Who Will Provide Long-Term Health Care?
Upon retirement, millions of American workers are exposed to substantial economic insecurity in their senior years. Many workers are forced into early retirement because of poor health, technological advances or plant shutdowns, and as a result, are spending a relatively larger proportion of their adult lives in retirement and the income they receive may be insufficient to provide them with adequate long-term health care.
Few people want to contemplate the idea of having to provide for their own long-term health care beyond retirement. The fact that 90 percent of those over the age of 65 are presently forced to finance their own health care expenses, coupled with their increased life expectancy compared to previous generations, makes the issue all the more pressing.
The financing of long-term health care for the elderly has increased in importance due to several factors. First, as the baby-boom generation reaches maturity, a slower growing population is propelling the country into a period of potentially severe labor scarcity. Further aggravating this situation is the fact that these "baby-boomers" are having only about half as many children as their parents.
As the workforce dwindles, employers will need to recruit and retain more female employees. However, employers must also be aware of the fact that women are still primarily responsible for caring for elderly relatives and that the financial and emotional distress of caring for an aging relative can have a significant impact on a worker's performance. The need for time off during workdays can result in absenteeism, tardiness or the need to leave work early. In extreme cases, some workers are forced to leave the workplace permanently.
The result is a loss of experience for employers, as well as additional training costs. A study by the Philadelphia Geriatric Center found that 28 percent of the women that left the workforce in 1985 did so to care for elderly relatives or friends.
Legally required benefits, specifically Social Security, are primarily responsible for the continually increasing costs of employee benefits. The higher FICA tax expense is the result of mandated increases in the payroll tax, as well as higher wages earned by workers in a strong economy. FICA taxes paid by employers increased from 7.15 percent in 1987 to 7.51 percent in 1988, while the taxable wage base increased from $43,000 in 1987 to $45,000 in 1988.
In response to this situation, some of the government proposals to expand Medicare benefits to the elderly include eliminating the cap on the taxable wage base, at least for the Medicare portion of FICA. Currently, the Medicare portion of FICA is 1.45 percent, shared by employers and employees. If employers were required to pay their share of that percentage on all wages, they might see a substantial increase in their costs of legally required benefits, and higher paid employees would see a negative financial impact on their paychecks. In addition, the unstable financial position of the Medicare system is likely to exacerbate the situation as the federal government continues to push private industry toward more mandated benefits.
The aging population will have a tremendous impact on the future of long-term care in a number of other ways. According to current trends, in the year 2000 the percentage of people 55 years and older will represent one-fifth of the total population. However, by 2010 that percentage will dramatically increase to one-fourth of the population.
Even more striking is the increase in the number of people over the age of 85, who are the most likely to require nursing home care. This category is projected to be the fastest growing segment of the elderly population. Today, people 85 years old and over constitute 1 percent of the population, but this group is growing three or four times as fast as any other age group. By 2040, the number of people over 85 years old will have grown by 400 percent.
Compounding the problems of the aging population is the issue of increasing longevity. Modern medicine, improved living conditions and better diet have all contributed to the tremendous progress in increasing life expectancy. In 1983, an average person was expected to live 74.7 years, compared with an expected life span of 71.4 years, just 10 years earlier.
Medicare, a form of social insurance and Medicaid, a public assistance program, are the two government-sponsored programs that address the nursing home needs of the elderly. Medicare was originally designed to provide a minimal benefit for the elderly. When Medicare was created, senior citizens as a group were poor and shockingly neglected, with one-third of them classified as impoverished. The very notion of denying medical care to our aging parents if they could not pay was a national outrage. Today, with the aid of federal programs and general national prosperity, senior citizens have become the wealthiest segment of the American population with the lowest poverty rate.
Although progress has been made in providing long-term care benefits through Medicare with the adoption of the Medicare Catastrophic Coverage Act of 1988, it is still important to realize the limitations of Medicare nursing home coverage. Total nursing home care is limited to 150 days per year, up from 100 days. Since the average stay in a nursing home runs about 456 days, Medicare coverage still falls short by about 306 days. Coverage is also limited to approved "skilled nursing facilities" and excludes custodial and maintenance care in a nursing home. Overall, Medicare paid less than 2 percent of the total $35 billion spent on nursing home care in 1985.
A 1984 survey by the American Association of Retired Persons found that 79 percent of the people expecting to need nursing home care believed that Medicare covered their stay. Many elderly people who are aware of Medicare's lack of nursing home coverage believe that Medicare Supplement policies or "Medigap" policies purchased on the private market adequately protect them. In reality, Medigap policies are not intended to cover long-term care but are designed simply to supplement Medicare. When Medicare stops paying, Medigap usually stops too.
Each year, about 1 million middle-class people are impoverished because of their own medical bills or those of their relatives. With nursing home bills ranging between $15,000 and $50,000 per year, two-thirds of all patients who try to pay for their own nursing home care become eligible for Medicaid within a year.
Some people attempt to rearrange their assets to qualify for Medicaid without leaving healthy spouses destitute, but that is becoming increasingly difficult. Not only is it emotionally difficult for individuals who need long-term care to see the depletion of their life's savings, leaving a healthy spouse with virtually nothing, but as the population continues to grow old, there will be a tremendous burden on the Medicaid system to support all of these people. Today, 8 percent of Medicaid recipients are in nursing homes, but 47 percent of the Medicaid budget is used to finance the 8 percent who need long-term care. Clearly, this system cannot continue to support the tremendous increase in elderly nursing home patients without some kind of tax on the current dwindling workforce.
For the most part, government programs like Medicare and Medicaid are inadequate for the current population of elderly. Their inadequacies will become more obvious as more people will need long-term care and find the government alternatives unsatisfactory. This leads to the potential for the private insurance market to develop a long-term care insurance policy.
The Private Market
The development of a long-term care insurance policy in the private market has recently received a lot of attention. While companies were initially slow to write policies, they are just beginning to issue coverage that experiments with different kinds of policies. Many of these policies include benefits for home health care and other alternative forms of long-term care that address the issue of increasing nursing home costs.
Insurance companies must consider the demand for their products as well as the problems associated with providing coverage. Their ability to maintain a reasonable loss experience may determine the availability of these types of coverages in the future. Insurance companies must also consider the alternatives of providing non-traditional long-term care insurance based on a disability policy, or long-term care insurance with a refundable premium.
Long-term care insurance is subject to the same influences on demand as other types of insurance. However, issues not common to other insurance are also present.
Private insurance for long-term care may compete with Medicaid. People do have the option to "spend down" their assets to become eligible for Medicaid, which does provide nursing home care. However, the extent to which Medicaid competes with private long-term care insurance is questionable. In addition to the welfare stigma attached to Medicaid, the substantial size of the deductible for the non-disadvantaged appears likely to make Medicaid a highly unattractive option for most people.
All of the long-term care policies currently available are modeled after major medical policies and as such, typically indemnify the insured by paying a specific amount of money for each day in a nursing home. By following a major medical model, it is assumed that health history is predictive of the need for long-term care.
Providing long-term care coverage through a policy modeled after disability insurance, rather than major medical insurance, solves several problems for insurers. First, it decreases the problem of inadequate data, as disability policies have been on the market for a long time and past history can be used for pricing purposes. Second, it would not require a prior utilization clause since the policy would pay benefits for either a hospital stay or a slow decline in function. Third, it would indemnify an insured even if the insured preferred to receive care at home, providing a less costly alternative to nursing home care.
Everyone has the option of paying for their own long-term care as opposed to buying insurance. People who finance their own long-term care avoid paying for an insurance company's expenses, profits and risk charges and are not subject to policy exclusions. Since nursing homes can cost from $15,000 to $50,000 a year, it would be beneficial to find out what an average nursing home cost may be before deciding the amount to save.
Group vs. Individual Policies
Presently, most long-term care policies are written for individuals, with only about 18,000 of the more than 500,000 existing policies being written through group plans. But, this number is expected to increase as the premium savings of group rates makes group long-term care coverage more attractive. There are however, several factors which inhibit their popularity. First, many employers have decided it is not their responsibility to offer long-term care benefits. Second, health care retiree expenses can not be prefunded on a tax-advantageous basis, which discourages employers from offering the coverage. Third, while the benefit may initially be offered with the employee paying the entire premium, many employers are fearful that workers may begin to expect the employer to foot the bill.
Aetna Life Insurance Company, part of Aetna Life and Casualty Company of Hartford, CT, was the first company to offer long-term care health insurance to a group. It was initially available to approximately 7,500 retired Alaskan state employees and their spouses. The premium, paid entirely by the retired employee, is deducted directly from his pension checks. The cost to participate will range from $20 per month for retirees 50-54 years of age, up to $385 per month for retirees 85-89 years of age. The cost will not increase with age.
The plan offers participants care in a nursing home without prior utilization requirements and home health care without prior nursing home confinement. The plan has a 90-day waiting period and provides a benefit of $125 per day in a nursing home in Alaska and a home health care benefit of $75 per day for a resident in Alaska.
Alternatives to Long-Term Care
Home health care is care provided in a patient's home by family, friends or a qualified practitioner. The major benefit of home health care is that it is less expensive than nursing home care. Some patients are in nursing homes for custodial or maintenance care simply because they are eligible to receive a benefit. Eleven to 50 percent of present nursing home residents could use less intensive services if they were available and affordable. In addition, offering a home health care benefit may provide incentive for earlier release from a nursing home, since many patients may prefer to recover in their own home.
Adult day care centers already number almost 1,200 nationwide and are increasing in popularity as an alternative to expensive nursing home care. Although it is not an alternative for elderly people requiring skilled nursing home care, it is an option for those who simply require custodial care, or a minimal amount of medical attention.
The centers generally provide activities for the elderly and are intended to provide patients with mental and physical stimulation to help them maintain a reasonable level of functioning. They provide elderly companionship, limited medical care and give families relief from having to care for the elderly person during the day. Most importantly, however, they provide a less expensive form of care for the elderly and allow caregivers to continue to work.
For the most part, private insurance policies do not cover adult day care. This may be due to the fact that to date there is no standardized regulation or licensing of such centers.
Eldercare comes under the more broad category of dependent care in employee benefits. Because of the aging population, employers will have to consider eldercare much like they consider childcare. In a recent survey by Hewitt Associates of 100 major industrial companies, benefit directors were asked which areas would see "major growth" by 1995. Seventy-seven percent agreed that eldercare benefits would increase in popularity in the future.
Home equity conversions could become a form of financing long-term care for the elderly. Home equity conversions, also known as reverse mortgages, allow a homeowner to convert part of the equity in their home into a stream of income while remaining in their home.
Converting home equity is an ideal situation for the elderly to obtain money, since many own their homes. The money may be used to pay for nursing home expenses directly or to purchase nursing home insurance. As the market value of homes has traditionally increased over time, the elderly may have protection against inflation. On the negative side, reverse mortgages are not likely to appeal to large numbers of aged persons as they are complex financial instruments and many elderly people are reluctant to go into debt.
Individual Medical Accounts are similar to Individual Retirement Accounts. As with home equity conversions, the proceeds can be used to purchase nursing home insurance or pay medical or long-term care expenses directly. IMAs, like IRAs, would allow a contributing individual to deduct the amount of their contribution from their income taxes. As an additional benefit, the investment income earned on the contribution is not subject to income tax.
IMAs provide a tax incentive for people of any age to save for their medical expenses. In 1987, however, IRAs were severely limited to low income workers and to workers without access to a pension plan. It may be difficult to convince the government of the need to provide the tax incentives for IMAs after the recent restriction of IRAs, since, if the incentives are too lucrative, the government stands to lose a substantial amount of tax revenues.
With the aging population, nursing homes will see a dramatic increase in the demand for services while traditional acute-care hospitals will see a decline in patients. Nursing homes may become victims to overcrowding, especially since some areas have put restrictions on the construction of new facilities. Conversely, acute-care hospitals may have difficulty covering their overhead costs because of low occupancy rates. One suggested solution to this potential problem is the concept of swingbeds.
A swingbed is a hospital bed that can be used to provide care to either acute or long-term care patients. This concept has been applied to small rural hospitals because of their subjectivity to decreasing occupancy and revenue limitations under the Tax Equity and Fiscal Responsibility Act. Small rural towns have been especially vulnerable since they frequently have a large population of elderly. In the future, it is very likely that even large urban hospitals may become subject to the same problems.
For a hospital to adequately accommodate long-term care patients, it may need to add services usually unavailable in acute-care hospitals such as specialized rehabilitative services, social services, patient activities (to encourage self-care), dental services and discharge planning. If hospitals can reconstruct their traditional ways of providing medical services, swingbeds may become a realistic alternative for long-term care in the future.
Continuing care retirement communities provide an alternative to private long-term care insurance. They are retirement communities that offer nursing home care to their residents. Admission usually includes an endowment fee (sometimes refundable) and monthly payments. In return, a resident usually receives a lifetime lease on an apartment, some meals, social activities and unlimited nursing care. Should the resident require nursing care, it provides payments for all the fees charged, not a fixed daily amount. Continuing care retirement communities could provide a solution to the overcrowding of nursing homes in the future.
The future of long-term care must change. All the alternatives for the future contain problems, but with proper alterations, these alternatives can conceivably work together to solve many of the problems of long-term care. It is imperative to develop these programs today to provide for tomorrow.
Anne Marie DiBella is risk management administrator of self-insurance for Browning-Ferris Industries, Inc. in Houston, TX.…