More on Long-Term Care Insurance

By James Kwak

After my previous post on the topic, a friend passed along a recent paper by Jeffrey Brown and Amy Finkelstein in the Journal of Economic Perspectives. I recommend reading it if you are interested in the topic because it provides a lot of good background information and explains some of why the market is the way it is.

They make some similar points to mine. For example (p. 138):

“First, the organization and delivery of long-term care is likely to change over the decades, so it is uncertain whether the policy bought today will cover what the consumer wants out of the choices available in 40 years. Second, why start paying premiums now when there is some chance that by the time long-term care is needed in several decades, the public sector may have substantially expanded its insurance coverage? A third concern is about counterparty risk. While insurance companies are good at pooling and hence insuring idiosyncratic risk, they may be less able to hedge the aggregate risks of rising long-term care utilization or long-term care costs over decades. In turn, potential buyers of such insurance may be discouraged by the risk of future premium increases and/or insurance company insolvency.”

They also show just how expensive private long-term care insurance is. By their calculations, the load on a typical policy is 32% (which means that the present value of benefits is only 68% of the present value of premium costs).  This is what you would expect in a thin market with a lot of adverse selection. (And one more note: The median cost of long-term care is a lot lower than in Massachusetts, the state I cited in my previous post. See this study to see where your state ranks.)

A lot of the paper is about Medicaid, which (along with other public insurance, such as Medicare’s limited benefits) currently covers a staggering 60 percent of total expenditures, with private insurance paying for only 4 percent (p. 122). Brown and Finkelstein argue that the availability of Medicaid is a major reason why the private market is so anemic. Essentially, if you have a modest income and a small amount of assets, most of the benefits you would receive from a private policy simply replace benefits you would have gotten from Medicaid anyway, so the policy isn’t worth much to you.

I think they are right, but I don’t think the implication is that we have to reform Medicaid to encourage the private market.* I think that the other problems with long-term care insurance, which they also discuss (the passage quoted above as well as behavioral issues), mean that a private solution is likely to fail even in the absence of Medicaid. As they point out, only one-quarter of people in the top wealth quintile have long-term care insurance, and, for them, the availability of Medicaid is unlikely to affect their choices.

The other problem is that a private solution is going to create a lot of uninsured, just as it does with health insurance, and without the Medicaid backstop, that means millions of elderly people who need long-term care but can’t get it. Are we really willing as a society to deny those people the care they need because they weren’t farsighted or rich enough to buy insurance when they were younger?

Hubert Humphrey once said, “The moral test of government is how it treats those who are in the dawn of life, the children; those who are in the twilight of life, the aged; and those in the shadows of life, the sick, the needy and the handicapped.”** The point of Medicaid long-term care insurance is that if you need long-term care, but  you have nothing, the rest of society (via taxes) will pay for it. Sure it’s inefficient. But is the alternative really better?

* To be fair, they don’t say that we should reform Medicaid, either. Instead, they say that it would be necessary to reform Medicaid in order to increase private market coverage. For example (p. 137):

“Substantial growth of the private market is signifificantly hampered by two features of Medicaid—means-testing and its secondary payer status—which combine to impose a large implicit tax on private insurance and to crowd out the purchase of private insurance for most of the wealth distribution. . . . The evidence today suggests that Medicaid reform is a necessary condition for substantial growth in the private long-term care insurance market, but it does not at all imply that such reform would be sufficient.”

** Cited by Don Berwick in his great speech on health care in the United States today.

17 thoughts on “More on Long-Term Care Insurance

  1. What is the point of this post?

    Are you arguing against someone who says we should scuttle Medicaid? If so, who is that, exactly, and where can I read their argument?

    Or are you arguing for some new policy? If so, what?

  2. At some point one can self-insure for long term care (a net worth of a couple of million should do the trick). Many commentators have pointed out that for a networth of under say 50k just trust medicaid, and so you have a donut hole group that needs the insurance. If you take the current cost of say 140k a year using the 4% withdrawal rate that implies a need for about 3.5 million. That would assume never depleting the principal, however if one depletes pricipal likley one can go to nearer 2 million. One also needs to consider that with todays tax laws ltc that is medically necessary may wipe out all income taxes as well.
    One needs to recall that prior to medicaid there used to be poor houses that were run by the county that took indigent elderly in, not that they were desirable places however. It does appear that if poor divorcing and shacking up makes a lot of sense if medicaid is an issue however.

  3. This comment for Nemo
    You are a regular commenter here, so I’m going to try and say this with a little better than my usual “diplomatic flair”. All you need do is put in “Paul Ryan Medicare” (since you apparently have brain damage in the part of your memory which covers anything in the 8 month range, as you would have remembered the rhubarb that ensued from Ryan’s asinine attempt at a budget) in a Google search. And these are respected sources, not

    I’m not going to waste my time putting 50 links up. If you don’t believe that, the videos below spell it out. And again, you can argue, but any lawmaker/legislature who proclaims that states are going to take on the costs of Medicaid (even if they could) is either an idiot, a liar or in Paul Ryan’s case both.

    Nemo, I say to you—If you believe that a huge block of Republicans aren’t currently trying to kill Medicaid, you are either naive or dumb. I’ve seen too many of your comments on here to deduce that you are the naive type, so…….

    P.S. I might add in this postscript that the old standby line for federal legislators when they don’t want to make a tough decision is “let’s give this to the states to decide”. That copout is more time-honored and insincere than the “Let’s form a committee” bs line for legislative procrastination.

  4. The old standby line for those politicians who don’t want to make any decisions at all is “if it is the will of the people, it shall be done”. Then they turn around and trust the people, and do what they want in the name of the constitution. Which here in doctor land, if you trust too much, you don’t make to many birthdays.

  5. I don’t get it. You have multi-millionaire/billionaire politicians stating that your medic-aid/care programs are bankrupting the country therefore “reform” (read: CUT) needs to happen and let the almighty and all-knowuing markets do their trick. Has not this free-market religion been proven false many, many, times over? Also, why is the obvious not ever stated: it’s the ever increasing military budgets and imperial “wars” that are bankrupting the USA…not its social programs for the people.

  6. @Anonymous – correct – it all boils down to non-existent *booty* from the latest decade-long, trillion $$$ war adventure

    so now suck out EVERYTHING from your own citizens…and I do mean EVERYTHING (bigger donut hole)

    *health* care – the last place left to suck out trillions…AND send the *job* oversees….unmanned drones (EKG EEG, MRI readers, etc) remotely controlled from anywhere you want…

    kinky – Chinese women controlling the probe from China – ah, the glories of globalism

    Another year or two, if ReThugs are brave enough to keep at it, and there will be NO JOBS left in USA – magic money circle jerk will be completed…you flow it out on a boomerang so it comes back to you – and MULTIPLIED!

    “….money for nothing and chicks for free…”

  7. Thank you for including these posts. I think senior economic security/ planning is an important issue. Some other areas that are related that I would be curious to hear your thoughts on continuing care retirement communities and are those including in your long term care statistics? Also, not everyone can buy long term care insurance — for individuals about a certain age and certain BMI — even if they have the intention to purchase — they might not be able to and or the premium do not make economic sense. Also, you discussion on the economic reasonableness of purchasing the insurance is right on. Though, dated at this point, I went to a legal seminar on the Elder Law several years ago and I believe at the time, unless you had assets in access of several million (I don’t recall the exact amount per individual/couple), your estate planning was Medicaid planning.

  8. The biggest problem with Medicaid is that it forces you into institutional care as soon as you reach the point where you can’t afford any care. Let me explain; I know many people who really only need a home health aide, not a registered nurse, just a trained home health aide. I live in Massachusetts like James, so that is not cheap, but it ranges from $15-25 an hour depending upon the level of care needed and thus the level of training the aid needs to have. Now obviously if you needed that person 24 hours a day it would cost much more than a nursing home – but many only need somebody three or four hours a day, or while their children are at work, or to give their spouse (who is obviously elderly as well) a break for a few hours. This is not huge money, but it adds up – if you need somebody for say six hours a day, five days a week we’re zero-ing in on $40K a year. There is also adult day care which is less expensive, but usually more hours so we’re still probably talking $25 – $30K a year. If you are widowed or single maybe you’ve saved up enough to afford that, in addition to buying your medications, food, clothes, and other necessities. If you are married, the well spouse still has all their own expenses and needs a place to live.
    Let’s assume a married couple, in order to qualify for Medicaid the sick spouse can only have $2,000 in assets and the well spouse (called the community spouse) can only have $113,000 in assets. Once you reach that level of assets, if you were using a home health aide, you’ve probably run out of money to pay that person so Grandpa goes to a nursing home. This is awful for the spouse, awful for the kids, maybe awful for the sick person depending upon their level of competence, and it costs the Federal Government $80-90K a year (Just like with Medicare, Medicaid pays a lower rate to the nursing home than the rate privately paid – so your also supplementing Medicaid patients when you private pay.) If Medicaid allowed the ill person to stay at home with a home health aide, up until the cost of that care met let’s say 80% of the institutional cost, everyone would be better off. Of course there is more room for fraud and abuse in that system – and often I feel that governmental systems would rather spend vastly more money and have less potential fraud then spend less money but have more potential fraud- in fact I’m certain of it. So that’s why we have the system we do, a horrible screwed up system like every other system in our country. As I like to say, we can’t even get rid of the penny we’re certainly not solving the big issues.

  9. Never see a medical bill. Never go bankrupt because of medical bills. Get comprehensive coverage, including long-term care. And, cut the nations medical bill in half.

    The nation should expand the insurance pool to cover everyone. The nation should self-insure through a single payer insurance system. Medicare for everyone, from birth to death. With expanded coverage to cover the items our now enemic Medicare leaves uncovered.

    The economic system is so enourmously productive it can’t dispose of what it can produce. It is time to eliminate unmet need and stop this arcane medieval analysis over Medicaid and private insurance.

  10. Thank you, James, for the analysis of long term care insurance. It underscores the need for single-payer, government sponsored health insurance, cradle to grave, for all. Contrary to the assertions of “private” Ryan, much of the current health care mess, i.e. high costs and less than good outcomes, is the result of so called private market policies that add profit margins at each step of the process and encourage insurers to accept cost inflation(insofar as margins are calculated as a percentage of costs). We are paying 30 – 40% more than the rest of the world and where is it going? We need to reduce profit centers as well as waste and abuse by providers. The so-called market hasn’t and won’t do that. The government should.

  11. Jim asks where is it going? I would respond as today’s economist who has political ties, that it goes toward growth and the GDP. This is where common sense hits the brick wall. And you wont find a politician who will do the correct thing, over the thing that makes his constinchuants money. For profit insurances always make their bottom line off the ones who don’t need it in the first place. Spiraling out of control costs won’t be contained until you get profit out of health care, and reconize there is not cure or machine for everything. The best medicine is to take care of yourself, for that is all there is of you.

  12. Long term care insurance is needed by all Americans and it also has great tax benefits.

    Long-Term Care Insurance


    Oh stop the bloody ads!

    And how are the bottom 75% supposed to be able to PAY for this very high priced product – while keeping a foof over their heads and food on the table?

    Tax benefits are meaningless to 80% of US households who DO NOT itemize.

    The typical individual over-65 has an incoe of around $18,000. The typical over-65 couple has an income of aroud $32,000 a year. Medicare, medigap and Part D hit them for close to $5000 a year PER PERSON. How are they supposed to pay the premiums for long-term care insurance – premiums that are escalating because they are aging – until, if and when, they need it?

    The majority of the US C-A-N N-O-T afford it.

    GO peddle your spam on Forbes or WSJ.

  13. Perhaps Mr. Insurance man has every intention of reducing the average age to like 68, that way they keep bills down and can still call it long-term. Sort o like the president wanting everyone to get and pay for broadband so we can more easily keep an eye on you and profit too. Once he get rollin, he doesn’t really never stop.

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