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Managing Medicare's Costs

Revising the odds of needing long-term care

One puzzle of retirement planning is how best to prepare for the substantial costs of late retirement. Those costs are of course largely hypothetical when you are still in your 50s and 60s. Who knows how long you will live, how your investments will perform, how your health will fare, and whether you might eventually need long-term care?

As a hedge against the costs of a very long life, longevity protection is available in various forms, but it can be expensive. Long-term care insurance, deferred annuities with guaranteed living benefit riders, and life insurance policies with long-term care riders all have hefty fees and premiums, so you should evaluate them carefully before you buy.

There is encouraging recent news on one front — the need to buy long-term care insurance may be less than was previously thought. The cost of long-term care is one of scarier aspects of old age. An extended stay in a nursing home can quickly impoverish a retired person, which helps explain why almost two-thirds of long-term care spending is paid for by Medicaid. And except for skilled nursing care, the cost of long-term care is in addition to Medicare-covered health care costs.

Two studies indicate that while the likelihood that someone will need nursing home care is higher than earlier studies found, the average stay is much shorter. And since the average stay is shorter, the value of long-term insurance may be less than previously thought. Averages do not apply to individuals, of course, and roughly one-half of those who will need nursing home care will stay longer than the averages. But it’s significant that both studies found evidence that that average stays are shorter because people are delaying disability, which is the pre-condition for nursing home care, until the end of their lives.

The first of these studies was an analysis published last year that looked at almost two decades of government health data (1992-2010). The three Rand Corporation economists who performed the analysis used information from interviews with surviving relatives to find out how long their family members had stayed in nursing homes before death. Including this information gives a more accurate picture of nursing home stays than earlier surveys that had focused only on people who were still living.

The authors found that 50-year-old men and women have 50% and 65% chances, respectively, of ever needing long-term care. Those odds are substantially higher than the 27% and 44% estimates of earlier studies. But the average length of stay is just over a year, or about a year less than prior research had indicated.

Then two months ago the Center for Retirement Research (CRR) followed up with a working paper that used the Rand Corporation data to develop a more accurate model for predicting the likelihood of needing long-term care. The CRR researchers also tried to assess how many people should buy long-term care insurance.

They said that earlier studies of the “willingness to pay” for long-term care insurance failed to take into account the fact that Medicare covers up to 100 days of skilled nursing care, as well as that many people who need long-term care will qualify for Medicaid. They concluded that the value of long-term care insurance is less than once thought.

Both studies share an underlying theme. It is that seniors’ mental and physical disability is slowly being pushed back toward the end of their lives. Almost 35 years ago, Dr. James Fries called this trend “the compression of morbidity.” In his landmark article in the New England Journal of Medicine, Fries, a Stanford University physician, said that as people live longer, the periods in which they are disabled will shrink in proportion to their lifespans.

As an example of how this might work, if during the next decade the average remaining lifespan for 65-year-olds grows by one full year, then the average period of disability will increase by less than one year. The result is that the period of disability is slowly squeezed into ever-smaller proportions of people’s lives.

That means that if today’s average disability period equals one percent of the average lifespan, it will slowly shrink to less than one percent as longevity increases. If true, someday people will be free of disability until the very end of life.

Currently a professor emeritus at Stanford, Fries continues to defend his theory. He’s said, for instance, that the “compression of morbidity” is not inevitable and does not apply to everyone. Instead it applies to people who follow healthy lifestyles. He’s also said, based on his and others’ research, that if you could do only one thing to live longer and postpone disability, it would be aerobic exercise. Although Fries’original hypothesis remains controversial, it is supported by studies showing that nursing home stays as well as the need for any kind of long-term care are becoming less prevalent.

An example is a paper by three Harvard researchers who examined Medicare records from 1991 through 2009. They found that disability-free life expectancy grew by 1.6 years during that time frame and concluded that “poor physical functioning is being increasingly compressed into the period just before death.” Their finding corroborates the CRR study mentioned above, where researchers found that end-of-life impairment has declined.

Another supporting study was published last year in Health Affairs and is abstracted here. It modeled future health care costs based on current trends, finding that research into “delaying aging” is effective and that it has the potential to extend lives by more than two years by 2060, most of that extra time free of disability.

So, should you buy long-term care insurance (or LTCI) in view of recent studies that indicate there’s a diminishing need for long-term care? Sometimes it’s said that the only people who purchase LTCI are those affluent enough not to need it. Still, if you plan to leave an inheritance or want to guard against the costs of requiring long-term care for an extended period — whether at home, in assisted living, or in a nursing home – LTCI may give you the greatest eventual payout in the event you need it.

That said, the expensive premiums associated with LTCI also mean that it has a good chance of not being cost effective. Insurers have abandoned the long-term care market, leaving the handful of surviving companies with considerable pricing power. The CEO of Genworth Financial, which underwrites about 35% of long-term care policies, said last year that the company expects to hike premiums on some older LTCI policies by as much as 50% and that its newer products will be priced to earn a 20% return.

After reading those statements as well as the numerous accounts of people in their 80s being regularly hit with double-digit premium increases, a carefully selected deferred annuity looks more appealing as a protection against the uncertain costs of late retirement. ◊◊

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