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Averting A Long Term Care Calamity
The leading edge of the baby boom generation (born between 1945 and 1964) is entering retirement age. This generation is larger than the one preceding it and the one following it. This demographic bulge threatens the solvency of government programs such as Social Security and Medicare. It also will test the limits of Medicaid, which pays for 49 percent of all long term care, the supportive services needed by people who lack the ability to take care of themselves for an extended period. Only a combination of governmental and private solutions, such as private long term care insurance, will avert the crisis.
Today seniors 65 years old and older make up 12 percent of the population. By 2025, that number will grow to 20 percent. In another decade, seniors over the age of 85 will number 14 million—ten times more than they number today. Historically, half the population over the age of 85 is afflicted with Alzheimer's disease, with 20 percent living in nursing homes. If that percentage holds true in the future, then 2.8 million seniors over the age of 85 will be living in a nursing home. Today, the average cost of a private room in a nursing home is $74,600 a year. At that rate, the over-85 seniors alone will require $209 billion in long term care every year (in today’s dollars). In five years, their care would cost more than $1 trillion.
Who will pay' Fully 59 percent of Americans over 45 think Medicare pays for long term care. They are wrong. Medicare pays for rehabilitation, but not for long term care. About 51 percent of today’s long term care is paid for by the individuals and private long term care insurance; 49 percent is paid by Medicaid, the government program for low-income individuals.
Medicaid eligibility requirements are difficult to meet now and likely will be more stringent in the future, as Congress tightens eligibility control costs. To qualify for Medicaid, individuals must have income below the poverty line and have a limited amount of assets. The family home is not counted as an asset as long as a spouse or dependent lives in it. However, if the equity in the home is $750,000 or more, the homeowner is ineligible for Medicaid. Congress may lower that figure in the future. It also may increase the “look-back” period for transferring ownership of a home to a relative in order to qualify for Medicaid. The 2005 Deficit Reduction Act extended the look-back period from three years to five years. Some members of Congress propose extending the look-back period to 8 or 10 years.
In addition to tightening Medicaid eligibility, the government is likely to give tax breaks to families that purchase private long term care insurance. In return for a long term care insurance premium, an insurance company agrees to pay for nursing home or in-home care, should the insured ever need it. “Congress must accompany Medicaid reform with meaningful incentives for purchasing long term care coverage,” writes Congressman Phil Gingrey of Georgia, a medical doctor. “From past experience, we know financial incentives are effective motivators. Accordingly, if we offset some of the cost associated with long term care coverage, more Americans will be likely to purchase policies.”
Gingrey and others also want to expand the federal Health Savings Account (HSA) program, which individuals now can use to pay long term care insurance premiums. “If Congress makes it easier to get an HSA and expands the contribution limit, we can encourage more Americans to save money, tax-free, for use in purchasing long term care policies,” Gingrey writes.
The vast majority of baby boomers are still in the workforce. The sooner they sign up for long term care insurance, the lower their premiums will be. For families that want to protect their assets, insurance is the best way to avoid the coming long term care crisis.