Behind the long-term care policy failure

Opponents of the Obama administration's health-care reform law were overjoyed last month when the government threw in the towel on one of its controversial features: creation of a public option for long-term care.

A portion of the reform law called The Community Living Assistance Services and Support (or CLASS Act) aimed to expand the number of Americans with long-term care coverage by providing a basic, inexpensive LTC option deployed mainly through the workplace as an opt-out choice in benefit plans.

The administration said it walked away from CLASS because it contained fatal flaws that would have kept it from achieving financial sustainability.

One key worry was adverse selection, which occurs when consumers are able to make enrollment decisions that hurt an insurance program's viability. In other words, healthy, younger people might not enroll at all, and others might sign up when they suspect a need to make claims could be imminent.

Premium pricing was another key issue. A flat monthly premium was envisioned originally, but benefit payouts would rise with costs. But research showed that few workers would sign up voluntarily for coverage if premiums were set at levels that could make the plan financially sustainable. Premiums originally were projected around $123 per month -- a figure that had spiraled upward to anywhere from $235 to $391 per month.

"CLASS failed because it tried to do too much," says Richard Johnson, senior fellow and director of the Program on Retirement Policy at The Urban Institute in Washington, D.C.

Skeptics think the administration knew that all along but kept CLASS in the Affordable Care Act because it was projected to generate $86 billion in revenue in the early years from premium payments made by policy holders whose coverage had not yet vested. Now, the abandonment of CLASS blows a hole equal to that amount in the long-term projection of the act's cost.

But no matter your opinion of the politics, this much is clear: We're still searching for a sensible solution to the looming cost explosion associated with caring for our frail elderly in the years ahead.

The Center for Retirement Research at Boston College says about one-third of Americans turning 65 this year will need at least three months of nursing home care sometime during their lives. Medicare covers only a small portion of long-term care needs, and the cost of a semiprivate room averages $79,000 per year. The Center calculates that the mean lifetime exposure to long-term care costs for a 65-year-old couple is $260,000, with a 5 percent risk of a $570,000 expense.

Meanwhile, Medicaid remains the nation's largest long-term care funder, paying for more than 40 percent of all care. And the market for private long-term care insurance continues to limp along, the victim of collective national denial and expensive policies. Only about seven million Americans have private long-term coverage, according to LIMRA, the insurance industry research and consulting group.

Some experts argue that the next phase of debate about long-term care should focus on improving the efficiency of care delivery, and cost reduction. For example, Len Fishman, CEO of Boston-based elder care provider Hebrew SeniorLife, pointed to the need for increased research on Alzheimer's disease at a recent seminar on long-term care sponsored by The Urban Institute. "Even if we can't cure it, therapies that delay the onset of Alzheimer's (and keep patients out of nursing homes) would have an enormous impact on health care spending," he said.

Others point to the need for better community-level support for family caregivers, who provide a great deal of the nation's long-term care.

Johnson has proposed expanding Medicare's coverage of long-term care through a surcharge on federal income taxes and existing general revenue that now supports it through Medicaid. Johnson's plan would resemble Medicare Part A in that seniors wouldn't pay premiums, but they would pay a $500 annual deductible for care and a 20 percent co-pay.

Johnson's idea would have the benefit of a mandatory revenue source and participation by the widest possible pool of insured participants -- all Americans. However, it's unlikely to gain momentum in a political climate focused on reducing -- rather than expanding -- Medicare expenditures.

Can the private long-term care insurance market step up to become a bigger part of the solution?

Jesse Slome, executive director of the American Association for Long-Term Care Insurance, says he believes the government should consider steps to limit Medicaid funding of long-term care, and create tax incentives to stimulate sales of private policies. "We need to change the rules so states aren't going broke, and Medicaid is a program only for those who really can't afford their own insurance -- and provide incentives for middle-class people to get coverage."

Noting that sales of private policies were up 2 percent during the first half of this year, Slome says, "Sales should be down, considering the bad economy and the bad image surrounding the product -- but they're not."

Mark Miller's Retire Smart column is carried on Tribune Media Services.