Why is there no catastrophic long-term care insurance? It could benefit millions of middle-income people who are able to pay for a few years of services and supports on their own but need to protect themselves against the risk of a very long period of need that would impoverish all but a handful of us.
Even though catastrophic coverage is a growing trend in health insurance, it effectively does not exist in long-term care. A typical LTC policy pays out a maximum of $100,000 or $150,000 (say, $150/day for 2-3 years). After that, you are on your own. But for many middle- and upper-middle-income people, that seems just backwards. They can cover that first few years. What they really need is a policy to protect against a true financial catastrophe.
But you can’t find one. Most insurers stopped selling gold-plated lifetime policies years ago and the few that remain are hugely expensive. Many carriers are refocusing their products on very short-term, relatively low-cost products that offer as little as six months of coverage. Their aim: Keep premiums as low as possible.
Some in the insurance industry have mulled the idea of a catastrophic-only policy. In such a design, individuals would be responsible for all of the front-end cost of care, say that that first 2-3 years or $150,000. Insurance would kick after that.
But there are two problems: The first is insurance companies struggle to price this benefit in the face of uncertain, open-ended risk. But even if they could figure it out, these policies can’t get approved by state insurance regulators.
The actuarial math tells the story: Among those who do have LTC insurance, more than 40 percent of claim dollars are paid out in the first year and about 75 percent are paid in the first three years. You might think of those first three years as the expected risk for those of us planning for disability in old age.
Perhaps only one in five of us will need care for five years or more. But for them—many people with dementia for example– the costs of care can be staggering.
Is there a solution? One idea is some form of public insurance. Individuals would use their own resources to pay for the first few years of coverage—savings, home equity, or private LTC insurance. But if they need a very long period of care, public insurance would kick in.
In a way, we have such a public insurance program already. It is called Medicaid. But today you need to spend down your financial assets to just $2,000 before you can become eligible, and you are pushed into a system that often provides inadequate or inappropriate care.
Britain is in the process of developing a public catastrophic program, though it is not likely to begin for at least four years. And last month my Urban Institute colleague Judy Feder proposed a version in her role as a member of the Congressional Long-Term Care Commission.
One interesting feature of Judy’s plan is that the level of individual responsibility would be adjusted based on an individual’s income. In effect, the more you make the more you’d be expected to pay out-of-pocket before you become eligible for catastrophic coverage. Lower income people would be expected to pay relatively little before getting benefits.
This basic public benefit could be supplemented with private insurance. The system could be financed with any Medicaid savings (since some high-cost people would no longer fall into Medicaid) as well as with a tax surcharge. That tax, of course, would be very controversial in today’s political climate.
There are other catastrophic models as well. The Brookings Institution’s Bill Galston has proposed a plan where people would be expected to buy private insurance to cover their first five years of risk. Medicaid would pick up all costs after that, though enrollees would not have to impoverish themselves to become eligible.
At the moment, this remains an idea-in-progress. But it is an important one. It makes sense to think about covering a critical need the current system largely ignores—the truly catastrophic costs of long-term care.