The Health Insurance Association of America (HIAA) is promoting “Americans Planning for Today and Tomorrow,” a grassroots campaign designed to build stronger and broader support for the Long-Term Care and Retirement Security Act of 2001. To date, HIAA’s media campaign and lobbying efforts have produced 147 cosponsors for H.R. 831 and 16 co-sponsors for S. 627.
S.627, sponsored by Sen. Charles E. Grassley (R-Iowa), would amend the Internal Revenue Code of 1986 to allow:
- a deduction (based on years of continuous coverage) for eligible long-term care insurance premiums for a taxpayer, spouse, and dependents, including accelerated deduction percentages for persons who are 55 years old;
- long-term care insurance to be offered under cafeteria plans and flexible spending arrangements and
- an income-adjusted credit (up to $3,000) for eligible individuals with long-term care needs and their caregivers.
“Largest Looming Expense”
In a news release describing the HIAA campaign, the group’s interim president, Donald A. Young, MD, notes, “For America’s 77 million baby boomers, paying future long-term care costs remains as their largest looming expense. According to the Bureau of the Census, in 2020, one out of every six Americans will be age 65 or older–roughly 20 million more seniors than today.”
By 2020, Young added, “the number of Americans 85 and older–the people most likely to use long-term care–will double to 7 million, and double again to 14 million by 2040. Meanwhile, the national average annual cost of a nursing home stay is about $50,000.”
Stephen A. Moses, president of the Center for Long-Term Care Financing, told Health Care News in an email interview, “Without strong tax incentives to encourage baby boomers to plan early and insure fully for long-term care, many of this 77-million mega-generation will fall into Medicaid by default as their parents and grandparents did, thus administering the final coup d’grace to America’s welfare-financed, institution-based long-term care system.”
Better than Medicaid
Walter M. Cadette, a senior scholar at The Jerome Levy Economics Institute, writes in Financing Long-Tern Care:
“The nation is not equipped to deal with this problem. By default more than by design, it has fashioned a welfare model for financing long-term care, pushing Medicaid far afield of its original purpose of providing for the medical care of the indigent.”
Cadette notes that most long-term care is financed in one of two ways. Persons with substantial savings finance the care out-of-pocket. Medicaid covers the rest: the poor as well as the not-so-poor who have “spent down” their assets. “More than a third of the Medicaid budget goes to long-term care,” he points out, “mostly to pay for stays in nursing homes. Medicaid pays, in whole or in part, for the care of two out of three nursing-home residents.”
Private insurance, notes Cadette, finances just 7 percent of long-term care. But insurance–public or private or some combination of the two–would be a far better way than Medicaid to meet the nation’s long-term care needs. He considers long-term care “almost perfectly suited” to an insurance model: an extended nursing-home stay is a low-probability but high- consequence event–the classic insurance risk.
So if insurance is the best long-term care option, why do so few people cover long-term care that way? For three reasons, according to Cadette:
- Many Americans believe Medicare will pay for long-term care. In fact, however, Medicare reimbursement is limited to short stays for rehabilitation after an acute illness.
- Because long-term care insurance is low on the priority list of middle-aged and young adults, the insurance pool is narrowed to those for whom long-term disability is a distinct possibility–something that greatly increases premiums. Administrative costs are also inordinately high.
- Adverse selection makes it even harder for insurers to generate economies from pooling. When insurers cannot readily distinguish low risks from high, the coverage they offer to low-risk consumers is too little to be attractive to high-risk consumers. Alternatively, adequate coverage for high-risk consumers is too expensive to appeal to low-risk consumers.
The solution, Cadette says, is to attract consumers when they are relatively young, before health problems that might give rise to the need for long-term care begin to surface. “The earlier the insurance is bought, the less the insured will know about the risk of disability later in life, which will limit adverse selection and make it less difficult for buyer and seller to strike an equilibrium price. The earlier the insurance is bought, however, the greater the risk created by the passage of time and therefore the higher the risk premium. Variability in the future price of care is a risk insurers cannot diversify.”
LTC Bills an “Opportunity to Act”
Moses agrees. “The only way to save Medicaid for the poor is to divert middle class boomers to LTC insurance now, while they are still young enough, healthy enough, and affluent enough to afford the premiums. Congress and President Bush are penny-wise, pound foolish if they miss this last, viable opportunity to act.”
The long-term care (LTC) policies subject to the deduction are covered by broad consumer protections. The bills also would permit long-term care insurance policies to be offered under employer-sponsored cafeteria plans and flexible spending accounts. Together, these initiatives have the potential to help millions of Americans who need long-term care services now and in the future.
Studies indicate roughly 40 percent of long-term care in this country is paid for by individuals needing care, their families, the insurance they purchase, or through other private sources.
The main providers of long-term care continue to be family members–typically wives and daughters. Many older people who need long-term care today are maintaining some of their independence by relying on family members for assistance.
While the LTC tax credit would not reach many modest-income individuals in need of long-term care, it would provide relief for many family caregivers. Caregivers often lose wages and benefits, sometimes even jobs, to care for their loved ones. In short, caregivers may give up their own future income security to provide long-term care today for a mother or mother-in-law.
The tax clarifications enacted as part of the Health Insurance Portability and Accountability Act of 1966 (HIPAA) are a good first step, but they have limits. Due to the limitations imposed on the medical itemized deduction, HIPAA’s tax benefits help primarily those workers whose employers contribute toward a long-term care insurance policy on their behalf.
According to employee benefits research, this represents only 2 percent of the current long-term care insurance market. The vast majority of Americans who have long-term care insurance purchase individual policies and may deduct LTC insurance premiums only if they itemize deductions and only if their medical expenses exceed 7.5 percent of adjusted gross income. IRS data show only 4.5 percent of all tax returns report medical expenses as itemized deductions.
The pending legislation goes beyond HIPAA and updates the consumer protection standards to reflect most of the National Association of Insurance Commissioners’ (NAIC) model act and regulations on long-term care as amended in September 2000.
During the August break, the HIAA campaign mobilized a growing and diverse coalition to reach out to members of Congress with letters, phone calls, personal visits, and town hall meetings. The coalition is made up of consumers, other interested organizations, long-term care providers, and insurance agents and brokers.
The campaign focuses on grassroots consumer education and activation and is part of HIAA’s effort to bring about tax relief for consumers to help them protect themselves against the high cost of long-term care. The goal is to ensure passage of S. 627 and H.R. 831.
For more information . . .
The full text of Walter A. Cadette’s May 2000 analysis, Financing Long-Term Care, can be found on the Internet at http://www.levy.org/docs/hili/59a.html.