State Implementation of Partnership Programs

The Deficit Reduction Act establishes the framework for new state partnership programs and sets requirements that partnership-qualified policies must meet. But the DRA does not dictate every detail of QSLTCIP programs — states have a good deal of leeway to develop their own programs as they see fit. States may impose requirements on PQ policies beyond those of the DRA (as long as they apply the same requirements to non-PQ policies), and some DRA provisions leave room for interpretation and variation in implementation.

A PQ policy must provide “annual compound inflation protection” to insureds age 60 or younger when they buy the policy. But the DRA does not clarify what this term means or stipulate which types of inflation protection qualify, so states are setting their own standards.

The DRA does not specifically mandate the 5 percent compound rate required by the original partnership programs. 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) as meeting the annual compound requirement. For a GPO to qualify, however, the offers of additional coverage would have to be made annually, and the amounts would have to be based on compounded increases in benefit amounts. States allowing GPOs will also need to address questions such as:

• Must increase offers continue for the life of the policy?
• Will the state require an insured to accept every increase offer to maintain PQ status?
• Can he decline some offers as long as he does not forfeit his right to future offers?

States must also decide whether to require an insured to maintain the level of inflation protection required at the time of purchase throughout the life of the policy, or allow him to downgrade inflation protection when he moves into an older age group.

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. However, only benefits received under the new policy count toward Medicaid asset protection — benefits received under the old policy do not count. (This rule will rarely come into play in practice, as an insured who is receiving or has already received benefits is unlikely to be accepted for a new policy.)

Many existing policies meet all PQ requirements except that they were issued before the effective date of the state partnership program. In such cases, the insured is essentially switching to an identical new policy. Many other existing policies meet PQ requirements except for issue date and inflation protection, in which case the new policy is essentially the same with an inflation feature added.

States will likely facilitate exchanges by allowing insurers to issue an endorsement or rider to an existing policy stating that it has PQ status, rather than requiring the insured to lapse the old policy and purchase an entirely new one. However, some states may require a new policy purchase.

Insureds sometimes want to change their policy after it has been in force — to decrease benefits to make premiums more affordable, or to increase benefits as circumstances change. The question arises: if an insured buys a PQ policy and later makes a coverage change, 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. The great majority of DRA requirements pertain to consumer protection provisions that are unlikely to be affected by coverage changes. 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.

As states develop their programs, they will need to define what coverage changes would violate their PQ requirements. Insurers will then take steps to prevent consumers from inadvertently losing PQ status. The insurance industry has proposed including a notice such as this when a PQ policy is delivered:

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. Without reciprocity, the person must forgo asset protection, move back to State A, or move to another state that has a program with reciprocity.

Under the DRA, reciprocity is the rule unless a state explicitly opts out. The degree of uniformity among QSLTCIP programs that the DRA imposes is intended to facilitate reciprocity.

Reciprocity is generally 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 than someone without such coverage. If the new resident does eventually go on Medicaid, the state will not be able to take assets it otherwise might have — but this is uncommon, and the gains generally outweigh the losses.

Must an insured wait until LTCI benefits are completely exhausted before applying for Medicaid? Under the DRA, the answer is no — but the amount of assets protected is based on the benefits paid as of the time of application. An insured may apply for Medicaid before exhausting benefits, but will receive credit only for benefits paid up to that point, even if additional benefits are paid afterward.

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 benefits, there may be no reason to wait.
• Those approaching the end of benefits under financial hardship may prefer to apply early.
• The Medicaid application process can take several months — those who wait until benefits are fully exhausted before starting may have to pay for care out of pocket during that gap.

If an insured qualifies for Medicaid before exhausting LTCI benefits, the Medicaid program will generally require that insurance remain the “first payer” — the LTCI policy must continue to pay benefits, with Medicaid providing additional benefits only for expenses not covered by the insurance but covered by Medicaid. This too must be weighed in determining whether to apply early.

An important DRA objective was establishing some degree of nationwide uniformity among partnership policies and between partnership and nonpartnership policies. If each state established widely varying requirements, insurers would have to develop and maintain many different products for different states, discouraging market entry. The DRA addresses this in three ways:

• It establishes standard requirements for all PQ policies in all participating states.
• It bases those requirements on the NAIC LTCI Model Act and Model Regulation, which already apply to most LTCI policies — so PQ policies will be very similar to most non-PQ policies.
• It prohibits a state from imposing additional requirements on PQ policies that it does not also impose on non-PQ policies, further minimizing the difference.

As a result, an insurer should generally be able to develop one LTCI product that can be used as both a PQ and non-PQ policy. The main difference between the two versions would be that a purchaser seeking PQ status must choose an inflation protection option meeting PQ requirements for his age.

While PQ and non-PQ products within a state will generally be highly similar, PQ products may differ significantly from state to state, since states may impose their own additional requirements. However, widespread adoption of the NAIC models tends to limit this diversity.

For an insurance product to become a PQ policy:

• The state insurance department reviews the product and certifies that it meets all requirements. Alternatively, an insurance department could establish 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 will most likely be made in a form included with the policy at delivery — facilitating the process for policies already in force that meet PQ requirements (the insurer can simply issue the disclosure form to existing policyholders rather than revising and refiling the entire policy).

Insurance companies will have to report certain data on their PQ policies for two main reasons:

• A state Medicaid program needs to know whether an individual is covered by a PQ policy and how much she has received in benefits, so this information can be considered if she applies for Medicaid.
• States and the federal government need data to evaluate partnership programs and set policy — including whether asset protection leads consumers to buy PQ policies, what types of PQ policies they are buying, and what impact the program is having on Medicaid finances.

The Department of Health and Human Services will issue reporting regulations specifying the type and format of data all insurers issuing PQ policies must include in reports to the Secretary of HHS. These reports will be made available to all participating states. CMS is working with the states to identify their needs and ensure that the HHS requirements meet them, minimizing the need for additional state-specific requirements.

The DRA and CMS directives require each state insurance department to provide assurance to the state Medicaid program 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 role they play in the public and private financing of long-term care.

In addition to standard LTCI licensing requirements, there will be new training requirements for selling partnership LTCI policies. At its September 2006 meeting, the NAIC adopted a Model Bulletin that many states will likely adopt (with possible modifications). Its requirements are:

• All LTCI agents in the state will receive training in PQ policies.
• An initial training course of no less than 8 hours, plus no less than 4 hours of ongoing continuing education every 24 months.
• Topics must include long-term care services, long-term care insurance, PQ policies, and the relationship between PQ policies and other public and private long-term care coverage. Advantages and disadvantages of both PQ and non-PQ policies must be covered.
• Training cannot include any company-specific training or sales/marketing information.
• Standard state CE requirements (class attendance, examination conduct, self-study, web-based training) must be adhered to.
• When a state establishes a partnership program, it sets a date at least one year after the effective date by which all LTCI agents must have received the training. Until that date, any licensed and qualified LTCI agent may sell PQ policies.
• Insurance companies issuing PQ policies must require agents to provide written verification of training completion. Companies must maintain this verification on file and be able to provide it to the state insurance commissioner upon request.