The Long-Term Care Challenge

Robert P. Saldin

Current Issue

In recent years, reform-minded Republicans have started recognizing and responding to the challenges facing middle- and working-class American families. In 2017, a GOP-led Congress passed a law that doubled the amount of the child tax credit as a means of supporting parents and reducing childhood poverty. And in February 2021, Senator Mitt Romney put forth a child-allowance proposal that would increase those payments and make them universal.

While these reformers should be praised for focusing on the needs of families with children, many continue to ignore a problem plaguing the American middle class from the other end of the age spectrum: the cost of long-term care (LTC) for the elderly. Though often overlooked, reforming LTC presents a unique opportunity for Republicans to fill what is arguably the biggest hole in the American social safety net and relieve the pressures that this broken system places on the middle class and state budgets.

"LTC" refers to the services and support that over 14 million chronically ill or disabled Americans require to complete "activities of daily living," such as eating, bathing, and dressing. For those requiring this form of assistance, there is considerable variation in the level of need, the type of services necessary, and the location where this care takes place. At one extreme are individuals with relatively modest limitations who may only require in-home visits by a family member or aide for a few hours a week. At the other extreme are individuals residing in nursing homes who require round-the-clock support.

LTC is expensive — so expensive that it can deplete a middle-class family's lifetime of savings in a few short years. Notably, the term "middle class" here includes a vast demographic range, from those just over the poverty line to those maintaining six-figure retirement accounts decades after they leave the workforce. To be sure, once individuals have burned through their assets to the point of impoverishment, Medicaid swoops in to pick up the tab. But this intervention only shifts the burden to state budgets, which crowds out other spending priorities.

Health-policy experts have recognized the cost of LTC as a serious concern dating back to the debates over Medicare in 1965. Given our aging population and the pervasiveness of smaller, more geographically dispersed families, LTC is only going to become more of a challenge for individuals, families, and states as time goes on.

Of course, the United States already has robust social-insurance programs targeted at various vulnerable populations. Social Security hedges against elder impoverishment and homelessness. Medicare covers most health costs for the same demographic, while Medicaid does so for the poor. Rather than undermining freedom and economic dynamism, as some critics initially worried, these forms of social insurance have provided the kind of predictability and social continuity that free, dynamic societies require. Such public backstops also have the potential to neutralize the forces of polarization and populism that fuel calls for Washington to intervene more directly in the economy.

Recognizing the LTC challenge, the Biden administration recently proposed $400 billion in new funding to support home-care workers (that proposal was included in the House-passed Build Back Better legislation, albeit with a reduced price tag of $150 billion). While the initiative's emphasis on expanding options for home- and community-based care — as opposed to less desirable and more costly institutional care — represents a step in the right direction, it fails to address the core problem at issue: Americans are woefully ignorant of the likelihood of requiring LTC. Consequently, not enough healthy people pay into the system to make a robust private market viable. The ultimate objective, therefore, should be a universal national program to mitigate the catastrophic costs that drain state budgets and impoverish middle-class Americans.

DEMOGRAPHY AND DYNAMISM

The LTC challenge is inextricably connected to what is otherwise a remarkably positive development: Americans are living longer. Today's youth have a life expectancy of 82 years — roughly a 50% increase from what it was a century ago. Projections indicate that the number of older adults will double between 2015 and 2050, and that the number of people over 85 will triple. In short, reaching "old age" is the new norm. A challenge that comes with this otherwise welcome news is that as people age, their likelihood of requiring LTC increases.

To be sure, LTC is not exclusively an issue for elderly Americans; individuals of any age may require LTC. A young adult who is paralyzed in an accident, for instance, will require assistance with activities of daily living. Fortunately, such cases are relatively rare. The far more common scenario involves older adults needing assistance during the later stages of life: Nearly 60% of those requiring LTC are 65 or older, and 80% of national LTC spending goes to elderly recipients.

The challenge of meeting the needs of older Americans who require assistance in one form or another is not new. What is new (as well as concerning) is the prevalence of demographic forecasts indicating that the number of individuals requiring LTC is set to increase dramatically. The latest estimates suggest that by 2030, the current population of 14 million people requiring LTC will swell to 24 million. Perhaps the starkest data points are these: Americans who reach the age of 65 can now expect to live past 85, and of those reaching 65, about 70% will need some LTC, with the average man requiring 1.5 years of assistance and the average woman requiring 2.5 years.

The key takeaway is that American society is rapidly aging, which means that our population is going to need far more support in the coming years and decades. Since LTC is so expensive for most Americans, that increased level of need poses a serious challenge. Without reform, the situation could impose significant constraints on America's dynamism and vitality.

WHERE THE FINANCIAL BURDEN FALLS

Though analysts struggle to measure LTC spending, it is clearly one of the biggest drivers of health-care expenditures in the United States. One analysis found that about $235 billion is spent annually on LTC. Another estimated that LTC spending amounts to more than 9% of total U.S. health expenditures. Notably, the data underestimate the real cost of LTC, since so much of the care is provided free of charge — usually by a family member. The value of family care for the elderly is estimated to be $470 billion each year, raising the total annual cost of LTC to about $705 billion.

Due to both personal preference and the high cost of institutionalized care, the overwhelming majority of LTC in the United States has traditionally been provided informally and without charge by relatives and friends. One study reported that in 2017, around 41 million unpaid caregivers provided 34 billion hours of care. This form of caregiving can be a source of joy and meaning for both the caregiver and the recipient, but it can be physically and emotionally draining as well. It can also interfere with informal caregivers' ability to hold a job or relocate for better career opportunities. Consequently, caregivers' financial vulnerability increases in both the short and the long term, exacting an economic toll on them as individuals and on society at large.

When family and friends are not willing or available to assist, or when someone's needs exceed what family and friends are capable of providing, paid care exacts a cost of its own. Individuals requiring paid assistance will typically need to hire a home health aide at a rate of about $24 per hour, and costs only increase from there. For a family whose elderly parent can no longer live independently, the figures can become overwhelming: A bed in a nursing home typically costs $93,075 for a shared room, or $105,850 for a private room, on an annual basis. For those who aren't wealthy, LTC expenses can quickly exhaust personal savings.

To the surprise of many, Medicare does not cover LTC expenses. This means that individuals and families are often paying out of pocket for care unless they are poor enough to qualify for Medicaid or are among the few with private LTC insurance. Although there is considerable variation, the average person reaching the age of 65 will require $138,000 in LTC spending. Roughly half of Americans reaching age 65 will face "significant need" — defined as being unable to perform multiple activities of daily living without assistance. For about 15% of American adults, the average cost will exceed $250,000 over the course of a lifetime.

The current system of LTC provision puts intense pressure on the middle class. Unlike the poor — who have few assets to spend down prior to reaching Medicaid eligibility — and the wealthy, who can finance their own care with relative ease, those in the vast middle have a lot to lose. About half of households aged 55 or over have retirement savings, but the median amount is just $109,000. For many families, a sum like that represents a lifetime of responsible saving, giving off the appearance of a healthy nest egg. But even average LTC expenses can eat through that amount in short order. Another 23% of households aged 55 or over have defined-benefit plans but no funds earmarked for retirement. Though many of these households are well above the poverty line, their plans are unlikely to provide enough funds to cover LTC costs.

In sum, the financial burden of our LTC-provision system falls squarely on the shoulders of a remarkably broad middle-class cohort that stretches from just above the poverty line to those who are still sitting on six-figure savings after a couple of decades of retirement. Medicaid provides a safety net, but qualifying for the means-tested program requires being in financial ruin. And even then, the economic burden doesn't go away; it's merely shifted from the individual to society.

Today, Medicaid covers 52% of the nation's LTC costs. That spending amounted to $129 billion in 2018, consuming 32% of the program's total budget. Medicaid typically competes only with K-12 education for the largest line item in state budgets. With LTC spending projected to continue growing fast, it threatens to pinch states' already-tight budgets and crowd out other fiscal priorities.

POLICY TRAPS AND POLITICAL CHALLENGES

Confronting the LTC challenge has become an increasingly urgent matter, but it has not caught health-policy experts by surprise. Lawmakers have made several attempts to reform LTC, dating back to the creation of Medicare in 1965 and including the Medicare Catastrophic Coverage Act (MCCA) of 1988, the Pepper Commission of 1990, the failed Clinton health reform, and, most recently, the fatally flawed CLASS Act, which became law as part of the Affordable Care Act (ACA) but was later abandoned by the Obama administration and eventually repealed by Congress. This history reveals several formidable policy traps that have plagued reform efforts.

Paying for a national program has always been the main sticking point. The major attempts at reforming LTC in recent decades all collapsed due to the staggering realities of financing a national program. The MCCA saga in particular led many to conclude that mandatory participation had to be avoided because it was too politically contentious. These earlier efforts also revealed a split among health-reform advocates: For those focused on older Americans and individuals with disabilities, LTC remained a priority, but many others came to see LTC's price tag as a threat to their central goal of achieving universal health coverage.

Financing LTC is especially difficult because the American public is generally ignorant about the issue and ill-prepared for the financial risk it poses. Among those 40 and older, 38% say they are not concerned at all about their potential LTC needs, while two-thirds say that they have done little or nothing to plan for them. Only one-third report having saved money for LTC. Around 40% of the public erroneously assumes that Medicare will cover their nursing-home bills should the need arise. In short, Americans underestimate the prevalence of the need for LTC and don't understand how such care is financed. Those misperceptions severely limit reformers' ability to rally political support for a new program to address the issue.

In addition to the political constraints it places on reformers, widespread ignorance regarding LTC has led America's patchwork system of LTC provision to be plagued by a classic case of adverse selection. Because there is relatively little interest in planning for LTC needs, the population interested in coverage is far more likely to already need care. This situation makes a non-mandatory program untenable, since there would be too few healthy people paying into the system to cover its costs.

Today's private LTC-insurance market helps illustrate the problems that adverse selection causes in practice. While private LTC insurance exists, the market is highly dysfunctional. Insurers and potential purchasers are limited by technical problems and the lack of awareness described above. The result is that private LTC insurance policies are expensive: A typical plan has an average monthly premium of about $216. That price tag discourages many Americans from purchasing LTC insurance; today, fewer than 4% hold such plans. Medicaid's existence and structure may also reduce uptake of these private plans. As the safety-net "payer of last resort," Medicaid imposes an implicit tax on private insurance insofar as having another source of financing extends the time it takes for a person to qualify for government assistance. Together, these problems in the private market have led many insurers to quit offering LTC plans altogether; fewer than a dozen continue to do so.

Although required participation in an LTC program appears to be the obvious response to a system crippled by an adverse-selection problem, even many advocates have long considered it a political non-starter since the demise of the MCCA in 1989. This lesson was reinforced by the acrimony over the ACA's individual mandate for health insurance. Such insurance is widely desired, but the mandate was still a source of major political and legal controversy. LTC insurance, by contrast, is not widely desired, due in no small part to individuals' ignorance of their likelihood of requiring LTC. If a mandate for something most people desire barely made it through Congress (and was then effectively repealed years later), it is hard to see how mandatory LTC insurance could survive the lawmaking gauntlet.

That said, the rationale for requiring LTC coverage is even stronger than it was for general health insurance. The case for the ACA's individual mandate rested on the premise that some mechanism was necessary to prevent healthy people from taking advantage of the system. Any law requiring the insurance industry to offer coverage to everyone regardless of health status would need to ensure that everyone carried insurance, otherwise healthy people would have the incentive to forgo coverage until they became sick — at which point insurers would still be forced to take them on. At a mass scale, that type of consumer calculation would deny insurers the pool of healthy individuals required to support those filing claims.

The same logic applies to LTC coverage, but even more so. The prohibitive cost of LTC and high levels of ignorance among the American public — which make it even less likely that people with no impending need will buy in to an LTC program — serve to reinforce, rather than weaken, the rationale for Congress to institute a universal mandate.

GUIDING PRINCIPLES

Policy experts and lawmakers have spent over 50 years struggling to devise LTC reform in a way that both meaningfully improves the status quo and has a fighting chance to clear the political hurdles scattered throughout the lawmaking process. Their successes and failures can help us sketch out a set of guiding principles to inform future LTC-reform efforts.

The current patchwork system leans heavily on two suboptimal support structures: unpaid family assistance that, among other problems, sharply reduces labor mobility for informal caregivers; and Medicaid, which serves as a means-tested backstop and payer of last resort. To re-conceptualize that system, reforming LTC should be understood as part of a broader effort to bolster the American social safety net in a way that promotes economic freedom and helps bring some much-needed stability to our democracy. As the Niskanen Center's Samuel Hammond has emphasized, combining free markets with a more universal system of social insurance can facilitate free enterprise by providing the kind of social continuity and certainty that are essential for sustainable economic dynamism.

Although promoting economic freedom and an expansive, universal welfare state doesn't map cleanly onto our familiar conceptual framework for understanding the American political spectrum, which tends to range from small-government libertarianism on the right to big-government progressivism on the left, similarly situated industrialized countries have successfully united the two approaches. Results have been encouraging for both those who prioritize an open, dynamic, and innovative economy as well as those concerned about the individuals who inevitably fall through the cracks in a free-market system. The experiences of countries such as Sweden and Denmark show that broad social protections can provide the foundation that allows for the maintenance of robust personal and economic freedoms.

In addition to framing LTC reform as part of a broader effort to bolster the American social safety net, policymakers need to address the system's status quo, which leaves a broad swath of Americans vulnerable to financial ruin. This weakness is especially apparent when considering how people become eligible to receive assistance from Medicaid for LTC expenses. To do so, people must "spend down" their savings until they are impoverished. Since wealth transfers are prohibited and Medicaid's five-year "look-back" period is designed to ensure that applicants haven't, say, gifted money to family members, "spending down" typically means spending assets on LTC until the Medicaid threshold is met.

These eligibility requirements hit the middle class the hardest. Poor Americans have few assets to burn through before qualifying for Medicaid, while the wealthy are often able to self-finance their care without significantly diluting their wealth. But for middle-class Americans hoping to pass on modest inheritances to family members, LTC expenses can be crushing. Reform efforts should seek to mitigate that risk while also recognizing that it's reasonable to expect middle- and upper-class individuals to make some provision for the likelihood they will have LTC needs as they age.

While our LTC system squeezes the middle class, it also puts significant pressure on state budgets. As noted above, in most states, Medicaid rivals K-12 education as the biggest line item in the budget. Recent studies have shown that the program is the top concern for budget experts in state legislatures. Given that LTC needs are projected to increase in the coming years and decades, they threaten to overwhelm public resources and capabilities. This could crowd out various public priorities at the state level, including education, transportation, law enforcement, corrections, other health-care needs, and parks and recreation. Relieving states of a significant slice of their current Medicaid obligations would give them more budgetary flexibility, enabling lawmakers to focus on other priorities or even fund tax cuts.

Unpaid caregivers bear an undue amount of the burden in our current system as well. To be sure, free care from family and friends is an essential component of LTC provision, but it comes with a hidden cost. The decision to take on caregiving responsibility for a loved one involves considerable uncertainty regarding the time horizon for such a commitment and the extent of support that will be needed. Additionally, there are often significant financial implications for the caregiver. In many instances, potential caregivers are put in the position of needing to choose between remaining in the workforce in the middle of their prime earning years or helping an elderly loved one. By one estimate, there are currently about 53 million family members providing an average of 24 hours of care per week and spending an average of $7,000 in out-of-pocket payments annually while doing so. At the macro level, these tradeoffs constitute a significant constraint on economic freedom and dynamism in the United States.

Aside from the financial consequences of informal care, social trends suggest that the number of people requiring LTC will soon outstrip the number of informal caregivers available to help them. Recent decades have witnessed an increase in single-parent families, women entering the paid workforce in large numbers, declines in average family size, and greater geographic dispersal of family members (an issue that is exacerbated by Medicaid's state-to-state variations and lack of interstate portability). All of these shifts indicate that the pool of informal caregivers is going to decline relative to those needing care, which makes reform not only economically desirable, but socially necessary.

TWO STEPS TO REFORM

Bearing in mind these guiding principles, LTC should be reformed in ways that provide relief and assurance to middle-class individuals and families while easing our reliance on Medicaid. The most significant challenges facing reforms are political. Given this reality, an incremental approach makes sense in the short term. But in the long term, the real crux of America's LTC challenge will require a national program with universal coverage for catastrophic LTC expenses.

Prioritizing home- and community-based services (HCBS) over institutionalized settings when possible has gradually become a widely accepted strategy, as national spending on HCBS has roughly doubled in real terms since 2000. Yet while Medicaid requires states to offer a nursing-home benefit, it largely leaves HCBS to their discretion, meaning there remains considerable variation among state approaches to such services. Oregon leads the pack, devoting 82% of its Medicaid LTC spending to non-institutionalized settings. At the low end, only 31% of Mississippi's Medicaid spending on LTC does the same.

The rationale for incentivizing and empowering states to expand their HCBS opportunities is compelling. Studies suggest that prioritizing HCBS over institutional care saves money. Additionally, most people requiring LTC prefer to stay in their homes than move to a nursing facility, making the expansion of HCBS a desirable measure.

As part of his administration's American Jobs Plan, President Joe Biden has embraced this approach. The current HCBS program under Medicaid suffers from two compounding problems: a long waitlist for enrollees eager to take advantage of the HCBS option, and relatively low pay ($12 per hour) for the home-care workers providing services and support. Biden's plan attempts to solve these problems by boosting caregiver pay and empowering states to expand the availability of HCBS.

The proposal, while laudable, is quite limited and doesn't really address the most vexing challenges in America's system of LTC provision. It doesn't offer any assistance to middle-class individuals who haven't already met the means test for Medicaid eligibility, nor does it do much to help those who need to be housed in a skilled-nursing facility. Nonetheless, it represents a step that is politically plausible now, would help establish a sustainable caregiver workforce, and would re-orient the setting of LTC in a way that's both more cost-effective and more desirable for seniors. In doing so, it would put the country in a better position to meet the anticipated surge of demand for LTC as our society ages, even if it falls far short of confronting the full scope of the challenge.

Ultimately, meeting that challenge will require a national program focused on catastrophic LTC costs. But passing such a program is a heavy lift in our current political climate. Fortunately, there are some encouraging signs for the political viability of LTC reform. Most notable among these is the fact that in recent years, the Republican Party has shown increasing openness to the idea of using public initiatives to address the challenges facing middle- and working-class families. The most prominent example of this is support for expansions of the child tax credit — an idea championed by a small cadre of "reform conservatives" a decade ago that is now broadly supported by Republican politicians, even if they disagree about work requirements and other particulars. One recent example of this trend is Senator Mitt Romney's embrace of direct cash payments to families with children. While extending that general framework to LTC is not on the short- to medium-term horizon, it is conceptually consistent with Romney's position.

There is also no shortage of examples for approaching LTC reform if one looks beyond our shores. Other wealthy industrialized countries are facing demographic forecasts similar to those of the United States, but have been more proactive in taking steps to address the need for LTC.

The Netherlands was first off the block, launching its program in 1968. The Dutch approach is universal and based on a public-private partnership that relies on private insurers to administer the program. About three-quarters of the cost is financed by individuals via payroll taxes and co-payments, with general funds covering the rest.

Germany started its program in 1995 as local governments were struggling to handle an increasing need for nursing-home care. German citizens are offered a choice between a public LTC plan or comparable private offerings, financed with a 2.55% payroll tax split evenly by employers and employees. Though the German program has been more costly than originally anticipated, it has sharply curtailed reliance on means-tested public programs and brought substantial relief to local governments. Japan — a country with a particularly acute age-related demographic challenge — largely limits its social-insurance LTC program to those 65 and older.

In the United States, the objective need not be a comprehensive program that covers every last dollar of LTC spending. Rather, reform should be geared toward the most daunting concerns facing individuals, families, and American society: the risk of financially catastrophic LTC expenses and the excessive burden LTC spending imposes on state budgets. A government-sponsored public program, or even a regulated private-insurance program that provides standard coverage for catastrophic LTC expenses, would go a long way toward addressing these challenges without expecting the public to provide complete protection for the assets of wealthy and middle-class Americans.

A key distinction between potential LTC reforms is whether participation should be optional or mandatory. In terms of policy design, mandatory participation — as in the programs of the Netherlands, Germany, Japan, and elsewhere — is perhaps the only viable approach short of a massive and quite unlikely reversal in public awareness of and concern over LTC. As the designers of the CLASS Act recognized, passing a mandatory program is politically challenging, to say the least. However, it is hard to see a way around it, as a non-mandatory approach offers little hope of significantly altering our dysfunctional system.

Though LTC can involve a diverse range of cases for people of any age, a national LTC program focused on combatting catastrophic expenses should be limited to seniors. Accommodating the needs of both younger and older people in a single program would be difficult for a number of reasons, starting with the fact that disabilities incurred by younger people — ranging from permanent injuries suffered in accidents to disorders like autism — are relatively uncommon and often difficult to anticipate, whereas we know there is a strong chance that people living to the age of 65 will encounter challenges as they age. Second, younger people usually have a far longer time horizon for their care needs than the elderly, and they typically have different goals and priorities as well. Many younger individuals with disabilities, for instance, are eager to work, whereas those over the age of 65 are often retired or contemplating retirement. Finally, the needs of older people pose a far greater cumulative fiscal challenge than those of young people. Separating LTC based on age would ensure the program focused on the population driving the nation's fiscal challenge — the elderly — while encouraging lawmakers to consider additional reforms targeting the needs of younger individuals with disabilities.

The resulting program should address the high cost of institutionalized care. As noted above, shifting as much LTC as possible from institutionalized settings to home- and community-based settings is certainly desirable, but nursing homes will always be necessary, too. It is here that costs are highest and the burden on the middle class and Medicaid is greatest. A social-insurance model of nursing-home LTC could be financed through a new payroll tax, as is the case with the German model. It also could be publicly funded, like Medicare, or it could rely on private insurers, as the Dutch program does.

Alternatively, individuals could be required to carry private, government-approved catastrophic LTC coverage. Subsidies would be needed to assist those with few assets, but this formulation would make certain that wealthy and middle-class Americans would be funding at least some of their own LTC needs. Income-based premiums — already a feature of Medicare parts B and D — could further ensure that the middle class and especially the wealthy are contributing to their own LTC needs rather than leaving taxpayers to pick up the tab. Coverage could be structured like the private LTC insurance plans that are already available, which provide daily benefits of about $128 for five years.

Again, the mandated coverage should be geared toward helping older adults with the kind of catastrophic expenses that lead to family impoverishment. Because the average stay in a nursing home is just under three years, individuals could be required to carry a plan covering that length of time. As noted earlier, a shared room in a nursing home costs about $93,000 per year, which could be covered with a daily benefit of about $250. Those living beyond the covered three years could become eligible for Medicaid immediately. This scenario would retain Medicaid as a key player in LTC spending but would dramatically reduce its obligations, thereby easing budgetary pressure on state governments. If participation was mandatory, premiums would be far more reasonable than those now available from private insurers.

THE LONG-TERM CARE OPPORTUNITY

For decades, any serious proposal for addressing America's LTC problem was widely dismissed as a black hole for public resources that the country could never realistically afford to take on. Yet similarly situated countries have managed to pull it off without courting fiscal catastrophe. To be sure, a national program in the United States would represent a significant expansion of our social-welfare state — one that the American populace is less accustomed to than are those of most other industrialized countries. Yet the reality is that at some point, we will be forced to grapple with our LTC situation whether we like it or not.

Addressing LTC does not need to be viewed as an inevitably grim, sacrificial exercise. Nor should it be understood as a lurch toward some socialist dystopia. To the contrary, the old, reflexive narrative that LTC and other social protections cost too much fails to appreciate them as a key factor for promoting economic freedom in a healthy liberal democracy. Such safeguards have the potential to not only address problems the free market is poorly suited to handle, but to provide the kind of social protections, stability, and confidence that a free and dynamic society needs to truly flourish. In this light, LTC reform represents not only a challenge, but an opportunity: to build consensus, to fortify America's social safety net, to assist working- and middle-class American families, and to free up state governments to focus on their own priorities.

Robert P. Saldin is a professor of political science and director of the Mansfield Center’s Ethics and Public Affairs Program at the University of Montana. He is also a senior fellow at the Niskanen Center.


Insight

from the

Archives

A weekly newsletter with free essays from past issues of National Affairs and The Public Interest that shed light on the week's pressing issues.

advertisement

Sign-in to your National Affairs subscriber account.


Already a subscriber? Activate your account.


subscribe

Unlimited access to intelligent essays on the nation’s affairs.

SUBSCRIBE
Subscribe to National Affairs.