LTC Bullet: LTC Over There
Tuesday, July 12, 2011
LTC Comment: The English are struggling with LTC financing problems similar to ours and may be about to show us what not to do.
LTC BULLET: LTC OVER THERE
LTC Comment: If you think we've got problems with LTC financing, take a look at England. Decades of socialized health care have convinced the British people that government should pay for all medical expenses. But the same English public is face to face with the reality that government cannot pay for everything, especially when everything includes long-term care.
Recently, a government commission published a report about LTC financing in the sceptered isle. The Economist summarized this Dilnot study last week in an article titled "Paying for long-term care: Shades of grey--A sensible-but costly-plan for dealing with an old problem." Read it here. Following are extended excerpts and our comments.
"Domestic help funded from savings may keep a pensioner at home for a few years, but when he becomes too doddery to make a cup of tea, he will be coaxed into residential care. In England this decline is often financially ruinous as well as traumatic: frail homeowners with no surviving spouse must pay eye-watering prices for care until their assets are all but exhausted.
The question of how to finance the long-term care of the elderly, and disabled adults of working age, has long vexed politicians. Last year the coalition government asked Andrew Dilnot, an economist at Oxford University, to come up with a plan. In contrast to other reforms that are designed to transfer the costs of state services to those who incur them . . . Mr Dilnot's report, released on July 4th, suggests the exchequer should pay more.
"Health care in England is free at the point of delivery; help with washing, dressing and eating is not (though it is in Scotland). At present, if a man needs such help and is poor and alone, the state will provide assistance at home free of charge; if he has a little money, he must pay for it all himself. Residential care, typically costing £26,000 [$41,304 at today's exchange rate] a year but sometimes much more, is likewise free for the poor; anyone who owns a home or has savings must run down his assets to pay. This prospect terrifies many. Most pensioners own their homes, worth an average £160,000 [$254,176]: if their health deteriorates, they stand to lose all but £23,250 [$36,935] of their lifetime savings.
"Mr Dilnot's solution is to limit the maximum sum that people would have to pay to between £25,000 [$39,715] and £50,000 [$79,430]: he suggests £35,000 [$55,601] would be appropriate. He also proposes that only those with assets worth £100,000 [$158,860] or more should pay the full costs of care as they are receiving it, so that the poorer approach the limit more slowly than the relatively rich. Taken together, his proposals would ensure that no one loses more than 30% of his assets (see chart) [omitted]. That would be fairer to savers; setting a limit might also encourage insurers to develop products that would cover individuals' liabilities.
"It would be costly for the state, however. Demand for elderly care has increased by 9% over the past four years, and it is set to rise further as life expectancy climbs (while the proportion of the population of working age shrinks). Funding for it, on the other hand, has stagnated. Cuts in central-government funds are already forcing local councils to reduce spending on adult social care by between 5% and 8% this year. (Mr Dilnot thinks local variation is unacceptable and wants national standards. The Law Commission, which helps Parliament tidy up legislation, agrees.)
"This week's plan would add to the state's burden. Implementing it now would cost an extra £1.7 [$2.7] billion a year, a bill that would spiral to £3.6 [$5.7] billion by 2025. . . .
"Attempts to rethink the care of the elderly and needy have in the past been blighted by political wrangling. . . .." [Emphasis added.]
LTC Comment: Sound familiar? Excessive dependency on residential (i.e., institutional) care. Actually exploding public costs and apparently devastating private asset spend down. Little private insurance. Fiscal hopelessness in the face of an aging population. Government proposals to cover even more of the LTC cost, while further relieving the public of responsibility. LTC over there sure sounds like LTC over here.
But let's compare and contrast the two situations. As in the USA, most of the elderly in Britain own their own homes. Unlike here, however, the English must spend down their home equity, averaging over a quarter million dollars, for long-term care until they have no more than $37,000 remaining. Our Medicaid program allows people to retain half-a-million dollars in home equity at a minimum and up to three-quarters of a million dollars in some states.
Sure sounds like a perfect problem for private LTC insurance to solve. Long-term care represents a relatively small risk of a catastrophic loss, which is ideal to be replaced with the certainty of an affordable premium. But private LTC insurance is relatively more prevalent, though stunted, in the United States than it is in England where the personal financial liability for long-term care is ostensibly much higher. Go figure.
What might be going on? I suspect LTC spend down is as much a myth in England as it is in the United States. Regardless of what the laws and regulations seem to say, if the reality is that most people get the government to pay for their LTC after the insurable event occurs, as we've demonstrated in dozens of studies is true here in the USA, then private LTC insurance is severely handicapped.
But let's say LTC spend down actually occurs in England as reported. No one gets any help from the government until they've spent down all their assets, including home equity, to the level of $37,000. Shouldn't there be a thriving private LTC insurance market there? Maybe not. The British are so steeped in expectations of free health care, much like our public assumes Medicare pays for LTC, that they probably don't worry about long-term care until they need it.
Only a relatively small number of people actually end up requiring catastrophically expensive institutional care for long enough to devastate their finances. The poor get full coverage and the rich cover their own care without much strain. So, although this is a perfect problem for insurance to solve, with relatively few people actually devastated financially, private insurance has a hard time getting traction.
So, what's a sensible solution? It's pretty obvious, reduce public LTC dependency and cost by targeting scarce government resources to those most in need while incentivizing everyone else to plan early and save, invest or insure for long-term care. Make sure there are no ways to escape personal responsibility for LTC. Let home owners pay for in-home care with reverse mortgages. Let them pay for institutional care by sale of the home or through estate recovery. If heirs want to preserve their inheritances, let them find ways to pay for their parents LTC. Such policies would take the financial burden off government and transfer it to individuals, families, and inheritors where it belongs and where it provides a strong incentive to prepare responsibly for LTC.
Is that what the Brits are doing? No. Nor is it what the Dilnot report recommends. Dilnot proposes a "solution." But like the "LTC Compact" that Medicaid planners in New York suggested, it recommends transferring even more of the risk of LTC spending onto the government. [See our report titled "The New York Long-Term Care Compact Proposal: Update, Analysis and Recommendations.] As The Economist article suggests, government LTC costs are high and growing already even as the elderly population is poised to explode.
Dilnot suggests, as did the "LTC Compact" proposal, that limiting LTC liability of the public to a set amount ($56,000 in England; up to $300,000 in New York) would encourage the insurance industry to provide coverage for liability above that amount. But here's the problem? If you can't get people to buy private LTCI at the relatively high levels of liability supposedly effective now, how will reducing that liability encourage more people to insure privately? Answer: it won't. Even more of the cost of LTC will fall on government under such as system than now. Collapse of the publicly financed system will occur even sooner.
Someone needs to look at the system in England with an unbiased eye. What is really going on there? How much private money is actually spent for LTC? What private insurance options are available? If LTC is such a huge risk and cost, why don't people plan ahead? Why is the government overwhelmed even under the current, ostensibly strict spend-down system? How might private insurance help solve the LTC financing problem there? Maybe I'll tackle these questions next year, after we confront the same questions in Washington, DC this fall.