EXPANDING PRIVATE LONG-TERM CARE INSURANCE AND STRENGTHENING MEDICAID RICHARD G. FRANK HARVARD UNIVERSITY

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1 EXPANDING PRIVATE LONG-TERM CARE INSURANCE AND STRENGTHENING MEDICAID RICHARD G. FRANK HARVARD UNIVERSITY

2 POLICY DESIGN CHALLENGE Assuming that the social insurance approach to LTSS is unlikely in the short to medium run What policy initiatives are most likely to grow LTCI and have the most salutary effects on Medicaid?

3 PROBLEM STATEMENT

4 FOUR KEY REMEDY IDEAS Simplification of product offerings and regulatory reform Expanded employer role Publicly organized reinsurance Reconsideration of subsidies

5 REGULATORY CHANGES AND INCREASED DEMAND FOR LTCI Simplification and standardization using electronic markets via regulatory reform Limit product choices to 5-10 products; no limit on number of sellers Modeled on Medigap; FLTCI; State of Minnesota Expand use of electronic markets with decision aids Alter state regulations to allow high deductible products to be in choice set Impact Addresses complexity, confusion and aids comparison shopping Makes LTCI more like commodity lowers selling costs (20%-30%) Reduces premium by 35%+

6 EXPANDED EMPLOYER ROLE Employers have advantages in offering LTCI Lower selling costs Reduced concerns over adverse selection Filter products (reduced confusion/complexity) How to expand employer participation? Simpler, lower cost products Mandated availability Effective in some health insurance markets Terrorism insurance

7 REINSURANCE POOLS Many of the great risks/uncertainties facing LTC insurers are common to all sellers and thus hard to spread Health Care Inflation Mortality/disability changes Macroeconomic changes Insurers respond by limiting coverage/exiting the market Publicly organized and privately (or mix) funded reinsurance pools have been used successfully in flood, earthquake, and are being proposed for some financial markets Impact: improved consumer confidence in LTCI; reduced risk premiums

8 PUBLIC SUBSIDIES FOR LTCI Federal Tax Incentives Itemized deductions of medical expenses Self employed deductions Employer sponsored LTCI LTCI purchased via Health Savings Accounts State Tax Incentives Carry through federal deductions State LTCI tax credit State LTCI tax deductions

9 HOW MUCH PUBLIC MONEY IS BEING SPENT IN LTCI SUBSIDIES? Types or Deduction Number of LTCI Claims Public Money Spent Medical Deduction Ages 50+ Self-Employed with LTCI State Deduction/Credits 2.6 million $1.4 billion 2.7 million $1.0 billion 605,000 $0.1 billion

10 INCIDENCE OF LTCI TAX SUBSIDIES Over 40% of the medical deduction subsidy is collected by top 25% of income distribution of older adults Adults over age 65 and in the top quartile of income claim a disproportionate share of medical deductions from LTCI Other subsidies favor high incomes but at younger ages

11 OBSERVATIONS Subsidies of $2.5 billion or more (employer-based subsidies ignored) are currently being provided The subsidies are oriented toward highincome/wealthy older adults Can we find mechanisms to target these funds that would more effectively expand protection, encourage more private spending on LTCI and reduce burden on Medicaid?

12 ROWS ARE WEALTH AT RETIREMENT, COLUMNS ARE LIFETIME EARNINGS At median lifetime income, wealth varies from $12,500 to ~$1.1 million Variation in wealth from savings behavior and shocks. *Source: See notes.

13 INFERENCES FROM THE PRIOR SLIDE Even at and above the median income and certainly below it 40% of households have modest to little wealth and cannot absorb health and disability shocks On the other hand, even down at the 10 th and 20 th percentiles of lifetime income, some households accumulate substantial assets ( the frugal savers ) Making LTCI affordable can potentially help these households to prepare for aging and reduce claims on Medicaid

14 CONCLUDING OBSERVATIONS Simplification and standardization of LTCI, expanded employer participation and new reinsurance arrangements can reduce premiums (as much as 20% to 35%), increase consumer confidence and make buying LTCI less burdensome Result: expanded take up Can we find mechanisms to allocate the $2.5 billion + in subsidies so that we increase take up in a way that expands financial protection and strengthen Medicaid? Can we find ways to target subsidies to the 20 million people between ages 45 and 65 with incomes in the 30 th to 50 th percentile of life time income?