Will Medicare Pay for Long-Term Care Needs?
WHO'S PAYING FOR ALL THIS?
by Anthony Cirillo
They say that wisdom comes with age but I know of one person wise beyond her years. I was reading an article in a local Charlotte "underground" newspaper by a young author (I'm guessing 20's) who had a keen insight into who was paying for Grandma's care. It was called, "Fear Not Granny. Generation X Will Save You." She cited some demographics. In 15 years, there will be a 50 percent increase in older Americans but only a 15 percent increase in the young population. In 1960, there were 5.1 workers paying into Medicare and Social Security per beneficiary who needed it. That number will be reduced to two workers per beneficiary. Few young people believe that Medicare and Social Security will be around and this young author predicted a ten percent hike in taxes to keep it solvent. Her message to her colleagues - save now for retirement.
That is a message the boomers have been hearing for a long time and some have heeded the call. All things being equal, that money may last you if you stay healthy. But, God forbid, you become sick and need the services of a long-term care facility, think again about where the money is coming from. Your savings will be squandered in short order. The average cost of nursing home care nationally has risen to $57,700 a year according to a May 2003 study conducted by Evans Research of San Francisco on behalf of GE Financial. The average age of the residents at nursing facilities where I entertain is 88 and these people are living well into their 90s and there is a growing number of people hitting the century mark and older. I have talked to people who have actually lived in nursing facilities for 20 plus years. That's a lot of years to finance. According to the Health Insurance Association of America, someone reaching age 65 has a 43 percent chance of entering a nursing home. Of that, the odds for a man needing long-term care is 1-in-3 and for a woman 1-in-2.
So let's clear this up.
There are four ways to pay for long-term care. People think that Medicare will carry the day. It does for just eight percent of the population. But... Medicare covers skilled nursing care only if you have been hospitalized for three consecutive days and then only for 100 days, 80 of which you pay $105 per day (2003 rates).
Next, self pay. That accounts for how 46% of people now pay for nursing home care. Remember that is out of your pocket and out of your savings. The average nursing home stay is 2.8 years, so if you have $150,000 or so socked away just for this, you should be OK. But as you read above, there are many who have been in facilities for well more than three years.
Another option is Medicaid. Forty-one percent of people have their stays funded this way. Essentially after you exhaust your own personal funds, you can become eligible for Medicaid. There are stipulations that I will not spell out here. And I do believe you essentially sign everything over to the long-term care facility from your house to your social security checks. Suffice it to say that it is not as easy as just going broke to qualify. And many people never want to consider this or think that it can be an option, a bit of stereotyping that Medicaid is a poor peoples' program.
Finally, the fourth option, which I will objectively present but tell you up front, subjectively, that I see this as the only real solution; long-term care insurance. You have seen the commercials on television and even the federal government offers long-term care insurance as an option to its employees. So there must be something up with it right? For the answers, I interviewed a long-term care insurance expert in Charlotte , North Carolina by the name of Phillip R. Timmerman, CLU.
Phil is president and CEO of DMJ Financial Services. First, since we devoted a lot of this book to misperceptions, let's dispel another one.
"It is a misperception to a lot of people that long-term care insurance is just for older people. That is not the case. We live in a culture where there is a sense of urgency to discharge people from hospitals as quickly as possible and into rehabilitation. The cost of paying for that recuperation is often left up to the individual," he said. So while nursing homes and seniors spring to mind, younger people who become ill or who suffer serious accidents might find themselves in that same situation needing convalescent care. For those without adequate health or disability insurance, or no insurance, the burden falls on them to pay.
Let's run through these - step by step.
First there are two categories of long-term care insurance, tax qualified and non-tax qualified.
A tax qualified plan may allow for some income tax protection on the benefits you receive. And that is may allow because the IRS really has not issued a final ruling on this. In 2002, anything you received above $210 a day was potentially liable to be taxed. So let's say you are in Long Island , New York and you are receiving a per day amount of $350 from your long-term care insurance policy for nursing home care. The difference between that and the cap ($210) is $140 and that amount is potentially taxable. Are you with me so far?
To qualify for this plan, your disability must be expected to last for at least 90 days. You need to then trigger two of six activities of daily living. That is you must have the inability to perform on your own, without substantial assistance, two of the following - bathing, dressing, transferring, feeding, continence and toileting. Or you must have a cognitive impairment that requires substantial supervision.
The difference between the above and a non-qualified plan are, first, the expectation that the disability will last 90 days is not required. Second, you only need to "trigger" one of five activities of daily living. Third, the benefits could be taxable. Most carriers now offer only the tax-qualified plan.
Within this, there are two types of plans in terms of how you are paid benefits. A reimbursement plan, the most popular, pays up to the actual charges incurred. Say a person has a $100 a day benefit plan and it included home health care. A nurse visits the home for two hours and the charge is $20 an hour. The $100 a day plan would not pay $100 but would pay $40 for the two hours of care actually incurred. That is called a reimbursement plan.
Then there is what is called an indemnity plan. In that same example above, you would receive the full $100 with $60 now in your pocket to spend perhaps for uncovered healthcare needs. Or playing the ponies!
Policies are guaranteed renewable; a health insurance phrase that means as long as the person pays their premium the policy cannot be cancelled by the carrier.
These policies cover care in the following facilities: assisted living, skilled nursing, intermediate and custodial care, adult medical day care and hospice. Home healthcare is optional.
There are three components of a long term care policy - a daily benefit amount, a waiting period, and once the benefits begin, a benefit period.
"The daily benefit amounts usually run from $50 to $300 a day in increments of $5-$10 so an individual can custom-design by region," said Phil. Keep in mind that nursing home rates vary depending on where you live.
The waiting period before you can receive benefits can run from zero days to 90-100 days. "The longer a person can postpone benefits beginning, the greater the reduction in the premium because the individual is assuming more of the risk of course," said Phil.
Your benefit periods can last from two years up to a lifetime benefit.
"By mixing and matching and tweaking the policies in those three core benefits, there can be quite a variance in premium. And then, you can add on to that any number of bells and whistles."
What are some options? Inflation protection is one. For example, you can elect to have a 5% compound inflation rider or a simple inflation rider. Some policies offer what is called a guarantee purchase, allowing you to buy more coverage in the future at certain times without evidence of insurability. According to Phil, that is less expensive than opting for the inflation rider.
You can elect to pay for your policy in several ways starting with a one-time payment then going on up to 5, 10 or 20-year options. Some people accelerate payments to avoid possible premium increases down the line. That is something you may want to investigate too and that is to check the carrier's history of premium increases.
So if you are taking good notes now, you should have a growing list of options to review with your agent. There is more to consider.
Typically there is simplified underwriting with no medical exam, no blood or urine tests required. Over a certain age, there will be a face-to-face cognitive impairment interview. And then if medical records are required, they will write to the person's doctor and get their history. "There are different underwriting classifications, which simply mean because of certain lifestyle or health situations (i.e. smoking), your neighbor may pay more or less than you for the same policy. But nothing will be excluded."
Of course, you want to know what this will cost. It's across the board. Just like buying a car, it depends on what you are looking for. You can go online and search for quotes but I will give you a couple of examples that Phil passed along. He is 57 and has a deluxe plan and is paying in the neighborhood of $700 a year. That same plan for a 65 year old would be $1,500 a year, for a 70 year old it would grow to under $3,000 and would go up incrementally to age 85 which is the age at which most carriers stop new applications. A person buying long-term care coverage at age 40 might pay $300-$400 a year. The older you are when buying the policy, the higher the premium of course.
"Let's say that 40 year old will pay 40 years of premiums at $400 a year and then access benefits at age 80. If you take the cost of someone starting at age 50 or 60 and accessing benefits when they are 80, the premium total is approximately the same. It really pays to buy at a younger age if you can because you are going to be covered against all the other contingencies such as accidents and illnesses."
I asked about a feature known as waiver of premium, where you do not have to pay premiums once you start accessing benefits. This varies so check locally with regards to the premium waiver rules for your region.
There are services that are not covered by these plans such as services considered medically necessary and typically covered under your medical health insurance policy. Prescription drug coverage and doctor visits come to mind. But with hundreds of insurance carriers writing policies and with so many creative marketing practices, who knows, you may be able to have these covered for a price as well.
What this all points to is that you have to do your homework. You don't want to get sick and not have all of your bases covered from your health insurance and disability needs to your long terms needs.
"In North Carolina , an outline of coverage must be left with the person and then there is a 30-day period to review it and to ask questions," said Phil.
But don't for a second think that those lavish entry fees to independent living communities and the like are covered. No way.
Phil has lectured a lot and people have tons of questions and misconceptions. They soon realize that most likely their employer and the government will not help them with this one. Which leaves another option, having your family take care of you. "As I cover this, I can see the heads bobbing in the room by people who have gone through that. The burden is tremendous." We will talk about some of the cultural implications of growing old in a later chapter. Suffice it to say, we are a guilt-ridden society when it comes to matters such as putting mom or dad in a nursing home. So we try to take care of them until we no longer can.
The response to long-term care insurance has been tremendous according to Phil. "In my 24 years in the business, I have never seen more positive media in regard to a financial planning product. It is unprecedented and it is only growing." With more than 122 companies in North Carolina alone offering it, up from just 10 five years ago, it certainly is.
"It's a win-win proposition for long-term care facilities, the financial planners who are marketing the product and the consumer."
The average age of buyers today is 62, down from age 72 in 1990. So what should you look for when buying?
"A good long-term care specialist has to listen first, then advise and consult, giving all the options so people can build their plan."
Phil said to steer clear of people who are going to scare you into buying by showing tear-jerking videos that pull at the heartstrings. I agree. North Carolina , for example, has by law what is called a suitability and needs analysis, a form that is incorporated into every long-term care application. It is designed to protect seniors from being sold policies that they cannot afford through the devices of fear and intimidation.
Remember that you are buying something that you may not need for a number of years, so you want to go with a company that will be around. Recently, there has been some consolidation in this industry. Consult research from reputable independent rating agencies such as A.M. Best Company, Standard and Poor's, Duff & Phelps and Moody Investors Services. Shop well and look for carriers that are rated highly with a history of good claims-paying ratios.
"It's all about education, helping people plan sensibly for a vulnerability that could wreck someone's best laid retirement plans," he said.
One of Phil's insurance colleagues passed along a story that really brings this chapter full circle. A colleague of his has lifelong friends; the husband is 55 and the wife 52. The husband is self-employed with a good income. Because their relationship was more friendship than business, Phil's colleague felt obligated to at least tell his friends what long-term care insurance was about. But it was a soft sell as most of these sales are. People have to understand and be ready to buy this product. It is on one of those unwritten lists of things to avoid like writing a will, making advanced funeral arrangements and such. They were interested but postponed buying. Long story short, the wife suffered a massive stroke. One month in a long-term care facility cost this couple $12,000 out of pocket.
Not that it all comes down to money. The tragic illness of a loved one, the care taking, the running back and forth, all while still running a business, one less thing to worry about - money to pay for all of this - can't but help. Yes, insurance agents are in business just like you and I, and they want to sell you a policy. Certainly they will make money, but the potential benefits to the consumer and to the couple above are obvious.
Medicare and Social Security will pay for my long-term care needs.
Social Security is not even a factor in paying for long-term care. Medicare pays for only limited stays. Paying out of pocket, exhausting your resources and qualifying for Medicaid, or buying insurance are your most likely payment options.
Medicare covers just 8 percent of the population. Self-pay (out of pocket) accounts for how 46 percent of people pay for care. Medicaid covers 41 percent of people with the remaining 5 percent covered by long-term care insurance and other options.
Excerpted from Who Moved My Dentures? by Anthony Cirillo. Copyright © 2003 Anthony Cirillo . All rights reserved. Excerpted by arrangement with Anthony Cirillo. $14.95. Available in local bookstores or click here.