Long-Term Care: How Big a Risk?

Huge thanks to my friend and colleague, Stephen D. Forman of Long-Term Care Associates, for permitting me to re-publish his blog, below.

In a nutshell: a Boston College study was released in November, 2014. Its findings are that the need for long-term care insurance is and has been exaggerated. It finds that if you are in the minority who do need long-term care for an extended length of time, no worries, Medicare and Medicaid will be there as your safety net.

If people stop long enough to think about some of the claims the study makes, they are counterintuitive, and fly in the face of too many actual life experiences. Steve explains why this is so in his post, below.

Please flip through my past blog posts to find links to an abundance of credible sources that refute the new study’s findings.

Why do media seem to enjoy hashing and re-hashing stories derogatory to long-term care insurance (LTCi) while often neglecting the abundance of coverage favorable to LTCi purchase?

Major media reported on this study without making much effort to present balanced opinions on it.

Coverage of the faulty study continues (Steve explains why it is faulty). More than a month after its publication, The Wall Street Journal reported on the study. No apparent effort was made to practice fair journalism and present balanced views. I see the date of the WSJ article was December 23, 2014. Perhaps most WSJ reporters were away for the holidays? Maybe the WSJ was really grasping to find any sort of copy. It looks to me like this article can be used as a classroom example of embarrassing, shoddy, unprofessional reporting.

I actually invested valuable time trying to blog about why this new study is so wrong but chose not publish it because I was unwilling to make the effort to go into the detail necessary to create a blog I’d be proud of. Fortunately, Stephen Forman succeeded where I failed.

Steve’s piece, below, will take about three minutes to read and is well worth it. Thanks for allowing me to share this, Steve!

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No single model received more attention in 2014 than one produced by the Center for Retirement Research (CRR) at Boston College titled “Long-Term Care: How Big a Risk?” (November 2014, Number 14 – 18, Leora Friedberg, et. al.) At the same time, no other model has been more widely misinterpreted, wrongly extrapolated, or gleefully co-opted by LTCI detractors. Since the New Year is considered a time for looking forward, let’s begin by clearing this foggy hangover from 2014, then speak no more of it.

Medicaid 1, LTCI 0

This is the way the CRR model’s conclusions are most often presented: by using monthly instead of yearly data, it was found that average nursing home stays are 30% shorter than previously believed. (On average a man stays less than 12 months, a woman 17.) In fact, 45% of patient stays do not exceed 3 months. Even worse, LTC insurance is duplicative since Medicare will cover these short stays– the study assumes the first three months of “all episodes of care are covered by Medicare.” [emphasis in the original]

Finally, CRR corrects a previous model which understated the probability of ever needing care by 32 – 63%. The conclusion? Since long term care is a relatively high-probability event– but less catastrophic than previously understood— it makes less economic sense to insure against.

The media jumped all over it:

• “Maybe You Don’t Need Long-Term Care Insurance After All” (Bloomberg)
• “Here’s a New Reason to Think Twice Before Buying Long-Term Care Insurance” (Time/Money)
• “‘Spending Down’ for Medicaid is the Most Practical LTC Financing Plan for Most Americans, Researchers Assert” (McKnight’s)
• “Is Long-Term Care Insurance for You?” (Wall Street Journal)
• “Boston College Finds Rip-Off in Long Term Care Insurance Costs When Compared to Other Options, Opines UltraTrust.com” (Estate Street Partners)

Readers who dove into these articles seeking sound advice were met with takeaways such as this: “Forgoing long-term care insurance and relying on Medicaid is the smartest financial planning decision for the majority of unmarried Americans.” Lacking were any qualifications concerning Medicaid’s notoriously low reimbursement rates, institutional bias, record of poor quality, or inability to access care.

This was our first sign of trouble: CRR assumes all “rational, far-sighted, well-informed” individuals make decisions entirely on the basis of money. We do not. As economists, they’d have been better served with a model in which rational individuals make decisions which maximize our utility. Had they done so, their buyers would’ve valued higher quality care and the ability to remain at home with family, tilting the scales in favor of LTCI.

Meanwhile, the Bloomberg piece acknowledges that the biggest threat to a retiree’s nest egg “isn’t a stock market crash. It’s a long illness requiring round-the-clock care.” Unfortunately, thanks to the new CRR model, not only should most people “just skip [LTC insurance],” but the majority of Americans (all but the richest 20 – 30% of singles) should “[spend] down their assets and then [let] Medicaid pick up the tab.”

Lest we dismiss this study for its preoccupation with singles, we are warned that “forthcoming research will show long-term care insurance makes even less sense for married couples.”

And why did the researchers focus on singles anyway, when 82% of all LTCI policies are purchased by members of couples? They argue that since 75%+ of nursing home residents are over age 65 and single, their limitation to singles is “not significant”. Once again our economists have set out on the wrong foot: they are not modeling nursing home residents, they are modeling buyers. Oh, dear.

The Average Family Has 2.5 Children

I’ve been careful in my choice of words: what the Center for Retirement Research produced was an economic model. Framing it otherwise (a study or research report) suggests a methodology or outcome which we shouldn’t reinforce. Models exist in the abstract, not reality. This one invented hypothetical buyers in a controlled environment.

One particularly unfortunate problem with CRR– overlooked in all the hubbub– is that it sought to answer a question of its own making, and not one that anybody had been asking. Namely, why do only a certain percentage of single individuals (an assumption of their own creation which disagrees with other contemporary sources*) buy LTC insurance, differing from the percentage predicted by the Brown & Finkelstein Model (ie, the famous “Medicaid Crowd Out Effect”)? This model was an attempt to reconcile the two numbers.

Now, models can serve a purpose, but they are inherently limited. In the case of CRR, even its “new” data remain archaic (10-years old) and don’t square with reality: after all, insurance is built primarily around the remote but catastrophic risk – not the occasional shopping cart dinging your car door. This is why buyers and sellers have played a tug-of-war between unlimited benefit periods and short-term care. One is hard to offer profitably, while the other is hard to make desirable.

Worst of all, the model presumes that buyers care only about nursing facilities, when the exact opposite is true. Most of our clients are motivated to purchase LTCI for its ability to do the one thing Medicaid is worst-equipped to do— keep them out of the nursing home.

Then, in a final Hail Mary, they assume Medicare pays for most short stays– which one nursing home worker laughs off, “[I] can count on 2 hands out of the thousands of patients I’ve served, how many have actually received 100 days of Medicare coverage.”

Ultimately, the economists got the results they hoped for (had they not, would this study have seen the light of day?), and were able to achieve agreement between the Brown & Finklestein model and their own:

Singles aged 65+ who “make optimal saving and insurance decisions” (how many real people do you know like that?) are substantially less willing to buy an option to purchase LTC insurance at market premiums, based on a more-accurate transition matrix updated to 2004 based on monthly probabilities instead of annual transition events.

Now go back and read that sentence again.

Not much of a headline-grabber, huh? We should be asking ourselves what all the hoopla was about– particularly since a landmark study was released almost simultaneously as CRR which contained some of the most newsworthy, compelling and positive research about LTC insurance in over a decade. Do you remember the financial media covering this report with the same enthusiasm as the Boston College model? Do you recall seeing any of the above publications covering it at all?

Don’t worry, we’ll be reviewing it in our next LTCA Sales Idea. Until then, Good Selling!

* CRR uses a penetration rate that is between 23 – 54% less than other estimates. Had they used the higher rates, the results of their study would not have been as dramatic.