Skip to content

Burman chapter on finances of long-term care featured in Russell Sage Foundation book

Aug 31, 2012

The Perverse Public and Private Finances of Long-Term Care

Leonard E. Burman

Russell Sage Foundation, August 2012

Leonard Burman

Leonard Burman

One of the first lessons of economics is that people respond to incentives—and the incentives in our long-term care system are all wrong. Medicaid pays for almost half of long-term care (Komisar and Thompson 2007), but only after a disabled person has spent down almost all of her wealth. That amounts to a nearly 100-percent tax on assets for many people. Medicaid provides nearly comprehensive long-term care insurance, but only after private insurance has paid. Since, for many people, private policies largely pay for services that would be covered under Medicaid, there is little reason to pay for insurance.

The response to the existing incentives is predictable: Americans save very little and few purchase long-term care insurance. Although the implicit Medicaid tax is only one among many factors at work, its perverse incentives are clearly counterproductive.

These incentives increase reliance on Medicaid, whose costs are a significant component of the ballooning federal deficits and create tremendous pressure on state budgets. While this is a problem even now, the future costs for federal and state governments will only grow as the enormous baby boom generation ages and requires more increasingly expensive long-term care services. In short, government policy discourages individuals from saving for long-term care without itself setting aside resources to meet the responsibilities it has taken on. This is a recipe for economic catastrophe (Burman et al. 2010) and places in doubt the government’s ability to actually deliver the services it promises in the future.

Although these issues might discourage those who would like to make access to longterm care universal, a fundamental reform of the system of financing long-term care presents an opportunity to realign incentives and bolster both federal and state finances. A well designed universal long-term care system would eliminate the asset test and the strongest savings disincentives under the current system. Of course, any program that guarantees payment for all or a significant fraction of long-term care expenses will reduce incentives for private saving (compared with a system where individuals are fully responsible). The solution is to require full prefunding of the nation’s long-term promises, either through a system of mandatory private long-term care insurance or through a fully prefunded federal program. There are, alas, both practical and political problems with both approaches. For that reason, incremental options to realign private incentives might be more feasible.

The plan of the chapter is as follows. The first section outlines the effects of the dysfunctional long-term care financing system on federal and state budgets and private households’ decisions. Next, the implications for public policy and several reform options are examined. A concluding section discusses limitations and challenges and suggests some broad benchmarks for evaluating public policy options.