Around the World in 80 Ideas   


WELFARE & PENSIONS
21: Partnerships for age
Financing long-term care



The problem: the cost of age

The populations of the developed countries are getting older, and there is a growing need for long-term social and nursing care. Since many people reaching retirement are relatively wealthy, governments have little appetite for financing such care for everyone. They prefer to make state aid available only to the desperately poor. On the other hand, long-term care insurance is expensive, so few people can afford to protect themselves from this major risk. And when the insurance has run out and people have exhausted their lifetime savings, that is when the state will come in with help anyway. So why should anyone bother to save and insure at all?

The idea: sharing the burden

A number of jurisdictions in the United States now have partnership arrangements, whereby if individuals pledge to take on some of their own long-term care risk, taxpayers will take on the remainder in a partnership arrangement.

Examples: different approaches

For many years the United States has had tax-funded Medicare and Medicaid programmes, designed to provide access to healthcare for the poor and elderly respectively. However, there is growing doubt that these programmes are the right way to pay for long-term care. They cover skilled nursing activities, but expensive care from skilled nurses in fully-equipped homes and hospitals is not what most elderly people need: their needs can be satisfied much better in much cheaper ways, often by social care support in their own homes.

To attempt to control these costs, many states adopted a policy of restrictions, cutbacks, and rationing. New York placed a moritorium on new nursing home beds as long ago as 1977. Massachusetts did the same in 1989, and installed measures to tighten the eligibility for care-home places and cut reimbursement rates too. And other states have tried to move care into lower-grade but perhaps more appropriate community care settings: thus about 75% of Oregon's elderly are cared for in their homes or in local care, rather than in expensive hospitals.

But there are more progressive solutions around as well. Some US states, such as Colorado, enter into a more explicit partnership with families, providing cash allowances to those who are looking after frail relatives at home, rather than sending them into institutional care at the expens of the taxpayers. The United Kingdom similarly provides the disabled, of whatever age, with an 'Attendance Allowance' to help them pay directly for the care they need while at home.

A number of American states have gone further, however, through a range of innovative programmes to encourage individuals to purchase long-term care insurance to protect them if and when they need care in retirement. Indiana established the first of these in 1987, and New York, California and Connecticut now have roughly similar schemes.

Traditionally, taxpayer aid has been available only to those without assets sufficient to pay for their own care. Thus people who have saved (or insured themselves) prudently and responsibly might find themselves ineligible for any assistance, while others who have squandered money throughout their lives are entitled to Medicaid.

This is not only unfair, but it is a direct disincentive against self-provision. All the more so because risks in long-term care are hard for insurers to assess - a long-term disability may last many years - making it hard, expensive, or impossible for a prudent person to obtain full coverage for the risk. So even the most prudent savers may see all their assets being exhausted in paying for their care, or their insurance benefits running out. If the government then steps in, they might well wonder why they bothered. Similar problems arise in other countries which rely heavily on means-tested social benefits.

Responding to this moral hazard problem, the state of New York agrees to protect a family's assets if they buy a long-term-care insurance policy that will protect them against most of the expected risk. Under the plan, such families can keep their assets when their insurance runs out, but will still qualify for Medicaid.

To qualify, people must purchase a policy that covers at least three years of nursing home care, six years of care at home, or a combination of the two. The policy must pay inflation-proofed benefits of a specified level and fund respite care for at-home carers.

California, Indiana and Connecticut use a slightly different system - ring-fencing - whereby each dollar paid out by an approved policy entitles the family to keep a dollar of assets intact when they are means-tested for Medicaid.

Assessment: error of imposing new costs

These partnership arrangements represent a very rational division of risk between individuals, insurers, and taxpayers. Because long-term-care risks are uncertain, to insure someone against every eventuality, including the prospect of a very lengthy period involving very expensive care, is simply impossible. But prudent families want to make at least some provision for themselves, and to see that there is some direct benefit for the sacrifice of so doing. So it makes sense for individuals and insurers to pick up the first tranche of the risk (say, the first few years in care) through saving and insurance; but for the government to take on the uninsurable risk beyond that. That means that individuals are incentivized to make provision for themselves, while the government is saved the possibility of everyone simply spending down their assets until they qualify for state assistance.

Certainly, these arrangements have not spurred the sale of a large number of qualifying policies. Some tens of thousands of policies have been sold in New York - but then the state has an elderly population of over 2.5 million. Furthermore, many of those who have bought these policies have been relatively well-off, savers who have been determined to ensure that at least something is left to pass on to their children.

It may be that people are fundamentally unwilling to think about long-term care costs, hoping that they will be lucky and that they will be able to afford whatever care they eventually need: in other words, that this insurance product will never sell widely. Equally, though, state-imposed costs on insurers may have taken the edge off a promising idea.

The states which have used these partnerships have flexed their regulatory muscle, demanding that qualifying policies fully protect holders against inflation (which can double the cost of a policy) and other expensive risks. These rules make qualifying long-term-care insurance policies even more expensive than the norm, and must severely reduce the number of people who are potential purchasers.

On the bright side, there is some evidence that fewer people are deliberately 'spending down' their assets, or passing them on (legally or illegally) to their children in order not to have to pay for their own care but to get taxpayers to meet the whole bill.

The ring-fencing concept remains, however, a useful approach to many of the moral-hazard problems caused by means-tested state benefits. If those who are prudent enough to save or insure retain some advantage over those who merely squander or spend down their assets, then more people are likely to opt for the responsible course. The details might vary, but the concept can be applied to pension savings, medical insurance, education fees and much else.

For further information:
  • Information on New York State's Partnership for Long-Term Care can be found at www.nyspltc.org
  • Information on the Connecticut Partnership for Long-Term Care is at www.opm.state.ct.us



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