Funding Long-Term Care: Cash Benefits for Informal Care
Recent data shows that almost half of Americans over 65 need help with daily activities and that the costs associated with this help can be substantial. Nursing homes average $87,000 a year, and home aides run $20 per hour of care. Despite these costs, few Americans buy long-term care insurance, and over 40% of long-term care expenses are paid out of pocket. Why don’t people buy insurance? One often-overlooked, but key, answer is informal care.
Several other reasons have been proposed and analyzed, such as high premiums and limited coverage, a lack of understanding of the risk, and Medicaid. But they only go so far in explaining the lack of demand: most individuals with better insurance offers (women) and too much wealth to qualify for Medicaid choose to forego private insurance. At the same time, most of them receive informal care by family members.
Informal care is an alternative source of long-term care for many individuals. Family members, who can provide the same necessary care as formal services, are often preferred over formal services and are sometimes cheaper sources of care, depending on the cost to their family members. Because long-term care insurance only reimburses formal services, individuals who would rather receive care from a family member may not find long-term care insurance valuable. Indeed, a 2012 study found that those who report believing that their family would be able to take care of them are 10 percentage points less likely to purchase private insurance. From my own research, preliminary calculations from a model of long-term care decisions and the family show that informal caregiving can reduce the demand for private insurance significantly.
More generally, informal care is a large yet under-acknowledged player in long-term care: nearly all individuals needing assistance receive some amount of informal care from loved ones in addition to or in place of formal services. However, the cost of informal care is largely absent from official calculations of the financial burden of long-term care. If this cost – lost wages, lost leisure, psychological costs, etc. – was included, the total burden would be much higher. In addition, discussions of new financing solutions – both private and public – rarely include informal care considerations. Even among proposals to improve caregiver benefits, the focus is on childcare, not the elderly, as evidenced by President Obama’s recent State of the Union address.
Instead of overlooking informal care for elderly Americans, we need to take it seriously. Specifically, we must acknowledge the costs incurred by family members and re-design policies to cover these costs. Currently, private insurance policies and social insurance benefits only cover formal services, or “in-kind” benefits. To cover informal care, we should redefine benefits as cash benefits that could either be used to offset the costs of informal care or pay for formal services. This flexible form of benefits would allow individuals to more freely choose their preferred source of care. My research shows that the distortion created by the current “in-kind” insurance benefit could be large, and converting the benefit to cash could increase social welfare considerably.
To be sure, the provision of cash benefits would have its fair share of implementation difficulties. We would need to think carefully about how to avoid a “woodwork effect” in which individuals feign sickness for cash benefits. But this solution has proven feasible elsewhere in the world: several European countries, such as Germany, France, and the Netherlands, have insurance products whose benefits include cash and in-kind services. In these countries, individuals are typically subject to a health examination that determines benefit levels.
To date, most proposals for new long-term care financing solutions in the United States have either failed (e.g. the CLASS Act, which would have created a voluntary public option for long-term care insurance) or been met with limited success (e.g. Long-Term Care Partnership Plans, which are insurance policies that allow individuals to receive Medicaid benefits while protecting a larger share of their assets). One idea that shows promise, however, is Medicaid cash benefits, which allows individuals to choose between hiring formal services and paying informal caregivers. This program is still being piloted, but given the recent findings on the interaction of informal care and insurance benefits, we should invest more resources into programs of this nature.
Corina Mommaerts is an ISPS Policy Fellow and a graduate student in economics. Her research explores the role of informal insurance arrangements within a community or family in mitigating various sources of risk.