The Reality
The Reality Check
ou may think that you will never need long-term care, but the reality is there is a strong likelihood that you will. research conducted by Jeffrey Brown, the William G. karnes Professor of Finance, estimates that between 35 and 50 percent of 65 year olds will use a nursing home at some point in their lives—and that 10 to 20 percent of them will live there for more than five years. Many Americans believe that Medicare will pay the costs of long-term care, but that’s not the case, explains Brown. While there are limited benefits for rehabilitation in a nursing facility following a hospital stay, Medicare usually provides no coverage in situations where there is a slow decline because of a chronic illness or disability and a need for help with the tasks of daily living. Medicaid will pay for some of these services, but only after a person has “spent down” most of their assets. The reality is that planning for the financial burden of longterm care needs is increasingly important as the American population ages.
espite the fact that long-term care is the largest out-of-pocket risk for the elderly, only 10 to 15 percent of the elderly population is covered by private longterm care insurance, says Brown. A survey he conducted indicates several reasons why, including, among others: (1) people underestimate the likelihood that they will become disabled; (2) they believe that they will be cared for by family, if needed; (3) they are concerned about the long-term financial stability of insurers; and (4) they can’t afford the cost of long-term care insurance. Although the insurance cost can be high, so, obviously, can the cost of care. On average, it costs about $75,000 per year for nursing home care. So lengthy stays for chronic illnesses or conditions such as Alzheimer’s “could easily wipe out all the assets of most households,” says Brown. “That’s exactly the kind of expenditure that one ought to insure against.” But it doesn’t appear that the private insurance market is going to solve this problem for the majority of Americans, he says. Many carriers are actually getting out of the long-term care business because they can’t make money on the product, and those that are still in the market may be pricing at levels that create “sticker shock” for consumers. It’s not an easy vehicle to price accurately, says Brown, which explains why many insurers have had to substantially raise prices in recent years. It is also unlikely that the government will be the solution. The Community Living Assistance Services and Supports (CLASS) Act, a provision of the healthcare reform bill signed into law by President Obama in 2010, was intended to have the federal government directly sell long-term care insurance policies to the public. However, in October 2011 implementation of the program was abandoned because independent experts projected that it would be fiscally unsustainable, a decision that Brown thinks was the right one due to the poor design of the program.
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Jeffrey Brown is the William G. Karnes Professor of Finance and director of the College's Center on Business and Public Policy. He is also the associate director of the NBER Retirement Research Center. A former senior economist with the White House Council of Economic Advisers, Brown has conducted extensive research on public and private insurance markets. The reality is he recently applied for long-term care insurance.
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Complicating matters further, the existing Medicaid program rules may themselves limit demand for private insurance. “Medicaid’s features of means testing and secondary payer status combine to impose an implicit tax on private insurance and to crowd out the purchase of private insurance for most people,” says Brown. To reduce that implicit tax and stimulate private insurance markets, lawmakers would have to be willing to eliminate those two features or to deny care to those who fail to insure themselves adequately, he explains. And even those steps wouldn’t guarantee that the private market would expand enough to cover everyone. “In other words,” says Brown, “the evidence suggests that Medicaid reform is a necessary condition for substantial growth in the private long-term care insurance market, but it does not at all imply that such reform would be sufficient.” So with fewer private companies offering insurance, and the public sector in retreat, what should consumers do? Brown suggests that the single most important step is to talk about it with your family and financial planner. “The biggest mistake that someone can make is to simply act as if ‘it won’t happen to me.’ Odds are high that it will.” So it is important to go through a planning process to consider exactly how you will pay for care if you need it for many years. Second, if you are still working, be sure to include the cost of long-term care into your calculations about how much to save. For most people, this means you will have to save more. Third, unless you have saved enough to be able to easily spend a $1 million on care, or unless you have saved so little that you will quickly qualify for Medicaid, you probably should buy a private long-term care policy. It may not come cheap, but it can provide you the resources to pay for care when you need them most. And in spite of the problems in the market, says Brown, “there are still several reputable and financially secure companies from which you can buy.”
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Cathy Lockman
Perspectives SPRING 2013
[ rEALITy CHECk ]
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