Private LTC Insurance is Not the Answer for Most People

(cross posted at freeforall)

The WSJ has a good point/counter-point on the question “should you purchase private Long Term Care Insurance?” (h/t Brad Flansbaum). Mark Meiners argues for purchase by saying “you shouldn’t hope for the best” while Prescott Cole says “LTC insurance is too expensive, you should invest what you would spend on premiums.”

Essentially, they are both arguing that you should prepare for LTC, one via purchasing insurance, the other by building flexible assets that could be use for LTC, or bequeathed to your favorite charity upon your death if die without needing it.

The Journal piece outlines an important conversation that misses the main public policy point: private LTC insurance will never be the solution for the LTC needs of the general population due to income and wealth levels.

Perhaps 10 percent of the population has enough income to pay premiums, and/or enough in assets they may wish to partially protect from a potentially catastrophic LTC cost. For example, past work I have done showed that around 4 in 10 elderly persons had income and assets at age 65 low enough to qualify for Medicaid before paying for any LTC. Those people are removed from the complicated decision framed in the WSJ piece, but they are certainly at risk of needing LTC.

If ever there were a risk profile that cried out for social insurance, it is LTC. The reason that seems so laughable, is our countries failure to grasp the most important thing in all public policy debates: the counterfactual, or the costs and benefits of what happens by default, in this case for LTC.

Author: Don Taylor

Don Taylor is an Associate Professor of Public Policy at Duke University, where his teaching and research focuses on health policy, with a focus on Medicare generally, and on hospice and palliative care, specifically. He increasingly works at the intersection of health policy and the federal budget. Past research topics have included health workforce and the economics of smoking. He began blogging in June 2009 and wrote columns on health reform for the Raleigh, (N.C.) News and Observer. He blogged at The Incidental Economist from March 2011 to March 2012. He is the author of a book, Balancing the Budget is a Progressive Priority that will be published by Springer in May 2012.

22 thoughts on “Private LTC Insurance is Not the Answer for Most People”

  1. I realize that Medicaid is an inflexible vehicle, but it does pay for long term care. It just asks that you use up all your assets first. It also underpays providers, but that is across the Medicaid spectrum — this is no worse for LTC than it is for other services, for instance, dentistry, where most dentists simply won’t see Medicaid beneficiaries (unlike nursing homes, which are largely funded through Medicaid). There are more resources available for elderly and disabled people in need of LTC than there are for the uninsured who are under the age of 65. I don’t want to pit needy populations against each other, I am in favor of making Mediaid more flexible in how it cares for people whose only apparent option is institutional care, but I guess my question is: why is LTC such a priority over other health care needs? Is it unfair to ask that people use up their existing assets before relying on social insurance? Who is really disadvantaged by that?

    When I have read your other posts, it seems like what you are calling long term care is the whole cluster of things that you need to do for elderly people who are in need of a lot of medical care even if they don’t require living in an institution — like paying for home health aides to take people to appointments instead of making them rely on their gainfully employed children. Is it fair to use public resources for the purpose of relieving the burden of adult children?

    I see commercials aimed at aging boomers, with these vibrant and healthy adults exploring new facets of their life with their health intact and we all know this is if not false then seriously misleading. Many already face health issues, and certainly, many are fixed in place by the health issues of their parents and the financial issues of their children. Nonetheless, asking their children to pay more in taxes to relieve them of the remaining issues of their parents doesn’t seem quite fair.

    1. = = = Is it fair to use public resources for the purpose of relieving the burden of adult children? = = =

      Wow – unpacking that simple sentence could take weeks. At what point did children become indentured to their parents for the duration of their parents’ lives? Under your plan, what happens when one sibling is wealthy and the other struggling – how much gets taken from each and how is the split enforced? When one sibling is living near the old homestead and the other two in California? In Australia? Children who were kicked out of the house at 17 and told never to return – are they dragooned back by federal marshals and their assets confiscated? Start collecting Medicare and you are automatically cast out to look for some imagined version of Walton’s Mountain – a vision of American life that neither now nor (if truth be told) then matches up with the way we have lived our lives?

      And, most fundamentally: Do parents cease to be citizens when they pass the age of 65 or declining health, such that they are no longer part of the national social contract, with a reasonable expectation of a reasonable draw on society’s resources in your declining years?

      Cranky

      1. Cranky, a frequent policy justification for financing LTC is that adult children of elderly people lose a lot of productive time at work. Some people actually quit work altogether, when they otherwise would have wished to stay. So no, I don’t think adult children are indentured servants to their parents, but I could equally have said that “no one is requiring those adults to care for their parents so why is it society’s problem?” In reality, I think it is a problem if you feel the need to stop working to provide in-kind services to your parent, but I raise it in the context of a lot of other priorities that might be even more important (at least to me).

        1. Perhaps I am misunderstanding what you meant by this paragraph:

          = = = When I have read your other posts, it seems like what you are calling long term care is the whole cluster of things that you need to do for elderly people who are in need of a lot of medical care even if they don’t require living in an institution — like paying for home health aides to take people to appointments instead of making them rely on their gainfully employed children. Is it fair to use public resources for the purpose of relieving the burden of adult children?= = =

          I read that as you proposing that citizens past a certain age should rely on their adult children to provide their care, and that the children should be forced to do so by withdrawing all civic resources from those citizens. To do so requires removing citizenship from and denying agency to citizens over a certain age (65? 67?) and coercing children (who are citizens in their own right, but had no say in the choice to bring them into the world) into providing that care (“the burden of adult children”). In short, placing children into servitude to their parents for the duration of their parents’ lives. I’m unclear on the moral or (in the US) Constitutional basis for such a policy.

          Cranky

          1. No, I am not making an “ought” statement, I am making an “is” statement: many adult children DO CURRENTLY provide such assistance and it is frequently cited as a basis for socialing LTC. So, whether they have to or not, and I think I stand with most people in thinking that it is a reasonable and in some cases even noble thing to do, I still think it’s legitimate to question whether the fact that such efforts are can sometimes be burdensome is a compelling basis for socializing LTC. I think the answer is, “sometimes, depending on how burdensome the care becomes.” For instance, I might say that many women don’t have to work (many do) but because so many women do work it is reasonable to propose subsidized high quality daycare for their children.

          2. = = =
            I still think it’s legitimate to question whether the fact that such efforts are can sometimes be burdensome is a compelling basis for socializing LTC. I think the answer is, “sometimes, depending on how burdensome the care becomes.”
            = = =

            Then we have a pretty fundamental disagreement. We are all members of our society, we all participate/participated in its construction, maintenance, and support, we will all have medical problems require treatment and we will all get old. Therefore (I would say) we all should receive the same amount and quality of medical care and LTC as we age (as a basis; more if we can afford to purchase it ourselves). Trying to divide the polity into ‘those with non-working adult children who don’t mind being unpaid nurses’ and ‘those with working/far away adult children who won’t act as unpaid nurses’ is unworkable and (I would argue) uncivilized.

            Cranky

    2. Barbara
      Medicaid underpays differentially across types of care it covers. In the NH business, Medicaid is a pretty good payer, in large part because the next most common source of NH care is out of pocket and private insurance is quite rare. There are some NH that don’t take Medicaid, but if you are in the NH business, you are in the Medicaid business.

      Medicaid does have instititional bias, and there are some demo programs, but generally Medicaid programs have been slow to open up community based LTC, I think out of fear of ‘wood work’ effect. The notion is that a NH probably has the lest moral hazard of many types of care (who do you know who desires to move to a NH) while community based care would likely have a great moral hazard impact.

      Your basic questions are important; I hold that we have the answers we can now observe due to many not understanding how things work, but maybe I am wrong. By covering LTC I do mean flexible benefits that would allow people to address disability they face.

    3. Is it unfair to ask that people use up their existing assets before relying on social insurance?

      Yes, it is. It also generates a lot of resentment by the middle class against social insurance, reinforcing the idea that it’s for those other people, not people like us. The most successful welfare states are those where benefits are not means-tested, so everyone gets something from the system. Even in the US, Social Security is one of the most popular government programs, because there is no means-testing.

      1. Medicaid is means tested for everyone, which is often a shock to middle class people at the end of their lives. I am all in favor of not having means tested programs, but I am not in favor of expanding no means testing if you are over 65 while holding on to means testing for everyone else. That would exacerbate the intergenerational transfer whereby those who are older are held largely harmless for their frailty while the rest of us face penury and ruin, and have to pay for the protection of others to boot.

        A very large and disproportionate share of public funding of medical expenses goes to people who are over 65 while the things that use to occupy a relatively closer position of importance in public priorities, especially education, are starved. I don’t like pitting needy populations against each other, as I said, but I’m tired of wringing my hands over the plight of the elderly when they have it relatively good. Sorry to sound so radical, I am not really, but if you think about this in terms of student loan debt, for instance, the disparity of funding for health versus education is simply mind boggling.

  2. The “sweet spot” of LTC insurance is even narrower than Don suggests. It only makes sense if your assets are in a narrow band–probably $300K to $3M or so. (Numbers are impressionistic.) Any less, there aren’t enough assets to bother protecting. Any more, and self-insurance makes too much sense.

    It’s also worth pointing out that this is very expensive insurance. I’m not thinking of the premium cost; I’m thinking of the NPV of the policy, compared to investing the money. (The vigorish, if you will.) The uncertainties to the insurance company are horrific, and they need a lot of capital to afford underestimating the future rate of health-care inflation. Add in the transaction costs of marketing the stuff, you have a pretty bad policy.

    1. Currently safe investments such a 10-year Fed bonds are yielding less than the rate of inflation and any other investment (for anyone who is not a hedge-fund manager) has yielded a net loss over the past decade I can’t agree with your “compared to investing the money” comment.
      Of course buying LTC insurance is also a form of investing. What happens if the provider goes bankrupt? Ala AIG?

      1. Keep in mind that as returns on investments go down, premiums go up. The insurance company is going to invest those premiums and they don’t really have access to fabulous asset classes that you don’t. You likely can still expect to do better investing the money yourself rather than giving it to an insurance to do so, even if that means only that you’re losing money more slowly than they are.

      2. LTC, like any other regulated insurance, is generally backed by a guarantee pool; just like AIG policyholders, the policyholders on an LTC policy from a bankrupt insurer should still have a policy with the same terms.

        However–unlike Life insurance, LTC is not sold at guaranteed rates; on most policies issued 20 years ago, the rates have gone up by 50% or more since issue.

        1. @SamChevre
          most LTC policies are written as level term, meaning you pay same premium for duration of policy. However, commonly insurance companies have gotten ‘class increases’ meaning all persons in a given class due to experience being higher than predicted. When such updates come about, many drop coverage. The insurance companies say that they either have to get such increases or go out of businesses, and state regulators typically relent.

          1. Correct; the increases are state-approved class increases. But I stand by what I said; I’m not aware of any policies issued before 1998 that have not had premium increases. (Genworth was, I believe, the last firm to have not increased rates on their underwritten business, and that changed in 2007 IIRC.)

      3. DGM,
        Insurers have their own equivalent of FDIC deposit insurance. Although it is usually capped at a number like $300K. Which isn’t so good, for a product like LTC insurance. Btw, insurers are not allowed to advertise their “insurance insurance,” and it varies by state, so you have to ask questions.

    2. @Ebeneezer Scrooge
      Your numbers are reasonable in terms of financial assets between which someone MIGHT purchase. You do have some with strong preferences based on things like control. The reasons you note are good ones that suggest that private insurance has very little chance of taking off to cover this risk. One way in which LTC insurance is very different from major medical is major medical is a premium this month to cover next months risk period. With LTC insurance, you can be talking about stringing premiums to cover something whose likely onset is 4 decades plus away, and with benefits denominated in dollars per day uncertainty abounds.

  3. Well, speaking as one of the VERY large number of people who either are in that asset band, or can expect to be when they’re closer to retirement, let me tell you that another glitch in the sytsem is that they aren’t anxious to sign anyone up who has had a test result come out questionable and been told to come back in a year after re-taking the test. So the decision was made for me by the insurance company’s search for only the healthiest people. Which doesn’t even make sense, because it’s actually a good strategy to sign up people who might die quickly rather than lingering on for years with general decripitude.

  4. Even if someone dies early they are most likely going to use at least some LTC benefits, unless they literally drop dead. For LTC insurers, the goal would be to maximize the duration of the period during which an LTC contract is held without having to pay out — which does make it more like life insurance. So any proclivity towards a chronic condition would generally be seen as a bad thing.

    1. I don’t see this. Most LTC policies don’t pay out for the first 90 or 180 days. The big LTC payouts are for dementia, of course. I would think that smokers, for example, should get extra special discounts. But then again, nobody went broke overestimating the the weirdness of insurance underwriting.

Comments are closed.