The State of the Long-Term Care Industry

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Long-term care costs are the biggest wild card in many retirees' plans. Joining me to provide an overview of the current long-term care landscape is Morningstar contributor Mark Miller.

Mark, thank you so much for being here.

Mark Miller: Hi, Christine.

Benz: Mark, this is a hot topic. Whenever I'm speaking to groups of retirees, the room goes crazy when long-term care comes up. I'd like to discuss the state of the state of long-term care. Let's start with the costs of long-term care. What sort of rate of inflation have we been seeing in long-term care expenses?

Miller: They've generally been going up anywhere from 4% to 5% a year depending on which segment of care you are looking at, if it's home-based or institutional, private nursing rooms, semiprivate. But that's the general ballpark.

Benz: Much higher than the general inflation rate?

Miller: Definitely.

Benz: Let's talk about how retirees and pre-retirees especially can handicap the odds that they will actually be on the hook for some of theses costs. How should they approach that decision-making?

Miller: RAND Corporation did a study that came out last year that's interesting. In general, you will find numbers out there that there's a 35% chance that you will need to be in a nursing home sometime in your life, maybe for a very short period of time. RAND broke it down much more specifically looking at numbers for different age groups. Looking at people in their late 50s to early 60s, the numbers are telling them that 56% of us will spend at least one night in a nursing home during our lifetime. There's a 10% chance that you will spend three years-plus. There is a 5% that you will spend four years plus. I think those are the really interesting numbers because that's where the costs really come in if there's a very extended need for care. Think about that three-year number.

At the same time, the national average rate per month for a private nursing home is $8,000. It's higher in more expensive states--$9,500, $9,600 in California, for example. You think about how those numbers can start to mount and that's where people start going crazy when they are talking to you.

Benz: Right. What I always like to point out is that if you are part of a married couple, sometimes you you are not incurring those costs simultaneously. You might have those costs incurring for both partners at various points in time.

Miller: It could, but there's two sides to that coin, because in many cases, and for married couple, one spouse who is healthy takes care of the other at least in part. Hard to say exactly how that washes out.

Benz: Let's talk about the trends in terms of long-term care insurance premiums. We have seen a lot of people who thought they were doing the right thing purchasing the insurance end with these terrible premium hikes that they have had to contend with. Have we seen any stabilization in terms of premiums?

Miller: Well, some. The problem is the headlines continue to be unstable, because a lot of these policies that were sold in the early going days of long-term care insurance were not priced properly. The insurance companies didn't do a good job of pricing out the risk in a number of different ways. The benefits were very generous. You will run into people, I still talk to people who say, boy, I bought my policy long time ago and have these great unlimited lifetime benefits. Those policies were poorly designed and poorly priced. We've seen this history of companies putting through double-digit rate hikes. They have averaged 20%, sometimes higher. Very scary numbers. The industry has gotten a black eye from that. A lot of comp carriers have stopped writing new business.

Benz: Well, that's the question. Fewer companies in that business altogether. That's usually not a great scene for consumers, right?

Miller: A lot of the experts who study this market think that things are stabilizing in the sense that the players who are left have better experience, track records, know how to price the policies properly. They are more expensive at the get go now, but perhaps less likely to see the big increases. There's no way to guarantee that. A lot of smart people who study the business think that we may be through the worst of that.

Benz: That's the pure long-term care insurance policies. Another trend that has been coming on strong is the uptake of hybrid long-term care policies. Let's talk about what those are first and then talk about the trend that we've seen in that marketplace.

Miller: It's a universal life insurance policy that has a long-term care insurance tacked on to it or inside of it, either it's a rider option or right inside. One option, for example, is the ability to convert a death benefit to a long-term care benefit. There are two or three flavors. They come with different levels of benefit protection. The thing that's been striking over the last few years is that sales of these policies have overtaken sales of traditional policies. Now, in one sense, this is not saying much because sales of traditional policies are down 60% since 2012.

Benz: In part because of these premium increases?

Miller: Yeah, it's cratering. Part of it is fear of the product from the rate hike standpoint. I think part of it is just human nature. People don't want to think about this, they don't want to plan for it and they don't want to pay for it. And the policies are not cheap. On the one hand, the traditional market is way down, it's selling about 90,000 policies a year. These new hybrids, at the same time, are growing. They are now selling roughly a quarter-million policies a year. That's kind of a striking change.

On the other hand, if you add it all up, it's still not a real lot of activity considering the need out there in terms of the potential population that might want a policy. That RAND study I mentioned concluded that maybe 12% of the eligible buyers or people who should be thinking of having coverage, have it. We are looking at still a sea change in a segment of the market that overall is kind of small.

Benz: One thing I know you've looked at Mark is, long-term care expenses with the exception of people who might be eligible for Medicaid-covered long-term care late in life just continues to be this big unfunded wild card for many older folks in this country. Any thought about whether there might be any movement of foot in Washington to address this gaping hole for so many retirees.

Miller: Medicaid does remain the big player. It funds two-thirds of long-term care need. Now, a couple of years ago, several bipartisan organizations brought together some of the smartest experts in the room to think about what would be an approach to solving this and getting a less patchwork approach to the way we protect against this risk. The consensus seemed to be that a smart approach would be kind of a hybrid public insurance, social insurance, if you will, and private commercial hybrid approach. You would have something like the Medicare program, for example, providing a base level of coverage. We would all contribute to that to some incremental change in the payroll tax. And then you'd have the ability to tack on higher levels of coverage privately. Almost the way you think about the Medicare market now, where you have the base level of coverage for hospitalization and providers. But then you can pull off the shelf other things ...

Benz: The supplemental type policies?

Miller: Supplemental coverage and the drug coverage and the like. It's a successful approach. It's worked very well so far in Medicare. If you did that it would allow you to provide cheaper private coverage because you'd be talking some of the demand for services out of those private policies. I think that's the approach we should be taking. Unfortunately, given the state of play politically, there's no sign of movement on it at all right now. But at some point, I think that's where we need to still get back to as a discussion about a new framework for providing long-term care because it's kind of the unsolved part of the puzzle, I think, in terms of the overall retirement safety now.

Benz: Mark, always great to get your insights. Thank you so much for being here.

Miller: My pleasure, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.