How making public long-term care insurance (sort of) voluntary has created a mess in Washington state

When Washington state lawmakers approved a public long-term care (LTC) insurance program in 2019, they made a last-minute change: residents could opt out if they purchased private LTC coverage. by November 1, 2021. wage surtax of 0.58% starting next year and, in return, be eligible for a public long-term care insurance benefit of up to $ 36,500 starting in 2025.

This opt-out option sparked an aggressive marketing campaign by long-term care insurance brokers looking to sell policies to people trying to avoid the new tax. He encouraged some Washingtonians – only carriers know how much – to buy private coverage they wouldn’t have bought otherwise and are unlikely to keep.

Adding an opt-out

How have insurers responded to this unprecedented wave of enthusiasm? They have stopped selling surplus LTC in the state and are not expected to resume until November 1.

What’s going on?

The first mistake was that of the state. The original bill wisely did not have an opt-out. But the legislature decided to exempt those who already had private coverage when the bill was passed in 2019. Then, lawmakers took it one step further: they stupidly gave residents an extra 30 months. after the bill became law to buy insurance and avoid the tax. Those who withdraw cannot join the program later.

Still, they tried to buy. En masse. In August, the insurance commissioner reported that a single carrier had received 66,000 claims in two months, eight times what it received all last year.

$ 300 or $ 3,000

For most Washingtonians, this decision makes no sense. A worker who earns, say, $ 50,000 a year would pay less than $ 300 a year in taxes to the public program. This is about a tenth of what a typical buyer would pay in the private market.

High income workers would pay more, of course. Someone who says $ 200,000 a year would pay about $ 1,200. But that’s still less than half of what a 60-year-old man would pay for an average policy.

There are differences, of course. Typical LTC policies are more generous than Washington’s public plan. On the flip side, private insurance premiums are likely to rise faster than a well-designed public program (I’ll explain why in a minute). Under the public plan, a 20-year-old would pay while working, but not after retirement. In contrast, 60-year-old private insurance buyers would avoid younger premiums, but continue to pay premiums until they make a claim, perhaps 20 years after reaching age 65. years.

The key to insurance

For social insurance to be successful, the vast majority of workers must participate. For example, anyone who works for a certain period of time automatically pays tax, is affiliated with social security and can claim future benefits. Some will die prematurely and receive no benefit. Others will live to 100 years and reap much more than they contributed.

This is how private or public insurance works. No one really knows if they will claim long-term care benefits and because a well-designed public risk pool is so large, taxes (or premiums, if you prefer) are relatively low.

But give people choice and the economics of long term care insurance is changing. The problem: Most people don’t want to buy a blanket – they don’t even want to think about getting frail in old age.

Worse yet, those who buy are the most likely to need it. With the risk pool full of people likely to claim, insurers are raising premiums, potential low-risk customers lose interest, and premiums rise again. This is called the death spiral.

Lots of buyers, no sellers

In 2010, Congress passed the CLASS Act, a voluntary federal insurance program. Actuaries calculated that the projected premiums would be so high that only the riskiest people would buy. The Obama administration abandoned the program before it even started.

The Washington legislature has made its public program voluntary anyway. True, people are less likely to opt out of a benefit than to sign up for it. Yet many will go to great lengths to avoid paying tax. Even if it is directly linked to a benefit. And even if the tax is much less expensive than a private insurance premium.

The math gets complicated for consumers. But why did private plans stop selling to people who wanted to buy so badly.

Two reasons: The first was that these consumers were so enthusiastic. Risk averse insurers feared that this pool of risks would be aggravated and premiums unaffordable.

The other concerned the conception of Washington’s plan. Carriers were terrified that buyers would buy their policies just to opt out of the state’s plan and then cancel their coverage. Bad for Washington residents, who reportedly have no LTC insurance. And bad for insurance companies that would have paid significant upfront costs to lose decades of future premium income. The only winners: the brokers, who would earn their commissions and happily move on.

Washington State should have designed its program to encourage consumers to purchase private insurance for extra charge his public project. Instead, it prompted them to to replace public insurance, but only for a short period. Really a bad idea.

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