More on Long-Term Care Insurance

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 significantly 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.
This post originally appeared at The Baseline Scenario and is posted with permission.

One Response to "More on Long-Term Care Insurance"

  1. jhillner   December 23, 2011 at 2:03 pm

    While these are valid concerns, they have been largely addressed. Reputable carriers offer provision for "alternate care" to provide a means for the contract to pay if a new conventional method of care deliver should arise before the policyholder needs to file a claim. Second, with the coming pressures on Medicare and Medicaid expenditures seen so clearly, one is hard pressed to envision a scenario in which coverage of LTC is expanded in those programs. LTC is difficult to pin down from an actuarial standpoint, but there are carriers, such as Genworth, that have been writing for nearly 40 years and have been pretty close to on-target. Another issue is that Medicaid expenditures for LTC and LTCI can hardly be compared. Medicare dollars are still largely spent in nursing communities while LTCI dollars are spent largely at home or in assisted living communities. They are two very different populations with very different associated costs. Finally, the idea that LTC is prohibitively expensive is patently untrue. A typical annual premium often roughly reflects a month of benefits. A good planner can design plans that very likely will recoup 25 years of premiums in a 6-month claim. That reputation stems from a tendency that people had in the past to procrastinate purchasing coverage until they were within a decade of the average claim age. Those people weren't insurance, so much as "pre-paying". All responsible adults should give serious consideration to how they want to pay for their future care — insurance should be one of the options considered.