U.S. Department of Health and Human ServicesU.S. Department of Health and Human Services
This report was prepared under contract # between the U.S. Department of Health and Human Services (HHS), Office of Social Services Policy (now known as the Office of Disability, Aging and Long-Term Care Policy) and ICF Incorporated. Funds were also provided by the Administration on Aging. For additional information about the study, you may visit the DALTCP home page at http://aspe.hhs.gov/daltcp/home.shtml or contact the office at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC 20201. The e-mail address is: webmaster.DALTCP@hhs.gov. The DALTCP Project Officer was Paul Gayer.
At the same time that the number of potential users of long-term care is increasing more rapidly than at any time in our history, the government has assumed a growing role in financing these services. For example, as discussed in the Phase I report, only 45 percent of long-term care was financed by private expenditures in 1982.1 With the projected size of the budget deficits in the 1980s, the federal budget cannot support the potential scale of the long-term care outlays implied by the two trends. New alternatives and existing alternatives for the private financing of long term care will have to be developed and expanded.
This report examines potential barriers to the private financing of long-term care, in particular the barriers to the use of personal resources in financing long term care services. In addition, the report examines the potential effect of reducing these barriers. These barriers include:
annuity rigidity -- The elderly receive almost one-half of their cash income in the form of fixed monthly payments, such as social security payments and pension benefits. This may be a barrier to private long-term care financing as these funds are not available as a lump sum at the time when large expenditures become necessary.
illiquid assets -- Many elderly individuals have substantial assets, usually in the form of a home, which are illiquid. However, home equity is not usually considered to be an available asset because elderly individuals must have housing for their remaining lives, and because they may have a spouse who requires housing. Therefore, these assets are not usually available to the elderly when expenditures for long-term care become necessary.
laws and regulations providing incentives to divest -- It is often thought that estate tax laws and Medicaid eligibility factors create incentives for the elderly to divest their assets. In the case of Medicaid eligibility, it is widely understood that transferring available assets to other family members reduces the need for an individual to use those assets to finance their own long-term care. Any incentives to divest assets mean that funds are not available to finance long-term care when the need arises.
All of these factors potentially increase the elderly's reliance upon public financing for long-term care services.
In addition to identifying the potential impact of the reduction of the barriers identified above, ICF also developed a model which estimates the effects of increased private long-term care financing on government costs. In this report, we present estimates of potential Medicaid savings if there were an increase in the number of elderly individuals purchasing long-term care insurance.
This report analyzes the potential barriers cited above to the private financing of long-term care. Analysis of these barriers indicates that:
Reduction of annuity rigidity from pensions does not seem to be a viable means of increasing private sector financing of LTC currently because only about one-third of the elderly receive pension benefits and, on average, the benefits are not large. For example, only about 13 percent of elderly families' income currently comes from pension benefits. This means that benefits would have to be reduced substantially to provide a substantial lump sum which would be used for long-term care. However, the number of families receiving pension or IRA benefits will increase substantially in the future. In addition, the amount of pension benefits is expected to increase over time. For example, the number of individuals age 65 receiving over $10,000 (in 1983 dollars) in annual pension benefits will increase from approximately four percent in 1985 to over 25 percent by 2005. As a result, methods to reduce annuity rigidity will prove more beneficial in the next two decades.
Home equity conversion programs would have an even smaller impact on the ability of the elderly to privately finance long-term care services although we found that over one-half of elderly families have over $10,000 in home equity. We looked at two types of home equity conversion programs, reverse annuity mortgages (RAMs) and sale/leaseback plans. Looking at the typical plans available, we found that, for example, if an individual owned a $50,000 home, he or she could expect to receive an annuity upon conversion of between $195 and $475 per month, depending upon the plan.
Current federal tax law provides few incentives to divest income or assets prior to the need for long term care. State tax laws, while they differ from federal law in some states, do not heavily tax the estates of most individuals if the estate is passed on to a spouse or children at the time of death. State tax laws provide few additional incentives to divest.
Medicaid eligibility rules may be barriers to the private financing of long term care. These include state Medicaid policies regarding the transfer of assets and other asset considerations. For example, many individuals divest their assets in order to become eligible for Medicaid long-term care benefits. Federal regulations have no restrictions regarding transfer of assets. However, all but five states (Alaska, Arizona, Delaware, Georgia, and the District of Columbia) have restrictions on the transfer of assets for less than fair market value solely for the purpose of becoming eligible for Medicaid. Some states have transfer of asset regulations which put the burden of proof on the state to show that the transfer of assets was made solely for purposes of becoming eligible for Medicaid. Other states specify that the individual show that they did not transfer assets to become eligible. The difference in where the burden of proof lies has an impact on how these regulations can be enforced. If the burden of proof were on individuals, eligibility would be harder to obtain.
Thus, our analyses indicate that there are significant barriers to the elderly in the use of their personal resources to finance long-term care services. Pension and social security benefits are provided in a way that does not make it easy for the elderly to obtain a lump sum payment to use for long-term care. As pensions become a more important source of income, insurance companies are likely to adopt new lump sum annuity options if there is sufficient consumer demand. The elderly have much more of their resources locked up in their home equity. Home equity conversion programs have not been used widely for a variety of reasons. It may be possible for financial institutions to develop plans whereby the elderly can use part of their home equity upon demand (like a line of credit). Finally, we found that the ability to transfer assets to become eligible for Medicaid is a large barrier to the use of personal resources to finance long-term care services.
In exploring opportunities to substitute private LTC financing for public sources, we recognize that not all groups of the population or types of LTC services are potential candidates for such alternatives. However, there is a significant group of the elderly population that enters a nursing home and pays for the early part of their stay using private resources and eventually shifts to Medicaid after spending down their liquid assets and income to meet medically needy eligibility standards. If only a fraction of this group can be encouraged to defer their shift to Medicaid or extend the period of private support for even a brief period, this will contribute substantially to the current and future long-term care financing picture. In this project, we developed a long-term care financing model which we used to measure the potential impact of increased private financing on government costs.
Using this model, we examined the impact of one form of private financing, long-term care insurance, on government long-term care costs. We developed a model to simulate LTC expenses and sources of payment for a cohort of individuals aged 67 to 69 in 1981. The model uses data on representative individuals in this age group to simulate the sources and levels of payment for long term care services. The model also simulates the decision to buy insurance and its effects on the source and levels of payments for nursing home services. Our analysis indicates that:
Under current financing methods (no long term care insurance), we expect that Medicaid would pay for 43 percent of the total cumulative nursing home expenditures for the age 67-69 cohort, individuals would pay for 55 percent of total cumulative nursing home expenditures out-of-pocket, and Medicare would pay for two percent of expenditures.2
If long term care insurance were purchased by about 20 percent of this cohort, total cumulative Medicaid expenditures (in nominal dollars) would decline by approximately eight percent. The policy we simulated would provide a nursing home benefit of up to $40 per day for up to four years of nursing home coverage for a cost of $480 per year. Both the benefits and premiums were assumed to increase with the CPI.
If long term care insurance were purchased by approximate half of the individuals in this cohort, total cumulative Medicaid expenditures would decline by approximately 23 percent. This would represent a decline in cumulative nursing home expenditures for this small cohort of the elderly of almost nine billion dollars (in nominal dollars).
This indicates that long term care insurance could have a significant impact on Medicaid expenditures. Significant savings would occur even if only 20 percent of the elderly purchase the insurance. Larger savings would result if more of the elderly purchased the insurance or if the elderly with fewer resources purchased it (we assumed the 20 percent of the elderly who had the highest income and assets purchased the insurance).
If properly structured and integrated with modifications to Medicaid, more of the elderly might purchase this. insurance, which would lead to larger savings. At the same time, we note that aggregate dollars spent on nursing home care might increase slightly as private pay days are substituted for Medicaid days. This would also increase the revenues of nursing homes and provide an incentive for the expansion of these homes.
The following chapters examine all of these issues in detail. We first discuss each of the barriers and how it might affect private financing. We then examine programs or policies which would be expected to reduce the impact of these barriers (such as home equity conversion programs and reduction in annuity rigidity). We then examine the expected impact of reductions in these barriers.
The last section of this report examines how increases in private financing of LTC may affect government long-term care expenditures. This section uses results from a model developed by ICF to forecast potential Medicaid savings due to increased long-term care insurance coverage.
| The Full Report is also available from the DALTCP website (http://aspe.hhs.gov/daltcp/home.shtml) or directly at http://aspe.hhs.gov/daltcp/reports/prvfin2.htm. |