Strengthening Risk Protection through Private Long-Term Care Insurance

By Yin, Wesley | Policy Brief Series (Hamilton Project), June 2015 | Go to article overview

Strengthening Risk Protection through Private Long-Term Care Insurance


Yin, Wesley, Policy Brief Series (Hamilton Project)


Chapter 1. Introduction

The largest out-of-pocket spending risk for elderly households is the expense of care and assistance in the event of cognitive or physical impairment. A 65-year-old couple can expect to spend $65,000 on long-term services and supports (LTSS), where LTSS is defined to include institutional long-term care (LTC) as well as home- and community-based assistance with daily living activities. This estimate of average spending masks the likelihood that some households will incur far larger costs; roughly 5 percent of elderly couples can expect to pay in excess of $260,000 for LTSS (Webb and Zhivan 2010). To readers unfamiliar with LTSS risks, these staggering spending estimates may seem implausible, but they are directly tied to the disability risks that individuals face and the cost of LTSS. For instance, 3 percent of men and 10 percent of women will incur nursing home stays in excess of three years (Brown and Finkelstein 2008), at a cost of roughly $80,000 per year (Metlife Mature Market Institute 2012).

The potential need for LTC and assistance exposes Americans to catastrophic financial risks from out-of-pocket spending on LTSS. While the wealthiest individuals can pay for these expenses through savings, most Americans do not earn and save enough to comfortably pay for LTSS, if needed. Medicaid offers LTC insurance as a critical safety net, but the coverage is means tested: to qualify for coverage, individuals might have to first spend down their assets so that they have sufficiently low levels of assets to meet eligibility requirements. Moreover, Medicaid's traditional bias towards financing institutionally based LTSS neglects the various needs and preferences of many Americans for home- or community-based care.

In theory, private LTC insurance could fill some of this gap in coverage for middle-class Americans, but few buy private LTC policies. Only 12 percent of elderly Americans (or 16 percent of the elderly population who do not qualify for Medicaid), many of whom are wealthy, have private policies (Johnson and Park 2011; Life Insurance Manufacturers' Research Association [LIMRA] 2010). In contrast, most middle-class households are exposed to the risk of having to spend down their assets to qualify for Medicaid coverage of LTSS and/or impose a financial burden on other family members to care for them. In short, many middle-class Americans are simply ill-prepared for the financial consequences of aging and the possibility of disability.

The financial risks facing middle-class Americans parallel the fiscal challenges facing our nation's public LTC entitlement programs. Medicaid spending on LTSS is expected to grow at 6 percent per year over the next ten years (Centers for Medicare and Medicaid Services [CMS] 2012), much faster than the growth rate of GDP. The pace of this spending is expected to increase after 2025, when baby boomers reach the ages at which LTSS needs are the highest. As a result, the projected fiscal pressures will put at risk the commitments to future Medicaid beneficiaries and other social investments, such as spending on education, infrastructure, and early childhood programs. The growing fiscal challenges demand reforms that foster greater efficiency while strengthening the critical safety net that Medicaid provides to the most vulnerable Americans.

This paper presents an LTC finance reform proposal aimed at two broad objectives: (1) improving the financial security of middle-class Americans, and (2) fostering greater efficiency in both public and private LTSS delivery to better meets the needs of beneficiaries. It proposes to expand LTC insurance coverage through the private insurance market, which provides an existing mechanism for administering LTC insurance and thus a pragmatic and potentially efficient platform.1 In addition, this proposal acknowledges the current fiscal and political reality that neither a marked expansion in federal benefits nor a mandate on LTC insurance coverage are likely. …

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