The Collapse of Long-Term Care Insurance

Attempts to have the private market manage support and services for the elderly or people with disabilities have utterly failed.

by

Jandos Rothstein

The first announced American death from coronavirus came in February from a nursing home in Kirkland, Washington. Within weeks, an astounding two-thirds of inhabitants and staff had contracted the virus, with 37 deaths among just 108 residents. It was the beginning of a painful record of long-term care facilities like nursing homes as the most deadly theater of the coronavirus pandemic. By May, one-third of all coronavirus deaths were nursing home residents or workers. By September, some 46,400 deaths had been confirmed, even with states providing spotty and partial data. Roughly 1 in 10 people who were in long-term care facilities when the pandemic started in New Jersey were dead by May.

It’s a chilling reminder of the importance of quality care for a needy and rapidly growing segment of the population. But the coronavirus descended upon a long-term care landscape in America already beset by crisis. For years, private long-term care insurers have been fleeing the market, while a public option doesn’t exist. The issue was perhaps too niche to garner any interest during the last Democratic primary, amid the hot-burning Medicare for All debate. But there is perhaps no component of health insurance where the private sector has failed more profoundly than long-term care, making this one of the worst and most rapidly faltering aspects of our impossibly expensive, wildly inefficient, and poorly performing health care system.

The problem begins at a very basic level: Many Americans don’t even know what long-term care is. It refers to a broad sweep of services and supports that elderly patients and people with disabilities need in their daily, basic activities. Non-medical help in things like bathing, dressing, and eating are all part of long-term care, as well as medical support for patients battling diseases like Alzheimer’s, dementia, and other chronic conditions. It can take place in nursing homes, in assisted-living facilities, or at home.

Common estimates say that about 50 percent of older adults will need long-term care at some point in their lives; for adults over 65, the odds shoot up to 70 percent. But, like much of our health care system, just because there’s demand doesn’t mean there’s supply. Though long-term care can be exorbitantly expensive, the percentage of Americans currently in possession of insurance coverage is just a small fraction of those who are likely to need it. Right now, fewer than 1 in 30 Americans own a long-term care (LTC) insurance policy, and only about 7 percent of adults over 50. The raw figure of 7.5 million insured has barely budged since 2008, despite an increasing aging population.

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Private insurers began offering LTC insurance in the 1970s, and sales ticked steadily upward into the 2000s. At its peak in 2002, about 750,000 individuals successfully purchased LTC insurance in a single year. By 2018, that number had plummeted to 57,000, a more than tenfold contraction, even as the percentage of the American population in the prime purchasing demographic, ages 60 to 69, expanded rapidly, from 9.5 percent in 2010 to 11.4 percent in 2018, according to a study from the Treasury Department.

Part of that trend is explained by a wild mispricing error by the insurance industry, which severely underestimated the cost of such plans. As the industry paid out huge sums for relatively cheap plans year after year, they scrambled to make up the difference by surging premiums and trying to minimize outlay. In 2005, a buyer between the ages of 55 and 64 paid an average annual premium of about $1,900. By 2015, LTC premiums had ballooned almost 40 percent, to more than $2,600, in spite of the fact that policyholders were receiving far less coverage for their buck. In 2005, the average policy topped out at $270,000 in benefits; by 2015, it had sagged to $235,000. In 2018, LTC insurance covered only about $10 billion in costs, while individuals paid $55 billion out of pocket.

Meanwhile, insurers have strained to deny policies to as many people as possible. According to recent estimates from the American Association for Long-Term Care Insurance, the industry’s top trade group, somewhere between 44 percent and 51.5 percent of people over 70 who apply for a long-term care policy are now declined. Almost one-third of those between 60 and 65, a less risky demographic, are turned down. Even 21 percent of people in their fifties, more than one in five, can expect to have their applications rejected. Any combination of two or more chronic conditions is grounds for near-automatic disqualification, as are diseases like AIDS and multiple sclerosis, a history of strokes, or diabetes requiring insulin shots.

Yet despite rates rocketing up, and plans being increasingly difficult to even qualify for, claim losses have still managed to exceed expectations since 2008, as insurers have found it impossible to structure a long-term care program in a profitable way. Some insurers have simply abandoned the LTC insurance market altogether; there were over 100 policy providers in 2000 and fewer than a dozen today.

There is perhaps no component of health insurance where the private sector has failed more profoundly than long-term care.

Confusion about long-term care helps the industry avoid even worse losses, though it will lead millions of Americans into financial catastrophe. A significant percentage of people wrongly believe that they’re covered for long-term care via their employer-provided health insurance; others believe that some combination of Medicare, Medicaid, or the Affordable Care Act will handle their needs. A study by the Nationwide Financial Retirement Institute found that only 28 percent of Americans age 50 and older with an income of over $150,000 know that the ACA does not cover long-term care costs, while 70 percent of baby boomers falsely believe that Obamacare covers long-term care.

They’re not entirely off-base in thinking that. The Affordable Care Act did initially include a provision for a national, public long-term care insurance system, called the Community Living Assistance Services and Supports (CLASS) Act. A pet program of the late Sen. Edward Kennedy, CLASS would have allowed all working adults to apply for insurance that would provide up to $50 a day in cash benefits, money that could be used to help with in-home assistance or nursing home care.

CLASS was derided as an accounting feint rather than a serious attempt to manage the long-term care problem. Because the program collected premiums for the first decade before paying out any benefits, it was scored as saving $70 billion inside the ten-year budget window. Former Republican Rep. Denny Rehberg of Montana, the former chair of the House Labor, Health and Human Services appropriations subcommittee, slammed it as “a budget gimmick to make the cost of Obamacare look better and cheaper.”

There were some savings with CLASS, particularly on the crushing long-term care costs absorbed by families across the country. But by 2011, it became clear that the Obama administration had no intention of actually pursuing it. Because the insurance was voluntary, and wasn’t supplemented with federal subsidies, the $50-a-day benefit would cost as much as $391 per month, and without a huge participation rate it still would not have remained financially solvent. So the White House announced they wouldn’t move forward on it.

CLASS was formally repealed in the American Taxpayer Relief Act of 2012, replaced by a Federal Commission on Long-Term Care. The commission went on to complete its study, replete with some of the data seen in this article and a handful of suggestions for limiting costs. And that was that.

THE END RESULT has been a powerful combination of denial, wishful thinking, and severe financial shock. Most older Americans have not looked into long-term care options at all, while just 8 percent consider it “very likely” that they will ever experience a long-term care need (again, something like 70 percent will). Medicare only covers short-term use of nursing home and home health care services, up to 100 days, strictly curtailed and narrowly defined.

Medicaid, meanwhile, currently the single-largest source of funding for long-term services, only kicks in at a point of financial ruin. Most states require long-term care recipients to draw down their financial resources to the very last $2,000 before Medicaid kicks in, even requiring them to empty out IRAs and 401(k)s and assets like real estate. Of course, financial ruin is not some far-off possibility; Americans making the median wage have a 1-in-6 chance of needing long-term care that entirely eclipses their financial resources.

But forcing people into penury to get assistance to feed and bathe themselves robs the elderly of dignity. Many are forced into nursing homes because they can no longer afford living on their own. The only other option is uncompensated long-term caregiving by family and friends, which “costs” nothing, except health stress and financial insecurity.

There’s no reason to believe any of these trends will reverse on their own. The cost of policies will continue to skyrocket, the amount those policies pay out will continue to drop, the number of people in need will continue to grow, and the number of applicants rejected will continue to increase in lockstep. According to the Congressional Budget Office, the cost of long-term care in the U.S. went from $30 billion in 2000 to $225 billion in 2015, compounding annually at nearly 15 percent. And yet the United States remains one of only a handful of developed nations whose government does not provide at least some universal long-term care benefits funded by taxes.

Long-term care is a market-breaker; there’s no meaningful way for it to conform to market principles, or to keep it from losing money. Private firms don’t want to compete for business despite a glut of demand, and a public solution holding itself to similar market-based principles failed before it even got started. But the need for long-term care is an absolute certainty, and herding a huge percentage of our fast-aging population into the corral of bankruptcy is not a solution either.

Some policymakers are finally coming around to this reality. Washington state passed a long-term care social-insurance program last year, which reimburses at $100 per day for in-home care up to a fixed lifetime maximum that translates to one year of daily support. It’s funded by a small payroll tax on all wages. The tax begins in 2022 and payouts in 2025. This mirrors numerous successful efforts abroad, and allows elderly people and those with disabilities the ability to live within their communities with some measure of dignity. But as with any expensive and necessary public-health program, piecemeal solutions at the state level are not likely to be sufficient. Which side of state lines you find yourself on shouldn’t determine the level of dignity and care you’re afforded in old age, and the federal power of the purse is most ably equipped to fund such a program. The Evergreen State has shown that this, like so many other crises we face, is solvable. It will take federal commitment to get it done.

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