How to Avoid the Catastrophic Costs and Effects of Long Term Care

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All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity. No one really likes to think about needing long-term health care services. But the reality is that each year, an estimated 12 million Americans need some type of long-term care to assist in performing everyday tasks like eating or bathing.

According to the Department of Health and Human Services, the average use of long-term care services is 3 years. Long-term care expenses are a key risk to your retirement plan, and you need to plan for them.

If long-term care is needed, it will affect you and your caregivers financially, physically, and emotionally. Having a plan to address these concerns is critical to easing the burden on you, your family, and your friends. While it used to be that families cared for their aging relatives, today's elderly increasingly rely on professional care from home health aides and nursing homes. Often, long-term care starts with services such as home visits, then, depending on your health and independence, may transition to additional services that require full-time nursing care.

These services will increase in cost if your required care increases. You face a crucial decision as you get older: Should you rely on your retirement nest egg and other savings to pay the bill if you need long-term care, or should you consider the up-front cost of long-term care insurance?

A perspective on long-term care for the elderly

Long-term care is expensive, but having a plan for your care might make a difference in your quality of life—and your family's—as you age. The key is weighing your personal needs against the costs and potential benefits of your options.

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Below, we discuss 4 options for paying for long-term care expenses, and how to weigh the pros and cons for your particular situation. To decide whether you need long-term care insurance and how much to buy, you need a sense of how much your care could cost. For an estimate of potential long-term care costs in your state, see the Genworth Cost of Care Survey or use our interactive map. Essentially, there are 4 different ways to pay for long-term care: Your options depend largely on your personal and financial circumstances and what you expect for your standard of care—both now and in retirement.

Veterans and people with low income who can't afford to cover long-term care expenses might be eligible for long-term care assistance from the federal government, through Medicaid and the Veterans Health Administration, or state-run assistance programs. You can't rely on Medicare to cover these costs, even if you're age 65 or older. Medicare provides limited benefits for long-term care, and would not cover an extended stay in a nursing home.

As for Medicaid, benefits kick in only after you've depleted your savings, and the choices for where and how you receive care could be limited. Benefits and eligibility vary from state to state, and savings and income are frequently key factors. Traditional long-term care insurance policies: You can choose the amount of coverage, how long it lasts, and how long you have to wait before receiving benefits. Typically, you pay an annual premium for life, although your premium payment period could be shorter.

However, many insurance companies no longer offer traditional policies and those that do may raise annual premiums after purchase. One type of hybrid insurance offers life insurance and long-term care. But if you don't use your long-term care benefits, it will pay a life insurance death benefit to your beneficiary upon your death," explains Tom Ewanich, vice president and actuary at Fidelity Investments Life Insurance Company.

If you had a long-term care need, you would be able to draw down or accelerate the death benefit amount to pay for your care, subject to a monthly maximum amount. However, even if you used up the entire death benefit, the insurance company would still provide additional long-term care coverage. Another type of hybrid is a long-term care annuity, which provides long-term care insurance at a multiple of the initial investment amount. The investment grows tax free at a fixed rate of return, and, if used for long-term care expenses, gains will be received income tax free.

If you qualify for long-term care benefits, the long-term care coverage would draw down both the account value and the long-term care pool. Only 6 percent of the dependent elderly in the community rely exclusively on formal care sources. Paramount among the continuing concerns regarding the long-term care system are questions of cost and efficiency.

Long-term care expenditures amounted to about 45 billion dollars in Congressional Budget Office, Eighty percent went for nursing home care. Spending on nursing homes, the only long-term care service for which spending can be monitored through time, has been one of the fastest growing components of health expenditures.

Concern exists that both excessive nursing home utilization and unnecessary increases in cost per day have contributed significantly to the growth in nursing home spending. Such a perception is not uncommon with respect to health care spending in general. However, one needs to be careful about transferring notions of excess and inefficiency that exist regarding the health care system, in particular the acute health care system, to the area of long-term care. Rather than overuse, underuse may be the norm, and the production of services may be relatively efficient.

Consequently, extreme caution must be exercised in trying to apply the prescriptions for acute care cost containment reducing use and reducing unit costs to long-term care. Despite a popular perception that extensive funding of nursing homes results in inappropriate utilization and the speculation that savings could result from reducing nursing home use by substituting home care, there is a need to be sensitive to the potential shortage of nursing home care.

A shortage of beds certainly exists relative to demand. It may also be present with respect to the need for nursing home care. The bed shortage stems from vigorous longstanding State activities to control Medicaid costs by limiting the supply of nursing home beds. The States have a real stake in controlling costs.

Medicaid pays at least some of the costs of care for about 60 percent of nursing home patients. Nursing homes and nursing home expenditures represent about 35 percent of an average State's Medicaid budget. Evidence of the bed shortage has been accumulating since the early 's. Nursing homes in virtually all areas consistently have extremely high occupancy rates. Hospital discharge planners, nursing home administrators, and representatives of long-term care consumers all report placement problems for different types of patients. More quantitative data also suggest the presence of a shortage of beds.

The experience of persons deemed to be at high risk of institutionalization living in areas with different numbers of nursing home beds was compared Weissert and Scanlon, These persons were dependent in five to six ADL functions, unmarried, over 75 years of age, and had low incomes. In the 10 States with the largest number of nursing home beds per elderly person, 92 percent of them resided in a nursing home.

In the 10 States with the smallest number of nursing home beds, only 54 percent were in nursing homes. This does not imply that 92 percent should be the norm. However, the gap is large enough to suggest that more persons in the low bedded States would enter nursing homes and would be considered appropriately placed if more beds were available. Although data in the analysis are from and available data do not permit it to be updated, the situation is unlikely to have improved. Since , nursing home bed growth has not kept pace with the growth or aging of the elderly population.

The number of beds relative to the expected number of users has declined 1. There also has been no significant change in the extreme variation in the number of nursing home beds per elderly across States. There is also evidence of under service in the community. When persons with ADL impairments were asked in the National Health Interview Survey whether they were getting all the help they needed, a significant share reported needing more help Figure 6.

Those persons needing assistance in virtually all activities those with an eating or transferring dependency got most of the help they needed. Although this is somewhat reassuring, persons with severe dependencies who can not get needed assistance are likely to have to enter an institution. Among the less dependent, the situation is less encouraging. Slightly more than 50 percent of those whose most severe dependency was bathing reported needing more help than they received. Understanding the effects of the shortage is essential to policy development in long-term care.

The shortage affects who uses and who does not use various types of care. What has been observed in past programs and research has been influenced by the shortage constraining choices and outcomes. To plan new programs and policies, the lessons that have been learned from the past must be adjusted to take account of the supply of services that will be available. Spending is influenced strongly by how efficiently care is produced unit costs in addition to the total volume used. Nursing homes, the recipients of 80 percent of long-term care dollars, have been under considerable pressure to control their costs.

Given the strong demand for available beds, attempting to increase this pressure is more likely to adversely affect access and quality of care rather than to simply improve efficiency. Nursing homes have traditionally had an incentive to avoid unnecessary costs. Private pay and Medicaid patients account for over 90 percent of their revenues. In caring for private patients, costs that do not improve a home's product and enable it to charge more or to attract more private patients simply imply less profit.

Lower profits are presumably unappealing in an overwhelmingly proprietary industry. State Medicaid programs have often added to the pressure to control costs. Many of these programs have put considerable effort into developing reimbursement policies to contain costs. Rather than adopting retrospective cost-reimbursement methods that permit increased costs to become increased revenues, States have long used prospective-reimbursement methods that break the direct link between costs and revenues.

How strongly Medicaid reimbursement policies contain nursing home cost growth varies considerably from State to State and across homes within States. However, the policies do seem to have had an impact overall. Since the 's, there has been a major decrease in the growth of nursing home cost per day that is not accounted for by inflation. In the early 's, nursing home costs per day grew more than 6 percent per year faster than the prices of nursing home inputs labor, food, etc.

Coverage options for long-term care

Since , that unaccounted for growth has dropped to about 2 percent per year. The higher growth observed in the early 's accompanied a major transformation of the nursing home industry. The role of public financing through Medicaid was greatly expanded, and with that came a demand that nursing homes be upgraded. Staffing requirements, both in terms of numbers of staff and higher skill levels, increased. Process regulations were expanded and strengthened. Structural specifications, especially those involving fire safety, became more stringent.

These regulatory reforms induced significant changes in the industry. Many small homes closed, and new larger homes entered the market.

Concerns about the current system

Existing homes desiring to continue in business took the necessary steps to meet the new standards. Financing these changes likely accounted for a significant share of the cost-per-day growth in the early 's. The significantly lower growth in cost per day since can also be correlated with prevailing policies. Until the passage of the Omnibus Budget Reconciliation Act of , widespread initiatives to improve quality by increasing standards were absent. Although a desire to control costs undoubtedly contributed to this inaction, concerns that increased resources do not guarantee increased quality also played a role.

States were also interested in controlling new bed growth that would add to Medicaid costs. Besides the direct controls they placed on new beds through certificate-of-need programs and moratoria, keeping Medicaid rates low was a means of discouraging investments. Accomplishing this objective became easier as States increased their skill in using reimbursement policies to control costs.

Long-term care: options and considerations

Increasing pressure to reduce future costs may have negative consequences for quality and access instead of producing the desired efficiency gains. Because of virtually guaranteed high occupancy, nursing homes have little need to compete. A likely response to lower Medicaid reimbursement is therefore a reduction in staff and other resources devoted to providing care.

Even though inputs and quality may not be perfectly correlated, there is likely a significant relationship. Consequently, aspects of quality would suffer from these reductions. Reducing payments for Medicaid patients also will adversely affect their access to nursing homes. When Medicaid rates are lower, nursing homes can profit by lowering their private charges to attract more private patients and displacing some Medicaid patients.

Unfortunately, from a policy perspective, the Medicaid patients who will likely be displaced are not the potentially inappropriate users of nursing homes— light-care patients who might be served elsewhere. Rather, the marginal Medicaid patient to the nursing home is the heavier care patient for whom the nursing home receives no more revenue, but must incur additional costs. To realign the nursing homes' perspective to coincide more closely with the program's requires a modification of reimbursements to match better rates and patient needs.

Case-mix reimbursement systems accomplishing such reform have been implemented in several States Illinois, Maryland, Minnesota, New York, Ohio, and West Virginia , and they are being planned in several others. These systems can improve access for heavier care patients, but, with the fixed supply of beds, such gains come only by reducing access for others. Whether these displaced patients receive adequate care outside nursing homes should be a significant policy concern. Little can be said about how efficiently individual community and in-home services are produced.

Experience with community and in-home services is much more fragmentary than our experience with nursing homes. Public funding of community care has been limited to a series of demonstration projects, coverage of selected services using normal Medicaid authority by a small number of States, highly targeted programs under the Section Home and Community Based Care Medicaid Waivers, and small programs financed exclusively from State and local funds.

Nevertheless, as this experience expands, it is essential that efficient production be encouraged. The same mechanisms that are employed in the nursing home market are applicable here, namely, use providers who serve private as well as public patients and who therefore face pressure from other markets to be efficient and use reimbursement methods that break the direct link between revenues and costs. Interest in quality of care must extend beyond avoiding actions that potentially reduce quality. Promoting and guaranteeing quality should be a central concern in long-term care policy because normal market forces are not available to assure it.

For example, a couple may elect to pay off existing debts; to prepay real estate taxes, insurance, or other large bills; or to prepay funeral expenses. Medicaid eligibility rules do not count certain assets such as a home, a car, and personal effects. Therefore, in appropriate cases a community spouse might take money from countable savings to buy a more expensive home; repair or improve an existing home; or buy a new car, new household furnishings, or personal effects. Medicaid rules do not restrict spending countable assets on non-countable ones of equivalent value.

Because of this allowable spending John is now financially eligible for Medicaid.

Some strategies are designed to convert excess assets into income for use by the community spouse. In order to avoid a Medicaid penalty the community spouse must receive something of equal value in exchange for the converted assets. Annuities are contractual arrangements in which an individual pays a lump sum to receive a future stream of income in return.

They are offered in a bewildering variety of forms by commercial financial entities, and can involve poorly understood consequences and costs to the consumer. Most annuities are inappropriate vehicles for Medicaid planning. The at-home spouse can either spend that income or reinvest it, effectively recouping all of the assets used to purchase the annuity. If done correctly, there is no transfer penalty and, since the check is payable to the community spouse, the payments received are income to the community spouse and do not impact the Medicaid eligibility determination.

Three Ways to Protect your Assets from Nursing Home Costs

This meant that Robert was ineligible for Medicaid payments. It included other provisions that are required by Medicaid law. On September 15, , Mrs. James applied for Medicaid benefits. Those benefits were eventually awarded by DPW after two successful court decisions were obtained by attorney Parker. James resided in the nursing home. By the time Mr.

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