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States Move to Require Long Term Care Coverage

Long term care is emerging as a serious public health issue and it has gained the attention of several state legislatures that are considering mandating Long Term Care Insurance (LTCI). The state of Washington enacted a law, effective January 1, 2022, requiring employers to begin collecting a .58% payroll tax from employees unless they document private LTCI coverage. Those funds would provide a limited lifetime benefit to qualifying Washington residents. California, Illinois, Michigan and Minnesota are now considering similar state run programs. Employers may find this a good time to proactively look at alternatives to offer employees private LTCI options. It is important to note that along with national inflation, adding an additional payroll tax will further diminish take home pay for workers.

Several demographic, economic, and health factors are combining to raise the stakes over long term care. The US population is shifting, with the number of Americans over age 65 exceeding the number under age 18 by the year 2030. The prevalence of chronic illness, from cardiovascular disease, diabetes, and musculoskeletal conditions will lead to more than 70 percent of those over age 65 requiring long term care. In just 20 years, the number of companies providing LTCI coverage has contracted dramatically, from 100 down to fewer than a dozen.

Medicare and other health insurance plans do not pay benefits for long term care. Whether long term care is delivered in a residential care facility or through home health services, those who do not have LTCI will pay for it out of their own savings or by drawing down their assets under a Medicaid (Medi-Cal in California) arrangement.

While the efforts of the states to help protect their citizens against long term care risks are well-intentioned, there are potential pitfalls in the execution of these mandate proposals. Washington’s program is a “one-size-fits-all” design that provides a maximum lifetime benefit of $36,500. Individuals with higher incomes will pay more in taxes for the same level of coverage as those with lower wages and many will pay much more than the maximum benefit amount. The Washington state program is not portable. Benefits are only payable for Washington residents receiving services in the state of Washington. Finally, benefit recipients must meet the requirement of needing assistance with at least three Activities of Daily Living (ADLs), rather than two that private individual LTCI typically requires.

The California task force is still developing a proposed bill for the Legislature, but appears to be leaning toward a program with greater flexibility. The preferred designs include portability and two ADLs for qualification. Once costs and inflationary trends are taken into account, the final design may be scaled back. Ultimately, a state program may not effectively meet the needs of the wide range of individuals.

State LTCI programs place an additional burden on employers to withhold, report and submit the required payroll taxes. Compliance will be multiplied for employers operating in more than one jurisdiction. The state programs do not require employers to provide LTCI for their employees, but offering affordable individual LTCI to employees on a voluntary basis may reduce the administrative burden. In addition, employees will receive better access to LTCI plans and provisions that meet specific needs and costs for them and their families.

Offering stand-alone LTCI is one possible approach to expand employee access to such coverage. However, hybrid products that combine LTCI with universal life insurance may provide employees with the optimal value. Separate LTCI only provides a benefit to the policyholder if they need and meet the requirements for long term care services. A universal life/LTCI hybrid plan guarantees benefits to all participants, either as long term care services or a death benefit. Families have options to include coverage for spouses, and to specify the desired duration and monthly amount of long term care coverage.

AP Keenan will be monitoring state LTCI proposals, including California, and will report on developments as they occur. If you would like to explore opportunities to make LTCI plans available to employees, we can help you evaluate solutions that fit their needs and minimize your administrative burden.

About Ju Anderson
Ju Anderson, Vice President, works with health care clients to create an effective strategy to address the health and welfare benefit needs including the financial analysis, implementation, efficacy and performance management of the health plans and other vendors.