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How Long-Term Care Should Be Financed

March 1, 2006
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An administrator offers his prescription for a financially healthy system by Steven C. Wolf
BY STEVEN C. WOLF How long-term care should be financed
The nuts and bolts of a workable public/private partnership
Providing financial assistance for those who need care but legitimately cannot afford it is a realistic government function. Setting payment rates with little or no regard for actual market forces is not.

As has been demonstrated repeatedly throughout our history, the free-enterprise system is by far the most efficient arbiter of purchase decisions as they relate to both quality and price. The most appropriate course for government, therefore, is to substantially disentangle itself from the arena of payment-system design, concentrating instead on appropriate financing approaches and assuring quality care. In a new charge-based payment environment, providers must be willing to accept the concept and risk of a marketplace where fair and open competition will occur.

To produce maximum efficiency and competition to ensure fair pricing and equal access, long-term care providers must be allowed to establish prices that are acceptable to the free market (probably, in the near future, working in a managed-care'oriented environment). Government would establish the amount it will pay for services (the base price); the difference, if any, would be paid by the patient, either directly or through insurance.

This will, by definition, entail a public/private partnership. Public funds will be available only to those in need of public assistance, and then only to the extent necessary. Private funds will be used to purchase noncovered services, pay for the difference between the "base price" (as mentioned above) and the publicly funded portion of the base price, and pay for any covered services that are priced above the base price. Patients will have the freedom to use their own funds (or those of family and friends) to purchase extra services, as well as pay for those services that are priced above the "base price." This would avoid the "all or nothing at all" restrictions inherent in current policy.

Under this proposal, every resident would effectively become economically equal from the providers' point of view. The discrimination against government-funded residents, which providers often find necessary to admit for economic survival under the present system, would be eliminated. Depending on available income and patient acuity, the government may have to subsidize many of these patients to one extent or another-but long-term care providers should receive their reasonable market-based charge for every patient, regardless of payer type. In this way, patients will receive the benefits of having true "freedom of choice".

All of this implies some degree of deregulation. Deregulation of rate-setting within our healthcare delivery system will reduce administrative expense and should produce heretofore untapped efficiencies on the part of long-term care providers, as they strive (often for the very first time) to compete for every resident, not just private-pay residents. Depending on the goals and objectives finally selected, a new and innovative system could even cost fewer government dollars than are currently being expended, while potentially yielding higher-quality patient care.

Now the big question: If free-market forces determine the charges set by each individual provider, what portion of those charges should be funded by government? I would submit that the answer encompasses four basic steps:

Step 1: The Income/Asset-Based Health Benefit Schedule
As suggested, any new program should make maximum use of available private resources, while providing assistance only where it is truly required. Therefore, maximization of private resources should include tighter restrictions on asset transfers, greater use of reverse mortgage programs, and the use of other tools ensuring that public funds do not supplant private resources. An equitable health benefit schedule could be developed using readily available income distribution tables, disposable income data, and the average charges applicable to long-term care services within each geographic area. While social policy and fiscal limitations should play a part in designing an appropriate benefit schedule, we would suggest that "available income" should:

  • include all current income (including interest and dividends), as well as all income attributable to any form of asset transfer that occurred in the preceding ten-year period, including annuities and trust fund transfers of all varieties;
  • potentially include an estimated rate of return on significant non-income-producing assets; and
  • exclude income and assets necessary for the reasonable support of a noninstitutionalized spouse and/or dependent children, if any.

Benefits available would depend on a weighted scale ranging from 0 to 100, reflecting available income. For example, an individual below the poverty level might receive a 100% benefit, while a middle-income individual's health benefit might be set at 50%. An individual who can realistically afford the full cost of long-term care would be expected to do so with no assistance. Again, this is in contrast to the current Medicaid and Medicare systems, under which the choices are essentially either a 0% benefit or a 100% benefit. General Objectives

To be successful, a new long-term care payment system must meet the following objectives: