Prior to 2006, the primary unmet health care need for retirees was coverage of prescription drugs. Up to this point, Medicare provided retirees with coverage for most other acute care services, including inpatient hospital, physician and outpatient hospital services.
Starting in 2006, the newly introduced component of Medicare (Part D) covers part of the retiree’s prescription drug costs, too.
That leaves one major hole in the health care safety net for elderly Americans: long term care coverage.
As reported in National Underwriter (Oct. 3, 2005), the average annual nursing home cost has escalated to $74,095. At the same time, Milliman Inc. research shows, only four out of 10,000 seniors experience annual drug costs exceeding that amount (an average annual drug cost per senior being $2,171.36). Given the growing population of aging baby boomers, escalating nursing home costs and rising average life expectancy, the financial situation of the elderly population is extremely challenging.
The introduction of Medicare Part D creates an opportunity to redirect resources from prescription drug costs to much-needed LTC coverage.
Employers have several options available for using Part D. For instance, employers may receive a direct subsidy from the government while maintaining their current drug coverage. According to the Centers for Medicare and Medicaid Services, the estimated value of the tax deductible subsidy is $668 per beneficiary. Alternatively, employers may wish to eliminate their current coverage and pay some or all of the retirees’ Part D premium.
Consider the following comparative analysis of the value of Part D and LTC costs. The annual Part D estimates in Table 1 are based upon the employer dropping drug coverage in favor of Part D. The LTC costs in Table 2 are based upon an estimated cost of $150 per day in a nursing home. Note the LTC values in Table 2 are not annual premiums at ages 70 and 80 but rather the expected claim costs at those ages.
The 2005 annual drug costs and frequencies were obtained from the Milliman Health Cost Guidelines 65-plus, and the LTC cost estimates were determined using Milliman long term care guidelines.
From the employer’s perspective, the savings from Medicare Part D present an opportunity to replace current and future retirees’ prescription drug benefits with LTC coverage. Surprisingly, providing LTC coverage is significantly less risky than providing prescription drug coverage. The key difference is that a medical plan covers the month-to-month cost of any prescription medication for any individual, while LTC coverage is limited to a fixed daily amount for any individual who is impaired either physically, as measured by an inability to perform activities of daily living, or mentally.
The rate of such impairments is reasonably predictable and has been improving significantly with time. The most recent evidence suggests people are not only living longer but also are living longer without impairments. The National LTC Survey has sampled the rates of ADL impairment since 1982. Table 3 shows a steady decline in these rates from 1982 to 1999, the most recent year of the study.
Hence, such coverage should be much less risky to employers than prescription drug coverage, which has increasing use and cost trends. And since Part D will reduce prescription drug liability accrual by 20% or more, this would free up resources to provide LTC benefits for retirees and simultaneously reduce the employer’s future risk.
Medicare Part D presents a unique opportunity for both employers and retirees. Employers would benefit from lowering their costs and reducing liability risk, and the LTC gap in the safety net for retirees would be bridged.