When Washington State legislators approved a public long-term care (LTC) insurance program in 2019, they made a last-minute change: Residents could opt out if they purchased private LTC coverage by Nov 1, 2021. Those who remained would pay an annual payroll tax surcharge of 0.58 percent starting next year and, in return, be eligible for a public LTC insurance benefit of up to $36,500 beginning in 2025.

That opt-out set off an aggressive marketing campaign by long-term care insurance brokers looking to sell policies to people trying to avoid the new tax. It encouraged some Washingtonians—only the carriers know how many—to buy private coverage they otherwise would not have purchased and are unlikely to keep.

Adding an opt-out

How did the insurance carriers respond to this unprecedented wave of enthusiasm? They stopped selling LTC overage in the state and are not likely to resume until after Nov. 1.

What is going on?

The first mistake was the state’s. The original bill wisely had no opt-out. But the legislature moved to exempt those who already had private coverage when the bill passed in 2019. Then, lawmakers went one more step: They foolishly gave residents another 30 months after the bill became law to buy insurance and avoid the tax. Those who opt out cannot join the program later.

Yet they tried to buy. In droves. In August, the insurance commissioner reported that just one carrier had received 66,000 applications in two months — eight times what it received all of last year.

$300 or $3,000

For most Washingtonians the decision makes no sense. A worker who makes, say, $50,000 annually would pay less than $300-a-year in taxes for the public program. That’s about one-tenth of what  a typical buyer would pay in the private market.

Higher income workers would pay more, of course. Someone making say, $200,000 annually, would pay about $1,200. But that’s still less than half what a 60-year old would pay for an average policy.

There are differences, of course. Typical LTC policies are more generous than Washington’s public plan. On the other hand, premiums for private insurance likely will rise faster than a well-designed public program (I’ll explain why in a minute). In the public plan, a 20-year-old would pay while working but not after retirement. By contrast, 60-year-old private insurance buyers would avoid premiums in younger years but continue pay premiums until they go to claim—possibly 20 years after they reach age 65.

The key to insurance

For social insurance to succeed, the vast majority of workers should participate. For instance, everyone who works for a certain amount of time automatically pays a tax, is enrolled in Social Security, and is eligible to receive future benefits. Some will die early and collect no benefits. Others will live to 100 and collect far more than they contributed.

That is how private or public insurance works. Nobody really knows if they will claim long-term care benefits and because a well-designed public risk pool is so big, taxes (or premiums, if you prefer) are relatively low.

But give people a choice and the economics of long-term care insurance changes. The problem: Most people don’t want to buy coverage—they don’t even want to think about becoming frail in old age.

Worse, those who do purchase are most likely to need it. With the risk pool full of people likely to claim, insurers raise premiums, lower-risk potential customers lose interest, and the premiums go up again. It is called the death spiral.

Many buyers, no sellers

In 2010, Congress passed the CLASS act—a voluntary federal insurance program. Actuaries calculated projected premiums would be so high that only the riskiest people would buy. The Obama Administration scrapped the program before it even started.

The Washington legislature made its public program voluntary anyway. True, people are less likely to opt-out of a benefit than to affirmatively enroll. Yet many will go to great lengths to avoid paying a tax. Even if it is directly tied to a benefit. And even if the tax is far less costly than a private insurance premium.

The math gets complicated for consumers. But  why did private plans stop selling to people who so badly wanted to buy.

Two reasons: The first was that these consumers were so enthusiastic. Risk-averse insurers feared they would worsen that risk pool and make premiums unaffordable.

The other had to do with the design of the Washington plan. Carriers were terrified that buyers would purchase their policies just to opt-out of the state plan and then cancel their coverage. Bad for Washington residents, who would have no LTC insurance. And bad for the insurance companies who would have paid significant up-front costs only to lose decades of future premium income. The only winners: The brokers, who would earn their commissions and happily move on.

Washington State should have designed its program to encourage consumers to buy private insurance to supplement its public plan. Instead, it crated an incentive for them to replace public insurance, but just for a short time. Really bad idea.