BILL ANALYSIS �
AB 1553
Page 1
Date of Hearing: May 7, 2014
ASSEMBLY COMMITTEE ON INSURANCE
Henry T. Perea, Chair
AB 1553 (Yamada) - As Amended: April 23, 2014
SUBJECT : Gender Pricing for Long-Term Care Insurance
SUMMARY : Prohibits gender pricing for long-term care (LTC)
insurance policies. Specifically, this bill :
1)Prohibits the use of sex (gender) as a factor to determine the
premium for LTC insurance.
2)Prohibits reducing or eliminating coverage in an LTC insurance
policy as a result of implementing the ban on using gender as
a factor in determining premium.
3)Clarifies that the bill's rules also apply to riders attached
to other policies that provide for the payment of LTC
services.
4)Defines "sex" as a person's gender, gender identity, or gender
expression.
5)Defines "gender expression" as a person's gender related
appearance and behavior whether or not stereotypically
associated with the person's assigned gender at birth.
EXISTING LAW :
1)Defines LTC insurance as any policy, certificate, or rider
that provides coverage for diagnostic, preventive,
therapeutic, rehabilitative, maintenance or personal care
services provided outside a general acute care hospital.
2)Requires LTC insurance policies to be reviewed and approved by
the Insurance Commissioner (commissioner).
3)Provides for the comprehensive regulation of LTC insurance
policies by the commissioner.
4)Requires the premiums for life insurance and annuity policies
to be priced according to gender.
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5)Permits the use of gender as an optional rating factor for
automobile insurance.
6)Prohibits the use of gender pricing for health insurance.
FISCAL EFFECT : Undetermined
COMMENTS :
1)Purpose . According to the author, gender discrimination has
broad public policy implications. Extremely high premium
rates could drive women out of the LTC insurance market, and
subsequently increase premium rates for both men and women who
retain policies. According to the American Association of
Long-Term Care Insurance, almost 70% of women age 75 or older
are widowed, divorced, or never married, leaving them less
likely to have spouses to care for them and more likely to
live in assisted living and nursing facilities. Currently in
California, 2 out of 3 nursing home residents are women.
Without the ability to afford long-term care insurance, these
women are forced to depend on the State to cover their costs
of care. AB 1553 is intended to prevent this by prohibiting
the use of gender as a basis for premium, price, or charge
differentials. Proponents note that women already bear the
burden of caregiving, in addition to earning less than men and
accumulating less wealth, so charging women more for the same
policies is neither a fair nor effective solution to covering
the industry's costs.
2)Long Term Care . LTC services provide individuals who, because
of illness or disability, are generally unable to perform
activities of daily living (ADL), such as bathing, dressing,
toileting, and getting around the house, or suffer from
cognitive impairments. LTC services are provided in a variety
of settings, such as nursing homes, assisted living
facilities, and private residences. Only about 20 percent of
the elderly who need LTC services live in an institutional
setting. The roughly 80 percent living in the community
primarily live in private homes, but a small number live in
residential communities catering to the needs of elderly
people. For those living at home, most receive assistance
from unpaid family members and friends (referred to as
informal care) while some pay for assistance (referred to as
formal care) from home health aides. Elderly people with
severe functional and cognitive limitations who require
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around-the clock assistance often live in institutional
settings. According to data from the Medicare Current
Beneficiary Survey, the elderly nursing home population has
declined over the past 10 years as more elderly people are
living in residential care facilities, community-based housing
with supportive services, and in their homes.
3)How is LTC Paid For ? More than half of LTC services are
provided as informal care, and it is typically provided by
family members (mostly spouses and adult daughters) and
friends. The Congressional Budget Office (CBO) estimates that
the value of informal care provided in 2011 was approximately
$234 billion. Total payments for formal care were
approximately $192 billion in 2011, two-thirds of which were
paid for by Medicare and Medicaid. Private spending for
formal care is mostly paid out-of-pocket (approximately $39
billion in 2011). Private LTC insurance pays for a relatively
small share (approximately $12 billion in 2011) of total
spending on LTC services. The CBO estimated that private
insurance pays for less than 10% of all LTC costs.
Approximately 3% of the adult population has an LTC policy,
but the percentage increases to 11% of those over 65.
4) Who Buys LTC Insurance? LTC insurance is one financial
product in the range of products available for retirement
planning. In exchange for premiums (which vary widely but
on average were $2268 in 2010) paid over many years
(average age of an LTC buyer is 59), LTC insurance provides
some financial protection against the prospect of LTC costs
in excess of the purchaser's retirement income. Sixty-five
percent of LTC insurance policies are purchased by women.
As such, LTC insurance appeals most directly to upper
middle income individuals (buyers have median annual income
of $87,500 and median assets of $325,000) who expect to
have sufficient retirement income to cover the LTC
insurance premium, living expenses, and out-of-pocket
health care costs, but would not be able bear the increased
costs of LTC services. There is little prospect of
widening the market for LTC insurance given the small
number of people who will amass sufficient retirement
savings to continue paying the premiums in their
retirement. Because some LTC insurance products receive
preferential tax treatment, LTC policies also appeal to
upper income individuals who otherwise would have the means
to absorb the cost of LTC services, but want to take steps
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to preserve assets for their heirs. Protecting their
children's inheritance is the most common reason cited for
buying LTC insurance.
5)Problems in the LTC Market . The long-term care insurance
marketplace is problematic for both insurers and consumers.
In the past five years 10 of the top 20 LTC insurers have
stopped selling new LTC policies. Insurers have struggled
with setting premiums adequate to cover their costs in the
absence sufficient claims data. LTC insurance is a relatively
new product that requires years of paying premiums before
claims are made. Only in recent years have the insurers begun
to receive claims for many of the policies sold early on and
those claims have been much higher than the insurers
anticipated. In addition to misjudging the cost of claims,
insurers have struggled with anticipating policy lapse rates,
LTC inflation, and life span increases. All of those factors,
and others, have led to LTC insurance being much more
expensive than previously expected. The early mistakes in
pricing LTC policies has led to rounds of major premium
increases which adds marketing challenges to a product that is
already, according to insurance agents, difficult to sell.
CalPERS is a recent example of an LTC insurer that
underestimated the cost of insuring LTC. It has pushed
through multiple premium increases (30% in 2003, 43.8% in
2007, and 85% in 2015) in an attempt to set premiums in line
with its costs. While premium increases of this size are
difficult to absorb for those who are still working, it can be
impossible for retirees on a fixed income to absorb the higher
premiums.
6)Retirement Readiness . It is well accepted that the average
American worker has inadequate retirement savings. A worker is
considered to be at risk for serious economic hardship in old
age if his or her retirement income falls under 200% of the
poverty threshold for individuals. A study of retirement
readiness published in 2011 by the UC Berkeley Center for
Labor Research and Education found that 47% of Californians
are projected to have retirement incomes below 300% of the
poverty level ($34,470 in 2013). Individuals who have not
been able to save enough to support adequate retirement income
are unlikely to be able to support the added cost of LTC
insurance premiums either before or, especially, during
retirement. Individuals with low retirement incomes who need
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LTC services are most likely going spend down their assets and
rely on Medi-Cal to pay for those services. The problem faced
by most low and middle income consumers as it relates to LTC
finance isn't the prospect of gender pricing, but inadequate
income and the associated lack of retirement saving. Buying
an LTC insurance policy will not solve the problem of
inadequate retirement saving.
7)Risk Classification . A basic premise of insurance is to allow
an individual to transfer his or her risk (uncertain
possibility of a future loss) to a third party (insurer) in
exchange for payment of premium. Premiums are a function of
the size of the potential loss, the likelihood of that loss
occurring (risk classification), and the expenses incurred in
providing the insurance. A "mathematically fair" premium
should allocate premiums based on these factors so that each
individual is bearing their share of costs in the insurance
pool. If an individual is charged a premium that is below the
"mathematically fair" premium, then that individual is
receiving a subsidy from others in the pool. Likewise, if an
individual is paying a premium higher than the "mathematically
fair" premium, then that individual is providing a subsidy to
others in the pool. When substantial subsidies exist within
insurance pools with an open market, individuals providing the
subsidy will withdraw from that pool to seek a lower premium
in another pool where they do not pay the subsidy. This can
doom the insurance pool by leaving only high cost individuals
who are paying inadequate premium to cover their costs to the
pool or by requiring dramatic premium increases that render
the insurance unaffordable to the remaining members of the
insurance pool. This pattern is commonly referred to as a
"death spiral." There is a distinct possibility that the ban
on gender pricing for LTC insurance will result in a large
premium subsidy for women (see discussion below) that will
both drive men from the market and attract women. Increasing
the concentration of women in the LTC insurance market creates
a very real risk of a death spiral in the LTC insurance
market.
Insurers devote considerable attention to risk classification
so that subsidies are minimized and they can avoid the "death
spiral." Risk classes should be constructed so that
individuals with similar risk are classed together, and that
each class should have significantly different risks. Age,
health status, number of miles driven, and gender are all
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commonly used for risk classification for insurance products
and have been recognized as legitimate classifications in
California law for different products. The Insurance Code
mandates, for example, the use of gender for risk
classification in life insurance and annuity policies. This
law was passed in recognition of the reality that women live
longer and a "mathematically fair" premium should be lower
than that provided to a similarly situated male. Also,
regulations adopted by the commissioner allow the use of
gender as an optional rating factor for automobile insurance
in recognition of the reality that women as a group have, for
various reasons, fewer accidents.
Notably, the use of gender for risk classification has been
prohibited in health insurance for a number of years. The
health insurance market has been marked by significant
subsidization (for a variety of reasons) and premium
instability for many years, in part because of the magnitude
and extent of these subsidies. Many of the reforms (community
rating, mandate to buy, guaranteed issue/renewal, minimum
benefits requirements) were included in the Affordable Care
Act to address subsidization and its consequences in the
health insurance market. The private LTC insurance market
does not have comparable features to compensate for the
adverse effects of the hefty premium subsidy that would be
caused by a ban on gender pricing. One need look no further
than the problems in the health insurance market in recent
years for an example of what happens to a heavily subsidized
insurance market without features to compensate for those
subsidies.
8) Costs . There is a considerable amount of data to show
that women have higher LTC costs. For instance:
a) Women are 50% more likely to need nursing home care
than men.
b) Two out of three nursing home residents are women.
c) Women who enter a nursing home remain there 50%
longer than men
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d) Women receive 50% more formal LTC services than men.
The reality of these higher costs is reflected in the premiums
charged under a gender pricing system. In those states where
gender pricing exists, women have 20-40% higher LTC insurance
premiums. The first LTC insurance policy with gender pricing
was approved by the commissioner in March of this year. In
order to have such a policy approved by the commissioner, the
insurer is required to have an actuary certify that the rates
charged are sufficient to cover anticipated costs and that the
premium rate is reasonably expected to be sustainable.
1) Gender Equity . Supporters of the bill assert that
prohibiting gender pricing for LTC insurance is merited as
a means to compensate for income inequality and the lost
income resulting from the burden of care women frequently
provide to their parents, children, and spouse. Supporters
describe gender pricing for LTC insurance as an "unfair"
and "discriminatory." As noted above, California law
recognizes that the use of gender to classify insurance
risks is not inherently an unfair discrimination. Existing
law characterizes the failure to engage in gender pricing
for life insurance and annuity policies as an "unfair" and
"discriminatory" practice, and auto insurance law
recognizes the use of gender in pricing automobile
insurance as well. To date, California law treats the use
of gender as a factor in setting insurance premiums based
on the individual issues in given insurance markets rather
than an absolute moral/ethical imperative. Despite the
goal of "fairness," there are many sound reasons to
conclude that a ban on gender pricing for LTC insurance
would further destabilize the already shaky LTC insurance
market, and could lead to more insurers leaving the market.
Some supporters have asserted that gender pricing should be
prohibited because the majority of elderly women have lower
pensions and little savings. As noted above, LTC insurance is
expensive and retirees must continue to pay the premiums for
this insurance from their retirement income, which makes it
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unworkable for low-income retirees. Elderly women with
minimal pensions or savings are simply not likely purchasers
of LTC insurance regardless of whether gender pricing is
permitted or not. LTC insurance policies sold currently do
not have gender pricing and the premiums for those policies
are out of reach for consumers who do not have substantial
retirement income. LTC insurance is a financial tool that
makes sense for some upper income consumers but private LTC
insurance is not a viable solution to finance LTC services for
those who do not have the retirement income to support the
premiums. Given that LTC insurance is primarily purchased by
affluent women, measures to further subsidize the cost of it
would seem to do little to address the very real issue of
income inequality for women.
2) Current LTC Insurance Market . According to opponents of
the bill, the long term care insurance marketplace has been
very volatile for a number of years and, the cost of LTC
insurance is beyond the means of many people despite the
absence of gender pricing in the current market. Opponents
also suggest that the existing regulatory restrictions on
LTC insurance products have prevented insurers from
developing a wider range of products that could provide
consumers with a greater ability to purchase a policy with
benefits tailored to their specific needs at more
attainable price points.
3)Suggested Amendment . The committee may wish to consider
amending the bill to delay implementation of the bill for
three years and require the Department of Insurance to conduct
a study to evaluate the likely market impacts of implementing
a ban on gender pricing for LTC insurance. Requiring
completion of the study within 18 months would provide the
Legislature with time to reconsider the gender pricing ban in
light of the results of the study before the ban is
implemented.
REGISTERED SUPPORT / OPPOSITION :
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Support
American Association of University Women
American Civil Liberties Union
California Advocates for Nursing Home Reform
California Alliance for Retired Americans
California Commission on Aging
California Communities United Institute
California Health Advocates
California Retired Teachers Association
California Senior Legislature
Congress of California Seniors
National Association of Social Workers - California Chapter
National Women's Law Center
Older Women's League
The Insight Center for Community Economic Development
Opposition
American Council of Life Insurers
Association of California Health and Life Insurance Companies
California Health Underwriters
National Association of Insurance and Financial Advisors -
California
Pacific Life Insurance Company
State Farm Mutual Automobile Insurance Company's (State Farm)
Analysis Prepared by : Paul Riches / INS. / (916) 319-2086