The WA Cares Fund long-term care insurance mess: What next?

By Mark Maurer

Some of you saw 2021’s commotion around the WA Cares Fund, the first state-run long-term care (LTC) program, and a few of you lived it. And for those of you who watched from outside the state of Washington, let’s listen to words attributed to Warren Buffett (on the internet, anyway): “It's good to learn from your mistakes. It's better to learn from other people's mistakes.”

With Buffett’s advice in mind, I’ll add this: You need to track state LTC programs before your clients get stuck with no option other than state-mandated LTC insurance.

The history

Washington state voters twice rejected a state LTC program, but the legislature passed it in 2019, intending for it to take effect in January 2022. Legislators hoped to save billions of dollars from the state Medicaid coffers by having all employees—not employers—pay a 0.58% payroll tax. The legislation also created a window for workers to opt out of the payroll tax if they were covered by a qualifying LTC policy by July 2021 (later moved to November 2021).

This created a mess in 2021. Everyone tried to buy LTC insurance to have it in place by the deadline. Applications flooded insurance companies, overwhelming their underwriting departments and their internal licensing staff as agents wanted to offer LTC insurance to their clients. Insurers raised minimums for premium amounts and applicants’ ages to slow the influx. Externally, insurer requests for medical records overwhelmed doctors’ offices and copy services; vendors who perform cognitive screening interviews were also inundated.

By early August 2021, most insurers stopped accepting any new applications to try to have pending applications issued by the November deadline, which was still almost three months away.

The present

In January 2022, Washington state legislators passed measures that:

• Delay until July 1, 2023, the collection of the payroll tax, which was supposed to start being collected by employers in January 2022, and refund to employees any premiums already collected by their employers
• Make benefits available on July 1, 2026, instead of the original date of Jan. 1, 2025
• Allow workers near retirement (born before 1968) to qualify for partial benefits on a pro-rated basis

The future of state-sponsored LTC programs

LTC industry analysts consider these states the ones to watch for proposals for state-sponsored LTC insurance, listed in order of how far they have progressed in their fact gathering: California, Oregon, Hawaii, Michigan, Alaska, Illinois, Minnesota, Missouri, Colorado, New York, North Carolina, and Utah.

Chatter says that California is likely to start openly implementing initiatives or investigating options in 2024, which would make it the first state after Washington to move to this stage.

The problem with opt-outs

Let’s hope that other states create programs that avoid some of the problems with Washington’s. The Washington state payroll tax is a flat 0.58% on employee earnings, with no cap. All employees in the state get the same benefits—$100 per day, with a $36,500 potential benefit pool per year. Anyone making $300,000 will pay $1,740 (arguably overpaying) for the same benefit as an Amazon warehouse worker making $50,000, who will only pay $290 (potentially underpaying).

Like most government programs in which individuals all receive the same benefits, the state really needs all those high-income people paying $1,740 per year to offset the much larger number of people paying $290 per year for the same benefits.

The problem is that most high-income earners applied for individual coverage so they could opt out. Initial estimates were that 100,000 Washington residents would apply for the opt-out. It turns out when you implement a tax that people voted down twice, they object with their checkbooks. There have already been 470,000-plus applications through the online state opt-out system, and the opt-opt period runs through the rest of 2022. If those are disproportionately high earners who would have contributed more LTC money, it threatens the program’s long-term solvency.

What will insurance companies do?

Many insurance companies are still lobbying Washington state to require ongoing verification of coverage before the end of 2022. Insurers are concerned people will purchase LTC plans, sign up for the one-time opt-out, and then cancel their LTC policies once they obtain verification.

That’s bad for the insurance companies, which spend a lot of time and money upfront to issue a policy—paying for medical records, third-party interviews (sometimes conducted face-to-face), underwriter salaries, agent compensation, and reinsurance reserving. In general, it takes three to four years for insurers to recoup all their costs and expenses on a policy and start to have a profit. So any LTC policy in Washington canceled in the first year or two is a financial loss to the insurer.

We’ve already had our first cancellation. His policy was issued and put in place on Sept. 7, 2021. He called to cancel on Dec. 23, 2021. When I mentioned that things could change before the opt-out ends at the end of 2022, so he may want to keep it in place a little longer, he said, “We’ll burn that bridge when we get to it.”

So the LTC companies will be watching closely for the next year or two. While I’m hopeful that people who purchased the LTC coverage realize its long-term value, I’m a realist, so I expect massive early cancellations once people can opt out, which hurts the LTC insurers most of all.

There are two likely scenarios for insurance company responses to other states that create LTC programs:

We’re in
If the states allow for an opt-out with personal coverage, the LTC companies are going to want some ongoing coverage verification to keep the LTC policies they worked so hard to issue on the books. This could be every five years, or when you change jobs, or something else other than Washington’s one-time and no-other-questions-asked opt-out approach.

We’re out
Some states may allow an opt-out window without ongoing verification of coverage. In that case, I expect some LTC companies (after seeing the short-lived nature of the 2021 Washington state LTC policy explosion) to just say, “As of today, we’re no longer offering LTC insurance in the state of X.”

Moral of the story?

If states implement this program with an opt-out, we may see another mad rush. One insurance company said on August 9, 2021: “In the last three days, from Washington alone, we have received the equivalent of three months’ worth of submissions from the entire U.S. Effective today … we have no choice but to suspend the sales of … LTC applications, in Washington State only.”

Speak with your clients early before opt-outs are announced, premium limits are enacted, and there’s a logjam of applications. To put it in context, the state of Washington has a population of 7 million to 8 million, and the WA Cares Act effectively shut down the LTC insurance industry for a few months. California has a population of more than 40 million (insert ominous music here). So once the legislation is announced, it might already be too late to obtain LTC coverage.

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Mark Maurer, CFP^®, is president and CEO of LLIS, a talented team of experts in life, disability, LTC, annuities, and hybrid solutions who, along with ALLiS (their 24/7 relationship management system), know that service never goes out of style.

image credit: istock.com/syahrir maulana