Healthcare insurers in the long-term care market over the decades found themselves in a bind because they could not pay claims with prices that had been agreed upon years earlier and that inflation and other factors made irrelevant, according to a report (PDF) from the New York State Department of Financial Services (DFS).
This has led to a crisis in the LTC insurance market, and New York isn’t the only state facing this problem, according to a DFS press release.
“The market nationwide is in crisis due to historical mispricing, which has led to ever-increasing premium rates and insurers leaving the market,” the press release said.
About 394,000 New Yorkers had LTC policies as of 2020, compared to the approximately 754,000 who had them in 2002. Only a “fraction” of LTC insurers that once sold LTC policies in New York at one time still do so today, and those companies find themselves in financial straits.
The report highlights the danger of creating an insurance product without the benefit of historical data. When the first policies were issued in the late 1980s, insurers needed to bet on what the future financial landscape might look like.
“Simply stated, LTC insurance plans across the country were initially offered at premium rates that were far lower than they should have been,” the report said. “Insurance pricing relies on assumptions about various things, including policyholder behavior, the costs of future heath care, and future market conditions, including the interest rate environment.”
When insurers’ concerns were brought to the attention of state officials, they were slow to act on adjusting premiums, and when they did, the approved increases still could not pay for the services that the LTC plans offered, according to the press release.
“Though those decisions were informed by the laudable consideration of trying to protect consumers from potentially unnecessary rate increases that they may not have been able to afford, the Insurance Department (as well as insurance regulators in many other states) should have confronted sooner the insurers’ initial mispricing to better safeguard the sustainability of the LTC insurance market as a whole: earlier action on rates might have benefitted consumers in the long run by keeping more insurers in the market, thereby increasing consumer options, and avoiding financial instability that could imperil consumer benefits,” the press release said.
As the population ages, the financial instability of the LTC industry will possibly get worse, according to the report.
New York officials, armed now with better historical policyholder data, intend to revise the state's methodology involving the approval of premium rate increases for LTC carriers that will include affordability measures the agency hopes will help consumers better manage rate increases.
“DFS is also encouraging the adoption of a variety of different types of LTC insurance policies so that more consumers can find benefits that suit their needs at a cost that is manageable,” the report said.