New strategies for covering long-term care costs

You’ve heard the scary statistics: About two thirds of Americans will need long-term care. The average annual cost of a private room in a nursing home is $87,600; the length of stay can run three years or more.

Do a few quick calculations, and it’s easy to get very worried about the potential financial impact on your retirement plan. But recent research is shedding new light on the risks. The key finding: The odds of needing nursing-home care may be higher than previously thought, but the length of needed care is shorter. The new data has experts talking about the implications for revamping our current approach to insuring against the risk of high long-term care expenses.

A recent study by the Center for Retirement Research at Boston College (CRR) found that 44% of men and 58% of women will need care–somewhat higher than some previous estimates. But the average duration of a nursing-home stay is 0.88 years for men and 1.44 years for women.

“It’s a big event for some people, not for others,” says Anna Rappaport, an expert on long-term care who heads an actuarial consulting firm that bears her name. CRR’s research also concludes that no more than 50% of men and 39% of women who use nursing-home care stay longer than three months.

That raises an interesting question about just how much nursing-home care is being paid for by Medicare. The program isn’t designed to cover long-term care, but it does cover up to 100 days of skilled nursing care following a hospitalization. The data on this question is inconclusive, but “it seems likely that many of these short stays are covered by Medicare,” states the CRR study. (The study is based on data from the National Long-Term Care Survey (NLTCS) conducted by the National Institute on Aging and Duke University, and also the University of Michigan’s Health and Retirement Study.)

Long-term care still should be regarded as a significant retirement risk. A recent report by the Employee Benefit Research Institute (EBRI) attempts to quantify the potential impact of a major LTC cost on retirement success by comparing projected retirement-savings shortfalls for different bands of longevity, and by calculating the projected outcomes with and without long-term care needs. Ignoring nursing-home and home health-care costs decreased the shortfall projections by an average of 74%.

“The comparisons show how important it is to include long-term care costs in these calculations,” says Jack VanDerhei, EBRI’s research director.

The risk is tied closely to longevity. Twenty-one percent of men and women age 80 to 84 have at least a mild or moderate disability, compared with just 7% of those aged 70 to 74, according to the NLTCS.

Seeking Solutions

The latest LTC utilization data comes at a time when insurance industry and policy experts are debating ways to improve the safety net for long-term care risk. The current system is a hodgepodge. Just 13% of households purchase commercial long-term care policies, according to the Health and Retirement Study; everyone else who needs nursing-home care is covered by Medicaid or self-insured.

The commercial LTCI market has been experiencing upheaval over the past several years. Many underwriters have stopped issuing new policies due to an inability to develop sustainable, profitable LTCI business. Among the players left standing, the industry’s largest underwriter–Genworth Financial (GNW)–forecast weakened earnings due to continued losses in its LTCI business. The company’s stock fell more than 5% the day of the announcement, and it’s down by about half in the past 12 months.

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