What is the best way to insure Long Term Care?
July 20, 2011 7 Comments
Lots of reports that the CLASS provisions will fall in any Senate-driven budget deal. Even if that doesn’t come to pass, CLASS is likely to go in any negotiations to move ahead on health reform. Most of the focus is on how CLASS influences CBOs score of deficit reduction, but I want to focus on the problem that CLASS is designed to address, the need for and cost of Long Term Care (LTC). Because we cannot repeal disability.
CLASS was an attempt to set up a self sustaining LTC insurance program that would provide a relatively small amount of money per day ($50-$75) that could be thought of as cover to help people live in their homes with disability and perhaps keep them out of a nursing home. It is a partial response to what many would say is a failure of the private insurance market to cover LTC.
I wrote a paper in Health Affairs (I believe ungated here via NIH depository) with colleagues from Duke and Boston University that was in the January 2010 Health Affairs that looked at the viability of using genetic markers as risk adjustors for private LTC insurance. I don’t want to focus on the genetic piece, but the reasons people don’t purchase private LTC insurance:
The policy big picture is this.
- Families are the first line provider of LTC and this will always be the case. AARP estimates the value of such informal LTC to be $450 Billion per year.
- Medicaid is the default payer of nursing home care in the U.S., the most expensive setting for LTC and pays around half of all such care. You could think of Medicaid as a universal NH insurance program with the deductible being your wealth. NH and LTC generally are where the big money is for Medicaid programs.
- I suspect CLASS will eventually be goners. Do the repealers have any ideas about how to expand insurance coverage for LTC? We have had tax credits for LTC insurance for years….
- The private LTC insurance market is small and there are many good reasons people don’t buy such coverage, including the fact that 3 in 10 of those surviving to age 65 die without using such care. Amongst the users, there are tremendous variations in length of use and the amount of money needed to finance the longest stay is probably $1. 5 Million. So, almost everyone is at risk of being unable to pay for the LTC they could need.
- If ever there were a risk that called out for social insurance (broad spreading of premium in return for broad coverage) it is LTC. The policy answer is risk pooling and the private market has failed to do it. Medicaid certainly plays a crowd out role for NH coverage, but think through the 6 reasons for non purchase above; all of them must be addressed to move off of the status quo.
What is the answer? The population is aging….
About Don Taylor
Don Taylor's RECKONING BLOG 
I have paid nearly $200 a month for private LTC coverage for me and my wife for many years, and will continue to do so.
The policy is dollar-denominated, and will very likely not cover the actual costs of LTC if/when we eventually need it down the road. But I view it as a way to shield a portion of our assets from LTC costs — maybe we will have some money left to live on after a lengthy LTC episode.
I think it would be far better to structure LTC policies to guarantee X days of coverage at prevailing rates, but understand the reluctance of insurance companies to take on the inflation risk.
Like all insurance, the goal shouldn’t necessarily be to keep you whole, but to leave you with something after a catastrophic incident.
@David
there is a fundamental difference in private health insurance (major medical) and LTCi. Major medical covers care you may need and then has to work out how much they pay providers given your cost share. LTCi is far simpler and is just dollars per day. So long as people view it as you do conceptually (trying to shield a portion of your assets from cost risk of LTC) then private LTC insurance makes sense. Fascinating that no private insurance product that I have ever heard of has written a policy that covers care and not dollars. I think this points out limits of private insurance as any population based answer to LTC
Don,
From my own research (around) two years ago, I uncovered another reason that people aren’t all that eager to buy: uncertainty about the end product. For any product that promises coverage, and not money, it’s really hard to look out for more than a decade and be able to acertain with any certainty what care will look like at that time and, thus, what sort of coverage is needed. Especially given the cost of care that has been constantly outpacing inflation, plenty of people feel more inclined to roll the dice regarding their health than invest in a product that A.) they might not use and, B.) might not cover their needs even if they do require it.
Think back to 1980 (hell, even 1990), and ask yourself if you could have predicted what medical care would look like in twenty years, including costs, policy frameworks, programs, etc.
That uncertainty begets issues as people who don’t purchase LTCI and wind up needing it either “spend down” to medicaid eligibility, burden their families, or find themselves destitute in their moment of greatest need. It was my hope that the CLASS act would alleviate a lot of these issues; it’s rather unfortunate that they bungled the planning of it so badly.
@Alexander
LTCi denominating benefits in dollars per (and not care) is a big reason people (rationally) do not buy LTCi. If you get a 5% annual inflation rider and costs rise 5.1% per year, that turns out to be quite a miss if compounded over 3 decades. The insurance industry writ large is very successful in US, meaning they sell lots of different types of insurance. They do not sell lots of LTCi. At least part of the problem must be the products offered. CLASS could be fixed in policy terms if there was general agreement that setting up self funded LTC plan of its type for people not yet disabled was agreed to as a policy goal. I would rather fix and implement; but implementing in way that it is doomed to fail is a bad option, because we would never go back and try again if that came about.
In my opinion, the answer is most definitely NOT tax deductions for LTCi. They’re regressive and they’ll go to people who would’ve bought it anyway.
If we do ANY sort of tax spending, it should be an income-limited tax credit. For example, Minnesota credits people up to the higher of 25% of the annual premiums they paid, or $100. The credit isn’t limited by income. Most people who buy any sort of policy that’s worth buying will get the full credit (because I’m pretty sure annual premiums for a comprehensive policy with inflation protection are more than $400 for just about anybody).
In many ways, LTC is an insurable event. It’s a significant financial risk, and the dispersion of risks is wide enough that you can create insurance against it. The author said that 3 in 10 people dying before needing any LTC is an argument against buying it, but what you’re actually insuring against is the risk of needing assistance in 2 or more Activities of Daily Living. That’s a pretty severe level of disability, and it’s sometimes called an institutional level of need (meaning that if you don’t get paid help, you’re at risk of having to be institutionalized). Fewer people need that level of assistance. In theory, there are few enough that this makes sense as a form of insurance.
I think there are both economic and psychological (or behavioral economics) reasons why people don’t buy LTCi even though it might be worth it to do so. One, affordability. LTCi is expensive, and it just seems to be too expensive for most middle-class people to fit into their budgets. Too many competing financial responsibilities. It’s cheaper the younger you buy it, but the younger you are, the less your income, and in some ways, the more the demands on your money (college loans, kids, mortgages).
Two, I think the concept of hyperbolic discounting affects our decisionmaking here. In comparing future costs or benefits versus present ones, people tend to under-discount near term costs, and over-discount future ones – and the excess discount increases with time. In other words, we underestimate the impact of future events, and the magnitude of this underestimation increases the further away the event is. Your average LTCi buyer today is age 55 or so, and on average they will go into claim in 25-30 years.
Hyperbolic discounting is an error, but it’s also human nature. I don’t think that it’s feasible to expect masses of people in their 30s to start voluntarily buying LTCi. I don’t think LTCi will grow very much beyond a niche product. People just won’t buy it, absent some sort of government intervention (i.e. a mandatory program). I know I haven’t – I have no slack in the budget. Based on all that, I think that if you think our LTC system needs intervention, the most effective change will be a mandatory government program.
I also think it’s unreasonable to expect employers to pick up the tab – LTCi is NOT as cheap as term life of disability income insurance, and employers already have to contend with very high health care costs.
Unfortunately, because health care is so expensive in the US, it would require significantly increased taxes to fund a mandatory, comprehensive LTC program. I believe that making CLASS mandatory might be a possible, if difficult, goal. CLASS’s relatively skinny benefit could actually have a significant impact, and it would only require modestly increased taxes – probably something like a 1% payroll tax, maybe a bit more.
Back to Medicaid crowd out of LTCi, my personal belief (I’m not an economist) is that it’s not the primary factor. I know there’s a study out there showing that if you made all the states go to the strictest LTC coverage requirements (in terms of the income limits), total LTCi purchase would only increase very modestly. I think the affordability constraints and the behavioral constraints dominate Medicaid’s crowd out effect.
@Weiwen Ng
making the risk pool very large via mandatory social insurance is the policy answer but that is politically impossible now.
Agreed.
By the way, I would dispute the article’s contention that the private market has failed to deliver risk pooling on technical grounds. They’ve done it well enough that viable policies exist. The people who are insured are not all sick and likely to become disabled – if they were, then the insurers would have to hike premiums continuously.
The main reason insurers have hiked premiums was because they under-priced their policies. The most recent guidance from the National Association of Insurance Commissioners says that they have to set premiums HIGH enough to withstand a certain amount of adverse experience. It used to be that they didn’t – and so, the race was on for the lowest premiums. That was exacerbated by poor investment performance, and by people remaining disabled longer than they initially projected.
I would have phrased it thus: the private market has failed to deliver policies that are affordable enough that a significant number of people purchase them, and that are structured so that people are able to buy them. The first part isn’t all the market’s fault – long-term care is pretty expensive, and a significant number of people need it, so it’s expensive. (In contrast, death is expensive, but very few people die before 65, so term life insurance is pretty cheap.)
I’d say the market has clearly failed in that LTC policies aren’t transferrable. It’s a definite concern to have to stick with one insurer through the life of my policy, which could be 20-30 years. What if they go under? If state regulators have to take over the policy, will they be able to maintain the benefits? Also, they only sell a few policies that let users pay increased premiums as time goes by – if I have to pay level premiums, that’s good if I’m on a fixed income, but if I’m buying younger and earning less, it’ll be a much steeper hill to climb. In contrast, I’d prefer a policy whose premiums increased some with my age, and then leveled off.