Live Long and Pay for It: America's Real Long-Term Cost Crisis

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As the population ages, the costs -- financial and social -- of long-term care will rise rapidly. We're not prepared for it.

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About a decade ago, my mother's slow mental decline became too obvious for our family to deny. She continued to live at home with my father under increasingly difficult circumstances until she fell and broke her hip. In the hospital, it became clear that her mental impairment precluded physical rehabilitation and that institutional care was unavoidable.

This is a standard baby boomer's saga, and what came next was not unusual either. I soon learned that long-term care for institutional residents was a big-ticket item. My parents lived in Connecticut, a high-cost state. The place we chose--a "continuum of care" facility with independent living at the top and a nursing home at the bottom--cost more than $100,000 per year for a semi-private room. (The national average at the time was about $70,000, and it has since risen to $78,000, according to a Metropolitan Life survey.)

Although I had spent much of my life studying public policy, I had no idea how long-term care was financed. I soon learned that Medicare paid for at most 100 days of rehabilitation (useless in my mother's case) and that Medicaid required beneficiaries to "spend down" nearly all their assets. Private long-term care insurance policies were available, I learned, but my parents--along with most Americans who can afford them--had not purchased one. Fortunately they had lived below their means for decades and had accumulated substantial assets, which proved sufficient to see my mother through nearly five years of full-time care.

I didn't need to study wealth distribution tables to see that only a tiny fraction of American families could afford to do what my parents had done. The median family could self-finance only a few months of institutional care, after which they would be completely dependent on public resources. But Medicaid is devouring ever-increasing shares of hard-pressed state budgets, and huge federal budget deficits are putting pressure on the decades-old fiscal partnership between the states and the national government, and the pressure will only intensify in the decades ahead.

In this presidential election year, the impact of demographic change--especially the growing weight of immigrants and minorities--commands our attention. But another demographic change--the relentless aging of the U.S. population--will be far more consequential for national policy. Long-term care expenditures accounted for nearly one-third of Medicaid's total outlays of $389 billion in 2010. As the population ages, the tension within Medicaid between caring for the elderly and the health needs of poor and near-poor families will escalate.

The problem is already acute. According to a recent report from the National Governors Association, Medicaid already constitutes the single largest share of state budgets--24 percent, a figure that rises relentlessly year by year. State spending on the program rose by 20 percent in the most recent reporting year and by even more--23 percent--in the previous year. The report estimated that by the end of fiscal year 2013, total Medicaid enrollment for low-income Americans and the dependent elderly will have risen by 12.5 percent in just three years. Because state revenues are growing much more slowly than Medicaid outlays, other priorities are getting squeezed. In many states, for example, public higher education--key not only to future prosperity and competitiveness but also to opportunity and mobility--is reaching a breaking point.

In short, there's a looming crisis in long-term care because our current model for funding it is crumbling under the weight of multiple demands and inexorable demographic shifts. But we're doing almost nothing to respond. It's time to shift to a new long-term care model that combines personal responsibility and social insurance, the government and the market, in ways that would benefit not only current and future beneficiaries but the rest of society as a whole.

Roots of the Impending Crisis

Let's start with the fundamentals. As a share of the total population, Americans over age 65 are projected to increase from 13 percent in 2010 to more than 20 percent in 2050. The share of Americans over 85 (the cohort most likely to need long-term care) will increase far more steeply, from 1.8 percent in 2010 to 4.3 percent in 2050. Depending on assumptions about medical advances and lifestyle changes, these projections imply that the number of disabled elderly needing long-term care three or four decades from now will be two to three times today's total, which stands between 11 and 12 million.

To be sure, not all long-term care involves the elderly in nursing homes. In fact, more than eight in ten recipients live in their communities, and of them, nearly half are mentally impaired or individuals with disabilities under the age of 65. What unites all recipients of long-term care is their need for assistance carrying out some or all of the basic tasks of living, such as getting out of beds and chairs, maintaining personal hygiene, and dressing themselves. With suitable part-time assistance, many of these individuals can remain in their homes. But some cannot. The number of nursing home residents now exceeds 1.5 million, and as the number of Americans aged 85 and over keeps rising, so too will the need for institutional care.

While many people believe that caring for the elderly full time at home would be cheaper than in nursing homes, the facts suggest otherwise. As noted above, the annual cost of care in a nursing facility averages around $78,000 a year--more for a private room. Home care is around twice that: Wages for home health-care aides average $20 per hour, which works out to $480 per day, or roughly $175,000 per year for round-the-clock care. (Remaining at home is less expensive for those who need only a few hours of help every day for a limited range of activities.) Given these stark economic realities, it is easy to understand why well over half of all long-term care--with an economic value calculated at $375 billion in 2007, and more today--comes in the form of unpaid assistance that spouses and other relatives provide.

Despite the fact that the public sector finances more than 70 percent of all long-term care costs in the United States, U.S. public outlays for this purpose are on a par with the rest of the Western world, as are total outlays. Although technological change--a principal driver of cost increases--is not nearly as important in long-term care as in the health-care sector as a whole, expenditures have been growing faster in the former over the past half century and are projected to continue to do so over the next four decades. The most plausible explanation is that the aging of the population increases the demand for long-term care even faster than for acute care. If so, the kinds of measures that are projected to slow health-care cost increases are unlikely to prove effective for long-term care. Aging Americans face the prospect of high and rising long-term care costs as far as the eye can see.

If most of us could anticipate that we were going to face extended periods of near-total dependence, then only the wealthy could bear the costs, because only they would have the money to set aside. The rest of us would have to throw ourselves on the mercy of our children, private charity, or high-income taxpayers. But that is not the case. Even with today's medical advances, which enable a higher percentage of the population to live into frail old age, most elderly do not experience extended stays in nursing homes or extended periods of dependence on professional home health services. Still, according to the much-cited estimate of health policy scholars Peter Kemper, Harriet L. Komisar, and Lisa Alecxih, 35 percent of all Americans who turned 65 in 2005 will end up needing institutional care at some point. Economists Jeffrey Brown and Amy Finkelstein estimate that between 10 and 20 percent of those who use a nursing home will live there for five years or more. Anthony Webb and Natalia Zhivan of the Center for Retirement Research at Boston College estimate that couples turning 65 face a 5 percent risk of incurring long-term care costs exceeding $260,000. There is, then, what Brown and Finkelstein call a "considerable right tail" in the distribution of nursing-home expenditures.

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William Galston is the Ezra Zilkha Chair and senior fellow in the Governance Studies Program at the Brookings Institution and College Park Professor at the University of Maryland. From 1993 to 1995 he served as deputy assistant to the president for domestic policy.

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