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.

So, given all this, just reform Medicaid, right? It turns out, however, that stiffening Medicaid eligibility rules wouldn’t do much. Brown and Finkelstein estimate that if every state were to adopt the eligibility rules used by the strictest state, demand for long-term care insurance would increase by only 2.7 percentage points. Shifting Medicaid from secondary to primary payer of benefits would make more of a difference, but it would substantially increase the program’s total costs—a political non-starter, given that soaring Medicaid expenses are already the biggest threat to the sustainability of state budgets. If we want to confront effectively the looming long-term care crisis, we’ll have to do more than reform Medicaid.

Toward a New Model

As we work to move beyond Medicaid, there are some European approaches worth considering. For example, Germany instituted a mandatory, universal long-term care system in 1995, and Howard Gleckman of the Urban Institute has analyzed its principal features. The funding mechanism is a payroll tax, initially set at 1.7 percent—divided equally between workers and employers—and increased to 1.95 percent in 2008. Benefits are indexed to inflation and are reviewed for adequacy every three years. The public system covers about 70 million people, while another 9 million (mainly higher-income individuals) choose to purchase private insurance. According to law, however, all workers are required either to participate in the public social-insurance program or to obtain private coverage; no one is allowed to opt out. About two million Germans (2.4 percent of the population) who have passed a needs assessment receive benefits; two-thirds of them opt for home-based rather than institutional care.

According to Gleckman, the German program “has succeeded in substantially reducing the number of long-term care patients on means-tested public assistance.” This suggests that a similar program in the United States (a fully funded, actuarially sound Part E of Medicare, for example) could reduce the ranks of Medicaid beneficiaries. The German program has remained financially viable, albeit with a close balance between revenues and expenditures. And the program provides a considerable measure of choice that enables families to tailor benefits to their individual circumstances. They may receive in-kind benefits, where agencies under contract to the insurance program provide care directly; cash, which, though significantly lower than the monetary value of the in-kind benefits, they can use for a wide range of purposes; or a combination of the two. Public satisfaction with the program seems pretty high.

Still, the benefits provided under the German program are spare by Medicaid standards, and the cost of even this modest initiative is projected to rise in coming decades—to 3.2 percent of payroll in 2040, according to one estimate. The inexorable rise in the frail elderly as a share of total population will make it impossible for Germany to hold the line on long-term care spending as a share of GDP. There is no reason to believe that the future will be any different in the United States.

It’s also worth examining what we’re already doing here at home, modest as it is. In the first place, according to Gleckman, the federal government and at least 34 states provide tax credits or deductions for the purchase of long-term care insurance. But evaluations find only a modest impact on the purchase of policies, and models suggest that tax credits as large as 25 percent of total premiums would increase demand by only 11 percent.

Another U.S. initiative is the Partnership for Long-Term Care program. Sponsored by the Robert Wood Johnson Foundation in the early 1990s, the program allowed an individual who purchased a long-term care policy to be able to qualify for Medicaid while retaining assets equal to the policy’s value. In this system, private insurance reduced Medicaid outlays, while the Medicaid backstop cut the cost of private premiums. Only four states—California, Connecticut, Indiana, and New York—implemented Partnership programs before Congress, fearing that high-income individuals would use it to abuse the Medicaid system, acted in 1993 to prevent new states from participating. Twelve years later, the Deficit Reduction Act (DRA) of 2005 allowed other states to create Partnership programs. Thirty-nine states now offer policies under this aegis.

Here again, the results have been modest, verging on disappointing. Policies sold in the four original Partnership states totaled only 259,000. While the DRA brought another 35 states into the system, their policies have collectively added only 230,000. Evidently, the incentives the Partnership offers have been unable to catalyze a broad response. Another step was taken in 2000, when Congress passed the Long-Term Care Security Act. It required the federal government to offer long-term care insurance to its employees and their families. The Office of Personnel Management (OPM) conducted a competitive bidding process and contracted with large carriers selling long-term care insurance in the private market to offer an array of insurance products. The contract ensured not only a wide range of choices but also the reliability of information about each option and enough standardization to permit ready comparison among options. As of 2011, the program had more than 268,000 enrollees, making it the largest private long-term care program in the country.

The cost of policies has contributed to the program’s success. A 2006 Government Accountability Office study found that annual premiums averaged 46 percent lower for single people and 19 percent lower for married couples who were both the same age than for comparable policies in the private market. In 2009, an unanticipated increase of between 5 and 25 percent affected about 150,000 participants, sparking widespread outrage and charges that the change reflected misrepresentations during the initial offering. Still, costs remain reasonable, at least for those who purchase plans well in advance of probable need. As of mid-2012, a 40-year-old federal worker would pay only $107 per month for a policy with expansive benefits. By contrast, a worker who waited until age 60 would pay more than twice as much—$231 each month, while a worker who put it off until the threshold of retirement would pay nearly $300.

Unlike most of the health insurance the federal government offers its employees, long-term care insurance receives no subsidies. The government does negotiate, however, with carriers who want to offer policies and makes information about costs and benefits available in an understandable, user-friendly format. And while most long-term care insurance is purchased on the individual market, the federal program enjoys the cost savings of a group plan.

That said, the program’s results should be kept in perspective. More than four million civilian and military personnel are eligible to participate, along with spouses and retirees. Even with the program’s convenience and cost advantages, the participation rate is barely 5 percent. If the objective of long-term care reform is to move away from traditional public programs toward a new insurance model, the OPM program represents a very modest step toward that goal.

The most recent effort to improve long-term care coverage was an instructive fiasco. The CLASS (Community Living Assistance Services and Supports) Act, appended to the 2010 Affordable Care Act (ACA), was intended to provide a benefit averaging $50 per day, mainly to support home-based long-term care. The legislation’s language was unusually sparse and general, delegating most key design decisions to the secretary of Health and Human Services. Republican Senator Judd Gregg succeeded in adding an amendment requiring the Administration to certify that the plan it developed would be actuarially sound and self-sustaining over 75 years. But the underlying legislation made that impossible, by allowing everyone—even those with serious health problems—to sign up, by permitting policyholders to collect benefits for life after only five years of contributions, and by limiting premiums the poor would pay to $5 per month. In the end, the Obama Administration had to admit that it could not square the circle: The Act’s mandatory features made it impossible to design a program that would achieve long-term sustainability. So the Administration threw in the towel and suspended implementation of the program.

The CLASS Act’s failure illuminates some basic truths about long-term care insurance. A voluntary program that must accept all applicants is bound to trigger adverse selection that will require higher premiums, public subsidies, or both to keep the program afloat. If neither is permitted, the program quickly enters a death spiral. Something has to give: Either the program must abandon guaranteed issue and select participants based on their health status, or it must get everyone to participate, generating a predictable pool over which it can spread the cost of benefits (much like the ACA). And if one of the purposes of the program is to limit or eliminate public subsidies out of general revenues—as should be the case, in order to avoid the costs associated with the ACA—then it must be allowed to adjust premiums so as to achieve long-term sustainability.

What’s Next for the United States?

If we think that the aims of the CLASS Act were worthy but the means fatally flawed, what should we do instead? My proposal, in brief, is to be bigger, bolder, and more fiscally realistic. There are two basic models for fundamental reform—one that mimics the structure of the ACA, the other that proceeds along the lines of the German program. The first option would work as follows: At age 40, every adult would be required to purchase a long-term care insurance policy or to pay a penalty equal to 2 percent of wage and salary income for each year without coverage. The policy would need to have certain features: a term of five years, a benefit of at least $150 per day, an automatic annual inflation adjustment of 5 percent, a 90-day deductible, and benefits that could be received in cash or in kind and used for both home-based and institutional care. The government would provide subsidies for purchasing the plans. Individuals with household income between 150 and 300 percent of poverty would receive income-related premium subsidies; those below 150 percent would be enrolled for free.

The federal government would create a competitive bidding process along the lines of, but broader than, the current system for federal employees (and the exchanges under the ACA), with the aim of creating a large menu of carefully vetted, readily comparable choices. After the five-year benefit period expires, Medicaid would assume full financial responsibility for any remaining costs. Individuals in this category would not be required to spend down their assets to be eligible.

The five-year requirement is intended to track the distinction between normal expectations—the maximum amount of time that 80 to 90 percent of Americans will spend in nursing home care—and unusually long stays that represent the equivalent of financial catastrophe. The average nursing home stay is 2.4 years—higher for women, lower for men. As we’ve seen, relatively few stays last longer than five years. The choice of age 40 to mandate the purchase of insurance rests on a judgment as to when it is reasonable to expect adults to begin providing for events that may occur in later life.

Insurers in the current federal program offer 40-year-olds the policy on which my proposal is based for an annual premium of $1,285. With mandatory participation and more competition among insurers, premiums under this system should be substantially lower. Regulations would permit premium increases in only a narrow range of circumstances that companies would be required to document and subject to strict review.

Under this plan, Medicare expenditures would be reduced somewhat since private insurance would finance a portion of the 100-day rehabilitation period that Medicare now covers. The impact on Medicaid would be far larger in fiscal terms, and much more significant structurally. Medicaid’s revised role in long-term care would be to: 1) create, through a competitive process, the options among which individuals could choose and provide information to assist individuals in making that choice; 2) use regulations to ensure appropriate standards and safeguards; 3) provide premium subsidies for low- and moderate-income individuals; and 4) serve as insurer of last resort after the expiration of the five-year private benefit period.

The design of this proposal deliberately mimics that of the ACA and therefore should raise no constitutional issues under the congressional taxing power. Like the ACA, it involves the private sector, which would increase choice and competition but also administrative complexity.

That’s one idea. The alternative to the ACA model is an approach that adapts Germany’s program to American circumstances. Under this approach, workers over age 50 would remain in the current system. All workers 50 and under would be required either to contribute 2 percent of their wages into a long-term care fund or to purchase private long-term care insurance with at least the coverage features specified below. For all workers making less than twice the median wage, the federal government would make a sliding-scale contribution to ensure a minimum annual contribution of $1,000 per worker.

The government would establish eligibility criteria for companies wishing to participate in the new program’s market exchanges. All companies meeting the criteria would qualify for inclusion, and the terms and conditions of their policies would be arrayed in standard formats that make it easy to understand and compare them. The government would ask every worker to choose a program and a policy offering no less than five years of coverage at $150 per day with a 5 percent automatic annual inflation adjustment, a 90-day deductible, and fully flexible benefits as in the first option. Drawing from the long-term care fund, the government would subsidize that choice up to the value of the lowest-cost policy with the basic features specified above. Individuals who select more expensive policies would pay the difference into the fund, while individuals who fail to make a selection would be defaulted into the lowest-cost basic package. Workers who directly purchase at least a basic package for themselves on the individual market would be exempt from the mandatory payroll contribution.

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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