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State Implementation
As we have seen, the Deficit Reduction Act establishes the framework for new state partnership programs, setting requirements that partnership-qualified policies must meet in all states. Many, but not all states, allow some form of Partnership LTC polices – and more states have applied for permission to offer Partnership policies. The DRA does promote uniformity, but it does not dictate all aspects of PQ programs -- states have a good deal of leeway to develop their own programs as they see fit. States may impose requirements on PQ policies in addition to those of the DRA, as long as they apply the same requirements to non-PQ policies. And some of the provisions of the DRA leave room for interpretation and variation in how they are implemented. No doubt, partnership programs will continue to evolve.
Inflation Protection
A PQ policy must provide "annual compound inflation protection" to insureds who are 60 years old or younger when they buy the policy. But the DRA does not clarify what is meant by this term or stipulate what types of inflation protection qualify, so the states are setting their own standards that they believe comply with this provision.
The DRA does not specifically mandate the 5 percent compound rate that is required by the original partnership programs. Therefore, some states are likely to accept other compound rates (such as 3 percent) as well as inflation protection based on a consumer price index that increases annually on a compound basis.
Some states may accept a guaranteed purchase option (GPO). However, for a GPO to qualify as "annual compound inflation protection," the offers of additional coverage would have to be made annually, and the amounts would have to be based on compounded increases in the benefit amounts.
Furthermore, states that allow GPOs may need to set rules for them. For instance, must increase offers continue for the life of the policy? (Under most but not all GPOs today, offers generally end if the insured becomes eligible for benefits or if he declines a certain number of offers.) And will a state require an insured to accept every increase offer that is made to maintain the PQ status of his policy? Or can he decline some offers as long as he does not decline so many that he forfeits his right to future offers?
States will also have to decide if they will require an insured to maintain the level of inflation protection required at the time of purchase through the life of the policy, or if they will allow him to downgrade inflation protection when he moves into an older age group, based on the purchase requirements for that age.
Jim buys a PQ policy at age 55, and to fulfill the requirement for annual compound inflation protection that applies at his age, he chooses an automatic 5 percent compound option. After he turns 61, can he switch to a less costly form of inflation protection, such as a 5 percent simple rate, as is permitted for those who purchase after 60? And when he turns 76, can he drop inflation protection altogether, since those who buy at that age are not required to have any?
Replacements
Can an existing LTCI policy be exchanged for a PQ policy? Under the DRA, if an individual owns an LTCI policy that does not qualify for PQ status, she may exchange it for a PQ policy. But only benefits received under the new policy, and not benefits that may have been received under the old policy, are counted toward Medicaid asset protection. (However, this rule will probably come into play only rarely, as an insured who is receiving or has received benefits is unlikely to be accepted for a new policy.)
Many existing policies meet all the requirements for PQ status except that they were issued before the effective date of the state partnership program. In such cases, an insured making an exchange is simply switching his old policy for an identical new one. Many other existing policies meet the PQ requirements except for issue date and inflation protection, in which case the new policy is essentially the same with the addition of an inflation feature.
States will likely facilitate exchanges by allowing insurers to simply issue an endorsement or rider to an existing policy stating that it has PQ status. However, it is possible that some states may require insureds to lapse their existing policy and purchase a new one.
Coverage Changes
Insureds sometimes want to make a change in their policy after it has been in force for some time. Needs and circumstances can change over time. Some may want to decrease their benefits, perhaps to make their premium more affordable. They might, for instance, want to change comprehensive coverage to facility-only coverage because they believe they have sufficient family support to handle any home care needs. Alternatively, an insured may want to increase her benefits. Such changes are not unusual given that people generally buy LTCI coverage many years before they are likely to need benefits. But the question arises, if a person buys a PQ policy and later makes a change in her coverage, will the PQ status of the policy be affected?
The DRA states that changes in a policy after it is issued will not affect its PQ status as long as all PQ requirements continue to be met. As we have seen, the great majority of DRA PQ requirements pertain to consumer protection provisions, and these are unlikely to be affected by any coverage change requested by an insured. 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 those requirements. It is also possible that a coverage change could violate a state-imposed PQ requirement.
Reciprocity
If a person buys a PQ policy in State A and later moves to State B and applies for Medicaid, will he be entitled to asset protection in State B? If State B has a partnership program and there is reciprocity between the two states, the answer is yes. Otherwise, the person will have to forgo asset protection, or move back to State A, or move to another state that does have a program and reciprocity with State A.
Under the DRA, reciprocity is the rule unless a state explicitly opts out, and the degree of uniformity the DRA imposes on PQ programs should foster reciprocity. Reciprocity is usually advantageous for a state. If a person with a PQ policy moves in, the state gains a resident with good LTCI coverage who is less likely to need Medicaid benefits than someone without such coverage. It is true that, under reciprocity, if the new resident does end up going on Medicaid, the state will not be able to take assets it otherwise would have been entitled to. But this is not a common occurrence, so the gains to the state would appear to outweigh the losses.
However, the DRA does not require reciprocity, and of course it does not require the states to establish a partnership program. So some states will probably not create programs, and the owners of PQ policies moving to those states will not be entitled to any asset protection there.
Application Date
Must an insured wait until his LTCI benefits are completely exhausted before applying for Medicaid? Or can he apply before he has received all benefits payable by his policy? Under the DRA, an insured does not have to wait until the exhaustion of benefits, but the amount of assets that will be protected is based on the amount of insurance benefits paid as of the time of application. In other words, an insured may apply for Medicaid before he has used up his LTCI benefits, but if he does so, he will receive credit only for the benefits paid up to that time, even if benefits continue to be paid afterwards. If, on the other hand, he waits until all benefits due under the policy have been paid, he will receive credit for the full lifetime maximum benefit of the policy.
Joanne has a PQ policy with a lifetime maximum benefit of $200,000. After she has received $150,000 in benefits, she applies for Medicaid. She may apply at this time, but she will be entitled to only $150,000 in asset protection, even if the remaining $50,000 of benefits is eventually paid out.
Sylvia also has a PQ policy with a lifetime maximum benefit of $200,000. She waits until she has received the entire $200,000 before she applies for Medicaid. She will be entitled to $200,000 in asset protection.
Thus, waiting is often advantageous, but not always. For instance, if a person has only $100,000 in assets to protect and has already received that amount in insurance benefits, there may be no reason to wait, even if he is entitled to additional benefits. Also, some individuals who are under a financial hardship as they near the end of their insurance benefits may want to apply early.
Finally, it should be kept in mind that the process of applying for Medicaid can take several months, so those who wait until their insurance benefits have completely run out before starting this process may have to pay for their care out of their own pocket for a time.
If an insured does qualify for Medicaid before he exhausts his LTCI benefits, the Medicaid program will generally require that the insurance remain the "first payer" -- that is, the LTCI policy must continue to pay benefits, with Medicaid providing additional benefits for any expenses not covered by the insurance but covered by Medicaid. This also must be weighed in determining whether it is advantageous to apply for Medicaid early.
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