Washington state testing long-term care program

A forthcoming long-term care program in Washington state could serve as a model for others, as the country ponders how to avoid a social crisis that could result as the population ages.

The program, WA Cares, is set to launch next year and will be a test of a vested, state-administered system — the first of its kind in the U.S. In January, the state will begin collecting a tax of 53 cents on every $100 most workers earn, setting up a fund that would start making payments in 2025. It will be available only to those who have contributed — current retirees are ineligible.

The program is a response to the gaping need for long-term care and a severe lack of funding. In 2019, when the legislation for the fund was passed, the median retirement savings of people older than 65 in the state was $148,000, and the average total cost of long-term care was $266,000, according to the AARP.

Nationally, the median annual cost of care ranges from about $19,000 for adult daycare to $106,000 for a private room in a nursing home, 2020 data from Genworth Financial.

Although long-term care insurance plays a role in retirement planning for many, in recent years the premiums have increased or the benefits have decreased as insurers have grappled with higher costs than they initially projected. One program, the CalPERS long-term care insurance option, has stopped writing new policies and has raised rates or lowered benefits for its participants, as it has struggled with solvency.

Since long-term care insurance is not what it used to be, a common planning strategy has been to consider annuities instead.

Only about 7% of Americans have private long-term care insurance, and most don't have sufficient savings to cover the costs of care, Ben Veghte, director of the WA Cares Fund, said Wednesday speaking at a National Institute on Retirement Security event.

The U.S. model for long-term care is a “residual” or “means-tested” system, in which Medicaid provides coverage for some, and the assumption is that all but the poorest people can afford to pay for care, Veghte said.

“It’s funded from general revenues and covers only those with low income and assets,” Veghte said. “It really isn’t up to date with the fact that the broad middle class today can’t afford to pay for long-term care.”

As the population ages, that will also be unsustainable, he noted. “Medicaid will be overwhelmed in the next two decades by the coming age wave.”

That is compounded by the financial and social crises that result when people quit full-time jobs to care for their elderly parents, he said.

Almost all countries face shortages of paid caregivers, so programs that pay family members to take time away from work to provide care at home could be necessary, he said.

Washington’s new system is similar to the one Germany developed in 1995, Veghte noted. That system requires vesting and uses social assistance as a backstop.

“We could learn from other countries, but we can’t simply import their models,” he said. “National approaches to long-term care … are rooted in the political culture and the political economy of these countries.”

The Netherlands, for example, pioneered a social insurance system in 1968 that provides near-universal coverage, which is funded by contributions from workers, employers and pensioners. That system, considered the most generous in the world, does not have vesting requirements, but faced out-of-control costs that led to overhauls in 2015, Veghte said. The program now covers only institutional care, and home care is integrated into the country’s health care system, he noted.

Other systems, like those in Germany, Japan and South Korea, have expectations that families pitch in, along with local and state governments, which provide social assistance.

Universal systems, like those in Denmark and Sweden, have resulted from the view that long-term care is a social right. Such programs are funded from general revenue and cover “virtually all of your needs with almost no financial participation by beneficiaries,” Veghte said.

In France, there's a hybrid approach, which is a balance between a universal system and family responsibilities for costs. That program is funded by general revenue, and benefits decrease as a person’s income increases, Veghte noted. Private insurance plays a role in supplementing coverage, he said.

In designing Washington’s system, the decision was made not to cover current retirees, which “was a hard choice we made,” he said. “But we are pricing in the age wave.”

With that coming age wave, as more baby boomers head into retirement, as much as 12% of state’s budget would have had to go to long-term care, up from 6.3% in 2013, he said.

Other states, including Minnesota, are also considering long-term care funds as a way to counteract that effect on the system, Veghte noted, and more could follow, as the pandemic raised awareness about long-term care needs.

The U.S. could learn from the changes Germany implemented 26 years ago, as covering seniors wins political support, and there is recognition of the burden that long-term care places on social assistance budgets, he said.

“Fixing the market failure is uncontroversial and can win broad public support,” Veghte said. “People understand the need for this and support the system. They’re willing to pay for it.”