U.S. Department of Health and Human Services
Private Financing of Long-Term Care: Current Methods and Resources
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
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:
Single premium annuity. Under this mechanism, an elderly individual could be offered a single premium immediate annuity for purchase at the time of entry into a nursing home, retirement home, life care center or other retirement/health care setting. This annuity would be structured to ensure a monthly cash payment continuing from the time of entry until death. This would provide incentives for the individual to leave the facility if possible, while preserving the value of his monthly benefits. The benefit could also be designed to increase in value with the length of the stay.
Life indemnity prototype. In a project sponsored by the National Center for Health Services Research (NCHSR), a prototype LTC indemnity policy has been developed, and premiums have been estimated under various sets of assumptions. Premiums for this plan were estimated to range from $28-116 per month depending on the indemnity payment (from $35-70 per day) and the age at the time of insurance purchase (65-80 years). In addition to estimating premiums, this NCHSR study includes a survey of consumer acceptance of such policies. When completed, it will provide valuable information on the attitudes and preferences of the elderly with regard to LTC services.
Combination life/LTC insurance. Due to the difficulty of attracting purchasers of LTC insurance at younger ages, some believe that combining LTC coverage with conventional life insurance coverage may offer broader appeal without the substantial risk that LTC insurance alone possesses. Most people purchase life insurance to protect primarily against unexpected and premature death. For those living to older ages, life insurance has less value than protection against the costs of unexpected LTC services that exceed normal living expenses. The significance of both types of risk suggests that a combination life and LTC benefit sold on a group or individual basis could provide good value to a broad range of individuals.
LTC/individual retirement account (IRA). To increase the private financing of LTC, some have suggested that individuals be able to contribute to IRAs which are earmarked for LTC. Contributions to these LTC/IRAs could either be tax deductible or used as a tax credit. By making the contributions tax deductible or a tax credit, and by deferring taxes on the interest earned on the contributions, the after-tax cost of saving for LTC expenses would be reduced. This would increase the availability of funds for the private financing of LTC.
Pension benefit options. Individuals who receive employer pension benefits from defined benefit and defined contribution plans generally receive either annuities or lump sum payments. One possible option to increase the private financing of LTC would be to allow individuals to elect a variation of a life annuity. This option may be particularly attractive for many of the elderly for a number of reasons. First, this option does not reduce the present value of one's pension benefits, but simply modifies the timing of the benefit payments. Any funds not used for LTC could be used for other purposes or they could become part of one's estate. This feature may be particularly desirable for the elderly who do not think they will require LTC services. Second, this method of financing may match the LTC expenditure requirements of the elderly who spend limited periods in nursing homes.
Reinsurance options. Reinsurance programs may help promote the growth of private financing vehicles. Little is currently known about LTC utilization patterns. There is, therefore, a high degree of risk in making LTC insurance widely available. This degree of risk means that premiums are difficult to set, and perhaps that they are higher than necessary. Reinsurance programs, which protect insurance companies for risks above a certain amount, may be useful in eliminating some of this risk, thereby reducing premiums. Such programs could encourage the broader sale of LTC protection.
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:
State policies. Many States regulate the development of new insurance products as well as the development of life care and continuing care facilities. While these regulations exist, they do not appear to be a substantial barrier to the development of LTC products.
Medicaid programs. Because Medicaid programs provide substantial LTC benefits, the existence of these programs may dampen the demand for private LTC financing products. It is likely that any policy attempting to encourage private financing for LTC will have to include changes in Medicaid eligibility rules.
Market factors. The development of pooled financing mechanisms may be slow due to certain market forces. These included limited knowledge of LTC utilization patterns and the costs of providing LTC insurance, the need to market these plans individually, and limited knowledge about the potential market for these products.
Consumer information. Consumer surveys indicate that many elderly consumers overestimate the benefits of Medicare and private Medicare supplemental insurance policies. Consequently, many elderly consumers do not perceive the need for LTC financing products.
B. PHASE II
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:
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 LTC 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 LTC 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 LTC. Any incentives to divest assets mean that funds are not available to finance LTC when the need arises.
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:
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 15 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 LTC. 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 4 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 LTC 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 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 LTC. 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 LTC. 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 LTC 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 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:
Under current financing methods (no LTC 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 2 percent of expenditures.1
If LTC insurance were purchased by about 20 percent of this cohort, total cumulative Medicaid expenditures (in nominal dollars) would decline by approximately 8 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 LTC insurance were purchased by approximately 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 $9 billion (in nominal dollars).
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.
This assumes no transfer of assets by the elderly; hence it represents an upper bound of the private share.