Long-Term Care Financing

January 16, 2020 Aaron Helmbrecht

Long-Term Care Financing


An estimated 70 percent of Americans currently age 65 and older will one day need long-term care (LTC) services and supports, which include nursing facilities, home health aides, personal care, and family caregiving. With Medicare not providing LTC coverage and private LTC insurance coverage low, Medicaid is a major provider of LTC services and supports for the elderly. The increasing growth in state Medicaid budgets, due in part to the LTC needs of a growing elderly population combined with the low level of penetration into the potential market by private LTC insurance, has prompted a number of proposals for reforms in the way LTC is financed in the United States. Proposed reforms can be expected to address both public and private financing mechanisms, as well as mechanisms involving both types of financing.

In 2012, the American Academy of Actuaries hosted roundtables under the initiative, “A National Conversation on Long-Term Care Financing,” comprised of stakeholders from public policy, actuarial, research, private provider, and retirement benefits backgrounds to discuss potential reforms to the LTC system. Building further upon that conversation, the Academy’s LTC Criteria Work Group developed criteria in the following areas that should be considered in any discussion on reform:

Questions to consider:

  • Do the candidates have proposals to create a new LTC system, either public or private (or public/private)?
  • Do the candidates have proposals to reform the private long-term care insurance market?
  • Do the candidates have proposals to build on the Long-Term Care Partnership Program?

Coverage (with reference to how many individuals are covered by the reform). Reform proposals should consider both the level and makeup of coverage, including factors such as:

  • Demographic, health, and wealth/income characteristics of the covered population.
  • Whether the program will be mandatory, voluntary, or some combination of the two.

Comprehensiveness of benefits.  The following concerns should be addressed when determining a proposed reform’s level of comprehensiveness:

  • Location of care. Will the proposed plan cover care provided in nursing homes, assisted-living facilities, or through in-home care?
  • Eligibility of care. When is a member’s care covered as part of the proposed plan? Common eligibility criteria are based on the severity of an individual’s impairment, such as an inability to perform activities of daily living or an evaluation of cognitive impairment.
  • Limits of total coverage. What are the overall coverage limits, and how do benefits used under the program count toward these limits? (For example, proposals should clearly define when coverage starts, the duration of coverage, and interactions with other programs and/or coverages, as well as elimination or waiting periods in the program.)
  • Limits on the level of care covered. What are the maximum amounts paid during a specified period of time (e.g., daily or monthly maximums)? Proposals should clearly describe whether the maximums increase with inflation, and whether they vary by location of care. Are periodic benefits paid in full, or limited to the actual expenses that the member incurs? Finally, proposals should clarify how benefits are coordinated with other private and public means of payments.

Reform proposals should clearly communicate the comprehensiveness of benefits provided by the LTC system. That is, the amount of risk that is covered by the system, including benefit criteria and limitations, should be transparent.

Quality of care. Like many other aspects of life, people contemplating long-term care should evaluate the costs and the benefits of their choices. Quality of care is an important consideration in choosing benefits. A successful reform proposal can achieve quality of care by including:

  • Quality measurement and assessment framework (qualitative and quantitative). As types of care and providers of care evolve, a quality measurement and assessment framework should be set up to cover all of them and be flexible to respond as new locations of care and providers emerge. Quality measurement should cover multiple domains, including patient- and family-centeredness, transitional care processes, performance outcomes, safety, timeliness, efficiency, equity, and cost-effectiveness.
  • Quality incentives. Quality incentives should be considered for the overall industry as well as for individual providers. Key incentive targets could include, among other things, the geographic supply of providers, evidence-based caregiver training, consumer transparency, provider suitability/accountability, and prevention.
  • Quality awareness. Awareness of the quality of care is needed from both a provider and a patient perspective. Awareness can be achieved with initial education, access to and readability of educational resources, and identification of what types of coverage the patient is eligible to receive.

Understandability and choice. Well-designed reforms will recognize that the needs of individuals and families vary widely, and program benefits can be designed to vary in order to accommodate these differences. Whether a reform establishes a simple or complex LTC system/program, consumers should be able to discern their needs, their circumstances, and the availability of assistance when making a choice.

Reform proposals should clearly communicate the comprehensiveness of benefits provided by the LTC system. That is, the amount of risk that is covered by the system, including benefit criteria and limitations, should be transparent.

Affordability. Affordability varies by level and source of family or individual income, type of coverage, other household expenses, whether the program costs are permitted to change over time, and other factors. Therefore, affordability is a key financial issue for each participant. Affordability can be usefully described on an after-tax, available-dollars basis including income and assets, both of which will likely change over the life of the participant.

Some recent attempts at reforming how long-term care is financed in the United States have failed because they did not adequately consider these seven essential criteria.

Risk management and cost control. For any reform to be sustainable, risk management and cost control elements should be considered. A risk evaluation system should be developed prior to bringing the program online. Cost controls should be established that allow for alignment of interests of all stakeholders.

As the program/system matures and is evaluated over time, it will be affected by more factors than those internal to the design and users of the program, including the changing economy, political environment, and demographics of those covered by and contributing to the program. Whether these changes are predictable or not, various scenarios should be evaluated before implementation so the emerging risks underlying these potential changes can be evaluated and potential controls can be designed so the program can react to changes that emerge over time.

Financial soundness and sustainability. A new program’s financial soundness and sustainability refers to the ability to deliver what is promised, knowing that these promises extend well into the future. Consideration of the following four key questions will help determine whether a program is financially sound and sustainable:

  • Can consumers be confident that the program will indeed deliver what was promised? Sound risk management and cost controls give confidence to consumers that the program will deliver on all of its promised future obligations. The funding structure of the program is important.
  • Is the program too complex or conversely too simplistic? The level of program complexity generally depends on its design. While prefunding and pay-as-you-go systems are considered comparatively simple, a partially prefunded design can be quite complex, as such a system depends on defining the relative size of the prefunding component.
  • Does the financial program make appropriate use of the funds invested? Sound investing of the program funds enhances the performance of the program, which is particularly important for programs that have an appreciable degree of prefunding. Choices for investments will depend on whether the program is private or public, with greater restrictions likely on the options for public programs.
  • Can the designers ensure that the program interacts well with existing private insurance and public programs? Designing a new LTC program is complex in part due to the current patchwork of existing programs. Public programs, including Medicaid, Medicare, those administered by the Veterans Health Administration, and others jointly cover close to two-thirds[1] of the cost of formal LTC services being provided today. These programs combine with existing coverage provided by private LTC insurers and include a small percentage of “public/private partnership” policies. Thus, critical questions come into play, including:
  • How is any new program to interact with these existing public and private programs?
    • Is the new program intended to displace all or part of the existing programs?
    • Is the new program intended to provide coverage to persons not currently covered by any existing program? How do definitions of a qualifying event vary between programs?
    • Are participants in existing programs penalized by the reform?


Some recent attempts at reforming how long-term care is financed in the United States have failed because they did not adequately consider these seven essential criteria. For example, the CLASS Act[2] enacted as part of the Affordable Care Act—and subsequently repealed—failed to consider at least two of the criteria: affordability, and financial soundness and sustainability.

Proposals for reform of the LTC system to provide access to affordable long-term care for the elderly in the United States need to address the seven essential criteria discussed above if the reforms are to be of value and to endure for the long term. Conversely, any proposal that fails to do so will yield LTC reforms that are less effective and less likely to endure.

Furthermore, the criteria often rely on three activities: adequate education of the consumer, awareness of any alignment or misalignment between the interests of consumers in the program and the interests of those financing the program, and, from an actuarial perspective, sensitivity testing (testing the impact of alternative assumptions). When a proposed reform’s conformity to the seven essential criteria is evaluated, these activities will be useful in helping the reform to achieve the ultimate goal of providing necessary and adequate care to the elderly in the population.

Additional resources from the American Academy of Actuaries

[1] The Long-Term Care Financing Crisis, by Diane R. Calmus; Center for Policy Innovation; Feb. 6, 2013.

[2] Community Living Assistance Services and Supports (CLASS) program.