Florida legislature introduces consumer protection disclosure bill (HB1055) for life insurance owners to convert policies to long term care benefit plans

Center for Economic Forecasting and Analysis (CEFA) estimates annual savings from policy conversions over $150 million to Florida Medicaid and Tax Payers

Since the National Conference of Insurance Legislators (NCOIL) unanimously passed the Life Insurance Consumer Disclosure Model Law in 2010, states all across the country have been looking at the cost savings impact on stressed Medicaid budgets by converting life insurance policies into long term care benefit plans. The policy conversion option was one of the consumer protection disclosure requirements included in NCOIL’s model law, and the nursing home and assisted living industries have been quick to adopt this funding option to help beleaguered families struggling with the costs of long term care across the United States. Life Insurance is an unqualified asset for Medicaid eligibility and it has been standard practice to lapse or surrender a policy as part of a Medicaid spend down plan. With billions in face value being abandoned, NCOIL and state law makers have come to realize that a better option for seniors, the long term care industry, and tax payers would be to convert these policies instead.

According to The Center for Economic Forecasting and Analysis (CEFA): In Florida, the Department of Elder Affair’s “Comprehensive Assessment and Review for Long-Term Care Services (CARES) Program” determines medical eligibility, and the Department of Children and Families “Economic Self-Sufficiency (ACCESS) Program” determines financial eligibility. On registering for Medicaid with ACCESS, applicants have to disclose assets and income. In particular, all Medicaid applicants are specifically asked if they own life-insurance policies, and if so, they have to disclose the full policy details. A failure to disclose and comply is fraud. A life-insurance policy is legally recognized as an asset of the policy owner (with all rights of personal property ownership) and it counts against the owner when qualifying for Medicaid. If a policy has more than a minimal amount of cash value (usually in the range of $2,000) it must be liquidated and that money is to be spent towards cost of care before the owner will qualify for Medicaid.

According to the Florida Legislature’s Office of Program Policy Analyses and Government Accountability: A life-insurance policy can be surrendered for its cash value to be spent down on care, or a policy can be converted for its fair market value and the full benefit of that conversion can be used to pay for long-term care as a qualified spend down. The owner of one or more policies has a variety of options to consider:
• A policy with more than a minimal amount of cash value must be surrendered back to the insurance company with the proceeds spent down on care.
• A policy with no cash value does not need to be liquidated but the death benefit will be subject to federally required Medicaid recovery efforts to return the amount of money spent on care.
• Many states will exempt a small “final expense” policy if the full death benefit value is assigned to a funeral home.

Medicaid budgets in every state are under extreme pressure to balance shrinking revenues and the demands of a growing elderly population requiring long term care services. Compounding this problem are across the board cuts of 11.1% for all long term care related expenditures the Center for Medicare and Medicaid Services (CMS), the federal government agency which manages the two entitlement programs, instituted for 2012.

Medicaid already reimburses at rates 1/3 lower than private pay rates, and this cut by CMS is an additional 11.1% reduction to the bottom line of every long term care service provider in the United States. Yet demand for services is increasing at an alarming rate. Ten thousand baby boomers a day started turning 65 on January 1, 2011-- and that pace will continue uninterrupted for twenty more years. The government and the long term care industry are desperately looking for innovative, private market solutions to help bridge this widening chasm.

With the introduction of HB1055 in 2012, the Florida legislature has taken the consumer disclosure protections first introduced by NCOIL a little over a year ago to its next logical steps. According to CEFA, the bill introduced in both the Florida House and Senate, would require: a) use of an accelerated death benefit (ADB) rider, if present, to pay for nursing home care, b) required disclosure to the consumer of the National Conference of Insurance Legislators (NCOIL) Model Law, (which deals amongst others with unclaimed property policies), and c) would allow policy conversions as an extended spend down Medicaid eligibility requirement.

The objectives of the sponsors of the bill are twofold, namely;
• To protect consumers by giving policy owners as much information as possible about their legal rights on life-insurance policy ownership; and
• To save taxpayers money by utilizing the value of life-insurance policies and to delay the need for a citizen becoming dependent on Medicaid.

CEFA’s economic impact study released in January, 2012, measures the cost saving implications of private market policy conversions for Florida tax payers and the state Medicaid budget through passage of HB1055. According to the CEFA study entitled, Conversion of Life Insurance Policies to Long Term Care Benefit Plans in Florida: The objective of this research project is to examine the impacts of the objective of House Bill 1055, specifically the opportunities for utilizing life-insurance policy assets as an available means whereby private funding may pay for long-term health care needs. Medicaid expenses on long-term health care services for residents may be offset by… $157.4 million on conversion of their life-insurance policies into long-term health care benefit plans per year.

The CEFA economic impact study does not take into account the tax advantaged status of policy conversions into long term care benefit plans for the consumer, nor did it explore the impact of new tax revenue for the state. By adding new taxable revenue being received by the long term care facilities in the form of extended private pay dollars that otherwise would not have existed, the state could not only be saving over $150 million annually but adding as much as $50 million in new revenue taxed at the corporate rate.

Pressure on the Medicare and Medicaid safety nets are growing daily (literally by 10,000 people per day) and it is imperative that private market alternatives are embraced as quickly as possible. The primary champion for this consumer protection disclosure law has been the Florida Health Care Association representing nursing homes and assisted living communities throughout the state. They recognize that it is in the better interest of the consumer to be fully informed of their options to use a life insurance policy to help pay for long term care as an alternative to abandoning the policy. It is also in the best interest of tax payers to extend the spend down period of a life insurance policy by converting it to its fair market value, allowing someone to remain private pay for as long as possible.

Informing the consumer of their legal right to use their own property (a life insurance policy) to its maximum utility as a means to pay for long term care is an irrefutable positive. As numerous states prepare to introduce similar legislation to Florida’s HB1055; it appears that the option to convert life insurance policies into long term care benefit plans is growing rapidly into a favored option for funding long term care in the United States.