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March 3, 2016

How the Urban Institute is working to improve long-term care financing

March 3, 2016

On February 22, a broadly diverse group of policy experts proposed major changes in the way long-term services and supports (LTSS) are financed and delivered. The group, which included independent policy experts as well as representatives of consumer groups, the insurance industry, and service providers, proposed a universal catastrophic long-term care insurance program and significant changes to Medicaid aimed at making the program more flexible.

The Urban Institute played two key roles in this project. I was a co-convener of the collaborative. And the group relied heavily on modeling results developed through our DYNASIM3 retirement and aging microsimulation model. Senior fellow Melissa Favreault was the lead modeler for this project, part of which was done jointly with the actuarial firm Milliman.

The Collaborative’s work was also informed by research from Urban senior fellows Brenda Spillman and Rich Johnson, and Institute fellow Judy Feder.

The DYNASIM modeling provided the collaborative with invaluable information about the current need for high-levels of LTSS. That research, funded by the office of the Assistant Secretary for Planning and Evaluation at the Department of Health & Human Services, showed a wide variation in need. Half of those 65 and older are unlikely to require high-enough levels of care that they would trigger private insurance benefits or Medicaid eligibility. Yet, one in seven is likely to need such care for five years or more, at a cost of at least $250,000—far beyond the financial capacity of all but a handful of older adults.

In separate reports funded by the Scan Foundation, AARP, and Leading Age, The Urban/Milliman results showed the effects of alternative insurance designs. For instance, we learned how individuals of different incomes would benefit from various options, how new insurance could reduce Medicaid LTSS costs, and how they could supplement supports now provided by family caregivers.

At the same time, Milliman’s analysis helped us understand how changes in insurance designs would affect premiums.

The microsimulation modeling and actuarial analysis clarified several important issues:

  • Long-term care is an insurable risk for older adults. Yet few consumers purchase insurance. This drove us to seek ways to improve long-term care insurance in ways that would help middle-income households finance their future care and avoid having to rely on Medicaid. 
  • While private market reforms could succeed in lowering long-term care insurance premiums, they could not reduce costs sufficiently to create a strong, financially sustainable risk pool. We found that it would be extremely difficult for any voluntary insurance to overcome the challenges of adverse selection—where those most likely to need care are most likely to purchase insurance, especially when it is expensive. This further drives up premiums and discourages healthier consumers from buying.
  • Tax increases needed to finance a carefully designed public program for older adults would be relatively modest. While the collaborative did not propose a specific plan, Urban modeled a highly stylized public catastrophic program for the aged that could be financed with a 0.6 percent Medicare-like payroll tax levied on employees only. A program that also covered younger people with disabilities would cost more.
  • A well designed universal catastrophic program could reduce Medicaid LTSS costs for the aged by more than one-third.

We also learned that private insurance companies no longer sell stand-alone policies that cover more than five years of LTSS.

As a result, we focused our recommendations on a universal catastrophic program, which could fill private market gaps and cover those with the greatest care needs and limited ability to pay.

Our recommendations are an important step towards LTSS financing reform, but they are only a step. Future progress will require refinements to our proposals, which themselves will require additional modeling and analysis.

In this Sept. 3, 2010 file photo, United Home Care Services home health aide Maria Fernandez, left, pours cereal for Herminia Vega, 83, right, as she performs household chores for Vega and her husband, in Miami. Photo by Lynne Sladky/AP

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