Long-Term Care is a Long-Term Problem

Filed Under (Health Care) by Jeffrey Brown on Oct 6, 2010

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.

A Solution in Search of a Problem: A Look at the “CLASS Act” Proposal for Federal Long-Term Care Insurance

Filed Under (Health Care, U.S. Fiscal Policy) by Jeffrey Brown on Nov 24, 2009

Deep within the “Patient Protection and Affordable Care Act” – the short title of the 2000+ page health care bill winding its way through the Senate – is a provision that came from legislation previously known as the CLASS Act.  The CLASS acronym stands for “Community Living Assistance Services and Supports” and is a plan to “establish a national voluntary insurance program for purchasing community living assistance services.”  Essentially, this legislation would create a voluntary, public long-term care insurance program.      


This provision has received almost no attention from the press, which is actually pretty surprising given that it would represent a major change in the federal government’s role in providing insurance for long-term care.  It would be a voluntary program through which individuals – in return for paying premiums to the government program for 5 years – would be eligible for a benefit of approximately $50 per day that they are receiving eligible care (where eligibility is triggered by an individual’s inability to engage in activities known as “Activities of Daily Living,” or ADLs – things such as bathing – without assistance.)


It is understandable that there is tremendous interest in rethinking our approach to long-term care.  The private market for long-term care insurance is quite small (e.g., only about 10 percent of the age 50-70 population is covered, and only about 4-5 percent of long-term care expenses are covered).  The government is already the largest source of payment for long-term care services through Medicare and Medicaid.  These expenditures are expected to grow rapidly in the coming decades due to population aging, among other factors. 


But as I read this legislation, the same question keeps nagging me over and over.  The reason it is nagging at me is that I cannot figure out the answer.  The question is, “exactly what problem is this legislation meant to address?” 


The legislation would create a public insurance program under the assumption that people cannot get the insurance privately.  In other words, it seems to be assuming that the problem is that private insurers can’t or won’t provide good insurance.  But there is not much evidence of this.  To be clear, we know the private market is imperfect.  My own research with Amy Finkelstein has shown that prices are higher than actuarially fair, and the benefits provided are not very comprehensive.  But we also show that the limited size of the overall market is almost surely driven by limits to consumer demand for these products, not because of problems with insurers providing insurance.  


So if the government wants to solve the problem of people being inadequately insured against long-term care expenses, it needs to address the issue of demand.  But, best I can tell, this legislation does virtually nothing on this front.  For example, if you think people are not buying it because they underestimate the risk, or because they are in denial about needing care, or because they think they have substitute forms of care, there is nothing in this legislation that will change this.  It is, after all, still voluntary to purchase it and simply having a government-run program is not going to change these beliefs.


On the other hand, Amy and I also show in our research that the Medicaid program serves as an enormous disincentive for purchasing private insurance.  In a nutshell, people do not want to pay for private insurance if most of the benefits they are paying for are simply duplicative of what Medicaid would have provided for free had they not purchased private insurance.  This public program would have the same problem – why should I pay premiums for this program so long as Medicaid will still pick up the tab if I fail to pay the premiums?  The feature that allows individuals to keep part of the benefit when Medicaid picks up the tab is presumably meant to address this, but I’m afraid it simply is not going to be sufficient to overcome this concern.


The government seems to implicitly understand that there are limits on demand – their own estimates are that only 5% of the population will take up this insurance.  That hardly sounds like a resounding success to me.

In short, it seems that the government has developed a solution to a supply problem that does not exist, but has failed to address the demand problems that do exist.  Needless to say, I am not optimistic as to this program’s future …