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.

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.

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.

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