Health Care’s Older Brother: The Long-Term Care Crisis
The median annual cost of a nursing home is over $87,000. This expense, which can persist for several years, is largely paid out of pocket by the elderly and their families until they are left with no savings. For most Americans, it is only at that point – impoverishment – that any form of social insurance kicks in. Social Security and Medicare largely ended elderly poverty but catastrophic long term care needs still push many into poverty.
Last March, a major study of public attitudes towards long-term care found that most Americans are largely clueless about the financial risk of needing care in old age. Around 70% of 65 year olds will need some long-term support before they die. Despite this risk, two-thirds of Americans over 40 have done little or no planning for their care needs. Three-quarters think their spouse will care for them, and almost half think their children and grandchildren will care for them. But the burden on family members can be substantial: many spouses and adult children reduce their hours in the labor force to care for a loved one.
Furthermore, many Americans mistakenly believe that social programs will help them with long-term care costs. Over a third think that Medicare – the federal health insurance program for those 65 and older – will help them, and a third think that their private health insurance plans will help them. In both cases, they are wrong. Medicaid – the federal/state health insurance program for the impoverished – is the only major government program that covers long-term care. But because it only pays for expenses for the poor, an elderly individual must deplete his or her life’s worth of earnings and savings before being eligible for Medicaid. One can buy private long-term care insurance, but these products suffer from a host of issues, including high premiums and low benefit caps. As a result, over 40% of long-term care expenses are paid out of pocket (compared to 17% of overall health expenses for the elderly).
Our current system boils down to two payment options: savings and Medicaid (i.e. poverty). But there should be another option: catastrophic insurance. While most elderly individuals do not incur enormous long-term care costs, five percent of individuals end up spending over $260,000. This is a classic example of an “insurable event”: a small risk of a financially devastating event. Because the risk is small but could affect anyone, the insurance premiums would be affordable since everyone would buy it.
The idea of catastrophic coverage is simple: you pay for your long-term care expenses up to a certain point, and insurance kicks in if spending hits “catastrophic” levels. Private catastrophic coverage is widely available in health insurance markets, but is virtually non-existent in long-term care. In an attempt to spark demand for private catastrophic long-term care insurance, the Robert Wood Johnson Foundation sponsored the Partnership for Long-Term Care program in 1993 which allows individuals to buy long-term insurance and to qualify for Medicaid while retaining assets equal to the amount of the policy. While thirty-nine states now offer these policies, demand remains low for this version of catastrophic coverage.
An alternative is publicly provided catastrophic coverage. In 2013 the Congressional Long-Term Care Commission proposed a model in which individuals would first be responsible for a percentage of long-term care expenses, and then become eligible for catastrophic coverage. This percentage could vary by the individual’s income, so that those with lower income would still pay relatively little out-of-pocket. Higher income individuals would pay a larger percentage of costs before coverage began, but they would still obtain coverage without depleting their stock of wealth (as our current Medicaid system does).
To be sure, implementing and financing a public catastrophic long-term care insurance program would be fraught with political difficulties. But our current system is unsustainable, especially in light of a looming demographic concern: aging Baby Boomers. With fewer children to rely on for unpaid care, Boomers will most likely rely more heavily on costly formal services. A system that better insures against long-term care costs, particularly catastrophic costs, will be ever more important in our aging society.