Financial Planning for Long-Term Care

First and foremost, long-term care is not simply synonymous with nursing homes. Consequently, financial planning for long-term care is not concerned only with nursing homes. As it has developed since 1980, long-term care includes a range of options, and the financial planning process should systematically evaluate the nature of and the trade-offs among the financial and nonfinancial characteristics of these different kinds of long-term care.

"Long-term care" typically refers to chronic, long-lasting care rather than to care that is more or less completed in a few weeks or months following an illness or hospitalization. This time dimension is important to recognize because some of the care services and facilities (e.g., a nursing home) can offer both short-term rehabilitative care after surgery and long-term residential care in the same building. Knowing that "nursing home care" is not identical to "long-term care" and understanding this difference is financially important.

In particular, most health insurance will pay for care in a nursing home that is short-term, posthospital recuperative care but will not pay for chronic long-term care that may be provided in the same facility. The national Medicare program, for example, embraces such a distinction: it pays for short-term care after surgery that can take place in a nursing home but does not pay for chronic care. Because of confusion surrounding this distinction, national studies of financial literacy concerning health, finance, and long-term care have found that many people incorrectly believe that Medicare will pay for chronic long-term care—a mistake which can have severe financial consequences for those who hold this view.

The term "long-term care" most often (but not exclusively) concerns older people whose increasing physical or mental frailty leaves them unable to fully take care of themselves. At its most Figure 1 Middle-Agers' Support for Their Children vs. Their Parents SOURCE: Based on: Cutler, N. E. Advising Mature Clients: The New Science of Wealth Span Spending. New York: John Wiley and Sons, 2002. general level, long-term care refers to a broad range of supportive services that includes personal, social, and residential as well as medical services. Variations on long-term care include the number and intensity of these kinds of services as well as the residential context in which they are delivered. For some older people long-term care may begin and end with assistance with shopping or cooking, and transportation to the doctor as they continue to live in their own home or apartment. For others, long-term care is full-time, medically driven nursing care in a government-licensed residential institution. Different points on this continuum of course imply different levels of cost and financial planning. The following discussion is only an introduction to home care, assisted living, and nursing homes, and is not intended as a complete consumer's guide to the many and increasingly available variations within each general type.

Home care. Most older persons prefer to stay in their own home rather than move to an "institution." The accomplishment of this goal is a function of the older person's needs plus the capacity of the family, community, and financial resources to bring the required personal and medical services into the home setting. While the psychosocial desire to stay at home is often paramount, some people may view home care as a financial question, asking if (or assuming that) home care is substantially less expensive than institutional care.

The most accurate answer to this financial question is "maybe." If family and friends will provide most of the personal, medical, social, home chore, and transportation services, then costs will certainly be lower. If, however, even some of the care is provided by paid caregivers or through a commercial home care service, then the following questions become relevant: Who will identify, screen, and choose the caregivers? Who will monitor caregiver performance and pay the bills? Who will be responsible for tax, insurance, and other legal and procedural details? In sum, home care is not always preferable to institutional care, at least from a financial and administrative perspective. The Encyclopedia of Home Care for the Elderly (Romaine-Davis et al.) and Hiring Home Caregivers: The Family Guide to In-Home Eldercare (Susik) illustrate the breadth and complexity of the home care approach.

Assisted living. Between traditional nursing homes and home care is assisted living. In years past such labels as "board and care homes" and "congregate housing" were used to identify residences where older people receive meals, housekeeping services, and some protective oversight, but relatively few health or therapeutic services. In some cases the "facility" was nothing more than the unused bedrooms of an elegant old home, now rented to reasonably healthy and ambulatory older people, with hotel-like rather than hospital-like accommodations.

The growth of assisted living as a separate kind of long-term care is a reflection of the growth and financial resources of the older population, the increasing capacity to remain healthy and reasonably independent at advanced age, and the continuing negative images of nursing homes as "old people's homes" and "institutions." Thus, as the architect and gerontology professor Victor Regnier notes, "assisted living is a long-term care alternative which involves the delivery of professionally managed personal and health care services in a group setting that is residential in character and appearance in ways that optimize the physical and the psychological independence of residents."

The key elements of the definition are "independence" and "residential in character." As the commercial assisted living industry has grown, many facilities provide greater support for higher levels of frailty and dependence; many (depending on state laws and regulations) have professional nurses on site and medical staff on call, and provide regular health monitoring, pharmaceutical management, and physical therapy. While there are many factors that contribute to the various amounts charged by different assisted living facilities (such as location, size of staff, elegance of housing, choices and specialties of meals, availability of health-related services), two generic financial alternatives should be evaluated.

The hotel model vs. the condo model. Most assisted living residences operate financially on a residential hotel model, meaning that the resident pays a monthly rental; there may or may not be a binding annual contract. For the monthly fee the resident receives a private (or semiprivate) room including a bathroom with shower or tub; housekeeping and linen service; and two or three meals per day served in a congregate dining room. The cost of the basic monthly room, board, and service may vary within the same facility depending on the size of the room and its location within the building. Some facilities offer rooms to be shared by two roommates or a married couple.

The condo model includes the same range of housing and services, the main difference being that the older person purchases the residence. This model of assisted living is often known as the continuing care retirement community (CCRC). Because the down payment can be quite expensive—from $50,000 to $200,000—these facilities and their services and meals are designed for the more affluent. Within the facility the residential space can vary from a small efficiency apartment to a two- or three-room apartment or town house designed for a married couple.

The "continuing care" feature of CCRC facilities implies that in addition to residential and assisted care services, the resident is purchasing more extended, future-oriented, contractually defined long-term care services. (In earlier years CCRCs were known as life-care communities.) CCRCs typically have hospital or nursing home "wings" as part of the main building (or campus), or have access to such facilities and services nearby.

One unique financial planning issue concerns the facility's rules about the refund of the substantial down payment if the resident dies or moves elsewhere. Some facilities define the buy-in money not as an actual purchase but as advance payment, a kind of mandatory endowment to support the enterprise. They typically offer return-of-payment schedules linked to length of residence. For example, the down payment may be returned minus 2 percent per month; if the resident moves out after twelve months, then 24 percent of the down payment is retained by the CCRC and the remainder is refunded. Given the substantial amounts that are involved, these financial considerations become as important as the personal, location, service, ambience, meal, and other elements of the decision process.

Costs and levels of service. Assisted living facilities charge for personal and health services using either of two basic approaches. In some facilities there is no separate charge for the assistive services; all residents pay the same amount, incorporated into their monthly fee. In this approach healthier, less dependent residents are subsidizing the greater service utilization of the more frail residents. The implied financial and social ethic is that eventually most residents will use additional services, without an increase in their fees, and so the cost-benefit ratio balances out.

Many assisted living facilities use the level of service required as a basis for differential costs per resident. Upon entry to the facility the new resident receives a physical, cognitive, and health assessment, and may enter as a "basic independent services" resident or be assigned to one of three or four higher service levels. The cost of the required level is added to the basic room and board costs.

A hybrid of these two financial approaches is one in which there is a single flat fee for all residents but (like a hotel) with additional charges for services as needed (e.g., requesting room service for meals, asking for additional transportation services, using optional health-related services, etc.).

Some facilities take the view that charging for specific services could inhibit an older person from requesting needed services. Professional assisted living should encourage people to take their meals, to be involved in social activities inside and outside the facility, and to remain as vital and independent as possible. To charge older persons, many of whom are children of the Depression, may encourage them to skip a meal or decline an invitation, in order to save money. Considering the contrasts between these fee for service vs. pooling of risk approaches, careful long-term care planning requires consumers to understand and evaluate the financial consequences as well the psychosocial implications.

Nursing homes. Although long-term care is not synonymous with nursing homes, nursing homes are the most identifiable kind—and symbol—of long-term care, and remain the most prevalent kind of long-term care. According to data reported by the U.S. Health Care Financing Agency (HCFA), in 1997 there were seventeen thousand Medicare/Medicaid certified nursing homes in the United States, representing some 1.8 million beds. A full explanation of the variation in nursing home care is beyond the scope of this entry. Dozens of books are available on how to choose a nursing home, what to look for in a visit to potential residence, and the current rules concerning public payments for nursing home care (through the Medicaid program). Good places to start are the articles on nursing homes in this volume and in the Encyclopedia of Financial Gerontology. Both general information and consumer choice guides are presented on the Medicare Web site and on the Web sites (included in the bibliography) of the American Association of Homes and Services for the Aging and the American Health Care Association, whose members include nonprofit and for-profit nursing homes, respectively.

The important financial issue to note at this point is the substantial cost of long-term care in nursing homes. In addition to the residential and personal care provided, as in assisted living facilities, by their very nature nursing homes provide much more intense, higher-level health and medical services to their residents. Nursing homes are licensed by state government agencies, and certified by the Centers for Medicare and Medicaid Services (CMS) to receive Medicare and Medicaid payments. These licenses and certifications determine the medical services that must be present in the nursing home, as well as the staff and licensing requirements for various levels of professional nurses, medical doctors in residence or on call, other health practitioners, and a variety of other health, hospital-like, and protective services.

All of these services are costly, so the monthly cost for nursing home care is substantially greater than for home care or assisted living. Federally collected data show that in 1995 the cost of care in the average nursing home was $127 per day, or over $46,000 per year. It is also important to note that nursing home costs vary substantially from state to state and from city to rural areas within states, including costs of $200 per day in some parts of the country. Clearly, in evaluating the financial dimensions of long-term care planning, average numbers are only vague guides, and consumers should identify the most recent nursing home costs for the specific geographical area that is likely to be chosen.