We estimate the California insurance program designs recently proposed by the task force to cover roughly 2% to 18% of LTC costs.

Introduction

States have started to recognize and call increased attention to the growing need for long-term services and supports (LTSS, also referred to as long-term care, or LTC), as well as the importance of planning ahead for the financing of these services. As a primary example, over the last few years, California has completed two feasibility studies^1,2 examining a potential new statewide LTC insurance program. The most recent study was completed in response to Assembly Bill No. 567,³ passed in October 2019 to “examine the components necessary to design and implement a statewide long-term care insurance program.” A task force, “composed of specified stakeholders and representatives of government agencies,” has proposed five plan designs for further analysis, as described in the task force report.

We asked ourselves, how can stakeholders better understand the value insurance programs provide to consumers? To answer that question, we recently introduced the concept of actuarial value to evaluate long-term care insurance benefit designs. Actuarial value (AV) is a common metric used to analyze benefits provided by medical insurance. Long-term care actuarial value (LTC AV) serves a similar goal, allowing users to examine the proportion of a covered individual’s LTC financial costs that would be covered by a given plan or program.

This article presents how LTC AV can help stakeholders evaluate the task force’s proposed LTC plan designs by providing an alternative metric for understanding costs that may be covered by a new program.

Caveats: We performed the LTC AV analysis in this article assuming readers have familiarity with LTC insurance product features and financing. Readers of this article should be advised by experts in LTC projections as needed when interpreting results. This article was not sponsored by an outside party and, as such, the results represent our own independent research and opinions of the authors.

What is LTC AV?

LTC AV represents how much coverage a particular LTC insurance benefit provides versus the amount left to be covered by other sources (such as individuals’ out-of-pocket resources, private insurance, Medicaid, etc.). For example, a plan with a 60% LTC AV means that, for every dollar of LTC costs expected to be incurred by an individual, the insurance plan is expected to pay 60 cents on average, whereas the remainder of the LTC costs (40 cents) must be covered by other sources. Using LTC AV can help stakeholders evaluate a plan design’s level of coverage and compare different benefit designs on a consistent basis. See our article, Rethinking LTC Benefit Design Evaluation, for further reading on the LTC AV concept.

California proposed LTC plan designs

We modeled LTC AV for four of the California task force’s proposed designs, as shown in Figure 1.⁴ We also include a column with the plan parameters for a 100% AV plan (i.e., a plan that covers 100% of a covered individual’s expected long-term care costs) as a reference. The California designs are measured against this 100% AV plan in the results further below.

Results of analysis

We calculate LTC AVs assuming a 45-year-old at program inception (assumed to be 2023). As shown in Figure 2, we expect Designs 2 through 5 would cover between 4% and 15% of expected LTC costs for an individual who was age 45 at program inception and age 80 at claim incurral. In turn, we would expect other sources would be responsible for the remaining 85% to 96% of expected LTC costs for the given claimant.

The LTC AVs shown in Figure 2 represent the expected insurance benefit amount provided by each design as a percentage of the total expected LTC cost associated with an 80-year-old claimant at all care settings before insurance. To calculate the expected LTC costs for a given claim age before insurance, we assume the following parameters highlighted in bold below, and provide commentary explaining the factors driving LTC AV results across designs from Figure 2:

• Daily cost of care calibrated to California based on the 2023 Genworth Cost of Care Survey and author’s judgment. We assumed the average 2023 monthly cost in California to be $7,100 for home health services, $11,900 for assisted living facility, and $13,200 for skilled nursing facility. None of the proposed plan designs have monthly benefit limits sufficient to cover the full average monthly cost of care in California. The extent to which a plan’s monthly benefit limit is expected to cover the cost of care influences the LTC AV for each plan.
• Comprehensive covered services provided in a skilled nursing facility, assisted living facility, or home care setting. Designs 2 and 3 do not cover costs from a skilled nursing facility, which (all else equal) decreases the LTC AV for these plans.
• Milliman Long Term Care Guidelines⁵ expected length of care need, varying by situs of care. The difference between a plan’s benefit period and an individual’s expected length of stay influences a plan’s LTC AV. For example, all else equal, we would expect plans with longer benefit periods to have higher LTC AVs. Designs 2 and 5 have the longest benefit periods (two years), while Design 3 has the shortest (one year).
• Future annual cost of care trends⁶ of 4% for facility care and 3% for home care. The assumed cost of care trend is higher than the benefit inflation we modeled for each plan, tied to a consumer price index (which we assumed to be 2.5%, aligned to general long-term inflation). All else equal, we would expect the LTC AVs to decrease with calendar year increases because cost of care trends outpace the benefit designs’ modeled inflation protection.
• Benefit eligibility trigger, unable to perform two of six activities of daily living (ADLs) for at least 90 days or severe cognitive impairment. All designs use benefit eligibility criteria consistent with this definition, so there would be no impact to LTC AV.

The LTC AV will vary depending on the age at which an individual incurs a claim. Figure 3 displays the LTC AV for a 45-year-old at program inception at several sample claim ages. Note that the dotted lines indicate LTC AV excluding the impact of intergenerational equity.

As shown in Figure 3, we estimate the proposed plan designs will cover roughly between 2% and 18% of total LTC costs, depending on the plan design and age at claim. We observe the following about the LTC AVs by claim age for the modeled designs:

• Designs 2 through 4 propose an “intergenerational equity” component whereby benefits grade up from zero to full benefits over the course of 20 years. For an individual aged 45 at program inception, the LTC AV rises between claim ages 55 and 65 as the intergenerational equity mechanism wears off. We show the LTC AV excluding the impact of the intergenerational equity mechanism as dotted lines. For an individual who was 45 at program inception, intergenerational equity would only have an impact should the individual trigger a claim before age 65. Note also, Design 2 does not provide any coverage prior to age 65. The LTC AV for Design 2 prior to claim age 65 is still nonzero, as some individuals will still be on claim after age 65 and able to collect some benefit.
• We estimate that the cost of LTC services will inflate at a faster rate (i.e., an assumed cost of care inflation rate of 4.0% for facility and 3.0% for non-facility services) than the benefit (i.e., an assumed benefit inflation rate of 2.5%). This phenomenon would contribute to lower LTC AVs over time.
• We estimate that the length of care need is lower for individuals who claim at higher ages, as shown by the uptick in AV for Designs 4 and 5 for ages 85 and up. Individuals claiming at high ages may be in a frailer condition and have higher mortality rates. This phenomenon would contribute to higher LTC AVs, all else equal. Note that this phenomenon is present in all modeled plan designs, but it has a more meaningful impact for comprehensive plans than for home and community-based services (HCBS) only, as demonstrated by Figure 3 above at the higher claim ages.

Understanding the portion of costs covered (and not covered) will help further inform trade-offs in designing LTC programs, and the role other care sources and payers may need to play to support all LTC needs.

Conclusion

The California insurance program designs recently proposed by the task force are estimated to cover roughly 2% to 18% of LTC costs. The plan designs shown in this article do not offer “complete” solutions to financing LTC (meaning they do not cover 100%, or even the majority, of expected LTC costs), but they may still provide valuable coverage to Californians.

Benefit features have a significant impact on the proportion of an individual’s LTC costs that would be covered by a new insurance program, which will also vary over time as intergenerational equity, benefit inflation, and other features influence and interact with program experience. Other financing or care sources, such as the state Medicaid program, individuals paying out of pocket, private market insurance, or informal caregiving would be responsible for the remaining LTC needs.

LTC AV can provide another useful metric in the plan design process for policymakers and other stakeholders to understand from a broad perspective the impact a new insurance program may have on an individual’s total LTC costs. Understanding the portion of costs covered (and not covered) will help further inform trade-offs surrounding the level of tax rate and the desired amount of LTC costs to be covered, and the role other care sources and payers may need to play to support all LTC needs.

Milliman is actively engaged in long-term care financing reform analysis for stakeholders across the country. Please feel free to contact the authors if you would like to learn more.

¹ Giese, C., Cunningham, J., Gunnlaugsson, A. et al. (September 9, 2020). Long-Term Services and Supports Feasibility Study. Milliman Report. Retrieved May 6, 2024 from https://www.dhcs.ca.gov/formsandpubs/Documents/Legislative%20Reports/Long-Term-Services-and-Supports-Feasibility-Study-Final-Report.pdf.

² California Assembly Bill 567: Oliver Wyman Actuarial Report (December 15, 2023). Retrieved May 6, 2024, from https://www.insurance.ca.gov/0500-about-us/03-appointments/upload/CaAB567OliverWymanActuarialReport2023.pdf.

³ The full text of California Assembly Bill No. 567 is available at https://legiscan.com/CA/text/AB567/id/2831261#:~:text=California%20Assembly%20Bill%20567.

⁴ Note, the modeled plan designs for this article are based on our interpretation of program features in—and in some cases, may represent simplifications from—the grid shown in the task force report. We acknowledge that different interpretations and assumptions may result in different results. Additionally, the proposed designs have other differentiating features (such as vesting, portability, and revenue structure) that are not included in Figure 1. As many of these additional features are focused on program eligibility and financing, as opposed to the level of program benefits, they are not considered as part of the LTC AV calculation.

⁵ The 2020 Milliman Long-Term Care Guidelines are a package of data sets that provide frequencies, continuance curves, utilization, claim costs, and other key data and assumptions developed from a large number of product designs over the past two decades. The Guidelines are periodically updated to reflect the most comprehensive and current information available in the market.

⁶ These trends reflect estimated future cost trends over a long time horizon and are used here for demonstration purposes only.