Long-Term Care: Another Tough Subject For The Next Round Of Reform

Democrats and Republicans may spend the next two years fighting about what to jettison or retain in the Affordable Care Act. In whatever fashion these conflicts are resolved, we'll be back -- at some point soon -- to address another looming challenge: long-term care.

This is a big problem. Less than 4 percent of American adults, and only about 10 percent of seniors, possess LTC insurance coverage. As Michelle Andrews previously noted for Kaiser Health News, such policies are costly. So most Americans do not purchase them. And there's a reason why these policies are expensive. The average nursing home stay is 2.5 years. The cost of such care would deplete the finances of most senior citizens, at minimum leading them to seek Medicaid assistance.

The health law includes some valuable components for long-term care. As regular readers know, the Community Living Assistance and Social Support Act is a voluntary disability and long-term care insurance program for workers. Slated to begin next year, the CLASS act will be financed through monthly insurance premiums. After five years of vesting, qualifying beneficiaries will receive a cash benefit for qualifying expenses that will vary with disability and will be sheltered from Medicaid asset tests. Over time, CLASS has the potential to keep millions of people off Medicaid and out of an institution. It will also cover many expenses that disabled people and their caregivers would otherwise bear without help.

The health law also includes other provisions and demonstration projects to improve home- and community-based services. For example, it includes improved medical bankruptcy protections for the spouses of disabled persons receiving home or community-based services. Unfortunately, these humane measures are not scheduled to take effect until January 1, 2014, and will expire on December 31, 2019.

Despite these components, the overhaul left much undone. CLASS addresses the risk of future disability among current workers. It does not help people whose disabilities prevent them from working in the first place. Its benefits also are modest when compared with the cost of nursing-home care. CLASS' voluntary contributory structure limits its reach, though no one at this delicate stage really knows how many people will take up this benefit or how employers will react to the new program.

Health reform did not address other prominent concerns. States face large and growing burdens for Medicaid, the single largest payer for long-term care services. In part in reaction to these burdens, and in part in reaction to political battles over health reform, some states have announced at least the prospect of significant cuts to programs for the elderly and the disabled. For example, South Carolina has announced that its Medicaid program will stop covering hospice care and that the state will cut its meals- on-wheels program.

Individuals who require long-term care services face other burdens, too. They and their caregivers require more access to home- and community-based services, and greater help in choosing services that are most effective for their specific circumstances. Individuals and families face big financial risks, including the genuine risk that one could lose one's life savings in the event one requires long-term care. Each of these problems is likely to worsen in the years ahead.

Moreover, the firms that provide long-term care insurance also need help. One of the largest players in this market, Metropolitan Life, recently announced that it would not offer new long-term care insurance policies after Dec. 30. Other firms have left the business or seek steep premium increases.

The Met Life story didn't get much play. I believe we will see more stories like it, given increasingly serious economic challenges that beset the long-term care insurance market. Fundamentally, private insurance is just poorly suited to providing reliable and effective coverage for long-term care.

Why is this? Private insurance markets work best to protect individuals against well-understood idiosyncratic risks. Insurance markets work poorly when risks are strongly correlated across the population, and when people don't trust insurers to cover what will become the reasonable standard of care.

Nearly 20 years ago, David Cutler noted that the above challenges are particularly daunting in long-term care. Many of the biggest risks are systematic: How much will it cost to care for dementia patients in 2040? No one really knows.

Adverse selection also is a key concern. Will individuals with chronic illnesses be able to buy coverage when they need it, and at what cost? There is wide variation in people's health status. Moreover, a relatively small fraction of people now own such policies. It is a big challenge to ensure that relatively young and healthy people are willing to buy coverage. At the moment, anyway, the American public seems allergic to the individual mandate, the single most powerful mechanism to address this problem. If anything, an explicit or implicit mandate is more important for LTC than it is in addressing the issues that dominate the current health reform debate.

There is also a delicate trust issue. When I buy a LTC policy today, I have no idea what the reasonable standard of care will be in 2040 for dementia or heart failure. Tens of millions of Americans do not trust this industry to exercise its discretion fairly in deciding what should, eventually, be covered.

One's insurer might also go broke over the coming decades. How will these firms' investments perform, relative to medical care cost growth, over the years ahead? Will future financial crises damage insurers? American International Group's commercials featured the tagline: "the strength to be there." AIG's travails remind us of the obstacles and risks that can arise within the overall economy.

Finally, there is the role of Medicaid -- whatever it will look like 30 years from now. Incentives to buy long-term care insurance are lessened by real or perceived possibilities that patients may be bailed out through public coverage.

For these reasons and more, our current arrangements for long-term care and financing are badly frayed.

Many approaches to restructure these arrangements have been presented. The best of these approaches embed private insurance within Medicare and Medicaid. All of these models include marked expansion of the public role, particularly the federal role, relieving states of a difficult burden. At minimum these arrangements provide a catastrophic insurance backstop for private coverage. At maximum, they provide more expansive universal public coverage. None of these approaches presume that private coverage, in its current form, can provide a viable financial foundation for long-term care, except within a minority of rather affluent Americans.

Health care reform is a continuing project, not something that can be enacted in a single bill or a single congressional session. Long-term care is one of the biggest agenda items left unfinished in the health care law. We'll have to face it. Better sooner than later.