LTC Bullet:  Of Floods, Insurance and Long-Term Care

Monday July 31, 2000


After the great Mississippi River floods of 1993, Center for LTC Financing President Stephen Moses published an article entitled "Of Floods, Insurance and Long-Term Care." A recent story from USA Today inspires us to republish part of Steve's article. Here's why:

There are two kinds of private insurance: the kind people routinely buy and the kind they don't. The first category includes life insurance, fire insurance and health insurance. The latter category includes flood insurance, earthquake insurance, crop insurance and, alas, long-term care insurance.

What characteristic distinguishes each of these two kinds of insurance? If you die, or your house burns down, or you get sick and you are uninsured, it is bad news. You are out of luck and out of pocket! On the other hand, if your property floods or your home quakes or your crop fails or you need long- term care, the government is there to help you with loans, subsidies, grants, and public assistance. In a nutshell, people buy insurance when they face a real financial risk; but when they don't, they don't.

Now, here's a portion of the story from USA Today followed by excerpts from Steve Moses' article.

"High-Risk Life, High Expense to Taxpayers: Federal Disaster Aid Makes It Feasible To Build In Harm's Way" by Owen Ullmann, USA Today, July 24, 2000, p. 6A.

"WASHINGTON -- It has been 50 years since the federal government got into the disaster assistance business. Now, what began as a trickle of aid for people living near the seacoast has turned into a tidal wave of financial support.

"The government's ever-expanding generosity has created a vicious cycle for taxpayers: By reducing the economic risks of living near the water, Washington has spurred development.

"So when each new disaster strikes, the cost of federal assistance rises to cover all new private buildings and public facilities.

"'Ironically, the federal government is aiding and abetting patterns of living that are unsustainable and draining significant resources,' Rep. Earl Blumenauer, D-Ore., complains . . . .

"Washington has been aware for decades that federal disaster programs inadvertently contribute to the very disaster losses they were intended to relieve.

"This is known as the 'moral hazard' problem: People are willing to build in high-risk coastal areas because they know the federal government will help if a hurricane or another storm wipes them out."


Now here's the excerpt from Steve's 1993 article that draws the parallel to long-term care:

"Of Floods, Insurance and Long-Term Care," by Steve Moses, LTC News & Comment, Volume 4, No. 1, Sept. 1993, pps. 11-12.

"This year's sodden catastrophe in America's heartland is a perfect analogy for the crisis in long-term care financing. The 'flood of the century' swamped thousands of homes, dislocated millions of people, and destroyed countless farms and businesses. Costs may reach $20 billion or more. State and federal governments acted immediately to provide emergency aid. Politicians inundated the media with promises that tax-financed indemnification would follow. Although most of the damaged property was located on flood plains, few property owners had private insurance to cover the risk of flooding. Why?

"'My home-owners' policy will protect me,' some claimed. 'The water could never reach me here in a hundred years,' many affirmed. 'Flood insurance is too expensive,' most said. Local officials and bankers frequently bent the rules to approve building permits and bank loans without the technically required flood insurance. No one said 'I'm not going to buy insurance, because the government will pay if the worst happens.' But, vaguely and evasively, everyone knew it was true. If the floods came, the political compassion combine would replace any natural harvest lost.

"Now compare the crisis in long-term care financing..

"'My Medicare supplement policy will protect me if I have to go to a nursing home,' some claim. 'It won't happen to me; I'm too healthy,' many affirm. 'Long- term care insurance costs too much,' most say. Elder law attorneys and many Medicaid eligibility workers bend the rules to qualify prosperous people for the welfare program's nursing home benefit. No one says 'I'm not going to buy insurance, because the government will pay if the worst happens.' But, subconsciously, everybody knows this is true. The reality is that if nursing home care becomes necessary, someone else usually pays. Who knows or cares whether the payer in fact is Medicare or Medicaid, Uncle Sam or Santa Claus?

"The main purpose of private insurance is to replace a small risk of catastrophic loss with the certainty of an affordable premium. In a free market, private insurance also performs another vital function; it prices risk. Voluntary exchanges between willing sellers (insurers) and willing buyers (insureds) determine actuarially sound premium levels. Premiums tell the public as accurately as humanly possible what the precise danger is of living on a flood plain or 'going bare' for long-term care. Given this information, rational people who are free to choose can make intelligent decisions in their own best interests.

"Ironically, for all its good intentions and altruistic justifications, government distorts this risk calculation and dangerously misleads the public by providing tax-financed grants or subsidies to indemnify the uninsured. By reducing or disguising actual risks, the government discourages responsible people from buying private insurance and rewards the irresponsible for failing to do so. This is the real reason why so few people have flood, crop, earthquake or long-term care insurance, self-serving evasions ('it won't happen to me' or 'insurance costs too much') to the contrary notwithstanding. When insurance truly costs too much, it means the risk is too great to take, by definition! If the government rebuilt every home that burned down, no one would buy fire insurance either."