CHAPTER OBJECTIVES

When you have finished this chapter, you should be able to

• Describe the benefits provided by the traditional Medicare program
• Explain how Medicare supplement policies dovetail with traditional Medicare coverage
• Explain the alternatives to the traditional Medicare coverages that were added to the Medicare program by the Medicare Advantage coverage options
• Describe the features of long-term care insurance
• Identify and briefly explain the alternatives to long-term care insurance
• In general terms, identify the qualification requirements for Medicaid and explain the way in which the Medicaid program provides for financing of long-term care needs
• Explain what is meant by Medicaid planning and describe the legislative restrictions that have been imposed on the process

In this chapter, we turn our attention to health insurance for the elderly. We believe the health insurance needs of the elderly, and the manner in which it is provided, are sufficiently different from the needs and health insurance options for the population to justify a separate discussion.

Because they often need more extensive care than other members of society and because their resources are often limited, senior citizens face special problems with health care costs. Three broad types of coverage exist for insuring the health care needs of the elderly:

1. Medicare
2. Medicare supplement (or Medigap) policies
3. Long-term care insurance

These three distinct forms of coverage represent pieces of the health insurance programming puzzle for older persons. In addition to these forms of social and private insurance, the federal Medicaid program provides financing for the health care needs of senior citizens.

Medicare is a federal social insurance program enacted by Congress in 1965 to address the problem facing senior citizens in the area of health care financing. Although the program provides extensive benefits, it is subject to deductibles and coinsurance provisions. To fill the gaps between the cost of medical care and the reimbursement under Medicare, commercial insurers and Blue Cross and Blue Shield organizations have developed special policies, usually called Medicare supplement (Medigap) policies.

Medicare and Medicare supplement policies provide coverage for a wide range of health care-related costs. They do not, however, cover long-term care, which is another exposure facing senior citizens. Although Congress considered including long-term care in the Medicare program, the idea was rejected, and Medicare provides coverage only for intermittent care and for periods of limited duration. Long-term care insurance developed in response to the need of senior citizens for protection against the catastrophic costs of nursing homes and other types of custodial care.

Because the Medicare program applies to nearly all persons over the age of 65, it serves as the foundation of health care coverage for the elderly. We will begin our discussion of health insurance for senior citizens with a brief overview of this government social insurance program.

MEDICARE

The Social Security Act of 1935 stands as the most comprehensive piece of social legislation of its kind in this country's history. It became a more significant feature in our national social environment in 1965 when it was amended to include the Medicare program. The Medicare program became effective on July 1, 1966. Today, it is the nation's largest health insurance program and covers nearly 50 million Americans, including 39 million elderly.

Originally, Medicare introduced two forms of essential health insurance to almost all citizens over the age of 65 and to certain disabled persons. The first coverage, designated Part A, is compulsory hospitalization insurance, financed by payroll taxes levied on employers and employees. Part B is voluntary medical insurance, designed to help pay for physicians' services and other medical expenses not covered by Part A. This supplementary coverage is financed by monthly premiums shared by the participants and the federal government.

Two major amendments to the Medicare program were enacted subsequently, adding Medicare Parts C and D. The Balanced Budget Act of 1997 (BBA-97) was enacted in response to growing concerns about the long-term solvency of the program. BBA-97's provisions included changes in financing and coverage options. BBA-97 also added a new Medicare option, Medicare Part C, which expanded the role of private plans in providing Medicare benefits. Under Part C, Medicare beneficiaries may elect to be covered by private organizations, such as HMOs or PPOs, that have contracted with Medicare to provide benefits.¹ The second major piece of legislation, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA-2003) expanded Medicare's prescription drug coverage by introducing Medicare Part D, the Prescription Drug Benefit.

We begin our discussion of Medicare by focusing on the traditional program comprising Parts A and B, now known as Original Medicare. Given the complexity of the Medicare program, not all details can be provided. Interested readers are encouraged to find additional information on the Medicare website (Medicare.gov).

Original Medicare

Eligibility Almost all persons 65 or over are eligible for Part A (Hospital Insurance) under the Medicare portion of Old-Age, Survivors, and Disability Insurance (OASDHI). Medicare Part A is financed by part of the Social Security payroll tax paid by workers and their employers, and by self-employed persons. Persons who are entitled to benefits under Social Security or the Railroad Retirement system, or who worked long enough in federal, state, or local government employment to be insured, do not pay any premium for Part A. In addition to those over 65, all persons who have received OASDI disability benefits for at least two years are entitled to Medicare benefits. Patients with chronic kidney disease requiring dialysis or renal transplant and individuals with amyotrophic lateral sclerosis (ALS, also known as Lou Gehrig's disease) are eligible without a two-year delay.²

TABLE 22.1 2013 Medicare Part B Premiums by Modified AGI

Persons who are eligible for Part A of Medicare have the option of purchasing Part B, supplemental medical insurance (SMI). SMI is a voluntary coverage financed jointly by monthly premiums paid by persons who elect the coverage, and contributions by the federal government, with premiums intended to cover 25 percent of the cost for most individuals. Enrollment is automatic for the elderly and disabled as they become eligible for hospital insurance, but they are given the opportunity to decline the coverage. For the 12-month period beginning January 1, 2013, the monthly Medicare Part B premium for most individuals was $104.90.³

The MMA-2003 introduced a new income-related premium effective in January 2007; beneficiaries with higher incomes are required to pay a greater portion of their Part B premium costs. The premiums for higher-income individuals are based on their modified adjusted gross income (AGI) two-year ealier. For example, the premium in 2013 would be based on modified AGI in 2011.

Higher-income beneficiaries will pay a monthly premium equal to 35, 50, 65, or 80 percent of the total program cost, depending on their income level and tax filing status. Table 22.1 provides the premiums that were payable in 2013 for various income levels. Prior to 2010, the income brackets were indexed, but the Patient Protection and Affordable Care Act of 2010 (ACA) froze the brackets through 2019. About 5 percent of beneficiaries were required to pay higher income-related premiums in 2010, but that will rise to 14 percent by 2019, as the brackets fail to keep pace with inflation.⁴

Medicare Enrollment Periods The initial enrollment period for Parts A and B runs for 7 months, beginning 3 months before the month in which the individual reaches age 65. If a person does not enroll during this initial 7-month period, he or she must wait until the next general enrollment period. These enrollment periods occur each year, from January 1 through March 31. Coverage begins the following July 1.

Premiums for Parts A and B will be higher if the individual waits to enroll during a general enrollment period. The Part B premium goes up 10 percent for each 12 months the individual delays after the initial enrollment period. This means, for example, that a person who waits for, say, two years before enrolling in Part B will pay a 20 percent higher premium. For persons who pay a Part A premium, the increase is 10 percent, regardless of the delay period.⁵

Employer Group Medicare Coverage Under certain circumstances, persons who are eligible for Medicare but who are still employed must be given the option of enrolling (with their spouses) in their employer's health insurance plan. Federal law requires that employers with 20 or more employees must also offer the same health benefits, under the same conditions, to employees age 65 or over and to their spouses who are 65 or over, that they offer to younger employees and spouses. The employee may accept or reject coverage under the employer group health plan. If the individual accepts the employer plan, it will be the primary payer and Medicare becomes excess. If the individual rejects the plan, Medicare will be the primary payer for Medicare-covered health services that he or she receives. If the employee rejects the employer plan, an employer cannot provide a plan that pays supplemental benefits for Medicare-covered services nor can the employer subsidize such coverage. An employer may, however, offer a plan that pays for health care services not covered by Medicare, such as hearing aids, routine dental care, and physical checkups.

Part A—Hospital Insurance Coverage The basic benefits under the Hospital Insurance coverage fall into four broad categories: (1) hospital care, (2) care in a nursing home or extended care facility, (3) home health services, and (4) hospice care.

Hospital Insurance Benefits Medicare Part A helps pay for medically necessary inpatient care in a general hospital, skilled nursing facility, psychiatric hospital, or hospice care. In addition, Part A pays the full cost of medically necessary home health care and 80 percent of the approved cost for wheelchairs, hospital beds, and other durable medical equipment (DME) supplied under the home health care benefit. Coverage is provided for blood after the first three pints, when furnished by a hospital or skilled nursing facility during a covered stay.⁶

When the beneficiary is hospitalized, Medicare will pay for all covered hospital services during the first 60 days of a benefit period except for the deductible. The Part A deductible in 2013 was $1184 per benefit period. A benefit period begins the day the beneficiary is hospitalized. It ends after the beneficiary has been out of the hospital or other facility that primarily provides skilled nursing or rehabilitation services for 60 days in a row. If the beneficiary is hospitalized after 60 days, a new benefit period begins. With each new benefit period, Part A hospital and skilled nursing facility benefits are renewed, except for any lifetime reserve days or psychiatric hospital benefits used. There is no limit to the number of benefit periods a beneficiary can have for hospital or skilled nursing facility care.

In addition to the deductible, if the beneficiary is hospitalized for more than 60 days in a benefit period, he or she is responsible for a share of the daily costs. For the 61st through the 90th day, Part A pays for all covered services except for coinsurance, which is paid by the beneficiary. In 2013, the coinsurance for the 61st through 90th day was $296 per day.

Under Part A, the beneficiaries have a lifetime reserve of 60 days for inpatient hospital care. These lifetime reserve days may be used whenever the individual is in the hospital for more than 90 days in a benefit period. Once used, the reserve days are not renewed. When a reserve day is used, Part A pays for all covered services, except for coinsurance, which was $592 per day in 2013.

Medicare Part A helps pay for no more than 190 days of inpatient care in a Medicare-participating psychiatric hospital in the individual's lifetime. Once the 190 days have been used, Part A does not pay for inpatient care in a psychiatric hospital. Psychiatric care provided in a general hospital, rather than in a psychiatric hospital, is not subject to the 190-day limit.

Skilled Nursing Facility Care Medicare Part A can help pay for up to 100 days of skilled care in a skilled nursing facility during a benefit period. To be eligible, the individual must have had a hospital stay of at least three days and been admitted to a Medicare-certified facility within 30 days of the hospital stay. All covered services for the first 20 days of care are paid by Medicare. All covered services for the next 80 days are paid by Medicare except for a daily coinsurance amount. The daily coinsurance in 2013 was $148. Persons who require more than 100 days of care in a benefit period are responsible for all charges beginning with the 101st day.

Coverage for care in a skilled nursing facility is limited to the special kind of facility that primarily furnishes skilled nursing and rehabilitation services. It may be a separate facility or a distinct part of another facility, such as a hospital. A skilled nursing facility is different from a nursing home, and Medicare will not pay for the confinement if the services received are primarily personal care or custodial services, such as assistance in walking, getting in and out of bed, eating, dressing, bathing, and taking medicine.

Home Health Care Medicare pays the full cost of medically necessary home health visits by a Medicare-approved home health agency. These services are usually provided on a periodic basis by a visiting nurse or home health aide. To qualify for coverage, the individual must require intermittent skilled nursing care, physical therapy, or speech therapy, be confined to his or her home, and be under a physician's care. There is no deductible or coinsurance, and no prior hospitalization is required for home health care benefits. Coverage is provided for a portion of the DME cost provided under a plan of care set up and periodically reviewed by a physician.

Hospice Care Medicare pays for hospice care for terminally ill beneficiaries who choose to receive hospice care rather than regular Medicare benefits for management of their illness. Under Medicare, hospice is primarily a program of care provided in the patient's home by a Medicare-approved hospice. The focus is on care, not cure. Medicare Part A covers hospice care for individuals with a life expectancy of six months or fewer. Benefits are provided for up to two 90-day periods, plus an unlimited number of 6-day periods. There is no deductible or copayment, other than for prescription drugs.

Medicare provides respite care benefits for those in hospice care, under which a beneficiary is covered for an occasional stay of up to five days in a Medicare-approved inpatient facility so the normal caregiver can get rest. The beneficiary is required to pay 5 percent of the cost.

Part B—Supplementary Medical Insurance The coverage under the supplementary medical insurance is much like a major medical contract. It covers medically necessary services, such as physicians services and outpatient care, as well as some preventive services. Covered expenses include the following five categories:

1. Physicians' and surgeons' services, no matter where rendered, including those in a hospital, clinic, doctor's office, or even in the home
2. Home health services
3. Diagnostic tests, surgical dressings, splints, and rental or purchase of medical equipment
4. All outpatient services of a participating hospital, including diagnostic tests and treatments
5. Specific preventive services, including, for example, mammography, pelvic exams and Pap tests, diabetes and cardiovascular screening, prostate and colorectal cancer screening, vaccines for influenza, pneumonia, and hepatitis B, and annual wellness visits.

Benefits begin after a deductible ($147 in 2013), and nothing is paid until this initial expense has been met by the insured. Medical insurance pays 80 percent of the covered expenses in excess of the deductible, provided that the charges are reasonable (based on customary and prevailing charges). Some services are covered in full, including home health services and certain preventive services.

Although Part B generally does not cover outpatient prescription drugs, it does cover a limited number of them under certain conditions. Examples include oral anticancer drugs, injectable drugs for osteoporosis, and blood clotting factors for individuals with hemophilia. Coverage is provided for blood after a 3-pint deductible. Parts A and B of Medicare cover blood, and if the beneficiary meets the three-pint blood deductible under one part, it need not be met under the other part.

Besides the deductible and coinsurance, the individual may have additional out-of-pocket costs if the physician or medical supplier does not accept assignment of the Medicare claims and charges more than Medicare's approved amount. Assignment refers to the arrangement in which a physician agrees to accept the Medicare-approved amount as full payment for services and supplies covered under Part B.

Participating and Nonparticipating Physicians The fee schedule for a Medicare-participating physician—called the approved amount—is based on Medicare's Resource-Based Relative Value Schedule (RBRVS). The RBRVS varies the approved amount based on the time, training, and skill required to perform a given service, adjusted for overhead costs and geographic differences. For a Medicare-participating physician, Medicare will pay 80 percent of the RBRVS, and the Medicare participant is responsible for 20 percent. If a participating physician accepts assignment, he or she is not permitted to charge more than the RBRVS.

The approved amount for a nonparticipating physician is 95 percent of the RBRVS. If a participating physician refuses to accept assignment, he or she is permitted to charge up to 115 percent of the approved amount for nonparticipating physicians (i.e., 95 percent of the RBRVS), Medicare will pay 80 percent of the nonparticipating physician approved amount. The Medicare participant is responsible for the remaining 20 percent, plus the excess charge, that is, the excess over the approved amount.

Besides avoiding excess charges, another advantage of using physicians or suppliers who accept assignment is they are paid directly by Medicare, except for the deductible and coinsurance amounts for which the beneficiary is responsible. Physicians who do not accept assignment collect the full amount of the bill from the patient. Medicare, then, reimburses the beneficiary for his or her share of the approved amount for the services or supplies he or she received.

Physicians who do not accept assignment for elective surgery are required to give the patient a written cost estimate before the surgery if the total charge will be $500 or more. If the written estimate is not provided, the patient is entitled to a refund of any amount paid in excess of the Medicare-approved amount. In addition, a nonparticipating physician who provides services that he or she knows or has reason to believe Medicare will determine to be medically unnecessary (and, thus, will not pay for) is required to inform the patient in writing before performing the service. If written notice is not given, and the patient did not know that Medicare would not pay for the service, the patient cannot be held liable for payment of the service.

Private Contracts Outside Medicare The BBA-97 allowed doctors to opt out of Medicare and to enter into private contracts with beneficiaries to provide Medicare-covered services at a rate the doctor sets. Neither the beneficiary not the physician will be able to obtain Medicare reimbursement for the services. In exchange for the right to charge a fee in excess of 115 percent of the Medicare-approved rate, the doctor is barred from participating in Medicare for two years.⁷

Traditional Program Medicare Supplement Policies

Although enactment of the Medicare program in 1965 reduced the need for individual health policies for persons over 65, the Medicare program is subject to deductibles and coinsurance provisions. To fill the gaps between the cost of medical care and the reimbursement under Medicare, commercial insurers and Blue Cross and Blue Shield organizations have developed special policies, usually called Medicare supplement (Medigap) policies. Unfortunately, abuses developed in the sale of these contracts. Some contracts sold as supplements to Medicare were overpriced and inadequate in the protection they provided. In addition, a small number of unscrupulous agents preyed on older people, selling them multiple policies with duplicate coverage. As a result, the states and the federal government enacted legislation to regulate the sale of Medicare supplement policies.

Regulation of Medigap Insurance Most states adopted a National Association of Insurance Commissioners (NAIC) model act for regulating the sale of Medicare supplement policies, with provisions relating to sales practices and policy benefits. Despite these laws, however, abuses persisted. In 1990, as part of the Omnibus Budget Reconciliation Act (OBRA), Congress enacted measures to encourage the states to regulate Medicare policies more rigidly. Among other standards, in an effort to deal with the myriad of policy types that consumers faced, OBRA required the NAIC to promulgate a “core” of basic benefits that must be included in all Medigap policies plus a set of optional benefit packages that may be added to the core benefits. In response, the NAIC developed 10 standardized Medicare Supplement policies. The plans were revised to reflect the new Medicare Prescription Drug Program following the enactment of MMA-2003, and two new plans were added. In 2010, the NAIC amended the model, adding two new plans and dropping four. Today, ten standard plans are available for sale, but the plans that have been discontinued may still be held by individuals who purchased them prior to June 1, 2010.⁸

TABLE 22.2 Medicare Supplement Policies

Standard Medigap Contracts The NAIC's standard Medigap contracts have been assigned letter designations ranging from A through N. Plans E, H, I, and J are no longer sold. Plan A provides coverage for the following five benefits:

1. The insured's share of hospital charges (coinsurance) under Hospital Insurance (Part A coverage) for days 61 through 90 and days 91 through 150.
2. All charges for an additional 365 days in the hospital
3. The Part A and Part B blood deductible (3 pints)
4. The insured's 20 percent share of expenses covered under Part B
5. The insured's share of costs for hospice care under Part A.

Plans B, C, D, F, and G include the same basic package as Plan A plus different a combination of additional benefits, as indicated in Table 22.2.

Plan F may be marketed as a high deductible plan. Under the high deductible versions, the insured is required to pay the first $2110 in 2013. (This amount will be inflation-adjusted in future years.) In addition to the $2110, the insured must pay a separate deductible for foreign travel emergencies of $250 per year.

Plans K and L provide coverage for a similar set of basic benefits but with higher initial cost-sharing and maximum limits on the insured's out-of-pocket expenses. As can be seen from Table 22.2, Plan K covers only 50 percent of some costs, while Plan L covers 75 percent. The out-of-pocket limits in 2013 were $4800 for Plan K and $2400 for Plan L. These amounts will increase in future years. Once the limit is met, the plan pays 100 percent of Medicare Part A and B copayments and coinsurance for the rest of the calendar year. Plans M and N were new in 2010.

Each state must allow the sale of Plan A, and all Medigap insurers must make Plan A available if they are going to sell any Medigap plans in a state. Although not required to offer any of the other 9 plans, if an insurer offers any other plan, it must offer plans C and F. Most insurers offer several plans to pick from, and some offer all 10 plans. Insurers can independently decide which of the optional plans they will sell, as long as the plans they select have been approved for sale in the state. Insurance companies may not change the combination of benefits or the letter designation of any of the plans.

The limitation on the number of plans and the standardization of the plans from insurer to insurer is designed to make it easier for consumers to make informed choices. Medigap insurers must use the same format, language, and definitions in describing the benefits of each Medigap plan and must use a uniform chart and coverage outline to summarize the benefits. Because each company's products are alike, insurers must compete on the basis of service, reliability, and price.

Other Federal Standards In addition to the standardized policies, federal law requires that state regulation of Medicare supplement policies meet the following standards:

• Medigap insurers must accept all applicants for coverage within the first six months after they enroll in Medicare after age 65, regardless of health. No one can be rejected because of illness, injury, or a preexisting condition. This is known as the open enrollment period.
• Preexisting conditions must be covered, but a probationary or waiting period not exceeding 6 months is permitted. If the policy is purchased during the open enrollment period, the waiting period must be reduced by the number of months of creditable coverage.⁹
• Medigap insurers must accept all applicants with guaranteed issue rights with no preexisting conditions exclusion. A number of circumstances can create guaranteed issue rights, for example, if the insured's Medigap carrier becomes insolvent, the insured's plan is discontinuing coverage in that area, coverage under an employer group plan is ending, or if the insured moves out of the plan service area. Several specific situations relate to Medicare Advantage and the Medicare Prescription Drug Program.¹⁰
• Medigap policies must be guaranteed renewable.
• The benefits under Medigap policies that are designed to cover cost-sharing features of Medicare must change automatically to coincide with any changes in the Medicare deductible and coinsurance percentages. Insurers are permitted to change the premiums to reflect the changes in coverage.
• The contract must provide coverage.
• Selling duplicative policies is prohibited. Insurance agents are required to obtain, in writing, a statement from the buyer about his or her eligibility for Medicare and whether he or she has other Medicare supplement insurance.
• Selling policies to an individual in a Medicare Advantage plan is prohibited unless his or her enrollment in the Medicare Advantage plan is ending.
• Insurers must achieve a minimum loss ratio (MLR) of 65 percent on individual Medigap policies and 75 percent on group policies.

Finally, in addition to the other requirements, federal law requires the seller to deliver a Medicare Supplement Buyer's Guide to purchasers. Buyers are granted a 30-day free look during which the policy can be canceled and returned for a full refund.

Unlike some types of health coverage that restrict where and from whom the insured may receive care, Medigap policies generally pay the same supplemental benefits regardless of the beneficiary's choice of health care provider. If Medicare pays for a service, wherever provided, the standard Medigap policy must pay its regular share of benefits. In some states, however, individuals may purchase Medicare Select policies. These plans provide the same benefits as traditional Medigap policies, but they are network plans and pay reduced or no benefits if the insured uses non-network providers (except in emergencies).

Medigap Premiums Although the benefits are identical for all Medigap plans of the same type, the premiums may vary from one company to another and from area to area. Insurance companies use three different methods to calculate premiums: issue age, attained age, and no-age rating. Under the issue age method, the premium varies with the insured's age when the contract is purchased but does not increase as the insured becomes older. Under the attained age method, the premium is based on the insured's current age and increases as he or she grows older. Under no-age rating, everyone pays the same premium regardless of age.

Part C—Medicare Advantage

The BBA-97 introduced Medicare Part C, originally called Medicare+Choice. The program was modified somewhat in MMA-2003 and renamed Medicare Advantage (MA). Some have characterized Medicare Advantage as the “privatization” of the Medicare system. Medicare beneficiaries may continue to participate in Original Medicare (the program's traditional fee-for-service program), or they may elect one of several alternatives to the traditional Medicare program. Today, nearly all Medicare beneficiaries have access to an MA plan, and 27 percent of Medicare beneficiaries were enrolled in an MA plan in 2012.

The goal of the MA program is to contain costs in Medicare by injecting private competition into the system and encouraging more beneficiaries to enroll in managed care plans. Health care in the United States has been transformed by the HMO-based managed care plan, and MA is an attempt to move Medicare in the same direction.

There are five types of MA plans:

• Health Maintenance Organization (HMO) Plan
• Preferred Provider Organization (PPO) Plan
• Private Fee-for-Service (PFFS) Plans
• Medicare Medical Savings Account (MSA) Plans
• Medicare Special Needs (MSN) Plans

To become an MA plan, an organization must submit its terms of coverage, premiums, and copayments for federal approval. If approved, the organization contracts with Medicare to serve particular geographic areas for a one-year period. The organization receives a monthly capitation from Medicare for each Medicare beneficiary in the plan, the beneficiary continues to pay the Part B premium, and the plan is permitted to charge an additional monthly premium.

Benefits under an MA plan include the typical benefits of Parts A and B. The plans may offer additional benefits, and most do. Premiums and copayments vary from plan to plan. In a few cases, the amount Medicare pays the plan is adequate to cover expenses, and the plan pays all or part of the insured's Part B premium. The annual enrollment period for MA runs from November 15 to December 31 of each year. During that period, beneficiaries may enroll in any MA plan or switch from an MA plan to Original Medicare. A beneficiary elects an MA plan by filing an enrollment form with the plan. Beneficiaries who fail to make an election will remain in the Original Medicare plan. An MA plan may not deny enrollment to an eligible individual based on health status or other factors.¹¹

HMO and PPO Plans Medicare HMOs have been an option under Medicare since the 1970s, and the BBA-97 authorized PPOs. As with other HMOs, the MA HMO offers a network of providers and provides out-of-network coverage only for emergencies. An MA PPO allows the beneficiary to use providers outside the network for an additional cost. HMO and PPO plans must offer at least one option that provides prescription drug benefits.

Managed care plans are subject to several patient protection requirements for beneficiaries dealing with Medicare managed care plans. These include full disclosure, emergency services, quality assurance, appeals and grievance procedures, and a gag rule prohibition. The term gag rule refers to the policies reportedly adopted by some managed care organizations that forbid their doctors from recommending or mentioning certain types of treatment because the treatment may be expensive.

The MMA-2003 created new regional PPOs in an attempt to increase access for beneficiaries in rural areas. Prior to MMA-2003, HMOs and PPOs were permitted to define their own service areas, and they typically avoided serving sparsely populated rural areas. MMA-2003 created regional PPOs, which are required to do business in regions defined by CMS, including urban and rural areas.

PFFS Plans PFFS plans are fundamentally different from the HMO and PPO managed care options in Medicare Advantage. They more closely resemble the traditional Medicare fee-for-service plan than they do managed care. A beneficiary who enrolls in a PFFS plan is permitted to use any provider, and the plan pays the provider on a fee-for-service basis. However, the plan sponsor is a private organization that contracts with Medicare, is paid on a capitated basis, and is, thus, “at risk.”

PFFS plans are exempt from many of MA's requirements that apply to the HMO and PPO plans, such as requirements to have a provider network, to have quality and utilization review policies, or to offer a prescription drug benefit. PFFS plans are not permitted to put providers at financial risk.

MSA Plans Medical Savings Accounts Plans are similar to HSAs available outside of Medicare. This arrangement combines a high-deductible MA plan with a Medical Savings Account for medical expenses that are not paid for by the plan. The deductible in 2013 varied by plan but could be no more than $10,900. After the deductible is met, the plan pays 100 percent of the costs.

MSN Plans A Medicare Special Needs Plan is designed for people with certain chronic diseases and other specialized health needs. The majority of enrollees in MSN plans are dual eligibles, that is, individuals eligible for Medicare and Medicaid.

Payments to Organizations Medicare pays plans a monthly capitated rate to MA plans to cover the cost of Parts A and B benefits provided to enrollees.¹² Beginning in 2006, Medicare paid MA plans based on a capitation rate determined through a bidding process. CMS establishes a benchmark for each county. This benchmark is based on the prior year's MA payment rate, increased by the projected per capita growth rate. If a plan's bid is higher than the benchmark, enrollees pay the difference in the form of a monthly premium. If the bid is lower, the Medicare program retains 25 percent of the savings, and the plan retains the other 75 percent. The amount retained by the plan is required to be returned to enrollees in the form of other supplemental benefits or lower premiums. Payments from Medicare to the plan are, then, based on the benchmark adjusted for enrollee risk. In the case of an MA MSA Plan, the organization's bid will be less than the benchmark, and the entire difference is contributed to the individual's MSA.

Medicare Advantage plans have proven to be popular. Between 2007 and 2012, the percentage of beneficiaries enrolled in MA plans increased from 19 to 27 percent. They have their critics however. Opponents argue that the MA program will create a multitiered system within Medicare, in which the healthy individuals will shift into managed care plans while the sicker and more expensive beneficiaries will stay in the traditional fee-for-service plan. Indeed, there is evidence that the population of individuals insured by MA plans is generally healthier than those in Original Medicare. As discussed later, the ACA has reduced funding for MA plans.

Part D—Prescription Drug Coverage

When Medicare was enacted in 1965, the central core of health care treatment consisted of hospital inpatient procedures. The use of prescription drugs outside the hospital was insignificant, and Medicare did not provide coverage for those expenses. The development of several hundred new medicines since 1965 has changed the focus of modern medicine to rely more on pharmaceuticals to treat and prevent illness. As a result, there was agitation for expanding Medicare coverage to include prescription drugs. The MMA-2003 authorized the new Medicare Part D, Prescription Drug Coverage, which was offered beginning January 1, 2006. Any individual entitled to Medicare Part A and/or enrolled in Medicare Part B is eligible to enroll in a Part D plan, and the enrollment period matches the enrollment period for Part B. Part D coverage is available through two mechanisms: (1) Medicare Advantage Plans and (2) stand-alone Medicare Prescription Drug Plans (PDPs) offered by a private company. Over 60 percent of those enrolled in a Part D plan are in a Prescription Drug Plan.

Medicare Prescription Drug Plans A Medicare PDP is a stand-alone plan offered by private companies but approved by Medicare. In 2013, a total of 1,031 plans were offered nationwide, and the average beneficiary had a choice of 31 different plans.

Coverage varied by plan, including deductibles, coinsurance, and copayments, but the plan was required to provide benefits with an actuarial value at least equal to the standard benefit described below. Each Medicare PDP has its own formulary, a list of drugs the plan agrees to cover, and a pharmacy network. Because formularies and networks vary by plan, insured must examine the benefits under the policy in light of his or her prescription drug needs.

Part D stand-alone plans must offer a defined standard benefit or an alternative of at least equal value (“actuarially equivalent”). To reduce the plan's costs while providing some level of benefits to all enrollees, Congress designed the standard benefit to provide some level of coverage at low limits and a layer of catastrophic coverage. However, between the lower layer and the catastrophic layer, the enrollee was responsible for 100 percent of the cost of the drugs, a gap known as the donut hole.

Not surprisingly, there was considerable confusion and dissatisfaction among beneficiaries who reached the donut hole and were suddenly required to pay 100 percent of the cost of their prescription drugs. Congress addressed the problem in the ACA, which contains features designed to phase out the donut hole by 2020. Beginning in 2011, Part D enrollees who reached the donut hole received a 50 percent discount on brand name drugs funded by pharmaceutical manufacturers under the Medicare Coverage Gap Discount Program. Over the next 10 years, Medicare will phase in additional coverage, until the beneficiary coinsurance for brand-name and generic drugs is 25 percent.

The standard benefit in 2013 had a $325 deductible and paid 75 percent of drug costs up to $2,970 in total drug costs. After that, donut hole coverage was provided until total out-of-pocket costs reached $4,750. In the donut hole, beneficiaries paid 47.5 percent of the cost of brand-name drugs and 79 percent of the cost of generic drugs. Beyond the donut hole, the catastrophic coverage begins, and the enrollee pays the greater of 5 percent or a drug copayment ($2.65 for generic drugs, $6.60 for others in 2013). The standard prescription drug benefit is illustrated graphically in Figure 22.1.

FIGURE 22.1 Standard Medicare Prescription Drug Benefit, 2013

The PDP benefit structure may differ from the standard benefit plan as long as it is at least equal in value. Most, however, have a coverage gap similar to the donut hole. In 2013, about 30 percent of PDPs provided greater coverage in the donut hole for either generic drugs or both generic and name-brand drugs. Plan deductibles vary, with no deductible in 45 percent of PDPs.¹³

Medicare pays for 74.5 percent of the cost of the standard benefit, and each plan collects a premium from the beneficiary to cover the remaining cost. The average premium in 2013 was about $40 per month although plans with premiums below $20 and over $100 were available. In addition, the ACA introduced a new income-related Part D premium in 2011, similar to the income-related premium for Part B. Higher income individuals will pay a surcharge designed to increase their share of the standard benefit cost. The surcharge amount is based on the same income brackets as the Part B premium increase, applying the same percentages (35, 50, 65, and 80) to the national average cost of the standard drug benefit. As with Part B, the income thresholds are frozen through 2019.

For example, an individual with income between $85,001 and $107,000 and filing as an individual would pay a surcharge to increase his or her share of the cost of the standard benefit from 25.5 percent to 35 percent. According to the CMS, the cost of the normal beneficiary share (25.5 percent of the standard benefit) is $31.17. This number, known as the Part D base beneficiary premium, is updated each year and is the basis for calculating the surcharges. In 2013, the surcharges for the four income brackets were $11.60, $29.90, $48.30, and $66.60. The surcharge is collected separately from the Part D premium paid to the plan, typically as a withholding from the beneficiary's Social Security payment.

Assistance for Low-Income Beneficiaries Federal funding is provided to assist low-income beneficiaries with their Medicare premiums, deductibles, and copayments. There are separate programs. The first assists individuals with the Original Medicare program, and the second assists individuals in paying for the new Medicare Prescription Drug Coverage.

Assistance for Part A and Part B Costs State Medicaid offices offer programs designed specifically to help certain low-income Medicare beneficiaries cover their costs under Parts A and B of Medicare. An individual eligible for this assistance is categorized as a Qualified Medicare Beneficiary (QMB), Specified Low-income Medicare Beneficiary (SLMB), Qualified Individual (QI), or Qualified Disabled and Working Individual (QDWI). Collectively, these programs are sometimes knows as the Medicare Savings Programs.

A QMB is an individual with limited savings and other resources whose income is at or below 100 percent of the FPL.¹⁴ The program will cover all the Medicare Parts A and B premiums, deductibles, and coinsurance for a QMB. An SLMB is an individual with limited savings and resources and an income between 100 and 120 percent of the FPL. SMLBs do not have to pay the monthly Medicare Part B premiums. A QI has income between 120 and 130 percent of the FPL. Medicaid will pay the Medicare Part B premium for a QI, but states have a limited amount of funds available, and funds are distributed on a first-come-first-served basis. Finally, QDWIs are individuals who were receiving Medicare owing to disability, lost eligibility because they returned to work, have limited savings and other resources, and have incomes below 200 percent of the FPL. They can purchase Medicare Part A, and Medicaid will pay their monthly Medicare Part A premiums.

Assistance for Part D Costs When it created the Medicare Prescription Drug Program, Congress included substantial premium and cost-sharing subsidies for Medicare beneficiaries with low incomes and few resources. Dual eligibles (i.e., individuals who qualify for Medicare and Medicaid) automatically qualify for these subsidies, as do QMBs, SLMBs, QIs, and QDWIs. These categories will generally cover anyone with limited resources and incomes below 135 percent of the FPL. These individuals pay no Part D premium or deductibles, and copayments of $2.65 and $5.60 for brand-name and generic drugs (in 2013), respectively. Copays are capped after total drug spending reaches $6634 (in 2013). Dual eligibles in nursing homes have no drug copayments.

Assistance is offered to other Medicare beneficiaries with limited resources and incomes between 130 and 150 percent of the FPL, but they must apply for the program. Once enrolled, the beneficiary pays a monthly premium dependent on income. He or she is responsible for a $66 annual deductible (in 2013), must pay 15 percent of total costs up to $6634 (in 2013), and has a copay per prescription after that ($2.65 for generic drugs and $6.60 for brand-name drugs).

Approximately 30 percent of Medicare beneficiaries are eligible for low-income subsidies for Part D. CMS estimates that nearly a quarter (24 percent) of those individuals are eligible for a low-income subsidy but have not applied.

The Financial Condition of Medicare

Medicare Cost Controls The cost of the Medicare program has been a problem for Congress since the program began in 1965, with expenditures exceeding predictions from the beginning. When the program was enacted, costs were projected to reach $12 billion in 1990; they were $110 billion (after inflation). Costs have continued to increase, and in 2012, the Trustees of the Medicare trust funds issued their sixth consecutive warning that the funds were financially unsound. Unfortunately, it has been easier to recognize the problem than to design the reforms ensuring solvency in the future.

In the past, most attempts to control the increasing costs have focused on the way providers are reimbursed. In 1984, Medicare introduced a new system for reimbursing hospitals, a prospective payment system (PPS), based on diagnostic-related groups (DRGs). Under this system, the hospital is paid a flat amount based on the patient's diagnosis, rather than an amount that varies with the number of days the patient is hospitalized. The flat amount is based on the average resource use for the patient's DRG. It was hoped this would give hospitals an incentive to provide care efficiently since they are not compensated for excessive use of health care resources. The RBRVS approach to compensating physicians, mentioned earlier, was introduced in 1989. In spite of the implementation of DRGs and RBRVS, Medicare costs have continued to explode. Although payments for specific procedures were controlled under RBRVS, utilization exploded as the number of procedures increased and hospitals learned how to optimize their diagnoses coding in the presence of DRGs.

The BBA-97 introduced a limit on the growth of physician reimbursements, known as the Sustainable Growth Rate (SGR), aimed at ensuring the annual increase in the cost per beneficiary did not exceed the growth in gross domestic product (GDP). Under this rule, if expenditures exceeded what was allowable, the physician fee schedule would be reduced for future years. Physician opposition to the reductions has been strong, and Congress has taken a series of legislative actions to prevent or moderate them since 2003, under what are known as “doc fixes.” There has been no adjustment since 2010, and most recently, the American Taxpayer Relief Act of 2012 (ATRA-2012) deferred a 26.5 percent reduction in physician fees for 2013 to January 1, 2014. The search for a permanent doc fix continues. Most experts expect that it will be delayed again at that point.

The ACA contained a number of provisions aimed at slowing the increasing Medicare costs. It cuts payments to MA plans, tries to further lower the increase in payment rates to providers, and strengthens efforts to fight fraud. Future increases in provider reimbursement for a particular service would be reduced to account for improvements in productivity, estimated to average 1.1 percent a year. Other ACA provisions intending to control cost, include the following:

• Promotion of Accountable Care Organizations (ACOs) through provider payment arrangements. ACOs are delivery systems that combine teams of hospitals, physicians and other health care providers to deliver coordinated care. If an ACA meets certain quality and efficiency benchmarks, it is able to receive additional compensation.
• A new Center for Medicare and Medicaid Innovation to test payment and delivery innovations that can improve the quality of care and/or increased cost efficiency. These include new payment systems aimed at reducing preventable hospital admissions and certain hospital-acquired conditions (such as bed sores and injuries from falls), under which hospitals will be rewarded or penalized based on their performance.
• A new Independent Payment Advisory Board (IPAB) that will monitor the Medicare program's fiscal health and recommend revisions to control increases in costs. The IPAB is a group of 15 experts appointed by the President and approved by the Senate. If Medicare spending growth exceeds certain targets, the IPAB must recommend ways to hold down costs. The IPAB's recommendations will automatically take effect unless Congress enacts an alternative measure within 6 months that achieves the same level of savings.

According to CMS, Medicare-related provisions in the ACA will reduce Medicare spending by $417.5 billion over the 10 years from 2010 to 2019. Critics point out that the bulk of these savings come from cuts to MA plans ($145 billion) and cuts to providers based on improvements in productivity ($205 billion). Given the historical failure of prior efforts to cut provider reimbursement, there is understandable skepticism regarding whether these cuts will be successful. According to the Trustees of the Medicare Trust Funds, if the scheduled cuts to physician reimbursement rates (including the SGR) are all implemented, “Medicare beneficiaries would almost certainly face increasingly severe problems with access to physician services.”

Medicare faces the same problems associated with the aging of the baby boomers OASDI, but exacerbated by increasing health care costs. In fact, Medicare's financial difficulties are more severe than those facing the Old-Age, Survivors, and Disability Insurance (OASDI) system. Expenditures from the Hospital insurance (HI) Trust Fund currently exceed income, and even assuming current cost-cutting measures are implemented, the HI Trust Fund will be exhausted by 2024. As with the Social Security Trust Funds, the Medicare Trust Funds balances are invested in Treasury securities, and these securities are gradually being redeemed to pay a portion of the benefits due each year. According to the Trustees, current funding fails the test of short-range and long-range financial adequacy.

The Supplementary Medical Insurance (SMI) Trust Fund, which pays benefits for Parts B and D, is stronger because the premiums and federal contribution automatically increase each year to meet the following year's expected costs. Federal contributions are projected to increase, but even these projections assume substantial reductions in physician reimbursement rates that are unlikely to happen.

Proposals for Reform

A number of proposals have been made to strengthen the long-run solvency of the Medicare system, but policymakers have fundamental disagreements on the solution. The proposed solutions can be broadly defined as (1) those that build on the current structure, modifying eligibility age, benefits, premiums, and payroll tax rates to achieve financial stability, and (2) those that fundamentally change the program's structure in an attempt to harness private market forces. The debate over these two different directions has been vigorous.

Building on the current program. Proposals that build on the current program include raising the Medicare eligibility age, increasing copayments, increasing premiums, particularly for higher-paid individuals, increasing the payroll tax rate, and strengthening the powers of the IPAB.

• Eligibility age. As was mentioned in Chapter 11, the eligibility age for normal retirement benefits in Social Security is moving from 65 to 67. For Medicare, however, the eligibility age remains at 65. To slow the growth in Medicare spending, some have suggested increasing the eligibility age to 67 or higher and indexing it to longevity, so it will continue to increase. Critics have raised concerns about early retirees and their ability to get affordable health insurance coverage. Following implementation of the ACA, this concern was lessened, given the age guaranteed issue requirements and age rating bands mandated by the ACA-2010.
• Copayments. Currently, Medicare does not charge a copayment for home health care or for the first 20 days in a skilled nursing facility. Some have suggested adding copayments for these services, as well as increasing copayments for prescription drug benefits.
• Premiums. As discussed earlier, premiums for Parts B and D are tied to income, with higher-income individuals paying higher premiums. Even at the highest income levels, however, premiums for Parts B and D cover about 80 percent of the cost. Some have suggested revising these amounts so that upper-income individuals pay 100 percent of their cost. Other proposals include adding a premium for Medicare Part A and increasing the premium for Parts B and D.
• Payroll Taxes. In 2012, the Trustees of the Medicare Trust Funds estimated the long-range financial imbalance in the HI Trust Fund could be addressed by immediately increasing the standard 2.9 percent payroll tax (1.45 percent each for employer and employee) to 4.25 percent, a 47 percent increase in payroll taxes for Medicare. Needless to say, such a tax increase has its critics.
• The IPAB. When Congress created the IPAB, it placed restrictions on the ways the IPAB could reduce Medicare costs. It cannot raise premiums, reduce benefits, or ration care. It can, however, reduce payments to physicians and hospitals. Some proposals for Medicare reform would give the IPAB greater authority to modify the program to control costs.

Harnessing Market Forces. Some policymakers suggest taking a different direction with Medicare, turning it into a program in which market forces would promote cost control. Supporters point to the Part D program's success, where consumers have choice, plans completed, and costs have been lower than projected. The most significant element of the market-driven approach is the Premium Support Plan, in which beneficiaries would receive vouchers to enable them to purchase private insurance. Related to this are proposals to modify benefits to make them more similar to standard major medical insurance, and proposals to discourage individuals from obtaining first-dollar coverage through Medicare Supplement policies.

• Premium Support. The most dramatic proposal to control costs is the Premium Support Plan. This arrangement would convert the Medicare program from a system of defined benefits paid for by Medicare to a defined contribution system in which beneficiaries are able to select their own insurer. Supporters of this approach contrast it with a system in which costs are controlled through “an unelected board that sets fees for doctors and hospitals.” Various Premium Support proposals exist, varying by how the voucher amount is determined and whether the current Medicare fee-for-service system continues as an option. Under one proposal, CMS would seek bids from insurers for a defined set of benefits. Each beneficiary would be given a voucher for the premium of the second-lowest cost plan. If they choose a higher cost plan, they must pay the difference. If they choose the lowest cost plan, they may keep the savings.
• Benefit redesign. Some experts suggest redesigning the current benefit structure to focus on catastrophic medical expenses. They would provide a single deductible that applies to combined Part A and B benefits, coinsurance for expenses above that level, and a maximum out-of-pocket limit, similar to a typical major medical policy. Proponents believe such a revised benefit structure is more likely to encourage efficient utilization patterns.
• Medicare Supplement (MedSupp) policies. Some experts argue that the first-dollar coverage provided by some Medicare Supplement policies (specifically Plans C and F) promote overutilization of health care. They would prevent first-dollar benefits in MedSupp policies and/or tax such policies. The ACA required the NAIC to review the benefit designs for Plans C and F and consider incorporating additional cost-sharing elements, but in November 2012, the NAIC advised U.S. Department of Health and Human Sevices (HHS) that it did not support changing the benefit design.

The need for reform of the Medicare system is clear. The debate over how to do so is vigorous. At this point, the outcome of the debate is unclear.

LONG-TERM CARE INSURANCE

Long-term care (LTC) insurance is a recent innovation, prompted by the enormous costs associated with the health care needs of the aged. With the increase in life expectancy and improved medical care, the number of Americans age 65 and older is increasing more rapidly than the remainder of the population. The number of persons age 85 and older has grown at an even faster rate than for the 65-and-older group. For various social and economic reasons, an increasing number of our aged are spending their final days in nursing homes and assisted-living facilities, with annual costs of $40,000 to $90,000 or more per year. It is not a criticism of the LTC industry to observe that the cost of LTC has reached a point that few individuals can afford to use personal resources.

Nature of the Long-Term Care Exposure

Although there is a tendency to think of LTC insurance in the traditional terms of accident and sickness, the need for LTC is different from the need for other types of medical care. Many people who require LTC are not “sick” in the traditional sense. They are old and frail, and although they may not require traditional types of medical services, they do need assistance with the activities of daily living.

Two kinds of LTC may be delineated: institutional care (nursing homes and assisted-living facilities) and home and community care. Although some elderly persons require care provided only in an institution, other elderly persons do not need institutional care. Their needs can be met in the community, by people with various skills, including health care professionals and others who provide assistance with the activities of daily living (ADLs). Although the earliest LTC insurance versions provided coverage only when care was provided in a nursing home, LTC policies increasingly provide coverage for care delivered in the community.

Inadequacy of Medicare for Long-Term Care Needs

Although Medicare addresses two facets of the LTC need (nursing home and home health care), it does so on a restrictive and limited basis. With respect to the nursing home environment, coverage under Medicare is limited to skilled care, which, as noted, may not be the care level required by a person who is not sick in the traditional sense but who needs assistance with the ADLs. In addition, home care is covered only if it occurs within 30 days of a three-consecutive-day hospital stay for the same condition that requires admission to the nursing facility. Further, a physician must certify the need for the skilled care on a daily basis, and the skilled nursing home facility must be certified by Medicare.

If all four requirements have been met, up to 100 days of skilled nursing care benefits are provided. For the first 20 days, Medicare will pay 100 percent of the approved amount. For days 21 through 100, the patient is required to make a copayment ($148 per day in 2013.) Medicare benefits terminate after 100 days, and the patient becomes responsible for all costs. Most important, no coverage exists for intermediate care or custodial care.

For home health care, Medicare will pay the cost of medically necessary home health visits that meet specified conditions. Only part-time or intermittent home care is covered (defined as care that is required at least four or fewer times a week). Further, the patient must be housebound, unable to leave the house except with assistance. The patient must be under a physician's care, and the physician must certify the need for home health care. Finally, as in the case of nursing home care, the home health care agency must be certified by Medicare.

Medicare supplement policies issued by private insurers supplement Medicare but do not provide coverage for extended care. The need, therefore, exists for a form of insurance that will assist in meeting the LTC costs for the aged. LTC coverage was developed by insurers to meet this need.

Development of LTC Insurance

The introduction of LTC insurance created a challenge for insurers and insurance regulators. The exposure is new, and the manner in which coverage is structured and priced is evolving. Some features in the earliest LTC policies produced complaints from consumer groups that led to specific regulations for this coverage. The earliest contracts, for example, usually required prior hospitalization before benefits were payable. This requirement was criticized because many persons in need of nursing home care do not have recent hospital confinement. Other policies limited coverage to skilled nursing facilities and provided no protection to persons whose primary LTC need was custodial. Recent policies have eliminated these defects, owing to competition among insurers and to the imposition of regulatory requirements.

The NAIC Model Law In the 1980s, the NAIC adopted a model law and regulation specifying minimum standards for LTC policies. The NAIC model law requires that LTC policies be guaranteed renewable, which, as we have seen, means the renewability must be guaranteed and the premium may be changed at renewal only for an entire class of insureds. Although the NAIC model law permits cancellation under extreme circumstances, the law spells out the causes for cancellation. The policy must be incontestable on the basis of misrepresentations after two years. The only allowable illnesses or conditions that may be excluded are those arising from preexisting conditions, war, attempted suicide, participating in a felony, service in the armed forces, aviation as a non-fare-paying passenger, or mental or nervous disorders. Coverage for Alzheimer's disease must be included. Insurers are required to offer an inflation protection option. It may provide for annual increases in benefit levels or for the right to purchase increased benefits without evidence of insurability. Finally, the model law specifies a minimum loss ratio of 60 percent for LTC policies.

In 2000, the NAIC amended the Long-Term Care Model Act and Regulation in response to consumer complaints about increasing rates. When insurers first marketed LTC insurance policies, they set premiums based on expected losses as they do for all lines of insurance. Unfortunately, insurers had limited experience with LTC insurance and little relevant historical data on which to base their prices. By the 1990s, most realized the policies were underpriced, and insurers began increasing the premiums. Although many of these increases occurred despite the insurer's best attempt to develop accurate initial rates, some insurers may have engaged in “low-balling,” i.e., charging low initial rates to get the business, fully intending to increase rates. The NAIC responded in 2000 by amending the NAIC Long-Term Care Insurance Model Act and Regulation to provide greater regulatory oversight over rates. The Model now requires actuarial certification that initial rates are adequate and provides incentives for insurers to charge adequate initial rates. In addition, the amendments gave policyholders the right to amend their coverage in response to significant cumulative rate increases by reducing the amount of coverage or by converting to paid-up status. Finally, the amendments require the insurer to provide greater disclosure on historical rate increases.¹⁵

Coverage of LTC Policies

The typical LTC policy provides coverage for care in a facility, including skilled nursing, custodial care, and assisted-living facilities. Increasingly, coverage is provided for home care or for services provided by an adult day care center. Policies pay a specified amount per day for a designated period or incurred expenses up to an aggregate limit, subject to a elimination-period deductible. Within this broad framework, there are a variety of permutations among the policies offered by different insurers.

Benefit Limits There are two broad approaches to the benefit structure of LTC policies. Under the earliest approach, which predominates, coverage is provided for a specified limit per day, with benefits payable from one to five or six years and, in the case of some insurers, for life. The maximum daily limit available varies by company, but some insurers have daily limits up to $400. Some policies pay the full daily benefit selected, regardless of the charges for the long-term care services provided. Other policies pay the charge incurred for the LTC services up to the daily limit selected.

The second type of benefit period available is not measured in days, months, or years, but in dollars. It is called a pool of money concept and is becoming popular among insurers. Rather than specify a time period, benefits for LTC services are paid from a single lifetime maximum number of dollars. A $100-per-day benefit payable for five years represents $182,500 (365 × 5 × $100). Under a pool of money policy, a $182,500 policy limit is available to pay for whatever long-term care expenses are incurred and benefits are payable for as long as the maximum amount lasts, regardless of the time period.

Increasingly, home care benefits are being included in LTC policies. The NAIC model law does not require that LTC policies include home care benefits, but if the policy does include home care, it may not be subject to a step-down requirement (a requirement that the insured was previously confined in a hospital or skilled nursing facility to be eligible for home care benefits). Further, home care benefits cannot reduce the duration of institutional care provided by the policy. When home care benefits are provided, they must include services provided by custodial care workers and agencies not certified by Medicare. The daily benefit for home care, when it is not subject to the same limit as for nursing home care, is usually 50 percent or 60 percent of the daily limit for nursing home care. Many policies include benefits for respite care.

A respite care benefit provides payment for substitute care given when the primary caregiver (usually a relative) takes a vacation or break from the caregiving task.

Elimination Periods As noted in Chapter 20, for disability income policies, elimination periods shorter than 90 days have disappeared from the market or have become too expensive for serious consideration by the knowledgeable buyer. For LTC policies, however, elimination periods as short as zero (first-day coverage) are available. In addition to the zero-day elimination period, LTC elimination periods are available for 15, 20, 30, 60, 90, 100, 120, 150, 180, and 365 days. A 20-day elimination period is a common choice because Medicare's skilled nursing coverage ceases 100 percent payment beginning on the 21st day. Some policies use separate elimination periods for nursing home confinement and home health care, usually with a shorter elimination period for home health care, which tends to be the more common need.

LTC Coverage Trigger LTC policies typically use some combination of the three following triggers to determine eligibility for benefits:

1. The inability to perform a certain number of ADLs
2. Suffering from a cognitive impairment, such as Alzheimer's or Parkinson's disease
3. A medical necessity, as prescribed by a physician, for LTC services

The activities of daily living (ADLs) are a set of self-maintenance activities designed to measure one's ability to perform routine personal care functions. LTC policies have traditionally defined eligibility for benefits in terms of the insured's inability to perform a specified number (one or two) of the policy's ADLs (usually five to seven). Because LTC policies are not standardized, they have differed in the number of ADLs listed and in the number the insured must be unable to perform to receive benefits. The greater the number of ADLs listed and the fewer required for benefits, the broader the coverage. The activities usually listed include eating, bathing, dressing, walking (sometimes called mobility), toileting, transferring (moving from one place to another, such as from a bed to a chair), and continence (the ability to control one's bowel and bladder functions).

Inflation Protection The NAIC model law requires that insurers offer some type of escalator clause or option to address inflation. One permissible option is a provision that automatically increases benefit levels at a compound rate of at least 5 percent annually. In some policies, the increase is on a simple, rather than compound, basis. As an alternative, the insured may be granted the option of periodically increasing benefit levels without evidence of insurability, as long as the option for the previous period has not been declined. Policies that agree to cover a specified percentage of reasonable charges without a specified maximum limit meet the inflation protection requirement. When offering a contract with inflation protection, the insurer must provide the applicant with a comparison of the increasing benefit levels and a policy under which benefits do not increase, along with a comparison of the premiums for coverage with and without increasing benefits.

Unintentional Lapses Because buyers of LTC policies may include persons who tend to be forgetful, the NAIC model law includes provisions designed to provide at least some protection against such inadvertent coverage termination. Before issuing an LTC policy, the insurer must give the applicant the option of designating at least one person (in addition to the applicant) who will be notified of an impending lapse for nonpayment of premium or a written waiver dated and signed by the applicant electing not to designate any additional persons to receive such notice. In addition, long-term policies may not lapse for nonpayment of premium unless the insurer, at least 30 days before the effective lapse date, has given notice to the insured and to those persons designated by the insured. Finally, LTC policies must include a reinstatement provision, permitting reinstatement after lapse if the insurer is provided with proof of cognitive impairment or the loss of functional capacity.

LTC Renewability The NAIC established the guaranteed renewable provision as the minimum standard for LTC policies, meaning that almost all LTC plans have conformed to this requirement. Given the problems insurers encountered writing disability insurance on a noncancellable basis, insurers have made no movement to go beyond the guaranteed renewable basis required by the NAIC model law.

Nonforfeiture Provisions One of the problems in marketing LTC policies has been the difficulty in spreading losses across age groups even though premiums vary with the age of the insured. The disinclination of younger consumers to purchase LTC insurance is perhaps understandable. Unlike permanent life insurance, most LTC policies have not had nonforfeiture or refund provisions, and the insured who lapses his or her policy forfeits the early premiums paid for protection. Most state laws allow a return of premium or cash value (nonforfeiture) benefit in LTC policies. Policies with a nonforfeiture feature generally cost about 20 percent more than policies without the option.

One of the newest offerings in the LTC insurance arena is a limited-payment (limited-pay) policy, similar to the limited-pay life insurance contracts. As the contract is designed, the insured can pay the premium in several large installments, which will pay for the policy for life in a few short years. This gives buyers the opportunity to purchase a paid-up LTC policy before retirement when their income and assets are higher. It would seem that as long as such contracts do not include provision for prepayment withdrawal, they could still qualify for favorable tax treatment.¹⁶

Tax-Qualified Long-Term Care Insurance Since 1997, federal law has granted favorable tax treatment to premiums for and recoveries under tax-qualified long-term care insurance (TQ-LTCI), extending the same tax treatment to LTC insurance as has existed for other types of medical expense insurance.¹⁷ For employer-provided plans, LTC insurance is treated as an accident and health plan, which means that premiums are excludable in employees' gross income. Similarly, LTC insurance premiums are eligible for deduction from income by self-employed persons, up to the allowable limits discussed in Chapter 21. For individuals, premiums paid on qualified LTC policies are deductible as medical expenses for itemized deduction purposes. The annual amount deductible is limited and depends on the insured's age.¹⁸

Benefits payable under a TQ-LTCI contract are treated as amounts received for sickness and personal injuries, which are generally excludable from income. However, Internal Revenue Code (IRC) provisions place a cap on the amount of TQ-LTCI benefits excludable from income. Generally, if the total periodic LTC payments received from all policies exceed a per diem limitation, the excess must be included in income.¹⁹ The per diem limitation for 2013 is the greater of $320 or the costs incurred for qualified LTC services provided for the insured. The $320 per day ($116,800 per year) will be adjusted for inflation in later years.²⁰

A TQ-LTCI contract may only cover qualified LTC services. In addition, the contract (1) must be guaranteed renewable, (2) must not provide a cash surrender value, (3) must not provide refunds other than on the insured's death or the contract's surrender, (4) may use dividends only to reduce future premiums or to increase future benefits, and (5) must not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare.

Federal law defines TQ-LTCI as insurance that provides necessary diagnostic, preventive, therapeutic, curing, mitigating, and rehabilitative and maintenance or personal services to a chronically ill person. A chronically ill person is a person who has been certified as unable to perform, without substantial assistance, at least two ADLs for at least 90 days. The ADLs defined by federal law are (1) eating, (2) toileting, (3) transferring, (4) bathing, (5) dressing, and (6) continence. The IRC standard includes coverage for Alzheimer's by classifying a chronically ill person as one “who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.”

In some respects, coverage under TQ-LTCI may be narrower than available under other policies sold. For example, TQ-LTCI policies are not permitted to use the medical necessity trigger, chronic illness must be expected to last for at least 90 days, and cognitive impairment is covered only if the person requires “substantial supervision.”

Cost of LTC Insurance

LTC insurance costs varies among companies, so any attempt to cite specific costs is challenging. However, as an example, consider one LTC policy offered by one insurer in 2013. The policy provided $200 daily benefit, a five-year benefit period, and a 90-day elimination period, and a maximum lifetime benefits of $365,000. The monthly premiums for an individual purchasing the policy were as follows:

Some insurers offer a two-policy discount (usually 10 or 15 percent) when two spouses purchase coverage. The discount may be applied to the cheaper of the two policies or to both policies.

The Life Insurance Accelerated Benefits Alternative to LTC

Although cash values in life insurance policies can provide a cash source in the event of a terminal illness or the need for long-term care, cash values may be limited or nonexistent. An alternative is an agreement by the insurer to advance the policy proceeds under a provision known as living benefits. Living benefit riders agree to pay a part of the policy death benefit to policyholders who choose this way of paying nursing home or other bills.

Living benefits are usually offered in connection with permanent life insurance, under an accelerated benefits rider that stipulates the conditions under which the benefit is triggered. These usually include a designated catastrophic illness, a terminal illness, or the need for custodial or nursing home care that occurs after the insured has reached a specified age ranging from 65 to 85. Most policies specify a maximum limit for the benefit, expressed as a dollar amount, a monthly benefit, or a death benefit percentage. The most common approach is a monthly benefit equal to a percentage of the face amount of insurance (e.g., 1 percent or 2 percent per month). Generally, the benefit is treated as a lien against the death benefit. Initially, many companies charged from 10 percent to 15 percent of the basic premium for the coverage, but it has become more common to offer living benefit riders at no additional cost. Most companies charge interest on the amount of benefits paid and add the unpaid interest to the lien against death benefits.

An alternative to accelerated benefits is viatication.²¹ Viatication, which was discussed briefly in Chapter 17, refers to the sale of a terminally ill person's life insurance policy to a business firm that specializes in such transactions. These firms are generally referred to as viatical settlement companies. Until 1996, the tax treatment of accelerated death benefits and proceeds from viatication was unclear. Health Insurance Portability and Accountability Act (HIPAA) resolved this by adding IRC Section 101(g). Generally, Section 101(g) states that any amount received under a life insurance contract on the life of a terminally ill insured will be treated as an amount paid by reason of the insured's death. This will typically result in the amount being excluded from taxable income. This rule applies to both accelerated benefits and viatical settlements.²² Amounts paid to a chronically (but not terminally) ill person are subject to the same limitations that apply to TQ-LTCI contracts.

Combination Policies

The Pension Protection Act of 2006 (PPA-2006) contained features making it more attractive to purchase LTC benefit in conjunction with a life insurance or annuity policy. These provisions generally became effective in 2010 for policies purchased after 1996. This has become an increasingly popular way to arrange LTC insurance, and many insurers have developed combination policies. Typically, the LTC benefits are arranged by including an LTC rider on the basic life insurance or annuity contract, but a single integrated policy is sometimes used.

Under current rules, LTC insurance purchased in combination with a life insurance or annuity contract will be treated as a separate contract for purposes of determining whether benefits are taxed. If the LTC coverage meets the requirements for TQ-LTC, it will be treated as such.

In addition, PPA-2006 clarified the treatment of LTC premiums when a combination policy is purchased. Prior to PPA-2006, withdrawals from a policy's cash value to pay for LTC premiums were treated as a distribution and could be subject to income tax. Under PPA-2006, funds may be withdrawn from the underlying policy's cash value to pay long-term care premiums, and the withdrawal will not be treated as current income or subject to any penalties. The withdrawal will, however, reduce the policyholder's basis for tax purposes. Thus, the net impact will be to defer taxes on the amounts used to fund long-term care LTC benefits.

Another alternative with respect to life insurance policy proceeds is viatication. Viatication, which was discussed briefly in Chapter 17, refers to the sale of a terminally ill person's life insurance policy to a business firm that specializes in such transactions. These firms are generally referred to as viatical settlement companies. Initially, many companies charged from 10 percent to 15 percent of the basic premium for the coverage, but it has become more common to offer living benefit riders at no additional cost.

MEDICAID PLANNING

“Medicaid planning” is a euphemism used by some attorneys who encourage upper-middle-class people to become artificially impoverished by direct transfers of assets (i.e., signing over their life assets) and become eligible for LTC Medicaid benefits. Medicaid is a program designed to provide benefits for the indigent and impoverished; it was created specifically to help those with limited resources gain access to, among other things, long-term health care. People who do not wish to spend their own assets on LTC expenses have legally avoided doing so, but in the process, they have siphoned dollars away from the licit poor who need care and have exacerbated the problem of funding care for the needy.

Statutory Restrictions

Many members of Congress thought that the process of Medicaid planning subverted the underlying philosophy of the Medicaid program. They were concerned with the impact on increasing Medicaid costs: 20 percent of Medicaid expenditures go toward long-term care, and Medicaid funds nearly half of the nation's nursing home care. Over the years, Congress has tightened the eligibility requirements for Medicaid, most recently in the Deficit Reduction Act of 2005 (DRA-05).

To be eligible for Medicaid LTC services, an individual may have no more than $2,000 in assets. (This is known as the “spend-down” requirement.) Certain assets are excluded from the calculation, such as the home, one car, and life insurance with a face value of less than $1500.²³ In addition, the Medicaid agency will “look back” at gifts the individual made in previous years, and other transfers for less than fair market value. Prior to the DRA-05, the look-back period was 36 months; the DRA-05 increased it to 60 months.

If a transfer of assets was made during the look-back period by an applicant or his/her spouse and it does not fall within a state exemption, then a period of ineligibility is calculated, beginning with the month following the transfer date. The number of months for which benefits are denied is equal to the transferred amount divided by the average monthly cost of nursing home care in the region. For example, if the regional rate is $4000 per month and the individual transfers $40,000 in assets, he or she will lose Medicaid eligibility for 10 months. The length of the penalty period has no limit. Prior to DRA-05, the penalty period began on the transfer date. The DRA-05 moved the start of the penalty date to the Medicaid application date.

Under the DRA-05, additional assets will be considered for purposes of determining eligibility. In 2013, an individual with more than $535,000 in home equity is ineligible, but states have the option of raising this threshold to $802,000. The DRA-05 also requires recognition of certain previously exempt financial instruments. Annuities must be disclosed and the state must be named as a beneficiary on the policy for the cost of Medicaid assistance provided.

Spousal Impoverishment Provisions

The law allows the community spouse, meaning the spouse who is not institutionalized, to retain a certain level of income and assets. This concession dates from 1988, when Congress enacted provisions to prevent what is referred to as spousal impoverishment, meaning leaving a spouse who is still living in the community with little or no income or assets.²⁴ When the couple applies for Medicaid, their resources are assessed. The couple's resources are combined, and exemptions for the home, household goods, an automobile, and burial funds are made. The result is the spousal resource amount, from which the community spouse is allowed to retain a set dollar amount and still allow the institutionalized spouse to be eligible for Medicaid. In 2013, the community spouse was allowed to keep a minimum of $23,184 or half the couple's assets up to $115,920.²⁵ Federal law allows states to raise the $23,184 minimum, and several states have enacted a higher minimum level.

Estate Recovery

The Omnibus Budget Reconciliation Act of 1993 (OBRA-93) changed the rules for Medicaid eligibility that can affect asset-transfer decisions. Under the rules introduced by this law, states must recover from the probate estate of a deceased Medicaid recipient amounts paid on behalf of the individual while alive. Some exempt property in the eligibility determination will be included in the probate estate. The probate estate consists of property passing under a will or under the state's intestacy law. In addition, the state may seek recovery against any other assets that the deceased recipient held at interest at the time of his or her death, which could include assets not in the probate estate. Property not in the probate estate includes property owned with a right of survivorship, property in certain trusts, insurance proceeds, retirement death benefits, and life estates.

Long-Term Care Partnership Programs

Long-Term Care Partnership programs were implemented by several states in the early 1990s in an attempt to reduce reliance on Medicaid by increasing the purchase of LTC insurance. Programs were established in five states (California, Connecticut, Indiana, New York, and Iowa) before the Congress established a moratorium on new programs in 1993. The DRA-05 lifted the moratorium and permitted all states to establish LTC Partnership programs, beginning on October 1, 2007.

Partnership programs are intended to counteract the tendency for Medicaid to act as a disincentive to purchase LTC insurance. Such programs allow individuals to protect some of their assets from Medicaid's spend-down requirements. For example, if an individual purchases an LTC policy with $100,000 in benefits, he or she is able to keep that amount of assets and be eligible for Medicaid. The hope is that the existence of the LTC policy will reduce the need for Medicaid to pay for LTC costs.

DRA-05 imposes a set of requirements on a qualified state long-term partnership. Among these, the policy must meet the IRS requirements for a qualified LTC insurance policy, and it must meet specific requirements of the NAIC Long-Term Care Insurance Model Law and Model Regulation. The policy must provide for “compound annual inflation protection” for individuals under age 61 as of the purchase date and “some level of inflation protection” for individuals 61 through 75. At age 76 and older, inflation protection is optional. Insurers must provide regular reports to the U.S. Department of Health and Human Services (HHS), including payment dates of benefits, the amounts, and the termination of benefits. States may not impose requirements on partnership policies that they do not impose on all LTC insurance policies. To address the possibility that an individual will purchase a policy in one state and move to another, DRA-05 requires the HHS to develop standards for reciprocity among the states, so benefits paid under the partnership policies will be recognized equally by all states.

By mid-2013, over 30 states had legislation authorizing a Long-Term Care Partnership, and more were likely to follow. How these programs will affect Medicaid costs is unclear. The intent is to reduce reliance on Medicaid. Critics argue, however, that the result of allowing people to protect their assets through partnership programs will be that more people will qualify for Medicaid. Unfortunately, the states with existing LTC Partnership programs do not yet have enough experience to draw conclusions.

IMPORTANT CONCEPTS TO REMEMBER

Medicare

Medicare Supplement policy

Medigap insurance

long-term care insurance

Medicare Part A

Medicare Part B

Medicare Part C

Medicare Part D

Medicare Advantage

prospective payment system (PPS)

diagnostic-related groups (DRGs)

Resource-Based Relative Value Schedule (RBRVS)

lifetime reserve days

skilled-nursing-facility care

home health care

durable medical equipment (DME)

hospice care

accept assignment

approved amount

excess charge

30-day free look

Qualified Medicare Beneficiary (QMB) program

Specified Low-Income Medicare Beneficiary (SLMB) program

private contracts outside Medicare

Medicare Medical Savings Accounts (MSAs)

Medicare fraud

NAIC model long-term care law

respite care benefit

activities of daily living (ADLs)

nonforfeiture provision

living benefits

accelerated benefits rider

viatication

Medicaid planning

look-back period

period of ineligibility

spousal impoverishment

partnership policies

QUESTIONS FOR REVIEW

1. Identify and briefly distinguish between Parts A and B of the traditional Medicare program.

2. Explain the relationship between Medicare and employer-provided health insurance for employees who are age 65 and over.

3. Describe the changes in Medicare enacted as Part C, Medicare Advantage. In what fundamental way does Medicare Advantage differ from the coverage under the traditional Medicare program?

4. Your father and mother will soon reach age 65, the age at which they will become eligible for Medicare. They have asked you to advise them on the advantages and disadvantages of a Medicare Medical Savings Account (MSA). Describe the essential nature of a Medicare MSA and explain to them what you consider to be the advantages and disadvantages of these plans.

5. Explain how life insurance policies can provide an alternative to LTC insurance.

6. Explain the triggers that may be included in a LTC insurance policy to determine eligibility for policy benefits.

7. Periodic surveys have indicated a significant misunderstanding on the part of the public concerning the benefits available under Medicare to cover long-term care. What specific limitations in the Medicare benefit structure make Medicare an undependable source of funding for the long-term care exposure?

8. Explain what is meant by a viatical settlement and the tax treatment of such transactions.

9. Briefly explain the eligibility requirements for Medicaid as they apply to expenses for long-term care.

10. Describe the coverage triggers required for a TQ-LTCI policy.

QUESTIONS FOR DISCUSSION

1. What arguments would you offer to support the decision to adopt the Medicare Advantage provisions of Medicare? What arguments would you offer to oppose the decision?

2. Under what circumstances would you recommend a Medicare MSA to a person eligible for Medicare? For which persons would a Medicare MSA be inadvisable?

3. A noted insurance authority has said, “Because the financing of long-term care is inconsistent with insurance principles, it is a problem that does not lend itself to solution through insurance.” In what ways is the financing of long-term care inconsistent with insurance principles? What, in your opinion, is the solution to the problem of financing long-term care?

4. “Medicaid planning represents a fraud on one's fellow taxpayers. It is asking me to pay your bills so you can leave your money to your children.” Do you agree or disagree? Why?

5. To what extent do you believe that the cost of medical care for the aged is at the heart of the difficulties facing the nation with respect to financing health care expenses?

SUGGESTIONS FOR ADDITIONAL READING

Beam, Burton T., Jr., and Thomas P. O'Hare. Individual Health Insurance Planning, 2nd ed. The American College Press, 2010.

Butler, Stuart and Henry Aaron. Perspectives: Options for Reforming Medicare. AARP Public Policy Institute, June 2012.

Centers for Medicare and Medicaid Services (CMS) and National Association of Insurance Commissioners (NAIC). Choosing a Medigap Policy. Updated annually.

Kofman, Mila, and Lee Thompson. Consumer Protection and Long-Term Care Insurance: Predictability of Premiums. Georgetown University Long-Term Care Financing Project Issue Brief, March 2007.

National Association of Insurance Commissioners. A Shopper's Guide to Long-Term Care Insurance. Updated annually.

Neldo McCall. “Insurance Regulation and the Partnership for Long-Term Care.” Journal of Insurance Regulation, vol. 16, no. 1 (Fall 1997), pp. 73–101.

WEB SITES TO EXPLORE

American Association of Retired Persons (AARP)	www.aarp.org
American Association for Long-Term Care Insurance	www.aaltci.org
America's Health Insurance Plans	www.ahip.org
Centers for Medicare and Medicaid Services	cms.hhs.gov/
Medicare	www.medicare.gov/
National Senior Citizens Law Center	www.nsclc.org/

¹Medicare Part C was originally called “Medicare+Choice.” The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) made some changes and renamed the program “Medicare Advantage.”

²Individuals age 65 and over who are otherwise ineligible may purchase Part A coverage. In 2013, the Part A premium for those with 30 to 39 quarters of coverage was $243 per month. For those with fewer than 30 quarters of coverage, it was $441 per month. Coverage may also be purchased by disabled persons who were previously entitled to Medicare but whose benefits have been terminated because of work and earnings and whose disability continues.

³Beneficiaries with incomes below 135 percent of the federal poverty level (FPL) and limited resources are eligible for subsidies that pay some or all of their Medicare Part A and Part B premiums. Assistance for Part D costs are provided to individuals with incomes below 150 percent of the FPL. These programs are discussed later in this chapter.

⁴“Income-Relating Medicare Part B and Part D Premiums: How Many Medicare Beneficiaries Will Be Affected?” Henry J. Kaiser Family Foundation Issue Brief (December 2010)

⁵Under some circumstances, a beneficiary can delay Medicare enrollment without penalty. A person age 65 or older who has group health insurance based on his or her current employment (or the employment of a spouse) may enroll during the eight-month period beginning with the month he or she stops working or is no longer covered under the employer plan, whichever comes first. If the individual does not enroll during the eight-month period, he or she must wait until the next general enrollment period.

⁶The 1988 amendments to the Social Security Act, the Medicare Catastrophic Coverage Act (MCCA), substantially expanded the benefits under Medicare, but the changes in the law were repealed before they became effective. The MCCA significantly expanded Medicare Part A and Part B benefits effective January 1, 1989, and January 1, 1990, respectively. The MCCA established a new Medicare supplemental premium, based on the individual's taxable income. In November 1989, responding to a public outcry against the legislation, Congress repealed the law.

⁷The original Medicare Act did not specifically forbid private contracting, but federal policies and subsequent changes to the Medicare law had worked toward eliminating the practice. In the late 1980s, the Health Care Financing Administration (HCFA), now called CMS, threatened doctors with fines if they administered Medicare-covered treatment to Medicare beneficiaries without sending the bill to the government. The controversy ended in the courts where the case was dismissed. The argument over private contracting was based on HCFA's contention that private contracting would undermine Medicare's cost-control efforts. The opposing argument is that individuals should have the right to contract outside the Medicare system without penalty.

⁸Plans sold in Massachusetts, Minnesota, and Wisconsin differ from those sold in other states because these states had an alternative Medigap standardization program in effect before federal legislation standardizing Medigap was enacted. Therefore, these states were not required to change their Medigap policies.

⁹Prior health insurance coverage with no more than a 63-day break in coverage.

¹⁰For example, individuals who join a Medicare Advantage (MA) plan for the first time and decide to move back to Original Medicare within one year have guaranteed issue rights. Individuals have guaranteed issue rights if they leave an MA plan because the company misled them. If an individual has a Medigap policy that covers prescription drugs, which pre-2006 policies could do, guaranteed issue rights apply to individuals who drop the existing policy and move to a new Medigap policy.

¹¹Individuals who elect hospice care are ineligible for an MA plan, and individuals with end-stage renal disease are eligible only for MSN plans that enroll individuals with the disease.

¹²Early Medicare HMOs were often available only in urban areas. Originally, Medicare's capitation was tied to 95 percent of the average Medicare fee-for-service costs in each county. Average Medicare costs varied widely across the country, and Medicare HMOs tended to be offered only in urban areas, where the average Medicare fee-for-service costs were high. Plan benefits were often generous, including prescription drugs and health club membership, with no premium.

As BBA-97 was being debated, states without access to Medicare HMOs, generally more rural states, sought to change the calculation of capitation rates. They argued their low average fee-for-service costs reflected greater efficiency in health care delivery. Where care was delivered less efficiently, HMOs could squeeze costs and provide more generous benefits. They were being penalized, they argued. Because they delivered care efficiently, they did not have access to the generous benefits provided by the Medicare+Choice plans.

BBA-97 attempted to increase access to private plans by changing the way the capitated rate is calculated, resulting in increased rates in many rural counties and other low-cost areas. Local payment rates were blended with a national average payment rate, phased in over six years to a blend of 50 percent local and 50 percent national, which was intended to reduce the wide geographic disparity in payments.

¹³“Medicare Part D: A First Look at Part D Plan Offerings in 2013.” The Henry J. Kaiser Family Foundation Data Spotlight (November 2012).

¹⁴The FPL in 2007 was $10,210 for a single individual and $13,690 for a married individual. Those figures applied in the 48 contiguous states and the District of Columbia. Higher levels applied in Hawaii and Alaska.

¹⁵The NAIC adopted less significant amendments in 2006, requiring continuing education for producers selling long-term care insurance and addressing problems created by states having different systems for licensing the LTC facilities. More recently, criticism has focused on the claims payment process, with critics arguing that some LTC insurers unreasonably deny claims. (See, e.g., “Aged, Frail, and Denied Care by Their Insurers, New York Times,” March 26, 2007.) This will likely be the next issue regulators pursue. Some have suggested the need for an external review system for LTC claims as exists for some medical expense claims.

¹⁶Innovations in the field of LTC insurance continue to occur, and the configuration of LTC policies is evolving. For a review of the latest in LTC policy design, Life Association News publishes an annual survey of LTC products, usually in July.

¹⁷See IRC Section 7702B. LTC policies issued before January 1, 1997, were grandfathered in as tax-qualified policies.

¹⁸If the taxpayer was not older than 40 by the end of the 2013 tax year, the annual limit was $360; age 41 through 50, $680; 51 through 60, $1360; 61 through 70, $3640; 71 or older, $4550. The annual dollar limits are indexed to reflect increases in health care costs.

¹⁹Periodic payments received under LTC contracts by reason of the insured's death are also considered taxable income, according to IRC Section 101(g).

²⁰That portion of a life insurance policy (i.e., a rider) that provides LTC coverage is treated as a separate contract under the IRC. Any refund given on policy cancellation or surrender will be includable in income to the extent that any deduction or exclusion was allowable with respect to the premium.

²¹The term comes from the Latin word viaticum, meaning money or supplies provided as traveling expenses to an officer on an official journey in ancient Rome. The suggested meaning is that the proceeds from the sale of the life insurance policy provide “supplies” for the individual's final journey.

²²A terminally ill individual is someone who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 24 months or less after the date of certification.

²³If the individual has a spouse that remains in the community, the spouse is permitted to keep a portion of the couple's income and assets.

²⁴Section 1924 of the Social Security Act; U.S. Code Reference 42 U.S.C. 1396r-5.

²⁵These dollar amounts are adjusted for inflation on January 1 of each year.