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Report

Strengthening risk protection through private long-term care insurance

Abstract

Americans currently spend over $300 billion a year on long-term services and supports (LTSS), paid for through government programs, private insurance, and importantly, individuals’ own out-of-pocket spending. Indeed, elderly households’ LTSS expenses present the largest source of out-of-pocket spending risk. However, the ability to insure against LTSS risks remains limited, with Medicaid (the main program providing coverage for these services) covering only limited LTSS. Moreover, with the number of elderly Americans expected to more than double in the next forty years, the number of people using LTSS and public expenditures on LTSS through Medicaid will both grow considerably in the coming decades, presenting important fiscal challenges. The financial risks facing middle-class Americans and the fiscal challenges facing Medicaid call for rethinking how households and the public sector finance LTSS needs.

This paper presents a proposal aimed at such a reform. First, I propose creating a new voluntary program, LTC Advantage, to help individuals purchase private long-term care (LTC) insurance. This progressive cost-sharing subsidy would be paid directly to the insurer to offset future LTSS claims, thereby lowering individuals’ effective LTC insurance premiums. Second, I propose the creation of a shared-risk-corridor program to help insurers manage systematic and undiversifiable financial risks. Only losses and gains from business cycles and changing market-wide financial parameters—as opposed to losses from poor claims management and underpricing—would be eligible for protection. Finally, I put forth a menu of policy options to boost access and demand for the LTC Advantage Program. These options include plan standardization, modifications to the Employee Retirement Income Security Act (ERISA) to allow penalty-free withdrawals from tax-advantaged retirement accounts for the purchase of subsidy-eligible LTC plans, policies to encourage employers to offer private LTC insurance plans, and demonstration programs through the Centers for Medicare and Medicaid Services (CMS) to test financing models that more efficiently integrate LTSS, primary care, and acute care delivery through Medicare.

Undertaking these reforms does not necessarily require additional resources; rather, this proposal would require a financing system that redirects much of what is currently spent on out of-pocket expenditures, informal care, and public programs toward the cost of more-complete insurance protection.

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