Over the past decade, purchases of private insurance for long-term services and supports have declined; a new study proposes three new options and estimates their costs and distributional effects.

Published Nov. 15, 2015 in Health Affairs
by Melissa M. Favreault, Howard Gleckman and Richard W. Johnson


About half of older Americans will need a high level of assistance with routine activities for a prolonged period of time. This help is commonly referred to as long-term services and supports (LTSS). Under current policies, these individuals will fund roughly half of their paid care out of pocket. Partly as a result of high costs and uncertainty, relatively few people purchase private long-term care insurance or save sufficiently to fully finance LTSS; many will eventually turn to Medicaid for help. To show how policy changes could expand insurance’s role in financing these needs, we modeled several new insurance options. Specifically, we looked at a front-end-only benefit that provides coverage relatively early in the period of disability but caps benefits, a back-end benefit with no lifetime limit, and a combined comprehensive benefit. We modeled mandatory and voluntary versions of each option, and subsidized and unsubsidized versions of each voluntary option. We identified important differences among the alternatives, highlighting relevant trade-offs that policy makers can consider in evaluating proposals. If the primary goal is to significantly increase insurance coverage, the mandatory options would be more successful than the voluntary versions. If the major aim is to reduce Medicaid costs, the comprehensive and back-end mandatory options would be most beneficial.

Many older Americans need long-term services and supports (LTSS) to help them with basic activities that they cannot complete on their own because of chronic illness or disability. In 2011, 7.7 million adults ages sixty-five and older received help with activities of daily living (ADLs), which include such tasks as bathing, dressing, eating, using the toilet, and getting out of bed. About 6 million adults in the same age group—nearly one-sixth of that population—have severe LTSS needs, requiring help with at least two ADLs for ninety or more days or having severe cognitive impairment.

LTSS needs will grow over time as the population ages. Urban Institute projections indicate that the number of older Americans with severe LTSS needs will increase 140 percent between 2015 and 2055, reaching 15.1 million. Over the same period, there will be an 80 percent increase in the US population ages sixty-five and older and a 190 percent increase in the population ages eighty-five and older.

The average American turning sixty-five today will incur about $138,100 in future lifetime expenses for severe long-term care needs, according to Urban Institute projections. These future expenses could be financed by investing $69,500 at age sixty-five, under the assumption that the investment earns average returns. This average spending estimate masks a large degree of uncertainty, which complicates retirement planning. Forty-eight percent of adults turning sixty-five today will likely never experience severe LTSS needs, while 15 percent will incur more than $250,000 in lifetime expenses. These estimates cover only those costs associated with severe LTSS needs and exclude the often substantial sums spent on coping with less severe disabilities.

Few Americans can protect themselves against this financial risk. Medicare does not provide coverage for extended LTSS. Medicaid does, but only for people who meet state-specific eligibility standards that limit benefits to those who have disabilities and very limited income and wealth. However, because people with LTSS needs may qualify for Medicaid after they deplete most of their resources, Urban Institute projections indicate that Medicaid will pay for about one-third of lifetime costs associated with severe LTSS needs for people turning sixty-five today.

Private insurance could help shield middle-income people from this financial risk. However, the market penetration of private long-term care insurance has been limited because of high premiums, the potential for Medicaid to crowd out demand for private coverage, and adverse selection—which limits the size of the market and drives up premiums. Indeed, sales of private long-term care policies and certificates declined from 528,000 in 2005 to 395,000 in 2012.

In addition, private carriers are no longer selling true catastrophic insurance, which helps protect consumers from financial risk. Instead, most of the carriers limit benefits to five years or less. As a result, private long-term care insurance pays less than a tenth of LTSS expenses for older people with severe needs.

Because private insurance is not widespread and public financing is available only for people who have few financial resources or who have already spent nearly all of their resources, older adults with severe LTSS needs will pay about half of their expenses out of pocket.These expenses impose financial burdens on many older adults with LTSS needs. In 2014, people ages sixty-five and older had median financial assets of only $76,000 and median home equity of only $80,000.

People who lack the resources for LTSS can receive poor or inappropriate care. This care gap can not only harm those who need assistance but also increase costs for Medicare, which pays for the hospitalizations and other medical treatments that often result from acute episodes caused by inadequate assistance.

Insufficient financial resources can also burden family caregivers, the primary support for most frail older adults. One in five family caregivers report high levels of emotional and financial stress, and more than three in five say that caregiving limits their ability to do paid work. The lifetime financial cost for a woman who leaves employment in her fifties to care for a parent may exceed $300,000, and she may be more likely as a result to fall into poverty than someone who did not leave employment to provide care.

Policy makers, advocates, and researchers have tried unsuccessfully for decades to create alternative LTSS financing mechanisms. In 1990, for example, the US Bipartisan Commission on Comprehensive Health Care—also known as the Pepper Commission after its first chair, Rep. Claude Pepper (D-FL)—proposed social insurance for home and community-based care and for the first three months of nursing home care for all Americans, regardless of income.The unsuccessful 1993 health reform plan of the administration of President Bill Clinton included a new state-run home care program for people with severe disabilities, with no restrictions on eligibility based on age or financial resources.

In the most recent attempt, Congress passed the Community Living Assistance Services and Supports (CLASS) Act as part of the Affordable Care Act in 2010, creating a national program of voluntary long-term care insurance. However, the law was never implemented by the administration of President Barack Obama and was repealed by Congress in 2013.

To better understand how policy changes could expand the role of insurance in the financing of long-term services and supports, we modeled several alternative programmatic options and compared likely outcomes under each to expected outcomes under current policies. Building on previous efforts to analyze LTSS financing policy options, we estimated overall costs and benefits and examined how they varied by multiple characteristics, including income. Our efforts represent the first look at some simplified options and highlight both the capabilities of our microsimulation model and its potential to inform the policy debate.

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