What inflation and a nursing shortage mean for long-term care
Long term care (LTC) in the US is in distress.
LTC refers to services designed to meet a person's health or personal care needs so that they can live as independently and safely as possible when they can no longer perform everyday activities on their own. Common LTC services include home health aids, nursing homes, and residential care.
Spending on LTC in the US reached $475 billion in 2020 – and perhaps costs twice as much when you factor in the value of unpaid care – according to data collected by the Congressional Research Service and the American Association of Retired Persons (AARP). LTC comprises 14% of total healthcare spending in the US. Researchers at Wharton project that total Medicaid expenditures on LTC will increase 3% per year above inflation through 2030.
One dramatic example of the crisis in LTC economics is the market for LTC insurance (LTCI). This market insures policyholders against LTC expenses. Although premiums for LTCI policies are supposed to be fixed, insurers holding blocks of these contracts have pleaded with regulators to increase premiums. As a result, policyholders in many states have seen their premiums more than double to maintain coverage.
Premium increases to-date are not enough to cover LTC expenses. Penn Treaty was in court-supervised rehabilitation starting in 2009. In 2017 the insurer was placed in liquidation (similar to bankruptcy) with $4.6 billion of LTC liabilities. It was this liquidation that spurred many regulators to approve more rate increases in their states. And in 2018, GE acknowledged a $15 billion shortfall in the long-term care insurance policies they held after several years of paying out 30% to 40% more on policies than they expected. Injecting additional reserves effectively doubled GE’s insurance reserves per life inforce.
All of this to say, there are many arenas in which you can see the effects of the distress of LTC in the US.
Strain on LTC is an important issue to understand because 7 in 10 adults aged 65 or older in the US will need long-term care services at some point, according to the Administration for Community Living and other studies. Over the past 20 years, adults have increasingly relied on state and federal programs to finance this form of care.
Costs on the rise and caregivers in short supply
Caregiver compensation represents a large bulk of the costs in LTC. Demographics and the labor market have pushed up prices for elder care and the outlook on these metrics is not good.
Ensign Group, which provides skilled nursing, senior living and rehabilitative services, notes that 60% of their expenses are related to payroll (relatively little of which is related to corporate expenses). Two other large publicly traded operators of senior living communities, Brookdale Senior Living and Diversicare Healthcare, have similar levels of caregiver compensation expenses. These firms note pressure to increase wages and other benefits to compete for talent as key drivers pushing up their overall LTC operating expenses. This, of course, has been even more prominent the last two years due to the strain the pandemic has placed on the demand for healthcare workers.
Across the board, wages for caregivers are increasing.
Wages for home health and personal care aids in the US have been on the rise. These historically low-wage roles that were paid 15% less than nursing assistant counterparts as recently as 2019 are now paid on-par to nursing assistants according to data from the U.S. Bureau of Labor Statistics occupational employment and wage statistics. Compensation for these roles has increased at over 6% compounded annual growth between 2017 and 2022.
Genworth, one of the largest long-term care insurance providers, indicates that median costs for home health aides have increased 42% since 2012 (4% compounded growth since 2012), up to $61,776 per year in 2021. Much of that growth happened during the pandemic, when annual costs for in-home care increased over $8,000.
While the supply of nurse assistants and in-home health aids has increased, this 2.1% of annual growth between 2017 and 2021 has lagged population growth of adults over the age of 65. That damage from a shortfall in supply is compounded by a trend of care moving away from assisted living facilities towards in-home care, where aids cannot scale their productivity across several residents. As a result, a growing shortage of professional caregivers and increasing costs will make elder care less accessible in the US.
Forms of long-term care (LTC)
In the United States, activities of daily living (ADLs) are a key metric for determining the wellbeing and independence of older adults. ADLs include bathing and showering, personal hygiene, dressing, using the toilet, the ability to get into/out of a chair or bed, and eating without assisted feeding.
Additionally, many caregivers and policymakers are concerned with impairments of instrumental activities of daily living (IADLs) such as shopping for food, preparing meals, using the phone, and taking prescribed medications.
For adults with impairments in their ADLs and IADLs, many forms of long-term care exist. While approximately 12% of older adults over age 65 in the US who have limitations in their IADLs aren’t receiving long-term care (proprietary analysis), most tap into a variety of in-home and out-of-home, formal and informal care. These solutions cover a spectrum of services varying from caregivers helping with a couple of IADLs a few days a week, to access to around-the-clock skilled medical staff.
In-home care
In-home care remains the most common location for older adults to receive long term care – 57% of those in LTC receive it in the home (proprietary analysis). This location of care is delivered by both formal and informal caregivers.
Informal home care
Informal care has historically been the most popular form of elder care. Informal care is unpaid, often provided by children or a spouse. A relative may support their loved one in need before/after work or live with the person in need and be available to them all day.
The economic cost of this form of healthcare is difficult to quantify since there is no direct (cash) cost. The cost will vary greatly based on who is providing care and what opportunities (financial or otherwise) they give up to support the elder in need. In terms of dollars spent, informal care is the most affordable form of support. Though, as noted above, there are meaningful indirect costs associated with this kind of care. Estimates of the value of informal home care in the US range between $250 and $570 billion.
Formal home care: a trend towards hybrid
Formal care refers to paid staff supporting a person in need. Formal care is becoming a more popular solution in the home for Americans. Between 2004 and 2016, the proportion of those who received some form of formal care increased from 32% to 40% for older adults living at home with impaired IADLs. Almost all that growth can be accounted for by an increasing use of hybrid home care.
While 200,000 adults requiring long term care who live at home receive all their support from a paid professional, 800,000 receive hybrid support. This large and growing population receives help by both informal caregivers, such as relatives, and paid staff, such as home health and personal care aides.
Hybrid care is much more flexible than other formats of support since relatives of a person in need of care can contract home health aids on a temporary or part-time basis. That labor can be scaled up or down based on the varying needs and budget constraints for the recipient of care.
Out of home support: assisted living facilities and nursing homes serve different needs
Nursing homes and assisted living facilities are the most popular locations for out-of-home long-term care. In the US, assisted living facilities are a recent development.
Nursing homes and assisted living facilities both employ full-time staff to support their residents. These institutions are distinguished by the level of care they offer. Nursing homes are often heavily employed by registered nurses (RNs) and dieticians with support from nursing assistants (who are paid a fraction of the wage of RNs and who have less medical training).
Assisted living facilities rely much more heavily on nursing assistants with oversight from more highly trained medical professionals such as RNs.
Assisted living facilities, which emerged in the US in the 1980s, focus on maintaining a safe social environment for the elderly. They offer full time support staff who are trained to assist with ADLs, but many of these facilities have minimum ADL requirements for residents. For example, some locations only accept residents who can feed themselves.
On the other hand, nursing homes can support seniors with much greater needs. Over 60% of US nursing home residents have moderate or severe cognitive impairment and 63% of residents have four or more ADL impairments.
However, that added care comes at a cost. Nursing homes cost twice as much as assisted living facilities. The median price of a private room ranges between $5,759 and $13,992, depending on which state (excluding Alaska, which has unusually high costs). That is between 1.4x and 3.1x the price of a private, one-bedroom apartment in an assisted living facility. Also, given the preponderance of severely disabled residents at nursing homes and hospital-like staff, many seniors find these locations to be less social and welcoming than assisted living facilities.
I have summarized much of this and other information in the chart below.
Sources of financing shift to the government
How people pay for their LTC plays a huge role in what form of care they receive.
Informal home care remains the most popular form of elder care in the US. Nearly 2 million adults over the age of 65 in the US who need help with activities of daily living receive some or all of their care from relatives or acquaintances not formally compensated for their time.
Non-cash expenses aside, public funding represented 72% of overall spending on LTC in the US. That share of spending has increased over the past two decades, up from 64% in 2000. This change primarily represents a shift of spending from out-of-pocket (personal income- and savings-funded) spending to Medicaid funding (Congressional Research Service).
Medicaid and Home and Community Based Services (HCBS) Medicaid waivers, also called Section 1915(c) waivers, are the largest source of formal financing for long-term, elder care in the country. Each state administers their own Medicaid programs. Therefore, the structure of these programs vary by state. Typically, applicants must meet maximum income and/or asset tests to qualify for these benefits.
In 2020, Medicaid paid close to half of all LTC spending, $200 billion, in the United States. For this reason, Medicaid is a major driver of how LTC is delivered. Given the discretion of states to administer Medicaid how they see fit, where someone lives can play a meaningful role in how their care is delivered.
Private funding and LTC Insurance declines
Private spending on LTC is in decline. The government is filling in the gaps. Between 2000 and 2020, the share of private funding, primarily related to out-of-pocket spending, has decreased from 36% to 28%. When individuals lack liquid assets to pay for their care, Medicaid foots the bill. Medicaid may later recoup some of their expenses from the estate of a recipient of care.
Given increasing costs described above and other challenges, insurance companies have been getting out of the business of issuing long-term care insurance (LTCI).
LTCI is a form of insurance that shares characteristics of both life and medical insurance. It is most often purchased by individuals who expect to have income or assets that would make them ineligible for state-funded resources and/or not enough resources to absorb the full cost of LTC.
Between 2012 and 2019, the LTCI lives inforce (the number of people with active policies) decreased 13%, a nearly one million person reduction in those covered by this form of insurance (see figure below). However, lives inforce is a lagging indicator. The largest driver of lives inforce in a given year is the carryover of active policies from the prior year (given year lives inforce = prior year lives in force + new policy sales - terminated policies). For this reason, declines in sales of LTCI policies take some time to show up in the lives in force figure.
In fact, there was approximately a 90% reduction in the number of insurance companies who issue LTCI policies between 2000 and 2019. In 2002, the height of LTCI issuance, over 750,000 new LTCI policies were sold to individuals. By 2018, that figure dwindled down to 55,000. Therefore, we will likely see steep declines in the share of LTC paid for with insurance, unless things change.
There is a lot of pain when costs rise for a necessity like LTC. Individuals pay what they can, and the government steps in to cover a shortfall in families’ abilities to care for the most basic needs of the elderly.
Insurance companies have largely backed out of providing coverage in a world of ever increasing policy liabilities.
What to do?
The LTC crisis is a big deal. Given that this suite of services will be needed by 70% of older Americans and represents 14% of overall medical spending, strains on our LTC systems are not sustainable. With an aging population that will need more care from a smaller pool of already short-staffed caregivers, we are already seeing the effects of the cracks in LTC.
In a later post I will discuss efforts that have been made to address the LTC crisis. While much work has been done, especially in the insurance world, to manage the asset side of the LTC equation, much opportunity exists to manage liabilities.
In fact, effective liability management in long term care may be the best solution to the LTC crisis in the US.
