Long Term Health Care


LOS ANGELES BUSINESS JOURNAL


Reprinted by permission of the Los Angeles Business Journal ™


Financial Planning Must Factor in Your Health Care in Senior Years

by Barry Boscoe, CFP

Ask anyone 60 years and older whether he or she will ever wind up in a nursing home and chances are the answer will be “never.”  Today many of us are living healthier and longer lives.  In reality, this may increase our need to face the future with the risk of possibly losing control over our lives and our finances due to the high cost of long-term care.

No matter how well people take care of themselves, they can still suffer from paralyzing injuries, disabling arthritis or Alzheimer’s disease.  The longer they live, the greater the chance of developing these problems.

Planning for perfect health falls into the “wishing and hoping” category.  Planning to avoid entering a nursing home, however, is not unreasonable.  With enough foresight, many people can insure that they retain their power of choice.  With enough money to draw upon, people can select from many alternatives, not only traditional nursing homes.

Financial planning has become the buzzword of the decade.  Broken down, financial and estate planning are about prevention – strategies adopted to avoid negative financial results.  In the case of long-term care (LTC), there are many more negative consequences to improper planning than just financial ones – especially loss of choice.  People who are approaching retirement or developing an overall financial plan should not avoid long-term care financing.

The preservation of one’s capital is a major goal.  However, two to three years in a nursing home at a cost of $40,000 to $70,000 per year would do serious damage to the financial plans of many retirees.  Until recently most disabled people had two choices – enter a nursing home or be cared for at home by a family member.  Fortunately, choices have increased over the past decade.

Provided one can pay, he or she can choose from a variety of facilities such as nursing homes, assisted living facilities or continuing care retirement centers.  Nursing homes usually follow the medical model, but do not provide acute care the way hospitals do.  They offer continuous nursing and other health-related services.

The costs can vary considerably.  For example, in cities such as New York, the price can reach as high as $70,000 per year, while in some rural areas it can be as low as $30,000 per year.

Assisted living or assisted care facilities follow the residential housing model.  They provide personal care services to individuals who are too disabled to remain at home, but not so disabled that they need a nursing home.  These types of facilities also include foster homes, board and care facilities and congregate care facilities.  Today, however, the term assisted living primarily refers to residential care in separate apartments.

Continuing care retirement centers offer a spectrum of services and living arrangements.  However, they often require a resident to buy his or her way in by paying a hefty lump sum up front, sometimes in excess of $100,000.  The advantage of these communities is that they allow residents to age in place by providing increasing amounts of assistance as time requires.

Unfortunately, the description of “care” has not been clearly standardized.  Care can be classified as skilled (daily care from a licensed medical professional), intermediate (care provided intermittently by licensed medical professionals primarily for rehab purposes) or custodial (care, assistance and/or supervision not requiring licensed medical professionals).

Around 95 percent of those receiving LTC have custodial care – meaning assistance with various daily living activities such as taking medications, transferring from a bed to a chair, dressing, bathing, etc.  These services can be provided by a non-licensed caregiver or by a relative or friend.

Most people have very little desire to stay in a nursing home – many even refuse to discuss the topic, hoping that their children will take care of them.  It is important to remember that wanting to remain in one’s home may be impractical.  Circumstances often prevent promises from being fulfilled.  Divorce, cross-country moves, job changes, illness and family problems are but a few events that make it impossible for a child to provide full or part-time care for an aged parent.

More and more people are now choosing to receive formal (paid) care in their homes, and the home health care industry has grown tremendously in response to this demand.  Costs have increased right along with demand.  A 1992 survey of Medicare home health care agency charges revealed a low of $38 for every four hour visit, to a high of $121, an average of $74.  What is unknown is that these charges may not be typical of services by non-Medicare providers.            What are the chances of needing long-term care (LTC)?  In 1991, The New England Journal of Medicine estimated that by age 65, a person has a 43 percent chance of entering a nursing facility at some point.  This figure does not include those receiving care at home.

Based on the above estimate, a married couple, both aged 65, has a 7 in 10 chance of requiring LTC.  Since most people insure a home and belongings from loss when the risk is only 1 in 1,000, or an automobile when the risk of accident is 1 in 70, it seems advantageous to insure a 7 in 10 risk.

Another study performed by the New England Journal of Medicine found that the average lifetime total stay in a long-term nursing care facility was approximately 2.11 years.  How much does it cost to provide enough protection to take care of a long-term stay?  There are several payment options for this service.

Common belief is Medicare will pay for LTC under part A.  However, this couldn’t be further from the truth.  Medicare only covers 5 percent of all current long-term care costs.  It pays for only a portion of the first 100 days of nursing home care, and in order to qualify a person must have been hospitalized prior to entering the nursing home.  In fact, the need for skilled nursing facility benefits covered by Medicare is so narrowly defined that Medicare pays only 1.8 percent of the entire nation’s nursing home bill.

It is estimated that about 99.5 percent of all LTC is custodial and intermediate, therefore not qualifying for Medicare.

Medicaid, on the other hand, has been paying an increasing portion of the country’s LTC bill.  For most people, however, Medicaid is unthinkable.  People haven’t worked and saved their entire lives only to spend down their assets in order to qualify for a welfare program.  Under current administration, it has become more difficult for people to “lose” their assets in order to qualify for this welfare program.

Self insurance (also known as paying out of pocket) may be a feasible option provided one has the funds.  Even though one may have the funds to self insure, taking the risk to do so is another question.

Other alternatives include reverse mortgages and medical savings accounts (MSAs).  However, because of the current congressional debate about MSAs, it is uncertain whether they will receive favorable tax treatment.  Some seniors will, therefore, use reverse mortgages to fund their long-term care.  However, others may want to ensure that they hand down their family home to their children unencumbered.

Private long-term care insurance is the last funding vehicle and possibly the only reliable solution to the problem of funding LTC.  There are three types of policies that can be purchased.  The first type provides a fixed amount of money for both nursing home care and/or home care.  This money is provided for a set period of time.  Within this type of insurance there are two basic types of policies:  indemnity, which pays a set daily benefit regardless of the cost of care, and reimbursement, which pays up to the cost of care or the daily benefit limit, whichever is lower.

Using a policy that specifies a maximum dollar amount either for home health care or nursing home care could deplete one’s assets.  Even though the policyholder has insurance, once the maximum amount for either home or facility  care is reached, he or she must then make the decision to switch to the other type of care, in order to continue receiving benefits, or pay for those costs out of pocket.

The second type of insurance is a recent innovation to the previous type of policy and is sometimes called “a bucket of money” policy.  This policy establishes a benefit account that a person can draw upon to cover any type of qualified care received in the home or facility, up to a specified limit.  The major advantage of this type of policy is that either type of care can be used, with the payment coming out of a single account.  The policyholder does not face the problem of exhausting the home health care benefit while still requiring LTC.

The third and newest type of insurance is a non-cancelable policy that offers both safety and equity.  One can even cover both spouses under the same contract, thereby reducing costs.  The idea behind this type of policy is to reposition one’s “just in case” funds into a tax-deferred life insurance policy.  Many see this type of an approach as a “personal money management” tool, a way one can prudently reposition assets to meet potential long-term care costs.

This program creates a win-win situation whereby the insured and/or their beneficiaries come out ahead, whether or not they need the long-term care.  If the long-term care is never needed, then the assets will pass to the heirs income tax free.  If the insured uses part of the benefits but dies prematurely, the balance of the benefits will be paid to the heirs tax free.  Unlike the other two types of policies available, this design can be funded with IRA money, creating leverage with a pool of money not often used.

In reviewing the various types of policies, one should consider what it takes to qualify for the benefits.  Typically, long-term care policies require a triggering event based on activities of daily living (ADLs).  A policy may require that an individual be unable to perform two or three ADLs for facility care, one or two ADLs for home health care.

When comparing policies, price is important, but should not be the only factor that determines whether one purchases the coverage or not.  If the policy does not provide worthwhile coverage it doesn’t matter how inexpensive it is.  When considering long-term insurance, the issue is not price, but value for money, which depends on how skillfully the policy has been designed to suit individual needs. Timing is important, especially for those who are already past the age of 65.  As one ages, not only does the cost of the insurance increase, but also the risk of requiring care.

For most retirees, long-term care is the only personal risk left.  The car, house, liability, health and future income are usually covered by this time.  The fear of becoming a dependent as one ages may still remain, but the fear of being forced into an unpleasant situation and of losing control, self dignity and self-determination will lessen.

Nothing can be done to insure that one will not require long-term care, but a good insurance policy can preserve a person’s dignity, power of choice and peace of mind.