Long-Term Care Financing

Private long-term care insurance pays only a small part of the bill—1995, such insurance covered less than 6 percent of all long-term care costs. The market grew during the 1990s, however, and the total number of policies increased from 800,000 in 1987 to almost 5 million in 1996. A 1997 survey conducted by the Health Insurance Association of America (HIAA) indicated that the number of policies purchased increased by more than 600,000 in 1996 alone, the largest number of policies ever sold in one year. The estimated total of 5 million, however, is cumulative; the number currently in force is a fraction of those ever sold, and could be even smaller given the high lapse rate (i.e., insured individuals dropping policies) seen in this industry.

In 1996, approximately 80 percent of the 5 million policies were individual policies. The remaining 20 percent were policies sold either through employer groups or as part of a life insurance package—up from less than 3 percent of the market in 1988. Half of all individual policies had been sold in only nine states. In 1996, the average annual premium for a person at age sixty-five who purchased basic long-term care insurance (covering four years of nursing home care or home health care beginning after the first twenty days of care) was $980. The premium rose to $1,321 with nonforfeiture protection, to $1,829 with 5 percent compounded inflation protection, and to $2,432 with both additional protections.

Controversy has raged around private long-term care insurance since 1990. The private sector has argued that public programs will never meet the demand and that individuals with financial means should not be encouraged to shelter or spend down their assets to become eligible for Medicaid coverage. Consumers and regulators have expressed concern about the lack of affordability and fraudulent marketing practices. A 1997 Consumer Reports article suggested that only 10 to 20 percent of the elderly can afford long-term care insurance, noting that premiums for two adequate policies bought at age sixty-five cost $3,500 per year, or 13 percent of the median annual income of elderly married couples. Whether this figure reflects a high or low proportion of a couple's annual expenditure depends on how much money (primarily assets) the couple has and what else they must buy.

Many observers have suggested that private long-term care insurance might play a more significant role in financing these services if an employer-based group market develops. Premiums for long-term care insurance sold through employers are lower than those sold as individual products because: (1) employers can market to younger people, (2) costs of administration are lower and there are no agent commissions, and (3) employers might use bargaining power to reduce insurers' profit percentages. Employer-based products also offer less stringent health screening criteria or eliminate medical under-writing entirely. A group market, furthermore, offers increased ease and comfort of purchase due to the fewer coverage decisions required. According to the 1997 HIAA survey, 1,532 employers were offering long-term care insurance to their employees and retirees by the end of 1996; up from seven in 1988 and 1,260 in 1995.