The Commissioner of Insurance adopts amendments to §§3.3801 - 3.3804, 3.3821, 3.3826, 3.3829, 3.3830, 3.3833, 3.3834, 3.3837 - 3.3839, 3.3842, 3.3844, and 3.3846, and new §§3.3848, 3.3849, 3.3860, and 3.3870 - 3.3874, concerning standards for long-term care non-partnership insurance coverage, long-term care partnership insurance coverage under individual and group policies, annuity contracts, and life insurance policies that provide long-term care benefits within the policy or by rider. Sections 3.3803, 3.3804, 3.3826, 3.3829, 3.3830, 3.3837, 3.3839, 3.3842, 3.3844, 3.3848, 3.3849, 3.3860, and 3.3870 - 3.3874 are adopted with changes to the proposed text published in the July 18, 2008, issue of the Texas Register (33 TexReg 5635). Sections 3.3801, 3.3802, 3.3821, 3.3833, 3.3834, 3.3838, and 3.3846, are adopted without changes. A correction of error was published in the Texas Register on August 8, 2008 (33 TexReg 6446) to correct an error in the July 18 publication of the proposal of §3.3842(j). As published in the July 18 issue, the last sentence of §3.3842(j) reads: "If the issuer elects to send the applicant a Suitability Letter to comply with the requirements of this subsection, the following specifies the Suitability Letter requirements and procedures apply:". As corrected, the last sentence of subsection (j) reads: "If the issuer elects to send the applicant a Suitability Letter to comply with the requirements of this subsection, the following specifies the Suitability Letter and the requirements and procedures that apply:".

The adoption of the proposed amendments and the proposed new sections were considered by the Commissioner in a public hearing held under Docket Number 2689, at 9:30 a.m. on August 12, 2008, in Room 100 of the William P. Hobby, Jr. State Office Building, 333 Guadalupe Street, Austin, Texas.

REASONED JUSTIFICATION. The adopted amendments and new sections are necessary to implement the insurance related provisions of Senate Bill (SB) 22, as enacted by the 80th Legislature, Regular Session, effective March 1, 2008. SB 22 establishes a state partnership for long-term care program in Texas that is intended to promote consumers' purchase of long-term care insurance from insurers by providing consumers with access to Medicaid under special eligibility rules in the event that an individual consumer should ever need Medicaid long-term care coverage that is in addition to that provided by the purchased coverage. In enacting SB 22, the Legislature found that long-term care is currently one of the leading cost drivers in the Medicaid program. (TEXAS SENATE STATE AFFAIRS COMMITTEE, BILL ANALYSIS (Enrolled), SB 22, 80th Legislature, Regular Session (October 18, 2007)). Further legislative findings indicate several other relevant factors. Although Medicaid pays for 67 percent of all nursing facility days in Texas, less than five percent of Texans have private long-term care insurance. As the population in Texas ages, the fiscal impact of publicly financing long-term care may lessen if more Texans purchase private long-term care insurance. However, prior to the enactment of SB 22, the law did not provide any incentive for Texans to purchase private long-term care insurance due to strict asset limits for Medicaid eligibility and required estate recovery of assets. In response, the Legislature enacted SB 22 to create a long-term care partnership program in Texas to provide the necessary incentive for Texans who can afford to purchase long-term care partnership insurance to do so. Texans who purchase long-term care partnership policies under the partnership program will be eligible for asset disregard equal to the long-term care insurance benefits that have been received to the date of Medicaid application from a partnership policy should they ever apply for Medicaid long-term care benefits. However, in order for a long-term care partnership insurance policy to be offered in Texas, a state plan amendment must meet the requirements of, and be approved under, the Deficit Reduction Act of 2005 (Pub. L. No. 109-171). This adoption implements those provisions of SB 22 that establish the state partnership program that is to be administered, implemented, and monitored by the Texas Health and Human Services Commission (HHSC) with assistance from the Texas Department of Insurance. SB 22 adds new Subchapter C to Chapter 1651 of the Insurance Code relating to the Partnership for Long-Term Care Program. The amendments and new sections of Subchapter Y are adopted to implement new Subchapter C of Chapter 1651.

In addition to amending Chapter 1651 of the Insurance Code, SB 22 also amends Chapter 32 of the Human Resources Code to add new Subchapter C, relating to the Partnership for Long-Term Care Program. Section 32.102 of the Human Resources Code requires that the Partnership for Long-Term Care Program must be consistent with provisions governing the expansion of a state long-term partnership program established under the federal Deficit Reduction Act of 2005, (DRA) Pub. L. No. 109-171. Under the DRA, a Qualified State Long-Term Care Insurance Partnership Program (Qualified Partnership) means an approved state plan amendment filed by the State Medicaid Director with the U.S. Department of Health and Human Services that provides an exemption from estate recovery in an amount equal to the benefits paid under partnership policies, where those benefits were disregarded in determining an individual's Medicaid eligibility. Under the Qualified Partnership, individuals who purchase partnership policies can apply for Medicaid under special HHSC rules for determining financial eligibility and estate recovery. These special rules generally allow the individual to protect assets equal to the insurance benefits received from a partnership policy so that such assets will not be taken into account in determining financial eligibility for Medicaid and will not subsequently be subject to Medicaid liens and recoveries. This feature of the Qualified Partnership is known as "asset disregard" and the asset disregard applies to all insurance benefits received from a partnership policy. The asset disregard applies to all insurance benefits paid on a reimbursement, cash benefit basis, indemnity insurance basis, or on a "per diem or other periodic basis without regard to the expenses incurred during the period to which the payments relate" (within the meaning of §7702B(b)(2)(A) of the Internal Revenue Code). Similarly, the asset disregard applies to all insurance benefits received from a partnership policy regardless of whether such insurance benefits are for costs for long-term care that would be covered by Medicaid. The asset disregard as of any date equals the insurance benefits that have been received to that date from a partnership policy, even if additional benefits may be received in the future from a partnership policy. The asset disregard does not include the return of premium payments made upon the termination of a partnership policy (due to cancellation or death) since such payments do not represent insurance benefits.

Minimum Standards for a Long-Term Care Partnership Benefit Plan. With respect to the insurance related aspects of the Partnership for Long-Term Care Program, new §1651.104 of the Insurance Code requires the Commissioner, in consultation with the HHSC, to adopt minimum standards for a long-term care benefit plan that may qualify as an approved plan under the partnership for long-term care program. New §1651.104 also requires that the standards be consistent with the provisions governing the expansion of a state long-term care partnership program established under the federal DRA. A partnership policy is a long-term care insurance policy that satisfies all of the insurance related requirements of the DRA. The requirements of the DRA that a partnership policy must satisfy relate to federal tax law qualification, issue date, state of residence, compliance with DRA consumer requirements, inflation protection, and agent training requirements. These requirements are more fully explained in the following paragraphs.

Qualified under Federal Tax Law. Pursuant to §1917(b)(1)(C)(iii)(II) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(1)(C)(iii)(II)), a partnership policy must be a qualified long-term care insurance contract, as defined in §7702b(b) of the Internal Revenue Code of 1986 (26 U.S.C. §7702B(b)) issued not earlier than the effective date of the state plan amendment. Issue Date. Pursuant to §1917(b)(1)(C)(iii)(I) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(1)(C)(iii)(I)), a partnership policy must not be issued earlier than the effective date of the Qualified Partnership. The issue date is the effective date of coverage under the partnership policy. Thus, for example, in the case of a certificate issued under a group insurance contract, the effective date of coverage with respect to such certificate is the issue date of the certificate. Pursuant to §1917(b)(1)(C)(iii)(VII) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(1)(C)(iii)(VII)) a policy received in an exchange of an existing non-partnership policy or certificate for a partnership policy or certificate after the effective date of the Qualified Partnership is treated as newly issued and thus is eligible for partnership policy status.

State of Residence. Pursuant to §1917(b)(1)(C)(iii)(I) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(1)(C)(iii)(I)), a partnership policy must cover an insured who was a resident of the State when coverage first became effective under the policy. In the case of an exchange of an existing non-partnership policy or certificate for a partnership policy or certificate, this state of residence requirement is applied based on the coverage date of the first long-term care insurance policy that was exchanged (State Medicaid Director's Letter (SMDL #06-019) July 27, 2006, issued by CMS, Supplement 8c to Attachment 2.6-A page 2 paragraph 2).

Consumer Protection Requirements. A partnership policy must meet all of the Federal consumer protection requirements specified in the DRA. Pursuant to §1917(b)(1)(C)(iii)(III) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(1)(C)(iii)(III)), the partnership policy must meet the consumer protection requirements of the National Association of Insurance Commissioners' (NAIC) Long-Term Care Model Regulations and Model Act that are specified in §1917(b)(5)(A) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(5)(A)).

Inflation Protection. Pursuant to §1917(b)(1)(C)(iii)(IV) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(1)(C)(iii)(IV)), a partnership policy must include at least one of the following levels of inflation protection: (i) if the policy is sold to an individual who has not attained age 61 as of the date of purchase, the policy must provide compound annual inflation protection; (ii) if the policy is sold to an individual who has attained age 61 but has not attained age 76 as of the date of purchase, the policy must provide some level of inflation protection; and (iii) if the policy is sold to an individual who has attained age 76 as of the date of purchase, the policy may (but is not required to) provide some level of inflation protection.

Agent Training Requirements. Additionally, pursuant to §1917(b)(1)(C)(iii)(V) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(1)(C)(iii)(V)), each individual who sells a long-term care partnership policy must complete training and demonstrate evidence of understanding partnership policies and how they relate to other public and private coverage of long-term care. Insurers that offer partnership policies shall certify to the Commissioner that each individual who sells partnership policies for the insurer has complied with the agent training requirements. The Department's rules regulating long-term care partnership certification and continuing education course and licensee requirements were adopted by Commissioner Order No. 08-0639, dated July 14, 2008, published in the August 1, 2008, issue of the Texas Register (33 TexReg 6138), and effective August 5, 2008.

In response to comments received on the published proposal for this rule, the Department has revised some of the proposed text in the published rule. Additionally, this adoption includes minor clarification changes to several proposed provisions. None of the changes made to the proposed text, either as a result of comments or as a result of necessary clarification, materially alter issues raised in the proposal, introduce new subject matter, or affect persons other than those previously on notice.

Changes in the Proposed Text in Response to Comments. The Department received numerous comments on the proposed text. The following changes have been made to the proposed text as a result of those comments.

Exemptions from certain requirements. Three sections have been modified in the adoption in response to comments that there are various consumer protection requirements in the proposed text that do not apply to life policies that have acceleration riders and that exemptions from these requirements are necessary for consistency with the NAIC Model Regulations. These sections are: (i) §3.3837(f) (Suitability Data Reporting Requirements), (ii) §3.3842 (Appropriateness of Recommended Purchase), and (iii) §3.3844 (Nonforfeiture and Contingent Nonforfeiture Benefits). Exemption from the Requirement to Offer Inflation Protection. Section 3.3860 and the definition of "long-term care partnership insurance policy" in §3.3804(21) have been revised in the adoption in response to comments to exempt life insurance policies or riders containing accelerated long-term care benefits from the offering of inflation protection. Commenters recommended that this exemption, which is substantially similar to §13C of the NAIC Long-Term Care Insurance Model Regulations, be added to §3.3820. The Department agrees that certain "life insurance policies or riders containing accelerated long-term care benefits" should be exempt from the §3.3820 requirement to offer inflation protection. Existing §3.3820, however, was not proposed for amendment in the proposal published in the July 18, 2008, issue of the Texas Register (33 TexReg 5635). Therefore, no substantive change may be made to existing §3.3820. In lieu of adding the requested exemption language to §3.3820, the Department is adopting: (i) an addition to §3.3860 to address the requested exemption; and (ii) a clarification addition to the §3.3804(21) definition of "long-term care partnership insurance policy." New §3.3860 specifies the policy summary requirements for non-partnership life insurance policies and annuity contracts that provide long-term care benefits by rider. Section 3.3860(a) specifies that a policy summary must be provided with a life insurance policy or annuity contract that provides long-term care benefits by rider. Section 3.3860(a)(4) requires that the policy summary for this type of policy contain a statement that provides that any long-term care inflation option required by §3.3820 and §3.3872 is not available under this policy. The definition in §3.3804(21) defines a "long-term care partnership insurance policy" as a long-term care insurance policy that is established under the Human Resources Code Chapter 32 Subchapter C and that meets the requirements of the Federal Deficit Reduction Act of 2005, Pub. L. No. 109-171 and Chapter 1651 Subchapter C of the Insurance Code. Chapter 32, Subchapter C of the Human Resources Code addresses the establishment and operation of the Partnership for Long-Term Care Program in Texas. A life insurance policy or annuity contract that provides long-term care benefits by rider does not comply with the definition of "long-term care partnership insurance policy" in proposed §3.3804(21). A partnership policy must contain an inflation protection provision as required by §1917(b)(1)(C)(iii)(IV) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(1)(C)(iii)(IV)). The DRA inflation protection provision is implemented in new §3.3872 (relating to long-term care partnership policies and certificates). Section 1651.104 of the Insurance Code requires that a long-term care partnership policy that is funded by a life insurance policy be consistent with the provisions in §1917(b)(1)(C)(iii)(III) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(5)(A)). The policy must meet the consumer protection requirements of the NAIC Long-Term Care Model Regulations and Model Act that are specified in §1917(b)(5)(A) of the Social Security Act as amended by the Deficit Reduction Act (42 U.S.C. §1396p(b)(5)(A)). These NAIC consumer protection requirements include the provisions in §6J and §6K of the NAIC Long-Term Care Model Act. Section 3.3860 is consistent with the §6J and §6K requirements. It is also consistent with the definition of "long-term care partnership insurance policy" in §3.3804(21). Section 3.3820 addresses the requirement to offer inflation protection to all applicants for long-term care insurance. Therefore, to address the commenter's recommendation relating to the §3.3820 exemption, the Department is adopting an addition to proposed new §3.3860. A new subsection (d) is added to adopted §3.3860 to read: "The statement required in subsection (a)(4) of this section applies to: (1) life insurance policies (A) that accelerate the death benefit for one or more of the qualifying events of terminal illness, medical conditions requiring extraordinary medical intervention or permanent institutional confinement, and (B) that provide the option of a lump-sum payment for those benefits, and (C) where neither the benefits nor the eligibility for the benefits is conditioned upon the receipt of long-term care; and (2) riders for group and individual annuities and life insurance policies that provide long-term care insurance." In addition, for purposes of clarity and consistency, the following provision is added to the adopted §3.3804(21) definition of "long-term care partnership insurance policy": "This term does not include a life insurance policy or annuity contract that provides long-term care benefits by rider." This addition simply clarifies the §3.3804(21) definition and is consistent with §3.3860(a)(4) and (d).