(Bloomberg View) -- The only good thing that can be said about aging is that it’s better than the alternative. It’s also more expensive, and as society ages, we’re going to have to figure out how we pay for it.
Most Americans will not end up lingering on in a nursing home for years. But for those who do, the costs will be astronomical. That’s largely not a problem for the bottom half of the income distribution, because Medicaid will pay the bill if you’re destitute. But middle-class people who have been carefully hoarding resources for years in the hopes of passing something down to their children can instead see their entire legacy handed over to the nursing home; an affluent couple with a spouse still living in the community can see that spouse forced into a sharp reduction of both savings and income.
Enter the idea of long-term care insurance. Buy a policy when you’re still relatively young and healthy, pay the premiums every year, and if you do end up needing intensive support services, you can go to a nursing home secure in the knowledge that your spouse and your legacy are protected. Personal-finance columnists have been solemnly recommending long-term care insurance for years, though in my experience, this advice is often just as solemnly ignored.
That’s because the policies are now quite pricey. When long-term care policies were introduced a few decades ago, they seemed like an attractive deal. As it turns out, that’s because they were underpricing the insurance. Insurers expected a significant portion of people to drop the insurance every year (meaning that their previously paid premiums would be all profit). Instead, only about 1 percent did. They also underestimated costs.
And while typical health insurers don’t have to worry much about interest rates, because they generally pay this year’s health care costs out of this year’s premiums, long-term care insurers need to park the money between taking the premium in and paying the benefits out. The ultra-low interest rates of the last decade have made those investments less profitable, hurting them still further. And state regulators have proved resistant to efforts to raise premiums to make the insurance more actuarially sound.
Thanks to these factors, two small insurers in Pennsylvania “could soon become one of the nation’s costliest insurance failures ever,” according to the Wall Street Journal. And they are not the only ones who have had trouble with this insurance product. This raises the question of whether long-term care insurance can ever be an attractive product for the middle class -- and if not, how the heck we’re going to pay for the care we need when we get old.
What we want, as consumers, is a product that offers low, level premiums and will provide all the nursing-home care we need if we get sick. In other words, we want long-term care insurance to look something like life insurance, except with variable payouts like health insurance has.
Insurers, on the other hand, would probably prefer long-term care insurance to have a premium structure more like ordinary health insurance, where policies are re-rated every year. (Tom McInerney, chief executive officer of insurance company Genworth, recently said as much to Forbes). That’s because death rates are relatively easy to predict but health care costs aren’t; labor costs rise, new technologies emerge, and the standard of care changes as new discoveries are made and new regulations written.
Effectively, setting a long-term level premium asks insurers to guess what sort of care they might be required to pay for in a decade or so, and if they guess wrong, too bad. Only as Pennsylvania shows, it’s not simply a question of insurers taking a nasty loss; people who faithfully paid their premiums for years may see their benefits cut if insurers go belly-up.
Some of this problem can be fixed by raising premiums to compensate insurers for the uncertainty. But the higher premiums go, the fewer people will want to buy the insurance; better to see the house sold when you finally have to go into a nursing home than to sell it now because your insurance premiums have devastated your budget.
We could try to encourage younger people to buy insurance, of course; the earlier you start with such insurance, the lower the premiums can be. But that increases the uncertainty problem that is plaguing insurers now, because who knows what costs will look like decades hence? Besides, financial counselors have already been encouraging those people to buy this insurance, with limited results. Even with the help of a substantial mandate policy, the government has had only partial success getting young people to buy health insurance; when it comes to health care, a lot of people seem to be unwilling to insure their risks unless that insurance is sold well below cost.
If the market simply can’t provide what we want, why not structure a program something like Medicare, with premiums automatically taken out of payroll, and everyone covered if and when the time comes?
Well, for one thing, because we already tried this, with the CLASS Act, a long-term care program that was originally included as part of Obamacare. It was attached to the bill as much because of budgeting arcana as because it filled a policy need -- the Congressional Budget Office only forecasts the costs of a bill for 10 years, during which period the new program would have mostly been taking in premiums rather than paying out benefits, which helped the administration claim that Obamacare would reduce the deficit. But lots of people also genuinely hoped that the CLASS Act would help the middle class deal with the crippling cost of nursing-home care.
Unfortunately, the bill included a requirement that the new program be actuarially sound over the long term, and when they looked into the matter, it turned out that after the 10-year budget window, when the government had to start paying for benefits, the program would be a fiscal disaster. So it died. It turned out that we have the same problem as taxpayers that we do as consumers: We would like to be protected from expensive disaster, but we aren’t willing to pay the expenses of buying that protection.
As the population ages, and the market for long-term care insurance continues to evolve toward something either riskier or more expensive, this is going to become a major public policy issue. If we want to ensure that people can go to nursing homes without gutting their estates or financially pinching their spouses, we’ll have to cough up quite a lot of money to pay for it. Or we may decide that what we have now is ultimately the best option: If you need a nursing home, the government will take most of your assets to pay for it, and you will die broke.
These options represent two different ideas about fairness. The first ensures that two middle-class families of roughly the same income do not end up in a very different place, financially, because one of them had the bad luck to need nursing home care, and the other didn’t. The other says that you should pay for what you need if you have the money, and if you don’t, the government will make sure you are taken care of anyway. The first expands government, the second minimizes it. But before conservatives say the choice is obvious, we should also point out that the first rewards bourgeois habits of careful saving; the second penalizes them.
These sorts of dichotomies mean that long-term care is going to be a long-term debate. And just as you get the best deal on insurance if you buy it before you need it, whatever decision we make will probably be a lot better if we start those conversations now.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.