High nursing-home bills squeeze insurers, driving rates up

NEW YORK -- Thirty years ago, insurance companies had the answer to the soaring cost of caring for the elderly: Plan ahead and buy a policy that will cover your expenses.

Now there's a new problem: Even insurers think it's unaffordable.

Life insurance firms pitched long-term care policies as the prudent way for Americans to shoulder the cost of staying in nursing homes. But those same companies have found long-term-care policies are squeezing their profits. Earnings for life insurers slid 11 percent in the most recent quarter, according to Moody's Investors Service, and long-term care was the chief culprit.

"Insurers that sell these products lose money on them," said Vincent Lui, a life-insurance analyst at Morningstar. "So they're raising prices and also trying to get out of the business right and left."

Four of the five largest providers -- including Manulife and MetLife -- have scaled back their business or stopped selling new policies, according to Moody's.

The largest provider, Genworth Financial, continues to offer them but has struggled under the weight of rising costs.

The trends behind the industry's troubles sound like good news outside the world of insurance: Older Americans are healthier and living longer. But that makes it difficult for the industry to turn a profit. Stays in nursing homes tend to last longer, so insurers have to pay out more in benefits than they had planned.

For older Americans and their families, however, there are few options besides private insurance. Medicare doesn't cover nursing-home stays except in certain circumstances. The Obama Administration had planned to make a long-term insurance program part of the Affordable Care Act but eventually abandoned it.

Sean Dargan, an analyst at Macquarie Group, an Australia-based investment bank, expects to see more people turning to Medicaid, the government's health insurance for the poor, to cover the costs of care.

"It could really blow a hole through state budgets," he said. "I think states and the federal government are going to need to think creatively to find a way out of this."

For insurance companies, long-term care has proven to be a tough business.

Genworth, based in Richmond, Virginia, has turned in losses for two straight quarters. On March 2, the company reported it discovered errors in its accounting for funds set aside to cover long-term-care claims, knocking its stock down 5 percent in a single day. Analysts said problems with these policies explain why Genworth has lost more than half its market value over the past year, plunging from $17 to a recent $7.79.

"Their single biggest product is long-term care, and look at their share price," Lui said. "It's one trouble after another."

Tom McInerney, Genworth's CEO, said his company has been taking steps to make long-term care insurance a viable business, raising prices on older policies, introducing new products and throwing out their previous assumptions.

"There's clearly a very high need for these policies," McInerney said. "Given high demand and the limited number of insurers offering it today, I think it can be a very good industry going forward."

When they began selling policies widely in the 1980s, the industry made a slew of assumptions about how long people would live, health care costs and interest rates.

Nearly all of them turned out wrong, analysts said.

Take life spans. At nearly 79 years, overall life expectancy in the U.S. has never been higher, according to the Centers for Disease Control and Prevention.

That's the biggest issue, analysts said, because it means more people who took out policies stick around to make claims, moving into nursing homes and asking insurance companies to help cover the steep bills.

The rate for staying at a nursing home has gone up an average of 4 percent every year for the last five years, according to Genworth's annual survey.

In 2014, the median bill for a shared room topped $6,000 a month.

The industry's actuaries also made a bad call on the bond market, betting on much higher interest rates.

That misstep proved critical because insurers buy bonds to cushion against future payouts, so years of historically low interest rates have thrown their accounts out of balance.

It's yet another reason insurers keep putting more money aside to cover claims, resulting in big charges and lower profits.

All these trends have forced companies like Genworth to spend much more than they had planned.

Last year, insurers paid out a record $7.5 billion in claims on these policies, according to the American Association of Long-Term Care Insurance, which tracks insurance rates.