Health-Care Mandate causes administration to backpedal

The Obama administration will give employers an extra year to comply with the requirement that they provide employees with health care. Businesses will now have until 2015 to comply with the Affordable Care Act. 

"We have heard concerns about the complexity of the requirements and the need for more time to implement them effectively... We have listened to your feedback. And we are taking action." the Treasury Department said in a statement. 

The administration plans to continue a dialogue with employers about the Affordable Care Act and publish proposed rules sometime this summer, the Treasury said in the statement. Real-world testing of the program will begin in 2014 with a full implementation in 2015, they said. 

It appears to me that there are concerns about the impact of high insurance premiums on consumer's wallets and corporate profits resulting in potentially negative implications for consumer sentiment and the stock market. Since the U.S. economy is improving but is vulnerable, and next year is an election year, I can only surmise that the political powers that be are pushing back implementation of the Affordable Care Act so as to not rock the boat economically or politically in the near term. As such, I would expect that this little nugget of good news will be a positive for the stock and bond markets. 

Today's Long-Term Care Insurance environment is challenging 

Many individuals and couples are being hit with double-digit rate increases on their long-term-care insurance premiums.  As a result, some are choosing to reduce their monthly benefit or the policy's benefit period to keep from paying higher premiums. 

One retiree highlighted in a recent Wall Street Journal article faced a rate hike of 46%. To avoid paying the increased premiums, she agreed to shrink the policy's benefit period to six years from ten. 

Currently, Medicare only pays for short stays in nursing homes or in-home care under limited conditions. Oftentimes seniors who need care have to burn through their savings to pay for it. Only after they've exhausted their funds will Medicaid, the government health program for poor people, pay for a basic level of care. 

To address this issue, insurers began selling long-term-care policies in the 1980s and 1990s under the premise to provide policyholders with better access to high-quality nursing homes and home-based health care than Medicaid. 

Unfortunately, insurers underestimated how fast medical costs would rise, and how many seniors would actually use the benefits. In addition, they underpriced the insurance premiums. To make matters worse, some insurers  were hungry for market share and charged too little at first and planned to increase premiums later, which is now adversely affecting their policyholders. 

The following chart illustrates that long-term care insurance premiums have increased, while the number of people buying the coverage and new insurance premiums have both declined over the years.                    

 

As a result, many once-prominent sellers of long-term-care insurance are leaving the market. Five of the 10 largest sellers, including MetLife Inc., Prudential Financial Inc. and Unum, have sharply reduced or discontinued sales since 2010, according to Moody's Investors Service. This leaves only a dozen or so companies that still sell a meaningful number of policies, down from about 100 a decade ago, according to LifePlans Inc., a consultant. In addition, in the past decade, sales to individuals have fallen by two-thirds to 233,000 policies a year, and the number of insured people is stuck at about seven million. 

Genworth Financial Inc., with about a 33% market share of long-term-care policies sold to individuals, said in May that it is seeking premium increases averaging more than 50% to stave off more losses in its oldest policies.

In addition, Genworth also halted sales June 1 through AARP, the older-Americans' group with a huge pool of potential customers. 

In general, a 55-year-old single person buying long-term-care protection can expect to pay $2,065 a year for $162,000 in benefits, including a 3% inflation-protection rider, which is 20% increase from last year, according to the American Association for Long-Term Care Insurance trade group.

Rate increases are forcing existing policyholders to dig into savings, sacrifice elsewhere or drop their coverage. For insurers, that could mean healthier policyholders abandon ship while sicker, more expensive customers hang on. 

Some insurance agents and financial planners are steering clients to new "hybrid" coverage, basically life insurance with a rider providing long-term-care benefits. One appeal: The policyholder can leave something to heirs even if the long-term-care benefits don't get tapped. But the long-term-care benefits under these "hybrid policies" are less generous than those in conventional policies, and policyholders typically have to write one big check upfront to obtain the coverage, rather than paying premiums each year. 

Long-term care insurance is a dilemma, because it is not cheap and future rate increases can result it in becoming extremely burdensome or unaffordable. I have spoken with and advised many individuals and couples on this issue over the years, and honestly, there is no easy answer. Most simply don't pursue the coverage when quoted premiums, but for those who have or had a loved one in a nursing facility, they are apt to take a policy. 

One must evaluate their specific situation and make the best decision they can, based upon the facts at hand and then do their best financially and health wise going forward. Sadly, I have seen other professionals make prospective buyers feel naive, uninformed, or even ignorant for not taking the coverage. Due to the myriad of emotional, financial, health and longevity factors that surround long-term care insurance, I don't believe one answer fits all. As such, thoughtful planning can be done, and whatever decision one arrives at should be respected.    

The Bond King tells investors not to panic 

Bill Gross manages the world's largest bond fund, the Pimco Total Return Fund, and his terrific track record over the past 26 plus years is why he's often referred to as "the Bond King." 

Even though Mr. Gross has outperformed his peers and corresponding bond index since the fund's inception of 5/11/1987, last month's 2.57% loss was the worst ever. Some investors knee jerk reacted to what I consider an extremely short-term downtrend by selling shares. This was due to fears that the Federal Reserve will slow down its asset-purchasing program this year and end it entirely in 2014. Those fears led to interest rates jumping nearly 100 basis points from May to the end of June. 

The research firm, TrimTabs Investment Research noted that bond investor reaction was widespread across the investment industry. Bond fund outflows / sells through the first three weeks of June were $20 billion more than the previous record for monthly bond fund withdrawals, which occurred in October 2008. 

Mr. Gross is a very capable bond fund manager and has sailed through many stormy investment periods, and as such he has urged investors to stay calm. In his most recent investment outlook, in which he compared the bond market to a sinking ship, he listed three reasons to remain optimistic about bonds. 

1)The Fed’s forecast of the economy is far too optimistic. 

2) Inflation is way off target (i.e., we won't being see higher inflation rates   

    in the near term). 

3) Bond yields have over-adjusted (i.e., bond price declines are over done

    and should bounce back). 

In his monthly letter, the Bond King noted that when at sea sailors don’t panic and if they see someone that’s afraid they "yell at them! Yell, This ship’s going to make it to port....in the mean time have a cocktail, tell the band to stop playing dirges (funeral songs), because you’re gonna be just fine.” 

Honestly, it amazes me that one off month, out of 26 plus years of superior performance, results in some investors jumping ship. These same investors probably won't venture any further than their bath tub when planning their next cruise.  

A business owner with a sense of humor 

I was on my way to a doctor's appointment for an injury I received a week and a half ago during the father daughter float trip with Tess (my seven year old). Basically, I was jumping on a floating trampoline and hurt my neck, or as my doctor diagnosed - whiplash. I am fine, not in a neck brace, but my neck is quite sore, and I won't be signing up for any more aqua circus acts. 

But my point of the story is, on my way to the appointment, I was at a stop light behind a landscape and lawn maintenance truck (see picture below). Well, the sign on the right tells of all the services offered.  But what drew my attention was the sign on the left; a reminder for the work crew that when laying sod, "it's green side up!" Obviously, the owner of this truck must be getting near middle age, because that is the punch line of a joke I heard over 35 years ago. That being said, I appreciate someone who can provide some levity in the work place not be so serious. 

  

 

A happy Fourth of July to you and your family! 

 

Quotes 

"You are as young as your faith, as old as your doubt, as young as your self-confidence, as old as your fear, as young as your hope, as old as your despair."

                   Paul H. Duhn 

"Perseverance is not a long race; it is many short races, one after another."

                   Walter Elliot 

"Success is not searching for you. You must do the seeking. Destiny is not a matter of chance, it is a matter of choice; it is not a thing to be waited for, it is a thing to be achieved."

                   William Jennings Bryan

 

Tony Moeller, CPA 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets. 

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