Private Capacity to Finance Long Term Care. Resources Available for Financing Long-Term Care


Family income is the most important indicator of ability to purchase long-term care. Income levels may change, however, with the onset of disability and any consideration of capacity for providing care should take this into account. Consequently, source of income becomes very important. In addition to income, a family's assets provide a potential source of funds. Since long-term care needs are likely to extend over time, only a portion of assets should be considered as a source of support in any given year. Other resources, such as in-kind transfers, may be from the private sector--through subsidized health insurance from employers, for example--or from the public sector--in the form of food stamps or Medicare and Medicaid eligibility. Perhaps the most important in-kind transfer would be help provided by the spouse or other relative when a disabled person remains at home. Finally, demands on income or resources for the provision of necessary goods and services to other family members reduce the amount available for purchase of long-term care.

Income. Income can be treated in a straightforward manner as a resource for financing long-term care. As, a yearly flow, this represents a renewable source of funds. Realistically, however, a measure of available resources should probably distinguish between sources of income that will and will not change with the health of family members. For example, Social Security benefits and other pension income already being received are independent of health status. Similarly, cash transfers from government programs such as Supplemental Security Income (SSI) for the elderly will probably also remain unchanged if a current beneficiary becomes physically impaired. In contrast, income from wages and salaries of a newly disabled family member would likely fall to zero. Other family members may also reduce their labor force participation if they are needed to provide care at home. Rent, interest and dividend income from assets may also decline if the family is forced to reduce savings to cover medical expenses. This latter issue will be discussed further in the context of the treatment of net worth.

It is also possible that some income sources may actually increase, although not usually enough to compensate for the losses described above. Other family members may enter the labor force or increase hours worked to partially compensate for one member's lost salary, particularly if the disabled person is not cared for at home. A disabling illness or accident may make an individual eligible for veterans, disability or retirement benefits that partially replace lost earnings. These may be from privately funded insurance benefits or from Social Security, SSI or other government programs. Employees with particularly good health and disability coverage may end up with after-tax income as high as or higher than pre-disability after-tax income. This is, however, likely to be the exception rather than the rule. Moreover, since a substantial portion of persons who will require long-term care will be over 65, it is unlikely that their post-disability incomes will be higher. In most cases elderly persons already receive retirement benefits which generally preclude any additional eligibility for disability benefits.3 On balance, then, earnings of the impaired individual ought to be subtracted from income, but offset by any increase in transfer payments from government programs or private insurance. Since the work response of other family members could either increase or decrease if a family member became in need of long-term care, empirical analysis should probably assume no change in behavior.

For this analysis, several approaches are used since replacement income estimates are not available. The section on elderly individuals is restricted to single individuals living alone and couples where one member is over 64. The first approach assumes that all labor income would fall to zero. The elderly spouse of a disabled person may find it difficult to continue working, particularly if the impaired individual remains at home. This lower bound estimate of resources can then be contrasted to total income to show the sensitivity of a family's financial capacity to wage and salary income. A second approach is to focus on those elderly without earnings. Such individuals are more likely to be at risk and their incomes have already been adjusted for the retirement transition in which transfers partially replace lost earnings.

For the section on impaired individuals of all ages a different adjustment is used. Family size in such households is often greater than two, increasing the possibility that some family members could continue to work. Thus, for the results in this section, only the earnings of the impaired person are subtracted from income. No adjustments are made for potential substitutions of disability benefits.

Net Worth. Some reasonable calculation of the contribution of assets should be added to the measure of income. However, if all net worth (assets minus liabilities) were included in one year, an unrealistically high estimate might result. The family could spend down all resources in a particular year but then be unable to provide care the next, if the period of disability lasts beyond a year. Consequently, only a portion of net worth should usually be added to income, implicitly assuming that a family would use up its resources over a period of years. The value of a family's net worth could be converted to an annuity--indicating a stream of resources that would provide equal additions to income in each year.4

In the case of the elderly, remaining life expectancy may serve as a rule of thumb for the appropriate period for consuming net worth. For this age group, disability is likely to be permanent. Using life expectancy as the number of years in an annuity equation, however, yields the troublesome result that persons who expect to live longer are less well off in any one period. In addition, life expectancy tables reflect average rates across the population as a whole. In this study, we concentrate on persons with physical impairments or in poor health--conditions likely to shorten life expectancy over that in published tables. Consequently, two annuity calculations are made for the elderly--using five and ten year periods--rather than differential periods for each family.5 Five and ten year estimates are also used when considering younger families with impaired members. Although such periods would greatly understate life expectancy of younger family members, disability for the younger person may be shorter and other types of resources available to such a family are likely to change over time.

The more liquid the asset, the simpler is a gradual consumption of it over time. Stocks, bonds and savings accounts can be drawn down in increments. However, interest in a business or ownership of property may be difficult to convert into cash in the short run. High interest rates in recent years have made it particularly difficult to sell such assets and costly to borrow against them. Therefore, it may be misleading to include the full market value of these assets in an annuity calculation.

The treatment of an owner-occupied home also poses other problems. The home is an important contributor to the well-being of a family in two ways: it represents an asset that can be sold to raise revenue and it offers a flow of services to the owner. Sale of this asset precludes its use as a source of inexpensive housing (particularly if the home has little or no mortgage remaining). Moreover, as discussed earlier, an owned home may provide added motivation for a disabled person to remain out of an institution.

In a world of lower interest rates and better capital markets, families could more readily borrow against some of their home equity over an extended period of time. Reverse annuity mortgages, for example, have been widely discussed.6 In practice, however, few of these innovative programs exist except as limited demonstration projects. High interest rates have slowed development of such programs. At present then, it may not be realistic to assume partial liquidation of an owned home to meet long-term financial needs. Consequently, owned homes will be included in the analysis here but annuities are calculated both with and without the home. In addition, results will sometimes be separated to isolate homeowners from those who rent or receive free housing.

In-Kind Transfers. Resources received in the form of goods and services contribute to the well-being of individuals and--directly or indirectly--to their ability to finance necessary long-term care. The usual source of such help is from government programs or from relatives.

Low income households are the major recipients of government sponsored in-kind transfers in the form of food, public housing and medical care. Food stamps are viewed by many as nearly equivalent to cash in the eye of recipients. Thus, the subsidy value of these benefits can be readily incorporated into an income measure. Public housing programs provide benefits to only a small portion of the low income population and benefits to the recipients are almost certainly lower than the cost of providing them.7 In this study, only food stamp benefits are included.

Goverment medical transfers include Medicaid and Medicare. Medicare is not restricted to low income persons; rather, all aged and disabled persons eligible for Social Security may participate in Medicare. Although the medical transfers certainly increase the well-being of families, they do not directly enhance a family's ability to privately provide care. Consequently, the value of these benefits are not included in the income measure.

Another important potential resource for a newly disabled person would be help from relatives outside the home. Particularly for the elderly, intra-household transfers in cash or in services--such as relatives helping with meal preparation or housework--may provide important supplements to income. Since many families not currently providing support to others may do so when a crisis arises, the extent of such aid is impossible to determine before the fact. Some information could be gleaned by looking at the proportion of disabled persons currently receiving such help, although data on the extent of such resource sharing are seldom gathered and are subject to underreporting. These transfers are picked up as income only when provided consistently over time and in cash. Information that is available suggests that family relationships are more important than need for care in determining whether relatives provide help. Thus, if a health care crisis arises, some but not all persons would receive help from relatives, making it difficult to identify likely recipients and to estimate the extent of such aid. Consequently, this important in-kind transfer cannot be studied here.

Discretionary Resources. Even after predicting adjusted "post-disability' resources, not all remaining resources would be available for purchasing long-term care. First, direct taxes should be subtracted, since individuals are required to pay such liabilities. Other family members require some portion of the income. moreover, a disabled person who wishes to remain at home also faces basic food and shelter costs. Only in the case of a single individual facing institutionalization is it realistic to allocate all of resources to long-term care.8

Thus, some measure of discretionary resources--an amount available after the basic necessities are purchased--is a more appropriate indicator of ability to finance catastrophic care. A conservative estimate of discretionary resources can be obtained by subtracting housing expenses--including utilities--and food from resources. Other expenditures, such as those for clothing and transportation, could arguably also be included as necessities but few would disagree with using housing and food. This more restricted approach may therefore overstate a family's ability to provide for long-term care, but will be used to indicate an upper bound on available resources. In addition, calculation of tax liabilities for the elderly is a task beyond the scope of this paper.

Individuals living alone are more likely to require an institutional setting if long-term care is needed. In such instances all resources would be available for purchasing such care since housing and food would be included at the nursing facility. Similarly, some adjustments to discretionary resources might also be appropriate in larger families where one member enters an institution. Housing costs are unlikely to change substantially but outlays on food could fall, particularly in small families.

The estimates of discretionary resources used here compare food and housing expenditures only to income because of limitations on available expenditure data. It would, of course, be more appropriate to develop a measure of discretionary resources--dollars available after making appropriate adjustments for assets and in-kind transfers to income and then subtracting housing and food expenditures. Unfortunately, data limitations make this a complex task and, therefore, a formal measure of discretionary resources is beyond the scope of this paper. The importance of such other factors will be discussed briefly.

In summary, the best measure of a family's ability to finance long-term care would begin with an estimate of post-disability income that recognizes likely adjustments among the various income sources of the family. Expenditures on basic necessities would then be subtracted from post-disability income while an annuitized share of net worth adjusted for liquidity problems and the value of in-kind transfers received would be added.

View full report


"privcap.pdf" (pdf, 2.25Mb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®