Private Long-Term Care Insurance and State Tax Incentives
Stevenson, David G., Frank, Richard G., Tau, Jocelyn, Inquiry
To increase the role of private insurance in financing long-term care, tax incentives for long-term care insurance have been implemented at both the federal and state levels. To date, there has been surprisingly little study of these initiatives. Using a panel of national data, we find that market take-up for long-term care insurance increased over the last decade, but state tax incentives were responsible for only a small portion of this growth. Ultimately, the modest ability of state tax incentives to lower premiums implies that they should be viewed as a small piece of the long-term care financing puzzle.
Private insurance currently plays a small role in financing long-term care in the United States. In 2005, private insurance paid for about 7% of all long-term care, while Medicaid (49%), Medicare (20%), and out-of-pocket payments (18%) financed the vast majority of these services (Georgetown University Long-Term Care Financing Project 2007). (1) Estimates of future long-term care spending suggest that the contribution of private insurance coverage will grow but that it will likely remain modest. For instance, the U.S. Congressional Budget Office (CBO) projects that private insurance will cover around 17% of long-term care expenditures by 2020 (U.S. CBO 1999). By implication, the role of public financing for long-term care will remain substantial, with Medicaid continuing to be the single largest payer.
Prior research has identified several reasons why private insurance has failed to become a major source in paying for long-term care. These include consumer myopia about future long-term care needs, the availability of safety-net coverage through Medicaid, limited employer offerings, limits on the ability of insurers to spread risk, the complexity of available insurance products, and the affordability of coverage (Wiener, Tilly, and Goldenson 2000; U.S. CBO 2004; Cramer and Jensen 2006). In light of these factors, state and federal policymakers have taken some steps to promote the purchase of long-term care insurance (LTCI) directly (e.g., by making such products available to government employees) and indirectly (e.g., through campaigns to raise awareness about personal responsibility for long-term care). The aim of such efforts is to reduce growth in claims on public long-term care financing, a priority that is expected to grow as the age distribution of the U.S. population changes. Between 2000 and 2050, the group age 85 and older is projected to increase from 1.5% to 5.2% of the U.S. population (U.S. CBO 2004).
One of the more direct ways for policymakers to promote purchasing LTCI is to subsidize its purchase through tax incentives, an approach that has been implemented at both the federal and state levels. At the federal level, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) offered limited tax advantages for LTCI by clarifying the treatment of premiums for qualified plans as medical expenses for individuals deducting medical expenses beyond 7.5% of their gross income and by not taxing LTCI benefits up to certain limits (Lutzky and Alecxih 1999). States have also used tax policy to encourage purchase of LTCI, and we focus on those policies in this paper. More than half of all states currently offer some tax incentive for the purchase of LTCI, including tax credits and tax deductions (Kaiser Family Foundation 2008). Tax credits reduce, by a specified dollar amount, the tax owed, while deductions allow some portion of the LTCI premium paid to be deducted from taxable income. Although both types of incentives reduce taxes and thereby affect the net prices of LTCI products, they are expected to differ in their effectiveness. A tax credit potentially benefits more taxpayers, since it is not limited to individuals who itemize their deductions. A tax deduction is less progressive, providing a greater price reduction to buyers with higher marginal tax rates. …