Long-term care has long been the biggest hole in the U.S. retirement safety net, and the pandemic is raising the stakes on the risks your clients face.
The horrific level of death among residents and staff in care facilities has called into question the model for institutional care. Meanwhile, the costs are jumping, driven by accelerating pressures on care facilities.
For planners advising clients on a future that may require a lengthy span of care at some level, the outlook is opaque.
The coronavirus has led to the deaths of more than 100,000 residents and staff of long-term care facilities. The weaknesses in the system have been apparent for years, and many experts now foresee a reckoning.
“If there's anything good that comes out of this, and there's not much, it will be an opportunity to at least try to reshape some of the ways that long term care is provided that are more desirable, less expensive and safer,” said Max Richtman, CEO of the National Committee to Preserve Social Security and Medicare, an organization that works on a range of issues related to financial security and health.
In nursing homes, deficiencies in infection prevention and control are widespread. A study published in May by the U.S. Government Accountability Office found that 82% of nursing homes had an infection prevention and control deficiency citation in one or more years from 2013 through 2017.
A shift toward more home-based care may be in the offing, which would indeed be less expensive and safer from a disease-control standpoint. But that would require changes in the way the federal government pays for care through Medicaid, which remains the single largest funder of care.
Meanwhile, the cost of the current system continues to rise.
Genworth’s latest Cost of Care survey found that assisted living facility prices jumped more than 6% last year, with home-based services and skilled nursing facility costs rising by ranging from 3.2% to 4.4%.
More increases are expected. Care facility operators surveyed by Genworth cite a shortage of workers, higher mandated minimum wages, higher recruiting and retention costs, and greater costs stemming from regulation as key factors.
Pandemic-related costs include hazard pay for staff, higher spending for training on new safety procedures, personal protective equipment and cleaning supplies, and child care to support staff. More than half of facilities surveyed (62%) predicted they will need to raise rates during the next six months, with 43% expecting increases of 5% or more.
“Some of the best practices we heard about include training, PPE and new technology,” said Gordon Saunders, a senior brand marketing manager at Genworth who manages the survey. “But the biggest driver now is the shortage of skilled labor.”
That shortage was present before the pandemic. Indeed, the higher costs this year are just the latest data point in a long-term trend. Genworth notes that from 2004 to 2020, the cost for facility and in-home care services has risen on average from 1.88% to 3.80% per year. Assisted living facilities have seen the largest percentage increases over that period, jumping 79%. But the cost of home-based health aids is up 30%, and homemaking services are up 41%.
For planners, one of the most useful features of the care survey is a tool that allows you to project possible costs for clients by location, and to adjust assumptions for future inflation of prices.
Outside of Medicaid, insuring against long-term care risk remains a patchwork. The commercial business hasn't penetrated the potential market widely, plagued by the difficulties carriers have had properly pricing risk—and human behavioral resistance to sinking large sums of money into premiums for a risk that may or may not turn into a future need.
Many people will wind up covered under Medicaid, which funds care only in cases where a patient's assets have been almost completely spent. Meanwhile, a great deal of care is provided by family members. That can lead to other problems, including job interruption, reduced Social Security benefits and retirement saving, and general financial instability for the provider of care.
The average annual premium among top insurers last year for a couple, both age 60, was $3,930, according to the American Association for Long-Term Care Insurance (AALTCI). That policy, which includes a 3% annual inflation rider, compares with $5,600 this year, the organization reports.
Considering that stiff increase, I asked Jesse Slome, AALTCI’s executive director, how much inflation protection consumers should buy.
First, he notes that most people who need care will access it in a home setting—an AALTCI survey of insurers found that 70% of claims start with home-based care, and a majority end that way, too. What if the more modest inflation in home-based care takes off?
“At age 60, you’re really buying coverage for an event that might occur 25 years from now,” he says. “What will nursing homes look like 25 years from now? It’s difficult to say, but with everything that has happened with COVID, I don’t think they will be a major part of the equation—we’re really going to be talking about getting care in the home.”
Ideas for reform have surfaced in recent years, starting with a flurry of reports in 2016 that called for a hybrid public-private approach to financing long-term care costs. The reports, which were developed by a nonpartisan consortium of researchers, called for streamlining and simplifying private long-term care insurance to make it work better, but also covering the most extreme risk through a publicly financed insurance program.
More recently, the National Association of Insurance Commissioners proposed a series of modest changes, such as allowing retirement plan participants to make early penalty-free withdrawals from retirement accounts to purchase LTCI, or to create LTC savings accounts, similar to health savings accounts (HSAs).
Richtman would like to see greater use of our social insurance programs to cover LTC risk—a federally sponsored long-term care benefit that would kick in after a waiting period, funded by a modest increase in payroll taxes.
One of the greatest benefits of this approach is that it sidesteps that natural human inertia with an automatic contribution structure.
“A lot of younger, healthier, people don’t want to pay for something that they think they’ll never benefit from—and that's the beauty of our social insurance system.”
Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to Morningstar and the AARP magazine.