LTC Bullet: Out of the LTC Frying
Pan into the Fire
Friday, September 19, 2014
LTC Comment: New LTC financing policy in the UK is potentially dangerous;
hard lessons learned in the U.S. could help, after the ***news.***
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LTC BULLET: OUT OF THE LTC FRYING PAN INTO THE FIRE
LTC Comment: Vincent L. Bodnar, ASA, MAAA is an actuary and Director at
Towers Watson, a leading global professional services company. Vince
also co-chairs the Society of Actuaries long-term care think tank this
year. We interviewed him on September 15 to learn more about the creative
work he’s doing internationally, especially in the United Kingdom (UK).
What follows is our interpretation of what he told us. It does not
reflect his or his company’s views.
Coping with the challenge to provide and pay for long-term care is an
international problem. Every country’s LTC policy is different, but the
same as the United States’ in certain respects. All seek to find a
workable balance between social and private solutions. The UK is an
interesting case in point. The British love their fully socialized
National Health Service (NHS), which covers acute care. But they’ve
puzzled for many years over how to handle long-term care.
Heretofore, the UK had a highly privatized, heavily means-tested LTC
services and financing system. Basically, anyone with a net worth
(including home equity) exceeding 22,500 British pounds ($37,000) had to
pay their own LTC expenses before getting financial help from the
government. According to media reports, this policy forced many people to
sell their homes.
The Brits have been trying to fix LTC financing for a good while, at least
since I met with a delegation from the Prime Minister’s office during our
2008 National Long-Term Care Consciousness Tour. Last year, the
Dilnot Commission on Funding Care and Support proposed a 72,000
British pound cap on private LTC expenditures. That’s about $118,000 in
What an interesting idea. Cap families’ liability for LTC costs instead
of forcing them to spend down nearly everything. Some have recommended
the same approach for us. Wouldn’t that make it easier than now to wrap a
private long-term care insurance product around what government is willing
and able to provide?
Well, maybe, but take a closer look at what they’re doing in the UK.
First, that 72,000 pound cap applies only to care costs, not room and
board. The Brits are on their own to fund “living” costs over and above
the care cap. Neither the government nor the British media have made that
clear. It’s a big deal. Average living expenses are 230 pounds per week
($377) or 12,000 pounds ($19,680) per year.
Second, not all LTC costs count toward the 72,000 pound cap. As in the
U.S., nursing facilities in the UK charge different rates to private
payers and to government-financed dependents. As a rule, the more private
payers a facility has, the nicer the place, as is also true in the United
States. Under the new British system, however, only the government rate,
exclusive of room and board “living costs,” which averages 300 pounds per
week ($480) is counted toward the cap. To buy up to a nicer facility, as
most people want to do, costs on average 200 pounds ($328) per week. That
extra is not counted toward the cap.
So, getting credit for only 300 pounds per week, a person would need to
pay privately for institutional care (plus living costs plus any extra for
better access) 240 weeks (72,000 pounds divided by 300 pounds per week) or
4.6 years before exceeding the new 72,000 pound cap. Not all that much
help, but it does seem like an ideal target for a private LTC insurance
product to wrap around, right?
Well, maybe, but there’s still more to consider. Historically, the
British have relied heavily on company pensions for retirement security.
They required every pensioner by law to purchase a single-premium annuity
(SPIA) to guarantee retirement income. But as in our country, most
retired people do not have enough income to fund institutional long-term
care. Where would retired Brits get the money to pay for their first
nearly five years of care before they reach the 72,000 pound cap on care
The answer they found was to repeal the requirement to purchase a SPIA so
that pensioners would have a large lump sum of money available to pay for
care when they need it. Not such a great idea, maybe. Who’s to say that
lump sum won’t be spent on other things or given away? With the
popularity of Britain’s National Health Service and the Brits love for it,
the UK is more vulnerable than ever to a problem like the one we have
with Medicaid estate planning, artificial self-impoverishment to qualify
for public benefits.
There is still more to this story. Will the British insurance industry
step up with creative new products to wrap around the new 72,000 pound
cap? That’s very doubtful. Most insurance carriers that tried to offer
private LTC coverage in the past fared poorly with distribution and
dropped the product. Once burned, twice cautious.
But wouldn’t it make sense now to introduce new products specially
designed to cover the initial LTC expenses before the cap kicks in?
Undoubtedly, but the British insurance industry has been clobbered twice
recently by new government policies. Eliminating the mandate to purchase
a SPIA at retirement devastated their annuity market. Adding insult to
injury, the government eliminated commissions for insurance agents forcing
companies to provide salaries or customers to donate fees. Burned again!
Still the UK government is struggling with the LTC financing challenge and
encouraging private industry to come up with new products and solutions.
The Brits may be making some changes that could make the problem worse
instead of better. They might want to take an even closer look at U.S.
policies that discourage artificial impoverishment to qualify for public
benefits and encourage creative LTC insurance solutions such as combo or
Otherwise the UK may be addressing one problem only to create more and