SD49 - Study to Determine the Benefits and Costs of Tax Incentives and Other Mechanisms to Encourage the Purchase of Long-Term Care Insurance


Executive Summary:
Disability is a risk facing everyone reaching his or her later years. Approaches for financing long-term care, however, remain imperfect. As the aging population expands due to both growth and increased longevity, the necessity of viable funding mechanisms becomes clear.

Most care is still provided by family or friends on an informal basis. Institutional care in nursing homes is financed primarily by public funds through the Medicaid program (about 60%) or out-of-pocket (about 35%). Private care insurance pays only about 3% of nursing home care in Virginia. Although home and community-based care provided for payment is expanding rapidly, most at-home care is still provided by family or friends. Similar to the case for nursing homes, private insurance plays a limited role in the payment for home-based services.

The current funding structure for long-term care for the disabled often creates a hardship for the consumer. To qualify for Medicaid requires a person to already be in or to "spend-down" to poverty. Alternatively, an individual will need substantial private assets to finance an extended period of long-term care.

The dilemma created is both social, in terms of ensuring that our elderly receive adequate care, and economic, in terms of balancing public expenditures and appropriate care. At present, the Medicaid program, originally designed as a program for the indigent, is expending ever increasing dollars on long-term care for the elderly. Nationally, Medicaid pays for about half of all nursing home care and in Virginia Medicaid pays for almost two thirds. Unless other means are developed to finance care, including making it the responsibility of the individual except in cases of true indigency, long-term care may become almost solely the responsibility of the government.

One solution is to expand the role of long-term care insurance. As reported in 1994 Senate Document 17 regarding public-private long-term care insurance partnerships, the single overriding problem with long-term care insurance is lack of interest by the public. Initially, certain factors limited interest in long-term care insurance. Products introduced in the 1980's had flaws including inadequate coverage and insufficient consumer safeguards. Products also were available only on a limited basis. However, efforts to improve policy design have been reasonably successful, at least enough so to remove product limitations as a major barrier. Similarly, product availability no longer poses a significant problem.

Even so, the public shows little interest in long-term care insurance. Affordability is still an issue. Most persons purchasing long-term care insurance wait until their sixties, when policies are considerably more expensive. Since few younger purchasers participate, the broad pool of insured persons necessary to reduce the cost generally is not in place.

1994 Senate Document 17 proposed several options, including providing group long-term care insurance policy options to employees of the Commonwealth and encouraging other employers to provide long-term care insurance, and expanding consumer education about long-term care financing options. However, these initiatives, even if pursued, still will bring a fairly small number of Virginians into the long-term care insurance market.

This study, therefore, proposes a public-private model that will use tax incentives to encourage purchase of long-term care insurance. It is intended that, in combination with better consumer understanding of potential long-term care needs and financing and improved insurance products, the trust fund model described will provide an additional incentive to individuals to take financial responsibility for their future long-term care requirements.