LeadingAge Magazine · March-April 2018 • Volume 08 • Number 02

Financing Long-Term Services and Supports: The Case for an Insurance Approach

March 16, 2018 | by Gene Mitchell

Building a new, rational and comprehensive system for financing LTSS in the U.S. has long been a priority for LeadingAge. Here is a look at a new proposal from the co-director of the LeadingAge LTSS Center @UMass Boston.

“LeadingAge believes America needs a fairer and more rational financing system to ensure access to quality long-term services and supports (LTSS) for everyone who needs these services.”

That quote appears at the beginning of a paper from LeadingAge, “A New Vision for Long-Term Services and Supports,” released in 2017. The publication lays out a case for a flexible, universal system for financing the care for older adults—a new system designed to overcome the many frailties of the current “system.” The LeadingAge vision has 3 essential features:

  • A universal approach to coverage: The mandatory program would spread risk over a large population, thus lowering expenses for individuals, and increasing overall funding for LTSS.
  • A catastrophic benefit period: The program would finance care for individuals with high needs for LTSS. Benefits would begin after individuals had financed their own care for two years through private long-term care insurance or out-of-pocket spending.
  • A “managed cash” benefit structure: Beneficiaries would use a cash payment to purchase services and supports related to an LTSS need. This flexible approach would ensure that services and supports were tailored to individual needs and preferences.

LeadingAge’s work in this area goes back more than 5 years, and can be traced through 3 past LeadingAge magazine articles:

There is a synergy at work regarding this issue. Marc Cohen, co-director of the LeadingAge LTSS Center @UMass Boston, has co-developed a plan for financing long-term services and supports in the United States. Cohen and Judith Feder, professor at the McCourt School of Public Policy at Georgetown University and a Fellow at the Urban Institute in Washington, D.C., detail their plan in a paper, “A New Public-Private Partnership: Catastrophic Public and Front-End Private LTC Insurance” (downloadable as a PDF).

LTSS ReportMelissa Favreault, a senior fellow at the Urban Institute, developed the DYNASIM LTSS model, programmed the policy simulations, and produced the projection tables for the paper.

Cohen’s work on this topic predates his affiliation with LeadingAge, but there are strong commonalities between the Cohen/Feder proposal and LeadingAge’s.

“It’s a next generation of the work on this topic,” says Aaron Tripp, director, long-term care policy & analytics for LeadingAge, author of the LeadingAge paper.

“[Cohen’ work] was done before he had any affiliation with LeadingAge, but I don’t think there’s anything in that paper we would take issue with,” Tripp adds. “We purposefully didn’t have a significant recommendation on the source of funds, for instance. There are probably several financing approaches we would be fine with.”

“The next thing for [LeadingAge] is an awareness campaign, including a social media campaign, with a recognition that there is a gap between people’s knowledge and understanding of the topic and the likelihood they might need this kind of care,” says Tripp. “The idea is not only to educate people, but to build an educated advocacy base. Right now, we don’t have the political environment to expect such a universal catastrophic plan, but when the winds change we want to have a base of advocates to speak intelligently on this topic.”

A Catastrophic Insurance-Based Approach

LeadingAge spoke to Cohen about the thinking behind his proposal:

LeadingAge: You chose to develop an insurance-based approach, specifically a public, catastrophic insurance model, combined with reforms to promote better private insurance products to fill gaps in the public coverage. Can you explain why the catastrophic insurance model was the choice?

Marc Cohen: There are a couple of reasons why we settled on the catastrophic insurance model. The first is that we have to recognize that in this country, there’s always been a philosophical challenge relating to the roles of the public sector and the private sector. Part of the reason why there has been an absence of good policy is that on one side of the argument are those who would limit public policy to the promotion of private insurance, and believe the government should only act in the case of market failure, and then you have those who believe public insurance is essential to assuring adequate affordable care, and it’s only recently that a number of groups who have been looking at this for many years seem to be coming together—and it’s on the side of a public catastrophic insurance program with private insurance to pay up-front costs.

One of the reasons why there is growing support for such an approach is that there’s a market failure as it relates to the catastrophic, back-end risk, as insurance companies are no longer willing to cover it. In a voluntary insurance market, it’s very difficult for private companies to price that risk, and in order for a private company in a voluntary market to sell that kind of product, they have to charge an arm and a leg. So there really is no private alternative for covering catastrophic LTSS costs.

The other piece of the puzzle is that the poor and the near-poor have protection through the Medicaid program, and despite what people say, Medicaid has improved quite a bit across the country, and more than half of the benefits for LTSS are paid for home care. The population we’re really concerned about are middle-income elders, many of whom can afford some level of private insurance, but not catastrophic insurance.

The final reason is that those catastrophic risks of long-term care present the greatest risk to the financial integrity of one’s retirement.

LeadingAge: The approach you advocate includes waiting periods that would precede the payment of benefits; the periods could vary depending on a person’s individual financial situation, or they could be implemented as “flat” periods without means testing. Can you explain why waiting periods are so central to this approach, and then explain the difference between the 2 kinds?

Marc Cohen: First, what is a catastrophic event, and is it the same thing for all people? Our idea is that a waiting period should be tailored to a person’s level of income. We wanted to do that so those who don’t have a lot of resources wouldn’t have to wait too long before a public benefit would kick in, because if they did, they really wouldn’t be getting catastrophic protection. They’d be spending all their money until there’s nothing left, and that would be not unlike Medicaid. So, we wanted a waiting period [that would] vary based on income, so lower-income people could access public benefits more quickly than higher-income people.

The waiting period itself is based on “time” and not on expenses, making it a time-based waiting period. This means people who become disabled could rely on family, and on some level of paid assistance, but the counting of the period before the public benefit would start would depend on how long the person is in need of help and not on how much they spent. That’s because we didn’t want to force people to spend money if they have families that could provide care, and we wanted to recognize that family care, so there are 2 components of the waiting period: One is that it’s time-based, and the second is that it would vary by level of income.

The range [of waiting periods], by the way, is 1 to 4 years.

There’s one other thing to say about the waiting period: We looked at people’s incomes and tried to assess whether they would be able to afford private insurance to fill the gap, so we did an analysis of what people tend to spend on private insurance, and found that between 1% and 3% of income is a reasonable amount. So, we tried to calibrate how much people could afford in long-term care, and how much they could afford in premiums. People who could access public benefits sooner would have less of a gap to fill, which means the insurance available to fill that gap would be in relative terms much less costly to them, and we’d likely see much greater take-up rates of private insurance. Our fundamental belief is that there is some level of private responsibility as well as some level of public obligation, so we tried to set the waiting periods to reflect this.

LeadingAge: Your program would be financed by raising the rates of Medicare taxes for people once they reach age 40. Why finance it in that way?

Marc Cohen: It was very pragmatic. One thing you hear about a lot is that people don’t tend to think about the long-term care risk in their 20s, 30s and frankly even in their 40s. People have competing demands on their money, especially early in their working adult life. The idea is that the tax would not be assessed until age 40, when people are more well-established, but they still have a lot of working years left and the dollars could be accumulated to pay for the benefits.

LeadingAge: Would this program allow people to opt out? Do you envision a significant number of people doing so?

We discussed that in another paper, and the idea was that this is like Social Security—it’s mandatory—but as an alternative we looked at giving people 2 [points] over a 10-year period to opt out. So, everyone is enrolled, and you have 2 opportunities to opt out, but after age 55, you’re in.

That might also make it a little more saleable, but you walk a very fine line because you want to ensure the integrity of the risk pool, and make sure the people who aren’t opting out are ones that may be at much lower risk. Typically, up until age 55, you are unlikely to have a good sense for whether or not you are likely to need long-term care in the future and how much care you may need. It is very difficult to know ahead of time whether you’ll be one of those people who is in the tail end of that risk.

LeadingAge: At that point of opting out, would people be required to do anything else as well?

Marc Cohen: Again, our belief is that the program should be mandatory, and we only briefly discussed the “opt-out” alternative. Our sense was that those who opted out would need to sign a document attesting to the fact that they understand that should they become disabled and require catastrophic protection they will be expected to pay for that out of their income, assets and savings—including home equity—and that they will face a higher Medicaid eligibility threshold than others who do sign up for the program.

LeadingAge: To be eligible for your plan, a person would have to pay the increased Medicare tax for 10 years, or 40 quarters. Clearly this would leave a lot of people (many boomers and all older cohorts) out of the program by definition. You’ve also stated that individuals below age 65 who are already receiving LTSS would not be covered. Do you assume that some version of our current system would have to be kept in place to meet those people’s needs?

Marc Cohen: We believe that the only potentially viable approach is to put forward a program that has a level of financial stability and actuarial soundness built into it. So, we recognize this isn’t going to solve today’s current problem. What we’re trying to accomplish is moving from a welfare-based system to an insurance system, and this is something that would occur gradually over time.

If you wanted to take care of more boomers, and address people not currently covered by the system, that could be done a couple of ways: First, you could have a proportional benefit by how much people have paid in, so [those people] would get something. You could also use general revenues to cover expansions in Medicaid or what have you, but it’s not optimal. There’s always a big issue regarding what to do with current generations as you move from a welfare-based system to an insurance-based system. If there is a political will to address the current challenge, then it will require additional resources to do so, and that needs to be understood up-front.

LeadingAge: Selling this approach to those young enough to benefit from it, and to those older people who would not, sounds like a tall order. Does that give you pause?

Marc Cohen: What we’ve done is modeled what it costs, what the benefits are, what the tradeoffs are, and if I was deterred by the current political environment, this would be the least of my worries. It’s a tall order, but you have to be intellectually honest about it. If we wanted to solve for everyone right now, the question you’d have to ask me is, who is going to be willing to pay x dollars for this program, because you’d have to subsidize the current generation of elders who would not have paid in for the benefit. That raises a different set of political challenges. I don’t know which is a bigger challenge, but we did want to put orders of magnitude around what this would cost, who it would benefit, and so on.

LeadingAge: Another part of your plan involves incentivizing the insurance industry to create new and better long-term care insurance products that would be attractive to consumers and dramatically increase take-up rates. What sorts of policies might do that? Have you had any feedback from people in the insurance industry about this?

Marc Cohen: I’ve gotten a lot of positive feedback. One challenge private insurers face is that there is an information problem out there, which is a lack of clarity about where government and public financing begins and ends, and where private responsibility begins and ends.

From an insurance company’s perspective, you have something to sell against, or with. You can say, “Look, here’s where your public benefit starts. Your public benefit could be $100 today, and we’ll sell you a step-up policy that would give you an extra $50 a day.” Or you can say, “If your gap is going to be 2 years, we’ll sell you a 2-year policy.” And as I said at the outset, we know the private sector isn’t going to cover the catastrophic risk.

LeadingAge: If something like this can be put into place, what portion of eligible people would need to access the benefits during their lifetimes?

Marc Cohen: We modeled 2 different types of waiting periods. For those who’ve turned 65, roughly one out of 3 would receive benefits under this proposal. However, what I want to point out is that if we’re talking about the highest income decile, it might be one out of 5, and in the lower income deciles, it might be 2 out of 5, 40-45% or so.

As intended, the benefit is skewed to more middle-income folks who have fewer alternatives available.

LeadingAge: Under this program, what government spending would increase, and what would decrease? What would the net effect be?

Marc Cohen: There would be a reduction in family out-of-pocket costs, and in fact a 15% overall reduction. It would be higher for lower-income folks and lower for higher-income folks. You’d also have a pretty significant reduction in Medicaid; as a matter of fact, there would be a 23% reduction in Medicaid. So, if you look at what Medicaid would have spent in the absence of this program and modeled it out starting in 2015 for a cohort, and then put this program in place, you’d see an overall reduction of roughly a quarter in Medicaid expenditures.

You’d have about 14% more spending on LTSS, so it’s bringing new money into the LTSS system, which in part would support the LTSS workforce infrastructure, which is currently severely strained.

LeadingAge: The paper proposes that the “surplus revenue” collected in the program’s early years could be invested in a “secure trust fund.” What’s to prevent Congress from treating these funds the same way they’ve treated Social Security surpluses?

Marc Cohen: In an accounting sense, Congress counts Social Security surpluses, but in point of fact there’s no money that’s been taken out of the Social Security Trust Fund; nobody’s raiding the SS trust fund, so people say that a lot and it’s not quite what it seems. But I’ll say this: I don’t know how you get Congress to approve something but then say once you approve this you don’t get any say about it. It will be a challenge, but other countries around the world have dealt with this challenge and I have no reason to believe that we can’t figure this out as well.

LeadingAge: There’s a Milton Friedman quote that comes to mind: “Only a crisis—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.” Is that how you feel about this plan?

Marc Cohen: I love that quote, because people ask me, “Man, are you swinging at windmills here? Are you kidding me, this isn’t going to happen.”

But we wanted to build the intellectual infrastructure so when the time comes someone can say there’s been some good work done that considers a lot of different options and models and approaches and has come down on this one. And by the way, here is what it costs and here’s who gets the benefits. This quote is precisely why we did this—because we want this idea “lying around” when the political necessities associated with addressing the LTSS financing challenge require a solution.

Editor’s note: A video of a January 31 presentation by Cohen and Feder is available at the Bipartisan Policy Center website (scroll down on that page to find the video). They appear at the 47:00 mark.

Gene Mitchell is editor of LeadingAge magazine.