NEW YORK — Thirty years ago, insurance companies had the answer to the soaring costs of caring for the elderly. Plan ahead and buy a policy that will cover your expenses.
Now, there’s a new problem: Even insurers think it’s unaffordable.
Life insurance firms pitched long-term-care policies as the prudent way for Americans to shoulder the cost of staying in nursing homes. But those same companies have found that long-term-care policies are squeezing their profits. Earnings for life insurers slid 11 percent in the most recent quarter, according to Moody’s Investors Service, and long-term care was the chief culprit.
“Insurers that sell these products lose money on them,” says Vincent Lui, a life insurance analyst at Morningstar. “So they’re raising prices and also trying to get out of the business right and left.”
Four of the five largest providers — including Manulife and MetLife — have scaled back the business or stopped selling new policies, according to Moody’s. The largest provider, Genworth Financial, continues to offer them, yet has struggled under the weight of rising costs.
The trends behind the industry’s troubles sound like good news outside the world of insurance. Older Americans are healthier and living longer. But that makes it difficult for the industry to turn a profit. Stays in nursing homes tend to last longer, so insurers have to pay out more in benefits than they had planned.
Few options
For older Americans and their families, however, there are few options besides private insurance. Medicare doesn’t cover nursing home stays except in certain circumstances. The Obama Administration had planned to make a long-term insurance program part of the Affordable Care Act but eventually abandoned it.
Sean Dargan, an analyst at Macquarie Group, an Australia-based investment bank, expects to see more people turning to Medicaid, the government’s health insurance for the poor, to cover the costs of care.
“It could really blow a hole through state budgets,” he says. “I think states and the federal government are going to need to think creatively to find a way out of this.”
When they began selling policies widely in the 1980s, the industry made a slew of assumptions about how long people would live, health care costs and interest rates. Nearly all of them turned out wrong, analysts say.
Take life spans. At nearly 79 years, overall life expectancy in the U.S. has never been higher, according to the Centers for Disease Control and Prevention. That’s the biggest issue, analysts say, because it means more people who took out policies stick around to make claims.
The rate for staying at a nursing home has gone up an average of 4 percent every year for the past five years, according to insurance carrier Genworth’s annual survey. In 2014, the median bill for a shared room topped $6,000 a month.
“They were making their best estimates at the time. They just turned out to be wrong,” says Shachar Gonen, a Moody’s analyst who covers the industry. “If insurers knew full well what they were getting into, they probably would have priced their policies much higher. So who knows if the long-term insurance business would have ever started.”
Last year, insurers paid out a record $7.5 billion in claims on these policies, according to the American Association of Long-Term Care Insurance, which tracks insurance rates.
Cutting benefits
To cope with mounting costs and faulty assumptions, insurers have been cutting benefits and hiking their premiums year after year. Average premiums for new policies rose nearly 9 percent over the past year.
In the past month, TIAA-CREF Life Insurance, MetLife and American General asked Connecticut’s insurance department for permission to raise rates as much as 22 percent over three years. The state rejected American General’s request and approved the other two.
Analysts who follow the industry say insurers have learned from their missteps and probably figured out the right price to charge for long-term care policies to turn a profit. The problem is, it might be too high for most people to pay.
“I’m of the opinion that it’s appropriately priced today,” Dargan said. “But it’s also out of reach for most middle-income Americans. And that’s who needs it the most.”
