Will Tax Credits Sell Long-Term Care Insurance?
Long-term care insurance has been a model of market failure. The need for care in frail old age or disability seems to be the ideal insurable event. Two-thirds of those over 65 will need some assistance before they die and 20 percent will need it for more than five years. Yet only about 6 million people own this insurance, and few seem interested in buying.
To boost sales, the industry has pushed for all sorts of government assistance. A federally-funded marketing effort called the Own Your Own Future campaign has tried to raise public awareness of the need for coverage. A joint state/federal program called the Partnership Program attempts to more closely link private long-term care insurance with Medicaid. And about three dozen states now offer tax incentives for the purchase of insurance (30 provide a deduction, 7 give credits, and 3 give both).
Now, in the context of health reform, carriers are pushing for new federal tax subsidies—either a credit or inclusion of long-term care insurance as part of an employer’s overall benefit plan. Making this insurance a benefit in such a “cafeteria plan” would allow workers to buy coverage with pre-tax dollars, significantly reducing their costs.
The question is: Do tax subsidies encourage people to buy insurance? The answer seems to be: Not much. In a forthcoming paper, David Stevenson and others at the Harvard Medical School compare purchase rates in states that have tax subsidies with those that do not. They found sales are about 10 percent higher where buyers can get a tax break. Credits increase the participation rate by about 20 percent while deductions make no significant difference at all. Oddly, people are more likely to buy in states with low level credits than in those with more generous credits.
Their results track an earlier paper by Anne Cramer and Gail Jensen, and another by my Urban colleague Rich Johnson that also found that demand for this insurance does not respond very much to lower prices.
The purpose of these subsidies is to reduce Medicaid costs, which states share with the federal government. The idea: Private insurance can at least delay the time when someone needs to go on to Medicaid by picking up some nursing home or home care expenses.
But this benefit to states may not outweigh the costs of providing the tax breaks. Harvard’s Gopi Shah Goda finds consumers may be more responsive to tax subsidies than other research concludes, but still estimates that $1 in state tax expenditures produces just 84 cents in Medicaid savings, half of which go to the federal government.
Because federal tax rates are much higher than state rates, a federal subsidy might be worth more to consumers. And including this insurance in a cafeteria plan may increase worker awareness of the product. On the other hand, these incentives are most likely to encourage wealthy consumers to buy, the very population least likely to qualify for Medicaid. And, like most tax subsidies, a big chunk will end up in the pockets of people who would have purchased the insurance anyway.
The apparent failure of these state tax breaks is something Congress should keep in mind as it weighs whether to expand federal tax breaks for this insurance.
it's the beginning of my research. the comments made as well as the article are helpful. i'm a 41yo female, no kids, no spouse. not sure if i'll have either so ltci is on my horizon. sooner rather than later. from the one stat that states few seniors actually use it, is interesting. i'll keep thoroughly researching.
Didn't you think of creating a journal based on your blog (many people already do so – have a look at their experience at the search engine on pdf periodical)? In comparison with the blog, journal is more convenient to read
Enjoyed your post. But, my mother had LTC Policy,pd for 17yrs, became confused during last 4 yrs, missed 2 payments, they cancelled and she lost 17 yrs @$200 pr mo.premium. Plenty of Insurance Reform to go around, 40yrs worth.
Becky in Florida
About two in three of those 65 and older will require some long-term care (either at home or in a nursing facility)before they die. But 20 percent will require care for a year or less, and some will get by with family assistance. Another 20 percent will require care for five years or longer. It seems to me that this pattern of risk fits insurance well.
Is savings more appropriate? Maybe. But we all know Americans won't save. That's why Medicaid already pays 40 percent of all long-term care costs. The other option, which Len Burman and others have suggested, is a tax-funded social insurance system. It is a reasonable idea, but politically impossible (see “public option”).
Credit would also be a good model. Those with long term needs could get gauranteed loans for their care against the value of their assets. If they improve, the asset is saved. If they don't, the asset is sold when spending is greater than its value.
I still think employer coverage is a good model if by providing this coverage the employer can opt out of paying taxes for it.
Is Long Term Care really an ideal market for insurance? I typically think of insurance as something where there are infrequent events involving large payouts. Long Term Care is something that most people who reach old age confront. Thus, I would think the more appropriate financing scheme would be savings/welfare.
We have long term care insurance. It's called Medicaid and it is buried in the larger program for the poor who are not elderly.
My proposal is to separate Medicaid for the elderly from the general program, replacing Medicaid for the non-elderly with employer mandated insurance for the working poor and replacing TANF with paid remedial education to 10th grade literacy through private providers (or employers) with the participants covered by either their employer's insurance or that of the education provider with offsets against an employer payroll tax for health care. Remedial education providers would build the cost of health care into their funding proposals or budgets. In a left libertarian world, employers could contribute to such providers rather than paying taxes.
As for long term care costs, in the same left libertarian world, they would be covered as a part of Medicare (Part E) by a business income tax with offsets for employers who provide care to their employees, either through insurance or by self-funding facilities for their retirees (which should be an option for large companies as a cost saving measure). Of course, large companies will only do this if employee-ownership catches on – which it does in a left-libertarian world.
Len: Interesting idea. I wonder how it would work in conjunction with a tax on high-cost health insurance? Would employers be more likely to substitute LTCi for newly-taxable medical coverage? Would workers go for it, even with an employer contribution?
It would still take a huge behavioral change to make any policy difference. Right now, the take-up rate for group LTC insurance is only about 5 percent. Like you, I think mandatory insurance is the only product that really addresses the problem.
A buyer of LTCI is betting that inflation will not exceed 5% or so (the maximum insurable rate) for the 30 years or so duration of the policy, that the insurer will remain solvent for that time, and that the insurer will not find a way to weasel out of its promise of quality care. I do not like the odds on that bet.
Paying today for a service to be delivered far in the future is seldom a good deal for the purchaser. That's the deal that Generations X and Y are being sold on Social Security too, and it's the deal late boomers were sold in 1983.
I'm opposed to subsidies for this insurance because I think the concept is flawed, wasting the government's money and the money of purchasers. If you can show me a realistic government policy path for the next 30 years that does not entail high inflation, I'll reconsider.
Great piece. I have also been skeptical of tax subsidies for long-term care insurance back to when I was at Treasury and such proposals were rampant.
I was wondering whether the better option might be to offer an exclusion for employer contributions to LTCI, and not allow it for payments made through a cafeteria plan. A big problem with long-term care insurance is adverse selection, and encouraging employers to offer it to all full-time workers would mitigate that. I know that few employers offer long-term care insurance now, but that might change if employer contributions were tax-free. (And if it didn't, it wouldn't cost the Treasury anything.)
Just to argue against myself, I suppose that adverse selection is much less severe for workers (since they tend to be younger and have to be healthy enough to work), so maybe allowing LTCI in cafeteria plans would make sense.
In the best of all worlds, it would make sense to mandate the purchase of long-term care insurance with subsidies for lower-income people–basically forcing people to pre-pay what they can currently expect to get under Medicaid.
I'm surprised that you passed up the chance to mention that you discuss these issues in your cogent and engaging book on long-term care. Since you didn't, I did.