Issue #26, Fall 2012

The Long Term Is Now

As the population ages, the costs—financial and social—of long-term care will rise rapidly. And our current model of funding it will not work.

About a decade ago, my mother’s slow mental decline became too obvious for our family to deny. She continued to live at home with my father under increasingly difficult circumstances until she fell and broke her hip. In the hospital, it became clear that her mental impairment precluded physical rehabilitation and that institutional care was unavoidable.

This is a standard baby boomer’s saga, and what came next was not unusual either. I soon learned that long-term care for institutional residents was a big-ticket item. My parents lived in Connecticut, a high-cost state. The place we chose—a “continuum of care” facility with independent living at the top and a nursing home at the bottom—cost more than $100,000 per year for a semi-private room. (The national average at the time was about $70,000, and it has since risen to $78,000, according to a Metropolitan Life survey.)

Although I had spent much of my life studying public policy, I had no idea how long-term care was financed. I soon learned that Medicare paid for at most 100 days of rehabilitation (useless in my mother’s case) and that Medicaid required beneficiaries to “spend down” nearly all their assets. Private long-term care insurance policies were available, I learned, but my parents—along with most Americans who can afford them—had not purchased one. Fortunately they had lived below their means for decades and had accumulated substantial assets, which proved sufficient to see my mother through nearly five years of full-time care.

I didn’t need to study wealth distribution tables to see that only a tiny fraction of American families could afford to do what my parents had done. The median family could self-finance only a few months of institutional care, after which they would be completely dependent on public resources. But Medicaid is devouring ever-increasing shares of hard-pressed state budgets, and huge federal budget deficits are putting pressure on the decades-old fiscal partnership between the states and the national government, and the pressure will only intensify in the decades ahead.

In this presidential election year, the impact of demographic change—especially the growing weight of immigrants and minorities—commands our attention. But another demographic change—the relentless aging of the U.S. population—will be far more consequential for national policy. Long-term care expenditures accounted for nearly one-third of Medicaid’s total outlays of $389 billion in 2010. As the population ages, the tension within Medicaid between caring for the elderly and the health needs of poor and near-poor families will escalate.

The problem is already acute. According to a recent report from the National Governors Association, Medicaid already constitutes the single largest share of state budgets—24 percent, a figure that rises relentlessly year by year. State spending on the program rose by 20 percent in the most recent reporting year and by even more—23 percent—in the previous year. The report estimated that by the end of fiscal year 2013, total Medicaid enrollment for low-income Americans and the dependent elderly will have risen by 12.5 percent in just three years. Because state revenues are growing much more slowly than Medicaid outlays, other priorities are getting squeezed. In many states, for example, public higher education—key not only to future prosperity and competitiveness but also to opportunity and mobility—is reaching a breaking point.

In short, there’s a looming crisis in long-term care because our current model for funding it is crumbling under the weight of multiple demands and inexorable demographic shifts. But we’re doing almost nothing to respond. It’s time to shift to a new long-term care model that combines personal responsibility and social insurance, the government and the market, in ways that would benefit not only current and future beneficiaries but the rest of society as a whole.

Roots of the Impending Crisis

Let’s start with the fundamentals. As a share of the total population, Americans over age 65 are projected to increase from 13 percent in 2010 to more than 20 percent in 2050. The share of Americans over 85 (the cohort most likely to need long-term care) will increase far more steeply, from 1.8 percent in 2010 to 4.3 percent in 2050. Depending on assumptions about medical advances and lifestyle changes, these projections imply that the number of disabled elderly needing long-term care three or four decades from now will be two to three times today’s total, which stands between 11 and 12 million.

To be sure, not all long-term care involves the elderly in nursing homes. In fact, more than eight in ten recipients live in their communities, and of them, nearly half are mentally impaired or individuals with disabilities under the age of 65. What unites all recipients of long-term care is their need for assistance carrying out some or all of the basic tasks of living, such as getting out of beds and chairs, maintaining personal hygiene, and dressing themselves. With suitable part-time assistance, many of these individuals can remain in their homes. But some cannot. The number of nursing home residents now exceeds 1.5 million, and as the number of Americans aged 85 and over keeps rising, so too will the need for institutional care.

While many people believe that caring for the elderly full time at home would be cheaper than in nursing homes, the facts suggest otherwise. As noted above, the annual cost of care in a nursing facility averages around $78,000 a year—more for a private room. Home care is around twice that: Wages for home health-care aides average $20 per hour, which works out to $480 per day, or roughly $175,000 per year for round-the-clock care. (Remaining at home is less expensive for those who need only a few hours of help every day for a limited range of activities.) Given these stark economic realities, it is easy to understand why well over half of all long-term care—with an economic value calculated at $375 billion in 2007, and more today—comes in the form of unpaid assistance that spouses and other relatives provide.

Despite the fact that the public sector finances more than 70 percent of all long-term care costs in the United States, U.S. public outlays for this purpose are on a par with the rest of the Western world, as are total outlays. Although technological change—a principal driver of cost increases—is not nearly as important in long-term care as in the health-care sector as a whole, expenditures have been growing faster in the former over the past half century and are projected to continue to do so over the next four decades. The most plausible explanation is that the aging of the population increases the demand for long-term care even faster than for acute care. If so, the kinds of measures that are projected to slow health-care cost increases are unlikely to prove effective for long-term care. Aging Americans face the prospect of high and rising long-term care costs as far as the eye can see.

If most of us could anticipate that we were going to face extended periods of near-total dependence, then only the wealthy could bear the costs, because only they would have the money to set aside. The rest of us would have to throw ourselves on the mercy of our children, private charity, or high-income taxpayers. But that is not the case. Even with today’s medical advances, which enable a higher percentage of the population to live into frail old age, most elderly do not experience extended stays in nursing homes or extended periods of dependence on professional home health services. Still, according to the much-cited estimate of health policy scholars Peter Kemper, Harriet L. Komisar, and Lisa Alecxih, 35 percent of all Americans who turned 65 in 2005 will end up needing institutional care at some point. Economists Jeffrey Brown and Amy Finkelstein estimate that between 10 and 20 percent of those who use a nursing home will live there for five years or more. Anthony Webb and Natalia Zhivan of the Center for Retirement Research at Boston College estimate that couples turning 65 face a 5 percent risk of incurring long-term care costs exceeding $260,000. There is, then, what Brown and Finkelstein call a “considerable right tail” in the distribution of nursing-home expenditures.

This structural fact suggests that long-term care is a classic insurable event—that is, an area of life in which each of us faces a small chance of a catastrophe with which we could not cope on our own. We do not buy insurance for the expenses—such as painting the walls and replacing the roof—that every home-owner incurs. We buy it, rather, to guard against disasters such as fires. Because relatively few of us will experience such disasters, we can use insurance to spread the risk among large groups of homeowners, making the protection we want far more affordable than it would otherwise be.

The Response Thus Far

There are many reasons why our long-term care policy should shift dramatically toward forward-funded insurance based on individual contributions. As more people use such insurance, the pressures on public finances, especially at the state level, would decline. Such a shift would alleviate harsh trade-offs states confront between health care and education, and would allow states to avoid choosing between Medicaid funds for health care for poor children and nursing-home operators. While it’s difficult to estimate the effect on overall health-care costs, rebalancing public and personal financing of long-term care would certainly lower the baseline costs of health-care entitlement programs—a must if we are to address our largest long-term fiscal challenge. Not least, moving toward such insurance would reflect a morally as well as fiscally sustainable balance between individual and social responsibility.

For various reasons, the private market for long-term care insurance has been slow to develop. One issue is information: Many people mistakenly believe that Medicare or their Medi-gap supplemental insurance policies will cover long stays in nursing homes. Time horizon is another impediment: The evidence suggests that consumers exhibit weak demand for other insurance products that must be purchased years or even decades before expected use. (If individuals were reasonably sure that they would incur at most limited health-care expenses prior to retirement, how much demand for health insurance would there be?) By the time most middle-income adults begin to consider purchasing long-term care insurance, they have reached the age at which annual premiums are very high, pricing many of them out of the market. (The average individual purchaser is 59 years old!) And most individuals tend to underestimate the odds that they will need long-term care services, in part because contemplating the prospect of frailty and dependence is so distasteful.

The health economist Richard Frank cites a number of additional factors reducing demand for long-term care insurance. Policies tend to be complex and call for a daunting number of design choices. They require potential purchasers to make sophisticated financial calculations and to assess multiple risks over multiple decades. And the time horizon of these policies raises doubts about the competence and reliability of the insurance companies who issue them. Many companies have been forced to raise premiums abruptly in response to overly optimistic estimates, while others have withdrawn from the market altogether.

There are also factors that tend to depress the supply of long-term care insurance, including the well-known problems of adverse selection and moral hazard. Individuals have information about their personal circumstances that they can use to time their purchase of insurance. Providers respond with forms and tests designed to screen out people whose health profiles suggest elevated risks. Because individuals who are aging and becoming frailer have increasing incentives to claim benefits, providers institute demanding procedures to determine actual eligibility for benefits. And finally, insurers have no choice but to limit their exposure to changes in demography and medicine that can affect entire populations over time, but these limits eliminate a range of policies that some individuals would otherwise wish to buy.

Medicaid also works, often in surprising ways, to decrease demand for private long-term care insurance. As a means-tested program, Medicaid imposes strict income and asset requirements for participation. One might imagine, then, that the program’s appeal would be restricted to low- and moderate-income elderly without substantial assets to preserve. The reality is more complicated, however, because individuals with assets can and do engage in Medicaid planning—those with assets above the threshold simply “spend down,” in the parlance, to qualify for coverage. According to Brown and Finkelstein, favored strategies include giving gifts to children and grandchildren, establishing trusts, and purchasing items that are excluded from the asset test. While Medicaid rules do allow states to examine such disbursements during a specified “look back” period, enforcement appears to be spotty. In practice, then, Medicaid does allow many middle-class Americans to sequester their assets, increasing its attractiveness relative to private insurance.

Some models suggest that this crowding-out phenomenon influences even upper-income households holding very substantial assets. While some analysts are skeptical of these findings, the fact remains that barely one quarter of individuals in the top income quintile own long-term care insurance policies. Given the “long tail” risk of extended nursing-home stays that would exhaust assets worth many hundreds of thousands of dollars, this unprotected exposure to highly negative outcomes is hard to explain. After all, wealthy individuals are disproportionately likely to have access to the information and advice they need to make rational plans. Something else is going on—myopia, or denial, or procrastination, or the mistaken belief that the safety-net programs will allow them to shelter large estates while receiving public benefits.

There’s another possible explanation. Brown and Finkelstein suggest that Medicaid makes private insurance appear less attractive in two ways. Owning private insurance makes it harder to qualify for the program. And because Medicaid is by law a secondary insurer, private insurance is required to pay benefits first, even if the public program otherwise would have covered some or all of those costs. This overlap, which reduces the net value of private insurance coverage, further discourages its purchase.

Issue #26, Fall 2012
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Raymond Lavine:

Informative and beneficial history on long term care insurance.

The free market system as people are aware is doing well for some people, in recession for others, and depression for older workers who will never find the jobs and incomes lost because of the 2008 financial melt down.

Harley Gordon offers the best approach to how we as agents should provide the need and urgency.

So long as you may qualify financially and are in good to reasonable health, owning a plan is good estate planning, and valuable to your family who absorb the consequences taking care of a loved one.

Long Term Care is not about protecting assets -- it is about preserving a family and providing additional income to a families income stream to pay for extended care benefits.

It thereby preserves the estate to provide income stream, tax consequences to allow for cash flow, legacy, and keeping a family together by keeping them apart.

For the next decade or more, the United States will not have the economic resources to have a government sponsored program, even if it is transfer of assets, to pay for extended care coverage.

The political system is toxic to allow for rationale education and conversation.

I do honor William with writing this article.

Sep 11, 2012, 8:35 PM
Kathleen Williamson:

Purchasing Long term care insurance may be the solution for the "under 50" population, but with the high premiums for the "60+" population who can not afford such a high premiums on fixed incomes.
So we are left with a generation of elderly that will need both home and institutional care before the "Insured" generation even come of age.
Something must be done now to enable todays frail elderly population, the providers who serve them and the families who struggle with the cost of such care to to have access to the least restrictive form of care they need.
Today's nursing homes are not the same institutions of the past. They are more home like, striving to provide life enriching environments for their residents as well as quality care, but all that comes with a cost.
I have seen an increase in the number Medicaid applications denied or assessed a "Penalty Period" due to the transfer of assets. The result is the facility incurrs an enormous debt and they must continue to care of the resident with no reimbursement for months and months.
Something must change or nursing home will be disappearing or going bankrupt in this troubled political and ecominc climate.

Sep 12, 2012, 10:05 AM
Wally Roberts:

Excellent analysis--as far as it goes. What it does not discuss that is crucial for making nursing homes affordable for both individuals and Medicaid is the exorbitant profits made by for-profit nursing homes, especially those owned by private equity funds.

And it's more than just money, as these profits are achieved largely by deliberate understaffing, which leads to enormous suffering by the patients. The private equity owners shield themselves from lawsuits over elder abuse by using multiple shell corporations so ultimate responsible cannot be assigned.

Sep 21, 2012, 10:14 AM
Gabriel Heiser:

You've only discussed how to pay for a current system of care with no mention of the other side of this coin, i.e., ways to reduce the cost of care by alternatives to the current nursing home model. I have read of other methods of care that are much less costly. I'd like to see a discussion of those ideas. If the costs were much lower, then a lot of this problem goes away. In my book, "How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets," I advise the reader how to take full advantage of the opportunities in the current law, but at the same time I recognize that with the aging population and longer lifespans, the numbers are just not going to work without radical changes. I applaud the author for discussing this difficult topic.

Dec 19, 2012, 12:31 PM

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