Kassebaum Bill Tax Breaks Should Boost LTC Ins. Sales

By Allison Bell

Years of lobbying paid off earlier this month when insurers succeeded at getting tax breaks for long-term care coverage into the final version of the Kassebaum-Kennedy health insurance reform bill.

In general, the Kassebaum bill treats a qualified long-term care insurance contract as an accident and health insurance contract.

The legislation:

Excludes premiums paid by employers from employees' taxable income.

Treats employees' own premium payments as unreimbursed medical expenses with certain limitations.

Gives current long-term care policyholders until Jan. 1, 1998, to make tax-free exchanges of their old contracts for updated contracts.

Allows benefits up to $63,875 per year (or up to $175 per day) paid by qualified LTC contracts to be excluded from income. The $63,875 limit is supposed to rise with inflation after 1997.

Authorizes insurers to treat long-term care reserves as life insurance reserves for tax purposes for contracts issued or exchanged after Dec. 31, 1997.

The bill explicitly prohibits employers from offering long-term care coverage through cafeteria plans or flexible spending arrangements.

Congress sent the bill to President Clinton Aug. 5. White House aides said they expected him to sign it by Aug. 21.

"We believe this is a win-win situation for consumers, insurers, the federal government and state governments," said Richard Coorsh, spokesman for the Health Insurance Association of America, which has been lobbying for long-term care tax relief since the 1980s.

State governments want consumers to take more responsibility for their own old age because state-funded, federally regulated Medicaid programs pay 47 percent of bills submitted by nursing homes and other long-term care facilities, Mr. Coorsh said. "Most state governments find that Medicaid costs are one of their biggest budget-busters."

Although passage of the bill represents a major victory for insurers, they must battle consumer ignorance and skepticism before they can translate the new tax breaks into increased sales, long-term care experts said.

"The bill sends the strongest signal ever that the government is not going to pay for long-term care, that people have to take personal responsibility," said Gail Schaeffer, vice president for retail long-term care at John Hancock Financial Services, Boston. "But it won't raise awareness unless we make it raise awareness."

Annual sales of long-term care coverage increased to 440,000 contracts in 1994 from 20,000 contracts in 1988, according to the HIAA.

Forty percent of the Fortune 100 companies tracked by Bryan Lane, a principal in the Stamford, Conn., office of Towers Perrin, make long-term care coverage available through voluntary, portable, employee-paid programs.

But insurers have experienced slow, steady growth in sales, not the spectacular growth some had expected to see as Baby Boomers began planning for their old age, Mr. Lane said.

"This is just a hard coverage category for people to relate to," said Chip Kerby, a principal in the Washington office of William M. Mercer Inc. "Is this a benefit the market is demanding? I guess that's still very much a question mark."

Some young employees do buy long-term care insurance. When Mr. Lane studied two large employers that offer voluntary plans, he found the participation rate for employees under 30 was 5 percent, compared with participation rates of 9 percent to 13 percent for employees between the ages of 40 and 50.

But many young employees have other financial priorities, and older employees who are interested in long-term care coverage have a hard time evaluating policy descriptions or knowing what level of service to expect once the time comes to collect benefits, Mr. Kerby said.

"Even the underwriters are gaining experience," Mr. Kerby said.

Ms. Schaeffer said she would like to see Congress act next by closing loopholes that permit middle-class consumers to spend or give away assets to qualify for Medicaid assistance with nursing home costs. "There have to be stronger incentives for people to take responsibility," she said.

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