How to fund long-term care is a looming crisis

by Jeff Shaw

There is no magic bullet, but private insurers need to be part of the solution

By Brett Murphy

The number of Americans over the age of 65 will nearly double in the period between 2012 and 2030 — increasing from 43.1 million to 72.8 million. Advancements in healthcare and dietary education have increased the average lifespan, clearly a positive development, albeit one that comes with challenging repercussions for the seniors housing and care industry. 

Healthier lifestyles lead to longer lifespans, which leads to seniors being able to retain their physical and mental abilities longer than previous generations. However, that increased longevity also means that more seniors than ever before will need some form of assistance and long-term care.


Eye-opening projections

A U.S. Department of Health and Human Services study indicates about 70 percent of people over the age of 65 are expected to need some long-term care services, and 40 percent are projected to need nursing home care. 

In 2013, national spending for formal long-term services and supports (LTSS) — services from a paid provider covering activities of daily living such as eating, bathing and dressing — totaled approximately $310 billion. Medicaid spending accounted for about $123 billion, or 39.7 percent, of that amount. 

According to the Congressional Budget Office, spending by the federal government, states, and individuals on formal LTSS for those age 65 and older will increase from 1.3 percent of U.S. gross domestic product (GDP) in 2010 to 3 percent in 2050. 

In addition, the cost of providing services is estimated to rise, making up a larger portion of federal and state budgets under the Medicaid program, and significantly impacting families’ savings, according to the Bipartisan Policy Center, a non-profit organization that promotes health, security and opportunity for all Americans. 


Limitations of Medicare, Medicaid

While Medicare pays for short stays in a skilled nursing or rehabilitation facility after hospitalization, it does not pay for long-term nursing home or home care. The other major government healthcare payment program, Medicaid, pays for nearly half of all long-term care in the United States.

In order to be eligible for Medicaid benefits, a nursing home resident may have no more than $2,000 in liquid assets as calculated by Medicaid. Though there are federal guidelines, Medicaid is a state-run program and therefore the eligibility rules are somewhat different in each state. 

The growing concern of how to fund long-term care led to a recent report by the Bipartisan Policy Center titled “America’s Long-Term Care Crisis: Challenges in Financing and Delivery.” The report outlines the roles of funding sources; including Medicaid, private insurance, personal savings, and direct unpaid care provided by friends and family members. 

Further, the authors point out that the demand for long-term care will more than double over the next 35 years. At the current growth rate of healthcare costs, the existing model is not feasible.


Lingering effects of the Great Recession

One of the recommendations by the Bipartisan Policy Center is to fund LTSS through private long-term care insurance (LTCI). In the decades leading up to the Great Recession, LTCI was a viable investment to provide financial security for unforeseen medical costs. 

But by 2008, the LTCI industry suffered from a triple blow of rising healthcare costs, longer life expectancy and a decrease in interest rates. 

Bear in mind that insurance companies base premiums on two of those factors — life expectancy and investment returns. The insurance firms collected cash over the years, expecting to pay out claims based on old life expectancy figures while also expecting to earn more income on their investments of the cash premiums. 

These dynamics left insurance companies searching for ways to raise rates on policyholders and add previously uncontemplated fees. As a result, premiums became unaffordable, leading policyholders to drop coverages even before collecting their benefits. 

The recommendations by the Bipartisan Policy Center recognize that the LTCI industry must be stabilized through policies that will help buttress the industry to keep it profitable while simultaneously ensuring premiums are affordable to a large number of individuals. On paper, these measures would make LTCI policies less risky for carriers while ensuring that benefits keep pace with the rising costs of care. 

For it to be effective, however, a high number of Americans would need to participate. The thesis is that if everyone is insured, some individuals will be sicker and incur more claims, some individuals will be healthier and incur fewer claims, and some will pass away before ever needing the benefits. 

A normal distribution curve will show that the majority of the population will receive a fair benefit of costs and the insurance companies can financially model out premiums. Unfortunately, the LTCI solution also requires high numbers of people demanding the insurance product and a high number of insurance companies offering competitive market premiums. Currently, that is not the case. 

According to research firm LIMRA, which is funded by the insurance industry, an estimated 131,000 long-term care policies were sold in 2014, down 24 percent from 2013. The Wall Street Journal reported in May 2015 that only about a dozen companies remained in the market compared with about 100 just over a decade earlier.

Among the ways to make insurance affordable for consumers and profitable for insurance companies is to create more affordable plans by offering fewer benefits that last only two to three years and to make beneficiaries wait before the benefits begin. 

Other measures outlined in the Bipartisan Policy Center report include waiting periods, cash deductibles, and providing the option to use retirement account funds to pay LTCI premiums.

The Bipartisan Policy Center also addresses the complexity and disparity of state regulations and federal waiver processes that make it difficult to use less expensive long-term care options, including home and community-based care settings. Their recommendations call for ways to move long-term care services from institutionalized settings to less expensive environments. 


Message to the industry

While the Bipartisan Policy Center study reveals that there is no magic bullet to solving the future financial crisis in seniors housing and care, it does provide clues to help developers, owners and operators begin to plan facilities with an eye toward profitability.

One point is clear: the market for long-term care services is expanding. There will be a need for more beds and more facilities that can provide the aging Baby Boomers with access to care. 

Senior living property owners who can spread costs across several facilities will have the greatest opportunity to serve a high number of seniors while keeping costs affordable for patients. This would simultaneously help the approaching increased demand from middle-class Americans who are rapidly nearing the age when they will need the benefits of that care. 

Ultimately, the key to profitability in long-term care lies in scalability.


Brett Murphy, vice president with Lancaster Pollard in Chicago, serves as the firm’s primary healthcare banker for Illinois. He provides clients with a full range of investment banking, mortgage banking, private equity, balance sheet financing and M&A advisory services. Prior to joining Lancaster Pollard in 2013, Murphy worked in the credit risk division of Banco Santander during its acquisition of Sovereign Bank.

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