Who Will Pay for the Elderly Is Now An Urgent Question

(Bloomberg Opinion) -- The next few years are going to determine how you'll spend the most vulnerable years of your life, and who's going to pay for it.  Pandemic excluded, the odds that you'll live to an advanced old age have increased. But living longer doesn't necessarily mean better quality of life. More than 40% of Americans over age 85 have Alzheimer’s disease and 70% of 65 year-olds are projected to need long-term care at some point.

The grim reality is that as people live longer, many will need long-term care. The pandemic exposed the poor quality of many care facilities, making it all the more clear that the status quo isn't sustainable. All developed countries are grappling with aging populations that will force them to decide how best to manage and finance the care of their elderly. The U.S. Congress is debating the question now as it grapples with President Joe Biden's spending plan.

Will it be the federal government assuming responsibility for universal care? State governments doling it out to the most needy? Or will families retain more control through wider access to private market insurance?

In the UK, Prime Minister Boris Johnson has proposed a major overhaul to the country’s social care system financed with a 1.25% tax increase on Britons. The tax increase is getting pushback, but at least it's an honest acknowledgement of the costs involved and that everyone will need to pay.

 In the U.S., long-term care — by which I mean non-medical care for individuals living with disabling conditions — isn't covered by Medicare. It's designed as a last resort for impoverished retirees provided through each state's Medicaid program. Since long-term care is expensive and most people don’t have private long-term-care insurance, Medicaid shoulders more than 50% of the costs of caring for America's disabled and elderly; private insurance covers just 11%.

To qualify for Medicaid, beneficiaries must prove they don't have enough wealth to pay for care themselves. This creates an incentive for middle-class retirees to spend or give-away their assets so they don't exceed state limits. According to one study between 1998 to 2008, almost 10% of retirees had to do this to gain Medicaid coverage.

Most of that care is through institutions such as nursing homes. Even if a family prefers home care, there are few options, and long wait lists for home health services.

Biden's original Build Back Better plan offered a solution to this problem. It included $400 billion to expand access to home health workers through state Medicaid programs. The money would be well spent on long-term care, as that will help the most vulnerable and needy members of society who are falling through the cracks of Medicaid. It's certainly a better use of government money than other provisions in the budget that mostly benefit the upper middle class, like reinstating state and local tax deductions for income taxes, or endless subsidies for electric cars.

But the provision already is getting pared back as lawmakers balance competing interests in the  reconciliation process.

Even if it passed in full, the extra money is only a stopgap solution. Expanding Medicaid programs isn't entirely bad, but it also gives states an incentive to loosen the asset requirements for qualification, drawing more people into the program and raising reliance on Medicaid when the opposite should be happening. It's another step toward crowding out an already thin and expensive private insurance market that would otherwise be a viable option for many middle class Americans who’d prefer private insurance.

Its' a vicious cycle. When fewer people buy long-term care insurance, those who do tend to be in need of the most expensive care, which makes the insurance even more expensive and excludes more buyers.

There is an argument to be made that long-term care should be provided by our government universally. But as the population ages, our taxes will need to cover more people with expensive needs, especially if more people get care at home. Unless we devote substantial resources (and forgo investment in other parts of the economy), there will still be waitlists and people shuttled into poor-quality institutions. Before we go all in on government provided care, ask yourself if you want to spend your most vulnerable years at a government-run institution, or burdening your children as you languish on a waitlist.

The pandemic exposed the need for developed countries to address long-term care in an urgent timeframe.  Even if the current budget provisions pass, it expands an entitlement that will only get more expensive. It doesn't solve the root of the problem: an over reliance on Medicaid for long-term care.

If Medicaid is expanded, it should be accompanied by more stringent asset limits as part of larger reform. This would keep Medicaid for what it is was meant to be: help for the neediest.

For everyone else, long-term care insurance needs to become a viable option. There is an incentive to buy private insurance because it offers better care and gives families more choices. But most people don’t buy it because it's so expensive. Premiums are high because of Medicaid. But they also reflect that long-term care is inherently expensive for companies to insure because many people who buy insurance will need it. The market could be improved by pairing long-term care with life insurance or reverse mortgages and making all premiums tax deductible.

 Long-term care will only become a bigger expense for many families. If the government tries to turn this incrementally into a universal benefit through Medicaid, it will be expensive and lead to worse options for the people who need care. Instead we must reform Medicaid, give it adequate funding and grow the private market.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Allison Schrager is a Bloomberg Opinion columnist. She is a senior fellow at the Manhattan Institute and author of "An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk."

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