More and more, people are becoming aware of a major gap in their financial planning for retirement. That gap is in financing any long-term care that might be needed. The cost of long-term care, either in a nursing home or at home by paid providers, is not covered by typical insurance designed to cover the cost of medical care during one's retirement. Coverage of long-term-care expenses is conspicuously absent in both Medicare and the private insurance policies that supplement it.
As the vast majority of the cost of nursing home care is paid for either out of the recipient's own pocket or by Medicaid, a program designed to pay for medical care for the poor, it is clear that current ways of paying for care need to be improved. How people can most effectively finance the cost of long-term care has become an issue of national importance.
Largely as a result of government budget pressure, there is increasing agreement that the financing of long-term care will require some sort of public/private partnership. Although it may be premature to attempt to define in a precise way what the appropriate role of each sector eventually will be, steps can be taken to improve today's financing situation.
It is important to recognize that regardless of whether the cost of long-term care is paid for out-ofpocket, through private insurance, or through a public program, it is the people who can afford to pay who will pay. They will not only pay directly for their own care, but they will also pay indirectly, through taxes, for the care of those who cannot afford to pay for their own care. So the question is not really who will pay for the cost of long-term care but rather bow they will pay and what options they will have. The role of the insurance industry is to develop products that offer people a variety of cost-effective ways from which they can choose in determining the best way to pay for long-term care.
The prevalence of private insurance in this country as a means of avoiding financial disaster is well established, Millions of families insure against the loss of their homes through homeowners insurance and against the loss of earning power through life or disability income insurance, and they assure adequate retirement income through pensions.
The private insurance industry can also protect financial security against the cost of long-term care for millions of Americans. While long-term-care insurance is still an emerging product, there has been spectacular growth in the number of policies purchased and improvement in the benefits provided just during the past five years.
But as private insurance emerges as a much improved method of financing long-term care, it is clear that there are those people who are currently too poor, too sick, or too old to benefit from private insurance. For these people, a public program clearly has a role to play in the financing of care.
For people who might otherwise finance long-term care out-of-pocket, private insurance offers three extremely important advantages: risk sharing, prefunding, and choice.
Risk sharing. Essentially, the theory of risk sharing involves trading an individually unknown and unpredictable, but potentially catastrophic, risk for a known periodic premium payment for which one can budget. As an example, let us assume that within a certain age group, one person in ten may need long-term care, the cost of which is $100,000. If ten people pooled their resources, each paying an amount substantially smaller than $100,000, they could assure that no one person would need to shoulder the burden of the full $100,000 cost. Risk sharing, then, reduces the cost of financing care for any one individual and increases the affordability of protection so more people can pay for their own care.