investments, and new government regulations limiting direct marketing by
telephone.14
A number of legislative changes have enabled insurers to begin to develop hybrid products that
combine LTCI with either an annuity or a life insurance product. The Pension Protection Act of
2006 simplified tax rules regarding combination products (effective in 2010) and added a tax
provision specifying that proceeds from an annuity can be used tax-free to purchase an LTCI
policy.15 LTCI policies can also be combined with a life insurance policy through an accelerated
death benefit rider. Circumstances that trigger these accelerated benefits include diagnosis of a
terminal illness or a medical condition that would drastically shorten the policyholder’s life span,
the need for LTC, or permanent confinement to a nursing home. Also, under the American
Homeownership and Economic Opportunity Act of 2000, proceeds from a reverse mortgage can
be used to purchase an LTCI policy.16
Factors Affecting the Demand for Private LTCI
After 15 years of strong growth, demand for private LTCI has slowed considerably since 2004.17
To date, less than 10% of the population aged 50 and older owns an LTCI policy.18 The
weakening of this market has occurred despite enhanced tax incentives (especially at the state
level), increased emphasis on consumer protections, and the enactment of a private LTCI program
for federal employees.
The factors affecting the demand for LTCI can be viewed by comparing two key cohorts: those
under the age of 65 and those aged 65 and older. For those under the age of 65, annual LTCI
premiums are generally lower.19 However, this cohort also faces competing demands of raising
families and saving for retirement. Many do not fully understand their future risks or coverage
options for long-term care services. According to survey data, some incorrectly assume that the
Medicare program (which currently provides health care to older Americans) will also pay for
their long-term care needs. A recent survey by AARP found that only 1 in 5 respondents between
the ages of 45 and 64 knew that Medicare does not cover an extended stay in a nursing home.20

14 U.S. Government Accountability Office, “Long-Term Care Insurance: Federal Program Compared Favorably with
Other Products, and Analysis of Claims Trend Could Inform Future Decisions,” March 2006.
15 See CRS Report R40008, Converting Retirement Savings into Income: Annuities and Periodic Withdrawals, by
Janemarie Mulvey and Patrick Purcell.
16 See CRS Report RL33843, Reverse Mortgages: Background and Issues, by Bruce E. Foote.
17 J. Douglas and K. Fisherkeller, “U.S. Individual Long-Term Care Insurance: 2008 Supplement,” LIMRA, 2009.
18 Judith Feder, Harriet L. Komisar, and Robert B. Friedland, “Long-Term Care Financing: Policy Options for the
Future,” Georgetown University, June 2007.
19 Once the policy is purchased, premiums cannot increase with age, but they can increase for other reasons.
20 AARP, “The Costs of Long-Term Care: Public Perceptions Versus Reality in 2006,” December 2006.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Although Medicare does cover up to 100 days of care in a skilled nursing facility,21 and limited
home health care,22 it does not cover longer stays in a nursing home or personal home care.
By the time individuals reach the age of 65 or so and have not sufficiently planned for their long-
term care needs, the cost and complexity of the policies become a major barrier to purchase. In
addition, increased concerns have arisen about the adequacy of consumer protections for LTCI as
a result of inconsistencies in LTCI laws and regulations across the states. More recently, adverse
publicity about potential problems with claims denials by LTC insurers and heightened concerns
about the future solvency of LTCI insurers in the current economic environment have further
dampened demand. The following section discusses these issues in greater detail.
Cost and Complexity of Long-Term Care Insurance
The cost of LTCI has been cited as a major deterrent to purchasing the product. Over 80% of
potential buyers of LTCI who choose not to purchase a policy cite cost as a “very important” or
“important” reason for their decision.23 Over the past decade, LTCI premiums have increased
significantly above the overall rate of inflation. As shown in Table 1, between 1995 and 2005,
average age-adjusted premiums have increased 59% (above the overall rate of inflation) for
individuals ages 55 to 64 and by 32% for those ages 65 to 69. One reason annual premiums have
risen is because claims data used to price policies have improved. In addition, higher annual
premiums reflect more comprehensive benefit packages (including inflation protection) being
offered. Between 2000 and 2005, the more comprehensive policies raised premiums an average
of 30%.24
Table 1. Average Annual Age-Specific LTCI Premiums, By Purchase Year
(in 2005 dollars)
% Change
1995 to
Age 1995 2000 2005 2005
55 to 64
$1,177
$1,376
$1,877
59%
65 to 69
$1,507
$1,686
$2,003
33%
70 to 74
$1,957
$2,074
$2,341
20%
Source: CRS estimates using CPI-U to adjust nominal premiums reported in America’s Health Insurance Plans,
“Who Buys Long-Term Care Insurance?” April 2007.

21 Medicare covers up to 100 days of post-hospital care for skilled nursing or rehabilitative services on a daily basis
(after a three-day hospital stay). There is no beneficiary cost-sharing for the first 20 days. Days 21-100 are subject to
daily coinsurance charges ($133.50 in 2009).
22 Medicare covers visits by personnel from a participating home health agency for beneficiaries who (1) are confined
to home, (2) need skilled nursing care on an intermittent basis, or (3) need physical or occupational therapy or speech
language therapy. The services must be provided under a plan of care established by a physician and the plan must be
reviewed by the physician at least every 60 days.
23 Marc Cohen, Who Buys Long-Term Care Insurance? A 15-Year Study of Buyers and Non-Buyers, 1990-2005,
LifePlans and America’s Health Insurance Plans, 2007.
24 Ibid.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Although more comprehensive policies have raised annual premiums, they have also increased
the complexity of the purchase decision. According to America’s Health Insurance Plans (AHIP),
40% of those who did not buy an LTCI policy when given the opportunity stated that the policy
options were “too confusing.” Potential buyers must evaluate the many different possible
combinations of product features available.
Potential policyholders must decide
• the type of coverage,
• the dollar amount of coverage and annual inflation adjustments,
• the length or duration of coverage, and
• the waiting period (which is often referred to as the elimination period).
The Type of Coverage
Individuals must choose the type of services to be covered by a LTCI policy. Services covered
under an LTCI policy may include care in a variety of settings, such as nursing homes or assisted
living facilities, or the individual’s own home through home health services. Policies may cover
respite care for caregivers, homemaker and chore services and medical equipment, among others.
Policies purchased in 2005 tend to be more comprehensive in terms of services covered and are
most likely to cover both nursing home and home care services. According to AHIP, 90% of
policies purchased in 2005 covered both nursing home and home care as compared with 61% of
policies purchased in 1995 (see Table 2).25
Dollar Amount of Coverage and Annual Inflation Adjustments
Another factor affecting the cost and complexity of a policy is how much coverage should be
purchased in terms of a daily benefit amount and whether to purchase inflation protection. The
dollar amount of the daily benefit is often initially chosen based on the current cost of services.
But the decision about how much this daily benefit should be adjusted over time to reflect
inflation is a more complicated one.
Inflation adjustments (often called inflation protection) are important because a LTCI policy is
often purchased 20 to 30 years before services are needed. Thus, a policy purchased today that
pays a $150 a day benefit may not be sufficient given growth in the price of future LTC services.
To ensure that policies cover an adequate amount of services, most companies now offer inflation
protection and most public awareness campaigns have urged individuals to purchase inflation
protection. As a result of these efforts, policies purchased in 2005 are more likely to include
inflation protection (see Table 2) as compared with those purchased in 1995. Two questions for
potential LTCI policyholders are what type and how much inflation protection to purchase?

25 Marc Cohen, Who Buys Long-Term Care Insurance? A 15-Year Study of Buyers and Non-Buyers, 1990-2005,
LifePlans and America’s Health Insurance Plans, 2007.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Table 2. Characteristics of LTCI Policies Purchased Since 1995
Policy Characteristics
1995
2000
2005
Policy Type (% With)



—Nursing Home Care Only
33%
14%
3%
—Nursing Home & Home Care
61%
77%
90%
—Home Care Only
6%
9%
7%
Daily Benefit Amounts (Nominal $)



—Nursing Home Care
$85
$109
$142
—Home Care
$78
$106
$135
% With Inflation Protection
33%
41%
76%
—Simple
14%
17%
23%
—Compound 15%
22%
49%
—Indexed to CPI
4%
2%
4%
Elimination Period for Nursing
46 days
47 days
81 days
Home Benefit
Source: America’s Health Insurance Plans, “Who Buys LTCI: A 15-Year Study of Buyers and Non-Buyers,”
Washington, DC, April 2007.
In terms of the type of inflation protection, companies offer both simple and compound inflation
adjustments. Although both methods increase the daily benefit by a fixed percentage, they vary on
which year the percentage is applied. Simple inflation adjustments increase annually based on a
fixed percentage of the daily benefit amount calculated from the first year the policy is
purchased
, so annual adjustments are a fixed dollar amount. Whereas compound inflation
adjustments increase the daily benefit amount annually based on a fixed percentage calculated
from each previous year’s daily benefit amount (see Figure 2), so the annual adjustments of the
daily benefit amount increase over time.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Figure 2. Illustration of Compound vs. Simple Inflation Adjustments
$600
e
m

Compound Inflation
o
Protection
$500
g H
Simple Inflation Protection
rsin $400
u
No Inflation Protection
N
$300
y of
a
r D $200
st Pe
o
C $100
vg.
A

$0
08
10
12
14
16
18
20
22
24
26
28
20
20
20
20
20
20
20
20
20
20
20

Source: CRS Estimates. Daily benefit amounts in 2008 derived from Genworth Financial 2008 Cost of Care
Survey, April 2008.
Notes: Inflation adjustments assume 5% annual rate of growth.
Once the policyholder chooses the type of inflation protection, he or she then must decide how
much inflation-protection to purchase annually. In making this decision, one approach would be
to rely on historical data. For example, since 2000, the price of nursing home care increased at an
annual average rate of 4.3%. However, it is unknown whether these trends will continue in the
future. Potential policyholders must decide whether they should choose inflation protection based
on historical trends or choose a higher or lower rate based on expectations about the future. This
decision raises both the complexity and the cost of the policy. An AHIP analysis found that the
existence of inflation protection increased premiums by about 25% between 2000 and 2005.26
Duration of the Benefit
The length of coverage (in years) of a LTCI policy is called the duration of the benefit. Deciding
how much coverage to purchase further complicates the decision process. LTCI policies can
cover two to five years of services and some policies can provide lifetime benefits. Although
potential policyholders want to purchase a policy that may sufficiently cover future risks, most do
not know what that risk may be because it varies widely across the older population. For example,
researchers have estimated that, of those who turned 65 years old in 2005, approximately one-
third will not require any LTC services over their remaining lifetime. At the same time, one in
five will require LTC services for more than five years.27 The longer the duration of coverage, the
higher the premiums.

26 Marc Cohen, Who Buys Long-Term Care Insurance? A 15-Year Study of Buyers and Non-Buyers, 1990-2005,
LifePlans and America’s Health Insurance Plans, 2007.
27 Kemper et al., “Long Term Care Over An Uncertain Future: What Can Current Retirees Expect,” Inquiry, winter
2005-2006.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Elimination Period
LTCI policies often have a waiting or elimination period that is the length of time between the
onset of qualifying impairments and commencement of payment for LTC services. The
elimination period is selected by the policyholder when he or she purchases the policy. This
elimination period is conceptually similar to a deductible in a health care plan—the longer the
elimination period the lower the cost of the policy, all other things equal. Policies purchased in
2005 tend to have a longer waiting (“elimination”) period, as compared with 15 years earlier (see
Table 2). Unlike other policy design features, a longer elimination period has reduced premiums.
Recent estimates show that the trend toward longer elimination periods in policies purchased
between 2000 and 2005 has reduced premiums by 6%.28
Adequacy of Consumer Protections For LTCI Policyholders
In addition to the cost and complexity of products, there has been a growing concern that many
LTCI policies do not have sufficient consumer protections. These consumer protections are
important given that an LTCI policy is often purchased 20 years or longer before the actual
benefit is used. This long time horizon introduces a great deal of uncertainty regarding the nature
of future benefits, long-run affordability of premiums for purchasers, and the financial stability of
insurers. Many of the laws and regulations that have been established by federal and state
governments attempt to address these issues. However, each state has its own set of laws and
regulations and there is wide variation across states.
State Oversight
State governments have primary jurisdiction for regulating the LTCI market. To do this, states
have established laws and regulations for LTCI carriers and the products they sell and play an
active role in verifying carriers’ and products’ compliance with these requirements. To help guide
states in their LTCI oversight efforts, the National Association of Insurance Commissioners
(NAIC) has developed a number of “Model Laws” and “Model Regulations” which provide
recommended guidelines for state regulators to adopt. These Model Laws and Model Regulations
are updated periodically by the state insurance commissioners. Because each state ultimately
establishes its own LTCI laws and regulations, state oversight requirements are not consistent
across states, leaving gaps in consumer protections. According to the NAIC, 47 states and the
District of Columbia based their LTCI regulations on the NAIC Model, 2 based their regulations
partially on the model, and 2 did not follow the NAIC Model. But even for states that have
adopted the NAIC Model, there is variability in which version was adopted. According to the
NAIC, as of November 2008, 24 states have adopted key features of the 2006 NAIC Model
language.29

28 Marc Cohen, Who Buys Long-Term Care Insurance? A 15-Year Study of Buyers and Non-Buyers, 1990-2005,
LifePlans and America’s Health Insurance Plans, 2007.
29 NAIC’s Compendium of State Laws on Insurance Topics, Long-Term Care Insurance Act Provisions, November
2008.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Federal Oversight
Since 1996, the federal government has attempted to standardize these regulations at a national
level for certain LTCI products. Federal law has included provisions for federal tax benefits and
minimum consumer protection standards for purchasers of “tax-qualified” LTCI policies as
authorized by the Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L. 104-
191).30 HIPAA tax-qualified products must conform to most of the provisions in the 1993 NAIC
Model Law and Regulations. These products are also required to offer inflation protection.
In addition, the Deficit Reduction Act of 2005 (DRA; P.L. 109-171)31 amended federal law to
establish the Medicaid LTCI Partnership program, a public-private partnership between Medicaid
and the private LTCI market. Under Medicaid’s LTCI Partnership program, states with approved
plan amendments32 may extend Medicaid coverage, including LTC benefits, to certain persons
who have purchased LTCI partnership policies without requiring them to meet the same means-
testing requirements applicable to other groups of Medicaid eligibles.33 During the eligibility
determination for Medicaid, these states may disregard assets equal to the amount paid out in
benefits under the Partnership policy. However, to be eligible for Medicaid, individuals would
still have to meet the general residency, functional, and income criteria under their state program.
DRA also includes minimum consumer protection requirements for the LTCI plans sold under the
Partnership program as specified in the 2000 NAIC Model Provisions (see Table 3). In contrast to
the HIPAA voluntary 5% compound inflation-protection requirement, the DRA provisions include
a mandatory inflation-protection provision for certain age groups. DRA, however, does not
specify the amount of inflation-protection that is required and instead leaves this decision up to
the individual states.
Table 3. Summary of Consumer Protections for LTCI Specified
By Different Versions of the NAIC Model Provisions
1993 NAIC
2000 NAIC
2006 NAIC
2009 NAIC
Model
Model
Model
Draft Model

Provisions
Provisions
Provisions
Provisionsa
Revised Pricing and Eligibility for LTC
Yes Yes
Yes
Yes
Insurance
Strengthened Suitability and Rate
No Yes
Yes
Yes
Stability Provisions
Imposed Stricter Criteria for Training
No No
Yes
Yes
and Certification of Insurance Agents
Independent Review of Benefit
No No
No
Yes
Trigger Denials and Standardized
Claims Definitions

30 These provisions for tax-qualification are also specified in the Internal Revenue Code (IRC) Section 7702(B)).
31 These provisions are also specified in the Social Security Act Title XIX Section 1917(b)(5)(42 U.S.C. 1396p(b)(5)).
32 Section 1902(r)(2) of the Social Security Act.
33 See CRS Report RL32610, Medicaid's Long-Term Care Insurance Partnership Program, by Julie Stone.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

1993 NAIC
2000 NAIC
2006 NAIC
2009 NAIC
Model
Model
Model
Draft Model

Provisions
Provisions
Provisions
Provisionsa
Current Federal Law Requirements
Health Insurance
Deficit Reduction
None None
Portability and
Act of 2005 (P.L.
Accountability Act
109-171)b
(P.L. 104-191)
Source: Congressional Research Service.
Notes: The term NAIC Model Provisions include both the Model Regulations and the Model Act promulgated
by the NAIC.
a. These consumer protections are currently being reviewed by the NAIC and have not formal y been
adopted yet.
b. The LTCI Partnership consumer protections described in the Deficit Reduction Act of 2005 did not include
the rate stability language in the NAIC 2000 Model Act.
However, federal laws standardizing LTCI regulations have become outdated and do not include
all of the relevant provisions of a specific NAIC Model Provision. For example, neither the
HIPAA tax-qualified policies or the Medicaid LTCI Partnership policies include the rate stability
provisions in the NAIC 2000 Model Act. These federal laws also do not address recent concerns
about the misrepresentation of LTCI by unqualified sales agents or inappropriate denial of claims.
The following section provides more detail about each of these issues.
Premium Instability
Generally, premiums for LTCI are lower when policies are purchased at younger ages. Yet,
younger purchasers will also be paying premiums over a longer period of time and long-run
stability of premiums is important to ensure their affordability in the future. Although insurers are
prohibited from increasing an individual’s premium based on a change in the policyholder’s
circumstances (i.e., increased age or onset of disability), insurers, however, are still able to
request permission from a state insurance commissioner to increase premiums for a class of
insured.34 This premium increase can be necessitated by inadequate medical underwriting,
premiums that were initially set too low, or insufficient growth in reserves to cover future
claims.35 Thus, premium or rate stability depends largely on the ability of insurers to adequately
predict future claims.
Data on the extent of premium increases is not widely available. However, the limited data
available for individual states have shown that one-time premium increases, when they do occur,
have often been in the 10% to 20% range.36 For example, a field notice for a major LTC insurer
announced an 18% increase in 2008 on their two oldest policies. The one-time premium increases
were for policies that were issued over 15 years ago when claims underwriting was not as
comprehensive.

34 A class of insured is generally defined as all individuals of the same age with the same policy form in the same state
and with the same coverage.
35 R. Desonia, “The Promise and Reality of Long-Term Care Insurance,” National Health Policy Forum. 2004.
36 Ibid.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Most recently, the Office of Personnel Management (OPM) has signed a new contract that
includes a new benefit option with increased home health care reimbursements, new benefit
periods, and higher daily benefit amounts. As a result of the new contract, OPM announced that
premium rates for current enrollees who had purchased automatic compound inflation protection
may experience rate increases of between 5% and 25%. Current enrollees who do experience
premium increases will be provided the opportunity to keep their current premiums substantially
the same by making changes to their benefit package.37
To reduce the likelihood of future premium increases on current policyholders, the NAIC revised
its model regulation in 2000 to require companies to provide actuarial information to certify the
adequacy of all proposed rates and to show that the vast majority of premium increases are
devoted to paying claims. In addition, when premiums are increased, 85% of the increased
portion of the premium must be available to cover claims. In addition, the NAIC Model Act
requires reimbursement of unnecessary rate increases to policyholders. Policyholders are also
provided the option to escape the effect of rising rate spirals by being guaranteed the right to
switch to another lower premium policy. Finally, the 2000 NAIC Model Act authorizes the
commissioner to ban from the market place for five years companies that persist in filing
inadequate initial premiums. As of November 2008, 36 of the 51 states and the District of
Columbia have adopted some provisions addressing premium rate increase, but not all of the 36
comply fully with the NAIC rate stability standards.38
Inappropriate Sales Practices
Following the 1993 NAIC Model Act, there had been a concern that some private sector insurers
and agents were inappropriately selling products to persons with low income and assets who may
otherwise be eligible for public assistance under Medicaid. In other words, these LTCI policies
would not be suitable for certain individuals given their circumstances. There was also a concern
that individuals may not fully understand the future value of the benefits they purchase. To
address these issues, the 2000 NAIC Model required insurers to develop and use suitability
standards, and to train agents with respect to the standards. Both insurers and agents must
ascertain an applicant’s ability to pay and their goals and needs through the use of a personal
worksheet. There are a number of disclosure requirements related to suitability, including the
requirement that the agent and insurer must distribute to the potential policyholder a brochure on
the “Things to Know Before You Buy.” Since then, the 2006 NAIC Model added provisions
concerning training of insurance agents to address concerns about suitability. The 2006 Model
Act also includes a new section on producer (insurance agent) training, which requires producers
to complete a one-time eight-hour training course before selling LTCI. According to the NAIC, as
of November 2008, 27 states have some form of agent’s licensing requirements in their state
legislation, but not all of them comply fully with the 2006 NAIC Model Act language.39

37 Office of Personnel Management, “OPM Awards New Long Term Care Insurance Contract,” press release, May 1,
2009.
38 NAIC’s Compendium of State Laws on Insurance Topics, Long-Term Care Insurance Act Provisions, February
2009.
39 Ibid.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Inappropriate Denial of Claims
Over the past year, there has been some anecdotal evidence that some LTCI policyholders are
having difficulty in accessing their benefits once a claim is filed.40 Recent actions by the NAIC
against a large LTC insurer have heightened these concerns. National level data from the NAIC
have also shown that the number of complaints regarding LTCI has increased between 2004 and
2006.41 According to a recent survey of LTC insurers by the NAIC, the number of overall
complaints regarding LTCI relative to policies in-force have doubled since 2004 from 5.0
complaints per 10,000 policies in-force to 10.6 complaints per 10,000 policies in-force in 2006.
Relative to the actual number of claims, the complaint ratio has nearly tripled (from 11.3 per
10,000 claims received to 27.0 per 10,000 claims received).
One of the key areas for complaints is the denial of claims. Although the number of claims
denials has increased, the increase is not as large when adjusted by the number of claims
submitted. The total percentage of claims denied for all policies increased since 2004 from 3.2%
to 3.9% in 2006. The percentage of claims denied for comprehensive policies increased from
4.1% to 4.9% over the same period. This data reflects activity from 2004 to 2006 and does not
provide any information on more recent years.
Denial of claims can occur for a number of reasons. For example, a number of issues within the
reimbursement process could lead to a delay in payment. The first relates to the eligibility for
payments from the insurer. The policyholder (or his/her guardian) must notify the insurer and
document that the policy has been “triggered.” For example, for non-cognitive impairments this
means the policyholder meets the requirement of needing assistance with two or more activities
of daily living (ADLs).42 Documentation can include a written statement from the policyholder’s
physician verifying this information or the insurer may require him or her to meet with an
assigned care manager to assess eligibility. Thus, a claim can be denied if the insurer does not
receive supporting documentation regarding eligibility for payment in a timely manner.
Another reason for denying a claim is that the policyholder has not yet reached the end of the
policy’s elimination period. Between 2004 and 2006, denied claims for home care because the
elimination period had not been met increased 16.3%, for comprehensive policies they increased
37.5%. Finally, denied claims for nursing home benefits where the elimination period had not
been met increased 17.7% over the same period.43
Although anecdotal evidence raised concerns among policymakers that some insurers are further
delaying claims on purpose,44 national level data from the NAIC do not validate these concerns.
According to the NAIC, since 2004, there has been a 37.9% increase in claims paid within 60
days and a 38.9% decrease in claims paid after 60 days. According to the NAIC, denial of
payments beyond 60 days was not a major issue between 2004 and 2006.45 Other survey data
support the fact that relatively few claims are denied. According to a Lifeplans Survey of 1,500

40U.S. Congress, House Committee on Energy and Commerce, Subcommittee on Oversight and Investigation, Long-
Term Care Insurance: Are Consumers Protected for the Long-Term?
, hearing, July 24, 2008.
41 National Association of Insurance Commissioners, “Long-Term Care Data Call and Analysis Report,” May 9, 2008.
42 ADLs include eating, bathing, dressing, toileting, transferring, or walking across the room.
43 National Association of Insurance Commissioners, “Long-Term Care Data Call and Analysis Report,” May 9, 2008.
44 Charles Duhigg, “Aged, Frail and Denied Care by Their Insurers,” New York Times, March 26, 2007.
45 National Association of Insurance Commissioners, “Long-Term Care Data Call and Analysis Report,” May 9, 2008.
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policyholders over a 2½-year period, 96% of claims were approved and 4% were denied. Those
who conducted the survey suggest this indicates an industry-wide initial claims denial rate of 4%.
The same survey reported that the vast majority (93%) of denied claims had a decision rendered
within a two-month period and the remaining 7% within another two months.46
Although problems in the delay of claims processing are not evident in the NAIC data collected
between 2004 and 2006, there is evidence that the problem may be isolated for policies issued by
one large insurer. The recent settlement against Conseco, Inc. highlights the use of improper
processing practices by the company. In May 2008, state insurance regulators and the NAIC
brought a regulatory settlement against Conseco, Inc. for mishandling of LTCI claims.
Specifically, claims were not handled in a timely manner and claims files were not documented or
maintained. The Conseco investigation found that the primary problem in most cases was a delay
in payment of the claim, rather than a denial.
Given these concerns the NAIC has developed draft revisions to the NAIC Model Act that
provide for external independent review of benefit trigger denials. This draft is being worked on
by a subgroup of the NAIC Senior Issues Task Force. As of May 2009, the subgroup is close to
having a final draft. A separate subgroup has been formed to work on revisions of the model
regulation to provide for standardized claims definitions. This subgroup plans to begin working
on a draft as soon as the independent review subgroup completes its work.47
Solvency of LTC Insurers
Given the current economic downturn, concerns about the long-run solvency of LTC insurers may
adversely affect the demand for the product. Amidst this uncertainty, potential LTCI policyholders
may decide to wait until the economic situation improves before contemplating a purchase of
LTCI. In addition, there are concerns about the guarantee of benefits for current policyholders.
The insurance industry does provide a number of safeguards to protect LTCI policyholders from
an insolvent insurer. The current system of protection for LTCI policyholders is called insurance
guaranty funds. This interdependent system is a cooperative effort among regulators and insurers
in the states where the insolvent insurer operated. It is administered state-by-state and funded by
assessments on insurers.48 When an insurer’s financial condition deteriorates to the point where it
may have trouble meeting its obligations, it is placed into receivership. In effect, the company and
its policies are taken over by the insurance commissioner of the state where the insurer is
domiciled. In the absence of bankruptcy, the commissioner may need to establish a plan to ensure
policyholders receive coverage or benefits. For example, the insurance commissioner may allow
other insurers to purchase parts of the troubled insurer’s business. If, however, the company is
liquidated, a state guaranty association may need to assume or reinsure policies of the failed
insurer.
State law requires insurers to become members of the guaranty associations in each state in which
they are licensed to do business. For health and long-term care insurance, the average coverage is

46 Testimony of M. Cohen, president, LifePlans, Inc., before the U.S. House Committee on Energy and Commerce,
Subcommittee on Oversight and Investigation, Long-Term Care Insurance: Are Consumers Protected for the Long-
Term
?, hearings, July 24, 2008.
47 Based on conversations with NAIC staff on April 21, 2009.
48 For more information on these funds, see CRS Report RL32175, Insurance Guaranty Funds, by Baird Webel.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

about $100,000. One concern about guaranty funds is that the amount of coverage per policy may
not be sufficient to insure future potential losses due to insolvency. This does raise the possibility
that the guaranty funds would have to raise premium rates and potentially reduce benefits for
current policyholders in the future if even a few insurers become insolvent.
Key Features of Legislative Proposals in the
111th Congress

LTCI legislative proposals in the 111th Congress are aimed at lowering the cost of policies and
improving consumer protections to increase participation in the LTCI market. If participation
rates increase, many believe the overall costs of policies may be further reduced because the
available risk-pool would be larger. Specifically, one of the key premises of insurance is to spread
risk across as large a population as possible. Adverse selection occurs when individuals who
expect to have a higher risk of LTC in the future (e.g., family history of Alzheimer’s) are more
likely to purchase a policy than those who do not. In a voluntary program, low participation may
limit an insurer’s ability to spread risk adequately resulting in adverse selection. When adverse
selection is present in a voluntary system, insurers must charge higher premiums to cover the
higher risk of the insured group. Thus, the greater the participation among the general population,
the lower the effects of adverse selection.
A number of legislative proposals to increase demand for private LTC policies have been
introduced or discussed in the 111th Congress. These include proposals to
• increase tax incentives to lower the after-tax cost of policies,
• improve consumer protections and increase consumer confidence in the product,
• provide a voluntary publicly-administered long-term care insurance product, and
• expand consumer education.
Expand Tax Incentives to Improve Affordability of LTCI
LTCI premiums currently do not have as generous tax incentives as health insurance. A number of
legislative proposals introduced in the 111th Congress would expand the tax treatment of annual
LTCI premiums. This section will first discuss the current tax treatment of LTCI and then detail
the individual proposals and their implications for after-tax LTCI premiums.
Current Tax Treatment of LTCI Premiums
Under current law, there are some tax advantages provided to some aspects of private LTCI.
Benefits from a “qualified” LTCI policy are excluded from the gross income of the taxpayer (i.e.,
they are exempt from taxation).49 The exclusion for insurance benefits paid on a per diem or other
periodic basis is limited to the greater of (1) $280 a day (in 2009) or (2) the cost of LTC services.
Premiums for LTCI are allowed as itemized deductions to the extent they and other unreimbursed

49 Health Insurance Portability and Accountability Act, P.L. 104-191 and Section 7702B(b) of the Internal Revenue
Code.
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medical expenses exceed 7.5% of adjusted gross income (AGI).50 LTCI premiums, however, are
subject to age-adjusted limits. In 2009, these limits range annually from $320 for persons aged 40
or younger to $3,980 for persons over the age of 70. In addition, under current law, employer
contributions toward the cost of tax-qualified LTCI policies are excluded from the gross income
of the employee. Self-employed individuals are allowed to include LTCI premiums in calculating
their deductions for health insurance expenses. Only amounts not exceeding the age-adjusted
limits can be deducted or excluded from taxable income.
In addition, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (P.L.
108-173) authorized Health Savings Accounts (HSAs), which allow individuals to pay for LTCI
premiums on a tax-advantaged basis. Individuals are eligible to establish and contribute to an
HSA if they have a qualifying high deductible health plan (HDHP). Individuals enrolled in
Medicare are excluded. Withdrawals from HSAs are exempt from federal income taxes if used for
purchase of LTCI.51
A number of legislative changes to the tax code have enabled insurers to develop hybrid products
that combine LTCI with either an annuity or a life insurance product. The Pension Protection Act
(PPA) of 2006 simplified tax rules regarding combination products (effective in 2010) and added
a tax provision specifying that proceeds from an annuity can be used tax-free to purchase a tax-
qualified LTCI policy (under Section 7702B(b) of the Internal Revenue Code (IRC)).52 PPA also
allows individuals to use the cash surrender value of a life insurance policy as payment for a tax-
qualified LTCI policy and exclude these payments from taxable income. Finally, PPA revised
Section 1035 of the IRC to allow for tax-free exchanges of certain insurance contracts. Under this
provision, no gain or loss is recognized on the exchange of a life insurance contract, an
endowment contract, an annuity contract for a qualified LTCI contract or the exchange of one
qualified LTCI contract for another.
Legislative Proposals To Expand Tax Incentives For LTCI
Legislative proposals in the 111th Congress include a number of additional tax incentives for
LTCI. Their intent is to improve the affordability of LTCI policies by reducing the after-tax cost
of policies and increasing the demand for LTCI. To do this, LTC insurance premiums would be
included in one or more of the following options:
• an employer-sponsored cafeteria or flexible spending account plan, which would
exclude them from gross income;
• as an “above-the-line” tax deduction to arrive at AGI; or
• as a credit against tax liability (“tax credit”).
Table 4 summarizes the advantages and disadvantages of each option.

50 See Section 213(d) of the Internal Revenue Code.
51 CRS Report RL33257, Health Savings Accounts: Overview of Rules for 2010, by Janemarie Mulvey.
52 See CRS Report R40008, Converting Retirement Savings into Income: Annuities and Periodic Withdrawals, by
Janemarie Mulvey and Patrick Purcell.
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Table 4. Advantages and Disadvantages to Taxpayers of Alternative Tax Incentives for
LTC Insurance Premiums
Tax Treatment of LTC
Insurance Premiums
Advantages
Disadvantages
Cafeteria Plan or Flexible
Not limited to taxpayers who itemize.
The employer must offer a cafeteria or
Spending Account
flexible spending plan.
Reduces AGI for purposes of other tax
provisions.
Lowers wage base for Social Security
and Medicare taxes on wages.
Above-the-Line Deduction
Not limited to taxpayers who itemize.
Required to pay Social Security and
Medicare payrol taxes on income used
Reduces AGI for purposes of other tax to fund premiums.
provisions.
Tax Credit
Reduces regular tax liability by amount
Non-refundable tax credit. If tax liability
of credit.
is less than the credit amount then
taxpayer would not benefit from ful
credit.
Source: Congressional Research Service.
Note: One proposal not included here (H.R. 1413, Representative Joseph) al ows a below-the-line deduction
from gross income for retirees for LTCI premiums.
Include Annual LTCI Premiums in Cafeteria and Flexible Spending Accounts
Cafeteria plans are employer-established benefit plans under which employees may choose
between receiving cash (typically additional take-home pay) and certain benefits. Under this
option, LTCI would be an eligible benefit within the plan and the employee would not be taxed
on the value of the benefit. This arrangement reduces both income and employment taxes (i.e.,
Social Security and Medicare payroll taxes). Under some of the current legislative proposals,
LTCI could also be an eligible expense in a flexible spending account (FSA). FSAs and cafeteria
plans are closely related, but not all cafeteria plans have FSAs and not all FSAs are part of
cafeteria plans. Reimbursements through an FSA are also exempt from income and employment
taxes.53 Including LTCI in a cafeteria plan or FSA would also reduce adjusted gross income for
purposes of other tax provisions. Cafeteria plans and FSAs only benefit individuals whose
employer has established such plans. Retired workers are not likely to have coverage. For an
individual filer with $55,000 in gross income and in the 25% tax bracket, this option would
reduce the effective cost of the premiums by 32.65% (this includes a reduction in employment
taxes of 7.65% as well).54 Examples of legislative proposals in the 111th Congress to include LTCI
premiums as part of FSAs or cafeteria plan are H.R. 897, H.R. 1721, S. 697, and S. 702.

53 See CRS Report RL33505, Tax Benefits for Health Insurance and Expenses: Overview of Current Law and
Legislation
, by Janemarie Mulvey.
54 Example assumes a 50-year old individual who is a single tax filer with no dependents, earns $55,000 a year and is in
the 25% tax bracket.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

Above-the-Line Deduction
Under this option, LTCI premiums would be deducted from a taxpayer’s gross income. An above-
the-line deduction also reduces adjusted gross income for other tax provisions. The key difference
from a cafeteria plan is that the provision is available to everyone and not limited to those
employers who offer a plan. In addition, under this option, LTCI premiums (even if deducted
from gross income) would still be subject to employment taxes if the individual were employed.
For an individual filer with $55,000 in income and in the 25% tax bracket, this option would
reduce after-tax LTCI premiums by 25%. Examples of legislative proposals in the 111th Congress
that would include LTCI premiums as an above-the-line deduction are S. 697, H.R. 897, H.R.
1192, H.R. 1263, H.R. 1721, and H.R. 1891.
A Tax Credit
A tax credit is applied directly against a taxpayer’s tax liability. The key distinction in a tax credit
is whether it is refundable or nonrefundable. A fully refundable tax credit is paid to the taxpayer
even if the amount of the credit exceeds the taxpayer’s tax liability. Under a nonrefundable credit,
if the tax liability is less than the credit amount of all refundable credits available, then the
taxpayer would not benefit from the full credit. Under this option, after tax premiums for the
individual filer with $55,000 in gross income would decline dollar for dollar by the amount of the
tax credit if the individual’s tax liability was equal to or exceeded the amount of all available tax
credits. As of May 2009, there has been one proposal (S. 94) introduced in the 111th Congress to
allow LTCI premiums to be a nonrefundable credit against one’s tax liability.
Other Provisions
Although the discussion above provides a brief overview of the impact of the different options,
actual tax savings will vary depending on the specific details of each of the proposals. To
minimize the cost to the federal government, many of the current legislative proposals would not
allow the full deduction or credit of premiums initially. Instead these proposals would
• phase-in the deduction or credit over time;
• base the percentage of LTCI premiums that is deductible or creditable on the
number of years a policy is held; or
• limit the income from which a deduction can be taken, allowing only a deduction
from gross income for distributions from a 401(k) or IRA.
Improve Consumer Protections for LTCI
As the market for LTCI expands, there is a growing concern that current regulations may not be
sufficient to protect consumers from potential abuses in claims administration and processing and
future rate stability. To address these issues, a few legislative proposals to expand tax incentives
for LTCI require that these tax-qualified policies meet specific NAIC Model Regulations and
Laws. These proposals are similar in that they would strengthen and create greater uniformity in
consumer protections from tax-qualified plans. They vary with respect to which version of the
NAIC Model Act is specified. (See Table 3 for a summary of different versions of the NAIC
Model Act with respect to consumer protections.) Examples of legislative proposals in the 111th
Congress to improve consumer protections for LTCI include the following:
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• H.R. 1192 would require tax-qualified policies to meet the 2000 NAIC Model
Act.
• S. 702 would require tax-qualified policies to meet the 2006 NAIC Model Act.
• H.R. 897 would require tax-qualified policies to meet the 2008 NAIC Model Act
(which is essentially the 2006 language with some technical corrections).
• S. 1636 would require the NAIC to develop a model disclosure form to assist
consumers in purchasing LTCI.
In addition to the above proposals, a more comprehensive approach toward strengthening
consumer protections was introduced through S. 1177, the Confidence in Long-Term Care
Insurance Act of 2009. The legislation would apply current consumer protections for LTCI
Partnership Policies to tax-qualified plans. In addition, the proposed legislation would formalize a
process by which consumer protections in both tax-qualified and partnership policies could be
updated in an expedited manner as new NAIC Model language is released.
S. 1177 would also direct the Secretary of Health and Human Services (HHS) to request the
NAIC to conduct a biennial review of national and state-specific LTCI markets. These market
reviews would be required to include data on the size and scope of the LTCI market, as well as
data on complaints, cancellations, and premium rate increases. The NAIC would also be directed
to develop consistent definitions for model disclosures and for marketing of LTCI policies. The
Confidence in LTCI Act of 2009 would also require several reports to Congress, including
• a report with the results of the biennial market review;
• biennial reports on the impact of Medicaid LTCI Partnerships; and
• a report regarding the need for minimum annual inflation-protection.
Expand Consumer Education
The “Own Your Future” Long-Term Care Awareness Campaign is a joint federal-state initiative to
increase awareness among the American public about the importance of planning for future LTC
needs. The Own Your Future Campaign is a collaboration of the Centers for Medicare &
Medicaid Services (see http://www.cms.hhs.gov), the Office of the Assistant Secretary for
Planning & Evaluation (see http://www.aspe.hhs.gov), and the Administration on Aging (see
http://www.aoa.gov), and it has support from the National Governors Association (see
http://www.nga.org). The program was started in January 2005. The project’s core activities are
state-based direct mail campaigns supported by each participating state’s governor, and targeted
to households with members between the ages of 45 to 70. Campaign materials include a Long-
Term Care Planning Kit and state specific information and resources in both print and on the
internet. As of January 2009, 23 states have participated in the Own Your Future Campaign.
The response from consumers to the first two phases of the Own Your Future Campaign exceeded
expectations, both in terms of consumer interest and in initiating LTC planning actions. Research
following a five-state phase of the campaign indicated that individuals who received the planning
kit were twice as likely to take some type of LTC planning action as compared to those who did
not receive the kit. Based on these successes, Congress provided additional support for LTC
education initiatives by establishing the National Clearinghouse for Long-Term Care Information
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under the Deficit Reduction Act of 2005. Under Section 6021(d) of the act, Congress appropriated
$15 million in funding for the National Clearinghouse over five years (2006 to 2010).
In the 111th Congress, there are two legislative proposal that would expand funding for the
National Clearinghouse for Long-Term Care Information. H.R. 519 would appropriate annually
$10 million for FY2010 to FY2012. S. 1177 would expand the National Clearinghouse for Long-
Term Care Information to include an internet directory called “LTC Insurance Compare” that will
provide tools to assist consumers in evaluating LTCI policies. S. 1177 includes $5 million
annually in funding of LTCI Compare from 2011 to 2013.
LTCI in the Context of Health Care Reform
On March 23, 2010, the President signed into law H.R. 3590, the Patient Protection and
Affordable Care Act (PPACA; P.L. 111-148, as amended by P.L. 111-152, the Health Care and
Education Reconciliation Act of 2010, or HCERA), which establishes a publicly administered
voluntary LTC insurance program entitled the Community Living Assistance Services and
Supports (CLASS) program.55
The publicly administered LTCI program is intended to address many of the concerns in the
private LTCI market. Once established around 2013, employed individuals aged 18 and older
could voluntarily enroll in the program. CLASS enrollment would not be subject to underwriting,
except for age, so coverage would be available to all persons who enroll, regardless of pre-
existing conditions. Employers can choose to participate in the CLASS program. In doing so,
they must automatically enroll eligible employees. Employees would then have the opportunity to
“opt-out” if they do not want to participate. The Secretary of HHS is required to develop an
alternative enrollment process for self-employed individuals, those with more than one employer,
and those who have an employer that does not elect to participate.
Premiums for the CLASS program are to be determined by the Secretary based on 75-year
actuarial estimates of expected future use and expenditures. After a five-year vesting period,
eligibility for benefits from the CLASS program is based on the existence of a functional or
cognitive impairment that lasts for at least 90 days and that is certified by a licensed health care
practitioner. Benefits to eligible recipients include a cash benefit of at least $50 a day, which
varies based on the degree of the beneficiary’s functional or cognitive impairment. Other benefits
include advocacy services, and advice and assistance counseling on accessing and coordinating
LTC services. PPACA also includes premium subsidies for workers with incomes below the
federal poverty level and full-time students aged 18 to 21 who currently are working.
Table 5 shows premium estimates by the Congressional Budget Office (CBO) and the Centers for
Medicare and Medicaid Services (CMS). CBO estimates that the average monthly premium in
2011 will be $123 (with premiums for new enrollees increasing for inflation in later years). These
estimated premiums were calculated to be adequate for the program to remain solvent for 75
years, taking into account the interest income that would be generated on unspent balances in the
program’s Trust Fund.

55 CRS Report R40842, Community Living Assistance Services and Supports (CLASS) Provisions in the Patient
Protection and Affordable Care Act (PPACA)
, by Janemarie Mulvey and Kirsten J. Colello.
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Factors Affecting the Demand for Long-Term Care Insurance: Issues for Congress

As shown in Table 5, CMS estimates that the initial average premium would be about $240 per
month.56 Premium estimates from CMS are higher than CBO’s, largely reflecting assumptions
about increased adverse selection. CMS states that “in general, a voluntary, unsubsidized, and
non-underwritten insurance program such as CLASS faces a significant risk of failure as a result
of adverse selection by participants. Individuals with health problems or who anticipate a greater
risk of functional limitation would be more likely to participate than those in better-than-average
health. Setting the premium at a rate sufficient to cover the costs for such a group further
discourages persons in better health from participating, thereby leading to additional premium
increases.”57 According to CMS, the problem of adverse selection would be intensified by
requiring participants to subsidize the $5 premiums for students and low-income enrollees.
Table 5. Estimates of Average Monthly Premiums Under CLASS Program
CBO Estimate
$123 per month
CMS Estimate
$240 per month
Source: CMS estimates available in Memorandum from the Office of the Actuary, Centers for Medicare and
Medicaid Services, Estimated Financial Effects of the Patient Protection and Affordable Care Act, as amended. April 22,
2010. CBO estimates available in Memorandum to Senator Reid, dated March 11, 2010, at http://www.cbo.gov.

Author Contact Information

Janemarie Mulvey

Specialist in Aging and Income Security
jmulvey@crs.loc.gov, 7-6928

Acknowledgments
The author would like to thank Kirsten Colello, Dawn Nuschler, Christine Scott, Bob Lyke, and Cliff
Binder for their comments on this report.



56 Memorandum from the Office of the Actuary, Centers for Medicare and Medicaid Services, Estimated Financial
Effects of the Patient Protection and Affordable Care Act, as amended
, April 22, 2010.
57 An analysis of the potential adverse selection problems for the CLASS program was performed by a nonpartisan,
joint workgroup of the American Academy of Actuaries and the Society of Actuaries. This memorandum entitled
“Actuarial Issues and Policy Implications of a Federal Long-Term Care Insurance Program” was issued on July 22,
2009, and based on the CLASS provisions in S. 1679, The Affordable Health Choices Act, which is similar to the
CLASS provisions in PPACA.
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