Long-Term Care Insurance

Relatively few people have purchased long-term care insurance polices. While the market potential is enormous, public policies may be necessary to further encourage this market. A long-term care financing system that depends on some proportion of the population purchasing insurance may want to focus on public policies that also inform and protect consumers from making inappropriate purchases. This may include public information, tax incentives, or even direct subsidies for the purchase of private insurance.

The real potential for long-term care insurance lies in educating people about the risk of long-term care and their options to pool this risk. In order for the private market to be effective at pooling this risk, large portions of people in their forties and fifties need to purchase policies and continue to make annual premium payments until they are in their eighties. Given what we know about individual purchases of other insurance, including health insurance, this is not likely to happen unless substantial numbers of employers are able to encourage most of their workers to obtain insurance through their workplace. Only then will private long-term care insurance begin to have a significant impact on the financing and delivery of long-term care. However, even if more people started buying long-term care insurance today, it will take another twenty years before these purchases begin to affect the financing and delivery of long-term care.

As our population ages, long-term care expenditures are expected to increase dramatically. Estimates by the Congressional Budget Office suggest that for just the elderly, long-term care expenditures are expected to increase from $123 billion in 2000 to $346 billion in 2040 (in 2000 dollars) (Hagen). The Congressional Budget Office estimates that regardless of how much private long-term care insurance expands between now and 2020, Medicaid spending will still increase substantially. Assuming an increase in private long-term care insurance spending, Medicaid spending would have to increase from $43 billion today to $75 billion in 2020 (in 2000 dollars) to maintain current levels of service to low and middle-income elderly people. If there is no appreciable expansion in private insurance spending, Medicaid long-term care expenditures for the elderly is estimated to increase to $88 billion by 2020 (Hagen).

For individuals, however, private long-term care insurance is the only option for pooling the financial risks of long-term care. Unfortunately, this is a limited and biased option. The benefit that is purchased is usually cash to be used to pay for care and not access to care itself, and the value of this benefit is greater when the policy is initially purchased and less when it is likely to be needed. That is, despite the "inflation" protections that can be purchased, the benefit value is not likely to increase with the risk-adjusted cost. This is because the "inflation" factor is independent of the real costs of care and the inflation benefit is financed in the premium. Moreover, not everyone purchases the inflation benefit for his or her policy. Nevertheless, these policies do pool some of the risks and this is more effective than saving for the contingency of long-term care, which most people are not doing anyway.