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How will America pay for long-term care?

As Democrats and Republicans continue to fight over the future of American health care, we must ask: How are we paying for it now? Should open-ended Medicare coverage be replaced with a selection of private insurers? Should Medicare subscribers be paying higher premiums?

We sat down with Richard Frank, Professor of Health Economics at Harvard University and a Research Associate at the National Bureau of Economic Research (NBER), to discuss the current state of long term care coverage.

Where are most Americans currently getting long-term services and supports (LTSS) (medical, social and personal care services on an on-going basis)?

Roughly 80% of all older adults receiving long-term services and supports because of functional impairments obtain it from families and friends. Recent estimates of the value of those services indicate that services worth $450 billion were provided in 2009. Because families are getting smaller, the ratio of over 65 adults to those under 65 is growing and so there will be relatively fewer younger relatives to provide care to older adults in the coming decades.

Are there private providers of long-term care insurance or do most people rely on government programs?

There is a private long-term care insurance market in the U.S. It is rather small. There are between 7 and 7.7 million policies currently in force. This amounts to about 4% of adults over 40 years of age and about 12.4% of adults 65 years and older. These policies account for a small share of spending on long-term services and supports, about 6.4%. That means that about 63% of spending on long-term services and supports is the responsibility of public programs.

What options are there for ‘middle Americans’ who are too well-off to qualify for Medicaid, but unable to afford long-term care insurance?

Older adults that cannot afford private long-term care insurance can potentially absorb some of the financial risks of needing long-term services and supports through use of the wealth that rests in their homes. Reverse mortgages have been used as a risk mitigation mechanism. They are not without their own risks and potential costs. Other methods involve voluntary arrangements to provide mutual supports among neighbors such as those that are sometimes found in Naturally Occurring Retirement Communities (NORCs).

Are there reliable predictors for long-term care needs, either for consumers or insurance companies?

Long-term care insurers have extensive underwriting procedures that are based of factors thought to predict functional impairment. Certain disease patterns occurring earlier if life, along with other characteristics (obesity) have been shown to predict disability and use of long-term services and supports. There is great uncertainty about rates of disability for cohorts of adults at say age 45. It is this that makes insuring against long-term services and support needs so challenging.

How does the aging Baby Boomer population look to impact this situation?

The Baby Boom generation is large in number and will live longer than prior generations. The US population is therefore aging at an increasing rate. The population over age 65 will increase from 13% of the population in 2010 to 21% by 2050. Moreover, the share of the population over age 85% will grow more rapidly. This is significant because the rates of disability and use of paid long-term services and supports grows with age. Thus about 7.5% of people aged 65 to 74 used paid care compared to 31% of those over age 85. The implication of this that that caring for the baby boom generation will make large claims on both public and private budgets.

What can long-term care insurers do to make their policies more relevant to consumers?

They might craft products that are simpler, easier to understand and carry lower selling costs. They might also consider ways that allow consumers to alter their contracts should their financial circumstances change and not create as many situations where they face forfeiture of all benefits.

On October 14, 2011, US Health and Human Services Secretary Kathleen Sebelius transmitted a report and letter to Congress stating that the Department does not see a viable path forward for CLASS implementation at this time. The CLASS provision in the Patient Protection and Affordable Care Act (PPACA) (sometimes referred to as Obamacare) would have created a voluntary long-term care insurance program to provide cash benefits to adults who become disabled. What impact would the CLASS provision have had on long-term care?

The CLASS Act was a serious but flawed attempt to address a critically important problem that will grow in important over the coming decades. Some of the principles set out in the CLASS Act can serve as a platform for expanding the protection offered Americans against the financial risks associated with long-term services and supports. Unfortunately, the political environment surrounding the Affordable Care Act (ACA) was not conducive to crafting a workable solution based on the many useful ideas contained in the CLASS Act.

Richard Frank is Professor of Health Economics at Harvard University and a Research Associate at the National Bureau of Economic Research NBER. He is the author of “Long-term Care Financing in the United States: Sources and Institutions” in the most recent issue of Applied Economic Perspectives and Policy, which is available free for a limited time.

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Recent Comments

  1. Dr. Robert Weed

    Long Term Care Insurance is very affordable and does the job evry well. The problem is way too many people are in denial … they don’t think, for whatever foolish reason, that THEY will ever need care. So, they think Long Term Care Insurance is a waste of money.

    The Class Act would have had the same problem but in reverse. Because of no health requirements in order to get a policy, adverse selection would have occured. The high price of small benefits would have turned into an even higher price for small benefit.

    Tax incentives and education are needed in order to get more people to plan for tehir own Long Term Care with affordable Long Term Care Insurance.

  2. Raymond Lavine

    My area of focus and knowledge is in selling through consultation extended care benefits aka Long Term Care Insurance.

    I welcome Richard’s comments.

    There are several issues to help the consumer

    1. Carriers are stressed because of the economic environment where assumptions made several years ago are not being achieved with fixed income and portfolio rates.
    2. Premiums have been raised on older plans to provide sufficient reserves. Why did this occur? Inflation on plans is higher then insurance rate returns, retention of plans is higher then anticipated, and people are using the plans longer then calculated.

    It is my opinion that the insurance carriers and agents are confusing the consumer about long term care plans by offering people quotes as if LTC plans are a commodity. Auto, Home, Life is often sold that way — comparing costs and coverage.

    Carriers offer different plan designs and health issues may preclude people from plans. These plans are not guaranteed issue but underwritten and 20-30% of people are either rated or declined because of health issues.

    It used to be that these plans were nursing home insurance but have been expanded to include care giving in the home or in a care facility based on circumstances.

    Some will sell the plan because there are tax incentives.

    What is central to making a decision to own a long term care plan is not what happens to the care giver but the consequences of not having a plan that effects those who provide care giving. Their career plans, retirement, family, children, friends, and emotional and physically challenges effects not only the person needing care giving but their family.

    I honor Richard’s research and information on this topic.

  3. Darrick Wilkins

    What jumped out at me in the article is the fact that obesity is now a leading cause for needing Long Term Care. LTC Tree services clients in all 50 States and in the past 15 years I’ve personally noticed a huge shift in obesity related claims.

    I think as America’s waistline continues to grow the obesity problem will become the number one cause for claims. When a person gets so big they simply have trouble moving. When simple mobility goes, all activities of daily living (bathing, dressing, transferring, etc) become near impossible to do without assistance.

    Darrick Wilkins
    Founder and co-CEO of LTC Tree

  4. [...] recent article from the Oxford University Press, “How will America pay for long-term care?,” explains that 80% of the care that parents with Long Term Care needs will get it from friends or [...]

  5. Beatrix Lewis

    The CLASS Act was too ambitious with the government thinking that this is the solution to expensive long term care insurance costs. It looked like a great program at first but in the long run it will exhaust all its funds and besides other people don’t want their taxes to support this program because they think that they will never benefit from this. I guess the only way to fight the high cost of policy is by purchasing this early and considering other long term care options that can cut lower the premiums.

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