Private LTC Insurance is a not a population solution

The WSJ has a good point/counter-point on the question “should you purchase private Long Term Care Insurance?” (h/t Brad Flansbaum). Mark Meiners argues for purchase by saying “you shouldn’t hope for the best” while Prescott Cole says “LTC insurance is too expensive, you should invest what you would spend on premiums.”

Essentially, they are both arguing that you should prepare for LTC, one via purchasing insurance, the other by building flexible assets that could be use for LTC, or bequeathed to your favorite charity upon your death if die without needing it.

The Journal piece outlines an important conversation that misses the main public policy point: private LTC insurance will never be the solution for the LTC needs of the general population due to income and wealth levels.

Perhaps 10 percent of the population has enough income to pay premiums, and/or enough in assets they may wish to partially protect from a potentially catastrophic LTC cost. For example, past work I have done showed that around 4 in 10 elderly persons had income and assets at age 65 low enough to qualify for Medicaid before paying for any LTC. Those people are removed from the complicated decision framed in the WSJ piece, but they are certainly at risk of needing LTC.

If ever there were a risk profile that cried out for social insurance, it is LTC. The reason that seems so laughable, is our countries failure to grasp the most important thing in all public policy debates: the counterfactual, or the costs and benefits of what happens by default, in this case for LTC.

NPR on Informal Long Term Care

NPR has an interesting story asking “who needs LTC insurance?” because other arrangements can be made to provide for such care (h/t Brad Flansbaum).

This puts a personal face and story on a public policy problem that hits close to home, as my mother-in-law is moving in with my family this Summer. The last 8-9 months my family has been consumed with myriad details to work this out (estate planning, new wills, buying a house, trying to sell two others, getting siblings on the same page, etc). I wrote last week on some of the public policy aspects of LTC; I mostly want to point folks to the NPR story, as it is the best, short representation of the many issues related to thinking through inter-generational living that I have heard.

The cost of caregiving and the demise of CLASS

AARP estimates that around 25 Million persons are providing unpaid caregiving to a loved one with a disability, and that those who do so while juggling market work lose around $325,000 in lifetime income after accounting for foregone wages, income from Social Security, and private pensions. The worst part of the demise of the CLASS provisions in the Affordable Care Act has been the fact that the majority of the focus was on the impact of CLASS on the 10 year deficit score assigned to the bill be the CBO (it accounted for around half of the ACA’s deficit reduction), diverting attention from one of the most profound public policy questions facing our nation:

CLASS wasn’t an accounting gimmick, but an attempt to set up a self sustaining, voluntary LTC insurance program that would provide modest benefits (not enough for a nursing home; best thought of as aiding aging in place) to persons with disabilities. If CLASS had worked perfectly and been a self sustaining program, it would have decreased the deficit in the short term, while increasing the deficit in the out years. As I wrote in December, 2009 about CLASS:

…Proponents claim that CLASS is self-financing over the long term, and opponents say it will increase the deficit in later years. Both are correct.

It is hard to project what will happen with CLASS, mostly because of uncertainties regarding disability rates 30-plus years from now, but there are numerous provisions designed to ensure that the program is self-financing. Regarding the long-term deficit, when a program runs a surplus, it buys federal securities that pay interest. When interest is later used to pay for care, it is counted as a transfer instead of revenue. Therefore, CLASS will inevitably increase the deficit in years 30 to 75 even if it pays for itself totally through premiums and interest earned on premiums, given current budget accounting rules. [update: it would add to the deficit before the 30th year]

One of the key beneficiaries of a self sustaining LTC insurance program would be the adult children of the disabled–who provide unpaid caregiving, with all the related harms (there are also benefits). CLASS was flawed, but could have been fixed had we focused on the policy goal–how will we insure LTC as the baby boomers move into retirement? I think the federal budget deficit is very important to address, but you cannot answer all important policy questions using deficit accounting. The CLASS episode whereby LTC policy was lost in a sea of deficit accounting scores shows this.

Quick thoughts on Senate Aging LTC hearing

I watched the hearing. There was a vague delusion to most of what was said….it is a terrible problem, lets do something about it, we cannot afford to do anything about it, isn’t there some way the private sector can fix this?

Generally, you expect private insurance markets to develop when there is an uncertain chance of a catastrophic loss that affects many persons. Long Term Care fits the bill, yet private insurance markets have not worked well. Somehow, we need to achieve broad risk pooling that includes all those at risk (everyone). From the introduction to a recent paper on private LTC insurance that I wrote with co-authors, there are six primary reasons that persons do not purchase private LTC insurance:

  • No clear risk signal for need of LTC when young
  • Lots of myopia about the need for and cost of LTC; so people don’t understand and/or face up to the risk
  • 3 in 10 of those achieving age 65 will not use LTC, so if everyone bought private policies, a substantial minority would never claim benefits from their policy
  • Medicaid coverage of NH care likely crowds out the purchase of private coverage
  • A substantial proportion of the population has insufficient income to pay LTC insurance premiums, and/or insufficient wealth to “protect” from the cost of LTC
  • The structure of the policies themselves lead to rational non-purchase: (benefits denominated in dollars per day and not care, which is risky especially when insuring against something that is probabilistically a long way off; history of premium increases when claims experience is higher than predicted; denial of applications).

You have to overcome all of these to make private LTC insurance work. I just don’t see it. Further, companies are leaving the market for LTC insurance, and it is a totally voluntary market in which they can underwrite. The most shocking thing I heard at the Senate hearing today was that only 1 company bid to be the carrier for the Federal Employees Health Plan LTC insurance plan, which is basically the largest, most stable such risk pool in the U.S. I just don’t see how we make private LTC work as any sort of population based answer to our nation’s LTC needs. Perhaps the National Flood Insurance Program could serve as a model….I will noodle on that a bit.

The essence of planning for long term care

Dan Diamond (@ddiamond) alerted me to a Senate Special Committee on Aging hearing (The Future of Long Term Care: Saving Money by Serving Seniors), that will be webcast live today at 2pm via the committee homepage. I hope they manage to talk about practical solutions to the difficulties of providing long term care, and do not simply spend their time clucking about what they oppose.

I was guest lecturing on Long Term Care and the demise of the CLASS provisions of the ACA in Peter Ubel’s health policy class on Monday and someone asked, “what is the essence of planning for LTC?” My answer was that it entails planning for who will wipe your ass when and if you can no longer do it for yourself.

Now, that it not what the 20 year old’s in the class were dreaming about discussing when they came to Duke, and I get that. It is very easy to put off thinking about LTC until tomorrow.

Around 7 in 10 persons who attain age 65 will use some LTC. Of the users, about half will do so for less than a year, but around 1 in 10 will need such care for longer than 5 years. It is impossible to look at a room of 20 year olds and say who will need LTC among the subset who live to 65; and of course someone in that room could need it much sooner due to a catastrophic event. Almost no one has the assets to self finance a 5-10 year period of LTC use (~$1.5 Million max risk), so nearly every0ne is at risk of needing such care and not being able to afford it. If ever there was a risk profile that called for social insurance it is LTC. Instead we have a default system in which families do their best, availing themselves of an incomplete safety net, and when care needs become too great and assets are exhausted, Medicaid pays for them to live in a Nursing Home until they die (Medicaid pays for about half of the total national NH cost). We can do better.

A few links with many LTC details if you want more (they will still be here tomorrow):

The long term care counterfactual

Cross posted at The Incidental Economist.

I wrote last week about the shrinking private long term care insurance (LTCI) options.

From the comments to that post,wintercow20 asks:

…Wouldn’t it just be simpler to institute a forced savings system in general rather than trying to figure out who may be using LTC or not?…

And I answered that yes, it would definitely be simpler, and noted that the risk profile of LTC use of persons attaining age 65 is best addressed via some sort of social insurance-based approach. At a minimum, it seems clear that private LTCI is unlikely to work well for a variety of reasons (more context on public v. private provision of LTCI: here, hereherehere).

Also in the comments Theodore Whitfield provides a reasonable back of the envelope calculation of what a Medicare or Social Security-based LTCI program might cost and notes:

…Admittedly this is just a quick, approximate analysis, so I would put much faith into the specific estimates. But it does suggest that funding LTC through SSI or Medicare might be very expensive…

Lets take away the uncertainty–LTC funding via Social Security or Medicare would be very expensive. However, providing LTC is very expensive now. Most of it is provided by family members on an informal (unpaid basis) and there are a variety costs (lost wages for caregivers, negative impacts on caregiver health, etc.) that are not so easy to estimate. The AARP estimated the costs of informal care provided to adults with limitations in Activities of Daily Living to be $450 Billion in 2009. And Medicaid is the payer of last resort for nursing homes and finances around 4 in 10 dollars spent on NHs (~$150 Billion annually), the most expensive LTC setting that exists.

All of that happens now and will continue to do so by default. Much of the debate about the CLASS act, or about any discussion of expanding social insurance to cover LTC implies that the admittedly big cost of doing anything new is correctly compared to zero.* That is incorrect. The correct counter factual for any LTCI proposal is the piecemeal system that we currently have and its costs, including the already large public expenditures.

The most important thing in public policy is counter factual thinking, and many seem to struggle with understanding the correct LTC counterfactual.


Shrinking private LTC insurance options

This is cross posted at The Incidental Economist.

Prudential announced this week that they will stop taking applications for private Long Term Care insurance (LTCI) at the end of March according to a WSJ story by Leslie Scism. Several other insurers have also exited this market in recent years, which means that private insurance options are shrinking as the baby boomers move toward needing LTC.

Medicaid exists as a de facto nursing home insurance plan with the deductible essentially being your wealth (Medicaid pays for ~40% of all NH costs in the U.S.). Before that, families provide a tremendous amount of informal long term care, which is both expected by many while also being very burdensome and costly, both in explicit financial terms as well as in other ways. That is the default system.

Prudential notes two primary reasons for their exit:

  • claims being higher than predicted
  • interest rates being very low

The first reason they put down to “increasing life expectancy”, but I am not sure I buy that. Life expectancy has been increasing for quite a while. The more likely culprit for higher claims is adverse selection, which just means the people signing up had higher risks than average, which you might expect to be particularly bad for a type of insurance that is so rare (less than 10% of those over 50 have any). Interest rates may seem unrelated to LTC, but effect the return on investment that insurance companies can easily obtain with the premiums for a type of insurance in which persons may pay in for many years with no claims before having large claims later. Prudential says they will honor existing contracts, but premium increases for all members are likely in spite of such policies typically being sold with flat premiums (State regulators have consistently approved such increases, believing default of insurers to be the only other option).

In short, it doesn’t appear that purely private LTCI markets can work, even with tax credit purchasing incentives that we have had for years. In the aftermath of the CLASS program demise, some noted the biggest problem within CLASS was the inability to assign an actuarially fair premium, which is important in a purely private insurance market, and allowing for simple underwriting could improve CLASS. However, the Prudential story and the move out of this industry by other private insurers shows they haven’t been able to assign actuarially fair premiums either.

Far more important than focusing on how premiums are set for a small pool is forced risk pooling of some sort, to get all those at risk of needing LTC into the pool. In one sense, if you are OK with families providing care and Medicaid picking up much of the nation’s NH bill then you could argue we have a system. If you don’t like this system, it is amply clear that a purely private insurance-based one won’t work, and some sort of forced risk pooling will be required. The question remains, how will we insure LTC?