The long-term care insurance industry is foundering, and attempts to address the issue have flummoxed lawmakers and regulators.

Long-term care insurance covers assisted living services, nursing homes and treatment for chronic conditions, all of which are vital as the American population ages and as the country contends with the COVID-19 pandemic. Yet the industry is contracting at an alarming rate.

Of the more than 100 companies offering long-term care insurance in 2004, according to the National Association of Insurance Commissioners, just about a dozen still operated in 2019. Fewer new policies are being written, causing companies to increase premiums on new and existing customers, which further dampens demand.

Between 1990 and 2015, the average annual long-term care insurance premium increased from $1,071 to $2,772, said the NAIC, a regulatory and standard-setting group of insurance commissioners from across the country.

“It’s become a situation where many of these companies either become insolvent, or they’re heading in that direction,” Idaho Insurance Commissioner and NAIC President Dean Cameron said. “The benefits that they were offering in many cases were richer than what could be paid for by a standard premium.”

The diminishing market leaves policyholders, many of whom are elderly and have been paying for coverage for years or decades, at risk of losing coverage altogether or experiencing untenable premium increases. As the population ages, lack of access also foreshadows a need for greater government intervention, likely at a greater cost to taxpayers, unless meaningful action is taken.

“It’s an unfortunate position that we find ourselves in,” Cameron continued.

Shaky foundation

Since private insurers began offering long-term care policies in the 1970s to help cover costs associated with nursing homes, the industry was marred by a series of miscalculations, Cameron said.

“From the very start, the industry underestimated the longevity of people — and perhaps we can even point the finger at ourselves in the regulatory community,” Cameron said. “The industry underestimated how long they would live; it underestimated the cost of a long-term care facility, the advances in medical technology that would help people live longer. The products, right from the very start, were underpriced.”

Actuaries also assumed more people would drop their policies — lapse rates have remained low — and underestimated the length of claims, which have increased as treatment for chronic conditions like Alzheimer’s disease has improved.

Sales of new policies peaked in the early 2000s and have declined quickly in the roughly two decades since, as insurers have sought to exit the market due to the poor performance of the product line, according to a 2020 Department of the Treasury report.

The total number of covered Americans, around 7.5 million, has been mostly stagnant since 2008. By one recent estimate, fewer than one in 30 Americans, and just 7 percent of those over 50, has a long-term care policy.

Those numbers suggest to some lawmakers, like Senate Banking ranking member Patrick J. Toomey, R-Pa., that Americans either don’t understand the importance of long-term care insurance, or are merely choosing not to invest.

“Long term care insurance frequently provides one of the best solutions to paying for this care, but many Americans don’t invest in LTCI or wait until later in life to invest when the cost of this insurance is higher,” Toomey, whose family had to confront long-term care options when a relative was diagnosed with Alzheimer’s disease, said via email.

Meanwhile, according to U.S. Census Bureau data, by 2034, people 65 and older are projected to outnumber children under 18 for the first time in U.S. history.

As Americans get older and demand for long-term care increases, access to private insurance is dwindling and Medicare and Medicaid offer limited coverage.

The expectation is the government will need to pick up the slack. The Congressional Budget Office projected spending on long-term care for the elderly will increase from 1 percent of gross domestic product in 2010 to 3 percent in 2050.

Sinking SHIP

Even for those who plan ahead, the long-term care insurance industry has proved hazardous. The insolvency of the Senior Health Insurance Company of Pennsylvania, or SHIP, is one recent example.

In 2020, SHIP was placed into rehabilitation by then-Pennsylvania Insurance Commissioner Jessica Altman, after racking up a $1.2 billion shortfall. Traditionally, insolvent long-term care companies were placed into liquidation, triggering state guarantee funds — backed by insurers and taxpayers — whose purpose is to pick up the claims of failed insurers.

Altman’s potentially precedent-setting move, however, placed the burden of that debt on SHIP’s remaining roughly 30,000 policyholders, whose average age is 87.

According to a court-approved plan of rehabilitation — which is opposed by a majority of the country’s insurance commissioners — those policyholders were forced to choose between a steep premium hike or a loss of benefits.

A group of insurance commissioners challenged the decision in the Supreme Court of Pennsylvania, but no verdict is expected until at least the fall.

SHIP had just a small slice of the long-term care market, but many commissioners, including Cameron, fear larger companies could follow suit. The country’s largest long-term care insurer, Genworth Financial Inc., has 1.1 million policies and may also be in a precarious financial situation, some regulators say. If it were to go the way of SHIP, a huge number of American seniors could be adversely affected.

“Certainly, I think almost every commissioner is watching very carefully as to what occurs with the SHIP case and what that potentially means for Genworth,” Cameron said.

Genworth declined to comment.

‘Difficult issue’

Three years ago, the NAIC created an executive committee dedicated to addressing problems in the long-term care insurance industry. This month, that committee adopted a new framework for multistate actuarial review of long-term care insurance rate increase requests, an initiative supported by Cameron. 

That multistate review process would help ensure rate parity and ensure costs are not shifted to policyholders in states with more permissive regulators, Cameron said.

The NAIC, in a 2019 brief on the industry, also endorsed other potential efforts to ameliorate some of the issues plaguing the industry.

Hybrid policies — ones that, for instance, combine different lines like life insurance with long-term care insurance — could help reduce premiums and increase take-up.

The NAIC also proposed potential federal interventions, like adding a home-care benefit to Medicare, Medicare Supplements and Medicare Advantage plans; allowing the creation of long-term care savings accounts, similar to health savings accounts, to cover expenses; and allowing retirement plan participants to make distributions from their savings without paying penalties.

Legislation enabling that last option was introduced by Toomey in 2021 and by Rep. Ann Wagner, R-Mo., in March. Wagner declined several requests for comment. Toomey’s bill did not advance out of committee, and Wagner’s remains with the House Education and Labor and Ways and Means committees.

“Enabling Americans to use retirement savings at any point in life to pay for LTCI without incurring an early withdrawal penalty and without paying taxes on the withdrawal will incentivize earlier investment in this insurance, while costs are lower,” Toomey said. “This will benefit individuals if they need care later in life. Since long term care is often needed after retirement, it’s common sense to allow Americans to purchase the insurance to cover long term care with their retirement savings.”

Other lawmakers, including Rep. Tom Suozzi, D-N.Y., have proposed a more substantial overhaul of the long-term care insurance system. Legislation introduced in 2021 by Suozzi would create a federal long-term care fund. Suozzi also declined to be interviewed for this report.

Despite the proposals, Congress hasn’t taken major action to address challenges in the long-term care insurance industry. In 2021, President Joe Biden proposed $400 million in funding for long-term care (HR 5376), but his proposal lacked details about how those funds would be allocated, and the proposal ultimately died in the Senate without support from moderate Democrats or Republicans.

The NAIC, meanwhile, in the past five years has regularly placed finding solutions for the long-term care insurance industry at the top of its annual list of priorities.

“None of us would say that we have a complete solution or answers, because we don’t,” Cameron said. “But we’re in search of how we protect consumers … and we’re in search of making sure these companies stay solvent. It’s a difficult issue, but it has our utmost attention.”