SUMMARY term care insurance in 1992). The average age of buyers of employer- Long-Term Care Statement covered by Medicare or health insurance, or may be dissatisfied or mistrustful payment as opposed to specific services). However, such a proposal may also sponsored plans in 1992 was 42, compared with 68 for purchasers of of policies that are currently for the Ways available. and Means Committee further certain social and economic goals, including increased risk pooling, individual and group association policies. Furthermore, recognition that • Among the general population, recognition that neither Medicare nor preservation The tax of code assets, currently and potential does notreduction explicitly in recognize Medicaid long-term expenditures care. for many states are currently suffering from serious budget deficits and have been Introduction most private insurance plans cover long-term care has come slowly. those who are not poor. Quantification and comparison of the costs versus Therefore, the tax treatment of long-term care insurance premiums and forced to make changes to Medicaid that may threaten beneficiaries' access to T benefits he Emplis oyee ambiguous. Benefit RAmbiguity esearch Institute surrounding (EBRI) is long-term pleased to care submit insurance for the tax the benefits of such a policy need to be carefully considered to develop T-97 quality care has led many leaders to regard long-term care insurance as a • appropriate Demographic public trends policy. ensure that the proportion of individuals requiring committee treatment might record be the anenclosed impediment statement to the regarding market forthe long-term long-term care care insurance potential alternative to Medicaid. formal paid care will increase in years to come. insurance---particularly employer-based group insurance. The committee faces a difficult challenge as they confront the provisions contained in the Senior Citizens' Equity Act (H.R. 8). EBRI is a nonprofit, The design of private insurance policies being sold has also changed nonpartisan, complexities public of this policy issue. research EBRI stands organization ready to based assist the in Washington, committee inDC. its Proponents of changing the tax code argue that the ambiguity dramatically in recent years. Long-term care insurance policies have become efforts. • While EBRI has private beeninsurance committed,nowsince finances its founding only a small in 1978, porti toon the oaccurate f long-term statistical concerning long-term care leads to questions not only about how to treat less restrictive as they have evolved, and many of today's policies have analysis careofneeds, economic as an security increasing issues. number Through of individuals our research recognize we strive the to contribute long-term care expenses but also about the treatment of long-term care additional provisions that make them more valuable to individuals than possibility of needing long-term care and the costs associated with such insurance. to the formulation If long-term of effective care were and deemed responsible to behealth medical, andlong-term retirement care policies. earlier policies. For example, several insurers now offer policies that adjust care, private initiatives to provide for this need have grown, through Consistent insurance premiums with our mission, paid by we an employer do not lobby on behalf or advocate of an employee specific policy wouldsolutions. be the benefit for inflation. Many policies also now include a provision that tax deductible both Among individually the to the general employer purchased population, and and would employment-based recognition not have that to be neither included plans.Medicare in the nor allows policyholders to stop paying premiums after a specified number of most private insurance plans cover long-term care has come slowly. Retirees employee's gross income. In addition, the benefits received when a long- days. One type of nonforfeiture provision continues coverage at a reduced • Despite growth and significant changes with regard to private-sector and workers have only begun to understand their exposure to the risk of term care insurance claim is filed (whether under an individual or employer- Submission for the record benefit level if a minimum number of payments has been made. Another long-term care insurance plans since the early and mid 1980s, no clear needing costly community or institutional long-term care, as an increasing sponsored policy) would not be included as taxable income to the beneficiary. type allows partial recovery of premiums paid. While policyholders may policy with regard to long-term care currently exists in the United States. number have faced the necessity of caring for a parent, spouse, or child However, since long-term care has not been thus defined, most employers value these provisions, policies with such features cost more. However, needing chronic (and often increasing) personal care assistance. have avoided the problem altogether either by not sponsoring a long-term for the these and other innovations give an indication of how much the private • Recent Demographic proposals trends call for ensure strengthening that the proportion public- and of /orindividuals private-sector care policy or by offering coverage on an employee-pay-all basis. Individuals long-term care insurance market has evolved since its emergence in the early requiring mechanisms formal paid through care will which increase individuals in years canto gain comeaccess . Increased to financing life of purchasing long-term care insurance either on an individual basis or as part 1980s. House Ways and Means Committee long-term care. One such proposal is that contained in the Senior of an employer-based plan use after-tax dollars, which has been assumed to expectancy, reduced fertility rates, and the aging of the baby boom generation Citizens' Equity Act (H.R. 8), which would, among other things, mean that the proportion of people at greater risk of needing long-term care guarantee them tax-free claims payments consistent with general rules of ISSUES relative encourage to the proportion the growth who of long-term can provide carephysical insurance andcontracts financial by assistance insurance taxation. The assumption that long-term care premiums must be Despite growth and significant changes with regard to private-sector long- stipulating that these contracts be treated as accident or health insurance will increase dramatically over the next several decades. In addition, more included in the taxable income of employees may impede the development of term care insurance plans since the early and mid 1980s, no clear policy with contracts for tax purposes. Hearing on the group long-term care insurance market because employers may assume two worker families and single workers and increased mobility among family regard to long-term care currently exists in the United States. While the members that other mean forms that of compensation there will be fewer that are individuals tax preferred available (e.g., health to provide insurance care private-sector market is likely to continue to grow and develop despite the • The tax code currently does not explicitly recognize long-term care. on an informal basis to friends and family. and pensions) will be more valuable to most employees. In addition, ambiguities and obstacles that exist in the current system, it is unlikely that Long-Term Care Tax Clarification Therefore, the tax treatment of long-term care insurance premiums and employers may refrain from offering long-term care insurance out of concern the goals of adequate coverage, universal access, affordability, and high quality benefits is ambiguous. Ambiguity surrounding long-term care insurance Current Sources of Financing that their interpretation of the tax treatment will be contrary to an eventual care will be met without a more coherent strategy, including clarifications in tax treatment likely acts as an impediment to the market for long-term Under ruling. the A misinterpretation current system of could financing require long-term the payment care, most of back financing taxes orfor result care policy objectives and in the regulatory environment, toward long-term care by care insurance--particularly employment-based group insurance. comes from individual out-of-pocket expenditures or Medicaid, with in uncertainty regarding the recovery of past surplus tax payments. in the United States. Medicare and private insurance accounting for only a small proportion of The provision in the Senior Citizens' Equity Act to treat long-term care At present, long-term care needs are met through both public- and Sarah Snider, Research Analyst • Tax policy is often used to promote specific social and economic goals. total expenditures. Long-term care includes services provided by paid and insurance the same as accident and health insurance for purposes of taxation private-sector initiatives in the United States. Medicaid, Medicare, private- Employee Benefit Research Institute The proposed policies for the tax treatment of long-term care can be nonpaid caregivers in institutional, home, and community settings. Because would mean that premiums paid by an employer on behalf of an employee sector long-term care insurance, and private out-of-pocket payments evaluated in terms of their tax burden versus their social benefit the would majority not have of functionally to be included dependent in the employee's individuals gross receive income long-term and that care on (including reliance on family and friends) are all mechanisms used to meet (keeping in mind who bears the burden and who benefits). benefits received when a long-term care insurance claim is filed would not be an informal basis from friends and family, 1 it is difficult to measure the total individuals' long-term care needs. Recent proposals call for strengthening Washington, D.C. included as taxable income to the beneficiary. expenditures on this care. However, according to the U.S. Health Care both public- and private-sector mechanisms through which individuals can • Tax policies can also be evaluated in terms of the public long-term care If long-term care insurance were to receive the same tax treatment as Financing Administration (HCFA), nursing home expenditures totaled $69.6 gain access to the financing of long-term care. Some proposals advocate a expenditures associated with the policy relative to the expenditures that billion accident in and 1993,health of which insurance, 33 percent employees was financed receiving through employer-sponsored consumer out-of- public-sector solution, some a private-sector solution, and some advocate would accrue without it. 7 February 1995 long-term care insurance benefits would receive the same tax-exempt pocket payments. Most of the remainder was financed through the Medicaid initiatives that would bolster the current public/private-sector mix. One such premium payments and nontaxation of interest on accumulating plan program (52 percent), with Medicare accounting for 9 percent, other public proposal is that contained in the Senior Citizens' Equity Act (H.R. 8) which • Furthermore, a change in long-term care tax policy might encourage the deposits that are characteristic of qualified pension plans. The benefits paid to and private programs accounting for 4 percent, and private insurance paying would, among other things, encourage the growth of long-term care substitution of formal for informal or more efficient sources of care for them 2 percent. would also be tax exempt, similar to those paid by health plans. To date, insurance contracts by stipulating that these contracts be treated as accident or unless the policies pay benefits according to a disability model (i.e., the only other tax-preferred prefunding (prefunding without immediate While private insurance now finances only a small portion of long- health insurance contracts for tax purposes. The bill would also allow for the The views expressed in this statement are solely those of the author and should not be attributed to the disability triggers payment as opposed to specific services). However, taxation of interest) of health benefits is through a separate account in a tax- term care needs, as an increasing number of individuals recognize the exclusion from gross income amounts withdrawn from individual Employee Benefit Research Institute, its officers, trustees, sponsors, or other staff. The Employee Benefit such a proposal may also further certain social and economic goals, qualified pension plan (a 401(h) account). However, these accounts have not possibility of needing long-term care and the costs associated with such care, Research Institute is a nonprofit, nonpartisan, public policy research organization. retirement plans or 401(k) plans for the purchase of long-term care insurance. including increased risk pooling, preservation of assets, and potential been widely used in the past because of various limitations. private initiatives to provide for this need have grown, through both reduction in Medicaid expenditures for those who are not poor. individually purchased and employment-based plans. By the end of 1992, a The Taxation of Long-Term Care Insurance Conclusion total of 2.9 million private-sector insurance policies had been sold, up from Theoretically, long-term care insurance is an item for which individuals with Tax policy is often used to promote specific social and economic goals. The 815 thousand in 1987. 2 These policies included individual, group association, assets to protect should be willing to pay. Furthermore, since people of any proposed policies for the tax treatment of long-term care can be evaluated in Continuing Care Retirement Communities (CCRC), employer-sponsored and age may potentially need long-term care services, their assets could be at risk terms of their tax burden versus their social benefit (keeping in mind who accelerated death benefits specifically for long-term care. While the majority at any time. While the chances of having extended long-term care needs are bears the burden and who benefits). Tax policies can also be evaluated in of these plans were sold to individuals or through group associations, small, the costs of such a need are extremely high. However, for a variety of terms of the public long-term care expenditures associated with the policy employment-based plans accounted for a significant proportion of this growth reasons, only a small proportion of those who can afford long-term care relative to the expenditures that would accrue without it. For example, a (increasing from 20,000 policies sold and 2 employers offering long-term care insurance have actually purchased it. For those individuals who have no proposal to treat long-term care insurance the same as health insurance for insurance in 1987 to 350,000 policies sold and 506 employers offering long- assets they wish to protect or who believe they will never require formal care tax purposes has an associated tax expenditure (and burden), and its adoption (perhaps because they have a large family), long-term care insurance may would subsidize those who purchase individual or receive employer- never be worth the price. However, others may lack information on the 1U.S. sponsored Bipartisan long-term Commission care on insurance. Comprehensive Furthermore, Health Care, it A might Call for encourage Action (Washington the DC: probability of needing such care, may mistakenly believe that they are already substitution U.S. Government of formal Printingfor Office, informal 1990)or . more efficient sources of care unless Suite 600 2121 K Street, 2Susan NW Coronel, "Long-Term Care Insurance in 1992," Policy and Research Findings the policies pay benefits according to a disability model (i.e., disability triggers (Washington DC: Health Insurance Association of America, February 1994). Washington, DC 20037-1896 207-659-0670 Fax 202-775-6312