One of the main objectives of long-term care (LTC) projection schemes, public and private, is to mitigate the risk to individuals of being exposed to “catastrophic” costs of care, which can occur when a person needs care for a very long period of time. A US-based study suggested that the average value of lifetime long-term care expenditures for people turning 65 in 2005 was approximately $47,000, with 28% of individuals facing costs in excess of $100,000 (Kemper et al. 2005).
Recent estimates of the distribution of lifetime cost of care in England by Fernández and Forder (2011) show that around a third of people aged 65 and over will spend little on care. However, for a small proportion of people, long-term care costs will represent so-called “catastrophic” levels of expenditure: 7% of people aged 65 will face lifetime care costs of at least £100,000, and 5% of at least £200,000. Bolance et al. (2010 and 2012) show similar results for the Spanish case and they also point at significant differences between men and women. Women’s LTC average expenditure from age 65 to death is much higher than men’s, and extreme cases are more frequent.
LTC protection schemes
The effectiveness of LTC protection schemes in terms of their ability to protect people from catastrophic costs, that is, as risk mitigation instruments, has received little attention so far. Risk mitigation, when addressing economic losses, usually works by transferring the risk to someone else, who covers the cost if the loss occurs in exchange for a payment (or premium). Risk transfer is easily achieved by sharing the risk with other individuals who may also suffer the same type of loss. A way to mitigate the risk to an individual of having to spend an enormous amount of money on long-term care during his or her lifetime is to be part of a LTC coverage protection scheme that shares the expenditure among participants in the programme. LTC protection can take many different forms, ranging from contribution to a national public LTC system through taxation or social insurance contributions, to individual or group purchased private insurance. In practice in most countries public and private LTC coverage protection systems coexist and complement each other to different degrees.
As part of the project How can private long-term care insurance supplement state systems? The UK as a case study, funded by the AXA Research Fund, we have investigated risk measures that are well-known in insurance and financial economics and their potential use for comparing the economic capacity of LTC protection systems as risk transfer instruments. Risk measurement requires the estimation of the statistical distribution of lifetime costs of care, which can be obtained by micro-simulation or by a method inspired on multiple decrement tables (see, Bolancé et al. 2010).
Applying risk measures to the Spanish public LTC system
We applied these risk measures to the public LTC system in Spain (assuming it was implemented as set out in the Law of Dependence approved in 2006) and measured the extent to which the new public LTC system would mitigate the risk of catastrophic risks of care to individuals, if fully implemented.
The results show that the introduction of the Spanish public LTC system would guarantee that the highest or maximum possible cost incurred by the majority of the population (i.e. 90% or more) would be reduced by 30% under the public LTC system. However the results also show that, despite the risk mitigation offered by the new LTC system there is still a risk of about 1% that a man will face lifetime costs of at least EUR 211,800 and a risk of about 1% that a woman will face lifetime costs of at least EUR 232,600. This suggests that the risk mitigation offered by the system may still be too low for the small group of people who face catastrophic risks of care.
In the Spanish public LTC system (and other European semi-universal systems), LTC benefits are allocated to people according to severity of need. Benefits cover part of the costs of care. While this system does result in a reduction in the lifetime costs of care faced by all individuals over the care needs eligibility threshold, it is still possible for people to be exposed to catastrophic costs of care if they need care for a long period of time.
If one of the major aims of the LTC system is to mitigate the risk to individuals of facing very high lifetime costs of care, policy makers may need to consider redesigning the way in which benefits are assigned to individuals, so that account is taken of both the severity and the duration of care needs. Policy-makers could also consider providing or encouraging additional risk protection designed more specifically to help people who spend a very long period of time requiring care.
In many countries, even if there is a universal public LTC system in place, individuals are expected to make substantial contributions to the costs of their care. This potentially results in individuals who need care over a long period of time being exposed to very high (or catastrophic) lifetime costs of care. As a result, in countries where the public LTC system provides partial coverage of the costs of LTC, such as Germany, France and Spain, private long-term care insurance products have been developed with the aim of complementing the public system coverage and provide additional risk mitigation (Comas-Herrera et al. 2012, Courbage and Roudaut 2008, Guillén and Pinquet 2008).
Guillen M, Comas-Herrera A (2012) How much risk is mitigated by LTC protection schemes? A methodological note and a case study of the public system in Spain, The Geneva Papers, 37, 712–724.
Bolance C, Alemany R, Guillen M (2010) Prediction of the Economic Cost of Individual Long-term Care in the Spanish Population, IREA-Working Papers 201011, University of Barcelona, Research Institute of Applied Economic, revised September 2010
Bolance C, Alemany R, Guillen M (2012) Efectividad del sistema publico de dependencia en Espanapara la reduccion del coste individual de cuidados a lo largo de la vida, Revista Economia Aplicada, 60, forthcoming
Comas-Herrera A, Butterfield R, Fernandez JL, Wittenberg R, Wiener JM (2012) Barriers and opportunities for private long-term care insurance in England: What can we learn from other countries?, in McGuire A, Costa-Font J (eds.) Elgar Edward LSE Companion to Health Policy, Elgar Edward, Cheltenham
Courbage C, Roudaut N (2008) Empirical evidence on long-term care insurance purchase in France, The Geneva Papers on Risk and Insurance – Issues and Practice, 33, 4, 645–658.
Fernandez JL, Forder J (2011) Impact of Changes in Length of Stay on the Demand for Residential Care Services in England: Estimates from a Dynamic Microsimulation Model, PSSRU Discussion Papers, 2771, PSSRU, London School of Economics and Political Science, London
Guillen M, Pinquet J (2008) Long-term care: Risk description of a Spanish portfolio and economic analysis of the timing of insurance purchase, The Geneva Papers on Risk and Insurance – Issues and Practice, 33, 4, 659–672.
Kemper P, Komisar HL, Alecxih L (2005) Long-term care over an uncertain future: What can current retirees expect?, Inquiry, 42, 4, 335–350.