Financing Long-Term Care for the Elderly Proposal

Research Problem

The high life expectancy in the developed world, coupled with demographic (baby-Boomer) aging, has increased the demand for long-term care (LTC). Projections indicate that expenditures on LTC will increase twofold over the next few years (European Commission 2012). Further, it is estimated that “70 percent of seniors aged 65 years or older” require LTC support to “meet health or personal care needs” (DHHS 2015, para. 6). LTC assistance encompasses diverse, supportive services meant to enable seniors to lead healthy lives. It includes activities of daily living or ADLs aimed at assisting a person to age at home or a supportive retirement center.

The financing of LTC is an issue of economics. Current social protection systems may not cope with the expected surge in seniors in need of LTC assistance. The rising per capita costs of these services constitute a significant problem emerging from the social risk of aging. It is projected that the prevalence of disability is likely to rise, increasing spending on LTC in the years to come (Stone 2000).

Furthermore, limited low-cost coverage options leave a large number of the elderly with a heavy financial burden. LTC costs will continue increasing because individual plans and government programs are inadequate. In the US, Medicare, and Medicaid cater for 63 percent of long-term care financing at 40 and 23 percent, respectively (Reaves & Musumeci 2015). LTC insurance accounts for only 9 percent of the costs, which leaves a significant population uncovered. Self-insurance may not be an option, as it requires an individual to save throughout his/her work years to insure himself or herself.

As a result, most families resort to caring for their elderly loved ones at home or in community settings. However, home-based care is impracticable in cases where the family caregivers all work or do not live with their senior relatives. Furthermore, the decrease in the average family size constrains the availability of unpaid carers at home. Forcing working family members to leave employment and provide LTC care may affect their earning capacity (Manton, Lamb & Gu 2007).

As a result, the number of informal care providers is low. Manton, Lamb, and Gu (2007) report that the elderly care ratio will drop from seven caregivers per person (>80 years) to as low as four carers per person in 2030. These challenges call for adequate and sustainable public financing arrangements to expand social protection systems. The availability of affordable, but sustainable programs can help address increasing elderly long-term care needs.

The purpose of this research is to explore the advantages and disadvantages of financing LTC for the elderly. It will involve a critical analysis of prior research on different LTC financing approaches – self-insurance, social insurance, tax-based public programs, and private insurance – and their pros and cons to inform future policy actions. This dissertation aims to give insights into sustainable financing programs that can contribute to effective and efficient LTC services and improved elderly outcomes.

Research Context

In the UK, public spending on LTC in 2010 was relatively low, at 2.0 percent of the GDP, and is projected to reach 3.9 percent by 2060 (European Commission 2012). The LTC expenditures in the EU are expected to rise with the projected increase in the elderly population (Schut & van den Berg 2010). However, policy reforms in this sector are not adequate. The effects of an aging population on public health spending have not received sufficient attention. In addition, questions of affordability and the advantages and disadvantages of various financing models remain unanswered.

Providing alternative financing methods, such as raising co-payments and supporting individual savings plans, will influence who qualifies for LTC (Brown & Finkelstein 2009). The amount of long-term care required by the elderly, related costs, and the age of eligibility are unclear (Wolff & Kasper 2006). Thus, social insurance based on the pooling of risks may be more cost-effective than self-funding or self-insurance. While any LTC need can be insured, existing private coverage only covers a small percentage of the eligible population, regardless of whether public systems exist or not (OECD 2011). The low supply of private insurance coupled with costly services should lead to growth in informal care. This may explain the low uptake of LTC cover by eligible consumers.

As stated, predicting the LTC needs of a person and future costs is a challenge. In addition to costs, factors such as personal preferences affect the use of private LTC insurance. Most elderly persons prefer to age in place, i.e., in their homes, supported by their children or close relatives (Szebehely & Trydegard 2012). Government intervention appears necessary to address the challenges in this sector.

The benefits of publicly financed LTC to society far outweigh the costs. While consumers would prefer unpaid family caregivers over specialized care in nursing homes, the opportunity costs to the informal carers are high. Brown and Finkelstein (2007) attribute the shrinking market for private providers to “limited coverage, high premiums, and the perception that outcomes are inequitable” (p. 1986). The government can intervene through various financing approaches to promote the uptake of LTC coverage. The main interventions include price subsidies, transfer payments, and tax-based systems that help complement private coverage (Rowles & Teaster 2016).

Publicly funded insurance tends to be compulsory and involves subsidies and unspecified premiums (Barr 2010). Government financing of LTC services can help address the challenges inherent in private coverage. The fact that public insurance is often compulsory will resolve the problem of low LTC uptake. In addition, a single-payer system will enable public insurers to pool risks and address the issue of “adverse selection” (Cornell et al. 2016, p. 1498).

Federal insurance programs can also cover risks that private ones do not insure. Moreover, it can accommodate various income groups and personal characteristics to address the problem of inequity. Given this context, the study will review current policies in the UK to answer three research questions. First, what financing options have the government adopted to promote the provision of LTC to the elderly? Second, what are the positive impacts (advantages) of the financing models on LTC efficiency and equity? Third, what are the adverse effects (disadvantages) of these measures on LTC?

The rationale for the Proposed Study

Affordable, universal coverage enhances the equity and accessibility of LTC to the elderly. The primary methods of financing LTC include out-of-pocket payments, private insurance, tax-based public systems, and social insurance (Costa-Font & Courbage 2011). These financing options have different advantages and disadvantages. A study examining the pros and cons of these measures is necessary to establish the best option for addressing supply and demand challenges and ensure optimal LTC care.

For example, in France, private providers grapple with high costs because users do not pay for all LTC services and comprehensive coverage encourages family caregivers to opt for the expensive formal care or nursing homes (Chevreul & Brigham 2013). This moral hazard results in an inefficient LTC sector, whereby the provider costs even out the profits. Consequently, private insurance often does not cover all LTC needs.

Public spending on LTC is a controversial issue in the developed world due to the rising elderly population and potential impacts on national budgets. Public expenditure measures can help manage the moral hazard related to LTC coverage. Demand-side strategies can incentivize insurers and promote private insurance uptake (Wolff & Kasper 2006). This research aims at examining ways in which the financing measures – whether demand-side or supply-side – adopted by the government enhances efficiency in the LTC sector. It will also explore the negative effects (disadvantages) of these interventions on access or equity.

The findings of this research will highlight the importance of demand-side financing strategies in improving LTC outcomes. The study will show the causal relationships between the current LTC financing strategies and their consequences to inform policy actions. Knowledge of these correlations will be useful in designing efficient demand-side programs that can be implemented to curb high costs and stimulate private LTC insurance uptake. Further, understanding the benefits of financing long-term formal care over informal, unpaid care could provide a business case for governments to intervene.

Major Issues and Sub-problems Addressed

This research will examine three significant issues. First, the financing options for LTC needs across countries will be explored along with the characteristics that make them attractive to users. The discussion will center on three main approaches: social insurance, tax-based public measures, and private insurance. In most countries, the proportion of the national budget that goes into LTC is low. Various steps have been taken to address this problem and protect the elderly requiring LTC services (Barnett et al. 2010). The research will analyze the LTC financing methods adopted by countries to realize the social protection goals.

The second issue examined include the potential advantages of each LTC financing option. In this section, the funding approaches will be analyzed in the context of the moral hazard issue. It will also involve an assessment of the available financing approaches in the context of incentivizing LTC consumers and insurers. In particular, it will include a description of the benefits or advantages of the various demand-side measures adopted by different economies in public LTC financing. For example, with social insurance, risk pooling is achievable across generations due to the intergenerational contract (Rothgang 2010). The key sub-problems that will be examined include efficiency, access, and equity of demand-side options for those requiring LTC.

The third issue will be the disadvantages of each financing option in the context of LTC performance. A comparison of these approaches will help highlight the adverse effects of each strategy. For instance, social insurance systems are associated with the problems of intergenerational burdens, inflexibility, and equity due to income exemptions (Rothgang 2010). On the other hand, tax-based systems tend to increase inequalities between different income categories of consumers with similar needs (Favreault, Gleckman & Johnson 2015). Thus, issues of eligibility, availability, and associated costs payable to caregivers or nursing homes will be explored to determine the relative benefits of each financing option.

The Delimitation of the Research

The broad aim of this research is to describe the advantages and disadvantages of financing LTC for the elderly in the UK. This study will be restricted to LTC systems for persons aged over 65 years. It will exclude financing measures for the long-term care of disabled persons of working age. LTC financing models impact the use, access, and costs of long-term care services. As such, each financial alternative has its advantages and disadvantages in terms of use, access, and expenditure.

This research will be limited to private and public strategies available for financing formal LTC. It will exclude informal care and self-insurance, which may not be practical for everyone. In informal care, the opportunity costs to the family members may not be apparent, as informal caregivers are often unpaid. Self-insurance is not always the optimal choice because it is not automatic that all persons will need LTC in their old age (Fernandez & Forder 2012). Thus, a risk-pooling mechanism is an optimal approach to financing long-term care for most elders.

The study will build on literature to highlight how each LTC financing option contributes to increased uptake and lower costs. The study will be limited to three financing strategies: tax-based public systems, private insurance, and social insurance. The determinants of LTC consumption will be examined to provide a framework for analyzing the benefits and adverse effects of each financing alternative. It will also involve a comparison of the outcomes of each option based on user responses.

Definition of Key Concepts

• Long-term care or LTC – describes the care offered to persons requiring support to do their routine activities, including ADLs (Stone 2000).
• Self-insurance – life savings meant to cater for LTC in old age.
• Informal care – care provided by unpaid family members or relatives at home.
• Demand-side strategies – are measures that aim to stimulate LTC uptake by increasing provider and user incentives.

Reference List

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Barr N 2010, ‘Long-term care: a suitable case for social insurance’, Social Policy & Administration, vol. 44, no. 4, pp. 359-374.

Brown, JR & Finkelstein, 2007, ‘Why is the market for long-term care insurance so small’, Journal of Public Economics, vol. 91, pp. 1967–1991.

Brown, JR & Finkelstein, A 2009, ‘The private market for long-term care insurance in the U.S.: a review of the evidence’, The Journal of Risk and Insurance, vol. 76, no. 1, pp. 5-29.

Chevreul, K & Brigham, KB 2013, ‘Financing long-term care for frail elderly in France: the ghost reform?’, Health Policy, vol. 111, no. 3, pp. 213-220.

Cornell, PY, Grabowski, DC, Cohen, M, Shi, X & Stevenson, DG 2016, ‘Medical underwriting in long-term care insurance: market conditions limit options for higher-risk consumers’, Health Affairs, vol. 35, no. 8, pp. 1494-1503.

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European Commission 2012, The 2012 ageing report: economic and budgetary projections for the 27 EU member states (2010-2060), European Commission, Brussels.

Favreault, MM, Gleckman, H & Johnson, RW 2015, ‘Financing long-term services and supports: options reflect trade-offs for older Americans and federal spending’, Health Affairs, vol. 34, no. 12, pp. 2181-2191.

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Stone, RI 2000, Long-term care for the elderly with disabilities: current policy, emerging trends, and implications for the twenty-first century, Milbank Memorial Fund, New York, NY.

Szebehely, M & Trydegard, GB 2012, ‘Home care for older people in Sweden: a universal model in transition’, Health & social care in the community, vol. 20, no. 3, pp. 300–309.

U.S. Department of Health and Human Services [DHHS] 2015, LongTermCare.gov. Web.

Wolff, JL & Kasper, JD 2006, ‘Caregivers of frail elders: updating a national profile’, The Gerontologist, vol. 46, pp. 344-356.