There is a lot of noise in the news about long-term care. Some individuals, especially high-income earners, are urgently purchasing personal long-term care (LTC) policies. Some employers are considering implementing LTC policy offerings to aid employees who want to purchase individual policies. Still, others are suggesting that employers and individuals alike take a "wait and see" approach. So . . . what is going on, and why are there so many conflicting recommendations?
Let's Start at the Very Beginning
Starting at the very beginning means understanding the long-term care problem in the United States. The problem is caused by a convergence of multiple social, economic, and financial challenges.
- The Cost of LTC Services: The cost for long-term care of all types has increased significantly over the past decades. In fact, costs have risen to levels that are not affordable for many, if not most individuals. While the actual cost of long-term care can be very location-specific, approximate costs fall as follows:
$7,600 per month for care in a long-term care facility (a.k.a. nursing home)
$3,600 per month for care in an assisted living facility
$68 per day for adult daycare
$20 per hour for home health aide
- Aging Population: There is a significant demographic shift in the population. The baby boomer generation is entering the stage where they begin needing long-term care services. The increasing percentage of elderly leads to concerns about the sustainability of care systems.
- Health Insurance Does Not Cover: Traditional health insurance plans do not provide coverage for long-term care services, because long-term care services are defined as custodial in nature, not medical in nature. Since services for long-term care are not considered medically necessary, they are not covered by health insurance or Medicare.
- Inadequate Home Care Infrastructure: While there is a decided preference for "aging in place," there aren't always sufficient resources or infrastructure to support this. The ultra-mobility of our society often means that families are spread far apart, a reality that does not lend itself easily to family care. In addition, for families with young children or career-focused individuals, changing lifestyles to care for a parent (as may have been the custom in prior generations) is not often considered a realistic solution.
- Financial Strain on Families: Families often bear the financial burden when institutional care is needed. This can lead to significant financial strain, forcing families to dip into savings or retirement funds.
- Lack of Awareness of Issues: Many people are unaware of the costs and needs associated with long-term care. As such, families are frequently unprepared for both the social and financial realities when a family member needs long-term care services.
- Lack of Funding for Social Services: Medicaid does provide long-term care services for individuals who have no assets and extremely limited income (and for many who have spent down the assets they did have paying for care). However, state budgets are also constrained and with LTC future cost projections rising, state governments are going to have to be creative in how they find ways to both pay for necessary long-term care services (for those on Medicaid) and ensure that facilities are available to meet the need.
Collectively, these challenges paint a bleak picture of the long-term care horizon. This is why there is a problem. This is why many people and states are seeking solutions. This is why you are hearing so much "noise" about long-term care in the news!
What happened in Washington state?
To solve their long-term care problem, Washington passed legislation that created the WA Cares Program. It is a mandatory long-term care program established to help residents afford long-term care services. Requiring mandatory participation helps to promote a broad coverage base.
- Funding: Funded by a payroll tax on employees. The tax is currently set at 0.58%. There is no wage cap, thus all earned income is taxed under the program.
- Benefits: $36,500 lifetime benefit to pay for long-term care services.
- Criticisms: Some actuarial projections indicate that the program will not remain solvent over the long-term given the aging population. There are also concerns about the adequacy of the lifetime benefit, given the rising costs of care. Lastly, there are design criticisms given that the tax must be paid by all residents. However, benefits are not available for residents who have paid the tax but later move out of state.
- Opt-Out Provision: The law allowed residents to opt out of paying the payroll tax if they purchased and maintain an "equivalent" individual LTC policy. The law allowed a six-month window in which to purchase an individual policy prior to the effective date of the program. The effect of the purchase window caused a run on policy purchases. Over 500,000 Washington residents purchased policies during the six-month window to opt out of the payroll tax. Who were those individuals? As a rule, they were residents with high incomes . . . for whom the payroll tax would typically be higher than the cost of the LTC policy premium. The knock-on effect of the mass opt-out is that many high-income earners will not be paying into the WA Cares program, thus, the program is at some risk of being underfunded or needing to raise the premium in the future.
What is happening now?
Many states across the country are considering following in Washington's footsteps and implementing a state-sponsored, mandated long-term care program. There are currently twelve (12) states considering such a program. These include Alaska, California, Colorado, Hawaii, Oregon, Illinois, Michigan, Minnesota, New York, North Carolina, Pennsylvania, and Utah.
States typically start with a "Feasibility Study" to review plan designs, actuarial cost projections, various taxation structures, and overall feasibility. The next step is to propose a bill for consideration by the legislative body. As an example of the process, California recently completed their Feasibility Study and Actuarial Analysis. No legislation has been proposed, but it is expected that a bill will be submitted in the 2024 legislative session. Then, there is the issue of the passability of the legislation. This is a matter that is unique to each state, where social needs, financial/tax cost, and political realities must be balanced in the various branches of state legislature. For most states, this process may take years. For some, it is possible that legislation may move quickly, intending to learn from Washington's experiment and act swiftly to get a jump on the problem.
Will my state have an opt-out provision?
The one lesson most states will surely learn from Washington is that providing a future window to purchase a policy and secure an opt-out from taxation is not viable because of the potential to compromise the funding base for the program. In lieu of a future window, states will likely consider three potential options:
- No opt-out
- Opt-out if the private policy is in force prior to law passage
- Opt-out if the private policy is in force during the lookback period (12 months)
The reality is that no one knows which option may or may not be included in the legislation for any given state. This is why we see some recommendations to purchase a policy (just in case) and others that suggest a wait-and-see approach.
Why does income level matter?
The higher the income, the higher the payroll tax payment if your state passes a mandatory LTC program. Thus, the higher the income, the more advantageous it will be to purchase an individual policy that will allow an individual to opt out of the payroll tax.
Individual Considerations
What should I do? There is a high likelihood that, at some point, most people are likely to need long-term care services. The question is, how are you going to deal with that? There are multiple strategies to consider:
- Kick the Can: You can kick the can down the road and decide to simply deal with it later in life. The negative consequence of this strategy is that for too many people, "later" never really comes, and you end up not really having a solution. Also, LTC policies are significantly cheaper for younger people, so the kick-the-can-down-the-road strategy means that if you do choose to purchase a policy later, it will be more expensive.
- Run the Risk: You can wait to see if your state passes a mandatory LTC program and run the risk that enough pre-information will be available to make an informed decision before any deadline in your state.
- Bite the Bullet: The bite-the-bullet option means recognizing the reality that you will likely benefit from purchasing a private policy, both to protect your assets and to avoid any potential taxation from a mandated program. It entails considering your long-term risk and needs, reviewing policy options, and purchasing a personal LTC policy sooner rather than later. This strategy will put in place financial protection against future long-term care expenses. Depending on policy provisions and timing of purchase, this option may also allow you to opt out of taxation for a state program (depending on what the state program allows).
How much should I buy? Here, our recommendation is to purchase all that you NEED . . . and NO MORE. We are fans of "corridor insurance," meaning purchase insurance for a portion of your expected need and plan to pay out of pocket for some portion of it as well. This keeps the policy premium lower and allows you to self-insure a portion of the risk. As an example, if you project that you will need an LTC service that cost $6,000 per month, you might consider purchasing a policy that covers $3,000 or $4,000 per month and then know that when you need LTC services, you will pay the balance out of your savings or assets. If you never need the services, then you save on premiums. If you do need the services, you have insurance for a portion of the expenses, and the remainder can more easily be taken from savings or assets without compromising the long-term viability of your financial profile.
Where should I buy LTC? The very first place to look is through your employer. If your employer offers a group option (either partially funded by your employer or fully paid by employees), this is usually the best place to start. Policies offered in the group marketplace are often more competitively priced (and they are portable when you leave your employer).
Employer Considerations
Depending on the phase of state legislative consideration, employers that are considering adding LTC to their benefits offering may want to do so sooner rather than later, as private LTC plans will likely need to be in place prior to the effective date of any state-wide program (if not sooner) for employees to opt-out of the state program (if opt-outs will be permitted). There also may be some concern over carrier capacity if there is a rush to implement a private plan, like what happened with the WA Cares program.
There are multiple ways employers can implement LTC coverage.
- Sponsored Benefit: Employers can offer coverage with a subsidized base benefit and the option for individuals to buy-up to a more comprehensive policy (for themselves or their family members).
- Carve-Out Benefit: Employers can offer coverage with a subsidized base benefit for a subset of their population. For example, management or executive-level employees. Most insurance carriers require a minimum number of employees in the carve-out to offer coverage.
- Voluntary Benefit: Employers can launch a fully voluntary LTC benefit offering for their employees. This allows their employees to hop onto a group policy at the employees' own expense. However, in all cases, insurance carriers require a minimum level of participation to offer any guaranteed issue coverage; otherwise, the policies would be fully underwritten individually. All such policies would be fully portable for employees upon termination.
It should be noted that there is no requirement for employers to offer LTC coverage to employees.
California Current State
In 2019, the California Assembly passed A.B. 567, which established a Long-Term Care Task Force within the California Department of Insurance to assess the feasibility of developing and implementing a culturally competent statewide insurance program for long-term care in California.
The Feasibility Report summarizes the program recommendations made by the Task Force and outlines the financial, administrative, and political feasibility considerations.
The Task Force proposed a progressive payroll tax, but declined to provide definitive direction on whether it would be imposed on employees, employers, or shared. Five (5) potential plan designs were defined, from basic coverage with a $36,000 benefit level to a very robust option with a $144,000 benefit level. The projected tax ranged from 0.50% to 2.4% of payroll for the plan design options outlined by the Task Force.
Various opt-out provision possibilities were addressed in the feasibility study, from none, to partial, to full. Timing options considered for the potential opt-out provision include a requirement to have private coverage in place prior to the law passing or having private coverage in place during a 12-month lookback period. In addition, consideration was given to a partial opt-out for individuals purchasing private coverage after the law was passed.
Importantly, whether there is sufficient political incentive to pass a law implementing a mandated LTC program (once proposed) is an entirely different matter. Pundits disagree on whether the political will and focus will exist to pass such legislation in the 2024 legislative session.
References
California AB 567
Feasibility Report
Feasibility Report FAQ
CA DOL Long Term Care Task Force