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Life Health > Health Insurance > Health Insurance

Financing Long Term Care: The Myriad Possibilities

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Once all but presumed dead, health care reform is now very much alive, resuscitated by an energetic administration.

Although the focus of this initiative will be concentrated on expanding affordable health care for all Americans, long term care finance might just become part of the equation. Forces are converging that could create a perfect storm for change in our long term care financing system. Among them:

o Insolvency of both Medicare and Social Security may be nearer in time than previously forecast by government actuaries.

o Steady increases to federal and state Medicaid budgets.

o Increasing concern about how the current economic crisis will affect retirement security.

o The lack of a coherent national policy on long term care that would facilitate planning for the nation’s burgeoning long term care needs.

o An aging population.

All these forces mean that long term care will be much harder to ignore.

To some, a larger government role in LTC finance seems unlikely. We are grappling with numerous serious issues, including high unemployment brought on by the worst economy in 80 years.

Moreover, we are starting to weigh the cost of entitlements, which are projected to triple as a share of the gross domestic product over the next quarter century. When we add in the costs associated with the economic stimulus package ($787 billion), the cost of bailouts ($350 billion), and the effect of another big program on long-term government debt, now exceeding $10 trillion, it’s hard to see a path by which government intervention in long term care finance could make things better.

But there is another side to the coin. A number of those who have studied LTC finance see it as a problem that should be addressed by the public sector more directly, along with better LTC service access and improved LTC workforce readiness.

The public would appear to agree. Polls by such organizations as the Mellman Group and Glover Park Group show that a majority thinks LTC should be a part of health care reform. Social policy makers point to rising Medicare outlays for LTC (which topped $42 billion in 2005), while unmanageable Medicaid LTC costs (over $100 billion in 2007) have long troubled state governors. Finally, there is growing awareness that current entitlements are unsustainable, although many are beginning to see government action on LTC financing as a potential solution to current ills rather a worsening of matters.

At the same time, there is dissatisfaction among consumers and their advocates about private LTC insurance that parallels the two major complaints about health care itself: affordability and access. The cost of private LTC insurance remains unacceptably high for many, while thousands who want and could afford policies are declined for coverage because their health poses a higher than acceptable risk to insurers.

Critics of the current patchwork of public and private financing assail the catastrophic costs to families and point out that risk could be evenly spread to the wider population. They advocate improving access to home and community-based services, tightening coordination of care for persons eligible for both Medicare and Medicaid, shifting the emphasis from nursing homes to community living, and ensuring better quality of LTC services.

Finally, there are concerns about the LTC insurance industry itself, brought on by the recent disquieting developments within the financial sector, including doubts about the adequacy of insurers’ capital and liquidity.

It was never easy to write LTC in a short-term world; it’s even more difficult now.

There are 20 bills and proposals for LTC financing currently circulating, at least 5 of which are before Congress. They range from pro-market strategies featuring tax incentives for qualified LTC insurance policies and special LTC saving accounts to universal mandated social welfare schemes.

All these proposals rely on both public and private sources. None depends on public or private financing only. The mix of dependencies, with public financing assuming a much more robust role, at least in theory, is greater now than at any time since the introduction of private LTC insurance in the mid-1980s.

To make some sense of these bills and proposals, it is helpful to locate them on what might be called a public/private guidance spectrum (see chart). This spectrum has been drawn up from diverse sources, including the papers of the Georgetown University Financing Project, industry trade groups and independent research.

The two left columns list private LTC insurance approaches. The two on the right list those with a public emphasis. Running along the bottom in italics are features of these proposals as well as trends.

The different colors in the chart are meant to suggest not that an item is exclusively “private” or “public” so much as its political drift, whether it assumes that the driving force is likely to come from the public or the private sector, and whether its authors see one or the other sector as central to directing or governing outcomes.

The bills listed on the left, as well as the “forced savings approach” proposed by James Knickman of the New York State Health Foundation, would offer tax incentives to purchase LTC insurance in exchange for policies of increasing utility and accessibility to consumers. All have merit, but it is not likely that any will emerge as sufficient by itself because they do not address the larger issues of affordability and access.

Medicaid LTC insurance is at the bottom of the column because its continuing availability is assumed for all who can’t afford LTC insurance or who would eventually exhaust their assets paying for LTC out-of-pocket. But Medicaid, as currently offered, is not sustainable as an LTC financing vehicle, and most acknowledge its utility only as a funding source of last resort.

In the next column is what I call “Private LTCI Plus.” Several of these bills and proposals build on what we have now, either by consumer-oriented enhancements to our LTC system, such as greater access to home and community based care via Medicaid; better care coordination (especially for those eligible for both Medicare and Medicaid); and chronic disease control management via Medicare.

Others seek to enhance the appeal of private LTC insurance through better alignment with existing public programs. The Medi-LTC proposal of John Cutler, Lisa M. Shulman, and Mark Litow, for example, would make plans more standardized under the imprimatur of Medicare. This proposal, which borrows features from the Federal LTC Insurance Program under the U.S. Office of Personnel Management, would exploit the marketing reach of Medicare by offering qualified private LTC policies using group-style administration.

Another proposal by the Council of American Health Insurers, on the other hand, seeks to use individual medical accounts to finance LTC insurance risk either through the private market or government high-risk pools, using Medicare age eligibility as the jumping-off point.

In the chart’s third column, “Public Catastrophic LTCI,” lists more public-oriented solutions, with linkage to Medicare but with a decreasing yet still important role for private insurance.

At the top of the list is the CLASS Act proposed by Sen. Edward Kennedy, D-Mass., which would make available a voluntary basic LTC insurance benefit on a guaranteed-issue basis. This would be offered at a modest cost via employer payroll deduction. Premium payments would be collected automatically via payroll withholding unless an opt-out provision is chosen, yielding a large risk pool. While providing only limited benefits under a two-tier structure tied to degree of disability, the CLASS Act would force LTC insurance into the mainstream of basic protection and do so at an affordable price, thus relieving pressure on Medicaid. It would also preserve an important role for private insurance.

Other notable proposals include:

o The Social Contract plan of Brookings scholar William Galston, which would mandate purchase of private LTC insurance in exchange for Medicaid eligibility with asset protection.

o The Federal Catastrophic LTC Insurance Program proposed by Christine E. Bishop of Brandeis University, which would provide a basic LTC insurance benefit after an elimination period of three years.

o The Medicare-linked optional LTC insurance benefit proposed by Anne Tumlinson of Avalere Health and Jeanne Lambrew of George Washington University, which would allow Medicare beneficiaries to trade their limited Part B home health benefits for a more robust private LTC benefit that would be continued by Medicare after insurance benefits were exhausted.

o The Medicare Advantage plan from the Alliance for Quality Nursing Home Care, the American Health Care Association and the National Center for Assisted Living, which proposes a Medicare LTC benefit after an individual either establishes a personal cash reserve of $100,000 or purchases a qualified private LTC insurance policy, either of which would have to be used up before qualifying.

The column on the far right of the chart lists proposals to finance a uniform LTC benefit by taxes or mandatory premiums. It includes the Medicare Part E proposed by Leonard E. Burman of the Tax Policy Center and Richard W. Johnson of the Urban Institute as well as the American Association of Homes and Services for the Aging plan.

The Burman & Johnson proposal would provide comprehensive LTC benefits, including home health care, under a new Medicare Part E financed by income taxes, with subsidies to low-income persons. There would be some copay, again with subsidies for low-income persons.

The Burman & Johnson and the AAHSA plans would implement a European-type social insurance model of managing and controlling LTC risk on a larger scale, similar to what is now done in Germany, Sweden, the Netherlands, and Japan. Like these countries, America is beset with aging demographics, changes in the family structure reducing the availability of female caregivers, greater mobility, inflation, and systems that fail to integrate acute care and LTC needs to ensure quality of care and cost efficiency. The American version, like its European counterparts, would be pay as you go, with no actual funding as in allocated trust accounts. Nor does there appear to be any feasible way of guaranteeing funding for future LTC liabilities, as any attempt to do so would impose a crippling burden on working persons and government officials.

There are problems with all of these approaches to LTC finance reform. Here are the most obvious:

? Private Market LTCI, which proposes to transfer LTC insurance risk from private persons to insurers via private resources, such as private savings and private LTC insurance, assumes the continuance of public assistance for those who are without means or who must impoverish themselves to qualify for public assistance. Since many fall into these categories, this approach does not address the needs of the majority of Americans and is unsustainable.

? Expanding the public safety net by allowing more people to have access to preferred home and community-based care solves certain short-term problems like changing Medicaid’s institutional bias, and it may lower costs initially, but it is likely to increase demand exponentially, thus increasing Medicare and Medicaid costs. This would in turn further crowd out private LTC insurance.

? Public catastrophic coverage would increase the LTC safety net by offering a basic benefit for LTC, but it would not cover all the risk that families with LTC needs face. Efforts to link Medicare with private LTC insurance seem promising but may not yield the desired spread of risk and do nothing for the younger working age adult, who is also at risk.

? Mandated public LTC insurance (e.g., Medicare “Part E”) would address the LTC needs of the majority, but it would almost certainly mean an increased tax burden on a population in which fewer and fewer people are paying to support entitlement programs. If revenues aren’t equal to benefits plus expense, taxes would have to rise to cover the difference, or either rationing or means-testing would have to be introduced.

I wish to stress that the views I express here are strictly my own and not those of any organization with which I am affiliated.

Having said that, I see a change from the current private LTC-insurance-plus-Medicaid to a social model that provides LTC as part of a more complete social welfare scheme as inevitable.

But this change will be incremental. We will move gradually from the status quo through the creation of a stronger LTC safety net via reforms to Medicaid, including more standardized eligibility and deinstitutionalized care. From this, we would move towards the adoption of a social insurance financing mechanism that draws upon vastly greater pools of insureds or that uses federal tax revenues as a backstop to private insurers as they relax underwriting guidelines.

Whether these will usher in a mandated welfare program for the aging, millions of whom are not prepared to finance their care, is uncertain. Nevertheless, the seed for such a development has been planted. For private insurers, this means private market LTC insurance for higher incomes, an increasing limitation over time of the Medicaid LTC safety net to the genuinely impoverished, and the creation of large risk pools that should spread morbidity risk and help to drive down administrative and system costs.

This change should also make it easier for private LTC insurance to break down the denial barrier, because social insurance will have done the heavy lifting in that department.

Some may be alarmed at this prospect. They needn’t be. While the current environment is admittedly confusing, few of us ever imagined that private LTC insurance was a universal solution for all LTC needs or that some form of government action would not be needed at some point. The failure of the private LTC insurance market to grow over the past decade, in spite of a dedicated, able workforce with a strong belief in its value proposition, suggests the industry may stand to gain more than it will lose by government entry into LTC protection.

The emergence of any form of social insurance addressing LTC needs, whether aimed at covering the shorter-term “front end” of the risk, the longer-term tail, or some percentage of both, should not be looked upon as Armageddon. On the contrary, it would furnish a much needed stimulus for growth.

The evolution of these developments will allow us time to develop more consumer-oriented products; to consider the structure of the risk that works best with our approaches; to retool our operations in favor of Web-based services; and to align ourselves with government sponsors of education and awareness programs. The question is whether we will use this time well. I believe that we will.

Paul E. Forte is CEO of Long Term Care Partners L.L.C., Portsmouth, N.H., which administers the Federal Long Term Care Insurance Program for John Hancock Financial Services Inc., Boston.


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