2012 Voluntary Benefits Special Report

Long-term disability may become a “CLASS” act

Insurers are starting to produce innovative LTD products

By Michael J. Moody, MBA, ARM

As any human resource professional can confirm, adjusting to the new health care landscape is proving to be a difficult and complex issue. However, many of the other employee benefit products also are getting more complicated by the day. While the attention on the health insurance arena has taken most of our attention, it is far from the only problem area. One example of this current market difficulty is in the long-term disability (LTD) sector.

Little market penetration

LTD insurance has been a staple in many employers' benefit packages, either as an employer-paid benefit or as a voluntary, employee-paid plan. As a result, some employees look to this coverage as a critical element of their overall insurance protection program. However, the majority of employees still do not take advantage of available LTD coverage options. Statistics indicate that less than 3% of all Americans have an LTD type policy. And this is despite the fact that recent studies have noted how important this coverage has become. It is estimated that seven out of 10 workers between the age of 25 and 65 will experience an accident or illness that keeps them out of work for more than three months. And nearly 60% of these occurrences will take place away from the job, thus precluding coverage under workers compensation.

To some extent, the LTD coverage is a victim of modern health care successes. Advances in the medical field have led to some once fatal diseases and injuries now being disabling rather than deadly. While this outcome is certainly laudable, it also means that, in many situations, the period of incapacitation is lengthier than previous cases.

Disability 101

Essentially, disability coverage comes in two very different approaches. The first disability approach is short-term disability coverage. In essence, short-term disability benefits take over when an individual exhausts his or her traditional sick leave. Plans vary greatly from employer to employer; however, they all typically run about six months in duration and are employer-paid coverage. The coverage, which usually is self-funded by the employer, provides a benefit that allows the employee to achieve close to 100% of their take home pay. While there are no federal laws that require short-term disability coverage, some states do have statutes that require such coverage.

Long-term disability then takes over at the end of the short-term disability policy period. Coverage is frequently a voluntary program that requires the employee to pay the majority, if not all, of the premium. The features of these programs—such as length of coverage and payment percentage—vary from plan to plan, and the needs of the employee and the employer. The current crop of LTD products is less than perfect for many employees. However, most of these shortcomings are due in large part to underwriting considerations that need to be satisfied in order to provide profitability.

As noted above, the medical profession has added greatly to the actuarial uncertainties that are currently associated with this coverage. Basic assumptions that have a direct bearing on actuarial projections have been radically changed by both the extension of average life expectancy and the successful treatment of heretofore life-ending events. Thus, under-writers are tightening terms and conditions in order to gain some degree of control over LTD losses. As a result, premiums and terms have become more volatile and even less attractive to consumers than they were previously.

Missed, by just that much!

Few realized that when President Obama signed the massive Patient Protection and Affordable Care Act into law, it may hold the key to resolving many of the market shortcomings surrounding the disability marketplace. One of the lesser-known provisions of the new law was The Community Living Assistance Services and Supports (CLASS) Act, and it was designed to establish a national voluntary insurance program for purchasing long-term care coverage. As originally envisioned, the CLASS Act would allow employees to purchase needed disability coverage from a program that is to be administered by the U.S. Department of Health and Human Services (HHS). As with many parts of the PPACA, the program was scheduled to begin in the fall of 2012.

Unfortunately, after embarking on an in-depth analysis of how to proceed, government bureaucrats soon found all of the similar difficulties that have negatively affected actuaries in the private sector were also problematic in the public sector. At the end of the day, the key consideration had become: could the CLASS Act be a financially viable option, since no government subsidies were to be used to fund the program? The program needed to be utilized by a broad base of employees of various ages; however, it soon became apparent that adverse selection was bound to occur.

At the conclusion of the analysis, the CLASS administrator had to apprise HHS Secretary Sebelius that she "saw no path to move forward with CLASS at this time." Therefore, she notes that it is her recommendation that HHS work with Congress and other stakeholders "to continue exploring all of the options to address the critical long-term care needs of Americans."

Accordingly, Secretary Sebelius advised congressional leaders the HHS would be suspending implementation of the CLASS Act.

So where does that leave the CLASS Act? There appear to be two decidedly different views about where CLASS goes from here. One group believes that, for the most part, "there are bigger fish to fry," when it comes to implementing the health care reform provisions. While they are aware of the critical need for long-term disability coverage, there are just too many more urgent health care issues to deal with, and as a result, CLASS will just fade into the sunset. However, there is a second group that believes that corrective action will occur shortly. The impetus for this view is a concern that abandoning the CLASS Act will open the door to further dismantling of the reform legislation. Reality is probably somewhere in the middle of this tug-of-war.

Conclusion

Certainly, there is a lot of movement within the disability market. In fairness, the current carriers have not been sitting idly by, waiting for the next shoe to drop. They have actually begun implementing strategic plans of their own. These include the introduction of a new approach to the voluntary disability market. The current trend is that voluntary life carriers are combining life products with disability coverage. While they go by several names, most are referred to as "combo" products and are obtained by providing a rider to the traditional life products.

The current market displacement can provide significant marketing opportunities for benefit consultants and agents/brokers. Many HR personnel have not been fully aware of the current developments with regard to the CLASS Act. And since this is such a complex problem and is, in many respects, a moving target, providing recent and relevant information is an excellent method to differentiate your firm's expertise. Coupled with what the existing voluntary market is offering, this kind of recent and relevant information can go a long way in assisting both current clients as well as potential prospects.