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Why Pressure Will Grow to Change Long-Term Care Financing

A blueprint for reform is beginning to emerge


Part of the Transforming Life as We Age Special Report

Anybody who knows anything about long-term care is aware that America’s current system is deeply troubled. Yet the nation’s capital has shown little interest in tackling long-term care financing, even as the need is growing with the aging of the boomer generation. Neither have the presidential candidates.

“Long-term care isn’t part of the political agenda,” said Robyn Stone, executive director of the LeadingAge Center for Applied Research at the annual Aging in America conference I attended last March. “I don’t have much hope that the election will shine much light on long-term care financing.”

Sad to say, her prediction has been spot on since then.

The problem is, the politics of long-term care financing reform require navigating deep divides in society, from the social safety net to taxes to individual responsibility and private sector initiatives.

But here’s the thing: The demand for long-term care will only swell, especially with those ages 85 and above projected to grow from 1.8 percent of the population in 2010 to 2.5 percent in 2030 and 4.5 percent in 2050. Long-term care is expensive and the costs are unevenly distributed throughout society.

Long-term care insurance is very expensive and not a particularly good deal.

— Steve Kaye, professor, University of California, San Francisco

Reform is difficult, but the underlying economic inefficiencies and injustice of the status quo will intensify the pressure for broad-based change. Eventually,  experts say, recommendations hammered out by bipartisan public policy groups in Washington, D.C., and experiments at the state level will likely combine to provide the blueprint for reform.

“I am pessimistically optimistic,” Stone said. “I’m 65-years-old. I started in the business at age 25. Perhaps in another decade.”

‘We Wish People Had More Savings, But They Don’t’

Try this experiment. Gather together a group of boomers at a dinner party or at a lunch break at work. Bring up the topic of parents and aging. My bet is that almost everyone will tell a caregiving story, noting how it’s costly, time-consuming and stressful.

And when the day comes that boomers need care themselves? The economics don’t look good. Most in this generation don’t have enough savings to pay the potential tab.

For instance, the typical American age 65 to 74 is worth $176,000, comprising $95,000 in financial assets and $81,000 in home equity. But if you’re turning 65, you should have saved at least $199,500 just to pay for your health and long-term care for the rest of your life, according to a report from the Long-Term Care Financing Collaborative, one of the main bipartisan policy groups.

Specifically, you’ll want $130,000 stashed away to have a 90 percent chance of paying your lifetime medical expenses — including Medicare premiums and out-of-pocket expenses. You’ll need an additional $69,500 for the supports and services that make up long-term care. This is before taking into account any other daily living expenses, such as food and shelter.

“One of the things that is really scary is how few resources people have by the time they reach their 80s,” says John Rother, head of the National Coalition on Healthcare and a member of the Collaborative. “We wish people had more savings, but they don’t.”

Families tend to step in and provide the bulk of care. This so-called “informal care” provided by family and friends adds up to an estimated 37 billion uncompensated hours that were worth about $470 billion in 2013.

Put somewhat differently, Americans caring for their aging parents by taking time off from work lose an estimated $3 trillion dollars in wages, pension and Social Security benefits, according to a MetLife study of caregiving costs. The evidence is overwhelming that for women, caregiving substantially hikes the odds of living in poverty and on public assistance in their later years.

Employers also take a hit, by the way. They absorb an estimated $17.1 billion to $33 billion a year in lost productivity from full-time employees acting as caregivers for their parents.

No Avoiding a Public Option

In the “formal care” system — think nursing homes and paid home care — Medicaid is what many middle- and low-income families rely on.

The private long-term care insurance market is a minor player. The business has shrunk dramatically, with premium prices too high for most families. The number of policies purchased by consumers fell by 65 percent from 2002 to 2012.

“Long-term care insurance is very expensive and not a particularly good deal,” says Steve Kaye, professor at the Institute for Health & Aging at the University of California, San Francisco. Adds Judith Feder, professor of public policy at the McCourt School of Public Policy at Georgetown University, “Insurance companies can’t get the premiums down low enough to be affordable.”

Medicare picks up very little of the expense for long-term care. That makes Medicaid the nation’s federal and state long-term care public financing option. Medicaid spending on long-term care was about $119 billion in 2014 (about a quarter of the estimated outlay by families). But Medicaid is a means-tested program and qualifying requires impoverishment — an anathema to families. “Medicaid forces people to exhaust their reserves,” says Rother.

Taken altogether, the looming retirement of tens of millions of boomers without long-term care insurance or sufficient savings means more families will face financial strains, debt and the loss of their own retirement security caring for aging parents. The ranks of those on Medicaid could increase significantly. Neither is a desirable outcome.

“There is no alternative to public support,” Rother says. But “can you devise a better system than Medicaid? You bet!”

New Focus on Catastrophic Need

Like it or not, the experts keep returning to the economic advantages of social insurance when it comes to caregiving. Social insurance is a way of pooling risks that works well for dealing with large and uncertain odds.

For instance, about half of adults 65 and older will eventually need some kind of formal care, perhaps in a nursing home but more likely in their home. The need for paid long-term care services lasts on average about one year, although 14 percent of people will need care for five years or more. Thing is, you don’t really know whether you’ll need care and, if you do, for how long, or the kind of care you’ll need.

Odds like these pushed the Collaborative to highlight in its list of recommendations the need for a mandatory universal catastrophic insurance program aimed at supporting those with high levels of need. The catastrophic benefit would be funded through a payroll tax, an income tax, a value-added tax, a dedicated tax or some combination of these levies. Another major long-term care study group — the Bipartisan Policy Center — also called for a mandatory catastrophic public insurance program in its list of proposals.

The Center ran some numbers to project what the effects of its social insurance plan would be. They suggest that in 2050, roughly one-third of individuals turning 65 would eventually qualify for benefits under the program, receiving $81,500 each. The program would reduce out-of-pocket spending by $130 billion and cut Medicaid spending by $154 billion. Simulations like this are extremely sensitive to underlying assumptions they’re built on, of course, but they’re useful in offering some guidance on the overall effect.

Of course, putting together terms like “mandatory,” “universal public program,” “health” and “taxes” is toxic on Capitol Hill these days, especially following the bitter partisan battles over the Affordable Care Act. Still, the dynamics of long-term care inevitably push expert advice toward a universal insurance benefit supplemented by government-created incentives to boost household savings, the private long-term care insurance market and relief for caregiving families. Medicare could also expand to take on more long-term care costs.

States Prioritize Home- and Community-Based Care

Whatever eventually evolves, a number of states aren’t waiting on Capitol Hill.

States like Washington, Minnesota, Oregon and Hawaii are acting like laboratories of long-term care financing. The bulk of the experimentation involves shifting resources away from expensive nursing homes into cheaper, more desirable options such as community and home-based care. The greater humanity and more efficient use of long-term care resources highlighted by the states will eventually hold sway among national legislators when the rules of care are rewritten, experts say.

“We have a weird system because nursing homes are so expensive that people end up on Medicaid anyway,” Kaye says. “We want a system that prioritizes home and community care.”

Fact is, by the time long-term care changes become law, the reforms won’t affect most elderly boomers. No, it’s the next generation that would benefit, a social and economic legacy worth fighting for today.

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