Planning for Out-Of-Pocket Costs
Determining The Cost of Long Term Care
The Effect of Inflation
Funding Options

 

Planning for Out-Of-Pocket Costs

Understanding the Need for Formal Care or Informal Care

As we learned in previous sections, informal caregivers are family members or friends who take care of loved ones typically without being reimbursed for their services. Formal caregivers are paid professionals or volunteers from aging organizations. Whether they are reimbursed for their services or not, formal caregivers receive some sort of funding either as wages or salary or for administration of their support group.

The chart below illustrates the relationship of informal care to formal care. As care needs increase, both in the number of hours required and in the number or intensity of activities requiring help, there is a greater need for the services of formal caregivers. Unfortunately, many informal caregivers become so focused on their task they don't realize they are getting in over their heads and they have reached the point where some or complete formal caregiving is necessary. Or the informal caregiver may recognize the need for paid, professional help but does not know where to get the money to pay for it.

It is the job of a care manager or a financial adviser or an attorney to recognize this need with the client caregiver and provide the necessary counsel to protect the caregiver from overload. The advisor can also likely find a source for paying for formal care that the caregiver may not be aware of.

 

Intermittent Care

This would require the occasional attention of an informal caregiver but there may also be a medical condition that may require expertise the informal caregiver does not possess. As a general rule most people receiving this kind of care would probably be in their own home and the caregiver would be living or working close by and stop only for occasional visits.

There is, however, a growing trend where the only family caregivers may be living hundreds or thousands of miles away from their loved one. In this case, a care manager would be hired to arrange for the intermittent care for the loved one.

Part Time Care

This could still be furnished by an informal caregiver assuming there is no extensive medical condition requiring frequent attention. It is more likely under this scenario the care-recipient and the informal caregiver would be living together. Or with no caregiver available a decision would have to be made whether it would be in the best interest of the care-recipient to receive formal care in the home or to go to a care facility. Oftentimes a care facility can offer a better environment at a lesser cost. On the other hand, many care-recipients prefer to remain in their homes at all costs. And for long distance caregivers, hiring a care manager is still the best option.

Full-Time Care

Full-time care can often be offered by informal caregivers living with the care-recipient. But this arrangement is not always in the interest of the caregiver. Because of the demand on a caregiver's time and attention, this arrangement will often result in the caregiver suffering from severe depression, social isolation and the development of medical ailments. Again, the decision is often dictated by the lack of funds to pay for professional care. But when the need for care has progressed to a fulltime basis, advisers or family should be looking to implement formal care delivery either in the home or in a facility. As with the other care options above, a care manager could prove invaluable in selecting the setting and the care providers.

Depending on what causes the need for long-term care, a care-recipient could start out at any point on the curve. For instance a stroke, injury or sudden illness may result in the immediate need for part time or fulltime care. On the other hand the slowly progressing infirmity of old age, the slow onset of dementia or a progressively deteriorating medical condition may only require occasional help; beginning with intermittent care from an informal caregiver but gradually progressing to the need for fulltime, formal care.

The Longer the Need for Care the More Likely the Need for Formal Care

The care progression curve above also illustrates an important principle with long-term care. It takes time for the need for formal care to manifest itself. Short duration, long-term care situations can often be handled by health insurance or Medicare service providers. In addition, families may have the resources and the stamina to get through short periods of care without paying for help. As the days turn into months, the care recipient typically worsens and requires more attention and the ability of informal caregivers weakens. Long duration care situations almost always result in the need for bringing in paid, formal caregivers or for placement in a facility.

Although the need for long-term care will happen to about one out of two of us, that need may not be longer than a few weeks for a few months. But none of us know whether our need for care will be of long duration or short duration and it is important when planning for long-term care to plan for the worst-case scenario.

Wealth Characteristics of Elder Households

The two charts below illustrate the relationship of pre-retirement income to post retirement income. Notice that prior to age 65, about 60% of all households in the age group of 55 to 64 earn $50,000 or more a year. These years are usually considered the highest earning years. Note that at age 65 and older this earnings group has dropped in half to about 33% of all households. Also note that prior to retirement only about 26% of households earn less than $35,000 a year. But after age 65, this demographic group has doubled to about 50% of all households. This is just an illustration of what everyone already knows, that income goes down after retirement.

Knowing that their income will be lower, many elderly rely on retirement savings and investments as well as the equity in their home to provide additional income when needed. It's surprising the high level of asset ownership for America 's elderly generation. Note from the chart below that well over 70% of those over 65 own a home, own a savings account and own one or more vehicles

source: statistical abstract of the United States, 2006

 

source: statistical abstract of the United States, 2006

Classifying Household Wealth Groups

We believe the preceding charts illustrate a natural selection of elderly households into three distinct groups. We will call these

• Low wealth households,
• moderate wealth households and
• high wealth households.

Low Wealth Households -- It appears a natural income division occurs around $25,000 to $30,000 or less of income a year. We will call this group the low wealth household group. Our rough estimate is this represents about 40% of all households with members over age 65. Based on our experience in dealing with folks in this age group, we find that a number of them may own a home, but not one of high-value. A number making less than $14,000 a year may also be renting or relying on government housing assistance. Some in this group may have retirement savings but probably not more than $10,000 to $20,000 total. And they consider this to be money that should only be spent in an emergency or when things get really tough.

Moderate Wealth Households -- The next natural division appears to occur in an income range from $$30,000 a year to around $70,000 a year. We think this might represent about 45% of elderly households. In our experience, a single person earning $35,000 a year, with no debts and moderate savings and investments can probably live comfortably in retirement. Of course this depends on the cost of living in the area and assumes there are no house payments. It would probably take about $40,000 to $45,000 a year to provide the same standard of living for a couple. Those elderly people in this range, either single or married, probably own a home with a reasonable equity value and they probably have retirement savings and investments in the range of $20,000-$100, 000.

High wealth Households -- This group represents those who planned well for retirement. These people, whether single or more likely married, probably represent about 15% of elderly households and would have incomes of $70,000 a year or more. They would most likely own one or more high-value homes and probably have no less than $100,000 in savings and investments but more likely have $200,000 to $500,000 in additional assets.

We also want to point out that our classification of wealth groups is not based on rigorous research but on a loose interpretation of the data above as well as our own experience in providing advice to these groups of people. The main purpose for identifying different wealth levels is to help our readers understand which groups are more likely to pay the cost of long-term care entirely out of pocket. We also adjusted our percentage of these age groups based on the fact that many folks age 65 to 70 are still working and their incomes would distort the numbers in the charts above.

The Likelihood of Paying Out-of-Pocket Based on Household Wealth

The chart below is not based on any hard research but is an attempt to illustrate the obligation of the three household wealth groups above in covering the cost of long-term care.

We have already pointed out that initially most long-term care is provided free of charge by family members or friends or volunteers. Typically the need for more intensive care evolves over time and this produces the need for paid, formal caregivers. But who pays for this care is directly related to the financial circumstances of the person needing care.

Based on our experience, the low wealth and moderate wealth households are going to rely more on non-paid family members to provide the bulk of initial care. This represents the dark blue area in all three bars below. High wealth households are more prone to hiring help instead of relying on family. The dark red area represents the fact that Medicare will provide the same amount of limited services to all three household categories regardless of income or assets. The light yellow area is the one that merits our attention. This is the focus of this entire section. How much of a family's income and assets must be spent to provide care when the family can no longer provide free care?

We believe the answer to this depends on the household wealth category of the person needing care.

A low wealth household is going to run out of assets quickly. There is a possibility of using the house and a reverse mortgage to pay for care at home, but our experience with people in this category is the family is eager to try and keep the house and instead have Medicaid pay for the care. Whether that can be done or not in an era of tightening budgets is questionable but it keeps the elder law attorneys busy trying to find a solution. Medicaid is hardly ever be desired solution but it is typically the only alternative. Long-term care services can cost anywhere from $2,000 to $6,000 a month. Care recipients who don't have the income to cover this will be subsidized by Medicaid after spending all assets down to $2,000 or less. The problem with Medicaid is most people would prefer to stay in their homes or even in an assisted living facility but in the majority of cases Medicaid will put them in a nursing home. Low income and few assets simply mean a care recipient has lost any choice in the care setting he or she may want.

People in the moderate wealth category are typically going to be able to stay in their home longer. They will have the means to pay for aides or possibly a privately hired, live-in caregiver. If they choose not to remain in the home, they have the option of a nice assisted living facility in a pleasant, home like environment. For these people it may be years before the assets run out and Medicaid becomes the only choice. Care recipients with moderate wealth have more choices in their care settings.

High wealth households have a peculiar dilemma. They typically have enough income and/or assets to maintain themselves in the home as long as they want. But the reason they have high wealth is because they prepared themselves for retirement and have deliberately provided adequate income and assets. These resources were set aside to enjoy their retirement years or to provide security for a spouse. It is possible the cost of long-term care could rob them of these dreams. Oftentimes, a healthy spouse caregiver will labor to provide care and destroy his or her health trying to avoid a spend down of these precious assets. It is this age group that should be the most concerned about providing future funds specifically for long-term care services. And ironically it is often this group that fails to do any long-term care planning in pre-retirement years because the anticipated availability of income and assets lulls them into a false security. Their typical response to a challenge to take up planning is should the need arise they will have plenty of money to cover it.

 

Pre-Retirement Planning for Paying the Cost of Care

Options to pay the cost of long-term care during retirement should be initiated when someone is in his 40s or 50s and not after retirement. If money is being set aside, this must be done early enough to provide adequate funding levels. If the intent is to buy long-term care insurance, waiting until retirement may be too late.

The cost of new policies is going up about 10% a year. And whereas a few years ago, a person in his late 60s or early 70s could qualify medically for a long-term care policy, ever tighter underwriting rules are resulting in a large number of denials for coverage. And then there's the problem of the premiums. Retired people, on a fixed income, may find it difficult to pay the high cost of long-term care insurance. But for those who waited and did not act in earlier years, there is the possibility of using a reverse mortgage to finance the cost of long-term care insurance. We will discuss this further on.

 

Determining The Cost of Long Term Care

In order to plan financial for your long term care, you need to know what the costs are now and what they will be in the future.

Current Costs

Every year Metlife conducts a national survey of nursing home and home health agency costs. This is a valuable resource for determining the cost of care in your area. Included below is the August 2003 survey. You can obtain this survey online by going to:

Metlife Annual Survey of Nursing Home & Home Care Costs-September 2005

 MetLife Assisted Living Survey-October 2005

How Reliable Are National Cost Surveys?

Nursing Home Phone Sample, Cost Surveys
We recently completed a survey of the cost of all nursing home beds in our state. We then calculated the average cost and the median cost on a weight adjusted basis of the number of beds in a given cost category. Our average cost was significantly and statistically less than a national sample survey for our state in the same year. Our median cost (the halfway point cost of all beds more costly equal to the same number of beds less costly) was significantly less than our average cost and the national survey cost.

We believe that it is not possible to do a reliable sample phone survey of nursing home costs because all nursing homes in a given state are not the same in structure and operation and marketing philosophy. Because of a lack of uniformity, all nursing homes in the state will not follow a standard statistical distribution on costs and therefore a random sample survey will not give reliable results.

We could probably use up six or seven pages describing in detail the factors that affect private-pay bed rates for nursing homes. Also the application of these factors and different state approaches on regulating nursing homes affect the private-pay bed rates from state to state. Here are some of the factors:

• State regulation allowing skilled only or also intermediate care facilities
• The number of beds the nursing home has. Unless the survey results are weighted per bed, a 20 bed facility at $160 a day added on to a 100 bed facility at $120 a day and divided by two is going to make it appear that the average cost between those two facilities for a bed is $140 a day. But the real cost per bed between the two facilities is the weighted average. Which is $127 a day.
• The degree to which a state attempts to control the supply of beds and the subsequent occupancy rate
• The number of non-certified nursing homes that cater to the wealthy and charge higher rates
• The number of specialty nursing homes that use a different private pay long term care rate structure
• State Medicaid reimbursement procedure and policy which may affect the setting of private-pay rates
• State imposed staff ratios which may vary from state to state and vary for different types of facilities
• Whether Medicare reimbursement for a particular area is covering actual costs and if that is reflected in private-pay rates
• Whether an existing home has paid its plant costs or is still amortizing those costs
• The cost of liability insurance from region to region and state to state

Assisted Living Cost Surveys
Sample phone surveys for assisted living costs are acceptable as far as they go, but they probably don't reflect the entire assisted living service market. Surveys are not reliable as a comparison from state to state because of the differences in services offered between states.

The term "assisted living" is a marketing tool that refers to a large number of different community living arrangements that also offer care. There is no uniform regulation of these services from state to state. Some states regulate on the basis of number of residents while other states regulate on the basis of services offered. Not all states use the term assisted living for these living arrangements. In the states that control services, some of those states allow very little in the type of services offered and residents in those states must go to a nursing home to receive more extended services. On the other hand, some states allow assisted living to offer nursing home skilled services under certain conditions. Obviously the services offered will affect the cost of care and the cost of an assisted living arrangement. Also in some states assisted living cost includes the cost of long term care services and in other states the cost is charged in addition to room and board.

A large number of operations offering community living with care are invisible to the public. They are small operations that don't advertise and probably fail to register with their state health department. Their residents come to them via referrals from others. For purposes of classification we will call these "board and care " facilities.

These are operations using a residential home and housing residents in bedrooms in the home, sometimes shared with another person. Dining facilities, living room and bathrooms are shared. Some of these operations are employer and employee companies but the vast majority are run by the people who own the home and have taken in aged boarders to supplement their income. Long term care services are usually limited to what the owner operators can handle themselves. To augment services, a number of these operations will bring in home health agencies to help with medical conditions.

Board and care operations naturally have a lower cost of operation and will charge their residents typically much less than the apartment-based assisted living facilities included in national surveys. The surveys will not include these providers because they don't advertise, they don't list in the phone book and many have failed to license with their health department.

Home Health Agency Cost Surveys
Since 85% to 90% of home health agency cost is covered by government, such surveys are of little use to the public because the government will pay for it.

What would be very useful is if surveys were to include the cost of non-medical home health services. These costs are borne by the public and it would be useful for planning purposes to know what the cost is in a given area. Perhaps the national surveys will add this information in the future.

 

The Effect of Inflation

About inflation

Inflation is generally defined as in increase in prices for goods and services over a period of time. Persistent inflation seems to be an underlying phenomenon in the US economy. In fact economists and business consider an inflation rate in the neighborhood of 2% to 4% a year to be beneficial since it stimulates demand. The current government target seems to be around 3% a year. Knowing that prices will be higher in the future, consumers, both individuals and businesses, will not put off purchases very long. A continued level of purchases keeps the economy rolling. The chart below reflects this underlying inflation rate.

3.45% --	91 years from 1914 to 2005
3.96% --	55 years from 1950 to 2005
2.99% --	15 years from 1990 to 2005

Source: Bureau of Labor Statistics

Sometimes for various reasons, perhaps due to tight money supply or shortages or following a period of high inflation where purchasers have bought ahead and then decide to hold onto their money, prices for goods and services can fall rapidly in high levels of decline. This is called deflation and it can be very destructive. Deflation generally results in consumers deferring purchases and holding onto their money anticipating lower costs in the future. This can often result in a so-called deflationary spiral where lack of spending throws people out of work which leads to more lack of spending which leads to more unemployment. This leads to loan defaults and bank failures which further destroy the economy. The 10 year period of the Great Depression in this country is an example of this and were it not for the economic stimulus of the Second World War, that depression could have lasted even longer. Governments try to avoid deflation at all costs.

Very high inflation rates are also considered detrimental. This tends to punish certain participants in the economy such as those on fixed income or lenders and investors with long-term fixed interest loans or investments. And eventually high inflation, which is often tied to high demand, can result in a drop-off in demand when needs have been satisfied, shortages have discouraged buying or the market is saturated. This can then lead to a recession or even a depression.

Measuring inflation

Economists and the government use a number of tools to measure inflation but the tool most often used and most recognized by the public is the Consumer Price Index or CPI. The Consumer Price Index is considered the best measure of inflation for the day-to-day buying activities of the average American. The CPI is also used as an indexing tool to help pensions keep up with inflation, to provide cost-of-living increases to workers, to adjust levels of taxable income, to allow government benefits to match inflation and to make sure Social Security benefits do not fall behind.

The CPI is produced monthly by the Bureau of Labor Statistics, an agency in the Department of Labor. Every month over 80,000 different items and services are priced in selected urban areas and in selected locations. Prices are reported to the headquarters of the Bureau and adjustments are made to reflect changes in packaging and substitution of equivalent services or goods. Price changes are then applied to over 200 different categories in the CPI. This might include food items, energy, transportation, government fees, communication, health care, housing and so on. Price increases or decreases are calculated to reflect changes to a standard index that was established in the 36 month period from 1982 to 1984 and was set to equal 100. Indexes are easier to use to compare relative changes in prices. As an example a consumer Price Index in December of 2005 equal to 148 represents a 48% increase in the CPI since the base years.

The most commonly quoted percentage change from month-to-month or year-to-year is the change in the broad-based CPI which is called the Consumer Price Index for Urban Consumers.

But the BLS also tracks price changes in various categories such as energy or health care and so on. Not all prices change the same. It is well known that health-care costs go up much faster year-to-year than the broad-based CPI. And in some years energy costs may increase faster or slower. Economists and the government are also interested in the CPI component that reflects housing prices.

Managing inflation

Since the double-digit inflation of the late 1970s and early 1980s, the government has been very focused on maintaining a sustainable level of inflation. The responsibility for this task has fallen largely on the United States Federal Reserve Bank. The bank does this primarily by controlling the supply of money.

During periods of high inflation, there is a need for more money to pay the higher prices. Money may come in the form of higher wages or salaries or higher interest rates or from loans but in our modern economy additional physical cash is actually generated through credit or bank draft or stock margin transactions. Only a small percentage of purchases in this country are made with currency -- paper bills and coins. Purchases are made by using bank drafts, personal loans, collateral loans, equity loans, margin accounts, credit cards or through credit accounts with the sellers of goods and services.

The Federal Reserve Bank uses interest rates to control the supply of credit and to a great extent the supply of money. When it's difficult or costly to obtain more money for purchases, then demand falls and with it prices fall as well. But the Fed walks a very tight line. If it reduces demand too much, this can cause higher unemployment and possibly a recession. If it allows for too much money to flow into the system, this can stimulate inflation and cause problems as well.

The Federal Reserve Bank of the United States has the following responsibilities:

• It is the bank for the federal government and disperses funds for government purchases.
• It is responsible for buying and selling government securities such as bills and bonds on behalf of the US government.
• It distributes and maintains the supply of paper bills and coins in circulation.
• It regulates and provides banking services such as loans and check clearing for all private, federally chartered banks in the United States .
• It overseas operations of foreign banks in the United States and foreign operations of U.S. banks abroad.
• When called upon it can buy or sell other currencies in order to stabilize exchange rates.

It is the loan services that banks require from the Fed, that are the primary tool for controlling the money supply. Banks, daily, need to loan money to each other in order to maintain minimum levels of federal deposit reserve requirements. Banks charge each other interest on maintaining this loan reserve service and the Fed facilitates these loans. This inter-bank interest is called the federal funds rate. When the federal funds rate is high, this increases the cost of business to banks and they must pass it on to consumers in the form of higher loan interest rates. A low federal funds rate reduces loan interest rates.

It is the supply of excess money in the Federal Reserve system that determines the federal funds rate not the Fed itself. But by controlling this money supply the Fed can basically control the rate. This is done through so-called "open market transactions". If the Fed wants to lower the funds rate it will buy government securities. Those who sell government securities receive checks (or more typically direct credit deposits) from the Federal Reserve which will be deposited in federal reserve banks. This increases the supply of money in the Federal Reserve system and provides additional funds for overnight bank loans. This increase results in a lower interest rate. If the Fed wants to increase interest rates it will step up its domestic sales of government securities. Proceeds from the sale will be applied to an increase in government revenues and money will flow out of the banking system. In essence, a sale of government securities takes money from buyers and in turn from banks and removes that money from the economy.

Starting in the early 1980s, under the direction of Fed Chairmen William Volker and continuing with his successor Alan Greenspan, the Fed has used various economic predictors to try and guess the direction of inflation and apply primarily the policy outlined above to affect interest rates. It should be noted other strategies are used as well but open market transactions are the most commonly used method to control interest rates.

Prior to this period, the Fed was focused primarily on measurements of the money supply. Changes in the supply and resulting interest rates were maintained by an appropriate monetary policy. Unfortunately, over the years, an evolving sophistication of capital markets in the United States made these measures of money supply less relevant and techniques to modify the money supply in the late 1970s were not as effective in controlling inflation as they had been in the past.

Differing Rates of Inflation for Long-Term Care Services

When planning for long-term care it is important to kn