Are Clients Too Scared of Long-Term Care Costs?

Financial advisors have been warning clients for decades that one major risk they face is long-term care expenses.

U.S. consumers who listen to any financial advice at all have remembered that message.

When Lincoln Financial surveyed 1,991 U.S. adults ages 18 and older in mid-2020, 44% said they were not prepared to handle long-term care or elder care issues.

The survey participants were more worried about long-term care expenses than they were about income taxes, inflation or longevity risk.

Now, some analysts are pushing back and wondering whether the warnings advisors are giving consumers reflect the actual level of long-term care risk, or whether this is a case of intentional or unintentional fear marketing.

Sudipto Banerjee, vice president of Retirement Thought Leadership at T. Rowe Price, for example, recently published an analysis suggesting that, although planning for long-term care costs makes sense, catastrophic out-of-pocket spending at the end of life is unusual.

“Even though there is an increase in health care expenses late in life, very few of those who aren’t already under Medicaid are likely to run out of money as a direct result of health care costs,” Banerjee concludes in his analysis.

What It Means

Assessments of your clients’ long-term care risk are complicated and based on complex data sets and statistical modeling tools.

Thinking in this area could evolve quickly as clients in the huge baby boomer generation head toward age 85 and reach the “old old” stage of life.

The Players

Congressional Budget Office analysts have assessed U.S. long-term care spending trends when helping Congress assess public and private LTC benefits proposals.

Banerjee published his skeptical assessment of long-term care risk in an analysis of older people’s spending on acute health care and long-term care life, after age 65, and in the last two years of life.

Richard Johnson and Melissa Favreault, senior fellows at the Urban Institute, analyzed the effects of serious long-term care needs on relatively affluent people’s level of economic hardship in a 2021 paper prepared for a planning office at the U.S. Department of Health and Human Services.

Total Long-Term Care Spending

In 2013, the Congressional Budget Office published a chart showing low-range, mid-range and high-range forecasts of how long-term care spending might change, as a share of U.S. gross domestic product, from 2010 through 2050.

In 2020, actual U.S. LTC spending amounted to about $300 billion, or 1.35% of GDP, according to the latest National Health Expenditures report.

One sign that LTC expenses may be reasonably stable is that the percentage of spending going to LTC expenses was down from 1.4% of GDP in 2010.

The actual 2020 LTC spending figure, as a percentage of GDP, was at the level predicted by the CBO’s optimistic LTC cost forecast scenario.

The Banerjee Analysis

Banerjee used data for 1992 through 2016 from a large, well-established University of Michigan survey series, the Health and Retirement Study program.

He calculated the odds that Americans who were 65 or older, who were not enrolled in Medicaid, and who were in their last two years of life would have very high acute health care and long-term care expenses.

He also calculated how those people’s end-of-life care expenses compared with their net worth.

He found that older people who were not on Medicaid were unlikely to have end-of-life care expenses that amounted to more than 60% of their total net worth, including home equity.

Care costs amounted to 67% of total net worth for the top 5% of spenders in the 85-89 age group; 119% of net worth for the top 5% of spenders in the 90-94 age group; and 150% of net worth for the top 5% of spenders in the 95-99 age group.

But care costs rarely reached that level for younger people, or for married people, Banerjee reports.

The Urban Institute Study

Johnson and Favreault used a health care spending simulation system based on data from the Census Bureau’s Survey of Income and Program Participation and the University of Michigan’s Health and Retirement Study data.

The analysts defined economic hardship as having household income — minus out-of-pocket spending on health insurance premiums, long-term care insurance premiums and other health care expenses — under 100% of the federal poverty level.

This year, the federal poverty level for household income is $13,590 for a one-person household in most of the United States and $18,310 for a two-person household.

The analysts presented many tables that broke results down by people’s lifetime earnings “quintiles,” or fifths of the population.

Households in the middle fifth in terms of lifetime earnings, for example, end up with an annual income of about $60,000 to $104,000.

Households in the top fifth end up with incomes of about $200,000 or more per year.

Middle Earners and Top Earners

When people needed fewer than two years of long-term care, 76% of the middle earners suffered economic hardship, and just 48% of the top earners suffered economic hardship.

When people needed two to four years of long-term care, the percentage of people experiencing economic hardship was 85% for the middle earners and about 69% for the top earners.

When people needed five or more years of care, 88% of the middle earners and 81% of the high earners suffered economic hardship, according to Johnson and Favreault.

Similarly, Johnson and Favreault found that top earners younger than 76 were much less likely to need long-term care than young middle earners.

But, once the top earners were ages 85 or older, their need for long-term care was similar to middle earners’ need for long-term care.

The Disclaimers

Agents and advisors will have to take their clients’ circumstances and views into account when applying ideas from the Banerjee and Urban Institute analyses.

The current income cutoff for Medicaid eligibility is less than $30,000 per year for a two-person household in much of the country, according to Policygenius, and Banerjee included older adults’ home equity in the net worth calculations.

Some clients might see having an annual household income under $30,000 or using a large amount of home equity to pay for long-term care as a bad outcome.

Another issue is that clients might disagree about how to handle serious but relatively low-probability risks.

One affluent client might see a 5% risk of spending $94,500 out of pocket on nursing home bills after age 90 as a nuisance.

Another, otherwise similar affluent client might see even a 1% chance of spending that much on nursing home care late in life as alarming.

Banerjee’s Advice

Banerjee recommends that clients consider whether they should self-insure; buy stand-alone long-term care insurance or products that combine LTC benefits with other types of insurance; or use products such as deferred income annuities to provide income in later years.

“While the numbers suggest it’s unlikely that health care expenses incurred during the last two years of life will exhaust people’s assets among the non-Medicaid population, the possibility can’t be completely ruled out,” he says. “Therefore, it’s necessary to plan.”

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