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 long-term care insurance to protect against the need for such care.
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, New York, 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 standalone 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.
3. Some parents might prefer to stay with their kids
LTCI issuers and marketers often proceed from the assumption that most people want to avoid turning their adult children into caregivers.
Fang said one researcher, Mark Pauly, came up with another idea: Maybe some people — even high-wealth people — would much rather stay with their children in old age rather than moving into a nursing home, or even having home care workers come to their homes.
In those cases, Fang says, people with children may avoid buying formal LTCI, to maximize the amount of informal care the children will provide.
4. Medicaid is such a good deal for many that two-thirds of Americans would probably rely solely on it even if they had to pay a fair price for Medicaid
Everyone knows that Medicaid crowds out the purchase of private LTCI by paying for nursing home care for the poor.
Fang cites an analysis showing that the crowd-out effect of Medicaid is so large that Medicaid would crowd out private LTCI for two-thirds of Americans even if Americans had to pay an actuarially fair price for the Medicaid coverage.
One issue is that many people who need nursing home care end up with low enough assets to qualify for Medicaid. Another reason is that Medicaid ends up being the backstop insurance even for people with private LTCI.
By serving as a backstop, Medicaid “imposes an ‘implicit tax’ on long-term care insurance purchase, because a large part of the premium for the private policy pays for benefits that would have been provided by Medicaid,” Fang writes.
5. People resist annuitizing
Professionals selling standalone LTCI may feel unloved, but the professionals helping consumers with retirement income planning face barriers of their own.
For the people who need LTCI benefits, the LTCI policy acts like a kind of an annuity. The consumer puts cash in; the policy later pays cash out.
Fang notes that, even in the income planning market, and even in tidy, well-organized countries such as Singapore, in which one might think that industrious, non-gum-chewing workers would prepare for retirement with precision, the rate of annuitization is far lower than economists would expect.
Economists would expect typical 65-year-olds to devote one-fourth of their wealth at retirement to actuarially fair annuities.
In the real world, in the United States, the annuitization rate is just 1% of total retirement wealth, and the percentage is also low in Singapore and Switzerland, Fang reports.
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