Introduction to Long Term Care

In the United States today, we are at a demographic threshold. Not only are people generally living longer, but the members of the baby boom generation -- a population cohort of 78 million people born between 1946 and 1964 --- are approaching the age of 60. As a result, our country's elderly population will increase substantially in the coming years, putting a serious strain on employer-sponsored retirement plans, the Social Security system, the healthcare delivery system, the Medicare program, and other services and programs for the aged.

But the needs of the elderly are not limited to retirement income and medical care. As people age they become more likely to develop a chronic condition that prevents them from functioning normally -- they may not be able to move about easily or dress or feed themselves, or they may suffer from disorientation or impaired memory. When such a loss in physical or cognitive functioning occurs, a person needs long-term care -- home healthcare, assisted living, nursing home care, or other services.

These services are expensive, and if they are needed for an extended time, the cost can be substantial. How can the average person pay for long-term care? And how can we as a society ensure that the need for long-term care is met without placing such a burden on government benefit programs that they become no longer viable? That is the focus of this course.

Providing for Long-Term Care Needs

Relying on Family

In the past, when a person developed a loss in functioning, he or she was usually cared for by a family member. And course, this is still common today -- many people provide care to a spouse, an elderly parent, or another relative. But changes in society and in family structure are making this a less feasible solution for many people. Life expectancies are longer and families are smaller than in the past, so there are simply more older people needing care in proportion to the number of younger people available to provide it. There are also more single people and childless couples, so many people have no adult children to rely on. And while in the past many women did not work outside the home and were able to provide care, this is much less common today. Consequently, today when a person needs long-term care, there may be no family member to provide it. Or there may be one person who must take on the entire burden herself, or a married couple must try to raise their children, care for an elderly relative, and hold down full-time jobs all at the same time.

Clearly then, many people need to receive long-term care services from paid personnel. Can they simply pay for these services out of their own income and assets? Because of the cost and the anticipated impact of inflation, this is difficult if not impossible for all but the wealthy.

Amber is 45 years old. She is concerned about her long-term care needs and has been told that if she entered a nursing home in her area today and remained there for two-and-a-half years (the average nursing home stay), it would cost her $150,000. But she does not expect to enter a nursing home anytime soon -- she wants to plan for her needs 30 years from now. Based on the recent past, her financial planner assumes an average annual increase in long-term care costs of 5 percent. At this rate, costs double about every 15 years, so the cost of two-and-a-half years in a nursing home in Amber's area 30 years from now will likely be about $600, 000. And this does not cover the home health care services or assisted living that Amber may need for months or even years before she enters a nursing home.  

Of course, Amber has 30 years to save and invest. But still, it will take an enormous effort. And at the same time she must pay for current living expenses and save and invest for her children's college education and her own retirement.

There are other problems associated with paying for long-term care out of one's own financial resources. Even if a person is able to pay for the care she needs, in doing so she may deplete family assets. What then becomes of her surviving spouse? He may see his standard of living lowered or even be forced into poverty. And how will he pay for his own long-term care?

The use of personal assets to pay for long-term care may also mean that inheritances are not left to children and grandchildren. This is particularly troubling when liquidated assets include a family business or farm.

Finally, what if long-term care is needed sooner than expected? To return to the example of Amber, what if she plans to accumulate in 30 years an amount sufficient to cover her needs, but after only 15 years she suffers a debilitating illness and requires care? She will not yet have the necessary funds.

Many people believe that the Medicare program will cover their long-term care needs after they retire. They are mistaken. Medicare focuses on medical care, such as physician visits and hospital stays. While it does pay benefits for home health care or nursing home care, these benefits are available only for a very limited time while a person is recovering from an acute illness or injury. Medicare benefits do not cover the care needed for an indefinite time by those with a chronic impairment. And neither Medicare supplement insurance nor Medicare Advantage plans provide any significant additional coverage for long- term care.

Other people plan to rely on Medicaid, the federal-state health benefit program for the poor. This is possible, as Medicaid does provide extensive benefits for long-term care services. However, those who are not already poor must generally deplete their life savings and assets before they can qualify for Medicaid, and while receiving Medicaid benefits they must spend almost all their income on care. Moreover, because many state Medicaid programs focus on nursing home care and because Medicaid does not usually pay providers as much as they get from private patients, care options are often limited for Medicaid recipients.

Long-Term Care Insurance

Because of the limitations and problems associated with depending on family members, paying for care out of one's own resources, or relying on government benefits, private long-term care insurance (LTCI) makes sense for a large segment of the population. A person can purchase an LTCI policy and pay regular premiums of an amount she can afford, and when she needs care, the policy will provide benefits to help pay for the services she requires. There are several advantages to this approach:

The insured knows that when she needs care, there will be funds to help pay for it.
The policy's benefits will help preserve the insured's savings and assets.
The insured pays premiums of an amount that is known in advance and can be budgeted for, instead of paying the entire cost of care, the amount of which is unpredictable and could be very great.
The policy can cover a range of care options, allowing the insured to receive the services that meet her needs and enable her to maintain her independence as long as possible.
The policy's benefits can ensure access to high-quality care, not always available to those relying on Medicaid or limited personal funds.

State Long-Term Care Partnership Programs

An approach has been devised to help achieve two goals: enabling individuals to provide for their long-term care needs and at the same time relieving the financial pressure on the Medicaid program that is sure to increase as the elderly population grows. This approach is the creation of state long-term care partnership programs. Under these programs, state governments modify the rules of their Medicaid programs to allow applicants who have purchased long-term care insurance policies that meet certain requirements to qualify for Medicaid benefits while retaining assets that they would normally be required to spend on care.

In essence, a state LTC partnership program works like this: A person buys an LTCI policy that meets the requirements of her state's program. If she later needs long-term care, the benefits of the policy help cover her costs, so that she does not have to apply for Medicaid and the state Medicaid program does not have to bear these costs. In compensation for this, if the person eventually does apply for Medicaid (because she needs care for a long time and her LTCI benefits run out), she is not required to spend all her assets in excess of eligibility limits, as are other applicants. In this way the individual preserves some of her assets and the state's monetary outlay is reduced.

Eli purchases an LTCI policy that meets the requirements of his state's long-term care partnership program. Several years later he needs nursing home care, and the policy covers most of the costs. But after three years the maximum amount of benefits provided by the policy, $150,000, has been paid and benefits end. Eli then applies for Medicaid. The state normally requires applicants to spend almost all their assets on care before Medicaid benefits begin. But because Eli participated in the partnership program, he is allowed to keep an additional $150,000 (the amount of insurance benefits he received).

Four states, California, Connecticut, Indiana, and New York, were the first to establish LTC partnership programs. In these programs, the assets of participants are protected not only while they are living but also after their death-that is, the state Medicaid program cannot take these assets after the participant dies under Medicaid estate recovery rules. However, as of 1993 the federal government required that any new LTC partnership programs established by other states subject such assets to estate recovery. This requirement made partnership programs much less attractive, and consequently no additional states established them. However, this has now changed-the federal Deficit Reduction Act (DRA) of2005, effective February 8,2006, removed the estate recovery requirement, and as a result, a major expansion of partnership programs is underway.


As the elderly population increases, the need for long-term care is a growing concern. Many people expect a family member to take care of them, but this is less often possible than in the past. Some people plan to pay for their care out of their income and assets, but given the cost of services and the impact of inflation, this is unrealistic for all but the wealthy. Many believe that the Medicare program will cover their long-term care costs after retirement, but Medicare benefits are available only for a limited time after an acute illness or injury. The Medicaid program does provide extensive benefits for long-term care, but only to those who are poor or who become poor by spending almost all their income and assets on care.

For many people, long-term care insurance (LTCI) is a good solution. A person can purchase an LTCI policy and pay regular premiums of an amount she can afford, and when she needs care, the policy will provide benefits to help pay for the services she requires. And state long-term care partnership programs allow an individual buying a qualifying LTCI policy to preserve assets in the event his insurance benefits run out and he is forced to apply for Medicaid.