Joe Donahue’s mother Alice Donahue spent her last three years in a Connecticut nursing home, slowly succumbing to Alzheimer’s disease. Her three sons, who lived nearby in central Connecticut, visited regularly. By the time she died in 1990 at age 86, her modest estate—about $200,000 all told--had succumbed as well, used up to pay for her care.
Once her savings, investments and house were gone, Medicaid stepped in to cover her nursing home bills until she died. But the experience left Joe Donahue, now 81, her middle son who retired from his job as a district director with the postal service the year before she died, frustrated and determined not to let the same thing happen to him.
“I want to have assets left to leave my kids,” he says Donahue, now 81, who lives in West Hartford.
It’s a problem many middle-income families grapple with. They’re not well off enough to comfortably finance a lengthy stay in a nursing home, but not so poor that they’ll immediately qualify for Medicaid if they need long-term care.
Medicare, the federal program for the elderly, covers little long-term care. Long-term care insurance, which pays benefits for a stay in a nursing home or assisted living facility as well as for home care, could offer some financial security. But in 30 years, it has failed to make substantial inroads, and only about 10 percent of seniors have coverage. Most who buy it tend to be relatively affluent, earning more than $75,000 a year, with at least $100,000 in liquid assets.
That may soon change. In recent years, states have been moving aggressively to establish programs that encourage middle-income people who might otherwise “spend down” their assets and rely on Medicaid, the state-federal program for the poor and disabled, to purchase private long-term care insurance instead.
The deal that states offer sounds sweet: Purchase a long-term care “partnership” policy, as it’s called, and in the unfortunate event that you exhaust your insurance benefits and still need care, you can qualify for Medicaid and still retain some or all of your assets. (Typically, Medicaid eligibility is limited to low-income people with assets of $2,000 or less.) Still, experts worry that partnership policies may not live up to their promise, largely because some consumers may not buy the tough inflation protection they need to protect their benefits’ value.
Under the policies, assets are protected on a dollar-for-dollar basis. Someone who wanted to protect $160,000 in assets, for example, might buy a policy that paid a benefit of $150 a day for three years, for a total value of $164,250. The daily benefit amount that people choose should reflect long-term care costs in their area.
As for policy duration, since the average nursing home stay is about 2.5 years, people typically buy three to five years of protection, says Chad Shearer, a program officer at the Center for Health Care Strategies, a non-profit that provides technical assistance to help states develop these programs.
For their part, states hope that partnership policies will relieve some of the pressure on their overburdened Medicaid programs, which currently pay the bills for about 70 percent of nursing home patients. To date, 43 states have either set up partnership programs or are in the process of doing so, according to the Center for Health Care Strategies.
Private insurers can sell only state-approved policies, and some states establish other guidelines to protect consumers. They may set minimum daily benefit levels, for example, or guarantee that residents’ policies will be honored even if the state partnership program ceases to exist.
Long-term care insurance policies, partnership or otherwise, generally begin to pay when someone is unable to perform daily activities like dressing or eating, or is cognitively impaired (in fact, about half of all claims are for people with Alzheimer’s disease or other cognitive problems).
Apart from deciding how much insurance to purchase, perhaps the most important decision is what type of inflation protection to buy. Long-term care insurance has a long “tail”: someone who buys a policy in her early 60s might not tap the benefits for 20 years or more. Robust inflation that keeps pace with rising costs is therefore essential. All partnership policies sold to people under age 76 must have some inflation protection, but state requirements vary widely, and consumer advocates are concerned that many states aren’t setting stiff enough standards, tempting consumers to skimp on this critical coverage.
Good inflation protection isn’t cheap. A 60-year-old who bought a five-year policy with a $150 daily benefit and 5 percent compound inflation protection—considered the gold standard--could expect to pay $3,147 annually, according to a report released in June by Avalere Health, a Washington health care consulting firm, and the Kaiser Family Foundation. (Kaiser Health News is a program of the foundation.)
If the same person bought that policy with inflation protection pegged to the consumer price index, the premium would be 29 percent less, or $2,445, according to the report.
Uncertainty about the “partnership” aspect of these policies is also cause for concern. Marrying a complicated product like long-term care insurance to a complex and constantly changing program like Medicaid, some believe, creates the potential for serious problems down the road.
To qualify for Medicaid, for example, someone must have both limited income and few assets. If a policyholder’s income exceeds state Medicaid eligibility guidelines, he may never be able to qualify for Medicaid in the first place and thus be unable to take advantage of the asset protection portion of his partnership policy. In fact, he may have to tap his protected assets to cover his care.
“Insurance has to understand exactly how Medicaid works, and vice versa,” says Bonnie Burns, a training and policy specialist with California Health Advocates, a Medicare education and advocacy organization. “I don’t believe this is happening to the degree that it needs to.”
Although most states are just now getting their programs off the ground, the Partnership for Long-Term Care got its start back in the 1980s as an insurance model developed by the Robert Wood Johnson Foundation to encourage middle-income people to buy long-term care insurance.
By 1992, four states—California, Connecticut, Indiana and New York—had received approval from the Centers for Medicare and Medicaid Services and put partnership programs in place, using seed money from the foundation.
But questions about the program--Congress wasn’t sure whether it would actually save Medicaid money, or add to its costs—prompted legislators to prohibit other states from launching new programs, and the partnership program stalled until the Deficit Reduction Act of 2005 lifted the moratorium. The original four partnership states require 5 percent compound inflation protection.
An analysis conducted by LifePlans for AARP concluded that that level of protection would likely cover about over 80 percent of a policyholder’s future nursing home long-term care costs (assuming an adequate daily benefit in the first place).
In Joe Donahue’s case, a few years after his mother died, he bought a partnership policy with a three-year, $150 daily benefit and 5 percent compound inflation protection. Although his premium has stayed level at $1,700 annually, if Joe needed long-term care now, his policy would pay $247 per day and allow him to protect $270,465 in assets.
That benefit would cover about 71 percent of his daily costs, based on the median daily rate of $345.94 for a private nursing home room in Connecticut, according to the 2009 Genworth Cost of Care Survey.
But the Deficit Reduction Act didn’t require that level of inflation protection for all partnership policies. The law specified that policies sold to people under age 61 contain some level of compound inflation protection, and those sold to people between 61 and 76 have some sort of inflation protection, though it could be simple interest or tied to the consumer price index, for example.
It’s up to the states to set the precise standards, however, and so far few are mandating 5 percent compound inflation, according to the Avalere/Kaiser report. Instead, state standards more often require “not less than 3 percent,” or “1 percent” or simply “any amount,” the report says.
It’s too soon to know whether the partnership model will save state Medicaid programs money. But judging from the rush to set programs up around the country, it’s clear states are eager to test it. In South Dakota, officials rolled out their program in July 2007, with 17 insurance carriers on board. In the first year they signed up 987 people, increasing long-term care insurance penetration in the state by about 3 percent. With a population that’s aging more rapidly than the nation,
“We need all hands on deck to deal with it, and we see the partnership program having a role,” says Kim Malsam-Rysdon, deputy secretary of the South Dakota Department of Social Services.
Preliminary estimates of potential state savings have been mixed. A 2007 General Accountability Office study of the original four partnership programs found that they were unlikely to result in Medicaid savings. But supporters of the program say the GAO analysis was flawed.
Meanwhile, data from Connecticut, the first partnership state whose program began in 1992, are somewhat encouraging. A state analysis found that of 39,000 policyholders, 980 have used partnership benefits. Just 57 of those people had to go on Medicaid, says David Guttchen, director of the Connecticut Partnership for Long-Term Care. Estimated state savings since the program started, based on people who either delayed going on Medicaid or avoided it entirely: $7 million.
“For most of these folks, their private insurance proved to be sufficient,” he says. And that is exactly what both consumers and states are hoping the partnership program achieves in the long run.