Chapter 4 — Long-Term Care Partnerships

In the previous chapters, we examined long-term care costs and long-term care insurance and learned about the advantages insurance offers. But what if a person does not buy an LTCI policy? If she needs long-term care, she must use her income, savings, and assets to pay for it — and if she needs care for a long time, she could exhaust these resources and be forced to apply for Medicaid. This presents a problem for the government as well: the more people who rely on Medicaid, the greater the financial burden on this already strained program.

States have sought to encourage individuals to provide for their long-term care needs through LTCI coverage in several ways, including offering tax incentives and targeting education programs. Another approach is long-term care partnership programs, which is the focus of this chapter.

A long-term care partnership program is a program under which a state government modifies its Medicaid eligibility rules to give a financial incentive for the purchase of LTCI policies that meet certain requirements. These are called partnership LTCI (or PQ) policies. Their goal is to increase the number of people covered by private long-term care insurance and reduce Medicaid expenditures. The word “partnership” refers to the collaboration between the public sector (state government) and the private sector (insurance companies) in funding long-term care needs.

Under the dollar-for-dollar approach, a person who exhausts his LTCI benefits and applies to Medicaid may keep assets equal in amount to the benefits he received under his partnership policy (in addition to any other assets he would otherwise have been entitled to keep). Moreover, these assets are exempt from Medicaid estate recovery and are preserved for his heirs.

Partnership policies have their limitations. If a person exhausts his insurance benefits, it is not guaranteed that he will qualify for Medicaid, and if he does qualify, he must generally spend his entire income on care. These and other disadvantages are discussed in the chapter on suitability.

Partnership programs began in 1988 when the Robert Wood Johnson Foundation sponsored demonstration projects in four states: California, Connecticut, Indiana, and New York. These projects eventually became permanent, and other states expressed interest in establishing programs of their own.

However, the federal Omnibus Budget Reconciliation Act of 1993 (OBRA 93) effectively halted expansion. Under OBRA 93, any new programs would be required to apply estate recovery to protected assets — meaning assets could not be preserved for heirs after death. This made participation much less attractive, and no new state programs were established for many years.

The Deficit Reduction Act (DRA) of 2005 lifted this restriction, allowing all states to establish programs that permit participants to preserve assets after death, and many states have since established partnership programs.

All four original states require that their partnership policies be federally tax-qualified, include automatic 5% annual compound inflation protection, and provide comprehensive benefits (both facility care and home care). All four offer the dollar-for-dollar approach to asset protection. Indiana and New York also offer a total asset approach — allowing an individual to keep all his assets if his policy provides a certain minimum level of benefits.

Connecticut and Indiana have a reciprocity agreement under which a resident may buy a partnership policy in one state, move to the other, and receive dollar-for-dollar asset protection (but not total asset protection).

As of December 2024, 45 states and the District of Columbia have established Long-Term Care Partnership Programs. Alaska, Hawaii, Mississippi, and Utah do not.

One measure of success is whether insureds are diverted from reliance on Medicaid. A very small number of those holding partnership policies — less than 1 percent — have exhausted their LTCI benefits and received Medicaid benefits, suggesting that partnership policies are keeping insureds off Medicaid rolls.

The federal Deficit Reduction Act (DRA) of 2005 (effective February 8, 2006) facilitates nationwide expansion of state partnership programs. Key DRA provisions:

• Repealed the OBRA requirement that states apply Medicaid estate recovery rules to protected assets — all states may now allow participants to preserve assets after death.
• Imposes a degree of uniformity by setting minimum requirements for new state partnership programs and partnership-qualified (PQ) policies.
• Promotes — but does not require — reciprocity among states (reciprocity applies unless a state explicitly opts out).
• Under the DRA, new programs can protect assets on a dollar-for-dollar basis only. Total asset protection is not permitted under new DRA programs. (The four original state programs are exempt and may continue to operate as before.)

To be partnership-qualified (PQ), an LTCI policy must:

• Be a federally tax-qualified LTCI policy (meeting all HIPAA requirements).
• Be issued after the date on which the state partnership program goes into effect. (Unlike HIPAA, the DRA does not extend PQ status to policies already in force when a partnership program is established.)
• Have the insured be a resident of the state sponsoring the partnership program when coverage first becomes effective.

In addition, PQ policies must include certain consumer protection provisions and meet age-based requirements for inflation protection. If a state imposes additional requirements on PQ policies, it must impose the same requirements on non-PQ policies — a provision intended to minimize differences between the two types and make partnership policies easier to understand and market.

The consumer protection provisions that a PQ policy must contain are largely the same provisions already required by most states and included in most LTCI policies today. Key areas include:

• Outline of coverage — a description of benefits, exclusions, and provisions must be provided at the time of application.
• Prospective applicants must receive a copy of A Shopper’s Guide to Long-Term Care Insurance (published by the NAIC) or the state’s own guide.
• Disclosure of past rate increases — the policy must disclose whether the insurer has ever had premium rate increases on this or related policy forms.
• Replacement coverage — the application must ask whether the applicant has other LTCI in force and whether the policy is intended to replace other coverage.

• Home and community care benefits — if provided, these must be at least equivalent to one half of one year’s nursing home coverage.
• Extension of benefits — nursing home benefits must be paid even if the policy lapses, provided the insured began receiving benefits prior to lapse and the nursing home stay continues.

• The policy must be guaranteed renewable or noncancellable.
• The purchaser must be offered the shortened benefit period non-forfeiture option; if declined, the policy must provide contingent non-forfeiture benefits.
• An incontestability clause must be included, placing increasing restrictions on the insurer’s right to contest over time: under 6 months in force (material misrepresentation); 6 months to 2 years (material and pertinent to the condition claimed); 2+ years (knowing and intentional misrepresentation only).

• Agents must comply with training requirements and safeguards preventing abusive practices.
• Advertisements must be submitted to the state insurance commissioner for review or approval.
• The insurer must assist the applicant in determining whether LTCI is appropriate — based on financial situation and preferences — and the applicant must sign suitability forms.
• The policy must include a 30-day free-look period.

In the area of inflation protection, PQ policies differ significantly from non-PQ policies — the DRA requires far more than HIPAA or the NAIC models. Requirements vary by age at purchase (the insured’s age when the policy becomes effective):

The DRA establishes the framework for new state partnership programs, but does not dictate all aspects — states have significant leeway to develop their own programs. Many, but not all, states allow some form of partnership LTCI policies, and the programs continue to evolve.

A PQ policy must provide “annual compound inflation protection” for insureds aged 60 or younger, but the DRA does not clarify what qualifies or mandate the 5% compound rate required by the original four state programs. Some states may accept other compound rates (such as 3%) or inflation protection based on a consumer price index. Some states may accept a guaranteed purchase option (GPO) — but for a GPO to qualify as annual compound inflation protection, offers would have to be made annually and based on compounded increases.

Under the DRA, an individual who owns an LTCI policy that does not qualify for PQ status may exchange it for a PQ policy. However, only benefits received under the new policy count toward Medicaid asset protection — benefits received under the old policy do not count. Many existing policies meet all PQ requirements except issue date and/or inflation protection; states may facilitate these exchanges through endorsements or riders rather than requiring a full lapse and re-purchase.

Under the DRA, changes in a policy after it is issued will not affect its PQ status as long as all PQ requirements continue to be met. However, if an insured downgrades or eliminates an inflation protection feature, this could violate the DRA inflation protection requirements depending on how the state interprets them.

Under the DRA, reciprocity is the default rule unless a state explicitly opts out. If a person buys a PQ policy in State A and later moves to State B, and State B has a partnership program with reciprocity, the person is entitled to asset protection in State B. Reciprocity is generally advantageous for both states and consumers, but some states will not create programs at all, and owners of PQ policies moving to those states will not receive any asset protection there.

Under the DRA, an insured does not have to wait until his LTCI benefits are completely exhausted before applying for Medicaid. However, the amount of assets protected is based on the insurance benefits paid as of the time of application.

If an insured qualifies for Medicaid before exhausting LTCI benefits, Medicaid generally requires that the insurance remain the “first payer” — the LTCI policy must continue paying benefits, with Medicaid providing additional benefits for uncovered expenses. Keep in mind that the Medicaid application process can take several months, so those who wait until benefits are exhausted may have to pay out of pocket for a period.

If an insurance product meets all DRA and state partnership program requirements, it becomes a PQ policy through one of two processes:

• The state insurance department reviews the product and certifies that it meets all requirements; or
• The state establishes a process for self-certification (such as a checklist).

The insurer must prominently disclose to consumers whether or not a policy is partnership-qualified. This disclosure is most likely made in a form provided by the state or developed by the insurer and included with the policy when delivered.

Insurance companies must report certain data on their PQ policies so that: (1) the state Medicaid program knows whether an individual applying for Medicaid is covered by a PQ policy and how much in benefits they have received, and (2) the states and federal government have data for evaluating partnership programs and setting policy.

The DRA and CMS directives require each state insurance department to provide assurance that any person who sells, solicits, or negotiates a PQ policy has received training in these policies and demonstrated an understanding of them and the part they play in the public and private financing of long-term care.

The NAIC adopted a Model Bulletin that many states have adopted (perhaps with modifications). Key requirements include:

• An initial training course of no less than eight hours.
• Ongoing training of no less than four hours of continuing education every 24 months thereafter. This course satisfies the “ongoing” training requirement.
• Topics must include long-term care services, LTCI, PQ policies, and the relationship between PQ policies and other public and private long-term care coverage. Advantages and disadvantages of PQ and non-PQ policies must be discussed.
• Training cannot include company-specific information, sales, or marketing content.
• Insurance companies issuing PQ policies must require agents to provide verification of training and maintain it on file.