Leonard E. Burman is Professor of Practice in Public Administration and International Affairs at Syracuse University. An expert in public finance and modeling the effects of government policies on individuals' and firms' decisions, Burman contributed a chapter to RSF's free e-book, Universal Coverage in Long-Term Care in the United States.
Q: First, we should establish some facts. How do Americans pay for long-term care? Is it mostly informal, unpaid work – assistance from families and friends – or do private insurance and Medicaid pay most of the bill?
A: Family and friends provide a lot of informal care and most people with long-term care needs live in the community, not in nursing homes. Medicaid pays for about 40 percent of the cash costs and Medicare pays for 23 percent. The rest is paid for by private insurance or out-of-pocket.
Q: You write that if current trends persist, we could face a fiscal “catastrophe.” How big of a burden is long-term care on the Medicaid budget, and why do you think it will increase “dramatically” in the coming decades?
A: Medicaid is a large and growing share of the federal and state budgets and almost one-third of Medicaid goes to cover long-term care expenses—a share that will rise over time. In 2009, federal and state spending on Medicaid was about 2.7 percent of GDP. That is more than half of spending on defense, which is less than 5 percent of GDP. In 2008, 30 percent of Medicaid spending paid for long-term care, but that percentage will increase dramatically over time as baby boomers age and their long-term care needs rise. Assuming a continuation of current policy, demographic and health cost trends, federal and state spending on Medicaid will exceed spending on defense by 2040.
Two factors drive this rapid growth. First, the proportion of the population aged 85 and over will almost double between now and 2040. More than one-fifth of this group was in nursing homes in 1995. Second, health care costs continue to grow faster than the economy—by more than two percent per year on average. Assuming nursing home costs track health care spending, this translates into steadily increasing Medicaid spending relative to GDP.
Q: A major argument in your chapter is that “the incentives in our long-term care system are all wrong.” I wanted to focus on this point – are you saying that if Medicaid didn’t exist, more Americans would save more for long-term care insurance? Isn’t it also possible that Americans simply underestimate their future need for long-term care, or that the private insurance market isn’t a viable option for many?
A: There’s a lot of evidence that people underestimate the cost of long-term care and the private insurance market certainly has a lot of problems, but public policy should aim to address those problems. Instead, it exacerbates them. Medicaid amounts to a 100-percent tax on assets above the threshold for eligibility for assistance (typically, $2,000 for a single person), which provides a powerful disincentive to save. Medicaid also strongly discourages purchasing long-term care insurance because much of what is covered under private insurance simply replaces services provided for free under Medicaid.
Q: As a possible solution, you suggest replacing Medicaid’s coverage with Medicare 'Part E'. How would do this work, and how would we finance it?
A: The new social insurance program would be financed by a modest income tax surcharge that would effectively add about one percentage point to income tax rates for people covered by the program. This funding mechanism would exempt low-income people because they do not pay income tax. Revenues from the surcharge that exceed outlays would be deposited in a privately managed interest-bearing account. This off-budget trust fund would grow quite large as the new program phased in, since it would be decades before a large fraction of participants were drawing long-term care benefits.
Q: Given the controversy surrounding the “mandate” in the health care law, how hopeful are you that we will find a better way to finance and supply long-term care in America? Are there any voluntary schemes that could expand private long-term care insurance and improve the nation’s fiscal outlook?
A: I think it unlikely that we could create a new “government run healthcare” program in what appears to be a toxic political environment after the highly partisan debate about health reform. Moreover, it could be very difficult to sequester the savings to pay for future long-term care benefits in a way that does not enable larger deficits in the short term. That is, establishing a trust fund only helps meet future needs if the fund isn’t raided for other purposes.
The alternative would be to mandate the purchase of long-term care insurance. This has the political advantage of turning a potentially powerful enemy—insurers, who would be put out of the long-term care business by the Medicare Part E proposal—into supporters of the new program. It might also garner some support from conservatives who favor privatizing social insurance programs. However, it is hard to imagine support for another insurance mandate in light of the backlash against the Affordable Care Act.
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