A national solution for providing financial protection for people who need long-term services and supports (LTSS) has eluded policymakers for decades. The few attempts there have been at legislation have failed—the most recent being the repeal of the CLASS Act. In the wake of the CLASS Act repeal, the short-lived Federal Commission on Long-Term Care (the Commission) considered a variety of possible financing solutions and adopted a shared vision statement for LTSS financing, but failed to achieve consensus on a detailed proposal. The Commission's deliberations and its vision statement provide a platform for further work to refine a proposal that could gain broad public and political support. This article reflects discussion that took place in the Commission as well as other considerations that may guide further work on a solution.
The Need for an LTSS Financing Solution
Under a life cycle theory of income and wealth accumulation, people save a portion of their income during their working years and accumulate assets which are then available when they stop working to pay for their daily living costs and for any unforeseen health care or service and supports needs. Ideally, people are able to draw down on these resources, either exhausting them or leaving a small amount for their heirs when they die. For anyone whose life fits this neat model, there is no problem financing their LTSS needs. The problem is that the vast majority of people have lives that do not fit it. Accumulating sufficient assets to meet their basic needs and finance LTSS once they develop a disability or stop working is a challenge, if not an impossibility.
The population that needs LTSS has varied financial circumstances and service needs. A little more than half are older than age 65 and have either entered retirement with chronic illnesses or conditions requiring LTSS, or have developed cognitive or functional limitations through the aging process. LTSS needs that develop in old age can be anticipated and prepared for to some extent, although few people reaching age 65 have done so. But almost half of the people needing LTSS are younger than age 65—and some have had intellectual or developmental disability from birth or childhood, or developed mental or physical injuries or illness as young adults (Kaye, 2013). LTSS needs that develop in these circumstances are far more difficult to anticipate, and the shorter work history of these individuals makes adequate preparation impossible.
Most people who need LTSS rely on unpaid caregivers to provide the needed care. Spouses, children, parents, other family members, and friends often make great sacrifices—curtailing their own career, devoting their off hours, and even moving—to meet their loved one's needs. More than two-thirds of those receiving care at home rely exclusively on unpaid care, with younger people with disabilities more likely to rely on unpaid caregivers than older people (Doty, 2010).
Nevertheless, many individuals with functional limitations initially or eventually must rely on paid caregivers for part or all of their care. Paid caregiving provided in the home or an institution is typically expensive, particularly when provided over an extended period.
The vast majority of people needing paid care initially pay for such services out of pocket—relying on their incomes from Social Security or disability benefits, pensions and retirement savings, and the equity in their homes. People with some financial resources may reasonably be able to pay out of pocket for low-level or short-duration care. Home-based or institutional care for an extended duration, however, will eventually exhaust the financial resources of most people.
Younger people with disabilities and their families will rarely have sufficient personal resources to pay for LTSS over an extended period of time or a lifetime, and many qualify fairly quickly for Medicaid. However, workers who continue working with functional limitations will have incomes that disqualify them for Medicaid and will not have other support for the paid assistance they need to continue working.
For people with LTSS needs that emerge in old age, it is reasonable to expect that assets accumulated over a lifetime would be consumed to pay for care. However, most people arrive at retirement age without adequate resources to meet their retirement income needs, let alone cover substantial LTSS costs. Only a small percentage of the population has the incomes over their working lives that would enable them to reserve sufficient assets to cover a protracted period of paid LTSS.
Given the uncertainty over whether and how much LTSS will be needed, and the potential for an extended period of need, there could be a role for insurance—either private or public—that would pool this risk. Private insurance for LTSS could help cover some of the LTSS risk for people with sufficient resources to pay the premiums, but today it is only serving a small percentage of the population that can afford it and benefit from it. With 7 million insured lives in private long-term care insurance (LTCI), only 16% of those age 65 and older with sufficient incomes and assets to warrant purchasing insurance have a policy, and the market is declining, with fewer policies being written and carriers leaving the market (Cohen, 2013). There are interesting innovations that are combining LTCI with other insurance products that may make it viable for a larger group of people preparing for retirement. However, without a mechanism for broad pooling of risk, private insurance will not meet the needs of most people with resources to protect. Beyond that, it will never be a practical choice for a large proportion of the retiring population that has limited resources.
The LTSS needs for individuals with few or no resources are now met through the safety net provided by state Medicaid programs. Many are already participating in low-income assistance programs and Medicaid when they develop LTSS needs. Others become eligible for Medicaid when they incur large medical and LTSS costs and exhaust the few resources they have (“spend down”). Medicaid is overwhelmingly the largest source of financing for paid LTSS—accounting for approximately 62% of LTSS expenditures annually—due to the lack of adequate personal resources and other methods for financing. Private insurance covers less than 12% of the expenditures, and personal income or assets account for only 22% (National Health Policy Forum, 2013). While Medicaid provides a valuable safety net, it is not the preferred means to meet the LTSS needs of most people. Few people would choose to end up on Medicaid if they could avoid it, given its requirement to first exhaust personal resources and also given its limitations in supporting care in the home and community and concerns about quality and choice of care.
Increasing reliance on Medicaid for LTSS financing is also not fiscally sustainable. Almost all states are experiencing growth in their Medicaid programs in the context of severe state and federal budget constraints, and many are trying to limit LTSS even for those eligible. Significant growth in the need for LTSS over the next two decades, with the aging of the baby boomers and the growth in the number of younger disabled people, will place additional pressure on states to control Medicaid spending.
At a societal level, more resources—private or public—need to be set aside to address LTSS needs and enable more people to remain independent and living in their own homes. Added resources could also provide access to services and supports that reduce hospitalizations, enable people with disabilities to remain in the work force, and otherwise help to lower the total cost of care and support for individuals with functional limitations.
Some of the added resources could come from allowing individuals greater flexibility in using accumulated assets (life insurance, annuities, home equity, and retirement funds) to meet LTSS needs. In addition, public policy should encourage the accumulation of additional assets in a variety of forms to pay for future LTSS needs. For many people, however, preparing exclusively for LTSS needs is difficult in the context of other, more immediate financial demands. Opportunities to integrate LTSS savings or insurance with asset accumulation or insurance for other purposes would encourage LTSS financing preparation as a by-product of preparation for more pressing needs.
Accumulating sufficient private resources to finance LTSS expenses out of pocket is challenging given the unpredictability of the level and duration of the need, and the potential for LTSS needs that are extreme in both cost and duration. This pattern of LTSS needs is more typical of younger adults with disabilities living for decades with functional limitations than it is of the over age-65 population—where substantial LTSS needs may derive from a decline in health status leading to death. However, older adults are increasingly surviving for long periods with severe cognitive limitations from Alzheimer's disease or other dementias, but no physical health problems. The potential financial impact of this type of LTSS needs makes it difficult to individually save for and insure.
Nevertheless, this is exactly the type of risk that lends itself to broad-based pooling. When the financial consequences of an event are large while probability of that event occurring is low, the risk can be shared broadly by a large population for a small premium. Although the financial risk of the need for paid LTSS is insurable, the potential for public and/or private insurance that would cover this risk is underdeveloped. Flaws in the current private LTCI market and in the design of products have limited the value and stunted the growth of private insurance. LTSS financing is ripe for a combination of public and private insurance mechanisms that would spread this risk broadly.
Although the financial risk of the need for paid LTSS is insurable, the potential for public and/or private insurance that would cover this risk is underdeveloped.
Individual savings or insurance for LTSS is more likely if some of the uncertainty can be removed and the risk reduced to a point where it seems possible to address. Encouraging people to make full use of public and private mechanisms may require assuring them that they will be able to retain the resources they need to continue to live independently and that there is a limit to their total exposure. One approach would be to rely on a mix of public and private financing (including individual out-of-pocket payment), but cap the total exposure of the private financing. In this way, individuals could plan to use private resources (e.g., income, savings, home equity, insurance) for a known share of expenses up to the cap, with expenses above the cap spread broadly through a public financing mechanism.
However, individual responsibility can only go so far—a large portion of the population cannot be expected to prepare sufficiently to meet very expensive and/or long-duration LTSS needs. Too many people lack the economic resources or feel the urgency to adequately save even for their more general future education, housing, or retirement needs.
Medicaid should remain as a safety net when other approaches to financing LTSS are not possible or when unexpected events exhaust resources. It should not become a substitute for an insurance program or be relied on when either public or private insurance could meet the need.
Financing solutions should provide new ways that are not linked to Medicaid and its income and asset tests to pay for LTSS for those who need assistance with functional limitations in order to remain active in the workforce, in the community, or in their homes. These populations, who have some financial resources, would benefit from receiving assistance with paid care and still retain enough of those resources to maintain their independence and degree of self-sufficiency for as long as possible. A mechanism providing financial protection and support for this population, many of whom might otherwise have to rely on Medicaid, should reduce Medicaid's total LTSS expenditures in the future. Financing for a new mechanism could rely, in part, on redirecting federal, or federal and state expenditures that would have otherwise been allocated for Medicaid LTSS.
The conversation about financing paid LTSS today should not overlook the many people making sacrifices in their own lives to provide unpaid care to a family member or friend. The value of unpaid care today is estimated to be nearly twice the value of all paid LTSS (Feinberg, Reinhard, Houser, & Choula, 2011). Should the opportunity for financial support in purchasing paid caregiving present itself, some portion of informal caregivers would avail themselves of paid care to supplement or substitute for some portion of their informal care. For many, that respite would be a welcome relief and something that improves their quality of life. To avoid monetizing too large a portion of unpaid care, it will also be important to include programs that can help unpaid caregivers continue to provide LTSS.
Closing the gaps in financing LTSS will require a combination of approaches that can help people allocate resources for LTSS well ahead of when they develop functional limitations. Approaches could include policy to increase public awareness of the LTSS risks and the importance of adequate preparation and to provide incentives for preparation, market reforms to enable the creation of vehicles that can protect against LTSS risks in the context of adequately preparing for retirement income needs, and government mechanisms to broadly pool risks and create additional financing through reallocated or new private and public funding.
Consideration of a larger public role in financing LTSS, however, will need to be predicated on an assurance that this will be done efficiently, that it will reduce the growth in LTSS expenditures in programs like Medicaid, and that it will improve the quality of life for those who receive LTSS. Ongoing work to integrate LTSS and medical care, develop new payment models, and improve needs assessment and care planning may reduce the growth in medical care expenditures by better utilizing LTSS.
The Challenge in Designing a Public Policy Solution
Most approaches to increasing asset accumulation and assuring affordable and accessible LTSS involve a mix of individual responsibility and private and public financing mechanisms. While many alternative benefit and funding approaches have been discussed in general terms over the years, the ability to design details and assess the cost and impact of various designs has been stymied by a lack of good population and actuarial models. This may be changing in the near future. As various groups work on developing and costing more detailed options, there are several issues that need to be considered.
Different Population Needs
The benefits and financing mechanisms will need to be responsive to the diversity of the population needing paid LTSS. Two different approaches may be needed—one for younger adults with disabilities that is responsive to the more immediate needs that are often unanticipated, and the other for older adults that can take advantage of the greater opportunity they may have for advance planning and preparation.
The benefits and financing mechanisms will need to be responsive to the diversity of the population needing paid LTSS.
An important justification for new public spending on LTSS would be the Medicaid savings generated, either by postponing or avoiding eligibility of the population that would otherwise spend down. The size of this group will vary depending on the structure of covered benefits and out-of-pocket costs in the LTSS program and the impact of the program on the accumulation and use of personal savings and insurance. A program that provides some relief to individuals with catastrophic LTSS costs will generate greater Medicaid savings the lower the eligibility threshold. The size of the group will be different for younger adults with disabilities and older adults, so the analysis of Medicaid impact should assess the effects separately for these different subpopulations.
Availability of Other Resources
Personal responsibility and individual resources will remain an important source of financing under any comprehensive financing proposal. Public insurance approaches will be far more expensive if they have the effect of discouraging the accumulation and use of personal resources. An important set of questions revolve around the amount and types of assets people have at various points in their lives and the potential to use these assets to pay for LTSS. Some assets are not liquid enough or are subject to limitations on distribution that interfere with their allocation for LTSS. Creative approaches to increasing the use of personal resources for LTSS would include efforts to convert home equity, enable life insurance or annuity conversion for LTCI, or encourage development of hybrid or combination of insurance or annuity products.
Impact on Family Caregiving
The availability of public insurance or some other financing mechanism for LTSS will provide an opportunity for many family caregivers to use paid caregiving for part-time assistance or respite or as a complete substitute for their informal caregiving. An important set of questions relate to the size of the intentional or unintentional monetizing of this volunteer activity (generally referred to as the “woodwork effect”). Minimizing the amount of unpaid care that would be replaced with paid, publicly supported caregiving would of course minimize the cost of a program; the lack of any woodwork effect, however, would mean a financing mechanism that fails to meet a large societal need. A program providing first-dollar or front-end benefits may be more likely to monetize unpaid care giving than a program with a high-deductible, or catastrophic or back-end benefit, although it would provide some caregivers with much needed respite care.
Benefit Design Choices
Answers to questions about the size of the insured risk and the distributional impact of a policy proposal depend on the structure of coverage and benefits. A front-end or first-dollar benefit design would insure a large and diverse population in terms of income and functional need; the cost of the program depend on the time or dollar limits placed on benefits, but a benefit lasting significantly more than three years could have a potentially large volume of payout.1 A back-end or catastrophic benefit design, which would have either a high-deductible or a time-specified attachment point, would cover a much smaller, higher income population since only about 20% of persons needing LTSS need more than five years of assistance (Kemper, 2005). Designing the insurance program and its financing requires a reliable estimate of the size of the population and its risk and the impact the program would have on both Medicaid eligibility and unpaid caregiving.
The Gap Population
A key target population for policy intervention is people with too many resources to qualify for Medicaid but not enough to afford private insurance or pay for (“self-insure”) expenses over an extended period. This population would be at risk of spending down to Medicaid in the event of a protracted illness and extended need for LTSS. It will be important that an insurance or benefit program interacts with and makes use of (and not substitute for) this group's personal resources. Designing the right insurance or benefit program for this group requires an understanding of the group's size, diversity, resources, and patterns of LTSS spending. A public program with a front-end benefit would cover their short-term LTSS needs, extending how long their personal resources would last, postponing or even avoiding the need for Medicaid. Public catastrophic insurance would provide benefits only to those with very expensive or extended LTSS needs. Capping an individual's total expense would reduce uncertainty and make it easier to privately insure or self-insure potential expenses up to the cap, but it would help primarily those with individual insurance or assets to protect and leave those with few resources without financial support in the short term. Creative ideas have been advanced, however, for adjusting the waiting period for catastrophic insurance for an individual's income (Commission on Long-Term Care, 2013, pp. 79–80).
Financing Integrated LTSS and Medical Care
New models of care aimed at integrating medical care and LTSS are emerging that raise the possibility of reducing acute care needs through the integration of lower cost LTSS. Should these models yield acute health care cost savings, it is possible that health plans could finance a limited amount of services and supports through the existing per member per month payment. Current Centers for Medicare & Medicaid Services demonstrations are testing LTSS integration with Medicare–Medicaid dual-eligible beneficiaries, where additional LTSS payment is possible through Medicaid. Success in these demos could open up the possibility for new financing approaches that offer LTSS supplements for health insurance premiums or that provide group LTSS benefits through existing health plans.
Major Design Issues
The design of an affordable and sustainable LTSS benefit or insurance program will require a number of detailed judgments about the populations to be covered, the extent of the coverage, the benefits, financing, and the interaction of public and private resources. Questions that will need to be addressed in designing the programs include the following.
What kind of financing structure would work for public insurance—combining federal/state clawback, charging premiums, copayments, new taxes?
What can states do individually without federal action? What would require federal regulation or legislation?
Is a mandate needed to ensure a sizable and stable risk pool? What combination of incentives and disincentives or penalties would yield enough buy-in to make it work?
How can public and private resources be most effectively combined (e.g., offer combined private/public insurance with a single premium, get Medicaid to pay premiums for its population)?
What regulatory changes, incentives, and innovative commercial offerings are needed to enable people to bring all of their financial resources into play: home equity, pensions, retirement savings, and annuities?
What is the best approach to timing introduction of the financing and benefits? An emphasis on developing assets over time focuses the impact of the programs on future retirees. What can be done for people already retired or who will begin retiring in the near future? What can be done for younger adults with disabilities?
How can benefits and costs be balanced for purchasers, so that premiums are viewed as reasonable in light of the risk exposure that is being reduced?
A Short-Term Approach
Much work, including extensive data analysis and modeling, needs to be done before a credible, affordable, sustainable, comprehensive program for financing LTSS can be advanced among stakeholders, the general public, and their elected representatives. There is no immediate imperative to put such a big idea before the Congress. With the current debt, deficit, tax, and spending challenges facing the nation, there is not currently an appetite among legislators for a major expansion of federally funded benefit obligations. In addition, the current partisan stand-off makes it difficult for members of Congress to even consider enacting large-scale programs.
Even without a single big answer ready to go, though, there are many smaller scale changes that could realistically be made in the near term, and would have an impact of LTSS financing. These include the following.
Reform of private LTCI through state legislation and regulation.
Private-sector initiatives to develop and offer new commercial products combining life insurance, annuities, and home equity conversion with private LTCI.
Modest federal legislation and regulation that could amend retirement income rules to permit more creative uses for retirement funds, address limitations in Medicaid and Medicare financing of long-term care, and help provide new ways to integrate public and private financing.
Development of a broad-based advocacy community that can eventually rally around a comprehensive financing approach and perhaps a specific proposal. The community will need to effectively promote the approach with their own memberships, with the general public, and with influential members of Congress. In addition, the community will need to organize a campaign to promote the idea with the general public and keep the issue before members of Congress during the upcoming mid-term election.
Meanwhile, additional work needs to be done to build and promote the case for a comprehensive financing solution that would combine public and private resources and include a public insurance solution.
Better data and modeling are needed to understand the potential costs and impact of various insurance solutions, including the costs and impact of either front-end coverage or a catastrophic insurance program.
A design is needed for a benefit that would adequately protect people with moderate income and assets from a loss of financial security and independence due to unaffordable LTSS costs, but would keep their resources engaged.
A public funding strategy is needed that would minimize the role of new public funding and new taxes, would repurpose existing state and federal LTSS spending, and would build on and encourage the use of private resources through reasonable out-of-pocket payments (in the form of premiums, deductibles, and coverage limits).
The Commission called for public policy to improve financing of LTSS that would reflect a comprehensive and balanced approach to public and private responsibility and that would encourage individuals who could prepare adequately to finance their own LTSS needs while ensuring a strong safety net remains for those who could not prepare. The Commission also proposed that insuring the most devastating LTSS costs through catastrophic insurance would clarify the need for Americans that have resources to prepare adequately through private savings or insurance to meet their more immediate LTSS needs and help stimulate individual efforts to prepare.
Over the next few years, it is important that we take the Commission's basic vision forward, address the analysis and design challenges in developing a specific proposal, line up broad nonpartisan support for a solution, make the small changes that can happen now at the state and federal level, and prepare to interact with the Congress on a comprehensive and balanced solution when the opportunity presents itself.