Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care?

Transcription

1 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? American Council of Life Insurers Research Findings constitution avenue, nw washington, dc

2 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? American Council of Life Insurers Research Findings 2005 Andrew Melnyk, Ph.D 101 c o n s t i t u t i o n a v e n u e, n w w a s h i n g t o n, d c w w w. a c l i. c o m

3 The American Council of Life Insurers is a Washington, D.C.-based trade association, whose 356 members account for 80 percent of the life insurance industry s total assets in the United States. ACLI member companies offer life insurance; annuities; pensions, including 401(k)s; long-term care insurance; disability income insurance; reinsurance; and other retirement products American Council of Life Insurers Circular 230 disclosure: This document was not intended or written to be used, and cannot be used, to: (1) avoid tax penalties, or (2) promote, market or recommend any tax plan or arrangement.

4 Contents Overview 1 A Looming Crisis for Boomers 4 The Costs to Medicaid 7 Lessening the Burden 10 Prospects for Long-Term Care Insurance 11 Conclusion 17 Illustrations Figure 1 Estimated Growth of Elderly Population, Figure 2 Total Nursing Home Expenditures, Figure 3 Nursing Home Population, by Age, Figure 4 Home Health Care Population, by Age, Figure 5 Medicaid Nursing Home Expenditures, Figure 6 Out-of-Pocket Nursing Home Expenditures, Figure 7 Current Nursing Home Expenditures, Scenario 1 10 Figure 8 Figure 9 Figure 10 Nursing Home Expenditures if LTC Insurance Purchases Increase, Scenario 2 11 Impact of Long-Term Care Insurance on Medicaid Nursing Home Expenditures 12 Impact of Long-Term Care Insurance on Out-of-Pocket Nursing Home Expenditures 13 Table 1 Ratio of Working Age to Elderly Population, by Year 8 Table 2 Affordability of Long-Term Care Insurance 12 Table 3 Average Annual Premiums for Private Long-Term Care Insurance 12

5 Overview Between 1946 and 1964, about 76 million children the baby boom generation were born in the United States. The baby boomers grew up during one of the longest periods of sustained economic growth in U.S. history and have enjoyed a considerably higher standard of living than any previous generation. The boomers represent a disproportionately large segment of the population (roughly 28 percent) and will soon swell the ranks of the elderly as they reach retirement. By 2030, when the youngest boomers reach retirement age, the elderly population will be nearly double what it is today. 1 By 2050, when the youngest surviving boomers turn 85, the population of the very old (those 85 and over) will have grown by more than 300 percent.

6 American Council of Life Insurers Research Findings As the elderly population grows, the need for long-term care will increase. The possibility that a baby boomer may need nursing home care during his or her elderly years is real and much more likely than most boomers realize. Currently, about 55 percent of those 85 and older require some form of longterm care and about 19 percent of all seniors suffer some degree of chronic impairment. 2 By 2050, it is estimated that up to 5.4 million seniors will need the services of a nursing home the most costly form of long-term care and another 2.4 million will require home health care. 3 Many elderly may never need formal long-term care. But of those who are currently 65, about 44 percent will use a nursing home at some point. And a sizable percentage will require such services for an extended period of time with women more at risk than men. 4 Of all elderly individuals who enter a nursing home, 12 percent of men and 22 percent of women will live there for more than 3 years, while one in eight elderly women can expect to live there for more than 5 years. 5 In total, the typical elderly resident spends just over two years and four months in a nursing home. 6 The cost of nursing home care is expected to continue its upward trend in the near future. The cost of long-term care is high and increasing, averaging $69,422 annually for a private room or $61,116 annually for a semi-private room in a nursing home, $18.58 per hour for a visit by a home health aide, and an average annual base rate of $30,265 for the services of an assisted living facility. 7 Since 1990, the price of nursing home care has increased at an average annual rate of 5.8 percent almost double the overall inflation rate. 8 The current system where Medicaid pays 45 percent of the total nursing home expenditures for the elderly may not be sustainable. 9 Total annual expenditure on long-term care for the elderly is estimated to be $135 billion, which accounts for over 9.7 percent of total spending on health care for persons of all ages. This is roughly 1.2 percent of the U.S. GDP. 10 Because baby boomers are aging and the cost of care is increasing, total spending on nursing home care is expected to more than triple over the next 25 years and to increase more than five-fold in the next 45 years. These increases will place a heavy burden on Medicaid and ultimately on taxpayers, most of whom are working-age adults. Currently, there are about 5 working-age adults per senior, but by 2030, there will only be 2.9 a 40 percent decline. This decline will occur while both the need for and cost of long-term care increase.

7 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? Baby boomers who do not plan for long-term care will face poor choices. Given the strong possibility that the typical senior will require long-term care, and given the escalating costs of that care, whether elderly boomers enjoy a comfortable retirement or suffer economic hardship may depend largely on their ability to afford long-term care. Most boomers have not planned for this reality and face the prospect of paying large sums out-of-pocket or relying on Medicaid. (In its current form, Medicaid only covers the cost of long-term care after a senior has spent down virtually all assets and retirement income.) Neither option is very appealing and may leave seniors and their spouses impoverished, with few long-term care choices. Private long-term care insurance offers a solution. Private insurance currently pays for only 8 percent of total nursing home expenditures but 36 percent of overall health expenditures. There is clearly a large gap in the market that long-term care insurance can fill. While long-term care insurance is becoming more popular, the majority of boomers who can afford to purchase a policy have not yet done so. If three-quarters of individuals between the ages of 40 and 65 who can afford long-term care insurance were to purchase and maintain a policy throughout their senior years, then by 2030, annual savings in Medicaid nursing home expenses would total $19 billion, and annual savings in out-of-pocket 11, 12 expenses would total $41 billion. Long-term care includes both nursing home care and various forms of home and community-based care e.g., home health care, assisted living facilities, and adult daycare. 13 However, this study focuses primarily on nursing home care for a number of reasons. Nursing home care is: n The most expensive form of long-term care. n Currently (and will likely continue to be) the primary form of long-term care Medicaid covers. 14 n Typically used by those people who are most disabled, least likely to be discharged to a non-death state, and most impoverished because they have either spent down their assets and income or were impoverished when they entered long-term care. n Covered by virtually all long-term care insurance policies, while home health care coverage has become standard only recently. 15 Additionally, assisted living is not typically covered by public programs so changes in its use would not have an impact on such programs. And, finally, data on nursing home care and residents is more consistent and reliable than data on other forms of care, ensuring more rigorous statistical results.

8 4 American Council of Life Insurers Research Findings a looming Crisis for boomers Over the coming decades, the demand for formal long-term care is expected to accelerate because: n Baby boomers will be entering their elderly years. n Life expectancy is increasing. n Home-based care provided by family members is becoming less-viable for the elderly. Baby boomers account for about 28 percent of the U.S. population and over the next several decades they will reach retirement age. More specifically, the oldest boomers will turn 65 around the year 2010, and the youngest by By 2050, the youngest surviving boomers will be 85, roughly the age at which long-term care is most needed. 16 Between 2005 and 2050, the size of this very old age group those 85 and older will have increased more than four-fold and the elderly population will have grown by 136 percent (Figure 1). Figure 1 Estimated Growth of Elderly Population, Percent Increase All Elderly Ages Source: U.S. Census Bureau (see Both advances in medical care and greater prosperity have resulted in increased life expectancy among the elderly. Today, a typical 65-year-old can expect to reach 83.2 years of age, whereas in 1950 he or she could only have expected to live to Life expectancy will continue to climb: by 2030, the average 65-year-old can expect to reach 84.2 and 85.3 by This increase in life expectancy increases the need for long-term care. As the elderly population is growing, the pool of informal caregivers for that population is shrinking, raising the demand for formal long-term care (nursing home care).

9 5 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? Because longevity may be increasing at a faster rate than improvements in the quality of health, the typical senior may live longer in the future, but may also need long-term care for a longer period of time. Informal home-based care is less viable for seniors because fewer family members are able to provide such care. An increase in life expectancy does not necessarily mean better health in old age and does not preclude spending time in a nursing home. Even though there has been an improvement in overall disability, the specific disabilities that have declined are not those that imply better health and lower health and long-term care costs, but instead simply reflect changes in the external environment and improvements in assistive devices. 19 Also, as life expectancy increases so do the incidence of degenerative diseases that require constant care and monitoring in their advanced stages. 20 Alzheimer s disease is of particular concern because almost half of all seniors 85 and over develop this condition. In the past, long-term care was often provided at home by family and friends. Up to 36 percent of all long-term care is still provided in this way. 21 But families have become smaller and more geographically dispersed, a greater percentage of women are in the labor force, and retirement among both men and women is increasingly delayed. For these reasons, it is likely that over the coming decades, there will be a further shift away from informal and toward formal care. A growing number of nursing home residents and a greater cost per resident will result in more than a tripling of total nursing home expenditures by 2030 ($340 billion.) By 2050 a five-fold increase in expenditures is expected ($576 billion) (Figure 2). 22 Currently, about 4.2 percent of all seniors reside in a nursing home, and an additional 2.7 percent receive home health care. 23, 24 Assuming recent utilization rates, between the year 2000 and 2030, the nursing home population will increase about 107 percent from 1.5 to 3.1 million and the use of home health care will increase 111 percent from 900,000 to 1.9 million (Figures 3 and 4). Figure 2 Total Nursing Home Expenditures, Billions Year Source: Based on data from the U.S. Department of Commerce, U.S. Census Bureau (see CDC, Health, United States, 2004; and Genworth (2005). Adjusted for infl ation. Refl ects only the elderly population.

10 6 American Council of Life Insurers Research Findings Figure 3 Nursing Home Population, by Age, and over Millions Year Source: CDC, Health, United States, 2004, and U.S. Census Bureau. Figure 4 Home Health Care Population, by Age, and over Millions Year Source: CDC, Health, United States, 2004, and U.S. Census Bureau. Furthermore, by 2050, the nursing home population is expected to increase to 5.4 million, about 260 percent greater than in 2000, and the number of those using home health care to 2.3 million, about 156 percent greater than in These large increases in the nursing home population are primarily driven by the number of the very old, those 85 and older, who make up the majority of this population. Total U.S. expenditures on nursing home care are determined by the expected number of residents and the expected cost per resident, both of which will increase in coming years. Since 1990, the cost of nursing home care has grown by 5.8 percent annually, about double the rate of inflation. Even if this trend were to continue for only a few more years, the average cost of a one year stay in a nursing home will increase from about $64,000 per year in 2005 to $108,000 in

11 7 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? The COsTs TO medicaid Given the current financing structure and absent a significant change in the system, nursing homes will remain the most costly form of long-term care and will likely dominate Medicaid s long-term care expenditures over the next several decades. Currently, most nursing home expenditures are paid by Medicaid, followed by individuals and families (out-of-pocket), Medicare, and finally, private insurance. 26 Though seniors typically prefer home-based care, the bulk of Medicaid s long-term care budget is spent on nursing home care. As both the number of nursing home residents and the cost per resident increase, the Medicaid program will be further burdened. If its share of expenses remains constant, by 2030, Medicaid s portion of total nursing home expenditures will reach $151 billion and by 2050, may be as much as $257 billion (Figure 5). 27 Figure 5 Medicaid Nursing Home Expenditures, Billions Year Source: Based on data from the U.S. Department of Commerce, U.S. Census Bureau (see CDC, Health, United States, 2004; and Genworth (2005). Adjusted for infl ation. Refl ects only the elderly population. While the demand for and cost of nursing home care are rising, the percentage of the population that pays most of the taxes is shrinking. This means that Medicaid nursing home spending will eventually outpace growth in tax revenues. At current tax rates, Medicaid cannot sustain its current level of coverage. Because the elderly population is growing at a much faster rate than younger age groups, the percentage of working age Americans will soon decline. In 2000, there were 5 working age people for each retirement age person, but by 2030, this will fall to 2.9 (Table 1). This change is significant because people of working age pay the bulk of taxes which in turn fund programs such as Medicaid.

12 8 American Council of Life Insurers Research Findings Congress may be forced to limit Medicaid nursing home spending either by reducing benefi t levels or restricting eligibility requirements. Absent any alternative, such changes may be necessary but will threaten Medicaid s primary purpose to provide a safety net for low-income individuals. Although originally intended for the care of people with very low income, Medicaid s eligibility rules are currently such that middle-income seniors may qualify for coverage by spending down their income and assets. It has been argued that to qualify for Medicaid, many middle-income and wealthy seniors intentionally transfer assets before entering a nursing home. Though the elderly do transfer assets, there is little evidence to suggest that this is routinely done with the intent of qualifying for Medicaid. 28 An important deterrent is a 3- to 5-year look-back period on all assets and income to determine eligibility. Also, because an individual nursing home resident and his/her spouse are allowed to keep very little income or assets, Medicaid does not serve as a good substitute for private long-term care insurance. Further, Medicaid does not always cover home and communitybased care, and so the array of choices can be considerably fewer than those offered by long-term care insurance. Table 1 Ratio of Working Age to Elderly Population, by Year Year Ratio of working age to elderly population Source: U.S. Census Bureau, International Database (see www/idbprint.html).

13 9 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? On the other hand, a sizable number of middle-income people do qualify for Medicaid. About 30 percent of elderly residents whose primary source of payment is Medicaid first entered a nursing home as out-of-pocket residents, spent down their assets, and eventually qualified for Medicaid. 29 Because spending down after entering a nursing home is common, Medicaid has effectively become a safety net both for the poor and for the non-poor who fail to adequately plan for their long-term care needs. If boomers do not plan ahead and fail to purchase private insurance, much of the burden of rising costs will continue to fall on individuals and their families. Currently, about 29 percent of nursing home costs are paid out of pocket by individuals. If this continues to be the case, projected out-of-pocket expenditures for nursing home care will increase from an estimated $31 billion in 2005 to $100 billion in 2030 and $170 billion in 2050 (Figure 6). This represents a 223 percent increase in total out-of-pocket costs for nursing home care by 2030 and a 448 percent increase by Figure 6 Out-of-Pocket Nursing Home Expenditures, Billions Year Source: Based on data from the U.S. Department of Commerce, U.S. Census Bureau (see CDC, Health, United States, 2004; and Genworth (2005). Adjusted for infl ation. Refl ects only the elderly population.

14 10 American Council of Life Insurers Research Findings lessening The burden To determine the extent to which long-term care insurance can protect baby boomers from financial hardship and reduce their risk of relying on Medicaid, two scenarios are considered. The first scenario assumes that current financing patterns continue (Figure 7). The second assumes that three-quarters of all people between the ages of 40 and 65 who can afford to purchase a long-term care policy choose to purchase one and maintain it until they need long-term care. 31, 32 The policies purchased are assumed to be three- to six-year term with 5 percent inflation protection compounded. 33 Long-term care insurance can serve as a signifi cant source of fi nancing for nursing home care and can greatly reduce both out-of-pocket and Medicaid expenditures. Under the second scenario, the share of expenditures paid by private insurance would increase from 8 percent today to 26 percent in 2030, Medicaid s share of expenditures would decline from 45 percent to 39 percent, and out-of-pocket spending would fall from 29 to 17 percent (Figure 8). Increased private ownership of long-term care insurance can save the Medicaid program $19 billion in 2030 and can reduce out-of-pocket expenses by 41 percent, from $100 billion to $59 billion (see Figures 9 and 10). These projections suggest that private insurance will help nursing home residents at risk of impoverishment avoid Medicaid, effectively reducing the percentage of residents who spend down. In this way, rather than serving as a safety net for middle-income seniors, the focus of Medicaid-funded long-term care can shift primarily toward the poor. Figure 7 Current Nursing Home Expenditures, Scenario 1 Other 5% Medicare 13% Private Insurance 8% Medicaid 45% Out of Pocket 29% Source: National Health Expenditure Survey ( and U.S./D.H.H./C.D.C (2002). Refl ects expenditures for the elderly.

15 11 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? prospects for long- Term Care insurance 4 Growth of the Product Both the individual and group segments of the long-term care insurance market are evolving and growing. The American Council of Life Insurers (ACLI), with the assistance of America s Health Insurance Plans (AHIP), recently surveyed long-term care insurance providers and found: n The market has grown to nearly $7 billion in premiums, and now covers over 5 million people. n Between 2003 and 2004, the individual long-term care insurance market grew 7.5 percent and the group market grew 25 percent. 35 n The amount paid out in claims has also increased with carriers paying $2.1 billion in benefits in 2004, about 20 percent more than in the previous year. Because private long-term care insurance is priced on the assumption that an individual will hold the same policy until they need long-term care, premiums vary widely depending on the age of the policyholders upon entry and the specific benefits and coverage chosen (Tables 2 and 3). Additionally, younger candidates for policies are much more likely to pass underwriting screens than are older candidates. 36 For these reasons, consumers are encouraged to purchase insurance while they are in their 40s and 50s, when premiums are lower and more affordable. Figure 8 Nursing Home Expenditures if LTC Insurance Puchases Increase, Scenario 2 Other 5% Medicare 13% Medicaid 39% Private Insurance 26% Out of Pocket 17% Source: National Health Expenditure Survey ( and U.S./D.H.H./C.D.C (2002). Refl ects expenditures for the elderly.

16 1 American Council of Life Insurers Research Findings Table 2 Affordability of Long-Term Care Insurance * Age in 2004 Percent who can afford policy at some point before age 66 ** * Policies with terms averaging three to six years, infl ation protection of 5 percent compounded (based on premiums reported in CBO (2004) and adjusted to refl ect 2004 prices). ** Assuming affordability by various age groups does not change. Table 3 Average Annual Premiums for Private Long-Term Care Insurance* Age Premium ** , , ,115 * Policies with terms averaging three to six years, infl ation protection of 5 percent compounded. ** As reported in CBO (2004), adjusted to refl ect 2004 prices. Figure 9 Impact of LTC Insurance on Medicaid Nursing Home Expenditures, Billions Current trends Year Increased purchases of long-term care insurance Source: American Council of Life Insurers, 2005.

17 1 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? When long-term care insurance was first introduced, most purchasers were in their 60s or 70s. In recent years the average age of new policyholders has declined steadily. For example, the average age of a long-term care insurance purchaser in the individual market decreased from 72 in 1990 to 65 in 1999 and further dropped to 62 in Although currently only 10 percent of seniors have long-term care insurance policies, that percentage is expected to change. Some reasons for the rise in demand and the drop in age of the average long-term care insurance purchaser include: n Heightened public awareness of the power of long-term care insurance as a tool for financial security in retirement. n Heightened public awareness of the advantages of purchasing a policy at a younger age. n The evolution of long-term care insurance products to provide policyholders more choices and flexibility at the time of claim. Figure 10 Impact of LTC Insuance on Out-of-Pocket Nursing Home Expenditures, Billions Current trends Year Increased purchases of long-term care insurance Source: American Council of Life Insurers, 2005.

18 14 American Council of Life Insurers Research Findings A better product is available. When long-term care insurance was first offered, most plans were nursing home-only. Recently, flexible care options and consumer protections have become available. Today, most policies allow customers to choose between in-home care, assisted living facilities, and nursing homes. In this way, individuals and their families can customize care needs. 38 Additionally, plans are now guaranteed to be renewable, have a 30- day free look period, offer inflation protection, cover Alzheimer s disease, have a waiver of premium provision, and offer unlimited benefit periods. Benefits are paid when a person needs help with two or more activities of daily living or is cognitively impaired. 39 Lifetime and limited premium products are available, and some products use life insurance or annuities to provide long-term care insurance. Incentives Passage of S. 1244, the Long-Term Care and Retirement Security Act of 2005, is an important part of the solution to financing long-term care. This measure would provide individuals with a phased-in, above-the-line federal income tax deduction for the eligible portion of long-term care insurance premiums. The long-term care policies that would be eligible for this deduction are subject to broad consumer protections. Additionally, long-term care insurance policies would be offered under employer-sponsored cafeteria plans and flexible spending accounts. S would allow qualified long-term care policies to be exchanged, tax-free, for other qualified long-term care policies that may be better suited to the individual s needs. Finally, this bill includes a phased-in tax credit of up to $3,000 to individuals with long-term care needs or their caregivers. These tax incentives would encourage the purchase of long-term care insurance by middle-income Americans and consequently reduce the burden on the Medicaid system. Individuals would have a larger selection of services and care, and may have the option of living at home or receiving care in a nursing home. Such flexibility will enable people who are chronically ill to live in the community and retain their independence. Increased long-term care coverage would also allow a significant number of family caregivers to stay at work. According to a recent study by the National Alliance for Caregiving, today, 6 percent of caregivers quit work to care for an older person, nearly 10 percent have to cut back their work schedules, 17 percent take leaves of absence, and 4 percent turn down promotions because of their caregiving responsibilities. Long-term care insurance typically covers assisted living facilities, which

19 15 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? are an increasingly popular long-term care option for people who do not require the intensity of care provided by nursing homes. Assisted living refers to a variety of housing options, all of which offer services to assist older people with daily living, yet allowing them to be independent. Not licensed as medical facilities, assisted living facilities offer a wide range of personal care and health-related services that appeal to people with functional impairments. Though not typically covered by Medicaid, in some states home and community-based services provided in assisted living facilities may be covered under Medicaid HCBS waiver programs. Room-and-board costs are not covered. Partnerships States are exploring ways to join with the private insurance industry to alleviate the growing burden of financing public long-term care. One such way is through the Partnerships for Long-Term Care, a pilot program developed by the Robert Wood Johnson Foundation in conjunction with state governments and with the support of the private insurance industry. The Partnerships for Long-Term Care allow consumers to purchase a longterm care policy whose benefits must be fully used before the policyholder qualifies for Medicaid. When these benefits are exhausted, the individual may apply for Medicaid, just as he or she would without the private insurance. But because the individual has used the insurance coverage provided under the partnership program, he or she is able to protect a certain level of assets. In this way, partnership programs benefit consumers, Medicaid, and private insurers. The partnerships operate in four states California, Connecticut, Indiana, and New York and more than 200,000 partnership policies for long-term care insurance have been purchased. These policies take two forms: a dollarfor-dollar model, which allows one to buy a policy that protects a specified amount of assets; or a total asset model, which provides protection for 100 percent of assets once private insurance coverage is exhausted. Thus far, fewer than 130 policyholders have exhausted their policies and accessed Medicaid. In 1993, shortly after the partnership pilots began, Congress suspended expansion of the partnership program to additional states because of concerns about a publicly funded program, such as Medicaid, endorsing private insurance programs. There was also concern that the partnerships would increase Medicaid spending. However, as Medicaid costs have

20 16 American Council of Life Insurers Research Findings increased, Congressional representatives from non-partnership states have expressed interest in implementing new partnership programs. During the 108 th and 109 th Congress, legislation was introduced in both the House and Senate that would repeal the prohibition on expansion of the partnerships. The Medicaid State Long-Term Care Partnership Act of 2005 (H.R. 3511) offers a simplified uniform approach to expanding the Long-Term Care Partnership Program that includes the following essential components: eligibility for benefits for any approved tax-qualified long-term care policy; state reciprocity; dollar-for-dollar asset protection; uniform, simplified reporting to a single repository; and consumer education. The State Long- Term Care Partnership Act of 2005 (S. 1569) and the Improving Long-Term Care Act of 2005 (S. 1602) include Partnership provisions as well. So far, 16 states have passed legislation that will implement a partnership program once the 1993 restrictions are withdrawn or waived. The long-term care insurance industry is interested in expanding partnership programs beyond the four pilot states, and is actively engaged in a public policy dialogue intended to use the lessons learned from the four pilot programs. A simplified, uniform approach to long-term care partnership programs can play an important role in encouraging the purchase of long-term care insurance and help provide important savings to Medicaid. Such an approach would include: n Benefit eligibility for any approved tax-qualified long-term care policy. n State reciprocity. n Dollar-for-dollar asset protection. n Uniform and simplified annual reporting to a single repository. n Consumer education.

21 17 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? Conclusion Because people are living longer and spending more years in retirement, planning for long-term care needs is becoming more important. Long-term care insurance can greatly ease the financial burden of disability in old age, and is increasingly recognized as a key component to effective retirement planning. Whether or not private insurance will lower future long-term care costs depends on many factors including: whether boomers realize the possibility of needing long-term care and plan ahead for this possibility; the degree to which awareness can be raised about the rising cost of care and the limitations of Medicaid and Medicare and how private long-term care insurance can help; and if boomers can recognize that long-term care insurance is more affordable if purchased earlier.

22 18 American Council of Life Insurers Research Findings demographics: How Today s trends make home care less likely for boomers As fewer people can provide informal care for their families and more people have to depend on alternatives like nursing homes, elder care costs in the United States will rise. Informal home-based care is less viable for baby boomers than it was for their parents. Several changes in how we live today limit the ways we can provide informal care to our families. Some of the demographic changes that are likely to lead to fewer options for informal home care include: n Declining family size n Increase in job-related mobility n Greater work force participation n Increase in divorce rates n An increase in people choosing to remain single In larger families, adult children are better able to share responsibility for their aging parents either by providing informal care or contributing financially. Over several decades, however, declining birth rates have made families smaller. In 1950, there were 24.1 births per 1,000 people; in 2002, there were 13.9 births per 1,000 a decline of 42.3 percent. In addition, working adults are less likely to remain in one place during their careers causing families to be separated geographically. Adult children are less likely to live near their elderly parents and thus unable to help with home-based care. More women are joining the work force. This trend, combined with a tendency of people to delay retirement, means there are fewer young retirees or women at home to provide informal care to spouses, partners, elderly parents, or other family members. In 1950, 32.4 percent of working-age women were in the labor force, compared to 59.5 percent in A higher retirement age under Social Security standards may further contribute to the depletion of home-based long-term care resources. A higher divorce rate and more people choosing to remain single means more older people will have no family members to care for them. Many of them will require nursing home or other expensive care which can lead to impoverishment. A 2005 study shows that 70 percent of single people who require long-term care become destitute. Birth Rates in the United States Women in the Work Force Births per thousand Percent Year Year

23 19 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? ENDNOTES 1 The elderly population is defined as those age 65 and older. 2 Congressional Budget Office (2004). 3 ACLI calculations based on data from the U.S. Center for Disease Control and the U.S. Census Bureau. Calculations assume recent usage rates. 4 Spillman and Lubitz (2002) 5 Brown and Finkelstein (2004). 6 Gabrel (2000). 7 Genworth (2005). All reported figures are based on 2005 data. Assisted living facilities charge additional fees for services such as dementia care, frequent personal care, and special meal or laundry service. Assisted living refers to a very broad range of living arrangements and is generally not covered by Medicaid or Medicare. 8 U.S. Department of Labor, Bureau of Labor Statistics. According to MetLife (2004), from 2003 to 2004 the average cost of a stay in a nursing home increased by 5.9 percent for a private room and 6.8 percent for a semi-private room. According to Genworth (2005), from 2004 to 2005 the average cost increased 6.4 percent for a private room and 5.7 percent for a semi-private room. 9 According to the National Health Expenditure Survey, in percent of home health care expenditures were paid for by Medicaid and 16.5 percent out-of-pocket. Medicare is the largest source of home health care financing, accounting for 33.2 percent of all expenditures. 10 Congressional Budget Office (2004) and U.S. Bureau of Economic Analysis, National Income and Product Accounts. Long-term care expenditure data is based on CBO estimates for According to the Health Insurance Association of America (HIAA (2003): Roughly seven out of ten long-term care insurance policies sold remain in force. Three out of ten have either lapsed voluntarily, been replaced by a new policy, or were terminated due to death. Therefore, it is reasonable to assume that three-quarters of the policies sold will remain in force. 12 In 2005 dollars. 13 Home and community-based care is a non-specific term that refers to a very wide range of non-institutional settings, many of which are not licensed or regulated by federal government (see Stone (2000) for a more complete discussion of this topic). 14 Though its use has increased over the last decade, home and community-based care are optional elements of state Medicaid programs. Consequently, there are very large differences among states in the percentage of the Medicaid long-term care budget spent on home and community-based care. In general, states pay approximately 43 percent of total Medicaid costs (CBO (September 2004)). 15 Cohen et al. (2002). 16 The average age at which a person first enters a nursing home is 83 for men and 84 for women (Brown and Finkelstein (2004)). 17 U.S. Center for Disease Control, Health, United States, U.S. Department of Health and Human Services (2003). 19 U.S. Department of Health and Human Services (February 2003). 20 Genworth (2005). 21 U. S. Department of Health and Human Services (1999). 22 If inflation is not controlled for total expenditure on nursing home care, the cost could reach $580 billion by 2030 and $1.52 trillion by The total hours of home health care per week varies among individuals. 24 Neither consistent nor comprehensive data on assisted living and other forms of long-term care is available. However, nursing home care and home health care make up a majority of long-term care. 25 In 2005 dollars. This assumes the cost of a private room is $69,422 per year and the cost of a semi-private room is $61,116. Further, it is assumed that 28 percent of residents stay in the former and 72 percent in the latter.

24 20 American Council of Life Insurers Research Findings 26 Medicare covers only post-hospitalization skilled long-term care services for a limited time. It does not pay for any non-medical home care. 27 Not controlling for inflation, and under current trends, in 2030 Medicaid is expected to pay $266 billion for nursing home care and, by 2050, will pay $699 billion. 28 According to US GAO (September 2005, p. 2): The evidence on the extent to which individuals transfer assets to become eligible for Medicaid long-term care is generally limited and often based on anecdotes. 29 Wiener et al. (1996). 30 Under current trends, not controlling for inflation, out-of-pocket payments are projected to be $162 billion in 2030 and $426 billion in Neither academic nor policy literature define affordability in a rigorous way (see Bundorf and Pauly (2002) for a comprehensive literature review). Because affordability is subjective, a single standard of affordability cannot apply to all people. However, for the purpose of this analysis it is assumed that income and the price of premiums are the only quantifiable barriers to purchasing a policy. Because premiums depend on the age at which an individual purchases a policy, it is also taken into consideration. Throughout this analysis, it is assumed that a 40- year-old can afford to devote 2 percent of his/her income toward the purchase of long-term care insurance, and that, between 60 and 65, an individual can afford to devote 5 percent or his/her income. Between the ages of 40 and 60, a constant, yearly incremental increase of affordability is assumed. 32 Long-term care insurance policies typically specify a level premium (i.e., the premium remains fixed throughout the life of the policy). Consequently, as incomes and/or inflation increase, premiums on existing policies become more affordable. Though level premiums are standard, in reality they can increase if insurers request an increase for the entire group of people who purchased a particular policy. [However, s]uch an increase can only be justified by inadequate medical underwriting, premiums that were initially set too low, or insufficient growth in reserves meant to cover future claims (Desonia (2004, p. 17)). According to the HIAA, the majority of its members have never had to raise premiums on long-term care insurance policies. 33 Data on premiums was obtained from CBO (2004). 34 Based on a statement, On Medicaid Waste, Fraud, and Abuse: Threatening the Health Care Safety Net, by the American Council of Life Insurers before the U.S. Congress, Senate Finance Committee, June 29, In terms of premiums. 36 For example, in the 40- to 44-year-old age group, 89 percent pass underwriting screens, whereas, in the 60- to 64-year-old group, 79 percent pass underwriting screens (see Merlis (2003)). 37 HIAA (2003). 38 Policies offer the services of a care coordinator at the time of claim to help craft a plan of care and identify local care providers. Other common benefits include respite care to provide temporary relief to family caregivers, homemaker or chore services, restoration of benefits, coverage of some medical equipment, survivorship benefits, payment of family caregivers, spousal discounts, and paid-up policies. 39 Activities of daily living include bathing, dressing, toilet use, transferring in and out of chair or bed, urine and bowel continence, and eating.

25 21 Long-Term Care Insurance or Medicaid: Who Will Pay for Baby Boomers Long-Term Care? Bibliography AARP, Private Long-Term Care Insurance: The Medicaid Interaction, Issue Brief number 68, ACLI, Who Will Pay for the Baby Boomers Long-Term Care Needs?: Expanding the Role of Long-Term Care Insurance, April AHIP, Research Findings: Long-Term Care Insurance in 2002, June Ahlstrom, Alexis; Clements, Emily; Tumlinson, Anne; Lambrew, Jeanne, The Long-Term Care Partnership Program: Issues and Options, unpublished manuscript, George Washington University School of Public Health and Health Services, Basset, William F., Medicaid s Nursing Home Coverage and Asset Transfers, Working Paper, Board of Governors of the Federal Reserve System, March 26, Brown, Jeffrey R. and Finkelstein, The Interaction of Public and Private Insurance: Medicaid and the Long Term Care Insurance Market, NBER Working Paper no , December Bundorf, M. Kate; Pauly, Mark V., Is Health Insurance Affordable for the Uninsured? NBER Working Paper, October Centers for Medicare and Medicaid Services, Program Information on Medicaid and State Children s Health Insurance Program (SCHIP), Chezum, Brian; Pelkowski, Jodi Messer, Spend Down and the Probability of Entering a Nursing Home, unpublished manuscript, November Coe, Norma B., Financing Nursing Home Care: New Evidence on Spend-Down Behavior, unpublished manuscript, September Cohen, Marc A.; Weinrobe, Maurice; Miller, Jessica, Inflation Protection and Long-Term Care Insurance: Finding the Gold Standard of Adequacy, the AARP Institute, working paper # , August Congressional Budget Office, Financing Long-Term Care for the Elderly, April 2004., Projections of Expenditures for Long-Term Care Services for the Elderly, CBO Memorandum, March Decker, Frederic H., Nursing Homes, : What Has Changed, What Has Not? Facts from Nursing Home Surveys, Center for Disease Control, Desonia, Randy A., The Promise and the Reality of Long-Term Care Insurance, National Health Policy Forum, Background Paper, July 31, Gabrel, Celia S, Characteristics of Elderly Nursing Home Current Residents and Discharges: Data from the 1997 National Nursing Home Survey, CDC, National Center for Health Statistics, April 25, Genworth Financial, Genworth Financial 2005 Cost of Care Survey: Nursing Homes, Assisted Living Facilities and Home Health Care Providers, October 2004, May Genworth Financial, Genworth Long Term Care and Alzheimer s Disease in America: A Retrospective, Health Insurance Association of America (HIAA), Executive Summary Research Findings: Long- Term Care Insurance in , January Johnson, Richard W.; Uccello, Cori E., Is Private Long-Term Care Insurance the Answer? Center for Retirement Research, Boston College, Issue Brief no. 29, March Kemper P.; Murtaugh, C.M., Lifetime Use of Nursing Home Care, New England Journal of Medicine, February 1991, 324(9), pp Long-Term Care Financing Project, Georgetown University, Fact Sheet: Private Long-Term Care Insurance, May Merlis, Mark, Private Long-Term Care Insurance: Who Should Buy It and What Should They Buy? prepared for The Kaiser Family Foundation, March MetLife, Mature Market Institute, The MetLife Markey Survey of Assisted Living Costs, October MetLife, Mature Market Institute, The MetLife Markey Survey of Nursing Home and Home Care Costs, April 2002, August 2003, and September National Association of Insurance Commissioners, A Shopper s Guide to Long-Term Care Insurance, 1999.

26 22 American council of Life Insurers Research Findings O Brien, Ellen, Medicaid s Coverage of Nursing Home Costs: Asset Shelter for the Wealthy or Essential Safety Net? Georgetown University, Long-Term Care Financing Project, Issue Brief, May O Brien, Ellen; Elias, Risa, Medicaid and Long-Term Care, Kaiser Commission on Medicaid and the Uninsured, May Spellman, Brenda; Lubitz, James, New Estimates of Lifetime Nursing Home Use: Have Patterns of Use Changed? Medical Care, vol. 40, no. 10, Stone, Robyn I., Long-Term Care for the Elderly with Disabilities: Current Policy, Emerging Trends, and Implications for the Twenty-First Century, Milbank Memorial Fund, United States, Center for Disease Control, Health, United States, various issues. U.S. Congress, Senate Finance Committee, Statement of the American Council of Life Insurers On Medicaid Waste, Fraud, and Abuse: Threatening the Health Care Safety Net, June 29, U.S. Department of Health and Human Services, 2003 CMS Statistics, U.S. Department of Health and Human Services, Assistant Secretary for Planning and Evaluation, Office of Disability, Aging and Long-Term Care Policy, Changes in Elderly Disability Rates and the Implications for Health Care Utilization and Cost, February U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics, The National Nursing Home Survey: 1999 Summary, Vital and Health Statistics, Series 13, Number 152, June U.S. Department of Health and Human Services, Informal Caregiving: Compassion in Action, Wiener, Joshua M.; Sullivan, Catherine M.; Skaggs, Jason, Spending Down to Medicaid: New Data on the Role of Medicaid in Paying for Nursing Home Care, AARP, #9607, June Author Andrew Melnyk, Ph.D. is Director, Research at the American Council of Life Insurers (ACLI). Prior to joining ACLI Dr. Melnyk was an Economist with USAID s Development Information Services project and, prior to that, a Research Economist with ERS Group. From 1998 to 2002, he held the position of Assistant Professor of Economics at the American University in Cairo (Egypt) and from 2001 to 2002 he served as Chair of the Department of Economics. He has a Ph.D. in Economics from the University of Miami with a specialization in labor and economic development.