In many countries, how to fund support for old
age is a growing issue. At the start of 2017, the German compulsory Long Term
Care (LTC) insurance scheme underwent comprehensive reform that reframed the
definition of care. Besides introducing a new “in need of care” definition, the
reform also added a new evaluation instrument for determining the need
for care.
This paper gives background information on the
German LTC social security system, presents the new definition and the new care
assessment and points out the major changes. It focuses on lessons learned and
first experience under the new system, which might be interesting and helpful
for other countries. It concludes with the implications this reform has for the
private insurance industry with respect to in-force policies, designing of new
products and pricing.
Background
LTC insurance, be it public or private, is
designed to protect against costs that arise from care needs. It provides cover
against the risk of becoming too frail to care for oneself without physical
assistance from another person even when using assistive devices.
Demographic and societal changes continue to put
pressure on society with respect to elder care. In particular, increasing life
expectancy and decreasing fertility rates mean that more people reach a
care-relevant age with fewer people to support them. In 1980 life expectancy at
age 65 was only 12.8 years for men and 16.3 years for women in
Germany (12.6 for men and 16.6 for women in the United Kingdom). In 2015 it was
already 17.9 years for men and 21.0 years for women (18.6 for men and
20.8 for women in the United Kingdom) – reflecting an increase of four to six
years of life expectancy over a 35-year period.1 In most developed
countries, the fertility rate has been below the replacement rate of 2.1 for
decades now. It was only 1.5 in Germany (1.8 in the United Kingdom) in 2015 and
has been this low since the early 1970s.2 An increased mobility
of the younger generations, a higher labour participation by women, and the
fact that families are getting smaller and less stable, imply that close
relatives who have been the traditional choice in the past are now less likely
to take on the role of caregivers.
In countries where a public system exists that
encompasses elderly care, these demographic and societal changes exert pressure
on the social system since they translate into a smaller share of the
population that is of working age. A measure that puts a number on this phenomenon
is the old-age dependency ratio. It sets the number of persons aged 65 and
over (the age when they are generally economically inactive) in relation to the
number of persons aged between 15 and 64 (working age). In the EU-28 countries,
this ratio is projected to increase from 0.288 in 2015 to 0.503 in 2050, which
indicates that only two persons of working age will be there to support
one pensioner.3
The majority of people will need care support
during a certain period before death. The experience from a German public
health insurer reveals that more than half of all men and almost three out of
four women require care at the end of their lives, and that more than 80% of
them require it for more than three months.4 Finding solutions
to fund the care of the elderly is therefore of key importance in ageing
societies.
Germany
Germany is one of the few countries with an
established public LTC system and where government and private solutions
coexist. In 1995 the public LTC insurance scheme was introduced as the last of
the five pillars of social insurance in Germany. Coverage is compulsory, and
people are usually insured through their health insurer. The financing of the
scheme is based on a pay-as-you-go system. The contribution rate has increased
from 1% of gross income at the outset to the current 3.05%, and is shared
equally between employee and employer. Those without children pay a surcharge
of 0.25 percentage points. The principles of the system are, firstly, the
partial nature of the scheme, which bears around half of the actual cost
incurred by an individual in need of care. Secondly, home healthcare should
take precedence over nursing home care. The benefits are not means-tested and
do vary, depending on whether a cash benefit or the reimbursement of care costs
is chosen and whether care is provided at home or in a nursing home.
When the compulsory LTC insurance scheme was
introduced, it had three care levels. The assessment of the level of care took
account of the frequency and duration of the assistance required to provide for
personal hygiene, feeding, mobility and housekeeping needs. Other activities,
such as measures to promote communication and general care, were explicitly not
taken into account. In reaction to the criticism of the focus on physical abilities,
a “level 0” was added later. Small levels of benefit were granted to
individuals with limited daily living skills, including mainly those with
cognitive impairments, such as dementia, but no physical care needs. In
addition, the highest care level differentiated so-called hardship cases that
manifested extremely high and intensive care needs and surpassed the usual
extent in care level III.
The three care levels and hardship cases were
defined by the following criteria:
1.
Persons in care
level I require assistance for the basic activities (personal hygiene,
feeding and mobility) at least once a day and several times a week
for housekeeping.
2.
Persons in care
level II require assistance for basic activities at least three times a
day and several times a week for housekeeping.
3.
Persons in care
level III require assistance daily and around the clock for basic
activities and several times a week for housekeeping.
The length of time a non-professional spends on
average per day caring for the dependent person has to amount to:
·
At least
90 minutes, more than 45 minutes of which are for the basic
activities in care level I
·
At least three hours, at
least two hours of which are for the basic activities in care level II
·
At least five hours, at
least four hours of which are for the basic activities in care level III
Persons in care level III counted as
hardship cases if they either needed assistance for the basic activities for at
least six hours daily, including at least three times at night, or if the
assistance for the basic activities could only be rendered by several care
persons together, including at night. Hardship cases were present especially
for terminal cancer, terminal AIDS, high paraplegia and tetraplegia, vigil coma
and severe manifestation of dementia amongst others.
The reform
From the outset, two features of the care
assessment and definition were especially criticized: the insufficient
consideration of cognitive aspects and the unsuitable counting of minutes as a
criterion to assess the need for care. Over the years, various legal extensions
were therefore instituted but never included a thorough reform of the system.
Benefits were expanded, “level 0” was introduced (first only for those
with a care level, later for all) and a provident fund was established.
Since 2013, a government initiative has promoted
private insurance by subsidising (small) premiums, the so-called “Pflege-Bahr”.
Nevertheless, a reform was concretely envisaged already in 2006 when an
advisory committee to review the care definition was initialised. This
committee accomplished much important groundwork, such as outlining a new
definition and assessment after thorough research and pre-testing the proposed
assessment instrument. Due to changing governments after elections and shifted
priorities, further work was delayed, but not abolished. A second committee
revised and concretised the new care definition and two larger studies were
conducted to validate the new assessment process. Finally, in 2015 the Second
Pflegestärkungsgesetz (PSG II) (i.e. the Second Strengthening-of-Care Act)
was passed and took effect at the beginning of 2017, more than 10 years
after its initialisation. It is embedded within the framework of the First
Pflegestärkungsgesetz, which brought an expansion of benefits and the setup of
the LTC fund in early 2015, and the Third Pflegestärkungsgesetz, which is to
strengthen care counselling in the municipalities from 2017 onward. With the
contribution rate increased by 0.2 percentage points, the financing of
PSG II was deemed sufficient at the time. However, another increase by
0.5 percentage points from 2019 onward had to be realised.
The new care
assessment and definition
The new evaluation instrument for determining
the need for care comprises six modules that are weighted differently in the
final overall score (Figure 1):
·
Mobility (10%)
·
Cognitive and
communicative abilities (higher value from module 2 and 3, in
total 15%)
·
Behaviour and
psychiatric problems (higher value from module 2 and 3, in
total 15%)
·
Self-care (40%)
·
Dealing with
requirements due to illness or therapy (20%)
·
Organisation of everyday
life and social contacts (15%)
Each module consists of various items. For each
item, the assessor records how independently the applicant can perform an
activity, if or to what extent an ability is present or how often a certain
behaviour occurs. The applicant receives one of the five care grades if the
total score is above 12 points of a total of 100 points. For the
highest care grade, a special rule applies, and is granted if the applicant has
a score of at least 90 points or has lost the use of both arms and
both legs.
The assessment philosophy is characterised by
five fundamental changes:
·
The allotment of time
required for care was replaced by the degree of independence. Heretofore, the evaluation was based on how
often and how long the dependent person needed assistance. To that end, the
assessor drew on benchmarks as reference points, a complete takeover of the
activities by a lay caregiver being assumed. For example, a full-body wash was
graded with 20 to 25 minutes. From now on, the extent to which the
applicant can shower or bathe independently will be captured.
·
The former deficit
orientation is replaced by a resource orientation. It is therefore not a question of what the
person in need of care can no longer do, but rather what he or she is still
able to do.
·
Previously, the need for
care in some activities of daily living was taken into account, consisting of
personal hygiene, nutrition, mobility and household assistance. In the future,
there will be a comprehensive consideration of the care need. Cognitive and psychiatric impairments will be
considered especially in modules 2 and 3 and to some extent in modules 5
and 6. In modules 1 and 4, on the other hand, special emphasis
is placed on physical impairments, which continue to be of great relevance due
to the high weight of these modules in the total score.
·
The earlier three care
levels have been replaced by five care grades. The lowest care grade only serves as a type of
preliminary level, though. It has an easy-to-achieve minimum score and
relatively low cost reimbursement benefits that can only be used for their
specified purpose.
·
In the past, a person
had to actually be dependent on assistance for the respective activity. In the
future, it will be irrelevant whether the activity in question actually occurs. For example, independence when climbing stairs
will be assessed even if there are no stairs in the applicant’s individual living
environment.
It is noteworthy that with regard to inpatient
care, the contribution to be paid by the person will no longer be dependent on
the care grade (except for the lowest care grade). A transition to a higher
care grade will therefore not lead to higher contributions, which often led to
conflicting interests between nursing home operators and the person in need of
care or their relatives. It should be noted, however, that the exact amounts of
the deductible and additional costs for investments, board and lodging differ
from nursing home to nursing home.
For those who already received benefits from the
public LTC insurance system before the reform in 2017, the protection of the
status quo is politically intended. Those people are automatically transferred
into the new care grades and continue receiving at least the former benefits. A
former categorisation into care level x is transferred to care
grade x+1. If the dependent person also has limited daily living skills,
he or she is transferred to care grade x+2. For example, an individual
with care level II before 2017 will be re-categorised into care
grade 3. If limited daily living skills were observed in addition to care
level II, the person will be categorised into care grade 4.
Implications for
private insurance
Additional private LTC insurance policies are
available from both the Health and Life insurance line – sometimes with
considerable differences. Health insurers offer daily allowances, subsidised
LTC insurance policies and the increasingly less important cost reimbursement
policies, while life insurers offer annuities. Due to the possibilities to
adjust premiums in daily care allowances, the higher guarantee level (including
a surrender value) in care annuities and varying interest rates, the
price-performance ratios of the policies cannot be compared directly. The
initial premium for daily care allowances may appear less expensive when looked
at in isolation. This may be one of the most important reasons why the number
of in-force policies for health insurers is much higher, amounting to 3.7
million at the end of 2017.5 Even though life insurers managed
a portfolio of only 220,000 policies, at the same time they enjoyed a strong
growth in recent years.6 Between 2005 and 2017 the number of
policies has increased by 24% on average per year, compared to an average
annual increase of 13% for Health insurance products.
For LTC insurance policies offered by health
insurers, Germany’s PSG II provides for a special adjustment right for
conditions and premiums, and even provides a duty to adjust the tariffs in
compulsory private LTC insurance and nationally subsidised additional LTC
insurance policies. Additional private policies follow the procedure in the
compulsory private LTC insurance. For one, this means that the new definition
of “in need of care” will be used in new business. It also means benefits
offered under existing policies have been adapted based on the new definition
of “in need of care”.
Products available from the Life insurance line
previously used three definitions – the legal definition of “in need of care”,
a definition based on activities of daily living (ADL), and an independent
definition of dementia – as benefit triggers. The legal definition was
typically copied into the contract wording at a certain point in time with a
commentary that changes in the public definition would not lead automatically
to changes of the tariff, implying that claims management retained the right to
do their own assessment. Because the need for financial support typically
increases with the level of dependency, tiered benefits were very popular. This
means that the benefit amount depends on the care level or the number of failed
ADLs. For example, the insured person receives a partial benefit when failing
four out of six ADLs, fulfilling the requirements for care level II or
when suffering from dementia and the full benefit in the highest category.
In future claims assessments involving
pre-existing policies, two situations are possible: Either those three benefit
triggers will have to be taken into consideration, which does not seem
impossible since the assessment report based on the new evaluation guidelines
will be available; or the insured person will have opted to switch to a new
policy, an option that most recent tariffs offer. No new underwriting is
required, but the change of tariff must not lead to an extension of the cover,
which can lead to a changed (usually lower) benefit than before, due to the
more generous nature of the new care definition. Switching to a new tariff can
have advantages for the policyholder, even though some specifics, such as the
gender-differentiated calculation and higher guaranteed interest rates in
earlier product generations, have to be dealt with adequately.
Due to the legal definition, one must ask how a
new policy should look. Sticking to the old care levels would do no favour to
either the carrier’s public image or its claims management. On the other hand,
life insurers have been engaged predominantly with other issues, such as
regulatory requirements or the reorientation of private pension products, with
the result that only a little capacity is available for revising the LTC
product. Thus, there are currently providers that, for the time being, are
continuing to use the old care levels or are not using the legal definition at
all, favouring the definitions of ADLs and dementia instead.
It is worth considering whether to use the new
legal definition exclusively, which covers both physical and psychological
disabilities. A separate definition of dementia would then no longer be
necessary. On the other hand, a parallel definition of ADLs could at least
provide a fallback option in case of future reforms of the public LTC system,
even though this might seem unlikely at the moment with the flaws of the old
definition appearing to have been corrected. Aside from that, such a
parallelism would follow the former market standard. Both variants are
currently to be found on the market; some carriers have opted to use only the
new social security definition going forward, while others combine it with an
ADL definition complemented by a cognitive element to imitate the legal
definition.
Tiered benefits still make sense for home
healthcare, since the need for financial support continues to be different for
each care grade. For nursing home care, this is no longer the case due to the
above-mentioned new regulation that the contribution to be paid is no longer
dependent on the care grade. However, no one will be able to tell whether
potential care will be delivered at home or in a nursing home when taking out
LTC insurance. Most products on the market offer an individual fixing of the
benefit amount per care grade.
As mentioned above, the lowest care grade (care
grade 1) serves as a type of preliminary level with an easy-to-achieve minimum
score and relatively low mandatory benefits. The calculation of this care grade
involves a number of uncertainties as the assumption regarding the number of
additional benefit recipients to expect has a major impact. It therefore seems
wise to offer no cover – or only very low cover for care grade 1; for
example, in the form of a lump sum benefit. Even a waiver of premiums for
reaching care grade 1 could jeopardize the profitability of the tariff
because the insurer might not gain enough premiums to pay out later benefits.
Therefore, for most products on the market, care annuities can only be paid,
and premiums only waived, from care grade 2 upwards.
Differentiating between care grades 4
and 5 is fraught with higher uncertainties than when looking at the other
care grades. For the most part, cases with the former care level III can
be expected in both care grades. Since further progressed cases with care
level III were underrepresented in the studies prior to the reform,
differentiating between these two care grades in the calculation is very risky.
Furthermore, the average time needed to provide care is nearly the same in care
grades 4 and 5. Thus, it is recommended to allow for the same or at
least very similar benefit amounts in these care grades. Some products on the
market combine the highest two care grades at the outset. Products with fixed
levels of benefits offer a high percentage of benefits in care grade 4.
One must also consider whether the assessment of
risks in medical underwriting has to change. Dementia-related or mental
illnesses affecting behaviour and conditions that involve the patient in the
monitoring and/or treatment processes are weighted more heavily than in the
past. Fundamental changes in the previous assessments are unnecessary. For
example, due to the predictability of care dependency, it was normally
impossible to obtain insurance for psychotic schizophrenia, especially when
dementia represented an independent benefit trigger.
Another major question is how pricing rates can
be derived for the new definition when there has been no actual experience at
all. The former relatively robust rates for care levels can be transferred to
the new definition using, for one thing, contingency tables of care levels and
care grades. These can be obtained from the studies prior to the reform, during
which applicants were assessed simultaneously with regard to the former and the
new assessment system. Various adjustments might be necessary, like taking into
account the effect of “lifting-over-the-threshold”: When assessing claimants
with real benefits resulting from it, a gap in the distribution of the scores
at the threshold to the next higher care level can be observed. This means that
almost no claimant receives a result close to the next higher care level, but
clusters receive a score just over it. Scores close to the next higher care
level would only lead to objections and, due to the worsening state of health
of almost all care recipients, a reassessment only a short time later would
confirm the justification of the higher care level. In a study setting,
however, this gap cannot be observed, but will probably occur for care grades
as well.
Additionally, assumptions about the number of
additional benefit recipients are necessary. These are the people that were not
care-dependent with regard to the old system, but will be granted a care grade
in the new system. One approach is to estimate the number of those who applied
but were rejected in the care level system and those who never claimed but are
likely to do so in the care grade system. Since the new system has been in
place for over two years, first numbers have been published. Public sickness
funds, which account for approximately 94% of care recipients, have stated that
by the end of 2017 around 304,000 people will have been granted a care grade,
but would not have received benefits in the old system.7
Conclusion
The objective of providing more appropriate care
grading through the LTC reform appears to have been achieved. In future, people
with cognitive and mental health problems will be shown the same recognition
for their limitations as people with purely physical impediments. Resource
orientation and a focus on the degree of independence replace deficit
orientation and the focus on the length of time required for care.
The design of the new care definition and
assessment may serve as an inspiration for public LTC schemes elsewhere, be it
for schemes to be newly introduced or existing ones to be adjusted. Linking the
benefit trigger of a private LTC product to the public definition entails a lot
of questions that have to be solved in advance in case of a reform. The
challenges for the private insurance industry pointed out above may help
private insurers in other countries weigh whether to use the local definition
in their products or to use an independent benefit trigger like one based on
ADLs. The first has the advantage of a high recognition value for the potential
policyholders, but the example of Germany shows that dealing with a reform is a
complex and effortful task.
Even though many questions had to be clarified
for the practical implementation, some German providers of private LTC
insurance have already integrated the new definition of “in need of care” into
their products. It remains to be seen how the private insurance market will
develop in light of the reform. Insurers will have to maintain a balance
between comprehensive insurance cover and payable premiums, as private LTC
insurance will remain one of the fastest-growing and future-proof products on
the German insurance market, not least due to the demographic trend.
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