Senior Living Business: The Case For Long-Term Care Financing--
AAHSA (and others) Continue The Debate And Suggest Changes
In today’s world, long-term care financing depends almost exclusively on two sources: (1) individual out-of-pocket costs and donated services from family members, the largest private source (about 52%); and (2) Medicaid, the largest public source.
“Medicaid is a wonderful safety net,” says Barbara Manard, vice president of AAHSA, “but it’s not an insurance plan. People accepting Medicaid must spend down all their assets and give up all their income except for about $30 a month. Certainly, no one would choose an insurance plan with a co-pay that amounts to everything you’ve got.”
While private long-term care insurance has gotten remarkably better in the last 20-30 years, it’s still a niche product. “Only about 8% of American adults have private long-term care insurance,” she says, “and those policies cover less than 10% of long-term care costs. So it’s a very limited penetration.” The result is that most ordinary Americans don’t adequately plan for their future.
Issues and concerns
Long-term care financing has been well studied by a number of organizations, including AAHSA, and several issues have been identified. The major concern is the cost of private long-term care insurance relative to the average income. The premiums are huge: $1,000 per year, on average, for each benefit year, according to Manard. To cover a five-year benefit period, the average premium is $5,000 per year. That’s simply out of reach for most Americans.
Premiums are cheaper for young people, but 20-year-olds don’t even think about long-term care — even though it’s possible to become disabled at a young age. “The highest risk begins at age 80,” she adds, “so a 40-year-old considering the insurance would be looking at getting benefits 30 or 40 years out — on average.”
Additionally, people are very concerned about service obsolescence. If you buy a benefit package today, will it be obsolete when services are needed 30 years from now? New technologies, different types of housing and care, and innovative ways of packaging and purchasing services are likely to affect long-term care in the coming decades. People are also concerned about the stability of the insurance company selling the benefits package. Will the company that sold the product be around in 40 years?
The need for a solution is becoming increasingly urgent as the elderly population grows and people demand more and different choices about where and how they spend their later years. While an insurance model spreads the risk more equitably, the private market has not been able to meet the need. “And we can’t rely on a welfare program that was never intended to cover long-term care,” adds Manard. “Also, the number of elderly people relative to those of working age is dramatically shifting.” Right now, the ratio is 3.3 workers for every retired person. When today’s youngsters retire, the ratio will be about 2.1 workers per retiree, so this is certainly a national challenge.
AAHSA convened a study group of CEOs and CFOs from the provider community, along with representatives of the legal and business community, to look at the facts. According to the group’s July 2006 report, “Financing Long-Term Care, A Framework for America” (which can be downloaded on www.aahsa.org), nearly 10 million Americans (40% under age 65) were in need of long-term care assistance in 2000 (the most recent data available) and the needs of many of those individuals were unmet due to the high cost of care. The group concluded that the best solution is to develop a public system as the foundation of long-term care financing.
That doesn’t mean that the government would run the program. Medicare is a national insurance plan, but the services are all delivered by the private sector. “Actually,” says Manard, “Medicare’s insurance plan is executed by contracts with private insurers. Blue Cross/Blue Shield, for example, serves as a fiscal intermediary for the actual running of the plans.” So Medicare is a kind of public/private model.
The Germans created a long-term care financing system in 1995 that is proving successful. Based on the old guild system, premiums are not paid into the state treasury but, instead, are paid to a private, not-for-profit entity that is very regulated and has public responsibilities.
“That’s what AAHSA envisions for the United States,” says Manard, “a foundation that would be the repository for the premiums paid for national long-term care insurance.” The foundation would be outside the government but chartered by the public to invest and manage the funds responsibly. It would probably contract with an entity such as Blue Cross/Blue Shield to receive monies and pay claims.
“We’ll end up with a public/private mix,” Manard adds, “but the question is: What’s the proper balance?”
Everyone in...and cash benefits
The goal, then, is to create a product that has broad participation and the lowest possible cost. The only way to get the price of an insurance product such as this down is to have near universal coverage and extremely low overhead. For a private-sector insurance company, the administrative costs required to sell policies on an individual basis and the need to return something to company shareholders adds about 25% to the cost, according to Manard.
The AAHSA concept is to be as inclusive as possible. “We envision a disability insurance model that would kick in when needed — whether that person is 75 years old or 23 years old,” she says. “On the day the program is implemented nationally, to the extent possible, every adult over age 21 would be enrolled, whether they are young and just starting out, age 40 and working on Wall Street, or 82 and living in a nursing home. That is our ideal.”
Once the plan is underway, for example, people would get a notice on their 21st birthday, similar to what 65-year-olds receive for Medicare, that would advise them that they’re now enrolled in the national long-term care insurance plan. The notice would explain the required premium — just a few dollars per month, but enough to produce an actuarially sound program without tapping tax revenues — and any program options. If it were positioned as an opt-out or limited opt-out system, the notice would also describe the conditions or categories whereby the person could opt out.
“Virtually all of America’s social insurance programs — and also those in Europe — are a complicated mandatory/voluntary combination,” Manard says. “Undoubtedly, whatever we do for long-term care will be the same.”
The plan would include appropriate help for people with insufficient income, and their contributions might come from Medicaid or another source. Right now, for example, part of the Medicare Part B premiums for low-income people are paid through Medicaid or from general revenues for the poor. On the other hand, having almost universal coverage would keep the costs low enough, in fact, to mitigate future pressure on Medicaid.
In terms of the benefits, AAHSA’s study group concluded that cash should be one (if not the only) benefit in order to provide consumers with the optimal flexibility to address their needs for long-term care. The cash might go directly to the beneficiary, to a fiscal intermediary, or as a voucher that can be used to purchase services.
“It’s a shame that 47 million or so Americans don’t have regular health insurance,” Manard says, “but 250 million Americans don’t have long-term care insurance. We’ve been talking about how to finance long-term care for 30 years. Periodically we get closer to consensus, and then we fall back. Our current national policy has encouraged people to buy private long-term care insurance, but I think people are now beginning to recognize the limits of that approach. So the hope is – and I see glimmers of it – that we are moving toward a national understanding that long-term care financing is a problem and that we’re running out of time to do something about it.”
The most recent development is a nine-point plan [see box, right] issued by the Leadership Council of Aging Organizations (LCAO), that is in complete sync with where AAHSA feels the country needs to go.
Manard suggests that people visit www.thelongtermcaresolution.org to find information on how to participate in AAHSA’s national campaign. “Something important that all providers can do locally,” she adds, “is to educate the people in their communities about the issues involved in long-term care and our growing need for a solution. Hold a forum, for example. An organization with this mission must be part of the solution. We’re all in this together. And what we’re seeing, particularly with the LCAO collaboration, is that the groups that serve seniors and people with disabilities, along with consumer and government groups, are now working together to come up with a solution for financing long-term care in this country.”
A detailed report on this topic, prepared for AAHSA, by The Moran Company, will be available in December on www.thelongtermcaresolution.org.