The general lack of private financing mechanisms which can protect elderly individuals against the catastrophic costs of long-term care is a major deficiency of the Nat-ion's health care system.
Chapter 2 of this report focused on defining the long-term care population and the types of needs associated with long-term care illness, and on describing the current long-term care delivery system in terms of expenditures and financing. Trends highlighted include:
The need for long-term care is defined by limitations in activities of daily living which require a need for personal human assistance. These limitations increase with age.
Not all elderly need long-term care. About five percent of the elderly resides in institutions at only one time. Of the elderly living in the community, about 13 percent have limitations in activities of daily living.
Even though the majority of the elderly long-term care population prefers to remain in the community, financing in the long-term care system is heavily oriented to institutional care.
The strains of individual and public financing are certain to increase because of the demographic trends indicating an ever increasing number of elderly.
The average income of the elderly has increased over the past two decades and this trend is expected to continue. While the elderly as a group do have the resources that could potentially be applied to private financing mechanisms, the cost of individually financing several years of nursing home care is beyond the reach of most elderly persons.
Current public programs for institutional long-term care are directed at the poor. Others become eligible for these programs only after impoverishment.
1. Proposals for Reform of Federal Financing
In contrast to the goal of this report, a variety of proposals have been advanced over the past several years to alter and expand Federal long-term care financing. These proposals principally focus on altering Medicare to cover extended custodial services, including personal care and nursing home care benefits (Somers, 1982; Davis and Rowland, 1985; Blumenthal et al., 1986). Proposals also have been advanced for expanding Medicaid coverage of long-term care. While such proposals attempt to address deficiencies in the current system, they also raise serious issues because they would substantially alter the role of the Federal Government in this area. In addition, such proposals would contribute to Federal budget difficulties and/or significantly raise taxes.
Another major dilemma facing proponents of reform is how to craft new financing policies which do not encourage a whole new group of beneficiaries to enter the public system--people who previously relied on the informal network of family and friends that currently provides about 70 percent of all long-term care services in the community.
In addition, the hopes of many that the widespread introduction of in-home services would offset a significant proportion of current nursing home costs (including public costs) have simply not materialized. Fifteen years of research, the most recent being the National Long-Term Care Channeling Demonstration sponsored by the Department of Health and Human Services, have shown the difficulty of targeting in-home services to persons who would have otherwise entered nursing homes. The absence of effective targeting mechanisms means that introduction of in-home services is more likely to increase than to decrease program costs.
Other approaches to public policy reform have taken a different tack. While acknowledging the need for more flexible service delivery, they are embedded in the need to control public costs. In Administration legislative proposals for FY 87, for example, States would be given additional flexibility to design and operate their Medicaid programs, subject to a cap on Federal Medicaid expenditures that would be indexed to the medical care component of the Consumer Price Index.
Other areas of Medicaid reform address the interrelationship between private financing and Medicaid and focus on adjusting eligibility for nursing home care coverage. Motivation for such options arises from the unsubstantiated belief that the future of private financing mechanisms is significantly affected by the availability of Medicaid, and from the desire to ensure that Medicaid resources are directed to those most in need. A number of such approaches are discussed in detail in Chapter 4.
2. The Need-for Private Financing Mechanisms
Although there are several ways in which individuals can use their private resources to protect against the high costs of long-term care, the existing options for private financing are neither well-developed nor well-known nor widely used.
It is the underlying premise of this analytic effort that private financing options for long-term care can play a larger role in our society than is currently the case. There need to be suitable, effective and widely available private financing mechanisms for the elderly who want to protect themselves at a reasonable cost against the high expenses of long-term care.
This chapter evaluates a variety of emerging mechanisms for private financing of long-term care. The critical strengths and weaknesses of each are discussed, and the barriers which appear to be impeding further development are identified. Where possible, affordability and participation are estimated. For Individual Medical Accounts, long-term care insurance, and insurance combinations, a special analysis was conducted and impacts on public and private costs were simulated.
This analysis is limited to private financing and the manner in which public programs may influence the growth of private options. It does not address the very real needs of persons who must rely on public programs because they cannot afford private alternatives. It is not intended to serve as a thorough reappraisal of the strengths and deficiencies of the public financing programs which now provide benefits to that population. In addition, the analysis does not deal with problems in the long-term care system other than financing, e.g., access to, and availability of, services and quality of care.
Finally, for purposes of analysis, it is assumed that the supply of needed long-term care services will expand as private financing options are increasingly available to a larger segment of the elderly.
Most mechanisms for private financing of long-term care are based on three conceptual types: cash accumulation, risk pooling, and resource mobilization. In addition to these mechanisms, there are possible strengths to combined financing mechanisms as well as various types of caregiver support strategies intended to assist the vital "informal network" of care which exists in homes and communities.
Cash Accumulation. Cash accumulation strategies refer to savings mechanisms that encourage individuals to increase the resources available for future long-term care needs.
The most widely discussed example of this approach is the long-term care IRA, which provides tax advantages (e.g., deductions or credits) for savings deposited in accounts earmarked for long-term care use. Although seldom provided by companies, prefunded long-term care accounts provided as employee benefits also function as cash accumulation mechanisms.
Risk Pooling. Risk pooling refers to mechanisms which pool the resources of a large group of individuals who are potentially at risk in order to pay for the actual services that will be needed by an unidentifiable and relatively small subset of the group. In the case of long-term care, the risk is that of needing extended care for chronic illnesses in a nursing home, home, or other community setting.
Three basic risk pooling mechanisms will be examined in this chapter: long-term care insurance, social health maintenance organizations (social HMOs), and life care and continuing care retirement communities (CCRCs). Each differs in terms of the comprehensiveness of the benefit package, how risks are managed, and organizational structure.
Long-term care insurance pools the premiums of a large group of beneficiaries to cover a relatively smaller risk of an extended period of need by an individual for nursing home, intermediate care or home health services.
Social-HMOs use the pre-paid, capitated, case-management approach of health maintenance organizations (HMOs) to extend long-term care benefits to groups of individuals.
Continuing care retirement communities typically provide for elderly individuals lifetime benefits including a range of residential, health, social and custodial services, in return for some combination of an entrance fee and monthly charge.
Resource Mobilization. This refers to financing mechanisms which enable individuals to convert non-liquid resources to cash, thus enhancing their ability to pay for long-term care.
Two models of this approach are considered in this chapter:
Home equity conversion plans convert the home ownership assets of individuals into a stream of income that can be used to purchase long-term care services.
Employee benefit plans include the addition of long-term care coverage as an option in the package of pension or health benefits offered employees.
Combination Financing Mechanisms. Several of the financing mechanisms under review may be more efficient and effective in tandem than alone. For instance, because direct payment for long-term care may involve very large expenses, individuals using a pure cash accumulation mechanism must save what many consider to be an inordinate amount of money in order to be fully protected against the relatively small probability of very large expenses. It might be more efficient to have available a mechanism which combines features of both cash accumulation and risk pooling approaches as, for example, by developing long-term care IRAs earmarked for long-term care insurance rather than for the direct purchase of services. In addition to exploring the potential of an IRA-insurance link, this chapter will also discuss insurance-pension benefit combinations and acute-chronic care insurance links. These combined strategies are analyzed as part of the special analysis section of this chapter.
Caregiver Support Strategies. Caregiver support strategies are designed to strengthen and expand the informal network of long-term care services provided in the home and in the community. This network is essential to the success of private financing mechanisms: it affects the affordability of long-term care services and helps to keep the elderly at home rather than in costly nursing homes.
Two types of caregiver support strategies will be examined: tax allowances for family caregiving and volunteer systems.
Tax allowances for home care include a variety of tax credits or deductions for services which assist family caregivers in providing home care for an elderly dependent.
Volunteer systems assist organizations and individuals in providing unpaid long-term care services to older persons in the community.
1. Long-Term Cars Individual Medical Accounts
Definition
An Individual Medical Account (IMA) is a cash-accumulation approach which would permit individuals to establish special purpose, tax-favored savings accounts dedicated, in whole or part, to the purchase of health care services. A long-term care IMA is intended to encourage individual savings throughout a person's productive years for the long-term care services which some persons will need later in life, usually well after retirement. Like the existing Individual Retirement Accounts (IRAs), most proposed long-term care IMAs would permit individuals to shelter savings from Federal (or State) income taxes in the special purpose accounts. Unlike IRAs, the IMA proposals normally permit tax-free withdrawals from the account only if needed for long-term care purposes.
Current Experience and Research Findings
This section of the report reviews development of the concept of long-term care IMAs. A much more detailed special analysis of IMA and insurance approaches was undertaken by the Department specifically for this report and is presented in Section D. That special analysis includes an assessment of the potential impact of a range of IMA options on total, out-of-pocket, and Federal expenditures for long-term care.
Historical Background. In recent years, several proposals based on the IRA model have been advanced to use tax-sheltered savings for special purposes. Some of the proposals have focused on savings for education while others have focused on savings for medical expenses, both acute care and long-term care.
The IRA model was first established in 1974 as part of the Employment Retirement Income Security Act (ERISA) and was designed to provide a means for persons not covered by private pension plans to save for their retirement years. In 1981, the Economy Recovery Tax Act expanded eligibility to all workers. One purpose of Congress in broadening the availability of the IRAs was to increase the overall rate of consumer savings, with accompanying benefits to the general economy.
In 1982, during deliberations over approaches to resolving the pending insolvency of the Social Security Trust Fund, proposals were advanced (Ferrara, 1982 and 1983) to use tax sheltered savings accounts to lessen individuals' dependence on social Security, with tax credits for savings of up to 20 percent of the Social Security payroll tax (employer and employee contribution combined). These initial proposals, developed in the context of Social Security reform, were limited to cash benefits, but it was recognized that the concept was also applicable to the Medicare Trust Fund. The proposals featured voluntary participation, and urged guarantee of Social Security benefits to current retirees and protection during the transition period. Future retirees would have reduced benefits, with the reductions dependent on the extent of participation in the IRA plan. Withdrawals from the IRA accounts during retirement years would not be taxed.
As a compromise plan for eliminating deficits in the Social Security Trust Fund gained acceptance, attention turned to the impending insolvency of the Medicare Trust Fund. There were two IRA-type plans advanced as part of the report of the 1982 Secretary's Advisory Council on social security, issued in March 1984. One of them, proposed by Rahn (1984), was essentially modeled on the Ferrara proposals for Social Security. It proposed a 30-year phase-in period; refundable tax credits available to participants, and deductions for voluntary additional contributions; voluntary participation with individual accounts; and an increase in the Medicare deductible in proportion to IRA participation, until the only Medicare benefits for individuals who had participated fully would be catastrophic coverage.
An IRA-type account was also proposed by Burke (1984) in the same report, with mandatory participation and with contributions used to buy catastrophic medical coverage. Coverage would be means-tested, with catastrophic expenses defined as those above 15-20 percent of income. Balances in the account at death would be divided, with the principal remaining in the estate, but interest transferred to a pooled government account to pay catastrophic medical expenses of individuals who had exhausted their IMA savings. Thus, this proposal had significant elements of risk-pooling supplementing its cash-accumulation approach.
The initial proposal to use IMA's to cover long-term care expenses for the elderly, rather than acute care expenses currently covered by Medicare, appeared in an article in the Federation of American Hospitals Review in the fall of 1985. It was written by Otis R. Bowen, M.D., who chaired the Advisory Council on Social Security from 1982-84, and is currently Secretary of the Department of Health and Human Services, and Thomas R. Burke, who was Executive Director of the Council under Bowen and is currently Chief of Staff in the Department.
The article, among other things, proposed an IMA for long-term care expenses linked to a risk pool concept. Individual accounts would be permitted for individuals who are covered by Medicare or who are age 40 and over. Savings up to certain limits and interest earned would be tax-sheltered. Some percentage of the interest earnings would go to a pooled fund and be used to pay long-term care expenses of those who have exhausted their individul accounts on necessary long-term care expenses. Withdrawals would be tax-free when used for long-term care expenses; any other use would be taxed at marginal rates and subject to penalty. Individuals who contribute less than the limit could only receive a portion of their long-term care expenses from the pool.
Current Legislative Activity. At the Federal level, several bills extending the IMA concept to savings for catastrophic medical care expenses (including long-term care expenses) have been proposed. One bill, proposed by Representative D. French Slaughter (H.R. 3505), offers a 60 percent tax credit to workers and employers who contribute to a "health IRA" for the worker. The maximum contribution under this proposal would equal the annual joint employer-employee Medicare payroll tax (currently 2.9 percent of earned income). Workers who opted to make the contributions would have a higher deductible for Medicare, but would have catastrophic coverage for both acute and long-term care expenses under Medicare.
Another bill, introduced by Representative Ralph Regula (H.R. 4349), would provide for a "health IRA" similar to current IRAs, except that funds used to purchase long-term care insurance or to pay long-term care out-of-pocket expenses would be taxed at a lower rate. Penalties would be imposed on withdrawals before age 59 1/2 or for use other than for qualified health expenses.
State Action. In May 1986, Colorado became the first State to create a medical savings account for individuals. The Colorado legislation, entitled "The Individual Medical Account Act of 198611 (House Bill No. 1102, General Assembly of Colorado), permits individuals to establish a trust which can be used to pay the eligible medical, dental and long-term care expenses of the account holder after age 59 1/2. Thus, the legislation is inclusive of, but not focused on, the long-term care expenses of the elderly. Features of the legislation include:
The individual can make annual contributions of up to $2,000 each for the account holder and spouse, as well as up to $1,000 for each dependent child.
The interest earned on the account will be exempt from Colorado income tax.
If mutually agreed, an employee may have his employer contribute to the IMA, or the employee may continue to make contributions to the existing health insurance policy or program.
The trustee is responsible for purchasing major medical coverage for each account holder to cover all medical, dental, and long-term care expenses in excess of $10,000 annually, as well as for paying the direct expenses of the account holder.
There is a penalty for early withdrawal (before age 59 1/2), regardless of the purpose, and any remaining principal and interest are taxed as part of the decedent's estate.
The Experience with IRAs. Since no experience with IMA's exists, the IRA experience provides the best basis for assessing the IMA concept and the likely levels of participation and savings. However, since IMAs have more restricted use than do general-purpose IRAs and, thus, are less attractive, the experience with IRAs is probably only instructive as an upper limit for the potential of IMAs. The latest information on IRA savers is for 1984 and is shown in Table 3-1, "Tax Returns with IRA Contributions by Adjusted Gross Income Class, 1984". As Table 3-1 indicates, the proportion of tax returns with IRA contributions in 1984 was relatively low--only 15.4 percent. The proportion rose sharply with income, from 2.1 percent in the lowest income group to 71.4 percent for those with Adjusted Gross Incomes (AGIs) of $100,000-200,000 and 63.6 percent of those with incomes over $200,000. Thus, IRAs have been used by a much higher proportion of the wealthy than those of moderate and low incomes.
Despite this difference in rates of Participation, most IRAs are held by those with moderate incomes, due to the larger number of people in moderate income brackets. Almost 40 percent of the tax returns with IRAs had AGIs of $30,000 or less in 1984, and about three-quarters had AGIs of $50,000 or less.
Overall, almost 9.5 percent of tax returns in 1983 had maximum IRA contributions. The group of persons who are already saving the maximum allowed in IRAs is an important one for consideration of IMAs. IRAs have an inherent advantage over IMAs--both IRAs and IMAs can be used for long-term care, but IRAs also can be used for any other purpose. Hence, taxpayers who do not have IRAs or who contribute less than the maximum are very unlikely to have any interest in IMAs.
Existing data show that the probability that the taxpayer will contribute the maximum amount rises with income. Table 3-2, Tax Returns with Maximum IRA Contributions, 1983 shows that only about eight percent of tax returns with IRAs are at the maximum contribution for those with under $5,000 in Total Positive Income (TPI--a somewhat broader concept than AGI which includes tax-sheltered income). In contrast, over 80 percent of the tax returns with IRAs which reported incomes above $100,000 contributed the maximum amount. Most taxpayers who save the maximum amounts have TPIs over $30,000 a year.
IMA proposals frequently call for funds withdrawn from IRAs for long-term care expenses to escape taxation entirely. It may be argued that this additional tax-favored treatment would result in some persons choosing IMAs over IRAs. However, the incomes of most people who have long-term care expenses are low enough that the tax advantages at current tax rates would be small or nonexistent, since such people are unable to work and their income and savings are rapidly depleted by the expenses of the long-term care. In addition, nursing home expenses above five percent of income are already deductible if the taxpayer itemizes, although this figure may rise under the tax reform bills currently being considered in Congress.
An indication of the potential revenue loss from IMAs can be obtained from the experience with IRAs. The Treasury estimates revenue losses of $14.4 billion from IRAs in Fiscal Year 1986. (These estimates do not account for future revenue gains from taxation of the eventual IRA withdrawals.
How Much Must Be Saved? A critical issue in development of pure IMA proposals (i.e., with no risk-pooling component) concerns how much a person must save to pay for future long-term care should it be needed. Consideration of this question involves examination of the current costs of long-term care services together with the effect of inflation estimates on both personal income and nursing home costs. The issues are discussed briefly here and in much greater detail in the special analysis, Section D, of the report.
The latest data available indicate that in Fiscal Year 1983, Medicaid reimbursements for care in skilled nursing facilities ranged from about $22 to $105 per day ($8,000 to $38,000 per year), depending on the State in which the facility is located, and averaged about $41 per day, or $15,000 per year. Services in intermediate care facilities are known to be lower in cost.
Current data on nursing home costs for private-pay patients (i.e., patients who paid their own bills with private resources) will not be available until later this year, when the National Nursing Home Survey of 1985 is completed. In general, however, private-pay patients are thought to pay 20 to 30 percent more for services than Medicaid does. Thus, after adjusting for inflation, costs for a private-pay patient in a skilled nursing facility would average about $21,400 to $25,000 per year. This is consistent with data from the American Health Care Association indicating that nursing home care averages $22,000 per year.
The amount to be saved also has to factor in inflation rates, since IMA savers will be saving for an event that is many years in the future. At present, nursing home costs are rising at a faster rate than the general inflation rate. Nursing home stays can range from fewer than 30 days to more than 10 years. The average stay in a nursing home is 456 days, (Liu and Manton, 1983), and the expected length of stay for someone who has already been in the nursing home for 90 days is 831 days. In general, then, sizeable savings would be needed to cover even an average stay, and larger amounts of savings would be needed for those exceeding the average.
High costs compounded by inflation make an individual savings approach to financing long-term care very difficult. Even if a person is able to save enough to pay out-of-pocket for an average length nursing home stay, the savings is likely to be too little for long stay patients, and far too much for those who never need nursing home care or who need very limited amounts of care. This problem suggests that savings approaches might be more effective when combined with risk-pooling approaches, such as insurance. A variety of plans linking the IMA concept to long-term care insurance are discussed in the special analysis, Section D.
Strengths of Long-Term Care IMAs
Individuals would be encouraged to save to take personal responsibility for their own and their spouse's long-term care expenses.
IMAs would provide those needing care with maximum flexibility in purchasing services.
Those who chose to participate will have greater resources in their later years to pay for needed long-term care services.
The costs borne by the Medicaid program for long-term care of middle and upper income persons might be reduced and might provide a partial offset to foregone tax revenues.
IMAs would encourage savings rather than consumption, thus providing potential funds for investment.
Weaknesses of the Long-Term Care IMA
If experience with IRAs is a valid predictor, participation rates would be low, especially among low and lower-middle income persons and families.
The tax-sheltering of the savings and interest would represent a significant loss of tax revenues. Under many MA proposals, the losses would not be offset by tax revenues when the funds are withdrawn for long-term care expenses.
If use of the accounts is restricted to nursing home expenses (the major cause of catastrophic expense), a large portion would pass to heirs, rather than being used for long-term care of the saver. This is because the majority of older persons are unlikely to spend any time in a nursing home. Further, such a restriction would also perpetuate the bias many see in the current system toward high cost, institutional care over home-based services.
If expenditures for home and community-based care were covered (reducing the portion passing to heirs and the bias toward institutionalization), this would significantly dilute the catastrophic protection provided. Also, if home and community care is included, it may be difficult to restrict the use of savings to legitimate, critical services.
It would be difficult to restrict the accounts to the payment of long-term care expenses. Those with large acute-care needs could be expected to press for opening up the accounts for those expenses also.
Tax Credits as Incentives for Saying
A possible enhancement of the IMA approach might be to offer a tax credit for savings for nursing home expenditures, rather than a deduction as with the current IRAs. Tax credits are generally more appealing to low and middle income persons than are tax deductions. Under current law, a tax credit for a $1,000 contribution is worth a $500 tax break to someone in a 50 percent tax bracket but only $100 to someone in a 10 percent bracket. The greater value of the tax credit to lower income persons could help to broaden the participation rate among those more likely to spend down to Medicaid if the need for long-term care arises.
However, tax credits for this purpose have some weaknesses. A major problem concerns affordability. While consumers in the lower tax bracket are clearly better off with the tax credit approach, it is not so clear whether lower-income taxpayers can or will afford the sizeable reduction in disposable income.
It is possible that tax credits might increase participation enough to have an appreciable effect on spending for Medicaid. However, the inherent target inefficiency of IMA plans (i.e., that many persons save but relatively few require the services) would almost certainly mean that the Treasury cost of revenues foregone would be much greater than the possible Medicaid savings. At present, there are no data on which to base an estimate of potential participation in a tax credit approach.
General Assessment
Feasibility and Practicality. Experience with IRAs indicates that savings institutions are likely to be quite willing to establish IMA accounts, and to promote them widely with newspaper and television advertisements. However, despite the ease of access to savings outlets and the promotion, a considerable amount of disposable income is required, and the overall proportion of taxpayers who have availed themselves of IRAs has remained low (about 15.4 percent of tax returns in 1984). Still fewer have saved the maximum amount permitted. Therefore, as previously discussed, IMAs are likely to have even lower participation rates, since they are less attractive than IRAs.
Improvement of the Quality of Life and Dignity of the Individual. To the extent that individuals participate and are able to save significant amounts of money toward future long-term care expenses, IMAs would improve the quality of life for persons in their later years. Persons would be able to exercise better control over the choice of care they received and retain the dignity that comes with taking responsibility for fulfilling one's own needs.
Strengthening the Family Unit. Freedom from financial stresses and the ability to maintain independence will help preserve the bonds between the individual and adult children.
Assuring System-wide Efficiency. IMA proposals that permit savings to be spent on either nursing home or home and community care services would encourage individuals to use less intensive, lower cost services, thus diminishing the current bias towards institutional care. The fact that individuals can choose their provider would work towards increasing competition in the market place and development of efficient providers.
Provision of Financial Security. As indicated by the earlier discussion, even in an IMA, it is difficult to save sufficient funds to cover long nursing home stays. Thus, IMA options tend to protect persons with minimal-to-moderate long-term care needs and leave vulnerable those persons with above average long-term care costs. Proposals to combine IMAs with risk-pooling approaches (primarily insurance) are directed at remedying this imbalance.
Containment of Public Expenditures. The impacts of long-term care IMAs on public programs would be two-fold: The tax shelter would reduce Treasury revenues, thereby impacting other Federal and State programs to some degree. However, the sheltered funds are available to pay for long-term care, possibly reducing the need for Medicaid funds to be used. As discussed in the later special analysis, Section D, the projected savings in Medicaid expenditures is modest.
The Public Role in Stimulating Growth
The review included in this section suggests that pure IMA approaches to directly financing long-term care are likely to be limited in effectiveness and efficiency. The inherent target inefficiency of individual tax shelter approaches for future nursing home care would probably make the cost much greater than the gain. However, when savings are combined with risk-pooling approaches, such as insurance, it is possible that a much greater target efficiency can be obtained. On these grounds, approaches that encourage tax favored savings for long-term care insurance may well be worth considering. A variety of such plans, linking the IMA concept to long-term care insurance, are discussed in the Special Analysis, Section D.
2. Freestanding Long-Term Care Insurance
Definition
Broadly defined, freestanding long-term care insurance is insurance that provides payment for chronic care in an institution, in the community, or in an individual's residence when the policy holder is not constrained to use a particular provider system.
Two important features are implicit in this definition:
The care covered by the policy is for chronic illness rather than acute illness or post-acute recovery. The benefits address the need for personal assistance with basic activities of daily living (often termed intermediate or custodial care) in addition to skilled nursing and therapeutic services.
The care covered may be needed for an extended period of time, often for the remainder of a person's lifetime, although use may be intermittent.
These key features distinguish long-term care insurance from the nursing home and home care benefits in Medicare and medigap insurance, which are intended to cover short-term recuperative or rehabilitative care in association with an acute care episode. The freedom of beneficiaries to select their own providers within general Qualifying guidelines distinguishes this-risk pooling model from others (e.g., social HMOs and CCRCs), which typically require the use of specified providers.
The Current Experience and Research Findings
The market for freestanding long-term care insurance is only beginning to receive serious attention. Until recently, insurance was generally perceived as not workable for long-term care.
A variety of barriers has inhibited development of this form of insurance (Meiners, 1983). Concern that policies would be bought disproportionately by those most likely to need care and that the availability of coverage might encourage its use, along with the custodial nature of much long-term care, have made insurers hesitant to enter the market. Questions of affordability and marketability also arise, considering the high costs of nursing home care and the widespread failure of older persons to appreciate the financial risks they face for long-term care needs.
The State regulatory climate in which insurers must operate varies significantly from State to State, placing insurance companies in the difficult position of having to develop multiple, State-specific marketing strategies. Some State regulators are relatively uninformed about the differences between the newer long-term care policies and more traditional insurance products, while others have established highly specific, very restrictive regulations which govern the structure, coverage, and other details of long-term care insurance products which may be offered in their State.
Medicaid, which has become a major payor for long-term care nursing home expenses even among middle-class elderly, is also thought by some, perhaps incorrectly, to discourage development of the market. (Chapter 4 of this report discusses in greater detail the relationship of Medicaid policies to private financing options.)
Another barrier has been a lack of data and analysis to clarify the issues involved in insuring long-term care. Until recently, little information has been available on the characteristics of persons receiving long -term care and patterns of service use. While better data is now available on the use of community services, there are still major gaps in the information base on nursing home use and related expenditures.
While many of these barriers remain significant concerns today, there is evidence that the climate for long-term care insurance is improving.
In the past few years, research results have supported the case for development of long-tern care insurance (Meiners, 1983, ICF, Inc., 1985), and an increasing number of insurers are actively involved in selling such coverage (Meiners, 1984; Lane, 1986). Data have become available to examine alternative prototype benefits (Meiners and Trapnell, 1984; Meiners, 1985; NAIC, 1986) and interest among consumers has increased (Meiners and Tave, 1984; Brickfield, 1985). Although the market is still in its infancy, these factors have encouraged a more positive attitude about the feasibility of a private market for long-term care insurance.
The Current Market. According to the American Health Care Association, as many as 25 long-term care insurance products are now being sold, and many of these products have entered the market in the past year (Lane, 1986). Available policies offer mostly nursing home benefits. Estimates of the total number of policies sold range from 50,000 to 300,000.
Several factors make it difficult to get accurate, up-to-date information on market development:
Because the market is still at an early stage of development, policies are subject to rapid adjustments and revisions which are difficult to track.
Insurance is regulated at the State level. However, State approval of a product does not necessarily mean that a company is actively selling that product. A company may have sought approval in order to lay the groundwork for a long-term care policy it thinks it may wish to sell at a later date; policies are sometimes approved before a company's agent network is in place and before the company is ready to promote its product; and, according to some reports, a company may be only nominally offering a long-term care product (usually at very high cost) because the State requires them to do so to be eligible to sell other types of insurance in the State.
Most long-term care policies have been sold on an individual basis. Group marketing has been very limited. The minimal marketing to groups that has been done typically has involved sales on an individual basis to members of groups such as churches, associations of retired persons or credit unions. Employment-based groups have not yet been prominent in this market.
Until recently, most of the long-term care insurers were small companies such as United Equitable and Fireman's Fund, which have marketed long-term care insurance for roughly a decade. More recently, however, several larger companies have entered the market. Some of the newer entries include AIG, Aetna, Metropolitan Life and Prudential. Other companies that reportedly are involved in developmental efforts include All State, CIGNA, Travelers, John Hancock, Safeco, and Mony (Lane, 1986). The Blue Cross Association is also actively assisting its plan members with research and actuarial analysis of alternative approaches.
Appendix 2 of this report, Features and Premiums for Long-Term Care Insurance Policies, shows the range of features and premium structures of long-term care insurance policies identified by the National Center for Health Services Research (Meiners, 1984). A more up-to-date comparison is being compiled by the National Association of Insurance Commissioners (NAIC) and should be available by the end of 1986.
Specific features of the available long-term care insurance products differ but there are common aspects:
Policies focus on nursing home care at the skilled and intermediate level. Some offer custodial and home health care benefits, but usually such benefits are more limited in their length of coverage and in the amount paid. Sometimes custodial and home care benefits require selection of an optional rider.
Benefits are structured as indemnity plans, paying fixed amounts per day, and have waiting periods from 0-100 days before benefits begin and a coverage period of 2-6 years.
Insurers use a variety of techniques to control or limit risk, including:
Use of specific service definitions to determine benefit amount.
Prior hospitalization requirements (usually 3 days), together with stipulations that the covered illness or injury must be the same that caused the hospital stay.
Requiring physicians to recommend and review the continuing need for care.
Screening of sales for pre-existing health conditions and prior hospital or nursing home stays.
Exceptions to coverage for such items as mental disorders without demonstrable organic cause (which might have the effect of excluding Alzheimer's disease.)
Providing for the possibility of premium adjustments.
Not providing a guarantee of renewability.
The premiums for long-term care policies vary by age, usual with the rate fixed at the time of purchase. Fixed rate policies require some accumulation of reserves to cover the higher risk as people age. A few policies are structured as term policies in which the premium increases every year to reflect the increasing risk.
Most of the earliest products were designed to be sold to people who were already at retirement age, with some products marketed to people in their eighties. New and revised products have expanded marketing to earlier age groups, with greater interest in pre-retirement purchasers. Anecdotal evidence, however, suggests that many of the initial sales are to people in their mid to late 70's (Phillips, 1984).
Actual premium rates vary widely among products depending on the age at time of purchase, the features of the policy, the actuarial assumptions underlying the marketing strategy, and the overhead charged by the insurer. A recent review of several of the available products published in Money magazine (March, 1986) indicated that a 65 year old purchaser could pay from $174 to $1,451 a year for policies that cover skilled and custodial care (Topolnicki, 1986). By age 75, the range for the same products is $252 to $3,244.
The wide range of premiums suggests a lack of standardization and the need for consumers to be well informed. Based on questions raised in the Money magazine article, the following analysis was produced for this report. It conveys the complexity of the situation for consumers about available long-term care insurance policies:
Is the whole spectrum of nursing care covered? Personal assistance with basic activities of daily living that do not have to be performed by highly trained nursing personnel, usually referred to as custodial care, is frequently not covered; policies are often limited to skilled or intermediate level care.
How generous is the daily benefit? Consumers should be aware of the cost of care in their area. A $50 per day benefit in a $60 per day nursing home involves cost-sharing by the beneficiary of 17 percent. The benefits are typically not indexed for cost increases, so inflation will erode the purchasing power over time.
How long do benefits last? About eighty percent of all nursing home stays that start at age 65 and older last less than three years, while 90 percent last less than five years. Accordingly, policies of comparable length could be expected to protect consumers against the risk of all except an extraordinarily long stay. Some policies are much more limited in their coverage of custodial care than skilled care, although it is more likely that custodial care will be needed for an extended period.
Do the premiums escalate over time? Most policies fix the premium at the time of purchase, implicitly requiring overpayment in the early years to compensate for underpayment in later years when the risk is higher.
When do benefits begin? Often insurers offer a choice of "elimination periods" (e.g., 20 days or 100 days), during which the insured must pay for their own care. The longer the elimination period, the lower the premium, because 30 to 50 percent of nursing home patients have short stays. Elimination periods are used by insurers to control insurance-induced demand (that is, demand for benefits that would not arise in the absence of insurance coverage).
Do benefits hinge upon prior hospitalization? Insurers frequently use a prior hospitalization requirement to limit coverage to medically related conditions and to control induced demand. Such screens can significantly limit the number of people who collect benefits.
Are any illnesses or injuries excluded from coverage? Some policies exclude coverage of mental conditions unless there is evidence of an organic cause. This exclusion may prevent coverage in the case of Alzheimer's disease if the criterion is strictly enforced, because while many Alzheimer's patients need long-term care, the organic nature of the disease cannot be verified until after death.
What are the restrictions on preexisting conditions? Waiting periods for medical conditions diagnosed prior to the purchase of the insurance range from 90 days to 1 year.
Are home health care services covered? Insurers have been reluctant to offer home and community care benefits for personal-care needs because they do not have a reliable way to control insurance-induced demand. A few, however, have begun to offer such benefits, frequently with limitations such as a requirement that the beneficiary must first be institutionalized. This approach could relieve the incentive to remain in the nursing home simply because the bills are paid there but not in the home. In practice, most insurers offer home care benefits only after an extended nursing home stay, but few patients requiring an extended nursing home stay are discharged back to the community.
Strengths of the Freestanding Long-Term Care Insurance Mechanism
Freestanding long-term care insurance has captured much of the initial interest in the insurability of long-term care. This approach to risk pooling has the following strengths:
By focusing primarily on the nursing home risk, the freestanding products address the major cause of catastrophic health care expenses among the elderly.
It is affordable to many individuals who wish to take personal responsibility for their own long-term care expenses.
A freestanding type of product, by focusing on the long-term care risk alone, simplifies some complexities involved in identifying the insurable risk.
Policies can be marketed as a new product rather than a modified Medicare supplement policy that must compete against the cheaper medigap policies, which about two-thirds of the elderly already own. However, as discussed later, there is a potential market for combined long-term care/medigap policies that may provide marketing advantages.
In addition to providing protection of personal income and assets, the freestanding products help beneficiaries gain access to nursing homes and maintain their status as private-pay patients. The limited supply of nursing home beds tends to limit access for patients who enter nursing homes on Medicaid and for those who quickly spend-down to Medicaid.
The insurance products have the potential to relieve some of the pressure on Medicaid by slowing or eliminating the spend-down process for insured persons.
A larger private pay clientele will relieve nursing homes of some of the administrative burden and reimbursement uncertainty associated with Medicaid, possibly encouraging them to offer patients preferred provider arrangements that help keep costs down.
Long-term care insurance is a new line of business for insurers that has substantial growth potential.
Weaknesses of the Long-Term Care Insurance Mechanism
The freestanding approach to long-term care insurance also has weaknesses:
By focusing primarily on the nursing home risk, the freestanding products perpetuate the institutional orientation that prevails in our public programs for long-term care. This focus also complicates marketing because potential purchasers generally prefer home care to nursing home care.
Often the personal-care benefits (in the nursing home or at home) are more limited in duration and dollar payout than the skilled-care benefits, even though the typical long-term care patient needs more of the lower level of care benefits.
Separating long-term care from acute care benefits reduces the opportunities and incentives to manage care across the continuum of need. This may result in higher overall expenses, because lower-cost chronic care services are less likely to be substituted for higher-cost acute care services. Combined long-term care/medigap policies may lessen this potential weakness.
Marketing two or more separate products to the elderly, rather than one merged product, increases the chances for confusing overlaps in benefits and duplications in sales efforts and expenses.
Marketing on an individual basis rather than to groups also makes the freestanding products more expensive. In addition, group sales can reduce the potential for adverse selection.
Because freestanding products typically pay a fixed amount per day, with no adjustment for cost increases, benefits can be significantly eroded by inflation or cost-increasing changes in technology.
Nursing homes might tend to shift more toward private-pay patients, making it more difficult for the elderly poor to gain access to care.
The freestanding products do not provide complete catastrophic insurance protection even for nursing home care.
At present, premium levels for the more complete coverage are such that only a relatively small portion of the current elderly population can afford the freestanding products.
What is the market potential for long-term care insurance?
Little is known about the market potential for long-term care insurance. However, research suggests that there is substantial room for growth. Key considerations of market growth are affordability and marketability.
Affordability. One study, using income cut-offs of $10,000 for individuals and $15,000 for couples, estimated that about 7 million people over age 65 (about one-fourth of elderly persons) could have afforded long-term care protection in 1980 (Meiners, 1983). Another analysis estimated that there were 4.7 million older persons for whom a standard annual premium would be less than 5 percent of cash family income in 1980 and 10.1 million older persons for whom a premium would be less than 10 percent (ICF, 1985).
Several studies have shown that cash income substantially underestimates the elderly's real income potential, which tends to be clustered in non-liquid assets such as home equity (Moon, 1983; Meiners, 1983; Winklevoss and Powell, 1984; Jacobs and Weissert, 1984; ICF, 1985). Linking strategies such as home equity conversion or IRAs to' insurance programs may enable more elderly to afford long-term care insurance with discretionary income.
In addition, the likely trends in the sources of income of the elderly also will provide an improved future situation, In constant dollars, the proportion of elderly families with incomes of more than $15,000 is projected to grow from 23 percent in 1985 to 35 percent in 1995, 52 percent in the year 2005, and 59 percent in the year 2015 (ICF, 1985).
Marketability. Product development is underway to overcome some of the weaknesses previously noted, as well as to make long-term care insurance more appealing. Further, increased recognition of long-term care as an insurable risk has encouraged the development of new linkages to create more comprehensive coverages that provide the opportunity of managed care and offsetting risks. Meiners and Greenberg (1986) suggest the following examples of linkages that may serve to broaden the market appeal of long-term care insurance.
Medicare “Super Supplements" -- Medicare supplemental policies that include long-term care benefits create the opportunity to coordinate benefits and perhaps encourage substitution of lower cost, chronic care services for higher cost, acute care services. There could also be economies in marketing one product rather than two and the combination could simplify the decisionmaking process for the consumer. For current owners of medigap policies, a merged product makes a great deal of sense, particularly if it can be purchased at a cost that is less than the two products sold separately. Also, a lower cost combination which trades some of the first-dollar acute care coverage for long-term care benefits might help expand the market.
One example of an expanded Medicare supplement policy is marketed by Blue Cross of Southern California. It includes several home health services that are designed to cover long-term personal care needs beyond what Medicare allows. The policy operates as a HMO-type plan with all services authorized by the physicians in the participating medical group, which allows for careful case management.
Medicare-HMOs -- Possibly foreshadowing the potential interest of Medicare-HMOs in adding long-term care benefits, Group Health Cooperative of Puget Sound, Washington, is responding to an unexpectedly large outpouring of member interest in long-term care insurance through a joint venture with Metropolitan Life to offer long-term care insurance on a test basis. The product being contemplated is an indemnity product, paying a fixed amount per day for nursing home care and a percentage of that amount for home and community benefits. It will focus on catastrophic cost but allow for price sensitivity by offering a choice of elimination periods (30-90 days) and length of coverage (3-5 years). It will be underwritten to avoid adverse selection.
An important feature is that the long-term care insurance package will be integrated with the traditional acute care benefits. This will permit lower-cost home and community services to be substituted for hospital and nursing home care where appropriate, with access to services controlled by a case management system. For selected services, Group Health will use its group purchasing power to negotiate preferred provider discounts for its members.
Under current regulations Medicare-HMOs have a strong negative incentive to offer long-term care benefits if, as might be expected, such benefits would attract the participation of the chronically-impaired elderly. This is because the current Medicare reimbursement formula does not reflect characteristics associated with chronic care needs. The Metropolitan Life-Group Health venture can price benefits appropriately by offering insurance as a separate package.
Medicare-Vouchers -- Opportunities for integrating long-term and acute care insurance packages would be enhanced by legislation recently introduced in the Senate to broaden the type of health plans that would qualify as alternatives to traditional Medicare coverage. The legislation is intended to give Medicare beneficiaries more flexibility in choosing insurance protection, in particular to take advantage of merging their Medicare benefits directly with health plans they participated in as employees.
As the Medicare voucher plan develops, private insurers could consider including long-term care benefits in the insurance packages offered. Researchers at Northwestern University studying consumer preferences for various vouchers found strong interest in plans covering custodial long-term care at home or in a nursing home (LaTour, Friedman and Hughes, 1986).
Retirement Community Reinsurance -- Relatively few continuing care retirement communities (CCRCs) offer an unlimited chronic care guarantee. Often a more limited guarantee is related to the difficulties of insuring the long-term care risk, especially with the small pool that most communities represent.
Developers of these communities are aware of difficulties that some communities experienced in meeting their long-term care obligations in the 1970s, and the commitments they are least comfortable with are chronic care guarantees. At the same time, developers recognize the importance of such guarantees to the marketing of CCRCs as a means of assuring a continuum of the services needed by elderly people. Growing interest in long-term care on the part of insurers suggests a possible solution to this dilemma.
Some CCRCs (which are discussed more fully in a later section) are actively exploring joint ventures designed to move responsibility for long-term care coverage to an established insurance company. An example of this is the Metropolitan Life long-term care benefit package recently developed with Williamsburg Landing, a CCRC in Virginia. In the Metropolitan Life-Williamsburg Landing package, benefits are available for all levels of nursing home care at a rate calculated to pay the actual cost. Home care benefits are available as a substitute for nursing home benefits and there is a 60 day waiting period before benefits begin, but no hospital stay is required. Under this arrangement, Metropolitan reserves the right to review the care needed, and the contract is structured to permit readjustments to reflect actual experience.
This type of arrangement eliminates the need for the community to act as its own small insurance company. Further, CCRCs present an opportunity to market long-term care insurance protection on a group basis, with all parties working together in a managed care environment to control the risk.
A variation of the CCRC-insurance link, which provides insurance for continuing care at home, is currently under development by the Health Policy Center at Brandeis University and the Friends for the Aging in Philadelphia and is expected to be available by mid-1986.
Under this concept, participants join a risk pool that has a managed care component, paying membership fees either directly from income and savings or from home equity. Insurance would protect members against catastrophic costs associated with long-term care while the case management component would ensure access to an efficient and comprehensive system of care.
Unlike traditional CCRCs, enrollees would not be required to move to a campus setting. By eliminating the housing costs, retirement security would be achieved at a lower cost, making it affordable to more people. In addition, this alternative may appeal to persons who prefer to remain in their home.
Combined Life and Long-Term Care Insurance -- Packaging life insurance with long-term care insurance is particularly appealing because it allows for the balancing of different lifetime risks (ICF, 1985). As people get to retirement age their need for protection from premature death declines compared to their need for protection against the cost of unexpected long-term care. Combining the two benefits encourages the purchase of long-term care protection at younger ages by a broad range of individuals.
Combining long-term care insurance with casualty or disability insurance has also been suggested as a way to help focus consumer attention on the long-term care risk. For example, the benefits in the typical freestanding policy could be marketed as a rider to home insurance as a way to pay extra living expenses for a person whose spouse needs to be institutionalized (Ericson, 1985).
The Public Role in Encouraging the Long-Term Care Insurance Market
The market potential for long-term care insurance can be improved by public policy actions in a number of important areas.
Consumer Education and Protection. Recent surveys have shown that consumers generally do not recognize their need for long-term care protection (Brickfield, 1985). Typically, they have not had a reason to think about the risk or have chosen to deny it exists. To the extent that the risk is recognized, most elderly persons incorrectly assume that Medicare or medigap policies will cover their needs.
States can and have taken the lead in helping elderly consumers select insurance protection. One program of note is the Senior Health Insurance Benefit Advisory (SHIBA) program in the State of Washington. This eight year old program is operated by the insurance commissioner's office, which recruits, trains, and supports volunteers at the local level to help elderly consumers. California has recently initiated a similar program and a number of other States are considering programs.
State Regulatory Approaches. State regulation is often cited by insurance companies as one of the potential barriers to development. Freestanding long-term care insurance is essentially a hybrid product combining elements of life insurance, disability insurance, and health insurance. While it is often grouped with medigap insurance for the purposes of regulation, it does not fit well with current guidelines for Medicare supplements.
Confusion about what long-term care insurance is or should be has prompted an aggressive approach to consumer protection in some States. Standards relating to the minimum package of benefits policies must include in order to be marketed is a frequently-used device for protecting consumers.
Though this approach may be well intended, it can backfire. The case of Wisconsin is illustrative. The Wisconsin State Insurance Commissioner's Office did a careful evaluation of the difficulties involved in assuring that the protection offered in many nursing home policies would be meaningful. After this review, Wisconsin established a broad set of minimum benefit standards, requiring insurance policies to cover custodial as well as skilled and intermediate care. Unfortunately, this action effectively eliminated the sale of such policies in the state (Meiners, 1983).
Although Wisconsin is currently in the process of considering revisions to its original standards, in the hope of creating an environment more conducive to product development, other States are considering implementing their own standards containing similar provisions requiring extensive benefit packages.
Because long-term care insurance is new, States are clearly faced with the difficulty of regulating an unfamiliar product in their attempts to protect consumers. To help clarify the issues, the National Association of Insurance Commissioners is conducting a study of long-term care insurance to serve as the basis for model laws and regulations (National Association of Insurance Commissioners, 1986) Other studies underway include a survey by the Massachusetts Insurance Commissioners Office which addresses possible trade-offs to be dealt with by regulators in helping to keep long-term care insurers solvent while also assuring that consumers are purchasing meaningful benefits (Kirsch and Robertson, 1985).
Medicaid as a Barrier. It has been asserted that the availability of Medicaid may act as a disincentive to the purchase of long-term care insurance. The issue has two related concerns: that because Medicaid is available as a "safety net," people will not give serious attention to long-term care insurance; and, that people with resources will 'game' the system by passing their assets along to others or protecting them in a trust, thus becoming eligible for Medicaid benefits.
A recent critique of these issues, however, concludes that many of these concerns can be refuted (Doty, 1986b). At the current time people are probably equally uninformed about their opportunities to use Medicaid as they are about the risk they face of having catastrophic long-term care expenses. As consumers become more educated about their risk of needing long-term care, they are likely to view long-term care insurance at least as appealing as the complexities, costs, and uncertainties involved in asset divestiture. Nonetheless, examination of Medicaid estate recovery provisions suggests that there is substantial room for States to reinforce the incentives for individuals to choose an insurance option. (A more complete discussion of Medicaid issues is provided in Chapter 4 of this report.)
The Government as Reinsurer. One way for the government to foster private market development of long-term care insurance is to establish a government-insured secondary market for long-term care policies. In some senses, Medicaid already serves a reinsurance role for individuals although it does not prevent financial loss.
Reinsurance for current long-term care insurance products would primarily protect insurance companies against the risk that the insurer's actual risk pool is more disabled than had been estimated in establishing the premiums.
Until recently, the general attitude in the insurance industry has been that reinsurance, whether provided by government or privately, is not a major consideration in their decision to enter the long-term market.
Because the insurance specifications, marketing, and claims administration tend to be structured narrowly, the need for reinsurance has been perceived to be small.
If insurance specifications and other factors were broadened, reinsurance might become more of an issue. For example, if insurers were to offer policies which pay for specified services regardless of cost, or offer policies with minimal health status screening, the need for reinsurance would be greater. In fact, even with the indemnity (fixed benefit) products, interest in reinsurance is now emerging as a way to overcome insurer hesitancy about rapid market expansion.
With the growing recognition among consumers about the risk of long-term care and the availability of insurance to protect against that risk, sales are occurring at a more rapid rate than had been anticipated for some insurers, often exceeding target sales goals. This has caused slowing of sales efforts to guard against overextending the business beyond manageable company limits. Reinsurance may be a way to reduce such limits to market expansion.
3. Social Health Maintenance organizations and Other Capitated Mechanisms
Definition
A social health maintenance organization (SHMO) is a managed system of health and long-term care services. A single provider entity assumes responsibility for a full range of acute inpatient, ambulatory, rehabilitative, extended care, home health, and personal care services, under a fixed budget that is prospectively determined. In short, a SHMO extends the customary health maintenance organization (HMO) concept to cover long-term care services.
The Current Experience and Research Findings
At present, SHMOs are very much in their infancy. In the early 1980s, the Health Care Financing Administration (HCFA) and private foundations sponsored a project at Brandeis University to develop the SHMO concept. This planning activity led to initiation of demonstration projects at four sites. The projects, which began operations in March 1985, are phasing in enrollment and will gradually absorb more risk over a three and one-half year period.
The SHMO demonstrations include a number of innovative features:
Voluntary enrollment will include a broad cross-section of the elderly population. Development of waiting lists for certain types of persons (queuing) may be necessary to prevent adverse selection.
Pooled financing comes from Medicare, Medicaid, and private sources.
Medicaid recipients, including those at risk of institutionalization, are included in the project.
Health and social services are consolidated under central case management in a single delivery system.
All types of services, including long-term care services, are provided to beneficiaries within capitated rates. Long-term care services are available, however, only up to specific limits.
The four sites now in operation were selected to represent different organizational possibilities:
Kaiser-Portland Health Plan, Oregon (Medicare Plus II): an established HMO that will develop and/or contract for long-term and community care services.
Metropolitan Jewish Geriatric Center, Brooklyn, New York (Elderplan): a community-based long-term care agency contracting with a newly formed gerontological medical group and community hospitals for medical services.
Ebenezer Society-Group Health Plan, Minneapolis, Minnesota (Seniors Plus): a long-term care agency in partnership with an established HMO for medical services.
Senior Care Action Network, Long Beach, California (SCAN Health Plan): a community case management brokerage agency that contracts with a large group practice and a community hospital.
The four demonstration projects, while differing in organizational arrangements, are similar in overall design, including such major elements as benefit packages, financing arrangements, enrollment procedures, and so forth. Major common elements are as follows:
Benefit package--The benefit package used in the demonstration includes the total Medicare benefit package, plus additional long-term care and other supplemental benefits. The long-term care benefits include additional skilled nursing facility care or equivalent intermediate care facility services; in-home support services, such as homemaker, personal health aide, medical transportation, medical day treatment, or respite care; and coordination of other services such as additional transportation needs. Each site covers a different package of these long-term care services. Copayments are required, and benefits are subject to annual dollar maximums which range from $5,000 to $12,000.
Financing--Reimbursement from Medicare (for all enrollees), Medicaid (for eligibles), and private enrollees (for non-Medicaid eligibles) will be pooled by the SHMOs. Medicare pays SHMOs according to the cost of Medicare services if purchased from fee-for-service providers. Medicaid financing arrangements vary in each State. Private enrollee payments will be made through monthly premiums in the $29 to $40 range.
Risk sharing--The SHMO model is a major departure from previous HMO experience, and consequently there is insufficient data (e.g., about costs, selection risk, and provider performance) to support reliable initial cost estimates. HCFA and the States involved have therefore agreed to share in the risk during the first two years of the demonstration. Only in the third year will all sites be-at full risk.
Enrollment--Ideally, enrollment would be on a first-come, first-served basis. However, older persons with current chronic care needs may be disproportionately attracted to the plans. To avoid this problem, the demonstrations sites are permitted to queue applicants based on their level of functional disability and/or personal care needs. Plans will serve high-risk applicants; the queuing procedure is intended to permit each plan to enroll a membership with a distribution of expected chronic care needs comparable to that of the entire population in the local area.
Legal authority and waiver of program requirements--The demonstrations were mandated by Section 2355 of the Deficit Reduction Act of 1984. They are conducted under authority of various demonstration provisions of the Social Security Act. Operation of the demonstrations requires waiver of various legal and regulatory requirements of Medicare and Medicaid. Waived requirements relate to reimbursement methods; coverage limitations; statewide availability of services for Medicaid eligibles; comparability of amount, duration, and scope of services for Medicaid eligibles; free choice of providers; and composition of enrollment in HMOs.
Appraisal of HCFA Demonstrations--SHMOs are far from being a regular part of the Medicare and Medicaid programs. They are still highly experimental, and they can only be operated at all by explicit statutory waivers of a large number of existing program requirements. An independent evaluation is being conducted by the University of California at San Francisco, but the final report is not scheduled to be available until the spring of 1990.
Strengths of the SHMO Mechanism
Within the same organization, a SHMO includes acute and long-term care services, and case management applicable to both. This arrangement permits a unified approach to delivery of care and gives enrollees one place to go to obtain services that are otherwise delivered in a fragmented fashion and that may be difficult for individuals with multiple needs to arrange. Case management helps to insure access to appropriate services and controls inappropriate utilization.
A SHMO provides an insurance mechanism for long-term care, pooling risk among plan members.
SHMOs combine financing from various sources, including private financing in the form of copayments and premiums charged to non-Medicaid eligibles.
Prepaid financing gives SHMOs strong incentives for cost-effective service delivery.
Weaknesses of the SHMO Mechanism
In the present demonstrations, coverage of long-term care services is quite limited; the protection falls far short of catastrophic and does not necessarily compare favorably with that afforded by other mechanisms. It remains to be seen whether SHMOs will be able to adequately manage the risks involved to make it possible and attractive to offer more extensive long-term care benefits.
The service-delivery arrangements involved in a SHMO are very complex. Combining providers of both acute and long-term services generally requires coordination of organizations that are likely to be quite different. Any such arrangement takes time and resources to develop; widespread diffusion of SHMOs should not be expected to be quick, even in the best circumstances.
It is unclear whether SHMOs can be developed without some, perhaps considerable, government sponsorship and without considerable revision of Medicare and Medicaid law.
Because SHMOs, like HMOs, involve terminating relationships with providers that may be of long standing, it can be expected that SHMOs suffer somewhat by comparison to other mechanisms that do not require changes in providers.
Assessment
General feasibility and practicality
Attractiveness and marketability -- SHMOs appear able to provide financial protection in a manner that should be attractive to the elderly, but the actual level of enthusiasm for SHMOs is still under test. The on-going demonstrations have been slow in meeting enrollment targets, but the reasons for this interim outcome are not yet clear.
SHMOs appear to have the potential of reaching a large target population. A rapidly-growing fraction of the elderly are in HMOs, and this group should provide a natural market for SHMOs should they become widely available.
The financial protection for long-term care expenses offered by the demonstration SHMOs is distinctly limited. Unless such limits can be increased, the relatively shallow coverage for chronic care needs may put SHMOs at somewhat of a disadvantage in the market, compared, for example, to private long-term care insurance. On the other hand, case management should make them effective gate-keepers for home health services.
Flexibility -- SHMOs have considerable flexibility to tailor services to the needs of individual enrollees. On the other hand, they offer little flexibility in response to individual financial circumstances. At least in the demonstration model, SHMOs provide consumers with little choice of service delivery modes or location.
Administrative ease -- SHMOs are not easy or quick to set up. While future SHMOS may require substantially less lead time than was necessary for the demonstrations, they still require thorough planning and development of an extensive set of arrangements with various providers.
As with any provider, quality of care must be a particular concern, and care must be taken to be sure adequate devices for insuring quality and appropriate access are in place.
Contains public expenditures
As long as public programs do not bear the cost of more extensive service packages than would otherwise be offered, SHMOs should not increase public expenditures. In fact, the case management function should help insure that expensive levels of care for chronic conditions are used only when appropriate, which may help reduce public expenditures by comparison with what they would be in the absence of SHMOs.
Improves quality of life and dignity of the individual
SHMOs should be effective at maintaining and improving the quality of life of enrollees, though continued attention will be needed to insuring quality of care.
Strengthens the family unit
SHMOs, because of the flexibility of their chronic care service package, can tailor services to support family caregiving, thus helping to keep the elderly at home.
Ensures system-wide efficiency and effectiveness
SHMOs have substantial potential for helping promote system-wide efficiency. Case management, a capitated approach, and the extensive nature of the service package should mean that decisions about appropriate services will be made in a comprehensive, coordinated, and efficient fashion.
SHMOs mesh well with Medicare, Medicaid, and the acute care financing system in general.
Related Capitated Mechanisms
It is worth noting that SHMOs are only one way of utilizing prepaid capitated case management mechanisms for long-term care services. In addition to continuing care retirement communities (discussed in the next section), ordinary HMOs may be vehicles for expanded coverage of chronic illness.
As a result of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982, Medicare regulations were changed to allow HMOs to provide prospective reimbursement on a capitated, at-risk basis for services to Medicare beneficiaries. This change has encouraged an increasing number of HMOs to market their care packages to Medicare beneficiaries (Iverson and Polich, 1985). As of December 1985, about 710,000 Medicare enrollees were members of HMOs, including both risk-based contracts and cost-based contracts (Iverson and Polich, 1985).
TEFRA regulations require that if the HMO can provide the Medicare acute care service package at lower cost than their capitated reimbursement, the HMO must use any surplus for extra services or to lower premiums. Either lower premiums or increased services can be viewed as possible incentives for HMOs to consider adding long-term care benefits to their package. Lower premiums could free up resources for purchasing long-term care insurance or other protection, and any added services could be those that address chronic illness. One HMO that plans to offer long-term care insurance to members on a test basis is the Group Health Cooperative of Puget Sound (described in the preceding section on long-term care insurance).
The limitation on this approach is that, in many cases, savings on acute care may not be sufficient to provide more than modest increments of long-term care. Further, there is concern that HMOs may not find this policy attractive, since offering expanded long-term care services may attract a disproportionate number of applicants with high needs for acute care.
As a separate matter, HMOs could also offer group long-term care insurance to their members, by establishing arrangements with insurance companies. One advantage is that such insurance would escape many Federal and State regulatory requirements on HMOs, some of which might interfere with management of the risks faced by HMOs offering chronic care benefits (e.g., HMOs must be open to all applicants regardless of medical condition, but separate insurance can be restricted to individuals meeting medical standards, such as pre-existing condition exclusions).
Further, HMO enrollees may present insurance companies with appropriate groups of potential customers, allowing long-term care insurance to be offered at favorable rates. This approach might also be favorably viewed by insurance companies because HMOs' role as case managers may make them effective partners in controlling induced demand.
4. Continuing Care Retirement Communities
Definition
The continuing care retirement community (CCRC) is a financially self-sufficient residential community for the elderly that offers medical and nursing services in specialized facilities that are typically on the premises. Its distinguishing feature -- and the basis of its existence and operations -- is a lifetime contract between the community and each resident that defines each party's financial and service obligations. The resident pays a lump sum accommodation feel prior to occupancy and a monthly fee thereafter (Cohen, 1980).
As described by Rose (1983), the CCRC generally consists of three components:
Housing units specifically designed for the elderly to permit them to live independently, with features such as guardrails and emergency call systems to help the resident cope with functional disabilities and frailty but without the "institutional" atmosphere characteristic of the old-fashioned "home for the aged."
Dining facilities and auditorium, arts-and-crafts room, game room, library, beauty and barber shop, etc. Typically, residents contract to take at least one meal per day in the dining center and unplanned absence triggers a check to make sure the resident is all right, one of the various low-key protective service features of CCRC living.
A care center encompassing a clinic to meet routine health needs and inpatient facilities (usually encompassing skilled and intermediate level nursing home care and non-medical personal care).
Seen slightly differently, Curran (1983) has defined the CCRC as an "amalgam of four businesses":
Current Experience and Research Findings
Background. The number of continuing care retirement communities in existence is relatively small, with estimates ranging from 300-600 communities housing approximately 100,000 residents (Glenn, 1984) to 1100 communities housing approximately 200,000 residents (Los Angeles Times, 1986). However, the industry is undergoing rapid growth, with an optimistic potential by 1990 estimated to be up to 1,500 more communities, housing a total of 2 percent of the elderly population (more than 500,000 persons) (Williams, 1984; Rose, 1984).
All but a very small percentage are sponsored by nonprofit entities, although approximately one-third of the non-profits are managed under contract by for-profit contract managers (Williams, 1984). In 1983, the average CCRC held 286 residents and had capacity for 59 nursing home beds (Rose, 1984).
Residents of CCRCs on average are 78 years of age at entry. Virtually all CCRCs require that entrants be functionally independent and in relatively good health. Because the entrance fee and monthly service fees are substantial, CCRCs have attracted the middle-class almost exclusively, often former professionals with solid pension incomes.
Specifically, entrance fees range from $15,000 to $175,000--depending, in part, on the size of the residential unit and the extent of the service guarantee--while monthly service fees range from $300 to $2,000 or more (Topolnicki, 1985; Winklevoss and Powell, 1984). However, approaches are being studied to make lifecare arrangements feasible for persons with fewer resources, e.g., the Brandeis "Life-Care at Home" project described earlier in Section 2, Freestanding Long-Term Care Insurance.
Typically, the contract between the CCRC and the resident has provided that upon the death of the resident the entrance fee will vest in the community, regardless of the value of services received. However, an increasing number of CCRCs are offering contracts under which fees may be totally or partially refundable to the resident who leaves or to heirs upon the resident's death. In addition, developers are now experimenting with new types of arrangements, including condominiums and membership plans.
Services. Ordinarily, one of the requirements for admission to a CCRC is that the resident be covered by Medicare and own a medigap insurance policy. Thus, payment for acute care services usually is provided by Medicare and private health insurers (Lane, 1986).
As a consequence nursing hone care is the key service added and guaranteed as part of the basic CCRC arrangement. Typically, CCRC contracts stipulate that residents can move to the nursing or personal care units without an increase in monthly fees.
However, a significant number of CCRCs -- especially the newer ones -- do not guarantee nursing home care for "as long as necessary" within the same fixed monthly fee that all residents pay. Rather, they guarantee care at the monthly rate for a short period of time (10 to 180 days) after which only access to nursing home care is guaranteed. There is an extra charge for the care itself and charges may be increased at any time.
Nearly half of all nursing facilities in CCRCs are Medicaid-certified. Although those CCRCs that guarantee nursing care typically will pay the costs of those who can no longer afford the monthly fee out of a charitable pool, the facilities that only guarantee access to nursing care at extra cost tend to expect those who can no longer afford the extra nursing care charges to apply for Medicaid.
Most CCRCs have their own nursing home facilities within the community. About three-quarters will also admit individuals from outside the CCRC directly into the nursing home, most often on the same paying basis as any other nursing home (Winklevoss and Powell, 1984). A relatively recent but growing variant of the CCRC concept is one in which the CCRC contracts with outside facilities to provide nursing home care to those CCRC members who require it.
Some CCRCs contract with private insurance companies to insure or re-insure the nursing home care required by residents, whether provided in the CCRC's own facilities or in outside nursing homes. This can also be combined with added financial Protection for acute care services. For example, both Metropolitan Life Assurance and Johnson and Higgins in partnership with Provident Life and Accident Insurance are marketing combined "medigap" and long-term care insurance policies to CCRCs. The policy premiums are factored into the CCRC's monthly fee structure.
A few CCRCs contract with health maintenance organizations to provide acute health care services. One CCRC has its long-term care services being provided by an HMO on an experimental basis. So far, the long-term care services being offered are quite limited.
CCRC residents live longer (up to 20 percent longer) and use fewer acute health care services than their peers (Williams, 1984). Also, CCRC residents exhibit higher nursing home admission rates but shorter lengths-of-stay than the general Medicare population. However, it is not certain that these improved outcomes are due to CCRC residence. In part, they may be due to the fact that individuals of higher socioeconomic status (like CCRC residents) tend to have longer and healthier lives than others.
Financing. Many of the early CCRCs offered guaranteed total health care for life to their residents and were known as "life care communities." Due to inflation and high interest rates and poor actuarial estimates, the costs of providing such guaranteed health care greatly exceeded revenues and reserves in a number of such communities and financial problems and bankruptcies resulted.
Although the term "life care community" is still frequently used interchangeably with that of "continuing care retirement communities." the newer CCRCs guarantee a more limited range of health services within the terms of the basic lifetime contract; additional services are billed separately. Table 3-3 (Winklevoss and Powell, 1984) shows the percentage of CCRCs offering various types of services covered under basic fees.
The most common errors in setting up and managing CCRCs include: 1) misjudging number of deaths and transfers to the nursing facility that will occur among residents; 2) failing to maintain reserves adequate enough to cover such misjudgments plus other contingencies such as inflation; and, 3) hesitancy in raising monthly fees to make up for earlier miscalculations (Williams, 1984:3).
To address these and related problems, the American Association of Homes for the Aging (AAHA) (which represents the non-profit CCRC sector) is well into development of a rigorous accreditation process for CCRCs. AAHA is developing quality standards, guidelines for actuarial planning and marketing and feasibility studies, and accreditation programs to safeguard the financial soundness and reputation for quality of the continuing care industry. The process is expected to be adopted by late 1986.
Governmental Activities. Federal legislation has been proposed to define life care centers as well as to provide guidance to the contracts for lifecare. In October 1985, the Real Estate Financing Bill (H.R. 2475) was passed and included provisions which clarified that refundable entrance fees of up to $90,000 were exempt from taxation. In other developments, the pending reauthorization bill for the Federal Trade Commission contains provisions which call for a two-year study of CCRC marketing and contracting practices.
While Federal legislation remains at the proposal stage, about 14 to 16 States have developed lifecare legislation. In general, the definitions of life care centers vary by State. Most but not all of the definitions specify that a residence will be provided; they also specify the age group, and emphasize the need to establish contracts between the communities and their residents.
The agency responsible for implementing lifecare legislation also varies according to the State, although the State Insurance Commission is responsible in most States. In other States, the responsible organizational component may be the Department of Social or Human Resources or the State Office on Aging. Life care centers in Minnesota are regulated under the securities legislation and no particular implementing agency is identified. None of the States with lifecare legislation have identified their Departments of Health as regulatory agencies for life care communities.
Generally, State life care center legislation requires financial disclosure. Arizona also has a recovery clause for life care centers to insure client protection.
The role of State and local health planning agencies in life care communities also varies and is not limited to States with specific life care legislation. Some States have identified specific review requirements for nursing home beds to be built in life care communities, while in others, agencies have developed specific plan development sections covering nursing facilities in life care center (Health Resources and Services Administration, 1986).
Strengths of the CCRC Mechanism
Traditional CCRCs are based on the philosophy that maintaining the independence of residents is critical to their well-being. This philosophy, together with the fact that the CCRC is responsible for providing the resident with most or all of the health care needed, create incentives to provide the lowest cost care possible, in the least restrictive environment.
Those CCRCS which have a full range of health services and nursing home care available provide an opportunity for one provider to manage the resident's care in the most efficient, least costly manner.
Research indicates that CCRC residents live longer and use fewer acute health care services than their peers (Williams, 1984). Studies also indicate that older persons residing in congregate settings (such as a CCRC), which allow them independence and control over their lives, experience a greater sense of well-being and better health than persons living in more restricted settings (Noelker and Harel, 1978). This may be attributable to the benefits of a congregate setting, to initial socioeconomic differences between residents and non-residents, or to the initial selection factors of the CCRC. The frequent social interaction and friendships which evolve in these situations also have been linked to higher self-esteem and better mental health as well as improved health status (Carp, 1977; Fillenbaum, 1986).
One study specifically of lifecare communities (Fillenbaum, 1986) found that lifecare residents had higher functional independence and greater capacity for self-care than persons with comparable health status living in the general community.
In financially stable CCRCs which offer a broad range of health care services, health care costs are more predictable, relieving a source of substantial anxiety and stress for most families. Further, assets beyond the entrance and monthly service fees are protected.
Elderly residents are freed from the many responsibilities of maintaining a home and their families are largely relieved of the burden of direct care-giving and brokering the provision of formal care services.
When nursing home care is located on campus, the trauma and resulting increased morbidity and mortality often associated with relocation from home to unfamiliar surroundings is lessened.
The CCRC may provide those elderly who have weak family supports (e.g., the never-married or childless widows and widowers) with "surrogate families" they would not have developed in a less structured environment.
Weaknesses of the CCRC Mechanism
CCRCs appeal only to older persons who find an age-segregated, congregate living environment to their taste.
Most CCRCs are currently affordable only to middle and upper income elderly. ICF, Inc. (1984) has estimated that only 10-20 percent of older persons can afford CCRC residence. While the Robert Wood Johnson Foundation has funded researchers at Brandeis University to work on CCRC models that would be affordable to a broader spectrum of elderly, these are in the conceptual stage of development.
It is difficult for the average consumer to assess the long-term financial stability of a CCRC that he/she may be considering. Residents in facilities that encounter financial difficulties may face higher fees or in extreme cases, may lose their entire investment. The AAHAIS effort to establish accreditation standards may help provide consumers with an initial screen. Also, the trend of CCRC sponsors to be more conservative in what they promise to provide residents should reduce the incidence of financially troubled CCRCs.
Assessment
Feasibility and Practicality. CCRCs are already in place and serving a population of approximately 100,000 to 200,000 elderly persons. As indicated in the discussion, the population that enters a CCRC has: a) liquid assets of at least $15,000, usually more; b) substantial pensions or assets providing annuities which provide a source of monthly payments; and, c) a desire to live in an age-segregated, congregate residential setting. The last characteristic will always limit the appeal of this option to some degree.
The entry fee requirement could be met by many elderly if they were willing to sell their houses. Meeting the monthly payments, however, presents the greater practical hurdle, although future generations of older persons, on average, are expected to have better pensions than the present generation.
Finally, sponsorship of CCRC arrangements is constrained by the large capital investment required. To date, non-profit CCRCs have had difficulty in securing attractive loans. Bond offerings have been used, but the principal source of capital is the initial entrance payment from prospective residents. The marketing effort required is time-consuming, sometimes taking several years before the accumulation of capital is sufficient to initiate construction.
Improvement of Quality of Life and Dignity of the Individual. Traditionally, CCRC sponsors have been committed philosophically to the principal of maintaining maximum independence for the older person, which has been shown to foster good mental and physical health. A CCRC arrangement may also alleviate anxiety among residents and families which often comes from the unpredictability of health care costs and having to move to unfamiliar surroundings when illness strikes. The sense of financial security experienced by residents probably varies by sponsor; but the risks of the "self-insured" arrangement should be carefully evaluated before signing a contract.
Strengthening of the Family Unit. The impact of CCRCs on intergenerational relationships is unclear. The CCRC may lessen feelings of responsibility among adult children; but it also may reduce stress significantly, thereby freeing both generations to develop and strengthen the emotional bond between them.
Assuring System-wide Efficiency. In theory at least, the CCRC arrangement integrates the provision of acute and long-term care. To the degree that philosophical commitment to maximizing independence among residents is carried out in care provision and to the extent that informal support networks which develop serve to augment formal care provision, less intensive and expensive care should be substituted for the more intense and costly kind wherever that is beneficial for the elderly resident.
Provision of Financial Security. As indicated above, for residents whose confidence in the financial and managerial acumen of those who manage their community is justified, the financial security provided may be high.
Containment of Public Expenditures. The extent to which CCRC arrangements do or could lessen public expenditures is an empirical question yet to be addressed in rigorous fashion. As mentioned earlier, nursing home lengths-of-stay as of 1984 were shorter for CCRC residents than for the Medicare population as a whole; however, the number of admissions was higher, perhaps offsetting any savings from reduced length-of-stay. The pattern of utilization of hospital care is uncertain.
As for Medicaid, it is entirely unknown whether existing CCRC residents would have, if they remained outside of a CCRC, spent-down to Medicaid eligibility or divested their assets in order to qualify for coverage of their long-term nursing home stays.
Even if CCRC residents do become eligible for Medicaid, however, whatever income they do have still is applied toward expenses and Medicaid only picks up the difference between income and charges. The monthly income of a typical resident is likely to be high enough to cover most of the Medicaid charge. Thus, savings to Medicaid are likely to be quite small. If a way is found to make a life-care arrangement feasible for persons with fewer resources, as is being studied in the Brandeis "Life-Care at Home" project mentioned earlier, savings to Medicaid may be considerably greater.
Potential Government Actions to Promote the CCRC Option
Actions that the Federal Government might take to promote consideration of this financing option include funding rigorous research on the health impacts of CCRCs, specifically including those on health status, health care utilization and on subsequent cost implications for Medicaid and Medicare. Along these lines, the Health Care Financing Administration is currently sponsoring a large-scale, three year evaluation of CCRCs, involving 20 CCRCs in four States. CCRC residents will be compared to elderly residents living in the community at large with respect to quality of life and health, service costs, and utilization.
There are a number of other research and survey questions which could be usefully explored, including:
Who manages the care of CCRC residents and what are the respective roles of the CCRC medical director and the resident's personal physician?
Does the greater number of nursing home admissions more than counterbalance any savings in length of stay?
Are Medicare savings on nursing home stays realized or would Medicare benefits typically have "run out" by the time patients are discharged anyway?
How much spend-down to Medicaid eligibility would have occurred among CCRC residents if they had not been in the CCRC? and
To what extent would the income of residents cover nursing home charges to Medicaid, should they become eligible?
The Federal Government also could encourage further development and experimentation with variations of the traditional CCRC arrangement which would make this pooled risk arrangement affordable for a larger population, preferably in partnerships with States or the private sector.
Finally, if there is to be a substantial expansion of CCRCs of any variety, States which restrict the addition of nursing home bed capacity through "certificate of need" legislation or moratoria would need to re-examine these restrictions, with a view toward removing undesirable regulatory barriers.
Relationship of Private Financing Alternatives to Current Systems
Public Programs. As discussed earlier, CCRCs interface well with public programs and appear to neither increase nor decrease public expenditures to a substantial extent.
Private Insurers and the Financial Sector. Most CCRCs, in effect, self-insure. Some have formal contracts with nursing homes and hospitals to admit and provide care for their residents, but even here it appears that the CCRCs assume all liability risks and simply reimburse the contractor on a fee-for-service basis. This could change, however, as major health insurance companies begin to tap the potential of the group market that CCRCs represent, particularly for long-term care insurance. Because most CCRCs require entrants to have medigap coverage, CCRCs probably already function to spur demand for this product, although the current number of CCRC residents is too small to have a major impact on demand.
As indicated earlier, CCRCs typically are capitalized through the sale of memberships and the sale of bonds. In the past, sponsors have been not for-profit entities which have attracted few investors. Within the past three or four years, however, for-profit CCRCs have emerged in pursuit of both profit and tax benefits from real estate depreciation (Williams, 1984:2). Two of the most recent major entrants, ARA and Marriott, are principally food and hotel service providers.
Providers of Long-Term Care. To the extent that new CCRCs contract out for nursing home services rather than build their own, existing nursing homes can be expected to welcome the resulting increased demand for their beds.
For Profit Enterprises. Any fast-paced expansion of the CCRC industry is likely to come from for-profit enterprises with internal capital availability. Non-profit entities, which must raise capital in more expensive and time-consuming ways, are likely to lose some of their market share. Given extensive waiting lists typical of the more established CCRCs, older CCRCs are unlikely to be hurt by the increased presence of more for-profit providers in the near-term; however, non-profit ventures now operating at less than full capacity may be.
Many non-profit sponsors are opposed to the entrance of for-profit sponsors into the field, believing that the profit- maximizing motive presents too many threats to quality of service. This belief, and the "threat" presented by for-profit entry into the field, have provided additional impetus for the efforts of the AARA to establish a private accreditation process.
Consumer and Out-of-Pocket Costs. Under a traditional CCRC arrangement, care costs are largely predictable. This is an important part of their attractiveness to consumers. Costs, of course, are the most predictable in those CCRCs which charge the same monthly fee regardless of whether the resident occupies an apartment unit or a nursing home bed.
An increase in monthly payments over the long-haul is an unpredictable feature of virtually all CCRCs. Most sponsors do guarantee continued residence to residents even if, at some future point, the monthly charge exceeds their income. Often a voluntary “charity” fund is established by residents to cover this exigency.
The resident's responsibility for deductibles and co-insurance is clear if enrollees are well-informed about the Medicare program changes and their private insurance policy provisions. The level of responsibility (total out-of-pocket costs), however, may depend on how well the CCRC operators manage the residents' total cars.
Definition
Home equity conversion (HEC) mechanisms allow a homeowner to convert the equity in a home into cash, without having to move or rake immediate repayment. HEC plans differ from home equity loans, which require the homeowner to begin repayment immediately.
The Current Experience and Research Findings
Most older homeowners have little or no debt outstanding against their homes. The equity held is usually the homeowners most important financial asset, yet it may be difficult to use without having to sell and move. HEC plans allow older persons to tap their home equity for income to meet everyday living expenses or for any other purpose.
In theory, the potential impact of HEC for improving the economic well-being of older homeowners is substantial:
Of the 17.9 million households headed by older persons in 1984, 75 percent were owners (13.4 million households). Of these older homeowners, in 1983 about 83 percent (11.1 million households) owned their homes free of debt (AARP and AOA, 1985).
Among the elderly poor, three out of five households were owner occupied.
Home equity accounts for 70 percent of the total assets held by elderly homeowners. The average home equity for persons age 65 and older was $54,700 in 1984 (U.S. Census Bureau, 1986).
The aggregate net home equity held by the elderly is approximately $700 billion.
The first entrants into the home equity market were savings and loan associations, led by Deering Savings and Loan of Portland, Maine, in 1961. Although other savings and loan institutions and several banks followed suit, the programs declined in the late 1970s. High interest rates were one major factor. Through the 1970s, it is estimated that about 40 pilot programs were tried, most of which have now failed.
The most successful current effort is thought to be that of the American Homestead Mortgage Corporation, a mortgage bank first licensed in the State of New Jersey and now operating in six States. American Homestead has invested an estimated $50 million in six States and has about 450 HEC mortgages.
Although it is very difficult to get accurate figures, analysts indicate that less than 1,000 bank or mortgage company financed HEC mortgages exist in the United States at the present time.
Major Types of HEC Options
Reverse mortgages are the most commonly used type of HEC mechanism and are of two types, fixed term and open term.
Fixed term reverse mortgages provide a series of monthly loan advances to a homeowner, with repayment of all interest and principal deferred until some agreed upon future time (usually 5 to 10 years). The prospective borrower is deemed creditworthy based on the amount of home equity held rather than on income earned.
Under fixed term loan arrangements, monthly loan advances reflect the borrower's equity, but usually do not cover more than 80 percent of the home's value. Interest accrues slowly in the early years, then more rapidly in the later years, which is the opposite of conventional home mortgages. Fixed term reverse mortgages are not appropriate for most Persons who wish to remain in their homes indefinitely, since the homeowner rust repay-the loan or move at the end of the loan period. However, they are potentially ideal for the more elderly cohort who would not expect to stay in their homes longer than the fixed term.
An open-term reverse mortgage was introduced in the early 1980s by the American Homestead Mortgage Corporation mentioned earlier. Known as the Century Plan, or IRMAs (Individual Retirement Mortgage Accounts), the open-term reverse mortgage loan pays monthly cash advances similar to a fixed term mortgage. However, the borrower receives these advances every month until he or she dies, reaches age 100 or moves. There is no obligation to make any repayments as long as the borrower is alive and living in the house.
Under the Century Plan open-term reverse mortgage, two types of interest are charged: the first type "fixed interest" is interest in the conventional sense and is charged on the monthly payment and added to the outstanding loan balance. As of August of 1986, the fixed interest rate being charged was 11.5 percent.
In addition, at the time of the loan's initiation, the borrower agrees to pay "additional interest" equal to a percentage of appreciation in the home's value at the time of repayment. This percentage is equal to the percentage of equity which the homeowner decides to borrow against, i.e., if the reverse mortgage is against 80 percent of the home's value, then 80 percent of the accrued appreciation is the "additional interest" due the lender at repayment. This percentage rate cannot be determined at the time the loan is initiated, but can only be calculated when the home is resold.
If the home has decreased in value or the amount of repayments collected is higher than the value of the house at the time of death, the borrower's estate is required to repay up to 94 percent of the sale price of the house. The Century Plan is described further in the analysis section which follows.
Sale Plans. Another HEC mechanism involves selling the home while retaining occupancy rights. There are two basic forms of sale plans: sale leasebacks and life estates.
In a sale leaseback, the homeowner sells the home to an investor who immediately leases it back to the seller for life. In effect, the seller becomes a renter in the home he or she just sold. The investor can be an individual, a limited partnership or an institution.
The sale leaseback contract spells out all the rights and responsibilities of each party. Typically the new owner takes over all expenses such taxes, repairs, and insurance. The seller gets a down payment plus regular monthly payments through a land contract or deed of trust.
Sale leasebacks involve complex legal and financial arrangements: the key contract provisions are inter-related and open to negotiation; and the long-range costs and benefits of specific transactions are difficult to gauge because of the inherent uncertainty of the homeowner's life expectancy and future repair costs, property tax increases, inflation and property appreciation.
Two-party sale leasebacks have been made on an ad hoc basis for years, especially within families. There is a sale leaseback guide and model documents package for buyers, sellers, and attorneys who wish to negotiate such transactions (see Appendix 3). In the past, many of these transactions were designed to gain tax advantages for a family member-buyer. More recently, however, the IRS has removed some of the tax incentive by requiring that the purchase price paid by the buyer and the rent paid by the seller be a fair market value.
A life estate plan preserves the seller's total ownership rights until death, at which time the home becomes the property of the buying party, which purchased a "remainder interest." This division of ownership rights into two parts is sometimes termed a "split equity" arrangement.
The first and largest plan of this type was developed in Buffalo in the early 1980s as an effort to conserve housing and preserve older neighborhoods. The city incorporated a nonprofit entity called Home Equity Living Plans (HELP) to establish a life estate sale plan program for elderly citizens. It was initially financed through $1.3 million in HUD block grants.
Under the program, the homeowner sells his house to the city. In return, the homeowner receives immediate rehabilitation of the property, a lifetime maintenance contract, payment of all property taxes and either a monthly cash annuity for life or a one-time, lump sum cash payment. Through 1985, the Buffalo HELP program had undertaken about 650 contracts, although it reportedly is no longer accepting new contracts.
Special Purpose Loans. Older homeowners frequently cannot afford the cost of maintaining their homes so that they are safe and comfortable, and are often reluctant to borrow money for these purposes because of an inability to repay installment loans from current income. States have found special purpose loan programs a means for helping the elderly overcome this difficulty. Such programs provide older homeowners with home equity loans that do not have to be repaid until the borrower dies or sells the home.
The proceeds from special loans rust be used for the special purposes designated by the State, such as weatherization or modifications to the house (e.g., ramps, elevators) that make it possible for the older person to continue to live there. A number of local housing agencies have used them effectively and there is a State-financed program in Wisconsin which targets low-income, older homeowners in specific neighborhoods.
In general, special purpose loan programs are administratively simple and can be efficiently delivered through existing loan channels. However, since these programs are designed to cover a "special-purpose" need, the loans made are usually for more modest amounts than other programs.
A variation of the special loan program used in many States establishes home equity payment accounts for older homeowners. In these programs, home equity is used to pay for regular, periodic expenses such as property taxes. The cost of these expenses is charged to an account; while the charges plus interest may be paid at any time, they are not due until the homeowner dies or sells the home.
At present there are programs for tax deferral in the following States: Alaska, California, Colorado, Florida, Georgia, Illinois, Iowa, Massachusetts, New Hampshire, Oregon, Tennessee, Texas, Utah, Virginia, Washington, and Wisconsin. A similar plan of payment for in-home services has been operating for several years in Mushashino, a suburb of Tokyo.
How Reverse Annuity Mortgages Work
Reverse annuity mortgages are complex and intricate financial instruments for both consumers and lenders. The following examples illustrate some of the complexities, costs, benefits and risks of these instruments.
The San Francisco Development Fund. The San Francisco Development Fund assisted in arranging for home equity conversion loans through demonstration programs in the San Francisco area and several other locations. In all, 15 banks and savings and loans participated in the program.
Generally the lending institutions agreed to limit the loan origination fee to 1 percent and to loan up to 80 percent of the value of the house. The borrower had to pay the usual types of fees involved in closing a home loan including an appraisal fee, credit reports, title search, and recording fees.
The total closing costs on an $80,000 loan ($100,000 house) averaged $2,000-2,500, including the loan origination fee. These costs were paid up front at the time of closure. If the individual did not have the funds to pay them, they were made part of the loan.
Interest rates varied among the participating banks but were generally 1 percent below the market rate, although there was no assurance that below market rates would be charged in the future. Generally when interest rates rose above 14 percent (as they did in the 170s) borrowers did not find it advantageous to choose home equity conversion loans. The average loan under the program was paid off in 7 years. No penalty was assessed for early pay-off (Ralya, 1986).
The Century Plan. The Century Plan is an open term reverse mortgage offered by American Homestead Mortgage Corporation. The borrower is not obligated to make any loan repayments until he or she dies, moves or reaches age 100. Interest is charged on the monthly advances and added to the loan balance. The current interest rate is 11.5 percent and does not change during the loan term.
The borrower also agrees to pay "additional interest" at the end of the term equal to some percentage of any appreciation in the home's value during the term of the loan. The percentage of appreciation to be paid to the lender is equal to the percentage of home value a borrower chooses to convert to income.
In addition to the percentage of home equity and appreciation being committed, other factors that influence the amount of the monthly advance are the borrower's age, the fixed rate of interest, the number of borrowers (that is, sole or joint ownership), and the home's value. Monthly advances are fixed throughout the term of the loan; they do not increase or decrease. There is no loan origination fee charged. The borrower is responsible for the usual costs of closing a home loan such as an appraisal, recording fees, termite inspection, etc. These costs may be incorporated into the loan to avoid out of pocket expenses for the borrower.
When the loan term is over (i.e., in most cases, the house is sold), the total cost of the loan can be calculated. This is done by adding all of the fixed interest to all of the additional interest (appreciation) now owed by the borrower. The total amount of interest is then compared to the total amount of all monthly advances made to the home owner. The result is a "combined" interest rate - the annual rate that would have produced the total amount of interest (fixed and additional) now owed by the borrower. In other words, the "combined" interest rate blends the fixed interest and the additional interest into one overall annual percentage rate (APR).
The effective interest rate paid by the borrower depends on how long the borrower lives in the home, and how much the home increases in value during that time. Table 3-4 shows the combined interest rate at various appreciation rates for a 70 year old borrower on loan terms ranging from 3 to 24 years. In this table, it is assumed that the borrower converts 100 percent of home value (and thus appreciation).
Clearly, the combined rate is very high for loans repaid after a short term, even at moderates rates of appreciation. For example, a 70 year old borrower who repays the loan after three years in which the home value increases at 5 percent per year would pay a combined annual interest rate of 50.4 percent. (If the property appreciates at only 3 percent each year, the effective rate would still be very substantial - 38 percent per year).
The combined interest rate goes down as the term of the loan gets longer, and it is smaller when the appreciation rate is lower. The combined interest rate actually drops below the fixed interest in certain circumstances. Because the combined interest rate cannot be known in advance, borrowers can only evaluate the general pattern of costs.
The general pattern includes the following elements:
Short term loans are very expensive, except when there is virtually no increase in property value.
When the loan term equals the borrower's life expectancy and the annual average appreciation rate is 5 percent, the result is a combined interest rate which ranges from 13 percent to 16 percent depending on the age of the borrower.
When the loan term exceeds the borrower's life expectancy and the appreciation rate falls below 5 percent, the result is combined interest rate below conventional long-term, fixed-rate mortgage rates, and in some cases below any market rate of interest (National Center for Home Equity Conversion, 1984).
Analysis of the Potential of HEC Mechanisms
Annuities produced by home equity conversion plans are likely to pay out in increments over extended periods of time. Thus, home equity conversion plans are generally not suitable to pay for extended nursing home care directly, which averages $22-000 per year. The following discussion focuses therefore, on the potential of home equity conversion plans for the purchase of long-term care insurance or for the direct purchase of home care.
ICF's 1985 analysis concluded that amounts available from home equity conversion do not increase the income available to elderly households sufficiently to generate substantial increases in the percentages of elderly who could afford to purchase long-term care insurance. ICF assessed the potential marginal contribution of home equity conversion to the affordability of long-term care insurance. They first ascertained what percentage of elderly families could pay the premium for the model long-term care policy ($450 per person, per year, in 1980 dollars) with less than 10 percent, and then with less than 5 percent, of their current cash income. The ICF researchers then added the income derived from home equity and recalculated these percentages.
At best, under the four different reverse annuity mortgages plans ICF simulated, up to 3 percent more married couples could purchase long-term care insurance with less than 5 percent of their income, while up to 4 percent more single individuals could purchase long-term care insurance after home equity conversion. At best, under four different sale/leaseback plan options analyzed, up to 5 percent more married couples and up to 7 percent more singles could afford to purchase long-term care insurance with less than 5 percent of their income, following home equity conversion.
In contrast to the ICF analysis, Jacobs (1985) concluded, based on an earlier analysis (Jacobs and Weissert, 1984) that the potential impact of home equity conversion on the affordability of long-term care insurance was quite favorable.
Rather than focus, as ICF did, on only the marginal contribution of HECs, Jacobs suggests asking instead how many elderly homeowners could use some of their home equity payments to cover the insurance premium without having to spend any of their current cash income. This approach more realistically reflects how an elderly person might view affordability, although it probably overvalues the role of HECs for the financially better-off elderly. (In contrast ICF's analysis probably undervalues the potential usefulness of HECs for those who are less well off).
According to Jacobs and Weissert's analysis of the 1983 Annual Housing Survey data, using American Homestead's Century Plan as the model home equity conversion instrument, approximately 5.1 million homeowners could pay for long-term care insurance solely with their home equity payments without having to use other income. Counting spouses over age 64, the number of elderly people thus covered under long-term care insurance would come to approximately 7.2 million or 28 percent of the community resident population. Jacobs further notes that, of this group, 4.5 million would need to use less than one half of their home equity loan to pay for the model Long term care insurance plan (like ICF, Jacobs and Weissert use the existing Fireman's Fund policy as their prototype for purposes of simulation).
Since the older the homeowner, the higher the annual reverse mortgage payments would be, 54 percent of the elderly aged 75-79 and 74 percent of the elderly 80 or older would receive at least $2,000 from a home equity conversion instrument. Indeed, almost one third of the elderly 80 or older would receive $5,000 or more annually from such a plan.
Moreover, for the older cohorts, it would be possible to take out a fixed term loan for a fairly short period without any substantial probability that the owners would outlive their equity, further boosting payment rates. For example, for-low income singles over 75 (defined as persons with income less than 150 percent of the official poverty line), the median annual payment from a five year fixed term reverse mortgage would be $3,900.
This suggests the potential advantages of the elderly waiting until they actually have a high level of need for long-term care services before "cashing in" home equity and then using the income generated to pay directly for home based services as an alternative to institutional placement.
The question then becomes: would payment rates at these levels be sufficient to cover the direct costs of home care?
Preliminary analyses by Korbin Liu, Kenneth Manton, and Barbara Liu (1985) of out-of-pocket costs for home care currently being paid by disabled elderly living in the community indicate that, at current prices, these HEC payment levels would be sufficient to cover the costs of home care for large numbers of such disabled elderly, including many of those currently living in the community whose characteristics and care needs indicate high risk for nursing home entry.
Data show that among the disabled elderly living in the community paying for care, only 25 percent paid more than $135 per month out-of-pocket ($1,610 per year) for ADL assistance and only 10 percent paid more than $400 per month ($4800 per year). The median monthly cost of home care for persons with four ADLs (Activities of Daily Living) who were receiving all their care from paid providers was $183 monthly or $2096 annually. Nursing services are more expensive, but these are used by less than 25 percent of elderly disabled living in the community who pay for care and, of these private pay nursing services users, only 25 percent spent more than $400 monthly on these services.
In sum, while home equity payment alone would be unlikely to cover the cost of intensive home nursing services, the vast majority of elderly persons living in the community and currently paying for home care are using much less expensive personal care and homemaker chore services. These services probably could be financed in large measure by home equity conversion payments.
Strengths of Home Equity Conversion Mechanisms
HEC mechanisms provide a means for the elderly to meet some of their long-term care needs (or protect against the risk) by using what is for many their most valuable asset. Buying long-term care insurance or direct payment of home care needs are economically feasible with expected levels of HEC income.
HEC mechanisms provide a means for the elderly to preserve their independence, which survey after survey show to be a high-priority goal for significant numbers of older people.
HEC mechanisms provide additional housing alternatives for the elderly.
HEC mechanisms help protect neighborhoods from deterioration and urban decay.
Weaknesses of Home Equity Conversion Mechanisms
Elderly homeowners have complete discretion in the use of funds from HEC loans and may not be interested in purchasing long-term care services or insurance.
The "dissaving" plan characteristics of HEC mechanisms are not appealing to many elderly. Borrowing money conflicts with the fundamental beliefs and values of many in the current generation of elderly who were raised during the Depression era and taught to live frugally, save, and avoid debt. For many, the effect of disinheriting their heirs may make the mechanism especially unappealing.
Banks and other investors fear the potential for negative public relations in the event of foreclosure actions against elderly clients, as for instance, may be necessary when fixed-term reverse mortgages reach maturity but the elderly homeowner refuses to sell the home.
HEC contracts involve highly complex agreements, which are difficult for lenders to arrange and for consumers to understand without fairly extensive financial counseling. The general lack of independent counseling services inhibits both banks and potential clients from entering the field. Banks have not found it economically feasible to offer potential borrowers the necessary counseling programs.
For financial institutions, the lack of a secondary market and insurance program for HEC loans may be the single biggest barrier to entering the market.
Assessment
General Feasibility and Practicality. It is important to be cognizant of the key role that the banking and lending industry must play if the HEC concept is to be more readily available to serve those elderly who can benefit. Without the willingness of the lending industry to enter the market and offer flexibile and appropriate products, HECs (particularly reverse mortgages) will remain a small and insignificant approach, serving only a handful of people. By all appearances this will not happen until demand is at least somewhat stronger.
As earlier noted, another barrier for lenders is the absence of the type of secondary market which is so critical in traditional mortgage lending. Mortgage insurance is essentially a guarantee to the lender against default by the borrower. To date, neither public nor private mortgage insurance has been offered to holders of reverse mortgages. It is of note that the State of Florida recently passed legislation creating an insurance fund for reverse mortgages, but the actual operation of the State's fund has not been implemented. The U.S. Department of Housing and Urban Development is also studying the issue of insurance for reverse mortgages and expects to issue a report.
Caution must also be exercised not to oversell the HEC concept to consumers. HEC is not for everybody and should not be viewed as a panacea. A determination of whether a given transaction makes sense can only be made after careful analysis of the financial and social factors in each case. It is crucial that adequate counseling and disclosure be provided.
Quality of Life and Dignity of the Individual. HEC would appear to improve the quality of life and dignity of the individual, as well as improve the standard of living for the elderly. While data on the reasons HEC loans are secured by the elderly is generally lacking, some information is available on 48 cases (4 pending) in Nassau County, N.Y. and Tucson, Arizona. Multiple reasons were frequently cited by borrowers. In 35 cases (72.9 percent), assistance in meeting daily living expenses was cited. Seventeen borrowers (35.4 percent) cited rehabilitation work on the home and 15 (31.2 percent) cited health and medical reasons.
Strengthens the Family Unit. HEC can contribute to maintaining the elderly in their homes and neighborhoods which are frequently near friends and family members. Family members who live near by can assist the elderly when the need arises.
Ensures System-Wide Efficiency. By providing additional income to the elderly, self-determined needs and priorities can be better met. If the number of banks and lenders who enter the market increases, the natural forces of competition and diversity would occur.
Contains Public Expenditures. Given sufficient volume, the additional income made available to the elderly under HECs could lessen the strain on local, State and Federal resources for health and social services expenditures.
Implications for Government
Although the first home equity conversion transaction was made more than twenty years ago, the concept has yet to create a surge of support from that segment of the American population which can benefit most, elderly homeowners.
As noted earlier, the wider adoption of HEC approaches by the elderly could have a significant impact on their general economic well-being. The potential for Federal, State and local governments is that the growth in their expenditures for health care and social service needs would be reduced. On a cautionary note, it is important to remember that elderly homeowners generally have complete discretion in the use of funds from HEC loans and may not be interested in using funds to purchase Long term care insurance or otherwise meet their Long term care needs.
Reducing Barriers to use of HEC Mechanisms. The Federal Government and State and local governments, as well as leading institutions, foundations, businesses, and the voluntary sector can each contribute to the development of HEC options. Among the possibilities are:
States that wish to focus HEC resources on the purchase of long term care insurance might do so by revising the rules for State medical assistance programs to clearly exclude HEC derived income from eligibility determinations, when such income is used to pay the premium on a long-term care policy. Because there are few precedents under the Medicaid program, a State would need to seek clarification or a waiver of Federal rules to implement this approach.
6. Employee Benefit Options for Retirees
Definition
Long-term care employee benefit options are options which could be offered as part of a company’s pension or health insurance package and could be designed to help retirees meet the financial liabilities associated with long-term care.
Employment-related long-term care benefits for retirees could take several forms and be paid for by the employer, the employee, or by sharing the cost. For example, insurance for long-term care could be provided by employers as an additional fringe benefit choice, or employers could simply help form a group and interested employees could purchase this type of insurance through their employee group. Also, there are important, but less far-reaching possibilities such as firms which are considering working with retirees to set up volunteer caregiving networks. This section focuses primarily on the potential for long-term care insurance as a retiree benefit.
Current Experience and Research Findings
With regard to employer-sponsored benefits there exists a marked contrast. On the one hand, a majority of workers today are covered by an employer-sponsored pension plan and a significant number of companies provide health insurance after retirement. On the other hand, based on what little empirical data exists, there appears to be virtually no similar provisions for long-term care. (A Business Roundtable survey this year on retiree benefits may provide additional information, but there is no reason to think this will reveal any substantial movement toward long-term care benefits.)
While there may be few companies offering long-term care benefits now, there is credible, albeit anecdotal, evidence of corporate, employee, and labor interest in changing this situation. However, the current experience is that substantial barriers exist and that some combination of legal, accounting, and statutory changes will probably be necessary before very many companies will get involved.
Premium Structure/Vesting/Portability. There are two basic approaches an employer can take in costing out the premium for a long-term care insurance benefit. Insurance premiums in an employee group can be set to reflect the increasing risk of needing long-term care as workers near retirement. Much like term life insurance, a worker at 30 might pay half the premium of a worker of 50. The advantage of this approach is that it makes each employee's premium cost self-contained with no cross-subsidization. Vesting and portability, while significant administrative details, can probably be easily arranged. An employer interested in sponsoring a voluntary group policy open to all employees but without company subsidy would probably need to utilize this approach. Otherwise younger workers would not participate.
Alternatively, the premiums could reflect the lifetime risk of needing long-term care, with employees of all ages paying the same amount. If this approach is taken and current employees are asked to pay premiums that reflect the risk of needing long-term care in their later working and retirement years, consideration must be given to issues of vesting, portability and conversion rights. The reason for this is that this type of premium structure implicitly assumes the accumulation of reserves that will be used to pay for the increasing risk in later years.
For employees to be willing to participate in such a plan, they must have a reasonable expectation of being able to continue their insurance into retirement at premiums that reflect the fact that they or their company have prepaid some of the risk.
Pay-As-You-Go Versus Pre-Funding. For almost all firms offering retirement health insurance today, employer payments for retiree health coverage are treated as operating expenses for the year in which the benefits are paid. As a consequence employers are increasingly concerned about their large and growing unfunded liability for retiree health and welfare benefits. Despite this, few companies offering retiree health coverage pre-fund their obligations.
Given the future liability which long-term care benefits would impose, and the expectation that the ratio of retirees to active workers will increase sharply in the future, for many companies pre-funding will be important if these benefits are to be offered. If retiree benefits continue to be funded on a pay-as-you-go basis, their costs as a percent of payroll will increase, perhaps leading to problems for employers in the future.
Barriers to Increased Pay-As-You-Go and to Pre-Funding. It is becoming more difficult for companies to fund benefits on a pay-as-you-go basis. One reason is recent court rulings that indicate that employers may not be permitted to terminate or cut back on any defined health benefit promised to retirees. As a result companies may be reluctant to commit to the uncertain liability of a defined long-term care benefit plan which promises specific coverage characteristics in the future, regardless of cost increases for this coverage.
An alternative approach is a defined dollar or defined contribution plan, which requires certain levels of current employer contributions, but does not guarantee specific insurance coverage in the future. From the employer's perspective, this approach is safer because the liability is fixed and not subject to the uncertainties of changes in the health care market. If the contribution is designed to cover the expected cost of insurance, this approach is a way of sharing the risk with employees that would currently be borne solely by the employer.
Another evolving difficulty for pay-as-you-go is that the Financial Accounting Standards Board is considering a requirement that employers' unfunded liabilities for retirees health and welfare benefits be disclosed in their financial statement.
The most important deterrents to pre-funding are the recent policy changes under the Deficit Reduction Act of 1984 (DEFRA) that eliminated the tax advantages of pre-funding retirement health benefits. As a result of this Act, investment earnings on retirement health plan assets will be subject to current income taxation. Also, in funding retirement benefits, employers will be prohibited from assuming an increase in medical costs in the future in determining the amount that can be put into the fund tax free. Thus, the overall impact on employee benefits of the DEFRA provisions is to discourage pre-funding.
Use of Trusts for Pre-funding. An alternative approach to pre-funding long-term care for retirees is to include such benefits as part of a pension plan. Section 401(h) of the tax code allows tax-exempt employer contributions and accumulation of reserves for health insurance benefits for retirees and their families, provided that such benefits are subordinate to the retirement benefits provided by the plan. This means that contributions to provide medical benefits and contributions for life insurance cannot exceed 25 percent of the aggregate contributions made to the plan from the date medical benefits are first included. In addition, a separate account must be established and maintained for these benefits.
Currently there is very little experience with 401(h) plans. However, given the tax law changes under the Deficit Reduction Act (DEFRA) that discourage the pre-funding of health benefit plans, more employers may consider 401(h) trusts in the future.
For most employers, though, the limit on contributions to these plans is too low to accumulate sufficient funds for retiree health benefits, thus making expansion of benefits to cover long-term care more difficult. In addition, setting up the 401(h) plan would increase the administrative burden of the pension plan. Finally, employees in companies that do not offer pension plans, almost half of all employees, cannot benefit from this approach.
General Climate
As companies begin to understand the need for pre-funding and the extent of retiree benefit obligations, the climate for retirees' health benefits including long-term care, has become less encouraging. Not surprisingly, employers are reluctant to make further commitments for 30 to 40 years in the future, particularly for long-term care services where the potential liabilities are large and unknown. Further, the principle that retirees have a right to a benefit plan promised in the past may make employers especially reluctant to add new coverage for long-term care, where demand and costs are expected to grow substantially in the future. Despite this, several insurance companies have indicated they are talking with interested companies.
As will be discussed more below under subsection e., encouraging employers to expand their obligations to include long-term care will require incentives to the private sector to provide and fund these benefits.
Strengths of Employee Benefit Mechanisms
Employer-based long-term care benefits would substantially expand the market for insurance protection against the risk of long-term care expenses, thus lowering premium costs and stimulating more companies to enter the market.
Risk of adverse selection under long-term care insurance policies would be minimized if all employees participate as a group.
Employer-sponsored insurance, because it can be offered on a group basis, would reduce marketing and administrative costs, so that premiums could be lower.
Substantially greater awareness and support would exist for individuals to buy long-term care insurance.
Weaknesses of Employee Benefit Mechanisms
It is unlikely that many employers will provide paid long-term care benefits for retirees in the current environment without changes in policy.
Recent court cases, changes in tax laws and accounting standards have tended to discourage the expansion of employer provided health benefits.
Adding long-term care insurance for current retirees would be extremely expensive and prefunding for long-term care would require many years of phasing in.
Any additional spending by employers would entail tax deductions for business expenses and thus tax revenues would decrease.
Actions Which Might Promote Employee Benefit Plans for Long-Term Care
Businesses are now recognizing long-term care as an area for concern. It is important that public policy help create an environment that will encourage them to participate in this area.
Retiree health benefits are currently paid largely (95 percent) on a pay-as-you-go basis. This makes it particularly difficult for employers to afford to commit themselves to paying for a new fringe benefit such as long-term care insurance for retirees. Easing of the defined benefit rule and favorable accounting treatment would make it easier for companies to be involved in "pay-as-you-go" or partial pre-funding.
In order to encourage employers to provide long-term care benefits on a pre-funded basis, it will be important to restore the tax advantages of pre-funding health benefits that were eliminated by the Deficit Reduction Act of 1984.
Long-term care benefits could be included as an option for retirees even if employers did not pay the full cost of this insurance in addition to their payments for other health benefits. Such an approach could be voluntary or it could be mandated that all employers with a retirement health plan (or pension plan) offer long-term care insurance as an option to their retirees. Retirees could be asked to pay the full cost of this insurance if they chose to take it, or employers could make a contribution to long-term care insurance instead of paying for other health benefits. In the latter case, the retiree could have a choice of which benefits to take.
For current employees, long-term care benefits might also be included as one of the choices in a cafeteria plan. Many people over age 64 might prefer to be insured against the catastrophic costs of long-term care rather than have the front-end coverage of many Medigap policies.
The Federal Government, in its national leadership role and as the nation's largest employer, might consider some form of retiree benefit plan for long-term care. Currently, the Federal Employees Health Benefits Program, like most employer sponsored health care programs, is oriented towards disease prevention and the treatment of acute illness. Federal workers and retirees, like most Americans, have no special coverage for expenses related to chronic illness and long-term care in a non-hospital setting. In this context, the Federal Government could set an example by offering a long-term care option as part of its retiree benefit plan. All retirees might be given a choice of the health insurance benefits currently offered or long-term care insurance, with similar government contributions to each plan. If a person wanted both types of coverage, this could be made available for an additional premium, paid for all or in part by the retiree.
There are also other ways that employers can provide assistance to the elderly with chronic illnesses. For example, some employers have set up programs that offer informal help to their retirees in a variety of ways, including retiree clubs or the provision of direct services to the chronically ill and disabled, such as transportation to the doctor or information about medicine. An increase in pension funds, or restructuring of pension payout plans to allow for lump sum withdrawals could also be helpful in meeting long-term care expenses. Employers can also give support to workers who care for chronically disabled or incapacitated family members such as an elderly spouse or parent.
Overall, employers can play an important role in the area of long-term care for their retirees. Consideration should be given to incentives that would encourage the development of long-term care benefits for retirees such as those described in this section.
7. Tax Allowances for Home Cars and Other Public Policies to Support Family Caregiving
Definition
This section discusses methods of sustaining and further encouraging family members to provide home care services to dependent elderly persons. Approaches examined include establishing special tax allowances, preferential rules in calculation of Social Security benefits, and flexible employment policies.
Family caregivers provide well over 80 percent of the long-term care assistance given to elderly functionally disabled persons living in the community and over 50 percent of all long-term care services (i.e., including the nursing home portion of long-term care) (Doty, Liu, and Wiener, 1985).
In recent years, there has been growing advocacy of public policies to support and sustain family caregiving. Three rather different arguments are employed to make a case on behalf of this viewpoint.
To Prevent Costly Institutionalization. It is often argued that, without support, families are more likely to experience "burn-out" due to the financial and emotional stresses of caregiving and decide to institutionalize the elderly person rather than to continue to provide at-home care. According to this view, the monies spent -- either directly via publicly-funded supportive services programs or indirectly via tax subsidies -- will be recouped through savings brought about by decreased use of publicly funded institutional care.
To Relieve Excessive Burden on Caregivers. Others see relieving excessive burden on family caregivers as valuable in and of itself, even if there is no impact on nursing home use or public monies saved. According to this view, families who provide informal home care to disabled elderly relatives deserve support for taking on a time-consuming and stressful task that they might have chosen to avoid.
To Ease the Conflicts between Work and Caregiving Responsibilities. This argument holds that female labor force participation will erode the family's ability to provide informal long-term care in the future. Consequently, more families are likely to institutionalize elderly relatives who require large amounts of help or supervision rather than allow caregiving responsibilities to interfere with work. Family support policies to help alleviate the burden of family caregiving are, therefore, essential if future female caregivers are to be able to balance the requirements of work with the goal of maintaining elderly disabled relatives at home as long as possible.
Current Experience and Research Findings
Current Federal Tax Policy. Three basic tools are currently available in the Federal income tax system for targeting subsidies to taxpayer households in which elderly, dependent persons are living (La Jolla, 1985).
Exemptions -- Taxpayers are permitted an exemption of $1,000 for each dependent. Taxpayers whose elderly kin live with them may claim them as dependents if: 1) the claimed dependent has income of less than $1,000 for the taxable year; and 2) over half the dependent's support is furnished by the taxpayer. Few family caregivers now qualify for this exemption, since most elderly kin have annual income in excess of $1,000.
Deductions -- Some long-term care expenditures on behalf of a dependent that qualify as medical expenses may presently be deducted if these expenditures amount to 5 percent or more of taxable income. The dependent for whom medical expenses are claimed must meet the same dependency criteria as required for the taxpayer to claim an exemption.
Tax credits -- The major current tax allowance available to taxpayer households with elderly dependents is the Child and Dependent Care Credit. Until 1982, this credit could only be applied to expenses for the care of a child under 15 years of age. Under the Economic Recovery Tax Act of 1981, expenditures for noninstitutional care of disabled spouses or other dependents also became eligible for the credit.
All of the following conditions must be met in order for the taxpayer to claim the credit:
The Child and Dependent Care Tax Credit is progressive in its impact; that is, households with lower incomes can claim a higher percentage of their dependent care expenses than those with higher incomes. The amount of the subsidy ranges from 20 to 30 percent of total expenses, up to the maximum of $2,400 per dependent. Thus, the maximum amounts of tax subsidy would be $480 to $720 per year.
Analysis of Current Tax Subsidies
Neither the provisions for claiming a dependent exemption nor deductions for medical expenses on behalf of a dependent are widely used by family members caring for the elderly. IRS data indicate that only 1.8 percent of taxpayers claim this exemption. This appears to result from the following factors:
Few taxpayers can claim dependent exemptions on behalf of elderly relatives living with them because very few elderly have incomes under $1,000 a year and many have sufficient income such that family caregivers cannot legitimately claim to be providing over 50 percent of their support.
Due to Medicare or Medicaid or both, few older persons living outside institutions have sufficient out-of-pocket medical expenses coupled with sufficient economic dependency on relatives to enable family caregivers to take medical deductions on their behalf. Data collected by IRS is not sufficiently precise to make an estimate of how many taxpayers may be claiming medical deductions on behalf of elderly relatives.
In principle, the Child and Dependent Care Tax Credit has the greatest potential for use among the three tax allowances currently available to families providing care at home to the elderly disabled.
Although the tax return does not require taxpayers to specify on whose behalf they are claiming the Child and Dependent Care Tax Credit, the Department of the Treasury has estimated that at most only about 10 percent of the projected annual cost of the Child and Dependent Care Tax Credit (S1.3 billion in 1981) is for dependent as opposed to child care. Also, many low income households do not take advantage of the credit because they have no tax liability (and thus nothing to credit against), or do not know about the credit, or do not understand how to use it.
It is possible to estimate those taking the credit for home care expenses for relatives over 65 only by eliminating all those claiming the credit who are also claiming extra exemptions for children or for younger adult dependents. Although this method still leaves open some possibilities for both under and overcounting, it should yield something quite close to the true figure. On this basis, it is estimated that only 1.5 percent of those taking the Child and Dependent Care Tax Credit are claiming expenditures for the care of older persons.
Some advocates of tax allowances for family caregivers argue that the current maximum amount that may be claimed under the Child and Dependent Care Tax Credit is not sufficient. However, according to analysis of the 1982 Long Term Care Survey (Doty, 1986), family caregivers who reported, out-of-pocket payments for formal caregivers reported spending, on average, $373 annually. This is considerably less than the current $2,400 maximum in expenses that can be claimed.
A more difficult problem is that the Dependent Care Tax Credit may only be claimed by families in which all taxpayers, including the primary caregiver are working. According to analysis of the 1982 Long-Term Care Survey, Caregiver Supplement (Stone, Cafferata and Sangl, 1986) only 16.8 percent of primary caregivers work. This reflects, in part, the high percentages of spouse caregivers (slightly over one-third of all family caregivers) and caregivers over 65 (also roughly one-third of all family caregivers). Even among adult child caregivers, 56 percent of the daughters and 45 percent of the sons are not employed.
Working caregivers are somewhat more likely, however, to have made expenditures for care. This is because they employ more paid helpers than nonworking caregivers, who are more likely to have no assistance or only informal help.
Some proponents of family support policies believe that current tax provisions discriminate against those family members who leave or stay out of the workforce in order to provide care and who provide care themselves rather than hiring formal providers.
According to the 1982 Long Term Care Survey (Stone, Cafferata and Sangl, 1986) 14 percent of female primary caregivers report having quit their jobs to provide home care. Such persons cannot benefit from the current tax provisions even though the elderly they care for are more severely impaired and even though they spend more hours providing care than other working and nonworking caregivers.
Finally, current tax code provisions require taxpayers to reside with the care recipient in order to claim tax credits. Although the great majority of caregivers do live with those they are caring for, nearly one-quarter of working female caregivers (principally daughters) do not live with the elderly care recipient.
Taking into consideration the various criteria that must be met in order to claim a dependent care tax credit on behalf of an elderly relative (i.e., all taxpayers in the household must be working and the elderly person must reside with the taxpayer), analysis of the 1982 Long Term Care Survey Caregivers Supplement indicates that only 5 percent of the estimated 2.2 million caregivers caring for the moderately to severely dependent elderly living in the community would qualify to claim the tax credit for any out-of-pocket expenses they might have. The existing provisions do not benefit caregivers who choose to provide all care themselves, nor do they benefit those caregivers who leave the labor force or who choose to remain at home to provide care, even though these persons may be caring for more severely impaired relatives and may also be paying expenses for formal help.
Congressional Proposals to Expand Tax Allowances for Informal Caregiving to the Elderly. A variety of legislative proposals has been introduced in Congress to provide tax allowances for home care. Most proposals build on the existing Dependent Care Tax Credit in order to remove or reduce some of the limitations on who can claim benefits.
Among the legislation that would permit the broadest expansion are those which do not require elderly dependents to be functionally disabled in order for family members to claim the tax credit, those which make the credit refundable, and those which eliminate the work-related requirement. Examples are outlined below.
One bill proposes a $400 refundable tax credit for any household which maintains an elderly relative 65 or older for more than six months in a year. There is no specific disability requirement, nor is there a specific requirement for out-of-pocket expenditures on medical or long-term care services, though there is a general requirement that the taxpayer must provide for over half the support of the elderly relative.
Another proposal would more narrowly limit the number of taxpayers who could potentially claim the dependent care tax credit but it would offer those who are eligible more financial support. This proposal would eliminate the work-related requirement. The elderly relative could not, however, have income in excess of $15,000. The elderly relative would have to live with the taxpayer and be at least 75 years of age. No qualifying medical or disability conditions would be required, but elderly persons under age 75 could qualify if they had a diagnosis of Alzheimer's disease. The maximum amount of expenses which could be claimed under the credit would be increased to $3,500 per elderly dependent, but could not exceed $7,000 per household. Households with incomes greater than $50,000 would not be eligible for the credit, but for low income households, the credit would be refundable (i.e., paid to the taxpayer if the credit exceeded tax liability). The subsidy level would be 30 percent for households with incomes of $10,000 or less down to 20 percent for households with incomes above $28,000.
Another bill is similar to the previous proposal, but includes the following modifications: the age requirement for the elderly dependent would be dropped to 70 years of age (still with no age requirement for Alzheimer's patients, however), a disability requirement based on Social Security definitions would be added, and payments for nursing home care for Alzheimer's patients could be claimed. In addition, the income standards for subsidy levels would be charged: taxpayers with incomes up to $25,000 would be eligible for the 30 percent subsidy, and the 20 percent subsidy floor would not be applied until the taxpayer's income surpassed $43,000. The maximum amount of expenses which could be claimed would increase to $5,000 per elderly relative, up to $10,000 per taxpayer. However, this bill would not make the credit refundable.
Another bill would simply drop the "work-related" requirement for the current Dependent Care Tax Credit. Similar bills have been proposed which are specifically targeted to households in which there are elderly Alzheimer's patients.
State Tax Initiatives Supporting Family Caregiving. Since 1979, four States -- Oregon, Idaho, Iowa, and Arizona -- have enacted legislation providing tax allowances for family caregivers. Each State has taken a different approach:
Oregon provides for a tax credit of up to 8 percent of expenses for the care of an elderly dependent -- up to a maximum credit of $250. Only households with incomes below $17,500 are eligible to claim the credit. Extensive documentation of disability and risk of institutionalization is required and must be certified by the State Human Service agency. Due to these restrictions, very few Oregon taxpayers have claimed the credit.
Idaho allows households that maintain an elderly relative (over 65 years) and provide over half the relative's support to take a standard tax deduction or credit on their State tax return. Taxpayers may choose between a $1,000 deduction to gross income, or a refundable tax credit of $100. (It is unclear, however, why taxpayers would ever choose the $1,000 deduction, since the maximum tax rate is 7.5 percent or a maximum of $75 per year.) No disability requirement is imposed. Taxpayers may not claim a deduction or credit for more than three qualifying persons.
The Idaho tax allowance is being studied by the Center for Health and Social Services Research (Pasadena, California) under a grant from the Health Care Financing Administration. Preliminary results indicate that in 1982, more than 700 taxpayers claimed elderly care deductions or credits. Cost to the State was an estimated $65,000 in lost revenue, or about $93 per claimant.
According to the study, the typical elderly dependent is the claimant's widowed mother or mother-in-law, over 80 years of age, with one or more chronic health conditions, and would likely be dependent on public assistance if the informal support system was disrupted. Claimants are generally married, with beginning health problems of their own, somewhat older than the average Idaho population, and nearing retirement age. Claimants had above average education and income.
Over 80 percent of the dependents cared for had incomes of less than $1,000 in 1981. Many in this low income group would have been eligible for the Federal SSI benefit, although only 3 percent were claiming it. This suggests that, when the elderly disabled move in with relatives, the family not only provides long-term care that government might otherwise have to pay for, but saves other public assistance costs. While more than half the claimants did not contribute to paying for medical bills (presumably because the elderly person was able to afford the Medicare co-payments), over 60 percent of claimants spent over $1,000 on their elderly relative's non-medical living expenses.
Iowa permits taxpayers to deduct up to $5,000 in eligible expenses from income, separate from the standard or itemized deductions. Eligible expenses include any cost directly attributable to the care of an elderly dependent living in the same household, such as food, clothing, transportation, and medical expenses not deducted elsewhere on the return.
In order for the caregiver to claim the deduction, the care recipient must either be a Medicaid enrollee or Medicaid eligible. In addition, on the first return on which a deduction is taken and every third year thereafter, taxpayers must attach a statement from a qualified physician certifying that the recipient is unable to live independently.
Since Iowa's tax rate is progressively structured, the value of deductions are greater for households with higher incomes. For an Iowa household with a median income of about $23,000, the maximum of $5,000 in eligible deductions would receive a tax subsidy of about $300.
Arizona permits taxpayers to deduct eligible medical expenses for any elderly person that the taxpayer cares for, whether or not the care recipient is a relative. The tax benefit is designed to take into account the fact that many elderly have recently moved to Arizona and do not have family there; they may, however, develop "surrogate families" among friends and neighbors. Taxpayers who have eligible deductions in excess of $800 per year for elderly non-relatives are also permitted to claim a "bonus" in the form of an additional dependent exemption an their State tax return, a benefit worth about $48 (La Jolla, 1985).
Effectiveness of Tax Subsidy Approaches
Are Tax Subsidies Likely to Prevent Institutionalization?
There is little evidence that tax allowances affect families, decisions about whether or not to bring a functionally dependent older person into a relative's home or how long to continue with home care versus seeking institutional placement.
For example, attitude surveys carried out by Sussman (1977, 1979) found that neither tax incentives nor any other specific type of government financial or service program assistance was likely to change the minds of individuals who said that they would not bring an elderly relative to live with them. On the other hand, persons who said they would bring an elderly relative into their home indicated that, while they would appreciate government assistance, such incentives would not affect their willingness to provide care at home.
The financial burden of family caregiving is rarely cited as a major reason for the decision to place an elderly relative in a nursing home. Rather, a decline in the elderly person's health status to the point where family caregivers feel that more care is required than they can provide is the reason most often given for choosing institutionalization (Arling and McAuley, 1983; Smallegan, 1983, 1985).
Social and emotional factors typically outweigh all others in causing family caregivers to decide home care is not feasible or cannot be continued (Sangl, 1983; Clark and Rakowski, 1983). Precipitating factors can include anxiety associated with having sole responsibility for the safety and care of a disabled relative; stress and loss of freedom when caring for someone who cannot be left alone; interpersonal tensions with either the care recipient or between the care recipient and other members of the family; and frustrations in coping with confusion, forgetfulness, and behavioral problems.
By the time family caregivers actively seek institutional placement for their elderly disabled relatives, many are already employing supplemental paid providers. Only very substantial amounts of additional care by paid providers (on the order of 20 or more hours per week) are seen as making continued home care possible (Harkins, 1985). This suggests that the limited amounts of paid care generally thought of as providing "respite" for family caregivers are affordable to many even without tax subsidies, but that the amounts of paid care needed to prevent institutional placement are not widely affordable even with tax subsidies.
Can Tax Subsidies Reduce Excessive Burden on Caregivers? Tax subsidies can make the services of formal providers more affordable. Recent research on the Department's National Long-Term Care Channeling Demonstration program has found that provision of formal services to supplement and provide respite for informal caregivers can improve the morale of primary caregivers on several dimensions. Family caregivers receiving the supplemental formal services reported feeling less worried about their ability to meet the care needs of the disabled elderly person. They also were less likely to report that they experienced serious problems with restricted privacy and limitations on social life due to their caregiving responsibilities (Christianson, 1985).
Can Tax Subsidies Reduce Conflict Between Work and Caregiving Responsibilities? Analysis of the 1982 Long Term Care Survey (Stone, Cafferata and Sangl, 1986) has found somewhat greater use of paid assistance by working caregivers who reported experiencing various kinds of conflicts between work and caregiving responsibilities. This suggests that current tax allowances may be helping those who are experiencing work/caregiving conflicts by making supplemental he12 more affordable.
Nevertheless, relatively few working--caregivers make use of formal providers, despite the fact that 36 percent of all female primary caregivers in the 1982 Long-Term Care Survey reported having experienced conflict between work and caregiving. It may be that most family caregivers do not believe that formal assistance, or at least the amount of formal assistance that is affordable to them, will resolve their conflicts between work and caregiving. In the channeling demonstrations, formal support services were provided either free or at very low cost, but were found to have no effect on family caregivers' perceptions of their employment limitations or their earnings and family incomes (Christianson, 1985).
Strengths of Tax Subsidy Approaches
Tax subsidies are viewed as attractive because of their comparative simplicity of administration. They require no new organizational structure to administer.
Tax subsidy approaches maximize the family's control over how much formal care, and of what type, to employ -- as compared with publicly funded service programs in which professionals make the decisions as to how much assistance, and of what type, the family will receive.
Weaknesses of Tax Subsidy Approaches
Because tax subsidies are "self-administered" by the taxpayers who claim them, subsidies are pore likely to be used by higher income taxpavers who are more knowledgeable and sophisticated in making use of advantageous tax provisions. Subsidies also have potential for fraud and abuse.
Tax allowances are difficult to target to the neediest groups, not only in terms of lower income groups, but also in terms of calibrating benefits to the degree of impairment of the person cared for and lack of an available informal support system.
Many caregivers do not benefit from tax subsidies (unless they are a refundable credit) because they do not file income tax returns or because they do not have sufficient tax liability. For example, about one-third of all family caregivers are themselves elderly and retired.
Other Public Policies to Support Family Caregiving
Social Security "Dropout Year" Credits. One criticism of tax subsidy approaches is that, since they are typically oriented toward paying the costs of hiring formal providers and can only be claimed by working caregivers, the subsidies do not benefit the caregivers who drop out of the workforce in order to provide another's care. These caregivers pay a price in foregone earnings and probably also in lower future earnings even after they return to work. As a result, when they themselves become elderly, the caregiver's Social Security pension will be lower than it otherwise would have been.
A proposal that would partially offset this is to allow persons who drop out of the workforce to provide home care to elderly relatives to have their Social Security benefits calculated so as to leave out the years when they were providing care, thus increasing the caregiver's entitlement. Instead of dividing total earnings by the 35 year working period mandated for other Social Security beneficiaries, family caregivers would be able to deduct those years during which they provided care to an elderly relative.
The chief drawback of this approach is that it could be perceived as inequitable unless it included individuals providing home care to children under school age and disabled family members of any age. However, under that configuration, it would probably be very expensive to the Social Security Trust Funds.
Encourage Flexible Employment Policies. A 1985 survey of elderly caregiving responsibilities carried out by the Traveler's Insurance Company resulted in an estimate that about 1 in 5 of all the company's employees aged 30 and over had caregiving responsibility for an elderly relative. As a result of the publicity given to this study and its findings, the question of employment policies as they impact on family caregiving and the need for employee counseling programs or work-based caregiver support groups has started to attract the attention of business and other groups.
The American Association of Retired Persons has embarked on a survey of corporate employees and employers regarding work/caregiving conflicts and employer policies that exacerbate or mitigate such conflicts. The Department's Office of Human Development Services has also funded two studies of these issues. Although findings from these studies are not yet available, a recent Conference Board report summarized the existing literature and reported on the findings of an informal survey of New York City businesses. According to senior research associate Dana Friedman, "by 1999, when about 5 million Americans will be over 85, caring for the aged will be a bottom-line business concern." Already, conflict between work and caregiving responsibilities is showing up in greater tardiness, lower productivity, and more depression among employees caring for elderly relatives (New York Times, 1986).
One response to this is a legislative proposal introduced in the U.S. House of Representatives. The bill would mandate employers of 15 or more workers to allow as much as 18 weeks of unpaid leave to workers following the birth of their child and to workers wishing to take time off to care for a seriously ill child or dependent parent. Workers would be guaranteed the rigbt to return to their job.
Given the relatively new appreciation of what is likely to be a growing problem, the issue is one deserving of further research. Developing employment policy designed to help reduce work/caregiving conflicts will require considerable initiative by the business community in the years ahead.
8. Volunteer Systems
Definition
For the purpose of this section, volunteer work is defined as work or assistance performed without compensation except for expenses incidental to performing this volunteer role, such as supervision or training costs, or assistance with transportation.
The Current Experience and Research Findings
Volunteerism is an important component of America's public and private services systems. Volunteer efforts, both informal and organized, provide a complex and diverse range of needed services to many persons who might otherwise not receive assistance.
A Gallup survey on volunteers indicated that 48 percent of all Americans aged 14 or older had done some volunteer work in the 12 months prior to the survey. Women volunteered more often than men (55 versus 45 percent, respectively), and people under the age of 50 volunteered more frequently than those older than 50 (51 versus 24 percent, respectively).
Nonetheless, older persons represent a significant segment of the total number of volunteers in this country. A survey conducted in 1981 by the National Council on Aging and Louis Harris, which counted only volunteer work done through group organizations, indicated that 23 percent (5.8 million persons) of the over-65 population provided volunteer services. A national Gallup survey conducted that same year, which included informal volunteer work as well as work done through group organizations, found that a total of 37 percent (9.4 million persons) of the over 65 population did volunteer work. In the 1985 Gallup survey on volunteers, 43 percent of those interviewed between the ages of 65-74 participated in volunteer activity.
Projections of the number of future older volunteers indicate a large and dramatically growing number of older volunteers between now and the end of the century. The number of older volunteers is estimated to increase at twice the rate of growth of the older population itself (reference to be supplied).
The President's Task Force on Private Sector Initiatives reported that the traditional areas of service which have attracted volunteers include the operation of cultural programs, public safety, maintenance of parks and recreation, and care efforts for the elderly and children. The 1985 Gallup survey on volunteers indicated that the areas in which the largest percentages of volunteer time were invested included religious activities (23 percent); informal activities not done as part of a group (19 percent); education (13 percent); and, general fund-raising (11 percent). The earlier 1981 Harris Survey on volunteers found that older volunteers spent more time in providing informal services (49 percent); religious work (38 percent); and health-related activities (27 percent), such as hospital work, mental health clinics, and rescue squads.
Estimating the costs associated with the use of volunteers (recruiting, training, supervision, and other factors) is a highly complicated and imprecise task. Typically, such information is not easily gathered and is unavailable from many organizations which utilize volunteers.
Attributing an estimated value to the contributions of volunteers, although also complicated, is an effort which has been more frequently undertaken in the voluntary sector. A Gallup survey on volunteers in 1981 indicated that 47 percent of all adult Americans (76 million persons) each volunteered an-average of 102 hours during the preceding 12 months. This represented a total of 7.8 billion hours of volunteer time with an estimated value of $62.2 billion.
Volunteers and Long-Term Care--Some Principles
In attempting to construct a vision of how volunteers can play an increasing role in meeting the elderly's long-term care needs, certain principles emerge:
Volunteering in the United States is an activity in the private domain. The decision to volunteer is a private decision. Therefore, any discussion of the role of government at any level is predicated on the assumption that the proper role of government is to assist and work in partnership with private organizations in volunteer endeavors.
Volunteering is essentially a community activity, developed, managed, and supported by individuals and community organizations to fit the needs of the individuals and organizations which make up the community. Therefore, community approaches to the involvement of volunteers vary widely, even though there may be certain essential processes which are common.
There are unique opportunities for volunteer involvement in long-term care which can further the caring ethic in America. The increase in the older population, and particularly those who face a daily challenge in coping with functional and chronic conditions, is causing major adjustments in various facets of American society. Just as the extent and degree of care-taking presents a new and different role for family members, so too, is there a new challenge to the volunteer community.
Volunteers serve to complement paid staff. Although volunteers cannot be expected to replace the often specialized expertise of professional caregivers (e.g., health care providers), there is a wide variety of important uncompensated roles which volunteers can fill in addressing the long-term care needs of the elderly and their families. These include, but are not limited to, the following voluntary service roles:
Volunteer assistance to older persons and their families can take place in both home settings and in a wide-range of institutional settings and group living arrangements.
Volunteer efforts cost time and money, especially those done well. The value of volunteer efforts usually far exceeds the costs associated with operating the effort. Costs associated with volunteer programs are usually borne by the community or the individual volunteer. However, there are many areas in which partial government financial assistance has been provided (RSVP, hospice, use of entitlement reimbursements for volunteer director salaries in nursing homes, State and local government funding). In these cases, cost is usually borne by a mix of community, individual and public sources.
Additional knowledge is needed in a variety of areas to support the widespread involvement of volunteers in long-term care. Among other considerations, it will be important to identify inappropriate assignments as well as appropriate ones. The degree of care, attention, or time commitment which is appropriate for paid staff, rather than volunteers, must be identified and will be important to the recruitment, placement, and proper supervision of volunteers. Given the nature of volunteer service, the best method for finding answers to these and other questions is by operating programs and formulating conclusions based on program design and actual results, as well as by reviewing existing volunteer programs in long-term care settings.
Future approaches need to build on existing organizations and systems (rather than the creation of new ones). Without discounting the potential value of service credit programs, brokered arrangements, or the earning of volunteer hours for "repayment" to oneself later in life, more volunteerism in long-term care can be generated by building on our existing, highly successful volunteer system.
Volunteers and Long-Term Care--Principles in Action
In every part of the country there are programs, large and small, mostly community-based, that provide volunteer services for homebound and frail elderly persons and, in many cases, for their families.
While it is impossible to describe the full variety of these programs, activities, and services, the following volunteer programs--with national, State and local sponsors--provide an illustration of these efforts.
Retired Senior Volunteer Program (RSVP)
RSVP, a program sponsored by the Federal ACTION agency, has an estimated 750 community projects in 1986. These projects will utilize 965,000 older volunteers and provide more than 67 million hours of services.
In-home care is a major program emphasis area. This includes activities involving personal care, respite care, companionship, emergency caregiving, and support groups for stroke and Alzheimer's Disease.
There are several features to RSVP community program design which have been critical to involving and supporting large numbers of volunteers in services to vulnerable older persons and their families: a community-wide approach to recruitment and placement of volunteers; provision for rotation of assignment; assignments tailored to the volunteers' interests and abilities; matching of volunteers with the unique needs of community agencies and their clientele; and a well-developed system of staff and peer support for volunteers.
Older persons who volunteer for RSVP usually serve one day per week on a regular basis. They are not compensated, but some are assisted in areas such as transportation and lunch incidental to volunteer services.
National Council of Catholic Women (NCCW) Respite Program
The NCCW Respite Program is a national program based in Washington, D.C. which utilizes approximately 4,000 volunteers in 60 dioceses to provide respite services for families who care for an elderly member at home. This program, which is in its third year, targets a frail elderly population except that it is not designed to address the needs of persons with Alzheimer's Disease.
Individual dioceses are responsible for the recruitment of volunteers, mainly through local congregations. Each volunteer is trained by health professionals in the skills needed to provide companionship and care to an elderly person in the home.
Respite volunteers serve as a companion to an elderly person for three to four hours a day, once a week or several times a month, providing the family with a break from their constant caregiving.
Iowa Care Review Committees
A State nursing home ombudsman program in Iowa operates a statewide volunteer network of Care Review Committees (CRCs) mandated under State legislation for each licensed long-term care facility. The system presently consists of nearly 700 volunteer committees and includes approximately 2,800 volunteers. The turnover rate for volunteers is a fairly low 15 percent annually.
CRCs serve the residents of long-term care facilities and their families as the first line of access for assistance in dealing with complaints, focusing on resolution at the local level rather than through litigation in the courts. The CRC system serves all long-term care facilities, not just those serving the elderly.
Ruth Taylor Geriatric Institute Volunteer Program
The Ruth Taylor Geriatric Institute, a component of the Westchester County Medical Center in Valhalla, N.Y., utilizes volunteers to provide a wide range of services, including pastoral activities, recreational activities, and one-to-one companionship for nursing home residents. The institute also runs an innovative program called Employee-Adopt-A-Patient (EAAP) in which employees who wish to participate adopt an individual patient and are allotted a certain amount of worktime to provide them with special attention.
Volunteers are recruited through agencies, such as the Retired Senior Volunteer Program, as well as by current and previous volunteers, media coverage, and organizations (i.e., fraternal, religious and corporate). Each volunteer receives an orientation and training. At present, there are approximately 40-45 persons who volunteer time at least once a week, an additional 30 groups of people (With 10-25 persons per group) who provide assistance on a bimonthly to annual basis, and groups of school children who are recruited on a seasonal basis.
Hospice Movement
The recent rapid spread of the hospice movement, which utilizes volunteers extensively, can provide important insight and understanding regarding the recruitment, training, and utilization of volunteers.
The 1984 hospice census, conducted by the National Hospice Organization, indicated that approximately 45,000 volunteers provided 315,000 hours of services to nearly 100,000 patients, a large proportion of them elderly persons in home settings. Volunteers provide direct supportive services, including respite care, transportation, or personal care to the patient or family. Some hospice programs are volunteer-intensive, i.e., almost entirely managed by volunteers, including physicians, nurses, and social workers.
A New Approach: Volunteer Service Credit
In 1985, Florida passed legislation establishing a computerized service credit program that allows individuals who are 60 years of age or older to earn credit for volunteer services provided to other older persons who have been determined to need such care. Volunteers earning credits provide respite care, homemaker care, and related services. In return, the volunteers can draw upon these credits when they are determined to need the services included in the service credit program. In effect, service credits are a medium of exchange that enables the elderly to help themselves by devoting blocks of time to helping others.
To date, only $50,000 has been allocated by the Florida Legislature for program administration and implementation in a few limited demonstration sites. Current funding is scheduled to end in 1986. From its inception, the program was expected to encounter budgetary problems because of a contingency requirement written into the enabling legislation. Essentially, if no volunteer is available to provide services to an individual who earned service credits, then the State is required to either provide the services or to pay for their provision. Program staff have estimated that $7 million in program debt could be accrued by the end of five years.
Although innovative, the volunteer service credit approach for the frail elderly has many potential long-range problems. These include liabilities on the part of the administering organization, the need to maintain large data banks in perpetuity, and potential conflicts concerning the use of "earned" credit hours. Additionally, this approach departs from the traditional volunteer concept in the U.S. in which one receives volunteer help simply because it is needed and not because it is "deserved" or $learned-" Clearly, these potential problems will need close attention as new programs are tested.
Volunteers and Long-Term Care--A Possible Model
Nursing homes and other care-giving entities often find it more efficient to work with community organizations which specialize in providing volunteer services rather than recruit individuals directly. Some nursing homes may work with several volunteer groups, drawing from one which specializes in young volunteers, another (such as RSVP) providing older volunteers, perhaps also drawing on educational institutions, to obtain an intergenerational mix of volunteers to serve residents. The Volunteer Bureaus and Voluntary Action Centers, located in many communities throughout the country, are among the many clearinghouses and information and referral centers for volunteers.
Given the needs of individuals and families who must cope with chronic problems over a period of months and years, it may be appropriate to develop a community volunteer system which specifically complements long-term care services. The system should be self-sustaining within the community.
The following are elements necessary to a community system for volunteer support of long-term care:
A community organization which will take on responsibility for the organization and management of the long-term care volunteer system in the community. Such an organization needs to be respected in the community and have the capacity to undertake a complex endeavor crossing two fields--long-term care and volunteers.
Responsibilities would include working with the agencies in the community which provide long-term care services to collaboratively develop appropriate assignments for volunteers; and working with the volunteer service agencies on the recruitment and effective involvement of volunteers. The brokering organization might also nee to provide orientation and periodic training for agency supervisors in the effective use of volunteers in long-term care.
Method(s) for financing ongoing services in a manner consistent with the unique needs of a particular community must be developed and program assistance, provided.
Few communities have used volunteers in the long-term care arena in any organized way, i.e., with a community-wide focus attuned to the use of community-wide resources. Innovative financing strategies and a period of program development will be necessary to build the system, during which time information and expert assistance can be provided to interested communities.
Organizations where volunteers serve must make a commitment to a high quality effort and demonstrate a willingness to provide visibility for the volunteer effort within the organization. In effect, volunteers in a successful program must be viewed as "part of the team" and the agency's director of volunteers or other staff person in charge of the volunteer effort must be able to carry out the activity effectively and with the support of top management.
There must be a methodology for the development of volunteer assignments. recruitment, orientation and training of volunteers, supervision, and recognition which creates and reinforces a high retention rate among volunteers, a positive esprit de corns and high quality volunteer support to older persons and their families. The methodology should address the issue of the dependability of volunteers, which is particularly important in long-term care situations; effective ways of avoiding burnout among volunteers; and other aspects of program operations in long-term care which depart from the usual approaches to recruitment and placement of volunteers. Additionally, thought needs to be given to transportation and other needs of volunteers providing services, especially the older volunteers, as well as to liability issues and insurance.
The system described above, carefully organized and supported, has the capacity to yield very large numbers of volunteers in a given community. Encouraging the development of any significant number of such systems across the country would require a sustained and phased effort over a 3 to 4 year period. The following approaches would help realize the proliferation of community volunteer systems in long-term care:
A major leadership effort would be joined between government and the private sector.
A quick study would be made of several respected programs in which volunteers are used in long-term care to gain immediate information on what makes for success, and to draw on the experience of those individuals who have been managing volunteer efforts in long-term care settings for a number of years. This investment could pay dividends in formulating an approach which would be practical and gain the support of government and private sector leaders.
Pilot systems in various regions of the country would be developed which use basic principles of good volunteer program development and administration, modified to anticipate differences inherent in the use of volunteers in long-term care. It is important for the success of such efforts that an interest and commitment from diverse organizations be generated in communities where these pilot efforts are implemented.
A broadening of the pilot effort could be achieved by providing the opportunity for other communities to learn from staff and volunteers who are associated with the pilot systems. The pilot programs would also incorporate an ongoing method for studying the successes and difficulties of each as a basis for learning by other communities.
The financing for the initial pilots, for the study of successes and difficulties, and for expansion are presumed to be from a mix of government and private resources at national, State and local levels.
The approach outlined above has the advantage of going beyond discussion and information sharing to encompass a more active, longer-term leadership commitment by the Federal and State governments and the private sector. The approach would facilitate the expansion and development of volunteer systems that impact more directly on the long-term care service needs of the frail elderly and their families.
This strategy also provides support for communities which are actively revising their service systems in order to be more responsive to vulnerable older persons and their families. Although this alternative would involve some Federal financial investment, it is likely to be extremely modest. Even in the short-term, the estimated value of volunteer services is likely to far exceed the costs associated with program development and administration.
Strengths of Using Volunteers
The use of volunteers in the provision of long-term care services to the elderly has many potential strengths and benefits, including the following:
Weaknesses of Using Volunteers
The use of volunteers to provide long-term care services to the elderly also has potential weaknesses, including the following:
Assessment
General Feasibility and Practicality. Volunteerism, as a broad system of services, is characterized by inherent flexibility in that it permits a matching of the skills and interests of the volunteers with the needs of those receiving services. There are many models of volunteerism in the U.S. as well as in Europe, particularly England, which may be adaptable to many of the needs of the long-term care population in the U.S. volunteer systems have the potential to link effectively with acute care systems (e.g., in hospital and other institutional settings) and can also play an important ancillary role in long-term care services (e.g., providing some types of in-home supportive services) which may be needed by elderly persons or their families.
Quality of life/dignity of the individual. Volunteerism can help promote the quality of life for both the elderly requiring long-term care services as well as their primary caregivers. The flexibility inherent in volunteer systems, as opposed to more traditional systems of care, which are often rigidly structured, may be an efficient and highly beneficial way of meeting many of the individual and personal care needs of the elderly and their families. Hospice volunteers, for example, are trained to be available and sensitive to the changing needs of service recipients and their families. This flexibility can help to ensure that those needing services receive assistance where and when it is most needed and helpful.
Strengthening the Family Unit. Volunteers can serve to strengthen the family unit by providing important respite care and other personal services to primary caregivers which may, in turn, give a level of support needed by families to continue care for an elderly person over a longer period of time than might otherwise be possible. Such services may also help to prevent unnecessary or premature institutionalization of some older persons particularly those with functional impairments. The use of volunteers may also serve to ease some of the financial burdens on families in caring for the elderly through the provision of unreimbursed volunteer service rather than the purchase of a paid service.
Public Expenditures. Although available cost information is limited, it suggests that volunteer activities and services can potentially be a highly cost effective approach to providing many in-home, rather than institutional services, e.g. in-home hospice services. In many cases, the use of volunteers may require minimal, if any, governmental financial support. The vast majority of volunteer services are provided without direct governmental financial support. There are also some volunteer activities in which the source of support is mixed, i.e., both public and private sector investments are made to support volunteer program development, administration, and implementation.
In March 1986, the Department initiated a series of special analyses designed to assess the potential of IMAs and long-term care insurance as mechanisms for protecting consumers against the catastrophic expenses often associated with long-term care. The analyses included the development of IMAs and insurance prototypes to explore features and costs, and the design and assessment, using a microsimulation model, of the impact of IMA and insurance models. In addition, the potential of several combinations of insurance with other approaches, such as IMAs, was explored.
1. Special Analysis of Individual Medical Accounts
Approach to Analysis
As a first step in detailed assessment of IMA proposals, prototype IMA proposals were outlined, exploring possible features and costs. Development of these prototypes involved decisions along six basic dimensions:
Who can save in an IMA? For the analysis described later in this section, it was decided that everyone would be allowed to save, whether or not the individual was a wage earner, and whether or not the person had taxable income in a given year. Similarly, no limits were specified on the age of the saver.
Who can they save for? For this section's IMA analysis, it was assumed that individual accounts would be established, with married couples allowed to have two. Accounts could be spent only on the saver. A more expansive alternative might permit spending on the long-term care needs of spouses, parents, step-parents, parents-in-law, adoptive and foster parents.
What can the savings be spent on? Proposals modeled in this section were limited to coverage of nursing home care or long-term care insurance as a basic model. An expansion of the basic prototype might permit spending on home and community-based care. Contributions for an expanded model would be higher and impacts on nursing home expenses would be smaller, accordingly, than those described below.
How can it be assured that the savings are spent on long-term care? Proposals modeled in this section are limited to coverage of nursing home care or long-term care insurance for which documentation is relatively easy to obtain. Simple forms of documentation that could be validated for tax purposes would be much more difficult to develop if expenditures for home and community-based care were included as well.
How much can be saved and sheltered from taxes? Estimates for a range of options are possible, depending on what types of care or insurance the savings are intended to cover, the estimates of inflation, and the projected loss to the Treasury.
What tax treatment will the savings receive? Most proposals treat IMAs like the current IRAs for taxation in the year contributions are made. The age of mandatory withdrawal of funds is generally removed or delayed since the need for long-term care increases in the older age groups and one wants to encourage holding funds until needed. Another possible variation would not tax withdrawals after age 65 unless expenses exceed an established threshold, such as $20,000 per year.
While the IMA analysis in this section examines options which offer tax deductions, credits are also possible. Offering tax credits rather than deductions will affect the desirability of an IMA for various income groups. Credits generally are more attractive to lower and moderate income populations.
What happens to savings that are not needed for long-term care? Unspent IMA savings are generally treated as part of the estate upon the account holder's death. However, it is possible to require that some of the account revert to a pool to cover catastrophic expenses of account holders, as is the case with the Bowen-Burke proposal analyzed later in this section.
Development of IMA Specifications
Specifications for two possible IMA options were developed. For both, estimates of the amount that would have to be contributed to assure that sufficient funds would be available when needed were provided by actuaries at the Social Security Administration (SSA). Participation rates (i.e., the percentage of people who would contribute any funds if the option were available) were estimated, based on 1984 tax return information on IRA deductions, as compiled by the Internal Revenue Service.
The net impact of each IMA proposal on out-of-pocket and Medicaid expenditures for long-term care services was then projected by using a micro-simulation econometric model developed jointly by researchers at ICF, Inc., and the Brookings Institution. As indicated above, the premium estimates and contribution assumptions used in the Brookings/ICF model estimates were provided by the Department.
Combination IMA/Insurance Prototype
The possible impact of combining the IMA concept with long-term care insurance was also assessed. Under this combination option, the projected impact of tax-favored accounts which set aside funds for the purchase of long-term care insurance (rather than for the direct purchase of long-term care services) was estimated.
As noted earlier, the combination of IMAs and long-term care insurance is attractive for two reasons. First, relatively few people will require extended nursing home stays. As a result, much of the tax-favored savings accumulated in a "pure" IMA would never be spent on long-term care, but would simply pass to heirs or beneficiaries when the account holder died. Second, those who will need nursing home care have to save a very large amount of money in an IMA to pay for such services from their individual savings.
A combined approach requires an individual to save far less to obtain protection--only the cost of insurance--since the risk is pooled with other individuals. The results of the analyses of the IMA/insurance proposals are reported later in this section, along with a discussion of other types of insurance combination strategies.
Amounts to be Saved
In order to estimate how much needs to be saved in an IMA, a variety of data were considered. As noted earlier, Medicaid reimbursements for care in skilled nursing facilities ranged from about $8,000 to $38,000 per year in FY 1983 (the latest data available), depending on the State in which the facility is located, and averaged about $15,000 per year. Services in intermediate care facilities are known to be lower in cost.
In general, private-pay patients are thought to pay 20 to 30 percent more for services than Medicaid does. Thus, after adjusting for inflation, costs for a private-pay patient in a skilled nursing facility would average about $21,400 to $25,000 per year. This is consistent with data from the American Health Care Association indicating that nursing home care averages $22,000 per year.
The cost of home care varies even more widely, since such costs depend on what combinations of services are needed and which of those needed services must be paid for and which are available from family members and other unpaid caregivers. Round-the-clock professional nursing care is much more expensive than nursing home care; on the other hand, homemaker's services for a few hours a day might cost half or less of nursing home costs, even for five-day a week assistance. The basic IMA prototype focused only on nursing home care, in part, as observed earlier, because so little data were available on which to base reliable utilization and expenditure estimates for home and community based care, and, in part, because extended nursing home stays are the major contributor to catastrophic expenses for long-term care.
Features of A Prototype IMA for Long-term Care
Features of the prototype developed for the analysis include the following:
Individuals contribute to individual accounts through age 64 only.
Contributions must be capable of accumulating a fund at age 65 sufficient to provide the inflation indexed coverage amount for a nursing home stay equal to the expected average amount of time spent in a nursing home.
As developed by the actuaries for this analysis, expected future nursing home use after the age of 65 was estimated as: 2.2 years, 2.1 years, 2.0 years, and 1.9 years, on average, for persons who begin contributing at ages 30, 40, 50, and 60, respectively in 1986. These estimates are based on nursing home population counts from the 1977 National Nursing Home Survey, adjusted to reflect a 37 percent increase due to induced demand (See Appendix 4 for a discussion of induced demand adjustments). The higher expected utilization for younger ages reflects expected increases in life expectancy.
All unused funds pass on to the decedent's estate or beneficiary at death.
The estimates developed by the SSA actuaries identified the amount which an individual would need to save each year through age sixty-four for this nursing home coverage. The contribution estimates are based on the assumption that no interim withdrawals are made from the accounts for any reason--hence, that all interest accumulates free of Federal income tax.
Table 3-5 shows the amount that a person would have to save each year to accumulate enough money by age 65 to meet the expenses of a nursing home stay. Two amounts are estimated, each using a different assumption about the future rate of inflation in the cost of nursing home care. Historically, inflation in the nursing home sector has been higher than general inflation.
The first estimate assumes inflation at the rate of increase of employee compensation, which is the inflation rate for the cost of nursing home care included in the intermediate (i.e., alternative II-B) assumptions of the Old Age, Survivors, Disability Insurance and Health Insurance (OASDI and HI) Trustees Reports. A second estimate is also included, with inflation lower than the II-B assumptions in the Trustees Reports but at ten percent above the Consumer Price Index (CPI). The second estimate is included because of the inherent uncertainty in projecting impacts for long periods, as necessary for this project, and because it is possible that cost-saving developments in nursing home technology could reduce the rate of inflation in nursing costs relative to general inflation.
The IMA prototype developed would limit contributions to the amounts shown in Table 3-5. Persons who save the maximum amount would accumulate enough funds to pay for the expected length of stay in a nursing home, under the assumption of a 6.08 percent rate of return on savings, the alternative II-B assumptions in the Trustees Report. The contribution rates include an adjustment for adverse or anti-selection and induced demand.
The Effect of Inflation on Contributions
As Table 3-5 indicates, the effect of higher inflation for nursing home costs is very substantial. The higher inflation assumption adds 47 percent to the savings needed starting at age 50; 58 percent at age 40; and 72 percent at age 30. (The younger the age, the more years the differential inflation rate has to affect the savings needed). The age of the person when he/she begins to save also has a major effect: the necessary savings rates for persons beginning at age 50 are more than double those who begin at age 30. This is because the older person has fewer years in which to accumulate necessary savings.
The Experience with IRAs
To estimate the probable participation rates and effects of IMAs, a distribution of potential savers, by age, sex and income levels, must be assumed. A distribution of the amount saved must also be assumed, since not all savers can be expected to save the maximum amounts. The best prior experience on which to base estimates of IMA savings is the experience with IRAs, which have been available to all wage earners and their spouses since 1982. The latest information on IRA savers is for 1984, and was discussed earlier in Section C.1.
IMA Options Analyzed
IMA options could take several forms ranging from an expansion of current law IRAs to include IMAs, to the establishment of separate IMAs in addition to or in place of current law IRAs. Two basic IMA options were examined in this analysis:
Expand Current IRAs:
This option was designed to have maximum appeal.
The limits of current IRAs would be increased by $1,000, raising the maximum contribution to $3,000 for an individual and $6,000 for a working couple.
The extra $1,000 is treated as an individual medical account for nursing home expenses.
Individuals would be permitted to withdraw funds from the IRA to pay for nursing home expenses without payment of taxes after age 65. Withdrawals for other purposes would continue to be taxed at the individual's current marginal tax rate.
Remove the requirement that individuals begin withdrawals from their IRA savings by age 70 1/2 as well as the restrictions on contributing to the account after the age of 59 1/2.
Assume that all those who save the additional $1,000 would leave it untouched until the need for long-term care arises, or until death, whichever comes first.
It was originally planned that the analysis would continue by examining the potential of completely separate IMAs for long-term care in addition to retaining the existing IRA's. However, the system-wide effects of the expanded IRA option were very small, and it seemed clear that the effects of additional, separate IMAs dedicated to long-term care would be even smaller. Hence, the decision was made not to pursue this option.
To explore further the possibilities of IMAs, and in the light of possible Congressional tax reform action eliminating IRAs for those with pensions, a second IMA option was analyzed. It is emphasized that the second option is clearly an upper bounds estimate for the possibilities of IMAs. It is used only for exploratory purposes. The option assumes that IRAs are eliminated, and that all those who now save in IRAs will do so in IMAs, in the same amounts as in their IRAs. The option is outlined below.
Replace IRAs with IMAs:
Current IRAs would be eliminated.
IMAs for long-term care would be established in the tax code with a maximum contribution of $2,000 per year.
Assume that everyone who currently participates in IRAs would contribute to the new IMAs, and in the same amounts.
Tax treatment of contributions and earned interest is the same as that for IRAs.
The amounts saved would be used for long-term care expenses as needed after age 65 and would be tax free if used for that purpose.
Estimating the Effects of IMAs
A model recently developed by the Brookings Institution and ICF Incorporated was used to estimate the potential of IMAs to protect consumers against catastrophic expenses associated with the need for nursing home care. The model is a micro-simulation model designed specifically to provide estimates of long-term care utilization and expenditure patterns. The model is based on data and assumptions that allow the user to estimate patterns of earnings, asset accumulation, and disability, and the effect of those factors on the utilization and financing of long-term care over the years 1986 to 2020. The model includes the probability of disability and of institutionalization, length of stay in an institution, and probability of use of noninstitutional services.
The model is the best currently available for long-term care financing projections, and it builds on previous modeling efforts. The model is summarized in Appendix 5. Details of the model are described in a draft documentation report (ICF, 1986).
As with any model, it can only attempt to simulate reality, and there are some simplifying assumptions which are necessary. Most important for these estimates are the following:
Supply is assumed to adjust to meet demand. Because trends in the supply of nursing home beds have been erratic and unpredictable, no readily available methods exist to forecast supply. The assumption is fairly reasonable for the long modeling period used.
General inflation, as measured by the Consumer Price Index (CPI), is assumed to follow the course of the estimates in the OASDI and HI Trustees Reports (Alternative II-B). As discussed earlier, there are different views on the possible level of future inflation in nursing home daily charges, so two estimates were used. One assumed that inflation would be ten percent above the CPI, the other that it would be the same as the Medical Care inflation estimates in the Trustees Reports, which were projected at the expected rate of increase of wage-earners compensation. As will be seen, the assumption on specific inflation is very important in the findings.
Age-specific rates of utilization of nursing home services were estimated using the National Nursing Home Survey of 1977 (the latest data available), with some adjustments for changes believed to have occurred since then. These age-specific rates are held constant in the model. Hence if there is a trend toward a more disabled population in the future (as some disabled persons live longer) or toward a less disabled population (if cures or palliative treatments are found for some disabling conditions), these estimates will be high or low, accordingly.
The model assumes that persons will first spend their current income for long-term care (after exhausting whatever Medicare benefits they are eligible for), then their assets, and finally will draw on Medicaid. Thus, no divestiture of assets to others to qualify for Medicaid is assumed.
Even the last five-year period covered by the model (2016-2020) does not capture the anticipated peak of long-term care utilization of the "baby boom" generation, thus, perhaps, underestimating the impacts of private financing approaches somewhat for long-term care utilization beyond 2020.
Who will participate in IMAs?
Expanded IRA Option. As indicated above, almost all persons who will save in IMAs are those who are already contributing the maximum in IRAs. Not all of them would contribute to an IMA, and not all of those who do would contribute the maximum. For purposes of estimating the first option (the expanded IRA), however, it was assumed that 90 percent of those who saved the maximum in an IRA account in 1983 would save to the new maximum amount of $3,000. This is an optimistic assumption. The second option (replacing IRAs with IMAs) assumes that rates of IMA saving by income are similar to those of IRA contributors in 1983, and therefore have similar characteristics to those shown in the review of IRAs.
With the rise in income over time, the proportion of contributors is also projected to rise, reaching the level of 28 percent by 2018. (Projections from the Brookings/ICF model are presented as five year averages. The year 2018 is the mid-point of the period 2016-2020.) The proportion also rises over time because of variation in income -- persons who cannot contribute the maximum in one year may be able to do so in another, and the total who have ever contributed rises. However, even by 2018 less than a third of the elderly population would have ever contributed the extra amount above the present $2,000 limit in a given year, and the proportion is only 40 percent for those with incomes of $50,000 or more.
The likelihood of contributing the maximum is also related to sex, marital status, and whether or not the person is a homeowner. Table 3-6 shows the proportion projected to hold accounts over time classified by those variables. Males are much more likely than females to hold accounts in which they have deposited the $3,000 maximum at least once, both because income for males is higher than income for females, and because most current husband-wife households decide to put the maximum in the account of the husband before that of the wife. By 2018, almost half of all elderly males are projected to have contributed the $3,000 maximum to an IRA in one or more years.
Married persons and homeowners are also somewhat more likely to contribute the maximum than those who are not married or who do not own their own homes, but the differences grow much smaller by 2018.
Projections of Nursing Home Utilization by the Elderly
As described earlier in this report, nursing home use by the elderly is projected to rise over the next several decades in response to the rapid growth of the elderly population, particularly the very old. Table 3-7 shows the total expected elderly population and the population in nursing homes, by age, for 1986, 2000, and 2018 based on projections from the Brookings/ICF Long-Term Care Financing Model. The projections are similar to those discussed in Chapter 2 of this report.
The projected proportion of the elderly who will be in nursing homes rises from 7.0 percent to 8.8 percent between 1986 and 2000, and then falls to 8.0 percent by 2018. This pattern is not due to increases in age-specific nursing home use, but to the effects of relatively large cohorts from the high birth rates of the 1920s and the post-World War II period, and a small cohort from the-low birth rates of the 1930s and war years. In raw numbers, the nursing home population will double over the 32 years.
The rise in the proportion of the nursing home population which is 85 and over is due to the projected decrease in mortality -- a much larger proportion of the elderly population will be in the oldest group in 2018 than currently and rates of nursing home use for those 85 and over are much higher than for the age groups 65-74 and 75-84.
Inflation and Projections of Aggregate Nursing Home Charges
Projections from the Brookings/ICF model indicate that aggregate nursing home charges for the elderly will increase sharply over the next 32 years to about $98 billion in constant (1987) dollars in 2018, even if there are no changes in present long-term care financing policy (that is, no increase in IRA limits, other than those needed to offset general inflation, and no special IMAs established for long-term care). These projections are based on demographic and inflation assumptions (alternative II-B) included in the Medicare Trustees Report. The increase is partly due to the projected increase in the nursing home population described above, and partly due to specific inflation in nursing home charges. As shown in Table 3-8, over the 32-year modeling period being examined, the difference in estimates between the two inflation assumptions is large.
Total nursing home charges would be almost fifty percent higher in real terms (measured in dollars at 1987 prices) under the employee compensation assumption and, by 2018, will be over three times as large as the $30 billion spent by the elderly on nursing homes in 1986. At the lower inflation rate, they will be a little over twice as large as in 1986.
The different inflation rates also produce differences in the sources of funds for payment of the nursing home expenditures. Table 3-9 shows the sources of funds in 2018 under the two different assumptions about nursing home inflation rates and the percent difference between the effects of the two rates.
The impact of the additional charges from the higher inflation assumption among sources of payment is quite uneven in 2018. The increase in payments from current income is quite small (2.7 percent), as few patients in nursing homes had additional current income they could spend above the amount required to meet charges at the lower inflation level. The increase in the amount coming from patients' assets, 57.1 percent, is greater than the increase in total charges, 48.4 percent. More patients use up more of their assets at the higher level of inflation. The total effect is an increase in out-of-pocket spending of $9 billion, or about 22 percent, under the higher inflation assumption.
The impact of the higher inflation rate on projected Medicaid spending is quite severe, with increases about double the rate of increase of total charges. Medicaid spending is almost twice as high at the higher inflation level than at the lower, and is almost four times as high in real terms as in 1986 at that higher inflation level, nearly $50 billion.
Effects of IMA's on Out-of-Pocket Costs and Medicaid Costs
In order to assess the effects of the IMA options over a long period of time, it was first necessary to project nursing home expenditures over the next 32 years assuming no changes from the present laws or regulations. The Brookings/ICF model includes the necessary demographic characteristics, and they can be accurately predicted for cohorts of persons already born. It also includes the alternative II-B assumption on inflation in the OASDI-HI Trustees Report. Table 3-10 shows the sources of payment for nursing home expenditures for this initial set of projections. These projections provide a set of baseline estimates, referred to as the "base case", against which the effects of various policy changes can be compared. It should be noted that these estimates include nursing home expenditures only for the elderly. Expenditures for those under age 65 are not included in the simulations.
When the model is run again with a specific policy option, such as the expanded IRAs, the differences in projected policy variables, such as source of payment for nursing home expenses, provide a measure of the effect or impact of the option in selected years.
Impact of Expanded IRA's
After establishing the base case, the model was used to project future aggregate nursing home charges according to source of payment under the assumption that the expanded IRA was in effect. The features of the expanded IRA option include: increase IRA limits by $1,000 and eliminate the requirement to begin withdrawals at age 70 1/2. Table 3-11 shows total nursing home expenditures by source of payment for this option.
The differences between Table 3-10 and Table 3-11 represent the effect of adding the additional $1,000 to the IRAs, and removing the requirement of drawing the money out beginning at age 70 1/2, under the higher inflation assumption. Projections are shown in constant dollars (1987) for comparability. Total nursing home expenditures are expected to increase slightly over the base case in 2000 and 2018 under the expanded IRA option. This increase is a result of a small shift in payment source from Medicaid to the IRA at higher, private pay rates. The effects of the expanded IRA option by 2018 are summarized in Table 3-12.
As one measure of impact, the additional IRA savings would pay for about 3.0 percent of total nursing home costs by 2018 almost $3 billion in constant dollars. The availability of the IRA savings would reduce other out-of-pocket spending by 4.3 percent compared to the base case, most of it from the current incomes of high income persons.
Medicaid would save about $400 million by 2018, split between State and Federal spending--about 1.3 percent of projected Medicaid spending in that year. The low Medicaid savings result from the fact that almost all of the additional IRA savings would be held by persons wealthy enough to pay for nursing home care almost entirely from their current incomes, without tapping their assets. As a result, they never spend down to Medicaid eligibility levels. This finding implies that nursing home charges do not represent a catastrophic expense to them.
At the lower inflation level (not shown), the conclusions are similar. Medicaid savings are even lower, about 0.7 percent, or $200 million.
Impact of IMA's
Under the second option, current IRAs are assumed to be eliminated and IMA's are assumed to be established in their place. All who currently participate in IRAs are assumed to contribute to IMAs, and in the same amounts.
This option was developed to explore the "upper bound" estimate of the maximum possible effects of IMAs. It is extremely unlikely that the IMA option would attract the savings that IRAs do, even if IRAs were eliminated, since their use would be restricted to nursing home expenses, while IRAs can be used for any purpose after age 59 1/2. "Upper bound" impacts are instructive for their order of magnitude, but they should not be considered to be the likely impact of such an option. With this consideration in mind, the estimated impacts in 2018 of this IMA option as compared to the base case are summarized in Table 3-13.
As expected, the IMA option has a considerably larger effect than the expanded IRA option. While total charges still rise only a small amount above the base case (due to some Medicaid payers who shift to private pay at a higher rate from their IMAs), Medicaid costs are about $2 billion or 3.7 percent less than the base case. Most of the impact is on out-of-pocket costs, however, with dependence on current income reduced by over $4 billion, and on assets by $1.5 billion.
Conclusions
Based on this analysis, the potential of pure IMAs to reduce Medicaid costs appears to be very limited, even before tax losses to the Treasury are considered. The potential for providing catastrophic protection also appears limited, since the IMA substitutes principally for other income or savings.
If experience with IRAs is a valid predictor, affordability is a major problem and participation rates are likely to be low, especially among low and lower middle income persons and families.
In addition to affordability, a major difficulty inherent in individual savings approaches to financing long-term care directly is the fact that even if a person were to save enough to pay out-of-pocket for the average nursing home stay, the savings would be insufficient for long stays and far too much for those who never needed nursing home care or who needed very limited amounts of care. Further, the inherent target inefficiency of individual tax shelter approaches for future nursing home care would probably make the cost much greater than the gain. However, it is possible that, when savings approaches are combined with risk-pooling approaches, such as insurance, a much greater target efficiency can be obtained. On these grounds, approaches that encourage tax favored savings for long-term care insurance may well be worth considering. A variety of such plans, linking the IMA concept to long-term care insurance, are discussed below.
2. Special Analysis of Long-Term Care Insurance and Insurance Combinations
In this section, the findings of a series of new analyses are presented on the costs, affordability, and impact of a number of alternative insurance approaches as well as specific policy features, several of which have never been tested in the marketplace.
The first part of this special analysis examined the effect of various policy features on premium levels. Since current offerings in the long-term care insurance market are fairly limited, it was necessary to develop and test a series of prototype or hypothetical policies to understand the effects of a wide range of policy features.
The second part of the analysis involved specifying selected policies and premiums, and developing assumptions about affordability in the population. These specifications were then used in the Brookings/ICF micro-simulation model to estimate the effect on out-of-pocket and public expenditure patterns for long-term care that would result from alternative hypothetical specifications of those factors.
In addition to testing the possible impact of insurance approaches, the potential of several combination strategies also was explored, including:
Design and Analysis of Prototype Insurance Policies
Premium rates for long-term care insurance are complex and depend on the interplay of a number of different factors. The marketability of insurance is influenced by the size of premium rates as well as the features of the policy.
To assess the influence of specific insurance features on premiums, estimates were made of prototype long-term care insurance policies with the following alternative specifications:
Issue age of purchasers: for ages 30, 40, 50, 60, and 65 years.
The estimates assume that the premium structure for starting ages 30, 40 and 50 is designed so that enrollees will be paid up in the year after turning age 65. For these ages, the enrollee is responsible for paying premiums until the year in which he or she has a 65th birthday, after which premiums are waived. For issue ages 60 and 65, the premiums are designed to be paid over the insurer's lifetime.
Premium levels: level premiums or indexed at 5 percent per year.
Waiver of premium: after 90 days in nursing home.
It was assumed that the policy provides for a waiver of premiums for persons who stay in a nursing home beyond 90 days.
Benefit levels: for level benefits, $50 per day nursing home payment and $25 per home health visit; for indexed benefits, starting at $50 per day for nursing home payments and $25 per home health visit, with premiums increasing by 5 percent each year.
Benefit period: 4 years, after meeting deductible.
Deductible: 30 days or 90 days in a nursing home before covered services (either nursing home or home health) begin. This period is also known as the "elimination period".
For estimation purposes, it was assumed that persons who pass into a benefit period will use up all benefits they are entitled to receive. Thus, it was assumed that a person staying in a nursing home for two years after the deductible period and then discharged, would also use two years of home health care at three visits per week if those services were covered under the policy as well. Similarly, a person discharged from the nursing home directly after meeting the deductible period would use four years of home health services.
Pre-hospitalization requirement: 3 days or none.
Most existing nursing home policies require a 3 day prior stay in a hospital before any nursing home stay can be counted towards the deductible. For analytic purposes, a second set of premium estimates was developed for policies without any prior hospitalization requirement.
Selection criteria: "select" or "group".
The select premium estimates are based upon the assumption that the insurer would be enrolling individuals who are significantly better risks than the general population. Select premium estimates assume that the groups of people enrolled will have lower utilization rates (i.e., will be better risks) in the early years of the policy but that their rates become very similar to those of the general population over time. Group premium estimates reflect general population utilization patterns.
The select rate premiums assume high marketing and administrative costs associated with individual policies. The group rate assumptions include lower marketing and administrative costs associated with group policies.
The premiums for select turn out to be higher than for groups because the effect of the higher marketing and administrative costs outweigh the advantage of insuring a lower risk group.
Guaranteed interest on reserves: starting at 7.5 percent and leveling at 5 percent.
Taxation on interest earned: zero percent or fully taxed.
The premium estimates were made using a revised version of the premium estimation model developed for the National Center for Health Services Research by Actuarial Research Corporation (ARC) (Meiners and Trapnell, 1984). The premium estimates are for hypothetical private market long-term care insurance products. Actual product prices will probably be different, reflecting the assumptions of the company offering the insurance. The estimates only approximate the relative order of magnitude of variation that might occur with different insurance features found with such products.
Table 3-14 shows the premiums for a level premium, level benefit product. The premiums for a product where both the premiums and benefits are indexed for inflation at 5 percent each year are shown in Table 3-15. These estimates provide a basis for an initial assessment of various insurance features and their relationship to affordable premiums for long-term care insurance. Selected highlights are described below.
The Effect of the Prior Hospitalization Requirement on Premiums
The requirement that the beneficiary have an immediately prior hospital stay of 3 days or more is a major limitation of most existing policies. This is because the chronic illnesses associated with the need for nursing home care are often not preceded by a hospital stay.
The ARC estimates suggest that removal of the 3-day hospital stay requirement increases premium rates by 40 to 70 percent, depending on issue age and other policy features. Comparing these estimates to an existing policy, a recently issued policy being marketed by Aetna, at issue age 65, costs about 43 percent more when the 3-day hospital stay requirement is removed. The substantial premium increases necessary are due in part to an anti-selection factor, i.e., to account for the fact that higher risk individuals are more likely to choose this option.
The Effect of Taxation of Interest on Reserves on Premiums
Most current policies use a premium rate structure that is fixed at issue age, at a rate that remains level over the life of the policy. Because the risk of using services increases as people age, this feature implicitly involves the accumulation of reserves by the company. Accumulated reserves are currently taxed at the corporate rate (which averages 46 percent).
One possible strategy for encouraging the market is to allow accumulated reserves to be tax free. If such tax savings were passed along to the consumer in lower premium rates, the estimates indicate that premiums at issue age 65 could be reduced by about 16 percent. If the policy were purchased at age 50 with contributions leading to paid up coverage at 65, the premium would be reduced by about 47 percent.
It is also interesting to note that this type of a tax change favors earlier purchase of the insurance. For example, the cost of an inflation-indexed policy--90-day deductible, no prior hospital stay required--is about 44 percent less per year when begun at age 40 than when begun at age 50. With taxes on reserves, the same policy would cost only 28 percent less per year at age 40.
The Effect of Inflation Adjustments on Premiums
As noted, most current long-term care insurance products do not adjust for inflation. Incorporating an adjustment, however, involves more than just straight indexing of premiums and benefits. Because the benefits are paid, on average. much later than the premiums, an upward adjustment of the whole beginning premium structure is necessary to accommodate the future inflation costs. Therefore, both premiums and benefits must take inflation into account. This adjustment affects premiums dramatically.
The estimates indicate that, at older issue ages, the beginning premium for a 5 percent inflation assumption is in the range of 30 to 40 percent higher (Table 3-14 compared to Table 3-15). At younger issue ages the necessary adjustment is dramatically higher--by a factor of between 4 to 6 times greater--making the attractiveness of prefunding substantially less than is often assumed. This analysis reveals why insurers are hesitant to offer inflation adjusted products. Without such adjustments, however, the value of coverage will erode substantially over time.
Premium Estimates for Long-Term Care Insurance and Insurance Plans Linked with Savings Vehicles--IMA Insurance Prototypes
As noted earlier in the section on Individual Medical Account strategies, proposals to combine a dedicated, tax-favored savings account with long-term care insurance were viewed as promising options worthy of further analysis. Estimates of the contributions and premiums necessary for several combination approaches were developed by actuaries from the Social Security Administration. In order to assure consistency between the assumptions and data used to make the premium and contribution estimates, as well as to facilitate analysis of combined approaches, the SSA actuaries (rather than ARC) provided both sets of estimates.
The combined IMA and long-term care insurance estimates were developed to cover nursing home care only, in part because the need for nursing home care is the major contributor to catastrophic expenses associated with long-term care. In addition, however, the data on the costs and utilization of home and community care services are not readily available and it was felt that any estimates that included such services would be highly unreliable.
Estimates were developed for annual contribution and premium rates that would be required for six different plans, all of which provide nursing home coverage starting at age 65. The six plans represent a continuum of options from pure IMA to pure insurance. These plans formed the basis for choosing which combinations of IMAs and insurance would be examined further with the Brookings/ICF simulation model.
Features of the Six IMA-Long-term Care Insurance Plans for which Estimates Were Developed
Except for Plan 1, which is a pure IMA design, all of the plans for which estimates were developed have an insurance feature. Plan 4 was designed to incorporate features of a long-term care plan first outlined in 1985 by Bowen and Burke (1985).
Plan 1: Pure IMA: This plan was discussed in the earlier section on IMAs. In summary, individuals contribute to individual accounts through age 64 only, accumulating a fund at age 65 sufficient to provide the specified indexed coverage amount for a nursing home stay of average length after reaching age 65. All funds are untaxed until death, at which time they are taxed as part of the estate.
The nursing home utilization rate estimated for this analysis is: 2.2 years, 2.1 years, 2.0 years, and 1.9 years, on average, for persons who begin contributing in 1986 at ages 30, 40, 50, and 60, respectively; and 2.6 years, 2.5 years, 2.4 years, and 2.3 years for those who begin contributing in 2021 at ages 30, 40, 50, and 60, respectively.
Plan 2: IMA Contributions Split 2/3, 1/3: Individual contributions each year are split, 2/3 to an individual account, 1/3 to a pooled fund. Each fund retains its own interest. For nursing home use at age 65 and over, the individual account is exhausted first. Thereafter, additional use is covered from the pooled fund. Any remaining amount accumulated in the individual account at death goes to the estate. Contributions are waived while in a nursing home at age 65 or older.
Plan 3: IMA Contributions Split 1/2, 1/2: Same as Plan 2 except funds are split half and half between the individual account and the pooled fund. Each fund retains its own interest.
Plan 4: IMA Interest Split 1/2, 1/2: All contributions are deposited into an individual account, along with one-half the interest on the individual account. The other half of the interest goes into the pooled fund. All interest on the pooled fund remains in the pooled fund. Any remaining amount accumulated in the individual account at death goes to the estate. Contributions are waived while in a nursing home at age 65 or older.
Plan 5: IMA/Insurance with Modified Return of Premium: Accumulated contributions/premiums are returned only if death occurs before age 65. Starting at age 65 all nursing home use is covered at the indexed coverage amount. Premiums are waived while in a nursing home at age 65 or older.
Plan 6: Pure Insurance: No funds are returned at death. Starting at age 65, all nursing home use is covered at the indexed coverage amount. Premiums are waived while in a nursing home at age 65 or older.
Table 3-16 and Table 3-17 present the estimates of annual premiums and contributions for the six plans based on different rates of inflation. Estimates are given for plans beginning in years 1986 and 2021, for issue ages 30, 40, 50, and 60. The estimates are provided for both 1986 and 2021 so that the effect of declining mortality during the years covered by the Brookings/ICF model will be reflected. Each plan is shown both with contributions and premiums paid-up by age 65 and with contributions and premiums to be paid for life.
Assumptions Which Underlie the Premium and Contribution Estimates
Coverage is assumed to be $50 per day at issue, indexed thereafter. Average nursing home rates for private pay patients were about $60 in 1986, so this amount reflects about a 17 percent co-payment. The contributions and premiums are for the issue year and are also indexed after issue.
The difference between the estimates in Table 3-16 and Table 3-17 is the rate of indexing of annual nursing home coverage and premium amounts. As noted earlier, the rate of indexing of nursing home coverage has an important effect on the estimated premium levels.
For Table 3-16, both contributions/premiums and coverage are indexed at 5.8 percent annually, consistent with the "ultimate" intermediate (alternative II-B) assumed rate of increase in medical service costs for the 1986 OASDI and HI Trustees Reports. (This rate equals the assumed rate of increase in employees compensation.) Table 3-17 shows estimates with indexing at 4.4 percent, reflecting a much more modest rate of indexing for nursing home coverage.
All contributions and premiums are computed assuming that each participant makes a payment every year, as required by the plan. It is assumed that contributions and premiums for plans 1 through 5 are made at the end of each year. For plan 6, premiums are assumed to be paid at the beginning of each year.
Nursing home utilization rates are based on data from the 1977 National Nursing Home Survey and were adjusted to reflect expected antiselection and induced demand for those who would voluntarily choose to purchase nursing home coverage. Induced demand adjustments reflect the judgment that increased insurance for the costs of nursing home care will increase the demand for nursing home care by those insured. The adjustment factor for induced demand is 37 percent, as indicated on the tables, and its calculation and rationale are described in Appendix 4: Induced Demand.
Mortality rates used in calculating contributions and premiums are the intermediate (alternative II-B) assumptions of the 1986 OASDI and HI Trustees Reports. The "unisex" figures provided in Table 3-16 and Table 3-17 are based on the assumption that equal percentages of the male and female population will participate. If participation were larger for females, contributions and premiums would be much higher because of the greater life expectancy of women.
The interest rate assumed for all estimates is 6.08 percent, the "ultimate" value included in the intermediate (alternative II-B) assumptions of the 1986 Trustees Reports.
All estimates include a 1.8 percent administrative cost factor, the same as for SSA's HI program. If insurance is provided on a substantially smaller scale by private companies, with their usual sales commission and profits, the administrative expense factor would be higher.
Analysis of the Results of Premium Estimates
Analysis of the results presented in Table 3-16 and Table 3-17 indicates that the longer one waits to begin contributions to any of the options, the more expensive they are on an annual basis. The effect is especially dramatic when the concept of pre-payment of premiums by age 65 is applied. The lifetime premium approach lowers the pure insurance starting premiums (plan 6 - 5.8 percent) by 30 percent at issue age 30 and by 50 percent at issue age 50 compared to the paid-up approach.
The least expensive option is pure insurance. The benefits of risk pooling are evident even with the three combination plans. Plan 3 is less expensive than plan 2 because more of the funds are directed to the insurance pool.
The difference between plans 3 and 4 is not quite as straight forward but the principle is the same. The more the funds are directed into the risk pool, the less the necessary contributions. In plan 4, earlier participation results in more of the funds being directed into the insurance pool. For early issue ages, this effect is enough to offset the fact that only half the interest earnings each year are contributed to the insurance pool.
The importance of the inflation assumption is seen again in the estimates in Table 3-16 and Table 3-17. The higher the expected inflation, the higher the necessary starting premiums. The required inflation adjustment is higher with the paid-up by age 65 approach than when lifetime payments are assumed.
The alternative inflation assumptions also provide a rough indication of the effect of underestimating the inflation factor. For the pure insurance approach, with lifetime premium payments starting at age 30, the premium will be underfunded, on average, by about 36 percent if a 4.4 percent nursing home inflation factor is assumed when in fact the real rate of inflation is 5.8 percent.
The effect of underestimating the inflation factor is lower with older issue ages. For issue age 60, the comparable figure is about 17 percent. These figures are somewhat misleading as indicators of the degree of the problem because they reflect only the average rate of underfunding. The degree of underfunding increases over time and is highest in the later years when use is most likely.
The final conclusion to be drawn from these results is that the premium rates even for the least costly pure insurance approach are still quite high. One reason for this is the lengthy coverage of the plans tested.
In order to determine the extent to which the use of deductible periods and limits on the years of coverage could further reduce the premiums, additional estimates were made. Approaches which include paid-up premiums by age 65 were not used because of their high cost. Rather, the lifetime premium payment approach is used.
Table 3-18 presents issue-age premiums for nursing home insurance covering $50 per day starting at age 65, with various possible lengths of coverage. All estimates assume a 90-day deductible period, and both the lifetime premiums and coverage are indexed at 5.8 percent per year after issue. Waiver of premiums is assumed for nursing home residents over age 64. Selection criteria are assumed to limit new issue ages over 54 to non-disabled persons and limit new issues at ages under 55 to persons not residing in nursing homes.
The premiums are essentially structured as if the policy achieved universal coverage among the general population. The selection criteria is substantially less restrictive than is generally assumed in products currently on the market. The estimates assume no 3-day hospital requirement. All reserves are assumed to accumulate an a tax-free basis. (As shown previously by the ARC estimates, if the reserves are taxed the necessary premiums would be higher--substantially so for early issue ages.)
The premiums are based on the same data and assumptions used for the estimates in Table 3-16 and are comparable to the pure insurance estimates (Plan 6). The premiums are reduced because of the addition of the 90-day deductible and varying lengths of coverage. The estimates include a factor for induced demand on the part of those individuals who voluntarily chose to purchase the coverage. The lowered out-of-pocket cost of entering a nursing home after insurance has been purchased is assumed to influence utilization. The assumed increase -in premiums ranges from 10 percent to 23 percent for coverage ranging from one year to unlimited years.
A comparison of the estimates in Table 3-18 and Table 3-16 indicates that the 90-day elimination period reduces starting premiums by about 20 percent, regardless of issue age. Cutting back from full coverage (with the 90-day deductible) to four-year coverage reduces premiums by 28 percent. A two-year policy is 35 percent less than a four-year policy. The effect does not vary substantially by age.
Prototype Analysis--Conclusions
The preceding prototype analysis provides several insights useful for the simulations of the potential impact of various insurance and combination options on nursing home expenditure patterns. The importance of inflation adjustments clearly emerged as a dominant consideration.
Premium contributions beginning as early as is practical and continuing over the beneficiaries lifetime will help this type of coverage be affordable, as will longer deductible periods before benefits begin and limits on the length of coverage. This is turn suggests the need for a reasonable level of disposable income to pay the deductible and co-payments. The SSA premium estimates are higher than current market rates for existing policies, in part because they assume that insurers will be less able to be as selective as they are now once policies are widely sold. If the SSA estimates accurately reflect the general magnitude of rates that will be necessary, then affordability concerns indicate that consideration needs to be given to more limited coverage approaches.
Estimating the Effects on Public and Private Expenditures of Insurance and Combination Approaches
The Brookings/ICF Inc. model was used to estimate the potential of various insurance options to protect consumers against catastrophic expenses associated with the need for nursing home care.
The model as specified does not adjust for induced demand: that is, if insurance for nursing home care makes people more likely to enter nursing homes, or encourage longer stays because financing is available, the model does not reflect that increased likelihood. Therefore, the results presented in this section do not reflect the potential effect of induced demand. However, special adjustments of the results for the last option presented in this section were made to approximate the effect of induced demand as an example of the impact of this concern. These results are discussed at the end of this section.
Private Market Policy Simulation
The estimates focused on a new policy recently issued by Fireman's Fund. The new Fireman's Fund policy was chosen because it reflected the most recent thinking of a company that has been marketing long-term care insurance for an extended period of time.
The policy reflects some major changes from earlier offerings. Most significant is the extension of benefits from 4 to 6 years and the introduction of an optional inflation-adjusted benefit and premium structure. The Fireman's Fund inflation adjustment is significantly more limited than assumed in the SSA estimates presented earlier. It covers only 10 years (rather than lifetime) beyond purchase, and the 5 percent annual increase is not compounded over that period. Nonetheless, it reflects a real world policy that attempts to deal with inflation.
Other features of the policy include a 100 day deductible period, $50 per day benefit, and a three day hospital stay requirement. The policy also includes a very limited home health benefit tied to the use of nursing home care paid by the policy. At age 65, the annual premium charged for this policy is $506.
To simulate the effect of a market for this policy, the following assumptions were made:
To initiate the model in 1986, persons age 67-81 will be eligible to purchase the policy. After 1986, policies will be purchased starting at age 67.
Individuals and couples were assumed to buy the insurance if they could afford it for less than 5 percent of their income and if they have $10,000 or more in assets. The asset provision reflects both the amount needed to pay the deductible as well as the assumption that insurance will only be purchased if there are at least minimal assets to protect.
No one who is disabled will be allowed to purchase the policy. Individuals who become disabled after they have policies will continue to hold the policy.
The 3-day hospital requirement will result in only 75 percent of those policy holders who enter the nursing home receiving benefits.
If an individual's income declines after purchasing the policy so that the premium is no longer less than 5 percent of income, it is assumed the individual will keep purchasing the policy as long as the premiums are less than 7 percent of income and the individual has $10,000 in assets.
Under these assumptions, about 23 percent of those age 65 and over would own the Fireman's Fund Policy in the year 2018. Table 3-19, second and third columns, shows the effect on nursing home expenditure patterns for that year. Compared to the base case which assumes no insurance, these assumptions indicate that about 7 percent of the total nursing home bill is paid by insurance. The major change in expenditure patterns is with out-of-pocket expenses which decline by about 12 percent. Medicaid expenditures decline by less than 2 percent.
Combined IMA and Insurance Plans
A simulation of plan 4--the interpretation of the Bowen-Burke concept--from Table 3-16 was also conducted. The simulation was done by assuming that, starting in 1987, individuals age 30-60 can set aside funds in a special account designed to shift one-half the interest earnings every year into an insurance pool (see earlier details).
Participation rates assume that 90 percent of persons contributing the IRA maximum ($2,000) will contribute the amount shown on Table 3-16, less the indicated amount of induced demand. (This is clearly an expansive assumption, since it implies that a 60 year old would contribute $2,628 ($3,603 with induced demand adjusted premiums) for life to this account, in return for a $50 dollar per day benefit (in 1986 dollars)).
Under these assumptions, about 29 percent of those age 65 and over would have such an account in 2018. The effect on nursing home expenditure patterns are shown in the fourth and fifth columns of Table 3-19. By 2018, the combination account pays about 8 percent of the total nursing home bill. Relative to the base case, in which the combination account does not exist, out-of-pocket expenses are reduced about 11 percent and Medicaid is reduced 4 percent. The fact that this option did better with Medicaid is probably because some lower and middle income people were assumed to contribute unusually large amounts to the account by virtue of the participation rate assumption.
Pension Benefit Link
The previous simulations clearly produced very limited effects on out-of-pocket and public payments in spite of what appear to be optimistically high assumptions about rates of participation. To examine the potential effect of more broad based participation assumptions, several other ideas were examined.
The first of these options tested was to include long-term care insurance as part of an employee benefit package. To simulate this option, it was assumed that starting in 1987, individuals age 65 who start to receive pension benefits of $1,000 or more per year receive a 2-year long-term care insurance policy. The policy has a 90-day deductible period and pays $50 per day (in 1986 dollars) for nursing home care. Using SSA estimates without the induced demand factor, one-half of the cost of the insurance is deducted from the pension.
Under these assumptions about 35 percent of those age 65 and over would have a two-year policy in 2018. The effect on nursing home expenditure patterns are shown in the sixth and seventh columns of Table 3-19. By 2018, insurance is projected to pay about 11 percent of the total nursing home bill. Out-of-pocket expenditures decline by about 11 percent relative to the base case, very similar to the previously discussed options. Medicaid expenditures, however, decline by nearly 8 percent suggesting that the link with pensions does a better job of getting insurance protection to those who are more likely to need Medicaid to pay for nursing home care.
Medigap Link
A second broad based option tested the idea that those who purchased medigap insurance would also buy insurance for long-term care. To simulate this option, it was assumed that, starting in 1987, individuals age 67 and over purchased a 1 year long-term care insurance policy in accordance with their propensity to purchase medigap policies. The 1 year policy was used because it was assumed that purchasers were unlikely to be able to afford more coverage, when using the SSA premium estimates for a $50 per day policy (in 1986 dollars) with a 90-day deductible even with induced demand factored out.
The proportion of persons assumed to purchase these policies varies by family income and was assumed to be identical to the percentage found for Medigap purchase in the 1977 National Medical Care Expenditure Survey -- 53.5 percent for those with income 125 to 200 percent of the poverty level, 75.4 percent for those with income 2-4 times the poverty level, and 77.1 percent for those with income greater than 4 times the poverty level.
Under these assumptions, about 55 percent of those age 65 and over would have a one year policy in 2018. The effect on nursing home expenditure patterns in that year are shown in the eighth and ninth columns of Table 3-19. By 2018 insurance was found to be paying about 18 percent of the total nursing home bill. The major effect is on Medicaid which declines 18 percent relative to the base case. The reduction in out-of-pocket expenses is about 12 percent, a decline very much on the order of the other options. These results suggest that important savings in Medicaid could be achieved even when only very limited coverage is purchased by a relatively large number of low income people. It would appear that the relatively smaller effect on out-of-pocket expenses relative to Medicaid expenditures is due to the low income and asset level of persons with medigap coverage. This issue will require closer scrutiny.
Percent of Income Criteria
The final simulation to test broader participation was designed to address the problem of the "all or nothing" affordability criteria used in previous options. It seems likely that insurance policies will be available that are priced for sale to various income groups. For some people limited coverage will be viewed as better than none.
Starting in 1987, individuals age 30 and over are assumed to purchase the longest coverage that costs no more than 1 percent of their income in year of issue. Persons could purchase from 1 to 6 years of coverage or unlimited years of coverage, depending on what they could afford, with the premium costs as shown in Table 3-16, without induced demand.
Policies tested would pay $50 per day and have a 90-day deductible period. If the premium exceeds 2 percent of income for three consecutive, subsequent years while under age 65, the coverage is dropped by 2 years (or from no limit to 6 years).
Persons age 65 or over in 1987 are assumed to purchase the longest coverage that costs no more than 3 percent of income, if assets are $10,000 or more. The asset criteria reflects both the amount needed to pay the 90 day deductible as well as the assumption that insurance will be purchased only if there is some minimal level of assets to protect. If the premium exceeds 5 percent of income for 3 consecutive, subsequent years while 65 or older, then the coverage is dropped by 2 years (or from no limit to 6 years).
Under these assumptions, about 63 percent of those age 65 and over would own an insurance policy in 2018. The effects on nursing home patterns are presented in the last two columns of Table 3-19. By 2018 insurance is projected to pay about 17 percent of the total nursing home bill. This is about the same as had been found to occur with the medigap link assumption. The major change with this simulation occurs not with Medicaid, although Medicaid did decline by about 12 percent relative to the base case, but rather with out-of-pocket expenses. Out-of-pocket expenses are shown to decline by nearly 18 percent, by far the largest decline in this pavor category of any of the simulations.
The Effect of Induced Demand
As mentioned earlier, the estimates presented in Table 3-19 do not reflect the potential effect of induced demand. To provide a basis for understanding this issue, adjustments to the model output were made to approximate the effect of induced demand on the results of the percent of income option. This option was chosen because it had the highest take-up rate of any of the options examined.
Adjusting for induced demand influences the estimates in two ways. Premiums are increased to reflect the increased demand. This reduces the number of people who could afford the insurance, which in turn reduces expenditures because those paying with insurance are assumed to pay the higher private pay rate. Those who can afford the insurance, however, are assumed to use more nursing home care than they would have in the absence of insurance. The net effect of these factors are reflected in the expenditure estimates presented in Table 3-20.
Overall expenditures with induced demand increased by only 2.3 percent compared to the estimate without induced demand. The relatively small net effect occurs because most of those using nursing home care in 2018 are able to afford only limited benefits, so the induced demand factor averaged a modest 11 percent. Induced demand had little effect on the relative percentage of the total bill paid by the different sources. Insurance pays about 15 percent of the bill under the induced demand assumption compared to about 17 percent when no induced demand was assumed. Introducing the effect of induced demand also reduces the effect that the insurance option had on other expenditures. Out-of-pocket expenses are reduced by 14 percent (compared to 18 percent without induced demand) and Medicaid expenditures are reduced by 9 percent (compared to 12 percent without induced demand). From these results, it can be concluded that the net effect of induced demand is to reduce the influence of insurance in relieving pressure on both out-of-pocket and Medicaid expenditures.
Micro Simulation Analysis--Conclusions
The results of the simulations must be considered suggestive of general directions rather than conclusive. They indicate that the market for long-term care insurance and the impact of that market will be highly dependent on assumptions about affordability--the proxy measure used in the absence of reliable information on demand. The market and its impact will also depend on the types of coverage that are offered.
The Fireman's Fund assumptions and the 1 percent of income assumptions, for example, provide estimates of the extremes in terms of the market take-up rate. By the year 201S, only 23 percent are projected to own the Fireman's Fund product compared to 63 percent who owned a policy under the 1 percent criteria. These results suggest the importance of early purchase and flexible benefits for encouraging a broad-based market.
To have an effect on Medicaid, however, the market must extend into low and middle income groups, as is suggested by the Medigap simulation. This simulation indicates that even limited coverage can have a noticeable effect on Medicaid if it is affordable to low and middle income persons.
Even under the rather favorable assumptions concerning the marketability of long-term care insurance, the impact by year 2018 is more limited than might be expected. Clearly the problem of affordability is a central concern. One of the other reasons for this finding may be that the model covers a period of time which does not capture the peak, nursing home utilization age for the "baby boom" generation. Those who are 40 in 1986 will be only 74 in the year 2020. Substantial increases in the rate of nursing home utilization occur well after this age. As a result, the expected impact of purchase of long-term care insurance in a "steady state" environment beyond 2020 could not be determined.
The results are also influenced significantly by the assumption about the inflation rate in nursing home costs. The simulations presented use a 5.8 percent inflation assumption, a rate that is nearly 50 percent above the 4.0 percent general inflation rate assumed for the economy as a whole in the model. A lower inflation assumption would substantially change the results because it makes the inflation adjusted insurance products less costly and therefore more affordable. Under a 4.4 percent nursing home cost inflation assumption, for example, 33 percent could have afforded the Fireman's Fund policy in 2018 (compared to 23 percent under the 5.8 percent assumption). Out-of-pocket expenditures would have been reduced by 16.3 percent and Medicaid by 2.2 percent compared to 11.7 and 1.5 percent, respectively, under the 5.8 percent inflation assumption. While the correct assumption is debatable, it is clear that the rate of increase in nursing home costs will be a critical factor in the costs and marketability of long-term care insurance.
| TABLE 3-1: Tax Returns with IRA Contributions by Adjusted Gross Income Class, 1984 | |||||
|---|---|---|---|---|---|
| AGI Class ($000) | Tax Returns | Tax Returns with IRAs | IRA Returns as a Percent of All Tax Returns | ||
| (000) | Percent | (000) | Percent | ||
| Less than $10 | 33,659 | 33.8 | 714 | 4.6 | 2.1 |
| 10-15 | 14,081 | 14.1 | 952 | 6.2 | 6.8 |
| 15-20 | 11,522 | 11.6 | 1,286 | 8.4 | 11.2 |
| 20-30 | 16,486 | 16.6 | 2,968 | 19.3 | 18.0 |
| 30-40 | 11,105 | 11.1 | 3,155 | 20.5 | 28.4 |
| 40-50 | 5,996 | 6.0 | 2,306 | 15.8 | 38.5 |
| 50-100 | 5,733 | 5.8 | 3,267 | 21.3 | 57.0 |
| 100-200 | 771 | 0.8 | 550 | 3.6 | 71.4 |
| 200 and over | 252 | 0.3 | 160 | 1.0 | 63.6 |
| Total | 99,605 | 100.0 | 15,359 | 100.0 | 15.4 |
| SOURCE: Department of the Treasury, Office of Tax Analysis, from the Statistics of Income 1984 Advanced Data. | |||||
| TABLE 3-2: Tax Returns with Maximum IRA Contributions as a Percentage of all Tax Returns with IRAs by Total Positive Income Class, 1983 | |||||
|---|---|---|---|---|---|
| Total Positive Income Class ($000) | Tax Returns with IRAs | Tax Returns with Maximum IRAs | Ret. w/Max. as a Percent of Returns With IRAs | ||
| (000) | Percent | (000) | Percent | ||
| Less than $5 | 40 | 0.3 | 3 | * | 7.6 |
| 10-15 | 248 | 2.0 | 102 | 1.3 | 41.1 |
| 15-20 | 543 | 4.8 | 264 | 3.4 | 48.6 |
| 20-30 | 817 | 8.8 | 418 | 5.4 | 51.2 |
| 30-40 | 2,178 | 15.4 | 1,209 | 15.6 | 55.5 |
| 40-50 | 4,675 | 31.1 | 2,660 | 34.3 | 56.9 |
| 50-100 | 3,276 | 61.1 | 2,421 | 31.2 | 73.9 |
| 100-200 | 608 | 75.7 | 511 | 6.6 | 84.0 |
| 200 and over | 207 | 74.6 | 170 | 2.2 | 82.2 |
| Total | 12,592 | 15.4 | 7,758 | 100.0 | 61.6 |
| SOURCE: Based on Galper and Byce, 1986. * Less than 0.05 percent. |
|||||
| TABLE 3-3: Summary of Services Offered by CCRCs: Percent of CCRCs Including Services in Fees | |||
|---|---|---|---|
| Services | Guarantee | ||
| All CCRCs | Extensive | Limited | |
| Apartment cleaning | 83.1% | 91.6% | 83.5% |
| Bed and bath linen | 71.0 | 81.0 | 67.8 |
| Community’s own physician | 32.4 | 45.9 | 17.6 |
| Dental care | 6.8 | 6.4 | 4.3 |
| Emergency call physician | 88.9 | 94.5 | 90.7 |
| Garage/carports | 25.6 | 24.8 | 27.2 |
| Health maintenance organization | 4.3 | 5.5 | 2.2 |
| Hearing aids | 3.4 | 2.7 | 1.1 |
| Home health care | 28.5 | 41.1 | 16.3 |
| Hospitalization | 25.6 | 39.8 | 9.3 |
| Illness or accident away from community | 20.3 | 34.3 | 4.7 |
| Kitchen appliance | 84.1 | 88.1 | 79.3 |
| Occupational therapy | 36.3 | 50.0 | 23.0 |
| Parking | 85.5 | 84.4 | 85.9 |
| Personal laundry facilities | 78.7 | 85.3 | 79.1 |
| Physical exams | 26.1 | 38.5 | 10.1 |
| Physical therapy | 35.3 | 48.1 | 21.6 |
| Podiatry | 10.6 | 7.3 | 4.3 |
| Prescription drugs | 15.9 | 28.7 | 3.4 |
| Private room in nursing care center | 25.1 | 20.2 | 16.3 |
| Recreational therapy | 72.0 | 84.4 | 61.8 |
| Referred specialist | 23.7 | 30.3 | 9.8 |
| Replacement of apartment equipment | 86.0 | 88.9 | 80.4 |
| Resident’s physician | 22.2 | 2.1 | 26.2 |
| Social services | 83.6 | 89.0 | 85.1 |
| Special diet | 83.6 | 92.5 | 81.6 |
| Special duty nurses | 9.2 | 11.9 | 5.4 |
| Storage | 81.5 | 87.1 | 72.3 |
| Telephone | 32.4 | 42.2 | 16.3 |
| Therapy for psychiatric disorders | 15.5 | 25.5 | 2.3 |
| Tray service | 56.5 | 73.3 | 43.2 |
| Treatment for preexisting conditions | 29.5 | 35.3 | 25.6 |
| Transportation | 72.5 | 84.9 | 57.4 |
| Utilities | 91.3 | 95.3 | 96.6 |
| SOURCE: Howard Winklevoss and Alwyn Powell: Continuing Care Retirement Communities: An Empirical, Financing, and Legal Analysis, 1984. | |||
| TABLE 3-4: Combined Annual Rate of Interest* for a 70-year-old Borrower** When Initial Home Value Equals $70,000 | |||
|---|---|---|---|
| Loan Payoff at End of Year | Combined Interest Rate Pay by Borrower at Various Appreciation Rates | ||
| 0% | 5% | 10% | |
| 3.0 | 12.1% | 50.4% | 73.2% |
| 6.5 | 12.1 | 27.4 | 38.2 |
| 10.0 | 12.1 | 20.5 | 27.4 |
| 13.5** | 5.6 | 13.7 | 20.7 |
| 17.0 | 2.0 | 10.3 | 17.2 |
| 20.5 | -0.1 | 9.7 | 15.3 |
| 24.0 | -1.7 | 7.3 | 14.1 |
| SOURCE: National Center for Home Equity Conversion, 1984.
* The combined interest rate includes all fixed interest and additional interest (appreciation) expressed as a single annual percentage rate (APR). ** The life expectancy of a 70-year-old person is approximately 13.5 years. |
|||
| TABLE 3-5: Estimated Initial Annual Savings to Pay for Expected Nursing Home Utilization, by Age | ||
|---|---|---|
| Age Savings Begin | Rate of Inflation of Nursing Home Charges | |
| 4.4 Percent * | 5.8 Percent ** | |
| 30 | $603 | $1,036 |
| 40 | 892 | 1,418 |
| 50 | 1,510 | 2,222 |
| SOURCE: Office of the Actuary, Social Security Administration,
1986. NOTE: The figures are for the starting year. When projecting forward, the figures need to be adjusted upward to account for inflation. * Inflation in nursing home charges assumed to be ten percent above that in the CPI. ** This is the expected rate of inflation in nursing home costs used in the OASDI and HI Trustees. |
||
| TABLE 3-6: Projections of Persons 65 & Over Who Would Have Contributed $3,000 to an IRA in One or More years, and Rates of Contribution, By Sex, Marital Status, and Homeownership, 1986, 2000, 2018 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Category | 1986 | 2000 | 2018 | ||||||
| Total Persons (000) | Per. w/ $3000 IRA (000) | Percent | Total Persons (000) | Per. w/ $3000 IRA (000) | Percent | Total Persons (000) | Per. w/ $3000 IRA (000) | Percent | |
| Total | 31,202 | 162 | 0.5 | 37,011 | 4,032 | 10.9 | 50,253 | 14,171 | 28.2 |
| Male | 12,365 | 155 | 1.3 | 14,283 | 3,184 | 22.3 | 20,453 | 9,534 | 46.6 |
| Female | 18,937 | 7 | * | 22,668 | 848 | 3.7 | 29,799 | 4,632 | 15.5 |
| Married | 16,795 | 140 | 0.8 | 19,223 | 2,721 | 14.2 | 27,106 | 7,975 | 29.4 |
| Unmarried | 14,507 | 22 | 0.2 | 17,729 | 1,311 | 7.4 | 23,147 | 6,191 | 26.7 |
| Own home | 24,686 | 149 | 0.6 | 30,344 | 3,588 | 11.8 | 42,083 | 12,251 | 29.1 |
| Don’t own | 6,616 | 13 | 0.2 | 6,608 | 444 | 6.7 | 8,170 | 1,915 | 23.4 |
| SOURCE: Projections for the DHHS, using the Brookings/ICF
Long-Term Care Financing Model. * Less than 0.5 percent. |
|||||||||
| TABLE 3-7: Projections of Population
in Nursing Homes by Age 1986, 2000, & 2018 (thousands of persons) |
||||||
|---|---|---|---|---|---|---|
| 1986 | 2000 | 2018 | ||||
| Total Elderly Population | 29,999 | 36,193 | 50,260 | |||
| Elderly in Nursing Homes | 2,099 (7.0%) | 3,201 (8.8%) | 4,021 (8.0%) | |||
| Elderly Population in Nursing Homes by Age | Number | Percent | Number | Percent | Number | Percent |
| Total | 2,099 | 100.0 | 3,201 | 100.0 | 4,021 | 100.0 |
| 65-74 | 380 | 18.1 | 435 | 13.6 | 659 | 16.4 |
| 75-84 | 840 | 40.0 | 1,193 | 37.3 | 1,295 | 32.2 |
| 85 and over | 879 | 41.9 | 1,573 | 49.1 | 2,067 | 51.4 |
| SOURCE: Projections for the DHHS, using the Brookings/ICF Long-Term Care Financing Model. | ||||||
| TABLE 3-8: Projections of Total
Nursing Home Expenditures for the Elderly For Two Different Assumptions in the
Rate of Specific Inflation, 1986, 2000 and 2018 (millions of 1987 dollars) |
|||
|---|---|---|---|
| Specific Nursing Home Inflation Assumption | 1986 | 2000 | 2018 |
| Ten percent above general inflation (+4.4 percent) | $29,682 | $38,386 | $66,095 |
| Wage-Earner Compensation Increase (+5.8 percent)* | 29,682 | 57,287 | 98,117 |
| SOURCE: Projections developed for the DHHS, using the
Brookings/ICF Long-Term Care Financing Model. * This is the expected rate of inflation in nursing home costs used in the Medicare Trustees reports. |
|||
| TABLE 3-9: Inflation and
Payment Source for Nursing Home Expenditures for the Elderly in
2018 (millions of 1987 dollars) |
|||
|---|---|---|---|
| Specific Nursing Home Inflation Assumption | |||
| 4.4 Percent | 5.8 Percent* | Percent Difference | |
| Total Expenditures | $66,095 | $98,117 | 48.4% |
| Medicaid | 23,597 | 46,192 | 95.8 |
| Medicare | 1,065 | 1,612 | 51.4 |
| Total Out-of-Pocket | 41,431 | 50,311 | 21.4 |
| Income | 27,154 | 27,888 | 2.7 |
| Assets | 14,277 | 22,423 | 57.1 |
| SOURCE: Projections developed for the DHHS, using the
Brookings/ICF Long-Term Care Financing Model. * This is the expected rate of inflation in nursing home costs used in the Medicare Trustees reports. |
|||
| TABLE 3-10: Base Case
Projection: Total Nursing Home Expenditures for the Elderly, by Source of
Payment in Years 1986, 2000, 2018 (millions of 1987 dollars) |
|||
|---|---|---|---|
| 1986 | 2000 | 2018 | |
| Total Expenditures | $29,682 | $57,287 | $98,117 |
| Total Medicaid | 12,914 | 28,368 | 46,192 |
| Medicare | 653 | 967 | 1,612 |
| New IRA/IMA | --- | --- | --- |
| Total Out-of-Pocket | 16,114 | 27,955 | 50,311 |
| Income | 9,562 | 15,115 | 27,888 |
| Assets | 6,552 | 12,840 | 22,423 |
| SOURCE: Projections for the DHHS, using the Brookings/ICF
Long-Term Care Financing Model. Base Case: Assumes no increase in IRA limits except for inflation, no Individual Medical Accounts for long-term care. Assumes 5.8 percent specific nursing home inflation, which is the expected rate of inflation for nursing home costs used in the Medicare Trustees reports. |
|||
| TABLE 3-11: Expanded IRA
Projection: Total Nursing Home Expenditures for the Elderly by Source of
payment in Years 1986, 2000, 2018 (millions of 1987 dollars) |
|||
|---|---|---|---|
| 1986 | 2000 | 2018 | |
| Total Expenditures | $29,682 | $57,289 | $98,352 |
| Total Medicaid | 12,914 | 28,360 | 45,616 |
| Medicare | 653 | 967 | 1,612 |
| Expanded IRA | --- | 84 | 2,925 |
| Other Out-of-Pocket | 16,114 | 27,876 | 48,199 |
| Income | 9,562 | 15,056 | 26,373 |
| Assets | 6,552 | 12,820 | 21,826 |
| SOURCE: Projections for the DHHS, using the Brookings/ICF
Long-Term Care Financing Model. Assumes 5.8 percent specific nursing home inflation, which is the expected rate of inflation for nursing home costs used in the Medicare Trustees reports. |
|||
| TABLE 3-12: Impact of Expanded IRAs:
Total Nursing Home Expenditures for the Elderly by Source of Payment In
2018 (millions of 1987 dollars) |
|||
|---|---|---|---|
| Base Case | Expanded IRA | Percent Change | |
| Total Expenditures | $98,117 | $98,352 | 0.2% |
| Total Medicaid | 46,192 | 45,616 | -1.3 |
| Medicare | 1,612 | 1,612 | no change |
| Expanded IRA | --- | 2,925 | N/A |
| Other Out-of-Pocket | 50,371 | 48,199 | -4.3 |
| Income | 27,888 | 26,373 | -5.4 |
| Assets | 22,483 | 21,826 | -2.9 |
| SOURCE: Projections for the DHHS, using the Brookings/ICF
Long-Term Care Financing Model. Assumes 5.8 percent specific nursing home inflation, which is the expected rate of inflation for nursing home costs used in the Medicare Trustees reports. |
|||
| TABLE 3-13: Impact of IMAs: Total
Nursing Home Expenditures for the Elderly by Source of Payment in
2018 (millions of 1987 dollars) |
|||
|---|---|---|---|
| Base Case | IMA Option | Percent Change | |
| Total Expenditures | $98,117 | $98,868 | 0.8% |
| Total Medicaid | 46,192 | 44,486 | -3.7 |
| Medicare | 1,612 | 1,612 | no change |
| IMA Option | --- | 8,367 | N/A |
| Other Out-of-Pocket | 50,371 | 44,401 | -11.9 |
| Income | 27,888 | 23,407 | -16.1 |
| Assets | 22,483 | 20,994 | -6.6 |
| SOURCE: Projections for the DHHS, using the Brookings/ICF
Long-Term Care Financing Model. Assumes 5.8 percent specific nursing home inflation, which is the expected rate of inflation for nursing home costs used in the Medicare Trustees reports. |
|||
| TABLE 3-14: Premium Estimates for a Level Premium, Level Benefit Indemity Policy | |||||||
| Issue Age | Tax Status | Selectivity | Provision for Paid Up | A | B | C | D |
| 30 | None | Select | Paid up at 65 | $138 | $125 | $198 | $179 |
|---|---|---|---|---|---|---|---|
| 30 | None | Group | Paid up at 65 | 100 | 90 | 150 | 133 |
| 30 | Fully | Select | Paid up at 65 | 256 | 229 | 396 | 353 |
| 30 | Fully | Group | Paid up at 65 | 201 | 178 | 318 | 282 |
| 40 | None | Select | Paid up at 65 | 213 | 192 | 320 | 286 |
| 40 | None | Group | Paid up at 65 | 158 | 141 | 244 | 217 |
| 40 | Fully | Select | Paid up at 65 | 368 | 328 | 580 | 516 |
| 40 | Fully | Group | Paid up at 65 | 288 | 255 | 463 | 410 |
| 50 | None | Select | Paid up at 65 | 391 | 348 | 609 | 541 |
| 50 | None | Group | Paid up at 65 | 289 | 256 | 459 | 406 |
| 50 | Fully | Select | Paid up at 65 | 618 | 550 | 994 | 882 |
| 50 | Fully | Group | Paid up at 65 | 473 | 418 | 771 | 682 |
| 60 | None | Select | Not paid up | 429 | 381 | 696 | 617 |
| 60 | None | Group | Not paid up | 343 | 303 | 560 | 494 |
| 60 | Fully | Select | Not paid up | 520 | 460 | 856 | 758 |
| 60 | Fully | Group | Not paid up | 426 | 376 | 705 | 623 |
| 65 | None | Select | Not paid up | 553 | 490 | 923 | 817 |
| 65 | None | Group | Not paid up | 446 | 393 | 747 | 659 |
| 65 | Fully | Select | Not paid up | 639 | 566 | 1074 | 951 |
| 65 | Fully | Group | Not paid up | 526 | 464 | 887 | 783 |
| SOURCE: Actuarial Research Corporation, June 1986. A: Policy has a 30-day deductible and requires a 3-day prior hospital stay. B: Policy has a 90-day deductible and requires a 3-day prior hospital stay. C: Policy has a 30-day deductible and no prior hospital stay. D: Policy has a 90-day deductible and no prior hospital stay. |
|||||||
| TABLE 3-15: Premium Estimates for a Indexed Premium, Indexed Benefit Indemnity Policy Index Rate: 5% per year | |||||||
|---|---|---|---|---|---|---|---|
| Issue Age | Tax Status | Selectivity | Provision for Paid Up | A | B | C | D |
| 30 | None | Select | Paid up at 65 | $563 | $497 | $934 | $824 |
| 30 | None | Group | Paid up at 65 | 479 | 421 | 798 | 703 |
| 30 | Fully | Select | Paid up at 65 | 1288 | 1132 | 2154 | 1898 |
| 30 | Fully | Group | Paid up at 65 | 1124 | 987 | 1884 | 1659 |
| 40 | None | Select | Paid up at 65 | 720 | 635 | 1196 | 1056 |
| 40 | None | Group | Paid up at 65 | 600 | 528 | 1001 | 882 |
| 40 | Fully | Select | Paid up at 65 | 1473 | 1296 | 2466 | 2174 |
| 40 | Fully | Group | Paid up at 65 | 1258 | 1106 | 2113 | 1862 |
| 50 | None | Select | Paid up at 65 | 1076 | 949 | 1792 | 1583 |
| 50 | None | Group | Paid up at 65 | 858 | 755 | 1436 | 1266 |
| 50 | Fully | Select | Paid up at 65 | 1962 | 1727 | 3291 | 2903 |
| 50 | Fully | Group | Paid up at 65 | 1601 | 1408 | 2694 | 2374 |
| 60 | None | Select | Not paid up | 616 | 544 | 1035 | 914 |
| 60 | None | Group | Not paid up | 521 | 459 | 877 | 774 |
| 60 | Fully | Select | Not paid up | 757 | 667 | 1276 | 1126 |
| 60 | Fully | Group | Not paid up | 653 | 575 | 1103 | 973 |
| 65 | None | Select | Not paid up | 719 | 634 | 1220 | 1078 |
| 65 | None | Group | Not paid up | 606 | 533 | 1030 | 909 |
| 65 | Fully | Select | Not paid up | 842 | 743 | 1430 | 1263 |
| 65 | Fully | Group | Not paid up | 723 | 636 | 1228 | 1084 |
| SOURCE: Actuarial Research Corporation, June 1986. A: Policy has a 30-day deductible and requires a 3-day prior hospital stay. B: Policy has a 90-day deductible and requires a 3-day prior hospital stay. C: Policy has a 30-day deductible and no prior hospital stay. D: Policy has a 90-day deductible and no prior hospital stay. |
|||||||
| TABLE 3-16: Estimated Unisex Contribution/Premium Rates for Nursing Home Coverage Starting at Age 65 of $50 Daily Coverage Indexed by 5.8 Percent After Year of Issue With Contributions Indexed by 5.8 Percent After Year of Issues: Assumed Antiselection/Induced Demand = 37% | |||||||
|---|---|---|---|---|---|---|---|
| Year of Issue | Issue Age | Plan | |||||
| 1 | 2 | 3 | 4 | 5 | 6 | ||
| 1986 | |||||||
| Contributions/Premiums to Age 64 | 30 | $1,034 | $2,094 | $1,590 | $1,399 | $1,034 | $867 |
| 40 | 1,418 | 2,916 | 2,212 | 2,082 | 1,418 | 1,202 | |
| 50 | 2,222 | 4,691 | 3,550 | 3,644 | 2,222 | 1,917 | |
| 60 | 6,515 | 14,391 | 10,923 | 12,230 | 6,530 | 5,896 | |
| Contributions/Premiums Until Death | 30 | --- | 1,484 | 1,129 | 1,111 | 712 | 610 |
| 40 | --- | 1,842 | 1,420 | 1,497 | 867 | 753 | |
| 50 | --- | 2,369 | 1,798 | 2,132 | 1,085 | 956 | |
| 60 | --- | 3,542 | 2,690 | 3,603 | 1,574 | 1,416 | |
| 2021 | |||||||
| Contributions/Premiums to Age 64 | 30 | 1,227 | 2,447 | 1,881 | 1,632 | 1,227 | 1,043 |
| 40 | 1,685 | 3,406 | 2,617 | 2,415 | 1,685 | 1,447 | |
| 50 | 2,698 | 5,588 | 4,287 | 4,266 | 2,699 | 2,362 | |
| 60 | 7,939 | 17,058 | 13,121 | 14,141 | 7,954 | 7,226 | |
| Contributions/Premiums Until Death | 30 | --- | 1,703 | 1,311 | 1,272 | 829 | 719 |
| 40 | --- | 2,104 | 1,618 | 1,697 | 1,008 | 883 | |
| 50 | --- | 2,732 | 2,097 | 2,419 | 1,275 | 1,135 | |
| 60 | --- | 4,015 | 3,081 | 3,969 | 1,825 | 1,650 | |
| SOURCE: Office of the Actuary, Social Security Administration, July 15, 1986. | |||||||
| TABLE 3-17: Estimated Unisex Contribution/Premium Rates for Nursing Home Coverage Starting at Age 65 of $50 Daily Coverage Indexed by 4.4 Percent After Year of Issue With Contributions/Indexed by 4.4 Percent After Year of Issue: Assumed Antiselection/Induced Demand = 37% | |||||||
|---|---|---|---|---|---|---|---|
| Year of Issue | Issue Age | Plan | |||||
| 1 | 2 | 3 | 4 | 5 | 6 | ||
| 1986 | |||||||
| Contributions/Premiums to Age 64 | 30 | $603 | $1,216 | $923 | $799 | $603 | $503 |
| 40 | 892 | 1,828 | 1,386 | 1,293 | 892 | 753 | |
| 50 | 1,510 | 3,182 | 2,408 | 2,462 | 1,510 | 1,300 | |
| 60 | 4,754 | 10,499 | 7,968 | 8,918 | 4,765 | 4,301 | |
| Contributions/Premiums Until Death | 30 | --- | 951 | 723 | 688 | 461 | 392 |
| 40 | --- | 1,281 | 974 | 1,004 | 609 | 525 | |
| 50 | --- | 1,795 | 1,362 | 1,576 | 828 | 728 | |
| 60 | --- | 2,922 | 2,216 | 2,916 | 1,302 | 1,175 | |
| 2021 | |||||||
| Contributions/Premiums to Age 64 | 30 | 705 | 1,401 | 1,077 | 920 | 705 | 597 |
| 40 | 1,044 | 2,106 | 1,617 | 1,479 | 1,044 | 894 | |
| 50 | 1,803 | 3,728 | 2,859 | 2,835 | 1,803 | 1,575 | |
| 60 | 5,794 | 12,232 | 9,409 | 10,136 | 5,705 | 5,181 | |
| Contributions/Premiums Until Death | 30 | --- | 1,082 | 832 | 773 | 533 | 459 |
| 40 | --- | 1,451 | 1,116 | 1,128 | 701 | 612 | |
| 50 | --- | 2,048 | 1,573 | 1,765 | 963 | 856 | |
| 60 | --- | 3,275 | 2,527 | 3,175 | 1,496 | 1,356 | |
| TABLE 3-18: Annual Premium at Issue for Nursing Home Coverage of $50 per Day Starting at Age 65 with 90-Day Elimination Period, 5.8 Percent Annual Indexing of Coverage and Lifetime Premiums After Issue, and Waiver of Premium for Nursing Home Residents Over Age 64 | ||||||
|---|---|---|---|---|---|---|
| Year of Issue | Issue Age | Years of Coverage | ||||
| 1 | 2 | 4 | 6 | No Limit | ||
| 1986 | 30 | $127 | $228 | $350 | $412 | $486 |
| 40 | 156 | 280 | 431 | 507 | 599 | |
| 50 | 199 | 356 | 546 | 644 | 760 | |
| 60 | 294 | 525 | 806 | 950 | 1,123 | |
| 65 | 362 | 647 | 991 | 1,166 | 1,398 | |
| 70 | 468 | 843 | 1,294 | 1,519 | 1,785 | |
| 75 | 621 | 1,127 | 1,736 | 2,026 | 2,369 | |
| 80 | 824 | 1,517 | 2,341 | 2,713 | 3,135 | |
| 2021 | 30 | 148 | 268 | 412 | 485 | 574 |
| 40 | 182 | 328 | 505 | 595 | 704 | |
| 50 | 234 | 421 | 647 | 763 | 903 | |
| 60 | 338 | 609 | 937 | 1,105 | 1,309 | |
| 65 | 412 | 742 | 1,141 | 1,342 | 1,586 | |
| 70 | 526 | 952 | 1,467 | 1,723 | 2,033 | |
| 75 | 688 | 1,256 | 1,939 | 2,268 | 2,665 | |
| 80 | 909 | 1,680 | 2,600 | 3,021 | 3,516 | |
| SOURCE: Office of the Actuary, Social Security Administration,
July 25, 1986. NOTE: Includes induced demand factors of 10, 11, 14, 16, and 23 percent for coverages of 1,2,4,6, and unlimited years of coverage, respectively. |
||||||
| TABLE 3-19: Projections of Total
Nursing Home Expenditures for the Elderly by Source of Payment and Insurance
Option in 2018 (5.8 percent nursing home inflation assumption) |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Source of Payment | Base Case | Fireman’s Fund | Combined IMB/Insurance | Pension Benefit Link | Medigap Link | % of Income | |||||
| Percent Distribution | Percent Distribution | % Change from Base | Percent Distribution | % Change from Base | Percent Distribution | % Change from Base | Percent Distribution | % Change from Base | Percent Distribution | % Change from Base | |
| Total | 100.0 | 100.0 | +0.5% | 100.0 | 0.8% | 100.0 | 1.6% | 100.0 | 3.6% | 100.0 | 2.4% |
| Medicaid | 47.1 | 46.1 | -1.5% | 44.8 | -4.2% | 42.7 | -7.8% | 37.1 | -18.4% | 40.3 | -12.4% |
| Medicare | 1.6 | 1.6 | No Change | 1.6 | No Change | 1.6 | No Change | 1.6 | No Change | 1.6 | No Change |
| Out-of-Pocket | 51.3 | 45.1 | -11.7% | 45.5 | -10.7% | 44.8 | -11.3% | 43.7% | -11.8% | 41.2 | -17.8% |
| Insurance | --- | 7.1 | N/A | 8.1 | N/A | 10.9 | N/A | 17.6 | N/A | 16.9 | N/A |
| SOURCE: Projections developed for DHHS Long-Term Care Financing Project, from the Brookings/ICF Long-Term Care Model. | |||||||||||
| TABLE 3-20: Potential
Effect of Induced Demand on Nursing Home Expenditure Patterns in 2018: One
Percent of Income Option (millions of 1987 dollars) |
||||||
|---|---|---|---|---|---|---|
| Source of Payment | Expenditures Without Induced Demand | Expenditures With Induced Demand | ||||
| Expenditures | Percent Distribution | Percent Change from Base Case | Expenditures | Percent Distribution | Percent Change from Base Case | |
| Total | $100,470 | 100.0% | 2.4% | $102,821 | 100.0% | 4.7% |
| Medicaid | 40,465 | 40.3% | -12.4% | 41,896 | 40.7% | -9.3% |
| Medicare | 1,612 | 1.6% | No change | 1,659 | 1.6% | 2.9% |
| Out-of-Pocket | 41,411 | 41.2% | -17.8% | 43,489 | 42.3% | -13.6% |
| Insurance | 16,978 | 16.9% | N/A | 14,774 | 15.3% | N/A |
| SOURCE: Projections developed for the DHHS Long-Term Care Financing Project, from the Brookings/ICF Long-Term Care Model. | ||||||
Long-term care is currently the one remaining catastrophic health care expense for which there has been virtually no insurance protection available. As a result, about half of all nursing home costs are paid out-of-pocket and almost all the rest are paid for by Medicaid. In the absence of other options, the process seems inexorable: estimates indicate that 50 percent of nursing home residents receiving Medicaid-financed care were originally private pay patients (Doty, Liu, and Wiener, 1985).
Medicaid is a welfare-based system: benefits are available only to those who are poor or have such high medical bills they are threatened with impoverishment. Recipients of the major cash-transfer programs, Aid to Families with Dependent Children (AFDC) and Supplemental Security Income (SSI) for the aged, blind, and disabled, are generally automatically eligible for Medicaid; most Medicaid recipients come from these groups. In addition, many middle-class people wind up receiving benefits as a result of incurring devastating medical expenses, mostly for long-term institutional care.
Medicaid is a payor of last resort. For example, if a beneficiary's medical expenses are partly covered by private health insurance, the private insurance pays first and Medicaid fills in the gaps, at least within limits on amount, duration, and scope of services established by t-he States.
This chapter discusses: how Medicaid ends up subsidizing the majority of those people who are in nursing homes for an extended period; whether Medicaid eligibility policies are a significant barrier to private financing of long-term care; and modifications to the Medicaid program which might, if deemed necessary and appropriate, promote the expansion of private financing mechanisms.
Medicaid eligibility for those who are not welfare recipients is established largely through one of two optional elements of State Medicaid plans: the medically needy option and special needs standards for the institutionalized.
1. The Medically Needy
States may, at their option, provide Medicaid to the aged (and certain other groups) with substantial medical bills who would otherwise qualify for Medicaid in the State except that they have too much income or resources. In 1985, approximately 30 States had medically needy programs applicable to the aged.
In FY 1985, Medicaid served nearly 3.5 million medically needy recipients at a cost to the Federal and State governments of $10.3 billion. Medically needy recipients comprised 15.7 percent of all recipients and accounted for 27.6 percent of total Medicaid costs.
The medically needy face both income and asset limits. They cannot receive benefits if they have assets above specified ceilings. States typically set the same limits for the medically needy as for the AFDC or SSI programs, though the medically needy limits may be higher. The cash-transfer programs exempt certain resources, most importantly the home, from the asset limits. Any amount of resources in excess of the State defined limits cause ineligibility, though the exclusion of the home exempts the largest asset of most elderly from consideration.
If income exceeds limits, the applicant can "spend-down" to eligibility. If income is above allowable limits, medical expenses sufficient to bring remaining disposable income below the limits can qualify a person for assistance. Individuals or families with any amount of gross income may be able to qualify if their medical expenses are high enough.
Only "excess" medical expenses are covered. Under the spend-down procedure, applicants receive no benefits until they have incurred medical bills equal to the amount by which their incomes exceed allowable income levels. Until the income limit is reached, medical bills remain the responsibility of the applicant. Medicaid pays subsequent bills if they are for services covered under the State's plan and to the extent that they are not covered by a third party. An individual receiving Medicaid benefits for nursing home expenses must apply all of his or her monthly income (e.g., social security and private pension payments) toward the nursing home bill, with the exception of a small personal needs allowance.
Spend-down is an ongoing process. An individual who has spent-down receives Medicaid benefits only for a certain period, usually a month. For the individual to receive benefits in subsequent months, he or she must spend-down again.
2. Special Income Limits for Persons in Medical Institutions
Apart from medically needy programs, States may also extend Medicaid to persons residing in medical institutions, including nursing homes, whose gross incomes do not exceed 300 percent of the current full benefit rate under SSI. With the current SSI level at $336 per month, States may set their special income limits for the institutionalized as high as $1,008 per month.
In 1985, this option enabled 20 States without a medically needy program for the aged, blind, or disabled to assist approximately 408,700 persons to pay the cost of long-term institutional care.
Once eligible, these individuals use what income they have, minus certain amounts that they may retain for specified personal uses, to pay for the cost of their care. Medicaid pays only the remainder, up to the Medicaid payment rate for such care, plus any other medical services used by the individual and covered under the State's plan.
This option is similar to the medically needy option. Asset limits and the spend-down process work in parallel fashions. This option applies only to people in institutions and offers assistance only for those with incomes below specified limits. Individuals with higher incomes cannot qualify for benefits, regardless of the size of their medical expenses.
3. Whose Income and Resources Matter?
The spend-down process under both options considers the income and resources of a "filing unit" that is not necessarily identical with a family. SSI rules--which govern various aspects of eligibility, including spend-down, for the elderly--assume that the income of a spouse or parent is available to meet the needs of other family members if the family lives together. If family members live apart, they are considered to be in separate households, and the financial status of each household is evaluated without regard to the status of other family members living elsewhere. Once a person is in an institution for 30 days, he or she is treated as a separate filing unit, and the income or resources of relatives still at home are irrelevant for eligibility for benefits.
This process, logical in the context of cash-transfer programs, frequently permits institutionalized members of families with substantial incomes or resources to qualify for Medicaid benefits in spite of the financial resources potentially available. States cannot deny benefits in these circumstances, but they may try to recover expenses from other family members. Such recoveries are not widely or extensively attempted, partly because enforcement difficulties make cost-effectiveness dubious in many cases.
4. Restrictions on Transfer of Assets
Otherwise eligible persons may be barred from Medicaid if they have given away or otherwise disposed of assets for less than fair market value. States may, at their option, consider transfers that occurred up to two years before a person applies for Medicaid and count the uncompensated value of such assets as if the person still had those assets. States may presume that the transfer took place for the purpose of establishing Medicaid eligibility, although individuals are allowed to rebut that presumption.
States may also deny eligibility to institutionalized persons who transferred ownership of their homes without receiving adequate compensation. Their period of ineligibility depends on the uncompensated value of the property, compared to the number of months of institutional care that the person could have paid for had he or she sold the home for full market value and used the proceeds to pay for care.
The provisions discussed above are the major features of Medicaid eligibility policy that affect people not on SSI or AFDC who actually or potentially need long-term care. These features clearly create, in some cases inadvertently, incentives for people to alter their behavior to qualify for State-supported benefits. They, therefore, also affect incentives for people to provide for their own financing of long-term care.
How responsive people are to these incentives, however, is far from clear. Obviously, the mere existence of an incentive tells nothing about the magnitude of its effect, because people may not be aware of its existence or of its importance, and because various other incentives and attitudes also influence behavior.
One consideration in evaluating Medicaid's impact on private financing of long-term care is that the public's understanding of how long-term care is paid for and what coverage people actually have is very poor. Many people, even Medicare beneficiaries, believe that Medicare covers long-term care. Others believe that Medicare and a medigap policy in combination do so, although this is very unlikely to be the case.
This point is borne out by a recent national survey of members of the American Association of Retired Persons (who are, arguably, better informed than the general public) that revealed that 79 percent of those who believed that they would at some point have extended stays in nursing homes believed that Medicare would pay for all or part of this care. Thirty-five percent of those with private insurance coverage said that their policies included extended care nursing home coverage, though most of these policies were with companies known not to offer such coverage.
People also appear to be poorly informed about the risk they face of requiring long-term care. Further, many people appear to want to avoid any consideration of future nursing home needs and thus avoid any planning for long-term care.
A second consideration in evaluating Medicaid's impact on private financing of long-term care is evidence that middle-class people are generally not disposed to rely on a welfare-based program for long-term care expenses. In a survey of 4,043 elderly in six States, researchers at the National Center for Health Services Research found that only 19 percent of those surveyed said that they would not purchase private long-term care insurance because they viewed Medicaid and other welfare coverage as adequate. This result, compatible with findings elsewhere in this report, suggests that many people faced with catastrophic medical expenses may wind up on Medicaid for lack of a better alternative.
A third consideration in evaluating Medicaid's impact on private financing of long-term care is whether the elderly are aware of and willing to use methods of circumventing Medicaid asset restrictions. One method, noted earlier, is based on Medicaid eligibility rules not affecting substantial assets given to heirs (or sold to them for less than market value) more than two years prior to application. Another method is to place assets in an irrevocable trust with restrictions designed to prevent any expenditure of income or principal on medical expenses. Under current law, elderly individuals can use either of these methods to preserve their estates for their heirs while obtaining Medicaid benefits for themselves. Evaluating the extent to which they actually do so, or might do so in the future, however, is very difficult.
Both methods require extensive pre-planning. Trusts are difficult and expensive to set up. Transferring assets as a strategy for acquiring Medicaid coverage requires substantial confidence in the predictability of future events, while the elderly are usually thought to be, in general, quite cautious in their orientation toward the future.
The sum of all these considerations suggests that the future of private financing mechanisms is not likely to be significantly affected by the availability of Medicaid. However, this conclusion is untestable, at least until private financing mechanisms are more widespread and accessible and there is a higher level of public knowledge about how Medicare, medigap insurance, and Medicaid interact with long-term care needs.
Although the preceding section suggests that Medicaid is not a significant barrier to private financing of long-term care, this observation does not preclude the possibility that changes in Medicaid could have a positive impact on private financing. In this regard, a variety of possible actions are often discussed, all intended to make it more difficult for persons who can afford to pay for their own long-term care costs to become eligible for Medicaid. It should be noted that many such proposals are advocated quite independent of any impact on private financing of long-term care, even though they are discussed here only in that context.
1. Restrict Medicaid Eligibility
Medically needy coverage and the spend-down process could be severely restricted to prevent individuals from qualifying for Medicaid benefits if they could once have afforded (say ten years previously) to provide for long-term care by insurance or other means. Such a change would certainly provide a strong incentive for people to provide for financing long-term care on their own. A phase-in period (perhaps of many years because of the current sparseness of private mechanisms) and extensive efforts to insure consumer awareness would be necessary.
Several factors, however, argue against a very substantial tightening of policy in this area. First, many people with sufficient means to pay for long-term care insurance may be refused coverage, because of pre-existing condition restrictions, or may fail to seek insurance because of irrational denial of the risks.
Second, such a step would be the first of its kind in social welfare policy in this country. On the basis of a long ago individual failure to plan, it would impose severe consequences on persons who have become destitute and who may be unable to obtain necessary medical care despite severe disability.
Third, even if an elderly individual had purchased (and continued to pay for) insurance, he or she might not have enough to cover long-term care expenses, since most policies are indemnity policies without an inflation adjustment.
Fourth, if Medicaid were not available for such persons, the alternatives would be to fund their care through State or county programs, to expect providers to furnish free care, or to turn them out of the nursing home. None of these possibilities is attractive.
2. Permit States to Require Spouses of Medicaid Recipients to Contribute to the Cost of Their Spouses' Care
As explained in the first section of this chapter, institutionalized individuals from even well-to-do families can now become eligible for Medicaid with no financial support required from their spouses.
States could be permitted to require the spouses of institutionalized recipients to contribute to the costs of care as a condition of eligibility. For example, States might set contribution amounts up to 20 percent of that part of the family's income that exceeds 200 percent of poverty. No contributions would be permitted for those with incomes below 200 percent of poverty (currently $22,000 per year); a family with income of $50,000 would pay no more than $5,600.
Proposing to increase family financial responsibility for long-term care is likely to be controversial. Federally-set maximum limits on the percentage of family income that may be required as a contribution, however, would assure that families would not be impoverished.
Although States would have the authority to waive the requirements in hardship situations, refusal of the spouse to contribute would lead to the loss of eligibility. The severity of this consequence provides the incentive for the spouse to pay the required support amount and might prospectively encourage planning for long-term care needs through private mechanisms.
A variant on this proposal would require adult children to help pay for the nursing home care of their parents. Such an idea raises very different and much more controversial issues of public policy. Among them is the philosophical issue of the extent to which individuals who, though related, are not generally held to be legally responsible for each other can be required to pay for each other's care. This variant also raises the possibility of increasing elder abuse, with elder family members mistreated at home rather than placed in nursing homes.
In 1983, the Administration announced that States were permitted, under certain limited circumstances, to impose such requirements on children of Medicaid recipients. The announcement was followed by widespread and strenuous public criticism. Only one State briefly undertook and then dropped plans to implement such a policy. This response suggests a pronounced lack of public support for this concept at this time.
3. Provide Incentives for Private Financing of Long-Term Care by Waiving Medicaid Spend-down
A number of variants of a proposal have been put forth that would, in effect, waive Medicaid spend-down requirements for the elderly who pay for two (or three or four) years of long-term care out of their own resources (e.g., insurance, assets, medical IRA). Since it would be illogical for government to try to limit this favored situation to those who meet long-term care expenses only through certain vehicles, e.g., insurance or medical IRAs, this discussion will treat the proposal in terms of care paid for by any source other than a public program.
Such a proposal has some clear and very appealing advantages. First, it would help provide catastrophic coverage--people who met the standards for coverage would have protection for their income and assets. Second, it would provide an incentive for expanded private financing.
Third it might save money for Medicaid. Whether or not it would depends on whether additional private financing attributable to this source outweighs the effects on Medicaid of the loss of spend-down for the long-staying cases. Whether it saves money is not evident; actuarial analysis would be necessary on this point.
Further analysis of this proposal, however, reveals a number of major problems. First, this proposal would create something close to a social insurance benefit for long-term care. It would resemble social insurance in that the benefits would be available without any means test on income or assets: benefits would be available without regard to how needy the person was. In this respect, it would resemble Medicare, in which benefits are available to all who have filled certain requirements (in Medicare's case, those who have made contributions for a minimum time and are over a certain age), but where benefits are not related to financial circumstances at time of receipt.
Unlike social insurance, however, this system would have no requirement of premium payments or other contributions in order to qualify for benefits. It would simply have a very high deductible. Once you met the deductible (with no help from Medicaid), you would qualify for benefits. Payments would be from general revenues.
It is not clear, however, that anyone would ever set out to design a social insurance benefit in this fashion. First, a social insurance benefit would probably have participants paying either contributions or premiums or both, rather than relying on general revenues for funding. Second, it might not appear appropriate to have a social insurance benefit tied to Medicaid limits on reimbursement and on amount, duration, and scope of services.
Another major problem with the proposal is that the requirement of paying for a large amount of care on your own, whether through insurance or otherwise, appears to set up two different classes of people: those who can afford fairly substantial payments for long-term care on their own and those who cannot. The result would be to make a benefit available only to those who are already well off, a questionable social policy.
Further, this proposal is not supportive of informal care-giving, since special treatment goes to those who pay for care and (presumably) not to those who receive it from friends and relatives. This situation may be perceived as inequitable. (If, in response, the proposal were broadened to encompass informal care, it would become very costly and probably virtually impossible to administer.)
Finally, the proposal would present various implementation difficulties. What expenses would be considered as meeting the requirements? Would a medically necessary standard be imposed? Home services present particular problems, since standards would need to insure credit was not given for maid service. Documenting that applicants have in fact met the qualification requirements will be administratively cumbersome, particularly if the period of care required for qualification is long.
4. Increase Eligibility Penalties Against Individuals Who Transfer Assets for Less Than Fair Market Value
States are now permitted to deny Medicaid for a period of time to persons who give away or transfer assets for less than fair market value. States may consider transfers occurring up to two years before a person applies for Medicaid.
This proposal would require States to impose minimum penalties for such assets transfers, and would allow States to consider transfers occurring up to five years before a person applied.
5. Allow States Greater Flexibility in Use of Liens
States, use of liens is severely circumscribed by current law. States can impose liens on recipients' property before death only under limited circumstances: if the recipient is institutionalized, is unlikely to ever return home, and is without a spouse, child, or sibling residing in the home. Only one State (Alabama) has elected to use liens.
This proposal would remove these restrictions and increase the States' ability to impose liens on the property of institutionalized Medicaid recipients, further facilitating State efforts to recover from the estates of Medicaid beneficiaries.
Once commonly used by States, particularly on the homes of welfare recipients, liens fell out of favor because they discouraged people in genuine need from applying for benefits. In Medicaid, such an effect could conceivably lead to inadequate care. However, the provision would be limited to persons in institutions who are presumably so disabled that the question of foregoing care does not arise.
6. Require States to Restrict Medicaid Eligibility of People with Assets Sheltered in Trusts
Currently, individuals can appear to be poor enough to quality for Medicaid if they have assets sheltered in a trust beyond their direct and immediate control. Under this proposal, States would be required to treat assets held in a trust for a Medicaid applicant or recipient the same as if the assets were in an ordinary savings account or other liquid holding.
The use of irrevocable trusts t o qualify for Medicaid benefits while sheltering assets has received some attention in both the popular press and in law journals and the like, but it does not appear to have become widespread practice yet. The proposal would forestall future use of trusts for this purpose; grandfathering could protect the few current trust beneficiaries.
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