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646 April 20, 1988 I PROVIDING FOR THOSE IN NEED I LONG-TERM CARE POLICY I c 1 i 28 I I i I Peter J. Ferrara John:M. Olin Fellow a 8 I- a I I a I . INTRODUCTION Many American families face the expense of assuring, adequate.longTtekm.treatment and care of elderly relatives who no longer can perform basic living activities for themselves. Many of the elderly who have no relatives to help them must fa ce>these costs alone. In some cases, families also must struggle through. the emotionally draininglexperience.ofi a 1 close family member's severe, long-term illness, making the financial burden even less bearable. There is broad agreement that, given the ' rising cost of such long-term care plus the aging of America, sound policies and institutions are required to meet such vital concerns L I I, I I J This does not mean, however, that Congress shodd'declare.open beason' on younger tax payers, or that family members should be free to avoid their responsibilities by shifting costs onto Uncle Sam's shoulders. What it does mean is that policy,makers should begin to analyze the issue carefully and to determine the appropriate roles for the private and"the public sectors, rather than engage in a buying spree for the elderly vote, leaving the tab to be picked up by future governments. Fear of Improverishment. It is not the government's responsibility,to underwrite the living expenses of every American who reaches a certain age. It is, however; appropriate for the government to pay for the essential long-term care expenses of those Americans who otherwise would be unable to meet such costs, or could do so only with great hardship. Federal and state governments alread y spend over $20 billion each year fulfilling this responsibility through Medicaid and other programs As part of a general reform of long-term care policy, such public assistance should be ex panded for elderly couples, since today's nursing home expenses for a disabled spouse often can impoverish the noninstitutionalized spouse. Moreover, all long-term care assistance should be pulled out of Medicaid, which was intended to be strictly a medical care program and provided through a separate program. Specifi c ally designed to serve the long-term care needs of those without adequate funds, it could be known as Long-Term Care Assistance and those Americans who have sufficient resources should use their own funds to pay for long-term care directly or through priv a te insurance. The average worker should not be taxed to pay for the nursing home expenses of the well-off elderly without sufficient funds to pay for nursing home care, the remaining issue is not a problem of access to care, which is assured, but that of h ow to prevent the assets of the elderly from being ravaged by nursing home costs. This is not really a health policy issue at all. It is an estate planning issue, which can be addressed best through private sector insurance and other private financial mec h anisms The government should not preserve substantial private estates through public assistance at the expense of the general taxpayer. Some of the savings of the more affluent elderly could be used.to.finance.the private insurance to protect the rest. Mo reover, the government should not allow affluent adults.to avoid the family responsibility of caring for their elderly parentswho could remain at home by placing them in nursing homes at public expense. To the extent that government should be involved in h elping these wealthier Americans it should be to ensure that they take steps to protect their resources:Ilnlparticular, the government should promote the expansion of private long-term care insurance and make it more attractive for workers to save during t heir working years for long-termxare services and insurance in retirement. Such measures would maximize the private resources avail able to finance long-term care and reduce the need for government spending An Estate-Planning Issue. With the government pr o viding assistance to those Americans 1 5 Calamitous Economic Consequences. Some lawmakers propose that the government should pay for every American's long-term care costs; at home and in nursing homesi 1 I through a new social insurance program financed b y increased payroll tax rates and other tax hikes. Such a program would be enormously.costly. Not only would most current private long-term care expenditures simply become a federal expense,.but with the govern ment paying the bills, far more elderly Ameri c ans would enter nursing. homes or use paid for home health services. With such heavy government subsidies stimulating demand prices for such care would likely, soar as well. Such a program could potentially, cost as much as all of Medicare today around $8 0 billion per year The economic consequences of such a program could be calamitous. Payroll tax rates al ready are far too high. These taxes already destroy jobs and retard economic growth. Payroll taxes need to be cut, not increased. Increasing taxes suff iciently to finance this new entitlement program would be a crushing body blow to the economy. Indeed, adopting such a program for the elderly at a time when the budget deficit is already huge and the baby boom generation is moving steadily toward retirem ent would be foolhardy 2 LONG-TERM CARE IN AMERICA About 5 percent of the elderly, or about 1.5 million retirees, reside in nursing homes. Such residents need assistance in performing daily living activities and often are immobile. The average cost of nur sing home care is about $22,000 per year? Discussions of long-term care issues, however, usually fail to note that nursing home residents typically stay in the homes for relatively short times 52 percent of those who enter a nursing home do not stay more t han three months 63 percent do not stay for more than six months 75 percent do not stay for more than a year Only 16 percent stary more than two years a Moreover, only 29 percent of the elderly who need long-term care are in a nursing home! The rest recei v e such care from spouse .adult children, friends, and to aJesser ex tent, from paid home health care professionals. s I I Medicare and Medicaid Medicare generally does not pay for nursing home expenses. The program does pay the full cost of 20 days of car e in a skilled nursing facility (basically a nursing home that provides more intensive medical, therapeutic, or rehabilitative treatment), if the care fol lows a hospital stay of at least three days and is for the same medical problem treated in the hospit a l. In theory, Medicare pays for an additional.80 days of such care but-.the program I charges the retiree a deductible .of $67.50 foreach such additional day, which is about equal to the average daily fee for skilled nursing care! As a result,:Medi are be n efits cover only about 2 percent of total nursing home costs for.elderlyAmericans I r f 1 1 National Center for Health Statistics, TJse of Nursing Homes by the Elderly: Preliminary Data from the 1985 National Nursing Home Survey, Advunce Datu, Number 135, May 14,1987 2 Task Force on Long-Term Health Care Policies, Report to Conpss and the Secretary, U.S. Department of Health and Human Services, September 21,1987, pp. 19,69 3 Ibid pp. 84-91 4 Ibid.,p.76 5 Ibid 6 The average cost of a day of care in a skille d nursing facility in 1985 was $61. 01. National Center for Health Statistics, Nursing Home Characteristics: Preliminary Data from the 1985 National Nursing Home Survey Advunce Dutu,.Number 131, March 27,1987, p. 7 7 General Accounting Office, Long-tem Can ? Insumnce, Covemge Vuries in u Widely Developing Munket Washington, D.C National Health Council, 1986 p. 8 3 Medicare also will pay for an unlimited number of medically necessary home health care visits to provide skilled nursing care and physical therap y , if the retiree cannot leave his or her home. Medicare, in fact, pays about one-third the cost of all professional home health services? But the program does not cover household cleaning, meal preparation, help in bathing and dressing, or other basic dai ly living activities. It is Medicaid, which assists low-income families both young and old, that provides the lion's share of federal nursing home care assistance, covering about 42 percent of such ex penses? Medicaid will spend about 18 billion this year on nursing home care, about one third of all Medicaid expenditures Medicaid Benefits. Unlike Medicare, Medicaid is a joint federal-state program, and its eligibility criteria and benefits vary. To be eligible for Medicaid this year, an elderly in dividual generally must have less than $1,900 in saved assets, while a couple must have less than $2,8 50. Elderly individuals or couples can still qualify if they have in addition a home of any value, an automobile with a market value of no more than $4,500, and household goods and personal effects of "reasonable1' value In addition, their income this yea r generally must not be more than $354 per month for an individual or $530 per month for a couple. Those with incomes above these limits also .qualify .for. Medicaid .coverage if ,their net income after medical expenses, including nursing home expenses, is less than these limits I, I I 4 Once an elderly person qualifies for Medicaid, the program will pay the full remaining cost of necessary nursing home care after the retiree contributes his or her income to such care, excluding a small personal allowance, a nd generally $354 a month for the support of a noninstitutionalized spouse. The program also .will pay for.the full cost of physician-or retiree's income. These services include personal assistance and even. homemaker,duties dered and -supervised home hea l th care services without any contribution from the 1 Private Insurance. The market for private long-term care insurance is inits infancy, but growing rapidly. Some 70 insurance-companies offer such.policies covering about 425,000 retirees and paying about 1 percent of elderly nursing home costs In ,1986, annual premiums for policies issued at age 65 and continued thereafter normally were in the $200 to $800 range, depending on the level of coverage provided Apart from Medicare Medicaid, and private insuran c e, the elderly and their families pay for remaining nursing home costs directly out of their own resources. These direct payments cover about half of all elderly nursing home costs io 8 Joseph C. Isaacs and Stephanie Tames, LongTem Care: In Search of Nati o nal Policy (Washington, D.C National Health Council, 1986), p. 8 9 Task Force on Long-Term Health Care Policies, op. cit., p. 19 10 Bid p. 1523, GAO, Long-Term Care Insurance, op. cit p. 10 11 GAO, LongTerm Care Insurance, op. cit pp. 26-27 12 Task Force o n Long-Term Health,Care Policies, op. cit pp. 11,69 4 Providlng for Those in Need In keeping with the admirable traditional American belief that society should help those in need, the government should pay for the essential long-term care expenses. of tho se who do not have the resources to meet these costs, or who cannot pay for them without great hardship. This will guarantee once and for all that all Americans who need long-term care will be able to obtain it. This assistance should be provided through a new program, perhaps called Long-Term Care Assistance, separate from Medicaid and designed specifically to meet long-term care needs. This new program should take the provisions for long-term care assistance out of Medicaid, allowing Medicaid to focus ex c lusively on medical needs. Following the prin ciples of federalism used by Medicaid and most other assistance programs, the new program should be a joint federal-state enterprise. This split-level feature would enable states and local communities to contr o l the new program and structure it to meet local needs and preferences. The federal share of the program should be financed out of general revenues, and the states should finance their share as each prefers The new program would address the care of elderl y xouples, when one spouse entered a nursing home and the other faced penury to meet the eligibility test for Medicaid. The non institutionalized spouse would be allowed to retain 50 percent of family income, up to 20,000 per year, besides the current allow a ble income level of about $4,250 under Medicaid rules,and still retain eligibility for the new program. Similarly, the spouse could keep 50 percent of additional assets, up to $20,000, besides the current Medicaid liinit of 2,850 This expansion of benefit s could increase government spending for nursing home assis tance by $1 billion to $2 billion dollars per year, though an estimate of precisely howlmuch is not currently available. The total increase should be reasonable, however, since only 12 percent of e lderly nursing home residents have spouses. Because this increase in cost would be modest, the government could and should.finance it out .of general revenues without any tax increase PRESERVING THE ESTATE With the government providing nursing home care a s sistance to those elderly Americans who would otherwise face hardship, the remaining issue concerns the situation of those elderly Americans who do have substantial resources to pay for nursing home care, directly or through insurance. The issue here is n ot access to needed care, which is assured, but how to protect their assets from being ravaged by high nursing home costs. This is not really a health policy issue, but an estate planning issue. Such estate planning concerns clearly should be addressed thr ough the private sector with insurance and other financial mechanisms, not with government assistance at the expense of general taxpayers. And because these Americans do have resources, it is reasonable to expect them to use some of their funds to pay for private insurance to protect the rest of their savings 5 The Slngle Retiree Some 88 percent of elderly nursing home residents-do not have a living spouse. What are 1) Income: The median income for elderly single retirees is about $8,000 per year,13 comin g primarily from Social Security, pensions, and returns on savings. Since the single retiree need not support a spouse, virtually all of this income is available to meet nursing home expenses the resources available to such single retirees 2) Home Equity: A bout three-fourths of the elderly own their own homes with a median equity of approximately $60,000.14 A single elderly person confined. to a nursing home, no longer able to take care of himself, does not require a separate residence. Consequently his hom e equity is available to help finance long-term nursing home expenses. (Under the proposed new Long-Term Care Assistance program, home.equity would still be excluded in determining eligibility for government assistance, so even single elderly people would n ot be required to use their home equity before receiving government aid I 3) Savings: The typical retiree has s vings On average, these savings are more substan The single retiree with no spouse can use such ac- l! tial than those of younger Americans cum ulated savings to finance nursing home expenses. A high proportion of single elderly nursing home residents, therefore, do have substantial resources to pay for their care, and they should rely on those funds before the taxpayers are asked to bear the expe nse. It is not too much to ask those who can to contribute $10,000 to 20,000 to their own nursing home care, particularly when caused by advanced age and dis ability, since unfortunately they cannot personally use those funds for other things. This level of contribution, in fact, would cover most nursing home stays, as 52 percent of those who enter a nursing home stay less than 90 days, and 75 percent stay less than a year. Some proponents of government funding of long-term care expenses counter that not p roviding government assistance to those elderly persons with substantial resources would lead to their "impoverishment Yet it is hard to see how the notion of impoverishment ap plies to a single elderly person confined to a nursing home, whose personal ne e ds and care are provided by the institution Elderly Couples The real need for government assistance to avoid depletion of funds caused by nursing home expenses occurs in the case of elderly couples, where the noninstitutionalized spouse 13 U.S. Bureau of the Census, Current Population Report, Series p-60, No. 157, Table 6 14 The median home equity for persons 65 and over in 1984 was $46,2 00. U.S. Bureau of the Census Household Wealth and Asset ownership (Washington, D.C U.S. Government Printing Office, 19 Table 5. Today, four years later, this figure has likely grown to around %6o,OOO, given housing value appreciation 15 U.S. Bureau of the Census, Household Wealth andAsset Ownership, op. cit Tables 3 and 5 6 may well become impoverished when the funds on which he or she is relying for continuing support must be used to pay the nursing home costs of his or her spouse. That is why ex panded government assistance for such elderly couples is recommended under the proposed new Long-Term Care Assistance program . But there is no need for a major government program for single retirees with substantial resources, who make up most of the nursing home population. I This does not mean that such single retirees do not need to protect their substantial savings and resou rces from high nursing home costs. But preserving substantial estates is not a proper function of government aid financed at the expense of the general taxpayer. Rather, it is a function that can and should be served by the private sector through in suranc e or other mechanisms Affording Protection. A recent Department of Health and Human Services (HHS)'study finds that in less than 20 years about 60 percent of single elderly individuals will be able to spend less than 5 percent of their income to purchase i nsurance:protecting against high nursing home expenses.16 But the common assumption that this is a cost to be financed out of income misses the real point. Since the goal here is mostly to preserve a substantial ac cumulation of resources, such insurance c an and should be financed by a portion of the ac cumulated savings, thereby protecting the rest. Since it is a problem for individuals.who have substantial resources and the issue is how to protect such resources, it must not be im plied that these indivi duals cannot afford such insurance I ,A Elderly couples earning more than $20,000 per year and having more than $20,000 in resources also could afford such protection. Expanded government assistance under a. Long-Term Care Assistance program has been recom mended for those who fall below this threshold. Interestingly, the HHS study projects that by 2005 some 93 percent of ,elderly couples, too, would be able to finance long-term care insurance with less than 5 percent of their income Ai I I HOME HEALTH CARE I Only 29 percent of the elderly who need long-term care assistance receive such care in nursing homes. About three-fourths of the remainder are cared for entire1 by their spouses, children, other relatives, or friends on an informal, unpaid basis. About 2 1 per cent of those outside nursing homes are cared for by a combination.of unpaid family and friends and paid professionals.18 Only 5 percent rely exclusively on paid home health ser vices 1.7 19 16 ICF, Inc. Ptivate Financing of Long-Tern Care: Current Methods and Resources, prepared for the U.S. Department of Health and Human Services, Assistant Secretary for Planning and Evaluation (Washington D.C January 1985 17 Robert Maxwell, Statement of the American Association of Retired Persons on Long-Term Care Financing before the Senate Finance Committee, Subcommittee on Health, Washington, D.C June 12,1987, p. 1 18 Bid 19 Zbid 7 Not only is home care preferred by most Americans, but it is reasonable for family mem bers to shoulder this responsibility if they have the means to do so. Such obligations adhere to traditional American concepts of family and community responsibility. Other Americans should not be expected to provide funding, through tax dollars so that adult children or other family members can avo i d the obligation of caring for elderly relatives by placing them in nursing homes at public expense Maids and Cooks. In some circumstances, public assistance for care in the home is jus tified. But the use of public funds in a family home is difficult to r egulate. Such public assis tance quite easily can turn into a boondoggle unless it is carefully targeted. Elderly Americans with only slight impairment, or spouses and adult children who are caring for dis abled retirees, are not entitled to personal maid s and cooks at public expense, euphemisti cally called "home health care." On the other hand, Medicare, as it does outside theahome,? should cover 'true medical services provided in the home for persons who cannot leave the home. .Elderly Americans eligibl e for nursing home assistance under the proposed new program should be eligible for home health care assistance if institutionalization in a nursing home would be necessary without such services, and such care in the home would not be lmore expensive than nursing home care. When the elderly person is living with a nondisabled spouse or adult children however, such taxpayer financing should not cover personal services such) as household cleaning, cooking, feeding, dressing, and bathing that can be provided b y family members This framework would maintain for home,health care the same principle as discussed for nursing home care the government should provide for those who have legitimate needs and do not have the resources to meet those needs. But retirees who have substantial resources should not look to the taxpayers to pay their bills Available Savings. A disabled parent commonly lives in the home of an adult child and receives care from the family. Providing such care. is certainly a, timelconsuming burden and the illness or infirmity of the parent is emotionally difficult for family members. But substantial financial resources often are available to the family.to. assistwith such care. Much of the elderly person's income, for instance, could be used by the family, which is providing for all of the parent's needs. As noted, the median income for single elderly Americans is about $8,000 per year. And if the elderly parent is living in the adult. child's home, the equity in the parent's former home also is ava ilable to the family, and the median home equity for persons 65 and over is around $60,0 00. Other savings of the elderly parent might be available as well. These resources typically more than compensate for the costs of food, cloth ing, and shel ter within the family's home for the elderly parent. Medicare helps with true medical ex penses in the home, and private insurance covering medical services for the elderly is broad ly available and heavily utilized. Given this assistance an d the resources of many of the I i I 8 i i I 20 Those who can leave the home should have their medical services provided in doctor's ofices and clinics just as other people do 8 .elderly, some family expenditures for professional home health care would not be an exces sive burden. For lower-income families, the government could .provide' assistance by allowing a de pendent elderly parent in the adult child's home to qualify the family for the earned income tax credit. This credit, now available to families with young dependent children, provides a refundable amount each year equal to 14 percent of income. The full credit is allowed for incomes up to about 6,000 and then is slowly phased out as income rises to $18,000 Providing care for an elderly parent may be more difficult for a couple when both hus band and wife work. But these two-earner couples usually have substantially above-average incomes and should not be looking to the taxpayers to finance their family responsibilities If these more affluent coupl e s need to hire outside professional help.to assist,with care of a disabled parent, they or the parent should pay for it themselves. To the extent that the couple needs outside help, it would be fairer to others for this to be provided through pru II dent i nsurance protection THE CASE AGAINST FEDERAL LONG-TERM CARE I Some propose that the government pay for the nursing home and home health care ex penses of every American, even millionaires, through a universal social insurance program financed by increased payroll tax rates and possibly other tax increases The American As sociation of Retired Persons (AARP) is leading a nationwide campaign on behalf of such a program Exorbitant Costs in the U.S. this year will be close to $50 biilionF1 Even if the program p r ovided for some substantial contributions to expenses out of beneficiary income, the government's initial cost likely would be over $30 billion. Total expenditures ,on home healthxare. this year will This social insurance prograq would be enormously costl y Total nursing home,expenses be well over $10 billionz Even these figures are surely low for they assume no change in the demand for care resulting from such a program. If the government started paying nursing home\\ expenses across the board, the number of Americans entering nursing homes almost surely would soar, sharply increasing the program's cost. It must be remembered that only 29 percent of those needing long-term care are in nursing homes. In addition, only 26 percent of the dis abled elderly in car e outside nursing homes receive some professional paid-for home health care services. With the government paying the expenses, many more would use such ser 21 GAO, Long-Tern Care Insurance, op. cit p. 10 22 Total expenditures for professional home health c are were $9 billion in 19 85. Task Force on Long-Term Health Care Policies, op. cit p. 19 9 vices. While advocates of home health care benefits argue that such benefits could save government funds by avoiding expensive nursing home care, studies show that such savings are unlikely to result A recent study by the Institute for Research on Poverty at the Univer sity of Wisconsin, conducted for the National Center for Health Services Research, con cludes that government home health care benefits result in lit tle if any reduction in govern ment nursing home expenses, yet lead to increases in government home.health gxpendi tures for those who would remain at home even without the expanded benefits. With the increased demand for nursing home and home health care brought about by such a universal program, prices for such care also would soar. This is especially true since in many states the supply of new nursing home space is heavily restricted by regulation Huge New Entitlement. The combination of increased utili z ation and rising prices could more than double the costs of the proposed universal program. Total costs of such a program could in fact be close to todays $80 billion Medicare expenditure, which is almost 10 percent of the entire federal budget. Creatings u ch a hugenew entitlement for the elder ly makes little sense, given the size of federal budget deficits and the pending retirement of the baby boom generation. Medicare itself is projected to run deeplyinto the red, requiring payroll tax-rate increases of as much as 400 percent by the time todays young workers retire, according to the latest official government reports By then, the Medicarespayroll tax rate alone could be higher than for all of Social Security today. Payroll tax rates already are far too h igh and need to be cut, not increased. Payroll taxes cost jobs. A study earlier this year by the Institute for Research on the Economics of Taxa tion concludes that the payroll tax r e increases in 1988 and 1990, scheduled under current law, will destroy h alf a million jobs free long-term care benefits for everyone would cause massive job losses and could stall the economy. Revenues would then fall short of expectations, resulting in a massive increase in the deficit I I I I I I .I if A tax increase of the magnitude needed to finance Helping the Rich Become Richer a I Expanding benefits beyond those in need, to provide free nursinghome care assistance to everyone, would be highly regressive It would mean taxing all working people to provide benefits to Amer i cans with substantial resources. The main effect of such a policy would be to increase the estates that the wealthy can leave to their children The true beneficiaries of such expanded benefits would be a relatively small number of Americans, mostly betwee n 40 and 60 years old and in the middle to upper income group. This relatively small group of high-income beneficiaries would receive large inheritance windfalls made possible by taxing the average taxpayer 23 Peter Kemper, Robert Applebaum and Margaret Ha r rigan,A Systematic.Companson of Community Care Demonsfmtions (Institute for Research on Poverty, June 1987 24 1987Annual Report of the Board of Twtees of the Federal Hospital Insumnce Trust Fund (Washington, D.C March 30,1987 25 Aldona Robbins and Gary Ro b bms, Effects of the 1988 and 1990 Social Security Tax Increases, Econoniic Report No. 39 (Washington, D.C.: Institute for Research on the Economics of Taxation, February 3,1988 ir 10 ENCOURAGING AMERICANS TO PLAN FOR LONG-TERM CARE A new government progra m to help finance long-term care expenses for those Americans who do not have the resources to meet such costs has already been recommended Allow ing the adult children'of an elderly person who needs home care to qualify for the earned in come tax credit a l so would assist families of moderate incomes For better-off Americans the government should promote the expansion of long-term care insurance and other private financing mechanisms to protect their assets against destructive long-term care costs. In addit i on, the government should encourage workers to accumulate special savings to finance long-term care insurance in retirement. The federal government could 1) Develop better data on long-term care needs A major concern of private insurers is the lack of sol i d dataon which to base long-term care insurance policies. More data on the incidence, duration, and costs of long-term care is needed. The federal government should consult with private insurers and take the lead in developing a data base. This would enab l e the private market to grow more rapidly 2) Extend to long-term insurance the incentives that apply to life insurance The federal government should extend the same tax policies to long-term care insurance that it applies to life insurance. The income ear ned on investment reserves for long-term care policies should not be taxed, just as life insurance reserves are not taxed. Siilarly, the benefits paid by long-term care policies should be tax exempt, as life insurance benefits are. The government should no t be taking resources out of the funds of workers who are trying to set aside savings for long-term care, just as the government restrains itself from dipping into life insurance proceeds intended to protect widows andchildren 3) Make long-term care costs and premiums eligible for the medical expense tax deduc tion High medical bills and health insurance premiums can be deducted, in part, from taxable income. Expenses for long-term care and pre*ums for long-term care insurance should be eligible for simila r medical expense deduction 4) Allow employers to include long-term care insurance in the tax-free "cafeteria" benefit plans offered to their workers Federal tax law should be changed to allow employers to offer long-term care insurance as one of the choic e s under "cafeteria" employee benefit plans. These are fringe benefit plans in which each worker is allowed to choose a package of tax-free employee benefits from a range of options 11 5) Encourage employers to provide retirement nursing home care with the same tax policy that applies to pensions The Deficit Reduction Act of 1983 bars employers from deducting most contributions to reserve funds for retirement medical benefits including long-term care coverage; it can even require tax on investment returns o n such reservefunds. Contributions and returns to pension funds, however, have remained tax-free. Without a deduction for contributions and the tax exemption for reserve earnings, private employers are far less inclined to offer such retirement benefits. T h is 1983 tax provision should be reversed 6) Amend corporate and individual pension plan rules to permit the purchase of long term insurance I Workers and retirees should be allowed to use vested funds in pension plans, 401(k plans, Individual Retirement A c counts (IRAs); and other.retirement.plans to make tax-free purchases of long-term care insurance. Employers should be allowed to use excess reserves in overfunded pension plans to provide long-term care he'alth insurance-benefits for their employees in re t irement I I I 7) Stimulate the conversion of life insurance policies into long-term care protection The government could encourage insurers to offer life insurance'policies that can be con 1 verted, completely or partially, into coverage for long-term car e in retirement. Life in surance needed to protect a family's earning capacity during working years generally is not needed to the same extent in retirement or when children reach adulthood. As retirement begins, death benefits under the policy could be.re d uced while benefits payable for long term care could begin and be increased I I I I 8) Encourage home equity conversion The government should encourage insurers.and.other financial institutions to make it easier for the elderly to use the equity built up i n their:homes tofinance long-term care in surance or services. Under a "reverse annuity mortgage permitted now in several states the elderly homeowner receives a payment each month in return for a mortgage on the home normally up to 80 percent of the home ' s value. The mortgage is then. paid off when the home is sold. Under a "sale leaseback" arrangement, an alternative to the reverse an nuity mortgage, the elderly homeowner actually sells his home but acquires an unlimited right to rent back the property f o r life at a predetermined rate. Through these mechanisms the elderly could use their home equity for nursing home care insurance and expenses while retaining occupancy of the home I I 3 9) Create health care savings accounts Congress could adopt a compreh e nsive program allowing workers and employers to put aside money during their working years for retirement medical and long-term care in surance and services. A proposal to do this (H.R. 955) has been introduced in Congress by Representative French Slaught e r, the Virginia Republican, and others 12 CONCLUSION These measures would mobilize existing private resources to finance long-term care, in creasing the ability of elderly Americans to meet such costs themselves and thereby reduc ing the pressure for cost l y and wasteful government programs To be sure, the government should pay for the essential long-term care expenses of those who do not have the resources to meet the cost, or could not meet it without great hardship A new program, Long-Term Care Assistanc e ; has been proposed to meet this need. This program would remove the current provisions for long-term care assistance from Medicaid and expand them to provide additional aid to elderly couples, who are not well served by the current system. But taxpayers s hould not have to finance long-term care for every retiree, regardless of wealth or income. Such a government commitment would require massive tax increases that would slow economic growth and destroy jobs If the government picked up the bills for everyon e , the number of the elderly entering nursing homes and the price of care would soar dramatically; further increasing program costs. Moreover, free nursing home benefits to everyone would be highly regressive, since working people would be taxed to provide benefits to shield the assets of.the.wealthy I Promoting Insurance and Savings. The proper policy fot,protecting Americans with ac cumulated assets is not providing them with benefits courtesy of the taxpayer, but encourag ing them to protect their resour c es through insurance. The government thus should take 8 steps to promote the development of private long-term care insurance to enable the elderly to obtain such protection more easily. It also should adopt policies to enable workers to ac cumulate saving s during their careers that would be available to finance long-term care in i retirement through private insurance or other means. Encouraging such prudent protec tion through private insurance, and not as a'new entitlement program for.the affluent is .the proper way to deal with the long-term care concerns of America's elderly I I t I I L I I I 13
646 April 20, 1988 I PROVIDING FOR THOSE IN NEED I LONG-TERM CARE POLICY I c 1 i 28 I I i I Peter J. Ferrara John:M. Olin Fellow a 8 I- a I I a I . INTRODUCTION Many American families face the expense of assuring, adequate.longTtekm.treatment and care of elderly relatives who no longer can perform basic living activities for themselves. Many of the elderly who have no relatives to help them must fa ce>these costs alone. In some cases, families also must struggle through. the emotionally draininglexperience.ofi a 1 close family member's severe, long-term illness, making the financial burden even less bearable. There is broad agreement that, given the ' rising cost of such long-term care plus the aging of America, sound policies and institutions are required to meet such vital concerns L I I, I I J This does not mean, however, that Congress shodd'declare.open beason' on younger tax payers, or that family members should be free to avoid their responsibilities by shifting costs onto Uncle Sam's shoulders. What it does mean is that policy,makers should begin to analyze the issue carefully and to determine the appropriate roles for the private and"the public sectors, rather than engage in a buying spree for the elderly vote, leaving the tab to be picked up by future governments. Fear of Improverishment. It is not the government's responsibility,to underwrite the living expenses of every American who reaches a certain age. It is, however; appropriate for the government to pay for the essential long-term care expenses of those Americans who otherwise would be unable to meet such costs, or could do so only with great hardship. Federal and state governments alread y spend over $20 billion each year fulfilling this responsibility through Medicaid and other programs As part of a general reform of long-term care policy, such public assistance should be ex panded for elderly couples, since today's nursing home expenses for a disabled spouse often can impoverish the noninstitutionalized spouse. Moreover, all long-term care assistance should be pulled out of Medicaid, which was intended to be strictly a medical care program and provided through a separate program. Specifi c ally designed to serve the long-term care needs of those without adequate funds, it could be known as Long-Term Care Assistance and those Americans who have sufficient resources should use their own funds to pay for long-term care directly or through priv a te insurance. The average worker should not be taxed to pay for the nursing home expenses of the well-off elderly without sufficient funds to pay for nursing home care, the remaining issue is not a problem of access to care, which is assured, but that of h ow to prevent the assets of the elderly from being ravaged by nursing home costs. This is not really a health policy issue at all. It is an estate planning issue, which can be addressed best through private sector insurance and other private financial mec h anisms The government should not preserve substantial private estates through public assistance at the expense of the general taxpayer. Some of the savings of the more affluent elderly could be used.to.finance.the private insurance to protect the rest. Mo reover, the government should not allow affluent adults.to avoid the family responsibility of caring for their elderly parentswho could remain at home by placing them in nursing homes at public expense. To the extent that government should be involved in h elping these wealthier Americans it should be to ensure that they take steps to protect their resources:Ilnlparticular, the government should promote the expansion of private long-term care insurance and make it more attractive for workers to save during t heir working years for long-termxare services and insurance in retirement. Such measures would maximize the private resources avail able to finance long-term care and reduce the need for government spending An Estate-Planning Issue. With the government pr o viding assistance to those Americans 1 5 Calamitous Economic Consequences. Some lawmakers propose that the government should pay for every American's long-term care costs; at home and in nursing homesi 1 I through a new social insurance program financed b y increased payroll tax rates and other tax hikes. Such a program would be enormously.costly. Not only would most current private long-term care expenditures simply become a federal expense,.but with the govern ment paying the bills, far more elderly Ameri c ans would enter nursing. homes or use paid for home health services. With such heavy government subsidies stimulating demand prices for such care would likely, soar as well. Such a program could potentially, cost as much as all of Medicare today around $8 0 billion per year The economic consequences of such a program could be calamitous. Payroll tax rates al ready are far too high. These taxes already destroy jobs and retard economic growth. Payroll taxes need to be cut, not increased. Increasing taxes suff iciently to finance this new entitlement program would be a crushing body blow to the economy. Indeed, adopting such a program for the elderly at a time when the budget deficit is already huge and the baby boom generation is moving steadily toward retirem ent would be foolhardy 2 LONG-TERM CARE IN AMERICA About 5 percent of the elderly, or about 1.5 million retirees, reside in nursing homes. Such residents need assistance in performing daily living activities and often are immobile. The average cost of nur sing home care is about $22,000 per year? Discussions of long-term care issues, however, usually fail to note that nursing home residents typically stay in the homes for relatively short times 52 percent of those who enter a nursing home do not stay more t han three months 63 percent do not stay for more than six months 75 percent do not stay for more than a year Only 16 percent stary more than two years a Moreover, only 29 percent of the elderly who need long-term care are in a nursing home! The rest recei v e such care from spouse .adult children, friends, and to aJesser ex tent, from paid home health care professionals. s I I Medicare and Medicaid Medicare generally does not pay for nursing home expenses. The program does pay the full cost of 20 days of car e in a skilled nursing facility (basically a nursing home that provides more intensive medical, therapeutic, or rehabilitative treatment), if the care fol lows a hospital stay of at least three days and is for the same medical problem treated in the hospit a l. In theory, Medicare pays for an additional.80 days of such care but-.the program I charges the retiree a deductible .of $67.50 foreach such additional day, which is about equal to the average daily fee for skilled nursing care! As a result,:Medi are be n efits cover only about 2 percent of total nursing home costs for.elderlyAmericans I r f 1 1 National Center for Health Statistics, TJse of Nursing Homes by the Elderly: Preliminary Data from the 1985 National Nursing Home Survey, Advunce Datu, Number 135, May 14,1987 2 Task Force on Long-Term Health Care Policies, Report to Conpss and the Secretary, U.S. Department of Health and Human Services, September 21,1987, pp. 19,69 3 Ibid pp. 84-91 4 Ibid.,p.76 5 Ibid 6 The average cost of a day of care in a skille d nursing facility in 1985 was $61. 01. National Center for Health Statistics, Nursing Home Characteristics: Preliminary Data from the 1985 National Nursing Home Survey Advunce Dutu,.Number 131, March 27,1987, p. 7 7 General Accounting Office, Long-tem Can ? Insumnce, Covemge Vuries in u Widely Developing Munket Washington, D.C National Health Council, 1986 p. 8 3 Medicare also will pay for an unlimited number of medically necessary home health care visits to provide skilled nursing care and physical therap y , if the retiree cannot leave his or her home. Medicare, in fact, pays about one-third the cost of all professional home health services? But the program does not cover household cleaning, meal preparation, help in bathing and dressing, or other basic dai ly living activities. It is Medicaid, which assists low-income families both young and old, that provides the lion's share of federal nursing home care assistance, covering about 42 percent of such ex penses? Medicaid will spend about 18 billion this year on nursing home care, about one third of all Medicaid expenditures Medicaid Benefits. Unlike Medicare, Medicaid is a joint federal-state program, and its eligibility criteria and benefits vary. To be eligible for Medicaid this year, an elderly in dividual generally must have less than $1,900 in saved assets, while a couple must have less than $2,8 50. Elderly individuals or couples can still qualify if they have in addition a home of any value, an automobile with a market value of no more than $4,500, and household goods and personal effects of "reasonable1' value In addition, their income this yea r generally must not be more than $354 per month for an individual or $530 per month for a couple. Those with incomes above these limits also .qualify .for. Medicaid .coverage if ,their net income after medical expenses, including nursing home expenses, is less than these limits I, I I 4 Once an elderly person qualifies for Medicaid, the program will pay the full remaining cost of necessary nursing home care after the retiree contributes his or her income to such care, excluding a small personal allowance, a nd generally $354 a month for the support of a noninstitutionalized spouse. The program also .will pay for.the full cost of physician-or retiree's income. These services include personal assistance and even. homemaker,duties dered and -supervised home hea l th care services without any contribution from the 1 Private Insurance. The market for private long-term care insurance is inits infancy, but growing rapidly. Some 70 insurance-companies offer such.policies covering about 425,000 retirees and paying about 1 percent of elderly nursing home costs In ,1986, annual premiums for policies issued at age 65 and continued thereafter normally were in the $200 to $800 range, depending on the level of coverage provided Apart from Medicare Medicaid, and private insuran c e, the elderly and their families pay for remaining nursing home costs directly out of their own resources. These direct payments cover about half of all elderly nursing home costs io 8 Joseph C. Isaacs and Stephanie Tames, LongTem Care: In Search of Nati o nal Policy (Washington, D.C National Health Council, 1986), p. 8 9 Task Force on Long-Term Health Care Policies, op. cit., p. 19 10 Bid p. 1523, GAO, Long-Term Care Insurance, op. cit p. 10 11 GAO, LongTerm Care Insurance, op. cit pp. 26-27 12 Task Force o n Long-Term Health,Care Policies, op. cit pp. 11,69 4 Providlng for Those in Need In keeping with the admirable traditional American belief that society should help those in need, the government should pay for the essential long-term care expenses. of tho se who do not have the resources to meet these costs, or who cannot pay for them without great hardship. This will guarantee once and for all that all Americans who need long-term care will be able to obtain it. This assistance should be provided through a new program, perhaps called Long-Term Care Assistance, separate from Medicaid and designed specifically to meet long-term care needs. This new program should take the provisions for long-term care assistance out of Medicaid, allowing Medicaid to focus ex c lusively on medical needs. Following the prin ciples of federalism used by Medicaid and most other assistance programs, the new program should be a joint federal-state enterprise. This split-level feature would enable states and local communities to contr o l the new program and structure it to meet local needs and preferences. The federal share of the program should be financed out of general revenues, and the states should finance their share as each prefers The new program would address the care of elderl y xouples, when one spouse entered a nursing home and the other faced penury to meet the eligibility test for Medicaid. The non institutionalized spouse would be allowed to retain 50 percent of family income, up to 20,000 per year, besides the current allow a ble income level of about $4,250 under Medicaid rules,and still retain eligibility for the new program. Similarly, the spouse could keep 50 percent of additional assets, up to $20,000, besides the current Medicaid liinit of 2,850 This expansion of benefit s could increase government spending for nursing home assis tance by $1 billion to $2 billion dollars per year, though an estimate of precisely howlmuch is not currently available. The total increase should be reasonable, however, since only 12 percent of e lderly nursing home residents have spouses. Because this increase in cost would be modest, the government could and should.finance it out .of general revenues without any tax increase PRESERVING THE ESTATE With the government providing nursing home care a s sistance to those elderly Americans who would otherwise face hardship, the remaining issue concerns the situation of those elderly Americans who do have substantial resources to pay for nursing home care, directly or through insurance. The issue here is n ot access to needed care, which is assured, but how to protect their assets from being ravaged by high nursing home costs. This is not really a health policy issue, but an estate planning issue. Such estate planning concerns clearly should be addressed thr ough the private sector with insurance and other financial mechanisms, not with government assistance at the expense of general taxpayers. And because these Americans do have resources, it is reasonable to expect them to use some of their funds to pay for private insurance to protect the rest of their savings 5 The Slngle Retiree Some 88 percent of elderly nursing home residents-do not have a living spouse. What are 1) Income: The median income for elderly single retirees is about $8,000 per year,13 comin g primarily from Social Security, pensions, and returns on savings. Since the single retiree need not support a spouse, virtually all of this income is available to meet nursing home expenses the resources available to such single retirees 2) Home Equity: A bout three-fourths of the elderly own their own homes with a median equity of approximately $60,000.14 A single elderly person confined. to a nursing home, no longer able to take care of himself, does not require a separate residence. Consequently his hom e equity is available to help finance long-term nursing home expenses. (Under the proposed new Long-Term Care Assistance program, home.equity would still be excluded in determining eligibility for government assistance, so even single elderly people would n ot be required to use their home equity before receiving government aid I 3) Savings: The typical retiree has s vings On average, these savings are more substan The single retiree with no spouse can use such ac- l! tial than those of younger Americans cum ulated savings to finance nursing home expenses. A high proportion of single elderly nursing home residents, therefore, do have substantial resources to pay for their care, and they should rely on those funds before the taxpayers are asked to bear the expe nse. It is not too much to ask those who can to contribute $10,000 to 20,000 to their own nursing home care, particularly when caused by advanced age and dis ability, since unfortunately they cannot personally use those funds for other things. This level of contribution, in fact, would cover most nursing home stays, as 52 percent of those who enter a nursing home stay less than 90 days, and 75 percent stay less than a year. Some proponents of government funding of long-term care expenses counter that not p roviding government assistance to those elderly persons with substantial resources would lead to their "impoverishment Yet it is hard to see how the notion of impoverishment ap plies to a single elderly person confined to a nursing home, whose personal ne e ds and care are provided by the institution Elderly Couples The real need for government assistance to avoid depletion of funds caused by nursing home expenses occurs in the case of elderly couples, where the noninstitutionalized spouse 13 U.S. Bureau of the Census, Current Population Report, Series p-60, No. 157, Table 6 14 The median home equity for persons 65 and over in 1984 was $46,2 00. U.S. Bureau of the Census Household Wealth and Asset ownership (Washington, D.C U.S. Government Printing Office, 19 Table 5. Today, four years later, this figure has likely grown to around %6o,OOO, given housing value appreciation 15 U.S. Bureau of the Census, Household Wealth andAsset Ownership, op. cit Tables 3 and 5 6 may well become impoverished when the funds on which he or she is relying for continuing support must be used to pay the nursing home costs of his or her spouse. That is why ex panded government assistance for such elderly couples is recommended under the proposed new Long-Term Care Assistance program . But there is no need for a major government program for single retirees with substantial resources, who make up most of the nursing home population. I This does not mean that such single retirees do not need to protect their substantial savings and resou rces from high nursing home costs. But preserving substantial estates is not a proper function of government aid financed at the expense of the general taxpayer. Rather, it is a function that can and should be served by the private sector through in suranc e or other mechanisms Affording Protection. A recent Department of Health and Human Services (HHS)'study finds that in less than 20 years about 60 percent of single elderly individuals will be able to spend less than 5 percent of their income to purchase i nsurance:protecting against high nursing home expenses.16 But the common assumption that this is a cost to be financed out of income misses the real point. Since the goal here is mostly to preserve a substantial ac cumulation of resources, such insurance c an and should be financed by a portion of the ac cumulated savings, thereby protecting the rest. Since it is a problem for individuals.who have substantial resources and the issue is how to protect such resources, it must not be im plied that these indivi duals cannot afford such insurance I ,A Elderly couples earning more than $20,000 per year and having more than $20,000 in resources also could afford such protection. Expanded government assistance under a. Long-Term Care Assistance program has been recom mended for those who fall below this threshold. Interestingly, the HHS study projects that by 2005 some 93 percent of ,elderly couples, too, would be able to finance long-term care insurance with less than 5 percent of their income Ai I I HOME HEALTH CARE I Only 29 percent of the elderly who need long-term care assistance receive such care in nursing homes. About three-fourths of the remainder are cared for entire1 by their spouses, children, other relatives, or friends on an informal, unpaid basis. About 2 1 per cent of those outside nursing homes are cared for by a combination.of unpaid family and friends and paid professionals.18 Only 5 percent rely exclusively on paid home health ser vices 1.7 19 16 ICF, Inc. Ptivate Financing of Long-Tern Care: Current Methods and Resources, prepared for the U.S. Department of Health and Human Services, Assistant Secretary for Planning and Evaluation (Washington D.C January 1985 17 Robert Maxwell, Statement of the American Association of Retired Persons on Long-Term Care Financing before the Senate Finance Committee, Subcommittee on Health, Washington, D.C June 12,1987, p. 1 18 Bid 19 Zbid 7 Not only is home care preferred by most Americans, but it is reasonable for family mem bers to shoulder this responsibility if they have the means to do so. Such obligations adhere to traditional American concepts of family and community responsibility. Other Americans should not be expected to provide funding, through tax dollars so that adult children or other family members can avo i d the obligation of caring for elderly relatives by placing them in nursing homes at public expense Maids and Cooks. In some circumstances, public assistance for care in the home is jus tified. But the use of public funds in a family home is difficult to r egulate. Such public assis tance quite easily can turn into a boondoggle unless it is carefully targeted. Elderly Americans with only slight impairment, or spouses and adult children who are caring for dis abled retirees, are not entitled to personal maid s and cooks at public expense, euphemisti cally called "home health care." On the other hand, Medicare, as it does outside theahome,? should cover 'true medical services provided in the home for persons who cannot leave the home. .Elderly Americans eligibl e for nursing home assistance under the proposed new program should be eligible for home health care assistance if institutionalization in a nursing home would be necessary without such services, and such care in the home would not be lmore expensive than nursing home care. When the elderly person is living with a nondisabled spouse or adult children however, such taxpayer financing should not cover personal services such) as household cleaning, cooking, feeding, dressing, and bathing that can be provided b y family members This framework would maintain for home,health care the same principle as discussed for nursing home care the government should provide for those who have legitimate needs and do not have the resources to meet those needs. But retirees who have substantial resources should not look to the taxpayers to pay their bills Available Savings. A disabled parent commonly lives in the home of an adult child and receives care from the family. Providing such care. is certainly a, timelconsuming burden and the illness or infirmity of the parent is emotionally difficult for family members. But substantial financial resources often are available to the family.to. assistwith such care. Much of the elderly person's income, for instance, could be used by the family, which is providing for all of the parent's needs. As noted, the median income for single elderly Americans is about $8,000 per year. And if the elderly parent is living in the adult. child's home, the equity in the parent's former home also is ava ilable to the family, and the median home equity for persons 65 and over is around $60,0 00. Other savings of the elderly parent might be available as well. These resources typically more than compensate for the costs of food, cloth ing, and shel ter within the family's home for the elderly parent. Medicare helps with true medical ex penses in the home, and private insurance covering medical services for the elderly is broad ly available and heavily utilized. Given this assistance an d the resources of many of the I i I 8 i i I 20 Those who can leave the home should have their medical services provided in doctor's ofices and clinics just as other people do 8 .elderly, some family expenditures for professional home health care would not be an exces sive burden. For lower-income families, the government could .provide' assistance by allowing a de pendent elderly parent in the adult child's home to qualify the family for the earned income tax credit. This credit, now available to families with young dependent children, provides a refundable amount each year equal to 14 percent of income. The full credit is allowed for incomes up to about 6,000 and then is slowly phased out as income rises to $18,000 Providing care for an elderly parent may be more difficult for a couple when both hus band and wife work. But these two-earner couples usually have substantially above-average incomes and should not be looking to the taxpayers to finance their family responsibilities If these more affluent coupl e s need to hire outside professional help.to assist,with care of a disabled parent, they or the parent should pay for it themselves. To the extent that the couple needs outside help, it would be fairer to others for this to be provided through pru II dent i nsurance protection THE CASE AGAINST FEDERAL LONG-TERM CARE I Some propose that the government pay for the nursing home and home health care ex penses of every American, even millionaires, through a universal social insurance program financed by increased payroll tax rates and possibly other tax increases The American As sociation of Retired Persons (AARP) is leading a nationwide campaign on behalf of such a program Exorbitant Costs in the U.S. this year will be close to $50 biilionF1 Even if the program p r ovided for some substantial contributions to expenses out of beneficiary income, the government's initial cost likely would be over $30 billion. Total expenditures ,on home healthxare. this year will This social insurance prograq would be enormously costl y Total nursing home,expenses be well over $10 billionz Even these figures are surely low for they assume no change in the demand for care resulting from such a program. If the government started paying nursing home\\ expenses across the board, the number of Americans entering nursing homes almost surely would soar, sharply increasing the program's cost. It must be remembered that only 29 percent of those needing long-term care are in nursing homes. In addition, only 26 percent of the dis abled elderly in car e outside nursing homes receive some professional paid-for home health care services. With the government paying the expenses, many more would use such ser 21 GAO, Long-Tern Care Insurance, op. cit p. 10 22 Total expenditures for professional home health c are were $9 billion in 19 85. Task Force on Long-Term Health Care Policies, op. cit p. 19 9 vices. While advocates of home health care benefits argue that such benefits could save government funds by avoiding expensive nursing home care, studies show that such savings are unlikely to result A recent study by the Institute for Research on Poverty at the Univer sity of Wisconsin, conducted for the National Center for Health Services Research, con cludes that government home health care benefits result in lit tle if any reduction in govern ment nursing home expenses, yet lead to increases in government home.health gxpendi tures for those who would remain at home even without the expanded benefits. With the increased demand for nursing home and home health care brought about by such a universal program, prices for such care also would soar. This is especially true since in many states the supply of new nursing home space is heavily restricted by regulation Huge New Entitlement. The combination of increased utili z ation and rising prices could more than double the costs of the proposed universal program. Total costs of such a program could in fact be close to todays $80 billion Medicare expenditure, which is almost 10 percent of the entire federal budget. Creatings u ch a hugenew entitlement for the elder ly makes little sense, given the size of federal budget deficits and the pending retirement of the baby boom generation. Medicare itself is projected to run deeplyinto the red, requiring payroll tax-rate increases of as much as 400 percent by the time todays young workers retire, according to the latest official government reports By then, the Medicarespayroll tax rate alone could be higher than for all of Social Security today. Payroll tax rates already are far too h igh and need to be cut, not increased. Payroll taxes cost jobs. A study earlier this year by the Institute for Research on the Economics of Taxa tion concludes that the payroll tax r e increases in 1988 and 1990, scheduled under current law, will destroy h alf a million jobs free long-term care benefits for everyone would cause massive job losses and could stall the economy. Revenues would then fall short of expectations, resulting in a massive increase in the deficit I I I I I I .I if A tax increase of the magnitude needed to finance Helping the Rich Become Richer a I Expanding benefits beyond those in need, to provide free nursinghome care assistance to everyone, would be highly regressive It would mean taxing all working people to provide benefits to Amer i cans with substantial resources. The main effect of such a policy would be to increase the estates that the wealthy can leave to their children The true beneficiaries of such expanded benefits would be a relatively small number of Americans, mostly betwee n 40 and 60 years old and in the middle to upper income group. This relatively small group of high-income beneficiaries would receive large inheritance windfalls made possible by taxing the average taxpayer 23 Peter Kemper, Robert Applebaum and Margaret Ha r rigan,A Systematic.Companson of Community Care Demonsfmtions (Institute for Research on Poverty, June 1987 24 1987Annual Report of the Board of Twtees of the Federal Hospital Insumnce Trust Fund (Washington, D.C March 30,1987 25 Aldona Robbins and Gary Ro b bms, Effects of the 1988 and 1990 Social Security Tax Increases, Econoniic Report No. 39 (Washington, D.C.: Institute for Research on the Economics of Taxation, February 3,1988 ir 10 ENCOURAGING AMERICANS TO PLAN FOR LONG-TERM CARE A new government progra m to help finance long-term care expenses for those Americans who do not have the resources to meet such costs has already been recommended Allow ing the adult children'of an elderly person who needs home care to qualify for the earned in come tax credit a l so would assist families of moderate incomes For better-off Americans the government should promote the expansion of long-term care insurance and other private financing mechanisms to protect their assets against destructive long-term care costs. In addit i on, the government should encourage workers to accumulate special savings to finance long-term care insurance in retirement. The federal government could 1) Develop better data on long-term care needs A major concern of private insurers is the lack of sol i d dataon which to base long-term care insurance policies. More data on the incidence, duration, and costs of long-term care is needed. The federal government should consult with private insurers and take the lead in developing a data base. This would enab l e the private market to grow more rapidly 2) Extend to long-term insurance the incentives that apply to life insurance The federal government should extend the same tax policies to long-term care insurance that it applies to life insurance. The income ear ned on investment reserves for long-term care policies should not be taxed, just as life insurance reserves are not taxed. Siilarly, the benefits paid by long-term care policies should be tax exempt, as life insurance benefits are. The government should no t be taking resources out of the funds of workers who are trying to set aside savings for long-term care, just as the government restrains itself from dipping into life insurance proceeds intended to protect widows andchildren 3) Make long-term care costs and premiums eligible for the medical expense tax deduc tion High medical bills and health insurance premiums can be deducted, in part, from taxable income. Expenses for long-term care and pre*ums for long-term care insurance should be eligible for simila r medical expense deduction 4) Allow employers to include long-term care insurance in the tax-free "cafeteria" benefit plans offered to their workers Federal tax law should be changed to allow employers to offer long-term care insurance as one of the choic e s under "cafeteria" employee benefit plans. These are fringe benefit plans in which each worker is allowed to choose a package of tax-free employee benefits from a range of options 11 5) Encourage employers to provide retirement nursing home care with the same tax policy that applies to pensions The Deficit Reduction Act of 1983 bars employers from deducting most contributions to reserve funds for retirement medical benefits including long-term care coverage; it can even require tax on investment returns o n such reservefunds. Contributions and returns to pension funds, however, have remained tax-free. Without a deduction for contributions and the tax exemption for reserve earnings, private employers are far less inclined to offer such retirement benefits. T h is 1983 tax provision should be reversed 6) Amend corporate and individual pension plan rules to permit the purchase of long term insurance I Workers and retirees should be allowed to use vested funds in pension plans, 401(k plans, Individual Retirement A c counts (IRAs); and other.retirement.plans to make tax-free purchases of long-term care insurance. Employers should be allowed to use excess reserves in overfunded pension plans to provide long-term care he'alth insurance-benefits for their employees in re t irement I I I 7) Stimulate the conversion of life insurance policies into long-term care protection The government could encourage insurers to offer life insurance'policies that can be con 1 verted, completely or partially, into coverage for long-term car e in retirement. Life in surance needed to protect a family's earning capacity during working years generally is not needed to the same extent in retirement or when children reach adulthood. As retirement begins, death benefits under the policy could be.re d uced while benefits payable for long term care could begin and be increased I I I I 8) Encourage home equity conversion The government should encourage insurers.and.other financial institutions to make it easier for the elderly to use the equity built up i n their:homes tofinance long-term care in surance or services. Under a "reverse annuity mortgage permitted now in several states the elderly homeowner receives a payment each month in return for a mortgage on the home normally up to 80 percent of the home ' s value. The mortgage is then. paid off when the home is sold. Under a "sale leaseback" arrangement, an alternative to the reverse an nuity mortgage, the elderly homeowner actually sells his home but acquires an unlimited right to rent back the property f o r life at a predetermined rate. Through these mechanisms the elderly could use their home equity for nursing home care insurance and expenses while retaining occupancy of the home I I 3 9) Create health care savings accounts Congress could adopt a compreh e nsive program allowing workers and employers to put aside money during their working years for retirement medical and long-term care in surance and services. A proposal to do this (H.R. 955) has been introduced in Congress by Representative French Slaught e r, the Virginia Republican, and others 12 CONCLUSION These measures would mobilize existing private resources to finance long-term care, in creasing the ability of elderly Americans to meet such costs themselves and thereby reduc ing the pressure for cost l y and wasteful government programs To be sure, the government should pay for the essential long-term care expenses of those who do not have the resources to meet the cost, or could not meet it without great hardship A new program, Long-Term Care Assistanc e ; has been proposed to meet this need. This program would remove the current provisions for long-term care assistance from Medicaid and expand them to provide additional aid to elderly couples, who are not well served by the current system. But taxpayers s hould not have to finance long-term care for every retiree, regardless of wealth or income. Such a government commitment would require massive tax increases that would slow economic growth and destroy jobs If the government picked up the bills for everyon e , the number of the elderly entering nursing homes and the price of care would soar dramatically; further increasing program costs. Moreover, free nursing home benefits to everyone would be highly regressive, since working people would be taxed to provide benefits to shield the assets of.the.wealthy I Promoting Insurance and Savings. The proper policy fot,protecting Americans with ac cumulated assets is not providing them with benefits courtesy of the taxpayer, but encourag ing them to protect their resour c es through insurance. The government thus should take 8 steps to promote the development of private long-term care insurance to enable the elderly to obtain such protection more easily. It also should adopt policies to enable workers to ac cumulate saving s during their careers that would be available to finance long-term care in i retirement through private insurance or other means. Encouraging such prudent protec tion through private insurance, and not as a'new entitlement program for.the affluent is .the proper way to deal with the long-term care concerns of America's elderly I I t I I L I I I 13
