Long-term care (LTC) in the United States represents one of the largest uninsured financial risks facing the elderly people. The paper provides a general introduction to LTC insurance by defining terminology used in LTC while presenting some of LTC’s basic issues. This paper also reviews the constantly growing literature on the market for LTC insurance which is especially notable for its small size. This is despite the fact that LTC expenses are large and very uncertain. The present paper provides a summary of LTC care insurance utilization in the U.S. and reviews research on the supply and demand of LTC insurance.
Health insurance has been a perennial subject as far as insurance and a broader health policy are concerned. As the baby boom generation nears retirement, there are growing concerns about financial security in retirement. LTC has been identified as one of the largest uninsured financial risks facing especially the elderly people in the U.S. either in home care or in nursing homes. Brown and Finskelstein (2004, p.1) postulate that LTC expenditures were $135 billion in 2004, and this represented 8.5 percent of the total health care expenditures, or approximately 1.2 percent of GDP. They also noted that only a small fraction of 4 percent of the said expenditures was paid for by private insurance and one third was paid for out of people’s pockets. Contrasting this information with the health sector in general, they found out that private insurance accounts for 35 percent of the expenditures and only 17 percent are paid out of people’s pockets.
According to Uccello and Johnson (1), the aging baby boomer has strained the government’s cost of providing health care services. They propose that one of the solutions to the looming crisis is to ensure that the private insurance coverage of LTC is properly promoted. Brown and Finskelstein argue that limited insurance coverage for LTC expenditures has important implications for the society and specifically the elderly. They also support the idea that its importance will become more pronounced when the baby boomer generation starts to retire in mass numbers and increasing medical care costs. A CBO report indicates that real LTCI in the U.S. is relatively high and has been growing reaching $135 billion in 2004 and the LTCI expenditure is expected to triple by 2040 (The National Bureau of Economic Research).
LTCI Background Information
Long-term care (LTC) is the term used to refer to a variety of services designed to help people perform everyday chores, mainly to help them remain independent. LTC services may include assistance with daily activities for people with chronic diseases or cognitive impairment. LTC can be delivered at home, at an adult day service center or in a nursing home. The costs of LTC depends on several factors but, according to a MetLife Market Survey, assisted living base rate was $3,031 with a national average of $36,372, while at nursing homes, costs for a semi-private room was at an average daily rate of $191 and a national yearly average of $69,715. Interestingly, Medicare was not designed to cover LTC services but only pay for part of the costs of select health care services constituting a basic level of health care. That is why the majority of care provided is a custodian or personal care (MetLife 6-10).
Basically, there are three ways to pay for LTC services including self-insurance, Medicaid, and long-term care insurance. LTC insurance is designed to help pay for the cost of LTC services either in one’s own home, adult care services, nursing homes, or the assisted living communities. The need for LTC usually arises at 18 years and over. The cost of LTC insurance depends on such factors as age on the day of insurance purchase, the type of policy preferred, the amount of included benefits, the type of selected inflation protection, the amount of coverage available, and the waiting period before the plan starts to provide benefits (MetLife 11-15). According to AARP, cost is the main reason why many people do not purchase the policy. Private LTCI is priced differently from other types of insurance; unlike other health and life insurances whose insurance premiums increases, LTCI policies have a flat rate due to individual circumstances like advancing age or deteriorating health but premiums may increase as a whole.
Long Term Care Problem
According to Nixon, the number of aging baby boomers is around 76 million, and by 2020, the population of those over the age of 65 will have been more than 60 percent, while the number of those over 85 will grow to more than 80 percent (1). Currently, about 15 percent of people over 60 years old require LTC services. The U.S. Department of Health and Human Services project that over 40 percent of those aged 65 years and above will need some nursing care in future. Lumsdaine considers the LTC insurance market (LTCI) to be under serious threat as demand continues to grow at an alarming rate (1).
Long-Term Care Expenditure Risk and Private Insurance
The focus will be on LTCI because the LTC expenditure risk is one of the largest financial risks faced by the elderly today and also – because LTCI market is not common at the insurance markets in the U.S., unlike other markets.
According to Finkelstein and McGarry, the LTCI interest emanates from the fact that annual expenditures on LTC in the U.S totaled $135 billion in 2004, representing an uneven healthcare distribution. Some estimates assert that 60 percent of people reaching 65 years and older will never enter a nursing home, while a fifth of those who will spend time there, will spend at least five years. Further revelations show that only about 10 percent of these elderly over 65 years have a private LTCI and only get a limited coverage. This results in a small percentage (about 4 percent) of expenditures being reimbursed by private insurers while the third is paid out of pockets. The other reason that LTCI is an unusual market in the U.S. is mainly because there have been no direct regulations on prices or policies that were offered. HIAA cites 67 as the average age of purchase for LTCI. After purchase, policies are renewable for the lifetime of the insured at an agreed constant nominal premium.
By 2005, it was estimated that about 7 million of LTCI policies had been in force in the U.S. These policies typically reimburse LTC expenses up to a fixed amount, say $100 or $150 daily. For one to receive the benefits, he/she has to meet the policy’s disability criteria, which is usually defined as the cognitive impairment or inability to perform at least two activities, say bathing and dressing.
The supply of LTCI (Coverage, Benefits, and Prices)
Who owns LTCI and what types of contracts do they buy?
Brown and Finkelstein say that the market for LTCI in the U.S. is owned by an individual and not so much by a group or a market (8). The most common types of insurance have been there for a long time, but LTC only emerged after 1987, and as per late 1990, it accounted for just 20 percent of policies sold. In 2000, it was reported that only 10 percent of people aged above 60 years owned a private LTCI policy. Information detailed by Brown and Finkelstein suggests that most policies sold in 2002 had an ‘elimination period’ of 30-100 days during which a person has to be in care before insurance benefits can be received. Some policies had 1 to 5 years of the maximum benefit period that capped the total number of days for individuals to start receiving benefits. MetLife reported an average of about $143 per day disbursed for a semi-private room in 2002 and said that the private rooms cost more.
According to the America’s Health Insurance Plans, cost is the highest barrier for the many people who forgo purchasing LCT policies. People often lack understanding of their health care needs or they are confused with what the government offers. The one single reason for many people buying LCT policy is to protect their assets.
How comprehensive is the LTCI coverage?
Brown and Finkelstein say that the coverage is not very comprehensive as it covers about a third of the expected discounted value of LTC expenditures. The report further says that 10 percent of the U.S. elderly population owns private policies and that private insurance benefits account for less than 4 percent of the LTC expenditures. The reason for the low coverage was given as due to higher financial costs, and also – due to the daily benefit cap.
The Pricing of Private Contracts
For a long time now, LTCI has been unregulated but starting from the last decade, the National Association of Insurance Commissioners (NAIC) has set model regulations to assist in keeping future rates at a certain level. The long-term impacts of these regulations are not yet known. Currently, though the policies are offered at premiums that are higher than actuarially fair levels, they are expected to have a load value of 0.18. This means that the policy buyer will get an average of 82 cents for every dollar paid. However, the estimated load will rise if individuals will stop paying premiums at some point in future (this will make them forfeit any future benefits), and the average load is expected to rise to 51 cents from 18cents. Brown and Finskelstein report a striking disparity in the loads based on gender, which is because premiums are offered on a unisex basis (22). As a result, a typical load for a 65-year-old male is 44 cents per dollar while it is –0.04 for women. This means that the male who purchases the policy will receive only 56 cents per dollar of his money, while the female will actually receive 1.04 benefits for every dollar of premiums they pay.
Are Supply Constraints to Blame for the Small Market?
Brown and Finkelstein argue that even if the public policy were to achieve an actuarially fair pricing, majority of the elderly people will find the LTCI still unattractive. Reasons given are that the unisex pricing will be more often utilized by women than men resulting in higher loads for men than for women, despite the fact that men and women have a relative balance when purchasing the policies. Brown and Finkelstein assert that majority of people may not buy the policies even if they were offered at fair rates. A study by Medicaid suggested that demand for private insurance was likely going to reduce more for women than for men. The National Bureau of Economic Research cites a NBER Working Paper that provides empirical evidence that the pricing and benefit structure of LTC policies are to blame for the smaller market. The NBER paper notes that if any considerable supply side market failures existed, then the private insurance plans could be sold at a higher price than the actuarially fair level. In this way, premiums will exceed benefits and insurers can, therefore, offer plans that provide incomplete coverage.