Two years ago, the Long-Term Care Financing Collaborative proposed a public catastrophic long-term care insurance program. In effect, people would use private insurance, savings, or home equity to pay for the first few years of their care needs, then the government would pick up costs for people with true catastrophic needs. Today, two highly-respected long-term care experts offered an important refinement to that basic structure: A plan that ties the time period before insurance benefits are available to a person’s income. As a result, lower-income people could access new benefits sooner than higher-income people.

The plan, from Marc Cohen of the University of Massachusetts, Boston; and Judy Feder of Georgetown University and the Urban Institute, would provide a lifetime cash benefit of $110-a-day, indexed for inflation. Like private insurance, benefits would be triggered once a person requires assistance with two activities of daily living (ADLs) such as bathing, eating, or dressing or has severe cognitive impairment.

Medicare surtax

The lowest income households would access the benefit after one year, while the highest income households would have to pay for their first four year of care before receiving a benefit. People would be eligible for the program only after working for 40 quarters after it has taken effect, which would exclude many Baby Boomers.

Marc and Judy suggested financing the coverage with a 1 percent Medicare surtax on both wage and non-wage income. People would begin paying the new tax at age 40. The cost of the catastrophic benefit: $486-a-year or about $41-a-month for some with an average wage of about $49,000. Their plan would be fully financed through the tax increase and Medicaid savings (since some people who would otherwise become Medicaid beneficiaries would be covered by insurance).

Overall, the plan would increase total long-term care spending by about 14 percent. Medicaid costs would fall by 23 percent and family out-of-pocket costs would decline by 15 percent but the new insurance program would increase overall dollars for long-term care.

Wrap-around private insurance

Their plan was supported by microsimulation modeling by Melissa Favreault who, like Judy, is my colleague at the Urban Institute.

The plan would to use this universal catastrophic program to encourage people to purchase private insurance to cover their front-end needs. At the same time, they hope that insurance carriers, which have largely abandoned the traditional long-term care market, will create products to wrap around the government insurance.  This would work much like private Medicare Supplement insurance (Medigap) that enhances basic Medicare.

At least some carriers tell me they would take advantage of the opportunity, either to sell stand-alone long-term care policies or even products that combine long-term care coverage with annuities. The benefit of an annuity-type policy is that it could add to the $110 public benefit, which would likely be insufficient for many with significant care needs.

Low-cost private insurance

A private front-end policy may be affordable for those who buy at a young enough age. For example, a   policy similar to the Cohen-Feder design that covers the first three years of need would cost about $60-a-month if bought at age 40. In today’s environment, few buy that young—the average purchase age is 60.

Even the handful of private carriers that have remained in the market have effectively abandoned coverage for more than five years, a major reason why the Collaborative, the Bipartisan Policy Center (BPC), the provider group Leading Age, and others, have embraced the need for a public program.

The Cohen-Feder plan attempts to address some of the challenges of a catastrophic plan, especially the need to balance overall cost with the recognition that low- and middle-income families cannot afford to cover several years long-term care costs from savings or home equity but are not likely to buy private insurance. Remember that coverage does not kick in until after people need significant assistance, and many will have had lower levels of need for many years before reaching that ADL trigger.

The plan, which was released at an event sponsored by the BPC, raises several questions: Is a payroll tax the best way to finance it? How would it work for younger people with disabilities? What kind of transition program would be available for the Boomers? Would affordable private insurance emerge to fill the front-end gap?

Still, the Cohen-Feder plan represents a significant step forward in the search for a way to pay for long-term care. Without a source of funding, few improvements in care delivery are likely. As BPC fellow Shelia Burke said at today’s event, “It’s always about money.”