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Private Financing for Long-Term Care Needs

The Good News and Bad News for Private Financing

for Long-Term Care (LTC) Needs

Eileen Tell, MPH

Introduction

Despite the availability of a variety of private finance vehicles to protect consumers from the catastrophic risks of needing long term care (LTC), most people do not have arrangements in place to help pay and provide for care when the time comes that they need it. New research underscores the importance of planning ahead for ways to address the relatively likely scenario of needing LTC as we age.  Specifically, 50% of those age 65 and older will, at some point in their lives, have a degree of loss sufficient to require hands-on help with two or more everyday activities of daily living (ADLs) or supervision due to a cognitive impairment.[1]  The average duration of this care need is just under 4 years, with the risk of needing care and the duration of care needed higher for women than for men.  Based on today’s costs of care, roughly 27 percent of us will see costs of care of at least $100,000, with costs in excess of $250,000 for about 15 percent of those who need care.[2]  These figures do not include the significant financial and emotional costs of the large portion of care that is provided by unpaid family caregivers.

While there are a variety of private finance options available to provide both financial protection and help finding and arranging for care, for a variety of reasons, few people have chosen to make this type of purchase.  These options include:

  • Traditional long-term care insurance;
  • Hybrid or combination insurance products (combine LTCI with life insurance or an annuity);
  • Short-term care insurance;
  • Impaired risk annuities; or
  • Reverse mortgages

Collectively, probably only about 9 million of the 40 million Americans age 65 and over have one of these private insurance options in place.  This falls well below the anticipated “take-up” for what has been shown to be a highly insurable risk.  In the 1990s and first half of 2000s, sales of traditional long-term care insurance grew steadily, and products improved significantly.  During that time, new product variations emerged to better meet varied tastes and preferences among consumers.

So why has the private finance market for LTC protection stalled so dramatically within the current decade?  There are several reasons:

  • No single product option today perfectly meets either current or growing needs.  Some cost more than many people feel they can pay, some provide only limited or partial protection, and some limit eligibility based on health, income, age or other criteria.
  • Today’s LTC options also provide limited reach due to the challenges of raising awareness, motiving and enabling planning, and overcoming denial of the need, or the human nature to avoid thinking about and planning for a future of need and dependency.  Many people prefer to “take their chances” and hope that they won’t need care or hope they will have saved enough to pay for their care needs.

In this article, we explore the good news and the bad news about the private financing of LTC needs as revealed over the nearly three decades of experience with these products.  We also highlight “What Every Care Manager Needs to Know about Private LTC Insurance” to help our audience understand key elements of the product for their clients who have it.

Good News for Private Financing of LTC Needs

There have been significant improvements in the design of LTC insurance products since they first emerged.  While early products were not well-suited to meet the needs of those seeking care, especially for home- and community-based services, today’s products offer comprehensive coverage in all relevant care settings.  Most policies have a single pool of benefit dollars from which the insured can select whatever type and amount of care they prefer.  So there is no institutional bias with private financing as still prevails with Medicaid.  As new options for receiving care (like the growth of assisted living facilities) have emerged, policy design has kept pace with these changes in the delivery system.  Most products have an “innovation” provision called an Alternative Plan of Care which gives the policy flexibility to maintain contemporary coverage as service delivery options change over time.  Today’s products also include many important consumer protections such as early and third-party notification in case of coverage lapse, provisions to reinstate coverage if a payment is missed, a third-party independent review for claims decisions and more.  While early policies relied upon an arbitrary determination of “medical necessity” for when benefits would be paid, today’s coverage is correctly aligned with accepted, reliable, and objective measures of functional and cognitive loss as used by Aging Life Care™ / geriatric care practitioners.

article_2_table1As a result of these important improvements in the type of care that is covered, those with private LTC insurance are more likely to be able to receive care outside of a facility which is generally the preference.

In-depth analyses of how these policies work also reveal that claimants and their families are well-served by their coverage.  Roughly 95% of all claims are paid.  Among those in claim:

  •  94% had no disagreement with the insurer about that claim;
  •  3% had a disagreement that was satisfactorily resolved.article_2_figure1
  • Most claimants say their policy benefits meet care needs; 90% feel their policy provides flexibility in service choice;
  • In the absence of insurance, half the claimants feel they would have to seek facility care or not be able to afford care; and
  •  Most (77%) do not find it difficult to file a claim.[3]

The figure below illustrates some of the non-financial benefits to claimants receiving care under their LTC insurance policy.

article_2_figure_2The presence of LTC insurance also improves the family caregiving experience. Individuals caring for someone with private LTC insurance are nearly twice as likely to be able to continue to work as those whose loved ones do not have LTC insurance.  This working caregiver is also less likely to experience the severe stress and negative physical health outcomes associated with juggling work and caregiving. [4] The care management assistance provided by insurers reduces caregiver stress by providing a valuable resource for respite care, help finding services, and providing paid care when family caregiving is either not feasible or isn’t desired. But having LTC insurance doesn’t erode the important role that families play in caregiving for their loved ones; it merely changes the nature of the role in a way that reduces the burden of hands-on care and the emotional stress of round-the-clock caregiving.

From a societal perspective, an investment in private LTC insurance also pays off with regard to Medicaid program savings.  A recent study estimated the projected lifetime Medicaid savings on nursing home care at just under $8,000 for each privately insured person with coverage at the levels prevailing in 2010.[5]

Finally, the other good news for private financing of LTC needs is the emergence of a variety of new product configurations that broadens the price points and better tailors coverage to satisfy consumer preferences for different kinds of product options.  Specifically, the industry has seen significant growth in the sale of combination products (LTC insurance combined with an annuity and/or a life insurance product) as well as in less costly, less comprehensive “short-term care.”   Because it limits the insurance liability, these short-term care products are often available with more lenient underwriting than traditional LTC insurance.  This helps broaden the reach of private coverage to those who might not otherwise be insurable with a traditional product.  Industry innovation in product design and pricing means broader market appeal for those who may not feel well served by the concept of a traditional LTC insurance product.

And Now for the Bad News

The economic challenges and sustained low interest rate environment of the current decade have negatively impacted both the supply and the demand side of the LTC private financing equation.  On the supply side, insurers are not able to realize the profitability on product that they previously experienced, especially given tight regulatory limits on the ability to adjust premiums based on financial and actuarial experience.  This means fewer companies offering product, limited resources for education and distribution.  Also, for the companies that remain in the market, premium increases, tighter underwriting, or other changes put the product out of reach of a growing number of potential buyers.

Offering coverage through sponsoring employers has been an important distribution channel for traditional LTC insurance; but with the emergence of the Affordable Care Act, and the challenging economic climate, the time and attention that employers are able and willing to give to this voluntary benefit is limited.  That, combined with some insurer market exits that hit harder in the employer group market, has cut off what had been an important distribution option, especially for reaching younger buyers where affordability is enhanced.

On the flip side, consumers are seeing higher premiums for comparable coverage today compared to a few years ago as companies have needed to seek rate increases.  This exacerbates an already challenging value proposition for the buyer.   Fewer consumers can justify the investment at a time when portfolios and incomes are challenged in this financial environment.  Also, most people who buy LTC insurance are risk-adverse and prefer more comprehensive coverage than perhaps they can afford.   Also, as some companies’ attempt to offer lower premiums through reduced coverage (e.g., no longer selling an unlimited lifetime benefit); the market appeal to a primary audience of typical buyers is reduced.  The typical buyer psychology isn’t currently compatible with a “some coverage is better than none” mindset, which is behind the emergence of short term care product designs.  And while the emergence of a variety of new product types, including lower cost coverage options is intended to address both the affordability issue and the “use it or lose it” nature of traditional insurance, having more options across and within products adds to the complexity of a product purchase that is already seen as confusing and challenging to many consumers.

Finally, while awareness of the risks and costs of LTC has increased, and the value of planning ahead for LTC needs is gaining acceptance, most consumers still fail to plan.  LTC insurance will remain a product that is sold, not bought, as long as the decision to buy or not buy is a voluntary one, and the incentives for purchase are in a “difficult to imagine” far off future for many.

Conclusion:  Coming to a New Normal for Solving the LTC Dilemma

There is a growing consensus among both the private and public sector players in the battle to address this LTC financing crisis, that the most viable solution involves creative collaboration between both private and public sectors.  Traditional and newly emerging private LTC finance products have an important role to play in defining solutions, but it has become clear over the last challenging decade of flat sales despite product innovation, that these private products, under even the best of circumstances, will remain a niche solution.  Even with the current private industry disruption, innovation, reinvention, and redefinition currently underway, private market penetration is likely to remain small.  For the first time, both public and private sector thought leaders are working together to identify the respective roles each can play in creating viable and affordable solutions.  Previously, the debate about how to solve the LTC dilemma was focused on the “false dichotomy that LTC should be primarily either a public or private responsibility.”[6]  The conversation today has moved toward a collaborative perspective at least with respect to the fact that the most viable solution(s) will be those in which both private and public sector strategies are combined.

Of course, there is still plenty of room for debate, research, and rhetoric with regard to the best use of both public and private sector resources, and the right way to design products and allocate dollars to address the LTC dilemma.  The fact that at both the state and federal level, policymakers and industry are talking about creative solutions, raising consumer awareness, and motivating LTC planning, is a step in the right direction.  Rather than focusing on the shortcomings of either a private or a public sector solution, thought leaders are coming together to explore how to work together to create and promote affordable options.

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