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Financing Long-Term Care

Long-term care involves services that meet a person’s health and personal care needs when they are no longer able to perform these tasks safely on their own. Nearly eleven million people in the United States use some form of long-term care, and that number is projected to double by 2050. Persons age eighty-five and over are the fastest growing segment of the population in most developed countries; they tend to be less healthy and are more likely to have chronic conditions that require care than younger cohorts.1 While there is some evidence that disability rates among older people have declined in recent decades,2 this trend may be reversing.3 The total number of older people is rising, and the number of years of care that people with disabling conditions require may also be increasing. All this translates into a greater demand for long-term care services in the years ahead.4 Although health insurance may cover medical care needed by people living with chronic illness, it provides little if any coverage for personal care services like bathing, dressing, preparing meals, getting out of bed, and using the toilet.

The aging population, and the increased incidence of chronic illness, also places greater pressure on family caregivers to provide these services. This development affects women disproportionately as they tend to adopt most of the responsibility for the care of older parents and spouses, regardless of whether these women participate in the labor force. In fact, research indicates that women who are in the labor force are just as likely to act as caregivers as women who are not.5 Along with the economic burden, caregiving can also lead to health problems for the caregivers themselves. Many studies have found that stress, less time spent with family/friends, amount of medication use, lost time at work, misuse of alcohol or prescription drugs, incidence of coronary heart disease, and depression are all associated with caregiving.6

In addition to these effects on unpaid caregivers, the growing demand for long-term care is placing increasing strain on public budgets. Medicaid, America’s federal-state health insurance program for people with low incomes, is the largest source of funds for long-term care. For decades, people have hoped that the purchase of private long-term care insurance might help to address these concerns, but the demand for private products remain extraordinarily low, and the supply of them is actually shrinking.

The Limited Use of Private Long-Term Care Insurance

Despite efforts to develop private long-term care insurance during the last several decades, only about 10 percent of Americans have private long-term care policies. Because few people purchase long-term care insurance, and because public insurance that covers long-term care is means-tested, the cost of long-term care represents a significant financial risk for older people and their families. On average, the annual cost for long-term care services is about $140,000.7 Wealthy people may have sufficient resources to pay for these services out of pocket, and the very poor will often qualify for Medicaid coverage, but a large portion of Americans are at risk of financial hardship as a result of long-term care needs. Along with the direct costs associated with purchasing paid care, the reliance on unpaid caregivers involves significant social costs as well. In addition to the issues noted above, caregivers, primarily women, must often reduce the number of hours they work for wages or leave the paid labor force entirely in order to provide care. In light of these risks, why are affordable long-term care insurance products difficult to find, and why don’t more people purchase them?

Most long-term care is provided on an unpaid basis by family, friends, and neighbors. In fact, one recent estimate suggests that unpaid caregiving saves the health care system $522 billion annually, which is several times the amount of direct public expenditure on long-term care.8 Yet even with unpaid care, many people rely on paid caregiving to meet some, if not all, of their social care needs. For many who live in nursing homes, or who receive home and community based long-term care service and support, relying exclusively on unpaid care is not realistic.

Many assume that Medicare, which provides health insurance for most older people in the United States, will cover long-term care if they need it. But this is not the case. Even with the recently adopted chronic Care Act of 2018, which expands benefits that may be offered by Medicare Advantage plans to personal care services, Medicare does not cover the costs of long-term care for most beneficiaries. Medicaid, rather than Medicare, is the most important source of public financing for long-term care services and supports. To qualify for Medicaid, however, individuals must meet the program’s income and asset eligibility criteria. As a result, most adults have to spend down their assets until they are sufficiently poor to qualify for the program.

Some economists speculate that the existence of Medicaid is one reason for the low take-up of private long-term care insurance.9 The Medicaid program’s long-term care benefits protect families against the cost of long-term care and set a floor on losses for those who do not have private insurance,10 possibly discouraging people from purchasing it.11 Yet, to the extent that individuals are motivated to purchase long-term care insurance so they can bequeath a portion of their lifetime earnings to their children, Medicaid is not a good substitute for private long-term care insurance, and the evidence of whether public insurance “crowds out” private long-term care insurance is mixed.

Another possibility is that the availability of unpaid care may discourage people from purchasing long-term care insurance. People often abhor the idea of being a burden to their families, but most people also prefer receiving help from a family member or close friend over care from a stranger. In fact, some have argued that there is a problem of intrafamily “moral hazard”: older people may be reluctant to purchase long-term care insurance because they fear it will discourage their spouse or children from providing care—or may even incentivize children to move their parents into a nursing home sooner than they would if they did not have insurance to protect inheritable assets.12 This is consistent with standard economic theory, which often assumes that narrow, self-interested motives primarily motivate behavior. The reality is more complicated, however. Evidence suggests that rather than crowding out unpaid care, the use of paid long-term care services is often complementary. For example, a recent study found that unpaid caregivers continue to provide significant support to family members, even after they were admitted into nursing homes—and that the levels of burden they experienced were comparable to those of unpaid caregivers providing assistance at home.

If neither the existence of Medicaid nor the large number of unpaid caregivers fully explain why people fail to purchase long-term care insurance, what else is going on? Part of the explanation may involve common human deviations from probabilistic rationality. For example, people routinely underestimate risk. The odds of needing some form of long-term care during one’s lifetime are high. About 70 percent of those who live beyond the age of sixty-five will require at least some long-term care services and support, but few people think they will need it. This type of unwarranted optimism is not unique to the perception of long-term care needs but occurs across domains. Although those who suffer from depression tend to adopt unrealistically negative assumptions about the future, most people do the opposite.13 Scholars in psychology and behavioral economics have frequently observed this “optimism bias.”14 In many domains, people overestimate the probability of positive events and underestimate the probability of negative events. Optimism bias among healthy people can have many positive consequences: it can reduce stress and anxiety, and there is evidence that it also encourages productivity in the workforce.15 But in the context of long-term care, the fact that optimism bias discourages people from preparing for the probability of requiring personal assistance later in life produces negative consequences for individuals, their families, and society as a whole.

Along with optimism bias, what behavioral economists call “present bias” may also discourage people from purchasing long-term care insurance. Present bias occurs when people place a heavy weight on the present and heavily discount the future, including their probable need for long-term care services. As with optimism bias, it is an old idea, and there is a large body of evidence from controlled experiments and observational studies indicating that present bias is common.16

Inadequate Coverage at Unfavorable Prices

On a more immediate and concrete level, the prices and policies of private insurance companies also discourage most people from purchasing long-term care insurance. The only way long-term care insurance could be financially viable is for people to purchase coverage when they are young adults. If people wait until they are much older, there is a serious problem of adverse selection, because insurance companies do not want to sell policies to people who are likely to need care only a few years after they start paying premiums.

Most of the time, insurance companies simply refuse to sell policies to older individuals in poor health, but even if they agree to sell an older person insurance, the price is likely to be so high that it would not make sense to purchase it. Under this structure, the only way to make long-term care insurance premiums affordable is to enroll people when they are younger—long before they are likely to need assistance. But from the perspective of insurance companies, this is still a problem. Even if you could overcome the factors that limit demand for this insurance among younger people, insurance companies are still unlikely to offer an attractive product, because it is difficult to predict the costs of long-term care decades into the future.

To cope with this uncertainty, insurance companies use two strategies. First, they tend to set high rates to guard against significant increases in the cost of future care. Second, they often set a cap on policy benefits based on the current costs of long-term care services. For example, a typical plan would not only place a cap on the total dollar amount available to pay for nursing home or home- and community-based services, it would also limit the number of years it would cover care (often to no more than three years of coverage). The high premiums make the product unaffordable to a large part of the market. At the same time, the benefit caps make the product less attractive to potential buyers. For example, one study estimates that the load of a “typical” policy purchased at age sixty-five in 2010 is 32 cents on the dollar. It is also much greater for men (55 cents) than for women (13 cents).

Because these traditional long-term care insurance plans are unattractive to insurance companies and potential buyers, insurance companies have recently tried to market combined life and long-term care insurance products. These products allow policy holders to use the benefits to pay for long-term care, rather than cash payments after death; but if policy holders do not need long-term care, they are able to bequeath the cash benefits to others. As with the traditional policies, however, the benefits are often capped at levels that are much lower than the average cost of long-term care, so it seems unlikely to significantly address the problem. These demand and supply problems led Howard Glickman of the Urban Institute to quip that long-term care insurance is a product that “no one wants to buy” and “no one wants to sell.”17

What Should Be Done?

The combination of low adoption of private long-term care insurance, limited Medicare coverage of long-term care services, and Medicaid coverage that is only available after people impoverish themselves means that most people face a high financial risk as they age. In addition, relying on Medicaid as the primary vehicle for the public financing of long-term care places a strain on state budgets at the same time that the program is being touted as a key mechanism for extending health insurance to younger populations. This limits the ability of states to meet other obligations, including public education and infrastructure investments.

The current system puts family members (along with friends and neighbors) at risk for addressing the burdens associated with caregiving. The well-known financial and health risks associated with caregiving have recently been further complicated by efforts to push people out of institutions and into home- and community-based settings, including efforts by Medicaid programs around the country to develop consumer-directed long-term care.18 While moving people out of hospitals and nursing homes is often a desirable outcome, efforts to discharge people from hospitals as quickly as possible frequently result in the migration of medical technologies into the home.19 Under these circumstances, unpaid caregivers are asked to take on medical and nursing tasks, including the management of technologies like artificial nutrition and hydration, home hemodialysis, and ventricular assist devices, among others. This effort to recreate hospital services in the home may appear to “save” money, but it actually just shifts these costs from public (Medicare and Medicaid) accounts to private accounts.

Decisions that result from optimism and present bias, as well as those that result from low financial literacy or cognition, often result in significant negative internalities and externalities. In these situations, mandatory social insurance programs are typically justified. As Sarah Conly argues, when people make decisions that interfere with their ability to achieve their life goals, including decisions that harm health and financial security, it is reasonable to coerce people through paternalist policies.20 An obvious course of action in the case of long-term care—as in cases like Social Security pensions and Medicare—would be to adopt a mandatory social insurance program to pay for some, if not all, costs associated with long-term care service and support. A social insurance mechanism would spread risk across the population, enabling people who are healthier and wealthier to subsidize people who are less healthy and poorer, while also spreading costs over individual lifetimes.

Could this work? As a technical matter, the international evidence suggests that it is possible to create a workable social insurance system for long-term care. Germany, the Netherlands, and Japan have all created social insurance systems to finance care, though there are differences between them. For example, Germany provides cash payments to family caregivers and Japan does not. But all are based on a social insurance model, are popular in their respective countries, and are financially stable.21 Interestingly, even though the populations of all three countries are older than that of the United States—and despite the fact that they offer more comprehensive coverage of long-term care services and supports—they do not outspend the United States for these services.22 All of these countries set budgets for their long-term care insurance programs. In addition, Germany and Japan both cap benefit levels based on the need of the beneficiary. Individuals and their families are responsible for additional costs that go beyond what is covered by the public program, while out-of-pocket spending is limited for people with lower incomes.

Although a social insurance model to finance long-term care is possible and in many ways desirable, it seems highly unlikely that the United States will adopt one in the near future. An ideological drive to reduce the government’s role in health care remains regnant in the Republican Party, as evidenced by the recent efforts to roll back the Affordable Care Act and limit the scope of the existing Medicaid program. On the other hand, the pressures generated by the aging of the baby boomers may soon create a unique opportunity for bipartisan policy action. The chronic Care Act—which represents an important philosophical shift for the Medicare program by offering limited social care benefits—received bipartisan support in Congress and was signed into law by President Trump.

A comprehensive social insurance program for long-term care would more seriously address the shortcomings in the U.S. health care system. By reducing burdens on families and unpaid caregivers, it could bring with it significant economic benefits as well.

This article originally appeared in American Affairs Volume II, Number 3 (Fall 2018): 32–40.

Notes

1 Victor Rodwin and Michael K. Gusmano, Growing Older in World Cities: New York, London, Paris, and Tokyo (Nashville: Vanderbilt University Press, 2006).

2 Anthony J. Vita et al., “Aging, Health Risks, and Cumulative Disability,” New England Journal of Medicine 339, no. 7 (1998): 481–82; Robert F. Schoeni, Vicki A. Freedman, and Linda G. Martin, “Why Is Late-Life Disability Declining?,” Milbank Quarterly 86, no. 1 (2008): 47–89.

3 Eric Stallard, “Compression of Morbidity and Mortality: New Perspectives,” North American Actuarial Journal 20, no. 4 (2016): 341–54.

4 Marc A. Cohen and Judith Feder, “Financing Long-term Services and Supports: Challenges, Goals, and Needed Reforms,” Journal of Aging and Social Policy 30, no. 2 (2018): 1–18.

5 E. K. Pavalko and J. E. Artis, “Women’s Caregiving and Paid Work: Causal Relationships in Late Midlife,” Journals of Gerontology Series B: Psychological Sciences and Social Sciences 52B, no. 4 (1997): S170–79.

6 P. Arno, D. Viola, and M. Gusmano, “The Caregiving Workforce in the United States,” presented at the London School of Economics, September 9, 2010.

7 Ellen Stark, “5 Facts You Should Know About Long-Term Care Insurance,” AARP, March 1, 2018.

8 Steven A. Cohen, et al., “Socioeconomic and Demographic Disparities in Caregiving Intensity and Quality of Life in Informal Caregivers: A First Look at the National Study of Caregiving,” Journal of Gerontological Nursing 43, no. 6 (2017): 17–24.

9 Jeffrey Brown and Amy Finkelstein, “The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market,” American Economic Review 98, no. 3 (2008): 1083–1102.

10 Tatyana Koreshkova, Karen Kopecky, and R. Anton Braun, “Accounting for Low Take-Up Rates and High Rejection Rates in the U.S. Long-Term Care Insurance Market,” Society for Economic Dynamics, 2016 Meeting Papers, 515.

11 Colleen M. Grogan, Sunggeun (Ethan) Park, “Medicaid Retrenchment Politics: Fragmented or Unified?,” Journal of Aging and Social Policy (2018), epub ahead of print, doi:10.1080/08959420.2018.1462675.

12 Mark V. Pauly, “The Rational Nonpurchase of Long-Term-Care Insurance,” Journal of Political Economy 98, no. 1 (1990): 153–68.

13 Daniel R. Strunk, Howard Lopez, and Robert J. Derubeis, “Depressive Symptoms Are Associated with Unrealistic Negative Predictions of Future Life Events,” Behaviour Research and Therapy 44, no. 6 (2006): 861–82.

14 Tali Sharot, “The Optimism Bias,” Current Biology 21, no. 23 (2011).

15 Manju Puri and David Robinson, “Optimism and Economic Choice,” Journal of Financial Economics 86, no.1 (2005): 71–99.

16 Ted Odonoghue and Matthew Rabin, “Present Bias: Lessons Learned and to Be Learned,” American Economic Review 105, no. 5 (2015): 273–79.

17 Stark 2018.

18 Frank Thompson, et al., “Federalism and the Growth of Self-Directed Long-Term Services and Supports,” Public Policy and Aging Report 26, no. 4 (2016): 123–28.

19 Jacqueline Chin, et al., Good Care at Home for Older People in Singapore, report to the Lien Foundation, National University of Singapore, 2017.

20 Sarah Conly, Against Autonomy: Justifying Coercive Paternalism (New York: Cambridge University Press, 2013).

21 John Creighton Campbell, Naoki Ikegami, and Mary Jo Gibson, “Lessons from Public Long-Term Care Insurance in Germany and Japan,” Health Affairs 29, no. 1 (2010): 87–95.

22 Pamela Nadash et al., “European Long-Term Care Programs: Lessons for Community Living Assistance Services and Supports?,” Health Services Research 47, no. 1, pt. 1 (2011): 309–28.

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