Physicians can expect to see more requests for medical records by companies offering viatical settlements to terminally ill or chronically ill patients who meet certain criteria as certified by their physicians. The viatical industry, which has been marketing its services primarily to AIDS patients through gay publications and networks, is maturing as a result of new federal legislation granting tax-free status to the proceeds and as viatical companies expand their marketing efforts to the population at large.
In these settlements, a viatical company or licensed individual pays a discount of 60% to 80% of the face value of a life insurance policy to the owner during his lifetime, takes over the premiums, and then collects the full face value from the insurance company when the person dies. Brokers often help people who qualify find funding sources, with more funding going to those with shorter life expectancies. Some people with a life expectancy of less than 6 months have collected as much as 96% of the face value of their policies.
John Banks, CEO of Viaticus, Inc, a subsidiary of CNA Financial Corporation, calls viatical settlements "a new idea that can put huge sums of money into people's pockets at a time when they most need it to pay bills and maintain some quality of life. Without a job, most people are only one or two paychecks away from disaster," he said. "When they cash out the policies, they often have more money than they've ever had in their lives."
Beneficiaries are usually the ones to contact his company, Mr. Banks said, because they are the ones living with the stress of trying to make mortgage payments, pay bills, and keep up with tuition under the most trying of conditions. "The goal of buying a life insurance policy is not to set up beneficiaries for life after the wage earner dies. It's to provide you with money when you can no longer provide for your needs."
To qualify for tax-free status under the Health Insurance Portability and Accountability Act of 1996, recently signed into law by President Clinton, terminally ill patients must have a life expectancy of less than 2 years and may use the proceeds with no restrictions. The individual need not be a hardship case, and the proceeds may be distributed, gifted, or spent in any manner.
More restricted "chronically ill" patients, who may have such life-threatening diseases as cancer, heart disease, Alzheimer's disease, and Parkinson's disease, are defined in the tax-free Advanced Death Benefits/Viatical settlement provision, the same as they are under new long-term care rules of H.R. 3103. "The person has to be certified within the previous 12 months by a licensed health care practitioner as either unable to perform (without substantial assistance) at least two activities of daily living for at least 90 days due to a loss of functional capacity; or require substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment."
The viatical settlement must either (1) provide a reimbursement (indemnity) arrangement for costs incurred by the payee (not compensated by insurance or otherwise) for "qualified long-term care services" or (2) be subject to the long-term care rules with respect to payments made on a per diem or other periodic basis. In general, the arrangement must not be reimbursement of expenses reimbursable under Medicare. The per diem/periodic payment rules apply without regard to the amount of expenses for qualified long-term care, which is limited to $175 per day or $63,875 per year.
Viatical companies anticipate widespread use of settlements once the idea catches on.
Like the other large viatical companies, "we do not rely on physicians' estimates of life expectancy, " said Mr. Banks of Viaticus. The initial application gives the company permission to access the patient's insurance information and their medical records, which are then reviewed by the company's in-house underwriting staff. The company may contact the patient's physician for clarification of treatment modalities, but the final decision on whether to offer a settlement "has nothing to do with the patient's physician."
The life expectancy of AIDS patients was fairly predictable until recent advances and treatments have made it less clear than that of patients with certain cancers, said Mr. Banks, citing breast, prostate, and lung cancer.
Have physicians been willing participants to date? Most view it as any other request for medical records and charge an administrative fee.
"Some attending physicians may want to help a needy patient out and might be inclined to certify a shorter life expectancy, said Mike Posey, president of Life Partners, Inc. of Waco, Texas, a viatical company that purchases policies and sells them in their entirety or in shares, to investors. "Most won't fudge too much because they have standards of ethics and practice. Others will give the patient maximum potential life expectancy because they refuse to play God and others won't respond to our request because they're just not comfortable with it."
In an unusual case, the physician for one cancer patient, whose broker was shopping around for the best discount on his policy, received 14 requests for his medical records, Mr. Posey said. Most apply to a maximum of five viatical companies, but with 50 or 60 companies now offering settlements, the field has become more competitive. (The rate of return for purchasers--if the policyholder's life expectancy has been predicted correctly--has been averaging 22%, apr).
Since the business is based on the time value of money, the company is careful to screen applicants who apply for a settlement. "Once you get beyond 5 years, the time value of money becomes too expensive," Mr. Banks said.
To get referrals, the companies are forming networks with providers of group benefits, social services at hospitals, and hospices and through charitable contributions to organizations, said Mark Leeds, spokesperson for the National Viatical Association, which lobbied for the new legislation.
To avoid having a treatment center become aware of the fact that a patient has entered into a viatical settlement or to have the names of potential viators sold to commercial interests, the NVA has proposed legislation encouraging the same level of confidentiality now granted to AIDS patients, said Leeds. The organization offers a booklet and list of referrals to anyone calling 1-800-741-9465.
About 80% of American households have some kind of life insurance, Mr. Banks said, with a large percentage of it provided by employers. Of the 2 million people who die every year, 24% die from cancer, 42% from heart disease, and 2% from AIDS. "I'm sure 25% to 30% of those people could qualify for a viatical settlement," he said.
Faced with a choice of buying medicine or food or paying a premium, many people let their policies lapse after years of paying in, and beneficiaries are left with nothing. The insurance industry realizes about $2 billion a year in lapsed policies, according to Mr. Leeds. Viaticals transform the policy into an asset.
In 1995, 5,000 Americas sold $400 million worth of insurance policies to viatical funding sources--up $300 million from the year before," according to the NVA.