Long-Term Care is a Long-Term Problem

Posted by Jeffrey Brown on Oct 6, 2010

Filed Under (Health Care)

Yesterday, I gave a talk at the Dutch Ministry of Health in the Hague (the political center of the Netherlands).  I was asked to make a presentation about the U.S. long-term care insurance system.  The problem is, we have no “system” to speak of.  Rather, we have a confusing patchwork of public and private programs that together do – at best – a modest job of protecting individuals from the financial risks of long-term care.

Long-term care is a classic case of a risk that people ought to insure – it is highly uncertain whether you will need it, but if you do, there is a chance of it consuming enormous sums of money.  A typical nursing home can cost you north of $6,000 per month, and having skilled RN care in the home can easily cost $30 or more per hour.  These numbers can quickly exhaust the limited financial wealth of a majority of American households.

And yet, most people in the U.S. do not insure against this risk.  In aggregate, people pay about 1/3 of all long-term care costs out of their own pocket, whereas only about 4% of expenses is paid by private insurance.  Who covers the rest?   Taxpayers – through Medicaid, and to a smaller extent through Medicare.

But Medicaid is pretty lousy insurance because it requires that you impoverish yourself before you qualify.  Normally, we think of buying insurance so that a big financial shock does not ruin our future consumption possibilities – for example, if your house burns down (say, for example, you failed to pay the fire department your annual fee – see Nolan’s latest post!), you get enough money to rebuild so that you do not have to cut back on your other expenditures.  With Medicaid, however, it helps you out only after you have spent virtually all your other money paying for care.

So why don’t people buy private insurance?  There are many plausible reasons, but one of them – as shown in my work with Amy Finkelstein – is because Medicaid’s means-testing and secondary payer status means that it is in your interest *not* to buy insurance.  Why?  Because most of what you buy ends up duplicating what you could have gotten for “free” from Medicaid.  And because many policies available in the private market fail to cover a large share of you possible expenditures, you may end up on Medicaid anyway.

This highlights a fundamental problem – and one that, I learned yesterday, is shared by the Netherlands and Germany (both countries about which others presented).  Namely, once you decide that you are going to not let people die on the streets for lack of funds to pay for long-term care (and thus provide a government program to help), you cannot help but mess up the private market.

This leaves a dilemma.  If the private market cannot function properly because of the government means-tested program, and if you are not willing to get rid of the means-tested program (which would almost certainly leave some people in need of care left without it), then the net result is that people will have significant exposure to uninsured risks. Of course, one solution is to drop means-testing altogether, and simply cover all long-term care under the universal Medicare program.  But I confess that I really dislike the notion that just because we allow one form of government intervention (e.g., Medicaid), we must then provide even more government intervention n (e.g., covering all long-term care under Medicare) just because the market can no longer work!  Not to mention that an expansion of our entitlement programs is the last thing we need given our long-term fiscal outlook.

Or do we just accept the status quo?  Let Medicaid continue to help those who need it, but at the cost of crowding out potentially better private coverage and thus leaving many people exposed to the risk of impoverishment.  It is a hard choice.  Different countries have taken very different paths – and none of them are happy with it.  The Netherlands covers all the care, but as a result they are facing large and growing government expenditures and are asking whether this is sustainable.

So, what are we to do?  There is only one solution I can think of that a) relies on private markets rather than a taxpayer –financed government program, and b) ensures that everyone gets the coverage against financially-catastrophic long-term care expenditures.  And that is to have the government mandate that everyone have coverage, but leave it up to the private market to provide it.  Then, take the money we are currently using to pay for long-term care through Medicare and Medicaid, and use part of it to subsidize the premiums for those with low-incomes.

The problem, of course, is that an “individual mandate” to purchase long-term care insurance would be politically unpopular in the U.S. (even then-candidate Obama was against an individual mandate for regular health insurance during the campaign).  It goes against our nation’s free market preference (which I am usually a huge advocate of!)  But in this case, the irony is that a government mandate would probably result in less government control of long-term care, at least compared to the current system under which the government provides $3 out of every $5 spent.

10 Responses to “Long-Term Care is a Long-Term Problem”

  • Nolan Miller says:

    “And that is to have the government mandate that everyone have coverage, but leave it up to the private market to provide it. Then, take the money we are currently using to pay for long-term care through Medicare and Medicaid, and use part of it to subsidize the premiums for those with low-incomes.”

    Jeff — did you just come out in favor of Obamacare?

  • Jeffrey Brown says:

    One of the things I have been enjoying while in Europe is having serious economic policy discussions with thoughtful individuals without those discussions devolving into mindless, ideological labeling. “Obamacare” is a label applied to a 2000+ page document that includes some good, some bad, and some ugly provisions. By the way, the part of “Obamacare” that dealt with long-term care (the so called CLASS ACT) is quite possibly one of the least sensible pieces of legislation I have seen passed in many years – as I have written previously, it is a solution in search of a problem. So, I really don’t think that a recognition that the private market will not work because we have a massive means-tested Medicaid program necessarily implies that I support the health care legislation that was passed earlier this year.

    The point of this post was quite simple, really. It is to say we face one of 4 choices. Either we (1) continue with the current, highly inefficient system that costs a large and growing amount of taxpayer money and still leaves people exposed to significant risk, (2) tell people who cannot afford long-term care that we as a society are prepared to let them die for lack of care, (3) socialize the risk by having the government provide the insurance, such as through Medicare, or (4) we get serious about our effort to utilize private markets, but recognize that the only way to do so is to require people participate, because they will not do so as long as Medicaid is distorting the market in the way that it is.

    All of these solutions are highly problematic. I think #4 is the least problematic of all. you may call it what you wish. I call it “the least of the evils.”

  • Nolan Miller says:

    Of course, I was just giving you a hard time. But, the broad approach you propose — which is one I also favor — is the basic approach of health reform. A combination of an individual mandate and subsidies for those who can’t affort market prices. (I guess you don’t propose prohibiting risk rating policies, which is also a part of health reform.) This type of approach, where the government sets what we hope are sensible rules to the game that ensure access for everyone and then harnasses the power of free markets to figure out how best to deliver services, seems to have the best potential to lower costs and increase access. The surprising thing to me is that health reform has been (also mindlessly) labeled as socialism when it is really a very market-driven approach to reform.

  • JX says:

    I’ve always wanted to learn about your opinion on the swiss model for health care, which has an appearance of a government mandated and private market provided system, but is still heavily regulated.

  • Justin Smith says:

    Obviously, long term care insurance can be very hard for insurance companies to sell. It is very expensive and many consumers are weary that they might pay premiums into the system for years and never reap the benefits. However, insurance providers can possibly make long term care insurance more attractive to consumers. Hartford Financial Services Group has recently introduced a whole life policy which comes with a long-term care feature. Purchasers are allowed to tap the death benefit if they need to pay for long-term care, and if not the money will go to heirs at death. (Americans are getting older and how to pay for long-term care must be addressed, Eileen Ambrose, Baltimore Sun, 12/5/10). I think that these types of plans address some of the fallbacks of typical long-term care insurance plans and more consumers will buy them. Although I like the suggestion Prof. Brown gives as a longer-term solution, I think the direction Hartford has headed is a step in the right direction.

  • Meghan says:

    The answer to the complete lack of long-term care lies in the basic economic principle of supply and demand. With such a high demand for long-tem car due to the increasing life-expectancy, the U.S. needs to supply the elderly with such services, either through a universal program, or allowing the existence of a private market. Now, to extremely simplify the science of economics again, the goal of any market is efficiency, which is where the U.S. runs into a problem. And which also leads of the paradox of a government mandate to enroll in private long-term care. We can all agree that Medicaid does not work: not only is accumulating enormous debt, but, like Jeff says, its means-tested approach requires one to be financial bankrupt to participate. We need private long-term care insurance, and unfortunately, it seems the only way to encourage people to participate is to take on the role of paternalism and force them to participate.

  • HP says:

    As much as I am against forcing additional insurance on the nation, I think the only way to achieve an efficient market for long term health care is to make long term care mandatory. The fact of the matter is that we the tax payers end up paying for those who do not purchase long term care; I know that I would rather be forced to pay for insurance for my family and myself rather than be paying for those who did not insure long term care but still use. Medicare and Medicaid are growing exponentially and we cannot leave the programs responsible for the rising costs of long term care; if insurance can slow the growth of these programs I am all for it.

  • John Keady says:

    The largest problem I see with making Long-Term Care insurance mandatory/private is that there will be millions of people that can not afford it. Are we going to model, the mandatory LTCI after Obamacare where there will be some sort of government subsidy for those under a certain income level? Needless to say, it would be terrible for a large portion of Americans to be without long term care, but I don’t know if the government should be forcing people to purchase LTCI. Frankly, I don’t even think medacaid should be providing it. I’m one of the very few American’s that is not so appalled by the term death panel. If you want to live an extra six-months then you pay for it. It is not the governments job to pay for that luxury. I think that we need to take a step back and look at whether or not we really need the government to do things like pay for long term care. I personally don’t think we do, but then again I am a healthy 21 year old.

  • NV says:

    I hesitate to resort to solutions which tamper with the free market in any industry, but the solution you proposed seems sensible. The long-term care problem seems to be a microcosm of the issues facing the entire system. Long-term care (health care) is extremely expensive. Current government programs don’t provide enough coverage or value to people needing long term care and the private market is too expensive or inefficient. Just as in the health care reform debate, we are faced with doing very little and allowing the free market to operate or buy increasing government intervention in this space. I believe health care might be a unique scenario where we need to increase government intervention in order to help consumers, regardless of free market effects. The problems in all areas, not just long term care, need solutions have have needed them for quite some time. Blending a mandate with private coverage seems to be a good happy medium.

  • Pengfei Yu says:

    The problem I see with long-term care insurance is the same as with many other forms of insurance in the US: the majority of people trust that they will be able to save money in the long run by paying the premiums and trusting that when they need care, they will be able to — in essence — draw out more from the system than they put in.In the meantime, the business model for insurance is to collect some money from many, many people, invest it profitably somewhere else, and then bet that you will have far fewer claims than you have people participating in the program. Hedge that bet by denying as many of those claims as possible.