Long-term Care Insurance

One of the myths I dispel in “Who Moved My Dentures?” is how long-term care is paid for in this country. Forbes had a recent article outlining the issues. I paraphrase it here.

Overall demand for long-term care is expected to expand massively over the next 50 years, as the number of U.S. residents over age 85 is projected to rise from 5.3 million in 2006 to 20.9 million in 2050.

Spending on long-term care, at roughly 10% of national health expenditures, is large and increasing. Estimates by GeorgetownUniversity‘s Health Policy Institute put national spending on long-term care, excluding unpaid care, at $206.6 billion in 2005–$129.8 billion on nursing home care and $76.8 billion on home care.

In 1998, about 60% of all long-term care spending was funded by either Medicare (20%) or Medicaid (40%). “Self-insurance,” or private savings used for out-of-pocket expenses, accounts for about a quarter of all long-term care spending. In addition, private long-term care insurance covers 7% of total expenditures.

Given the uncertain and expensive nature of long-term care, simple economic theory suggests that risk-averse individuals should purchase long-term care insurance. Paradoxically, the private long-term care insurance market remains small: In 2002, only about 6 million people had private long-term care insurance.

The demand for this type of insurance is slack for several reasons. Consumers underestimate the risks of foregoing insurance; Kaiser Family Foundation surveys indicate that one-third of respondents underestimate the cost of nursing home care. In addition, many wrongly assume that Medicare or Medicaid automatically covers long-term care expenses.

Nonetheless, despite its small size, the private long-term care insurance industry is growing, and the share of total long-term care expenditures covered by private insurance is increasing. Any decline in elderly disability rates due to advances in medical care will be outweighed by the number of aging baby boomers and accelerating health care costs. Indeed, the Congressional Business Office projects that long-term care expenditures for the elderly will quadruple by 2050. If private long-term care insurance coverage remains limited, the welfare of the elderly will decline, as could the wealth of their adult children, due to onerous out-of-pocket spending on long-term care. Medicaid spending on long-term care will have to rise, putting enormous strain on government budgets, and the existing infrastructure, already suffering from low standards–16% of nursing homes have serious deficiencies in quality, according to a 2005 Government Accountability Office report–may deteriorate further.

Concerns about large and rising long-term care spending in the United States are warranted. Promotion of private long-term care insurance should be high on the agendas of both state and federal lawmakers, as the future long-term care cost burden on Medicare and Medicaid will be unsustainable.

And that brings us full circle to what I have been telling people. The burden of health care is increasingly on our shoulders. Ultimately we are going to have to take responsibility for it. The writing is already on the wall with consumer driven, high deductible health plans. So start looking into this issue for yourself or a loved one.