A Long-Term Bet Gone Bust : The Indicator from Planet Money Long-term-care insurance seemed like the next big thing. Then insurance companies started losing billions of dollars. What went wrong?

A Long-Term Bet Gone Bust

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One of the biggest and most iconic companies in the world, General Electric, is talking about splitting up. And the reason has to do with the spectacular failure of an obscure little corner of the company - a part that, quite frankly, I did not even know existed - insurance - more specifically, long-term care insurance. Long-term care insurance is this kind of insurance that anyone can buy. It covers things like a nursing home or a home health aide. But recently GE came out and said it was having a, quote, "adverse claims experience" with these policies. Basically, the unit was bleeding money. They'd gotten the math wrong.


VANEK SMITH: I'm Stacey Vanek Smith. This is the INDICATOR, Planet Money's quick take on the news. Today's INDICATOR is $6.2 billion. Last week, GE took a $6.2 billion loss on its long-term care business. To be clear, this is not just about GE. MetLife got out of the business and so has just about everybody else. And they all say the same thing - we underestimated how much this was going to cost. So how did all these companies get this number so wrong? And why can't they get it right?

JEFF BROWN: I've spent 10, 15 years racking my brain and talking to so many people. It is one of the harder problems.


VANEK SMITH: Long-term care insurance got really popular in the '90s. People were living longer, outliving their savings. And the baby boomers were just getting to an age where they were thinking about that kind of thing. These policies were not like health insurance, which you buy one year at a time. They were long-term policies - 10 years, 20 years or, in some cases, life. You had to pay the insurance company every year to keep it going. You had to pay a premium. But there were really strict rules about when the companies could raise that premium.

MARK PATTERSON: So my name is Mark Patterson. And I live in Nashville, Tenn.

VANEK SMITH: And how old are you if you don't mind me asking?


VANEK SMITH: Mark is a patent lawyer, and he is a very organized guy - very responsible. He bought long-term care insurance about a decade ago - seemed like the responsible thing to do. Mark started shopping around, and there were a lot of companies selling this kind of insurance. And the premiums for the more comprehensive policies were affordable for Mark. He bought a policy from MetLife.

PATTERSON: It was $157.68.



VANEK SMITH: How did you feel about that price?

PATTERSON: I thought it was reasonable for the coverage.

VANEK SMITH: In fact, it was probably too reasonable. Insurance companies were not charging enough for policies like the one Mark bought. Over the past decade, the baby boomers who bought these policies started getting to the age where people need long-term care. And they started making claims. The insurance company started paying out, and they realized they were paying out way more than they were taking in. They were losing tons of money. So the question is what is so hard about this insurance. I mean, these are giant companies with really sophisticated risk models. They can tell you with chilling accuracy when you are going to die and what is going to kill you. They make a lot of money on life insurance. So what is so different about long-term care insurance? Jeff Brown is the dean of the College of Business at the University of Illinois. He has spent a lot of time looking at the economics of long-term care insurance.

BROWN: This is a tough problem. It is one of the harder problems that I've run across in sort of the intersection of economics and policy and real behavior and how markets work. It is a hard one.

VANEK SMITH: Jeff says there are a few things going on here. First off, the way long-term care insurance is regulated means insurers can't just raise rates as much as they want to. So they weren't allowed to raise rates to keep up with how much they were spending. Also it's much easier to predict whether someone is going to die in the next 20 years than it is to predict whether they're going to get long-term care. And that's partly because getting long-term care isn't just a medical decision. It's a really personal decision.

BROWN: There's a lot of choices to be made. Do I really want to go into a nursing home? Do I want my family to take care of me? Do I want to bring in professional help from outside? That's a choice that I have. Those things are really hard to predict 40 years in advance. So it really is just more complicated.

VANEK SMITH: And when the insurance companies tried to predict what kind of care people would get, how long they would need it and how much it would cost, they guessed wrong - really wrong. And that's why they wound up losing so much money. So that is why the insurance companies got long-term care so wrong and wound up losing so much money. In the past few years, insurers have been allowed to raise rates more. Rates for Mark Patterson, who bought his policy a decade ago, went up just last month. He got a notice in the mail about it.

PATTERSON: It went up to 296.41.

VANEK SMITH: So it almost doubled.

PATTERSON: Yeah, it did, yeah.

VANEK SMITH: What did you think when you got that notice?

PATTERSON: I thought that these guys were definitely trying to get us - get me out of the - get me to cancel my policy.

VANEK SMITH: Mark was probably right. MetLife has stopped issuing new long-term care policies and so have most other companies that used to sell it. As of this month, Mark is done. He did the math and decided it just doesn't make sense to keep paying his premium. And actually, long-term care insurance doesn't make sense for a lot of people. The main reason - Medicaid, the public health insurance program, it covers long-term care. Now, you don't get Medicaid until you are basically out of money. But right now, you've got a lot of people paying for nursing homes until their money runs out, and then Medicaid starts covering it. In other words, the private sector has basically failed to figure out how to cover long-term care. And now, the government is on the hook.


VANEK SMITH: We always love to hear what you think of the show. Send us an email - indicator@npr.org. This podcast is produced by Darius Rafieyan and edited by Jacob Goldstein.


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