Israel Proposes Overhaul of Long-Term Care Insurance Model

Israel's Capital Markets, Insurance and Savings Authority has proposed a significant overhaul of the country's long-term care insurance system, aiming to replace the current mutual insurance model within health funds with a new, long-term personal accumulation system managed by insurance companies through tenders. This proposal comes after years of near-collapse in the sector, which insures approximately 5.2 million people.

The new model would split existing policyholders into two groups. Those aged 55 and under would transition to the new system, beginning to accumulate personal savings, though the conversion of past premiums into future benefits remains unclear. Individuals aged 55 and over would be moved to a "closed group" managed by a government statutory corporation to preserve their existing rights. Securing the rights for this older group, which will no longer be subsidized by younger policyholders' premiums, is estimated to require a one-time state budget allocation of NIS 5-10 billion.

The authority's move stems from the realization that the long-term care insurance sector requires fundamental rethinking, not just crisis management. Between 2021 and 2023, long-term care claims surged by about 30% due to increased life expectancy and other factors, nearly depleting the fund of Clalit Health Services, which insures over half the market. To prevent immediate collapse, the authority implemented austerity measures, including reducing monthly benefits and tightening the definition of a long-term care case, making current policies vastly different from those sold just three years ago.

Despite these measures stabilizing Clalit's fund, the market's lack of confidence is evident, with only one insurer bidding in Clalit's latest tender. The authority views this reform as structurally necessary, comparable to closing down old, deficit-ridden pension funds. The proposal also aims to create regulatory stability, as the current system has led to public disputes between the authority and the Ministry of Health over deteriorating policy conditions.

However, the proposed model raises questions about its ability to provide a genuine solution for individuals. Younger savers will face a future decision point: cash out accumulated funds or convert them into insurance benefits. This could lead to a "lemons market" dynamic, where healthier individuals withdraw funds, leaving those most in need with higher costs. The proposal also faces scrutiny regarding its added value for individuals already committed to significant pension savings and whether it adequately covers those struggling to save even for retirement.

Further questions remain about how the model will automatically adjust premiums and coverage based on claim developments or ensure a private entity is willing to operate the funds long-term. The significant state budget required for the older cohort also raises concerns about distributive justice. The Ministry of Finance, while acknowledging the current model's flaws, notes that austerity measures have stabilized Clalit's fund and that the existing system, while imperfect, currently provides a safety net without requiring immediate public expenditure. Ultimately, the decision on this multi-billion shekel reform will fall to the next finance minister.