A little-known provision of the health reform law has the potential to transform long-term care services and delivery. The Community Living Assistance Services and Supports Act establishes the nation’s first voluntary insurance program to purchase long-term care services and supports from the community. Its inclusion is recognition that our current practices in the payment and provision of care will not be sufficient for the demographic demands of people with disabilities or people over the age of 65, and the economic environment that our country faces over the coming decades. It forces those of us who are aging—and that is all of us—to think about the long-term and plan accordingly. For those who sense opportunity, it’s time to figure out ways to provide services as efficiently and profitably as possible.
This week’s post is the second in our five-part series “Viewpoints: Health Economics.” This series of posts from invited authors will examine the most pressing issues in health economics and the health marketplace following the passage of health reform. Watch for our other companion pieces in the coming months.
When I Grow Up, I Want to Live in a Nursing Home
There is a persistent gap in the provision of long-term care support services that has yet to be rectified. Most people prefer to stay at home and remain as independent as their health and functionality allows, often relying on unpaid family or caregivers to provide assistance. There are many nonmedical services that allow people to remain in the community, but as their needs increase, the system is either inaccessible or unaffordable to many. Many people erroneously believe that Medicare covers the costs of long-term care, but it does not: Medicaid is the primary payer of these services, and private payments account for the remainder. A year’s nursing home stay averages $75,000.(1) When that becomes too expensive, or if an individual couldn’t afford it anyway, people spend down their assets to qualify for Medicaid. Today, roughly nine million elderly people require assistance with daily activities, and a further five million under age 65 require the same.(2)
Fast-forward by about 10 years, when you have ever greater numbers of people requiring long-term care assistance—who are financially ill-prepared for this stage of their life, have more chronic conditions than previous generations, have fewer children to take care of them, and do not want to live in a nursing home—and now we really have a problem. Demographics aside, an overreliance on the state to pay for care in old age comes at a cost through either taxes or cuts in services or reimbursement, which is a reality all too many providers are feeling right now.
This system requires a reboot. The CLASS Act is not a panacea; rather, it begins the movement away from the institutionalized spend-down approach to caring for the nation’s elderly by giving working adults the opportunity to plan for their future long-term care needs. It provides some relief to unpaid caregivers, it acts as a supplement to existing insurance, and its cash benefit encourages innovation among entrepreneurs and providers of nonmedical services and supports. It can be used to offset costs in a more traditional setting, but like other reform initiatives, its focus is to change the system to which we’ve grown accustomed and promote a more independent life for the aging and disabled populations.
How the CLASS Program Works
The CLASS program will be entirely funded by premium payments and its associated interest earnings. No taxpayer funds will be used to pay benefits. Here’s how it’s proposed to work: Let’s say that you are a 63-year-old worker who intended to retire right at 65, but because of significant losses to your savings, you must now work until age 70. You’ve heard of this CLASS program and think that it will benefit you greatly, but there a few details that you need to understand. You won’t be able to enroll in the program until 2012, but you also need to pay premiums into the program for at least five years, during three of which you need to be employed, before taking any benefits. Your employer has decided to participate in the program, and you are going to be automatically enrolled. You may opt out, just like the employer-sponsored 401(k) program, but you really like the idea of receiving a cash benefit of at least $50 per day to help you when you require assistance with daily activities. Your premiums of around $123 per month are higher than the 18-year-old enrollees, but since you are in good health now, you thought it wise to enroll, since the benefits are not subject to a lifetime or aggregate limit and can be used for a range of services like home modifications, transportation, aides, and nursing support, all of which you think that you will require in the future.
Like any other type of insurance product, the CLASS program is not without its challenges. First, there’s adverse selection, created when those who believe that they will actually require the product are more inclined to purchase it, thereby distorting the risk pool. Then there’s the moral hazard problem, which results in an inherent changed behavior that’s based on the security of being insured, so that the 63-year-old from the previous example can now fulfill a lifelong dream to go skydiving with a greater certainty that he or she will be taken care of should the improbable happen. The extent to which these phenomena affect the success of CLASS will have to be played out, and further studying and monitoring of forecast benefits will be required as the program begins. The unfortunate circular impact could be higher than forecast benefit payouts, which would in turn increase premiums (a provision of the CLASS Act is that it must be actuarially solvent) and lead to even greater adverse selection.
Another concern is whether there will be sufficient participation to create an insurance pool large enough to achieve desired risk dispersion. Again, going back to the earlier example, you can probably be certain that this 63-year-old worker nearing retirement is more inclined to enroll than an 18-year-old. Obviously there are some exceptions, but how many 18-year-olds are even thinking about this phase of their life? This rather simplistic scenario underscores a real challenge: The Congressional Budget Office believes that it was conservative in its forecast participation rate, but selling this type of insurance to people who hope that they will never need it, at an age when they are more worried about affording a family, is a tough sale indeed.
Finally, naysayers believe that an approximate daily benefit estimated between $50 and $100 per day can’t buy much given the current costs of care. That’s true if you lack imagination, but if we have faith in the entrepreneurial spirit, it’s really up to the market to offer an innovative solution and create new business models out of this opportunity.
Grandma’s Got a Facebook Page: Adapt or Die
A convergence of initiatives indicates a bright future for those in the health care and long-term care business. Both the health reform efforts and the stimulus package included provisions to begin building the infrastructure for technology to play a more central, pivotal role in health care, as indicated by the chart shown.(3) By the time that the first CLASS benefit is disbursed in 2017, the nation’s health information technology infrastructure will be in place. Greater amounts of data will enable better decision-making, new reimbursement models will have been tested and some perhaps implemented, and technology companies and venture capitalists will continue investing so that health care and custodial care continues to evolve. These elements and CLASS Act benefits will be coming together at a critical point on the demographic timeline, when demand for assistive services from the population aged 75+ really starts picking up (see first chart).
The U.S. is not alone in its aging demographics, and there is ample business opportunity worldwide to capitalize on this trend. From telemedicine and wireless remote monitoring systems to robot nurses and personal aide attendants in Japan, the availability of wireless technologies and the ever-expanding capabilities of smart phones will lead to new business models for companies that can offer value to the long-term care consumer. Countries like China and India, with undeveloped health care infrastructures and systems, are leapfrogging technologies and innovating health care products and business models for use in developed countries.(4) Technology, changes to the federal reimbursement system, and the sheer demand for these services will unleash creativity among businesses, entrepreneurs, and existing providers to provide better solutions and services to the disabled and aging.
So What Does This Mean for Your Organization?
Start planning now. A government-backed marketing initiative will begin educating the public on a new long-term care insurance option, inciting more demand for community-based services. Organizations need to start asking questions on how this incorporates into their plans. Accountable care organizations, bundled payments, medical homes, quality-based incentives, continued reductions to payments—these are all changes that health care organizations are facing. The CLASS Act is just one more factor for which organizations need to start thinking about strategic partnerships or alignments to provide complementary services along the health care continuum.
*Author’s Note: Research assistance for this piece was provided by Ansley Dee, Senior Associate with Dixon Hughes’ Senior Living Practice.
1) Genworth Financial. 2010 Cost of Care Survey: Long-Term Care Survey. Richmond, VA: Genworth Financial; April 2010.
2) Senate summaries for the Patient Protection and Affordable Care Act and the Community Living Assistance Services and Supports Act.
3) HIT or miss. The Economist, April 16, 2009.
4) Immelt JR, Govindarajan V, Trimble C. How GE is disrupting itself. Harvard Business Review, October 2009.
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