HHS Logo: bird/facesU.S. Department of Health and Human Services

Private Financing of Long-Term Care: Current Methods and Resources

Executive Summary

David Kennell

ICF Incorporated

January 1985


This report was prepared under contract between the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and ICF Incorporated. For additional information about the study, you may visit the DALTCP home page at http://aspe.hhs.gov/daltcp/home.htm 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.


A. PHASE I

1. Background

Current demographic trends indicate that the number of individuals age 65 and over is expected to grow from 26 million in 1980 to 32 million by the year 2000. This group is the one most likely to require long-term care (LTC) services including care in nursing homes, residential care facilities, retirement communities, and care in their own homes.

An analysis of LTC financing indicates that both public and private financing has increased over the last 15-20 year. Public financing, including funds from Medicare, Medicaid, the Veteran's Administration and other State programs, increased from 34 to 57 percent of all LTC expenditures from 1965 to 1979. In short, as demand for these services has grown, the government has assumed a larger role in their financing. Federal, State and local governments, however, are becoming increasingly concerned that they will be unable to meet the growing demand for publicly financed LTC services. New methods for the private financing of LTC need to be explored and developed. This study addresses these alternative methods of LTC financing such as pooled financing arrangements.

2. Pooled Private LTC Financing Prototypes

Pooled financing alternatives are designed to spread the costs of LTC services across a broader group of individuals, while eliminating risk for all individuals in the group. Examples of pooled financing arrangements are LTC insurance, prepaid health plans offering LTC services, and life care and continuing care centers.

LTC Insurance. Few individuals currently have private insurance for extended LTC services. Most elderly individuals have Medicare coverage and supplemental coverage, which may provide up to 100 days in a nursing home, but which do not cover extended stays.

In recent years, several companies have developed individual insurance policies that provide extended LTC services. Approximately 100,000 individuals are currently covered by this type of insurance, which is offered by more than ten companies. Of the four policies examined in detail, all provide indemnity type benefits for from two to four years of care in a licensed nursing home. Coverage continues under these plans beyond the time when skilled nursing is necessary. Per diem benefits range from $20-50 per day for nursing home care (equivalent to $600-1,500 per month or $7,300-18,250 annually) for nursing care, with most individuals purchasing $40 or $50 per diem policies. Premiums are usually based on an individual's age at the time of purchase and vary depending on the coverage desired. For a per diem benefit of $40-50, premiums are in the $400-800 per annum range for those in the early 70s, who are the most frequent purchasers of the insurance.

Group insurance coverage plans could also be designed to include LTC coverage. We identified only one plan, the Blue Cross plan for the United Auto Workers (UAW), which offered this coverage. The policy includes both skilled nursing and home health care benefits, and it is estimated to cover about 800,000 UAW workers and their dependents. The average monthly cost of this benefit has been estimated to be about 50 cents per month. In part, the cost remains low due to low utilization of the benefit.

Prepaid LTC Programs. A second form of pooled financing is prepaid LTC programs. These programs provide a pooled financing vehicle which could be used to provide LTC services.

Most current Health Maintenance Organization (HMO) packages include a standard LTC benefit package, providing these services only when necessary in recuperation. However, several innovative prepaid LTC programs have emerged in recent years.

The Health Care Financing Administration is currently sponsoring several Social/HMO (S/HMO) demonstration programs which offer comprehensive LTC benefits. Under these programs, Medicare pays the S/HMO a per capita amount on behalf of Medicare beneficiaries. This premium is supplemental by an additional amount from HMO enrollees. In exchange, Medicare beneficiaries receive comprehensive LTC benefits, as well as non-health related services such as Meals on Wheels and homemaker services.

Blue Cross of Southern California is also offering a prepaid LTC package through the Ultracare plan. This plan, which supplements the Medicare program benefits, provides home health benefits such as nursing care, housekeeping, meal and transportation services, and those services offered in life care and continuing care centers.

Life Care Centers. A life care center typically provides a full range of residential, health, and social services for the remaining lifetime of an elderly individual in exchange for some combination of an initial entrance fee and a monthly charge. Centers that provide primarily residential services, but do arrange for residents to have access to health care services, are considered continuing care centers. Life care and continuing care centers differ from a traditional retirement home in how they finance the costs of their services. Their financing ranges from comprehensive financing for residential and health services to financing for residential services only. In 1979, there were approximately 600 life care or continuing care centers, with over 200,000 residents. Due to the unique financing arrangements of these organizations, they represent an important method of financing LTC.

Life care centers typically require a large initial fee, as well as substantial monthly payments. Initial fees range from $50,000-100,000 for a one bedroom apartment with monthly payments ranging from $750-1,500. Despite the fact that life care centers are relatively expensive, many homes have a waiting list.

3. Alternative Financing Approaches

In the course of our review, a number of additional approaches for private LTC financing were identified. Although not yet tested in the market place, these alternatives represent the current thinking of those who have followed the trends in LTC financing and are actively involved in new prototype design. In addition, some of these alternatives represent the use of a combination of pooled LTC financing vehicles and personal resources. The approaches considered include:

In summary, there is a broad range of alternatives to encourage greater private financing of LTC services that deserve closer attention in the future.

4. Financial Resources of the Elderly

Elderly individuals and families have a variety of resources available for use in meeting potential LTC needs. Personal income from social security, private and public pension plans, life insurance benefits, and personal assets all represent potentially significant sources of financing for LTC services. Although LTC financing problems are greatest for those with little personal income and few assets, there may be opportunities to pool these risks or fund these benefits more efficiently and effectively.

ICF's analysis indicates that 26 percent of all individuals 65-69 had a total potential annual income (including annuitized value of wealth) above $25,000 in 1980. This percentage declines to 16 percent of individuals age 80 and over. For single elderly persons, corresponding figures are 7 percent for those 65-69 and 10 percent for those 80+.

There appears to be a promising market for LTC financing alternatives. We estimate that, among the approximately 12 million individuals age 70-79, approximately 2.5 million (20 percent) would have been able to purchase LTC insurance for less than five percent of their income in 1980. The market is much larger if we assume that a portion of the nine million individuals age 65-69 would also purchase LTC insurance. In the case of life care centers, we estimate the current potential market at roughly two million of the 12 million individuals age 70-79.

In the future, the income of the elderly is likely to increase for three reasons: (1) the future growth in real wages; (2) increases in women's labor force participation; and (3) the growth in the percentage of elderly families receiving pension and IRA benefits.

5. Barriers to Growth

Despite the apparent need and potential for growth in LTC financing products, there is limited availability of these products. We identified several barriers to growth in these products including:


B. PHASE II

1. Background

At the same time that the number of potential users of LTC 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 LTC was financed by private expenditures in 1982. With the projected size of the budget deficits in the 1980s, the Federal budget cannot support the potential scale of the LTC outlays implied by the two trends. New alternatives and existing alternatives for the private financing of LTC will have to be developed and expanded.

This report examines potential barriers to the private financing of LTC, in particular the barriers to the use of personal resources in financing LTC services. In addition, the report examines the potential effect of reducing these barriers. These barriers include:

All of these factors potentially increase the elderly's reliance upon public financing for LTC 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 LTC 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 LTC insurance.

2. Key Findings

Analysis of Barriers. This report analyzes the potential barriers cited above to the private financing of LTC. Analysis of these barriers indicates that:

Thus, our analyses indicate that there are significant barriers to the elderly in the use of their personal resources to finance LTC 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 LTC. 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 LTC services.

Impact on Medicaid Costs. 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 LTC financing picture. In this project, we developed a LTC 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, LTC insurance, on government LTC costs. We developed a model to simulate LTC expenses and source of payment for a cohort of individuals aged 67-69 in 1981. The model uses data on representative individuals in this age group to simulate the sources and levels of payment for LTC services. The model also simulates the decision to buy insurance and its effects on the source and levels of payment for nursing home services. Our analysis indicates that:

This indicates that LTC 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.


NOTE

  1. This assumes no transfer of assets by the elderly; hence it represents an upper bound of the private share.