So, why exactly is it that Americans — and residents of many other developed countries — do such a truly terrible job of planning for long-term care (LTC) costs?
Many consumers are broke, the world is uncertain, and people hate to think about having difficulties with the activities of daily living.
But people also hate thinking about getting sick, suffering from a disability, getting into an automobile accident, or dying, and they seem to be much more likely to use private insurance to protect themselves against those risks than they are to use LTCI to protect against LTCI.
One obvious answer is that LTCI is still a relatively young product, especially in terms of policies existing as arrangements that actually pay claims for a significant number of insureds. U.S. insurers have always had a hard time figuring out how to develop popular, sustainable health-related products. In 1909, for example, H.G.B. Alexander, president of the International Association of Accident Underwriters, spoke in an address at a meeting in Niagara Falls, N.Y., about the small and fragile state of the young accident and health insurance business.
That year, stock companies collected $22 million in premiums — less than $1 in premiums per capita. “The comparatively meager showing is chargeable to ourselves,” Alexander said. “We have given scant, if any, attention to the education of our representatives, and the general public has been left in a large measure in absolute ignorance about the benefits of accident insurance.”
But Hanming Fang, an economist at the University of Pennsylvania, has tried to go beyond the obvious and take a deeper look at possible reasons for the relatively small size of the U.S. private LTCI market. He follows in the footsteps of colleagues like Jeffrey Brown and Amy Finkelstein.
Here is a look at some of the ideas he included in a working paper published behind a paywall on the website of the National Bureau of Economic Research.
Even LTC planning professionals who disagree with some, or many, of Fang’s points may find thinking about his arguments interesting.
1. The typical daily benefit is low
Fang starts by talking about well-known obstacles, such as competition from Medicaid, and the fact that many people who are already in poor health cannot qualify for stand-alone LTCI.
But he also talks about the benefits themselves. Even in 2005, when the LTCI market was just starting to enter the current slump, and policy terms tended to be more generous, the average maximum daily benefit was just $142, Fang says.
Meanwhile, in 2008, just three years later, the actual average daily nursing home cost was already $200 per day.
“Since about one-quarter of policies have [a] maximum daily benefit [that's] fixed in nominal terms, the daily benefit caps are even more binding in practice,” Fang writes.
2. The kinds of wily people who like insurance may be especially hard to underwrite
Fang described a study based on an instrument called the AHEAD questionnaire. Organizers of the survey tried to measure how much secret information the survey participants knew about their own health, when compared with what LTCI issuers knew, and also to assess the participants’ level of risk aversion, by determining what kinds of preventive care the participants used.
The researchers found that the people who were most likely to have private information about their own health — information that the LTCI issuer would have wanted to have — were also more likely, all other factors being held equal, to take good care of themselves and buy LTCI coverage.
When the researchers did that study, it looked as if the private information, the risk aversion, and an inclination to own LTCI might somehow cancel out — but the part about the private information is not something to make LTCI underwriters feel giddy.