Issue Brief

November 2000

Long Term Care

"Will you still need me, will you still feed me, when I'm 64?"
If you are old enough to remember when the Beatles first sang those lyrics, you have probably thought about long-term care once or twice in the last few years.  And if you are like most of us, unless you needed to find long-term care for an aging parent or disabled loved one, you quickly turned your thoughts to something else. 

Why don't we want to think about it?  Probably because thinking about the issues involved in long-term care brings us face to face with some of our darkest fears.  Perhaps also, because most people erroneously believe that their own long-term care needs are already covered by health insurance, Medicare, and - for those who have a passing familiarity with health policy - Medicaid.  Consequently, most of us put it on the "back burner" in our minds and concentrate our mental energies on easier topics such as retirement financing or estate planning.  

Some experts estimate that only 10 percent of people now in their 60's will ever need long-term care and even for people who reach their 80's, these experts assume fewer than half will need long-term care.  So why should the general public care about it?  In a word - cost.  If one is unfortunate enough to need nursing home care, current costs run near $50,000 a year and the American Council of Life Insurers estimates that a year in a nursing home will cost $190,000 by 2020.  Even if you are fortunate enough never to need even the most minimal long-term care services, as taxpayers we all foot the bill for services that are provided to others through Medicare and Medicaid.  And, with the aging of the population, those costs are estimated to rise dramatically in the next 20 years, even as disability rates go down.  So -- what is long-term care, who needs it, and who pays for it?  

What is Long Term Care? 
A person of any age who has a chronic illness or other condition that requires him or her to have outside help with the basic activities of daily living needs long-term care.  Long-term care services are those services that help individuals cope with their disabilities.   The care can be provided either in an institutional setting such as a nursing home or in an individual's own home such as the care provided through home health services.  It can be extensive as in the highest skilled nursing home or it can be something as simple as meals on wheels or the friend who drives a neighbor with failing eyesight to the grocery store every week.  

Today, more than 12 million people in the United States need help with the basic "activities of daily living" (ADLs).  The term ADL refers to the activities necessary to live a normal life such as eating, bathing, dressing, getting in and out of bed, and using the bathroom. 

In addition, millions more need help with tasks that are referred to as the "instrumental activities of daily living" (IADLs).  This term refers to the activities that are necessary for an individual to remain independent such as:  keeping house, doing laundry, buying groceries, preparing food, taking medication, and managing to meet transportation needs.

Although people of all ages can need long-term care, the largest block of long-term care users is the elderly.   It is the dramatic growth in this segment of the population that will produce the biggest cost pressures. 

Who pays and how much will it cost? 
According to the Congressional Budget Office (CBO), long-term care is financed from five sources at the following costs this year:

1. Private funds -- the most common source of funding is personal savings, $42.8 B;
2. Medicaid --- after private savings have been exhausted, most elderly people have to rely on Medicaid, the federal and state program which provides health care to low-income people, $43.3B;
3. Medicare --- although Medicare is primarily an acute care program it often pays for follow-up services to some acute care, $29.4B;
4. Private insurance --- this is a small portion of long-term care financing today but is growing in importance, $5B
5. Voluntary service --- family and friends often provide a great deal of service at no cost.  Although CBO did not estimate the value of these services, the Department of Health and Human Services has estimated it to be between $45 and $94B a year.

Last year CBO did an extensive analysis of the potential cost of long-term care services for the elderly 40 years into the future.  Recognizing the unreliability of projections 40 years out they did their most detailed work on the next 20 years. 

For the purposes of their analysis, CBO defined long-term care as "the medical, social, personal care, and supportive services needed by people who have lost some capacity for self-care because of a chronic illness or condition."  They excluded medical care for acute conditions but did include post-acute care such as skilled nursing care and home health care. 

Through the Medicare and Medicaid programs the federal government accounted for $50 billion of long-term care costs in 1995 and these programs are estimated to pay $72.7 billion in long-term care costs in 2000.  Although Medicaid is thought of primarily as the health care program for low-income children and families, it is also used to pay for nursing home care for older people who have used up all their personal savings.

The CBO assumes that donated and private pay care will continue to increase over the next two decades.  However, it believes this care will decline as a share of total long-term care.  It also assumes there will be an increase in private insurance over the next two decades.  Given all these assumptions, CBO assumes the real cost of long-term care will rise from $123 billion in 2000 to $207 billion in 2020.  (These estimates are in inflation-adjusted 2000 dollars.)  This represents a whopping 68 percent increase in real costs.  Medicare and Medicaid are estimated to pay 73 percent of these costs so this is a major budget issue of interest to all taxpayers and office holders.

What can be done now? 
A variety of proposals have been offered to deal with various pieces of the future long-term care problem and some progress has been made.   The 1996 Health Insurance Portability and Accountability Act (HIPAA) included tax benefits to employers and employees who purchase long-term care insurance.   It also established minimum requirements for products to receive the favorable treatment, thereby guaranteeing that long-term care products on the market today offer consumer protections not available in earlier products.  Still only six million people were covered by long-term care policies as of 1998. 

During the 106^th Congress, a variety of tax incentives have been proposed for various long-term care purposes.  Tax deductions to encourage people to buy insurance and tax credits for disabled persons and families helping to care for them are among the more popular tax incentives proposed in the last two years.  What will finally happen with these proposals remains to be seen, but the Congress has done one thing that could be very beneficial in confronting long-term care issues.

In 2000 Congress passed legislation authorizing group long-term care insurance for 13 million federal employees, retirees and their families.  Since only six million people were covered by long-term care insurance at the end of 1998, this program will provide a significant opportunity to increase the pool of people using long-term care insurance.

The law authorizes the Office of Personnel Management (OPM) to negotiate a long-term care package that offers flexible benefit options including a range of services such as home health care, adult day care, and nursing home care.  In a departure from tradition in other federal employee benefits programs, the insurance will be paid for entirely by the employees who purchase it.  Nevertheless, because of the large size of the group, it should be significantly more affordable than individual products and may result in a large increase in the number of people covered by long-term care insurance.

Today this country faces many challenges in sorting out the appropriate balance between social insurance, such as that provided by Medicare and Medicaid, and private insurance.  As OPM negotiates long-term care coverage for federal employees, it will help us gain a better understanding of the role private insurance can be expected to play in meeting the growing need in this area.  If the government puts this package together in a sound way, it could prove a model for other employers and significantly help many individuals be better prepared for their own long-term care needs.