Long-Term Care Insurance in the U.S.

The health care reform bill signed into law by President Obama in 2010 included the Community Living Assistance Services and Supports (CLASS) Act, under which the federal government was going to sell long-term care insurance policies directly to the public. However, the law also included a provision that before the program got underway, it had to be certified to be actuarially sound over the long term. On October 14, 2011, the Department of Health and Human Services announced that it could not make such a certification, and thus was going to end the implementation of the program.

Where does this leave insurance for long-term care in the United States? In the Fall 2011 issue of my own Journal of Economic Perspectives, Jeffrey R. Brown and Amy Finkelstein tackle this question in \”Insuring Long-Term Care in the United States.\” Here is a sampling of the insights that emerge:

Only a minority of older Americans have long-term care insurance. Even among those in the top wealth quintile, who have the most wealth to protect by purchasing long-term care insurance, only a bit more than a quarter have it.

Long-term care insurance policies with only moderately decent coverage can still be quite expensive. Brown and Finkelstein look at annual premiums for kinds of long-term care insurance policies as of mid-2010: \”These policies all cover institutional and home care, and have a maximum daily benefit amount of $150. They differ in their deductible (60 day or 30 day), their benefit period (four year or unlimited), and whether or not the daily benefit is constant in nominal terms or escalates at 5 percent per year (compounded).\” For the record, average nursing home costs are already above $200/day, so this insurance would cover only part of future costs. 

The loads on long-term care insurance are very high. A \”load\” is a measure of how the expected value of all premiums paid compares to the expected value of all benefits received. A load of zero means these are equal to each other. A load of, say, 20% means that for every $1 in premiums paid, you can on average expect 80 cents in benefits. The formula for load is:

Moreover, the idea of load can be extended to take into account that many people take out a long-term care policy, but at some point stop paying the premiums–and as a result get little or nothing in benefits. The first column shows loads assuming that people keep their policies; the second policy shows the load with this \”lapsation\” and policy termination taken into account.

Long-term care insurance requires a very long-term contract, which raises problems of its own. Brown and Finkelstein write: \”First, the organization and delivery of long-term care is likely to change over the decades, so it is uncertain whether the policy bought today will cover what the consumer wants out of the choices available in 40 years. Second, why start paying premiums now when there is some chance that by the time long-term care is needed in several decades, the public sector may have substantially expanded its insurance coverage? A third concern is about counterparty risk. While insurance companies are good at pooling and hence insuring idiosyncratic risk, they may be less able to hedge the aggregate risks of rising long-term care utilization or long-term care costs over decades. In turn, potential buyers of such insurance may be discouraged by the risk of future premium increases and/or insurance company insolvency.\”

Long-term care insurance faces the tough problem that it has to compete with Medicaid, which pays for long-term care if you run down your assets. There\’s no easy way out of this trap. If Medicare didn\’t cover long-term care insurance, then politicians would face the catastrophe of potentially turning the elderly and infirm poor into the streets. If Medicaid was redesigned to cover long-term care insurance without requiring that you run down your assets first, it would encourage saving–but also cost considerably more. As Brown and Finkelstein write: \”Attempts to reduce the implicit tax and stimulate private insurance markets tend to have at least one of two undesirable consequences: either they increase public expenditures, for example, by making Medicaid a primary payer and reducing means testing; or they require that policymakers be willing to deny care to individuals who fail to insure themselves adequately.\”

We know that demand for long-term care is going to expand dramatically as the U.S. population ages. We know that it is less expensive and probably better for the elderly if such care can be provided, at least for many of the elderly, through supportive home care rather than institutionalization. We know that requiring the elderly to become impoverished before being eligible for public assistance in long-term care seems a peculiar and counterproductive way to proceed. We know that private markets for long-term care insurance aren\’t working especially well. The CLASS legislation in the 2010 health care reform bill wasn\’t the answer. It made utterly unrealistic promises about costs and benefits, and the government was right to pull the plug on it. But the problem of how to provide and finance long-term care isn\’t going away.

Here is a post from August 2011 looking at Long-Term Care in an International Perspective.

are eventually going to run down your assets and end up on Medicare anyway, then purchasing such insurance doesn\’t seem attractive.

Long-Term Care in International Perspective

As societies age, the cost of long-term care is going to rise. A May 2011 OECD report– Help Wanted: Providing and Paying for Long-Term Care–lays out many of the issues.

Long-term care is a broader category that what we usually think of as health care. The OECD report defines the term this way: \”Long-term care is the care for people needing support in many facets of living over a prolonged period of time. Typically, this refers to help with so-called activities of daily living (ADL), such as bathing, dressing, and getting in and out of bed, which are often performed by family, friends and lower-skilled caregivers or nurses.\”

While the United States spend much more per capita on health care than other high-income countries, the share of Americans receiving long-term care is quite low compared to many other countries. OECD projections also suggest that U.S. spending on long-term care as a share of GDP will stay below the OECD average in coming decades. 

Because the number of Americans receiving long-term care is so low, U.S. spending on long-term care–whether per capita or as a share of GDP–is well below that of other OECD countries. For example, U.S. spending per capita on long-term care was $455 in 2008, while the OECD average was $543 per capita, and per capita spending on long-term care is upwards of $1200 in Norway, Sweden, and Netherlands. Over time, according to the OECD: \”In 2008, public LTC expenditure accounted for 1.2% of GDP, while private LTC expenditure for another 0.3%, on average across the OECD. Public LTC expenditure is expected to at least double and possibly triple by 2050.\”

As I look over the OECD projections, however, what strikes me is that the countries that already have the much higher levels of spending on long-term care also have large shares of the population already receiving such care, and receiving it in an institutional setting. For example, while 0.5% of Americans are receiving long-term care, about 4% or more of the population is already using long-term care in Netherlands, Norway, Switzerland Sweden and Austria. In addition, about three-quarters of the long-term care users in several of those countries are receiving their long-term care in institutions, which are far more expensive than long-term care provided at home.

Moreover, in a number of countries, including Norway, Netherlands and Sweden, almost all of the spending on long-term care is from public programs, not private insurance or out of pocket.

These patterns suggest to me that societies make a choice about long-term care. It\’s often not a choice that\’s made all at once, or made by a single piece of legislation, but rather a choice that arises out of a series of other decisions. It\’s a choice about how large a share of the extreme elderly are going to live in institutions paid for by a publicly financed program, and how large a share of the elderly are going to get support for continuing to live at home, while relying on their own personal and financial resources or on private insurance. Leaning toward the second option is clearly preferable. But there an inevitable need for public support for long-term care for some of the elderly–provided in the U.S. by Medicaid. Once that public back-up system exists, getting people to rely on their own resources becomes harder. Every country, including the U.S., needs to think urgently about how to strike this balance. At least in the case of long-term care, the U.S. has a health care situation where it is not starting off with problems of costs that are already extraordinarily sky-high.