Public and private issues in LTC financing for the elderly
PUBLIC AND PRIVATE
ISSUES IN LTC FINANCING
FOR THE ELDERLY
By Mark J. Warshawsky, Ph.D.
Vice-Chairman of the 2013 Federal
Commission on Long-term Care
Retirement and Savings Forum
February 25, 2014
• What Are the Real Issues?
• Needs (Kaye, LaPlante, Harrington; NHATS research)
• Public Finances and Private Resources (CBO)
• Crowd-Out of Private LTC Insurance
• Eligibility Rules and Empirical Evidence
• Estate Recovery Efforts by the States
• Private Market Solutions (My Gloss on LTC Commission
Financing Approach ―A‖)
Tighten Medicaid Eligibility
Tax Incentives to LTCI
Life Care Annuity
Regulatory Relief for LTCI
• Social Insurance Solutions
LTC Needs, 2007
Millions with Significant Needs (2+ ADLs)
by Age Group and Residential Setting
Nursing home 1.3
Percent Elderly Needing Assistance from
Others, by Age Group, 2011
Percent Needing Assistance
Percent Elderly Needing Assistance from Others, by
Gender, Race and Income Groups, 2011
Income Quartile, $
Major Sources of Help for Elderly
Community Residents with 2+ ADLs, by
Age Group, Percent, 2005
60 – 74
75 – 84
Unmet Needs for Personal Assistance
among Community Residents
• Based on survey responses and regression analysis
• Of those adults with 2+ ADLs, 29 percent have unmet
Very few of these people, though, get no assistance
Rather they get 56.2 hours a week on average and need
16.6 hours more
Overall, only 6.6% of all needed hours of help are unmet
among adults with 2+ ADLs
Adding in residents of nursing homes, the unmet needs
fall to 4.5% of total needed hours
Hence, unmet needs are not a reason for a new social
insurance program, as was claimed for the ACA
Value of LT Care for the Elderly, 2011
Sources of Payment for Formal LT Care
for the Elderly, 2011, $ billions
Projected LTC Spending for the Elderly
• Spending on LTC for the elderly is projected to climb from
1.3 percent of GDP currently to 3.0 percent in 2050 at
current prevalence rates.
• From 2013 to 2023, Medicaid spending on LTC will grow
5.5 percent annually.
• From 2013 to 2023, Medicare spending on LTC will grow
6.5 percent annually.
• Considering the rapid growth in our other retiree income
and health obligations and their poor funding, public LTC
spending for the elderly is not sustainable, although costsavings technological or medical breakthroughs are
Private Long-term Care Insurance (LTCI)
• About 11 percent of the elderly have LTCI.
• Coverage for the adult population is 3 percent in 2011, up
from 2 percent in 1999.
• Coverage grew 12 percent annually from 1999 to
2005, but increased only 1.5 percent annually thereafter.
• Since 2005, many insurers have exited the
market, premiums have risen significantly, and benefit
provisions have been tightened (e.g. lifetime benefit is
hard to find).
• These problems were caused by insurer misjudgment on
lapse rates and Federal Reserve policy on interest
rates, as well as, sometimes, higher claims than
• The Partnership for Long-Term Care is an arrangement
between states and private insurers intended to reduce
dependence on Medicaid for financing LTC.
• LTCI offered through a state’s partnership program
enables policyholders to maintain larger amounts of
countable assets and still qualify for LTC under Medicaid
once the private policy is exhausted.
• States have established their own programs in response
to the DRA of 2005. By 2009, 30 states had established
programs in addition to the original four states.
• Partnership policies accounted for about 10 percent of all
LTC policies in 2011, up from 3 percent in 2007.
• Medicare and private health insurance cover LTC through a post-
acute care benefit that covers rehabilitative care—short-term stays in
skilled nursing facilities (SNFs) and home health visits.
Medicare will pay for SNF care for up to 100 days only after a prior
hospitalization lasting at least 3 days.
Since 1965, overall hospital lengths of stay have declined. Also
hospitals are increasingly holding patients in observation status.
The LTC Commission recommended eliminating the 3-day hospital
This change could possibly reduce costs. Still, a new and better
trigger would be needed to protect against the use of Medicare to pay
inappropriate LTC expenses.
Something else to note: the Jimmo v. Sebelius settlement eliminates
the administrative ―improvement standard‖ requirement for
determining Medicare eligibility for LTC services.
Medicaid Crowd-out of LTCI
• First discussed by Pauly, modeled extensively by Brown and
Finkelstein in comprehensive simulation work
They estimate that Medicaid can explain the lack of private
insurance purchases for at least two-thirds and as much as 90
percent of the wealth distribution, even if
comprehensive, actuarially fair private policies were available.
In another empirical study, they find that states with more
generous Medicaid eligibility had lower rates of private LTCI
An implication of their findings is that public policies designed
to stimulate private insurance demand will be of limited efficacy
as long as Medicaid continues to impose a large implicit tax.
Other surveys find public confusion about the current extent of
social insurance coverage of LTC.
• Asset and income tests have been thought to require
spend-down/impoverishment to get LTC benefits paid by
• But the rules explicitly exclude housing (up to
$802,000), automobile, personal valuables, term life
insurance, (in many states) retirement assets in
distribution (not necessarily lifetime), and $116,000 for a
• Plus there are reports that it is possible to ―game‖ the
system further through the use of trusts and life insurance;
listen to late night radio and TV ads from attorneys.
Empirical Evidence on Use of Medicaid by
the Upper-Income Elderly
• Study by deNardi, French and Jones
• They estimate that fifteen percent of elderly individuals in the
middle income quintile, 8 percent in the upper middle
quintile, and 5 percent in the top quintile receive government
• Moreover, because they live longer, beneficiaries in the top
income quintile receive, on average, double the lifetime
payouts of those less well-off.
• Because of the costs of these undeserved benefits to the
upper-income groups, Medicaid lowers reimbursement rates to
providers and restricts benefits to contain overall costs; the
poor, who really have to rely on Medicaid, are thereby tied to
lower quality care and decreased provider flexibility.
Estate Recovery Efforts by the States
• The asset exclusions and gamesmanship would not
matter, so much, if states tried to recover assets from the
estates of decedents who benefited from Medicaid.
• But all the available evidence indicates the states don’t
devote much effort to this legally required activity.
• The most recent study on the subject finds that most
states recouped less than 2 percent of total LTC
spending. Four states even reported no reimbursements
• It is interesting to note as an aside that this has become
something of an issue for the ACA, as estate recovery
applies not just to LTC benefits but may also apply to
health care benefits provided to those age 55 and older.
Private Market Solutions: Tighten
Medicaid Eligibility Rules
• Require that a reverse mortgage be taken on the
home, and that that cash flow be included in the income
Require that an immediate life annuity be taken from the
retirement account and that that cash flow be included in
the income test.
Include the face value of term life insurance in countable
assets, as well as personal valuables and cars in excess
of de minimus amounts.
Reinvigorate state efforts at estate recovery by
carefully, repeatedly and prominently investigating the
extent of their activities.
Conduct a public education campaign on what Medicaid
and Medicare do and do not cover for LTC.
Private Market Solutions: Tax Incentives
• Allow withdrawals from existing 401k, IRA, or Section 125
accounts to pay LTCI premiums without triggering a
taxable distribution event. This policy change effectively
lowers the cost of LTCI, especially for those in higher tax
• We guess that this change would have minimal net
• The tax costs of incentivizing broader LTCI participation
would be more than offset over time as those newly
covered by private LTCI coverage draw on private rather
than public resources to finance their care.
Private Market Solutions: Life Care
• Insurance product innovation proposed and investigated by
Warshawsky and colleagues
Would combine LTCI and immediate life annuity, issued at
Because those with impaired longevity are generally not able to
get LTCI, but in APV terms are not (much) more expensive
than those with normal or superior longevity, they are attractive
to and should invited by the superior longevity pool who select
into life annuities and who can pass current LTCI underwriting.
This combination means that underwriting can be minimal for
the life care annuity and it can be offered at a slight discount
The proposal would change the tax law to allow investment and
distribution in the LTCI portion of the life care annuity through
tax-advantaged retirement accounts.
Private Market Solutions: Medicaid CarveOut
• Most direct assault on problem identified by Brown and
• Upon retirement, individuals should have the choice of
receiving a lump-sum payment from the government for a
significant portion of the expected value of their Medicaid
benefits—most for the poor, with little or nothing for the
• Retirees would be obliged to use the payment to
purchase private, permanent LTCI in place of Medicaid
coverage. This would further reduce Medicaid’s future
• One could envision the creation of a LTCI exchange to
facilitate this solution.
Private Market Solutions: Regulatory
Relief for LTCI
• Currently regulated tightly at both the federal and state
• Relieve state regulations on high-deductible LTCI, thereby
providing for catastrophic insurance coverage and for
clarity to families about the amount they need to save for
deductibles or provide for in their Medigap policies.
• For sufficiently large changes in the macroeconomic
environment, allow (in the upward direction) and require
(in the downward direction) writers of LTCI to change
automatically the pricing of existing outstanding LTCI
policies on an actuarially fair basis.
• Similarly, the requirement to offer a 5% COLA for benefits
should be softened to reflect recent inflation rates.
Social Insurance Solutions
• There were several Commission members who proposed
social insurance solutions – either expanding Medicare or
creating a new mandatory federal LTCI program.
• The exact (or even approximate) scope of these programs
were not specified. And no CBO scores were obtained.
• But relevant are the following calculations: if the federal
government bought every adult (18+) in the US a fairly
generous LTCI policy (plan D) from the OPM FLTCIP, it
would cost $812.5 billion annually for a 5% ACIO or
$378.2 billion for a FPO policy. There is considerable
advance savings implicit even in a FPO policy (perhaps
there should be term LTCI), but anyways, even in
Washington, DC, that is a lot of money!