Can the US do a better job of designing long-term care insurance? The answer is yes, according to two important new studies. With hard work and political will, we can develop better ways to help pay the enormous cost of long-term supports and services.
The new research is a big step towards improved financing of these services. It did not find a “magic bullet.” But it did show how various options differed from the current system and from one another: There are big differences between voluntary and mandatory insurance, and smaller, but important, distinctions among the voluntary programs. To learn more about the main study, take a look at this article in the journal Health Affairs (which I helped write) or this more technical paper.
While no solution is perfect, most alternatives are an improvement over today’s ineffective system, which often leaves families impoverished and reliant on Medicaid. In many cases, it results in poor care that leads to dangerous medical events, such as falls or infections.
My Urban Institute colleagues Melissa Favreault and Rich Johnson used a sophisticated computer model to study three new kinds of long-term care insurance. For each, they analyzed both voluntary and mandatory programs. The voluntary insurance was financed with premiums, and included subsidies for low-income people. The mandatory programs were funded through higher payroll taxes.
Each new insurance option had an identical daily cash benefit of $100 in 2015, increasing by 3 percent each year. The cash benefit is an important change from private long-term care (LTC) insurance, which typically reimburses consumers only for approved expenses such as time from a certified home health aide. Participants would become eligible for benefits once they develop a high-level of need for personal assistance, in much the same way as they do with today’s private LTC insurance.
While each new option would offer an identical daily benefit, they’d differ in when they begin and how long they last. One (front-end insurance) would cover the first two years of care after a 90-day waiting period. The second (back-end insurance) would provide lifetime benefits after a two-year waiting period. The third (comprehensive insurance) would provide lifetime benefits after 90 days. The insurance could be provided by government or by private insurance companies.
How do they differ? Mandatory insurance would insure the most people. At age 65, nearly everyone would participate and the risks and costs of LTSS would be spread broadly across almost the entire population.
However, mandatory insurance could require a significant tax increase. For instance, if Congress funded the program with a Medicare-like payroll tax that would apply to all wages, it would have to boost the tax by between 0.6 and 1.35 percentage points, depending on which plan it chose. Of course, such a universal system could be financed in other ways, such as through income taxes, premiums, or some combination (which is how we finance Medicare today).
Voluntary insurance would cover far fewer people. On average, the analysts assumed that about 20 percent of 65-year-olds would buy either front-end or back-end insurance or some form of private insurance. Only a handful would purchase comprehensive coverage. Many would be relatively high-income buyers who would replace their private insurance with this new coverage.
With subsidized voluntary insurance, about 80 percent of low-income seniors would participate at age 65, but enrollment would drop sharply as the subsidy declines. Without a subsidy, only about one in ten middle-income people would enroll.
Why won’t more people buy voluntary insurance? Primarily because premiums would be too high. Consumers are extremely sensitive to long-term care insurance premiums and many, especially with moderate incomes, are not likely to buy even at these lower prices. For instance, a 55-year-old would have to pay about $1,900 annually for front-end policy and about $2,900 for a back-end policy that pays benefits after two years.
While the Urban modelers looked a new insurance programs, Al Schmitz and Chris Giese of the actuarial firm Milliman Inc., analyzed several important reforms to the private long-term care insurance market. To show how these changes could affect premiums, they rolled up several ideas into a single package. They found that by making multiple changes, insurance companies could significantly reduce premiums, but probably not by enough to dramatically increase the number of Americans who’d buy the insurance.
Because few moderate-income people would buy voluntary insurance, none of the new insurance models would reduce Medicaid LTSS spending for older beneficiaries by more than 10 percent. However, high participation in back-end and comprehensive mandatory insurance would significantly reduce Medicaid spending—by about one-third for the back-end program and about 40 percent for comprehensive insurance.
The alternatives would also differ in their ability to provide families with new resources to purchase assistance. The study found that the front-end options would primarily provide families with new resources to pay for personal assistance or other supports. Overall, between one-quarter and nearly 40 percent of new insurance benefits would finance care that participants would otherwise not get or that is now provided by unpaid caregivers.
There is lots more valuable information in this work, which was funded by the Scan Foundation, AARP, and Leading Age. If you are interested in #long-term care financing, take a look at the Health Affairs paper.