How much will it cost? A simple question on the surface that is often considered first when planning for and designing insurance plans and programs to address the financial impact of long-term care (LTC). This question leads to citing public statistics on LTC costs, such as:
- Most people over the age of 65 will require long-term care services1
- Average LTC costs range from $50,000 to $100,000 annually depending on an individual’s site of care2
- On average, women need long-term care services for 3.5 years, and men for 2.5 years3
But are these the most important metrics to consider when evaluating a program’s benefit design or selecting LTC coverage? LTC needs are complex and individuals’ experiences receiving LTC can vary greatly, making it difficult to compare programs or policies. In this article, we propose a new metric to assist in evaluating or designing a program's benefit structure: LTC Actuarial Value.
The concept of actuarial value (AV) is not new but has become more known due to the Patient Protection and Affordable Care Act (ACA). AV helps categorize medical insurance into metallic tiers (e.g., gold, silver, bronze) based on the amount of coverage an insurance plan provides. In basic terms, AV represents how much coverage insurance provides versus the amount left an individual must pay for out of pocket. For example, a plan with a 60% AV means that for every $1.00 of applicable services expected to be used by an individual, the insurance plan is expected to pay $0.60 on average and the individual is expected to pay $0.40 on average. This concept can be applied to LTC benefit designs as well. Using a metric such as LTC AV can help evaluate a design’s level of coverage and put different benefit designs on a more consistent basis.
Actuarial value calculations should be interpreted with caution. The underlying applicable costs and services used to determine the AV need to be consistent to provide meaningful comparisons of plans. For purposes of this analysis, we assume applicable services include paid, formal LTC services commonly covered by a private market comprehensive insurance policy after an individual satisfies benefit eligibility requirements. Related to this, LTC AV may not capture all aspects of a program’s value (i.e., the AV would not be impacted by coverage of additional services outside of the applicable services included in our calculation).
Value of insurance can vary greatly depending on care needs
To illustrate the application of LTC AV, consider a sample plan design issued to a 50-year-old with a $300 daily benefit (DB), 3-year benefit period (BP), 30-day elimination period (EP), and 3% compound inflation. For this sample LTC insurance (LTCI) plan, we illustrate in Figure 1 the cost sharing associated with different examples of LTC events (represented by the blue bars) as well as the overall LTC AV associated with this plan (represented by the orange line).
Figure 1: LTCI plan With $300 daily benefit, 3-Year benefit period, 30-day elimination period, and 3% inflation, claim age 82
As shown in Figure 1, for an individual with a 3-year home care need starting at age 82, we would expect that over 95% of an individual’s LTC costs would be covered by the sample plan, while the individual would cover the remaining 5% of costs out of pocket (or via another payer, such as Medicaid). The percentage of total costs covered by the plan varies dramatically for an 82-year-old depending on the length of need and the setting where care is received. For example, for an individual with a longer length of need, less of the costs are covered by the plan, as the individual covers benefits that exceed the three-year benefit period in this example.
The LTC AV essentially reflects the average insurance plan coverage across all potential LTC events, weighted together by their probabilities and boiled down to one number. The AV for the plan in Figure 1 shows that, on average, for this design, the plan will cover approximately 45% of expected LTC costs, while other sources (e.g., individual paying out of pocket, or Medicaid) will be responsible for the remaining 55% of costs.
Comparing benefit designs using LTC AV
Using a metric such as LTC AV can help compare different benefit designs on a more consistent basis. For example, consider the two following sample plan designs for coverage issued to a 50-year-old in 2022:
- Plan 1: $300 DB, 5-year BP, 30-day EP, no inflation
- Plan 2: $150 DB, 3-year BP, 90-day EP, 3% compound inflation
Figure 2: LTC AV by claim age and plan design for issue age 50
Figure 2 illustrates each plan design's AV and how it changes over time. For example, Plan 1 has an AV that ranges from approximately 15% to 45% depending on the age when an individual starts needing care (the claim age). Plan 2 has an AV that ranges from 20% to 25% depending on the assumed claim age.
Before diving into how the AVs vary over time, it is first important to understand the benefit specifications or plan design features impacting the AV at any given claim age. Figure 3 illustrates the AVs for Plan 1 and Plan 2 at claim age 55, as well as what benefit design features produce the most cost sharing for the insured. Plan 1 has an AV of 46% at age 55, indicating that on average Plan 1 will cover 46% of an individual's claims incurred at age 55 and the individual will be responsible for the other 54% of LTC costs. Similarly, Plan 2 has an AV of 20% at age 55, indicating that on average Plan 2 will cover 20% of an individual's claims incurred at age 55.
Figure 3: AV and impact to cost sharing by plan design feature for claim age 55
Note: “Insured’s Responsibility” reflects amounts not covered by the plan that are the result of contractual features and maximums (relative to a policy with first dollar coverage and no maximums, i.e. the actual qualifying benefit or care episode). For the purposes of this article, we refer to the amount not covered by the plan as the “Insured’s Responsibility,” however in reality these costs may be paid by the individual out-of-pocket, Medicaid, or other sources.
For Plan 1, the 54% of cost borne by the insured is the result of cost sharing determined by the following benefit features and illustrated in Figure 3.
Elimination period (EP)
- Plan 1 has a 30-day EP, during which the individual will pay for LTC costs out of pocket. We estimate that approximately 3% of total covered services are paid by the insured during the 30-day EP for a 55-year-old claimant. Said differently, if Plan 1 had a 0-day EP instead (such that the plan rather than the insured would be responsible for costs during this time), then the AV would be 3% higher.4
- Plan 2 has a longer, 90-day EP. We estimate that this EP results in a 55-year-old claimant bearing approximately 7% of the cost of covered services.
Benefit period (BP)
- Plan 1 has a 5-year BP, after which the insured will pay for LTC costs out of pocket. We estimate that approximately 30% of total covered services are paid by the insured beyond the 5-year benefit period for a 55-year-old claimant. Said differently, if Plan 1 had a lifetime BP instead (such that the plan rather than the insured would be responsible for costs beyond five years), then the AV would be 30% higher.
- Plan 2 has a shorter, 3-year BP. We estimate that this BP results in a 55-year-old claimant bearing approximately 45% of the cost of covered services.
Starting daily benefit (DB)
- Plan 1 has a $300 DB, where daily costs incurred in excess of this amount are covered by the insured. When comparing this $300 DB to the average cost of care for LTC in various care settings, we estimate that approximately 9% of total covered services are paid by the insured beyond the $300 DB for a 55-year-old claimant. Said differently, if Plan 1 had no DB maximum (such that the full cost per day would be the responsibility of the plan rather than the insured), then the AV would be 9% higher.
- Plan 2 has a lower $150 DB. We estimate that this DB results in a 55-year-old claimant bearing approximately 24% of the cost of covered services.
- Plan 1 has no inflation protection. While the $300 DB for Plan 1 stays level, we assumed the cost of care to trend by 3% to 4% each year. The growing cost of care compared the level benefit design results in out-of-pocket costs for the insured. We estimate that for a 55-year-old claimant the lack of inflation protection will require the insured to pay for approximately 12% of covered services out of pocket. Said differently, if Plan 1 had inflation growing with cost of care trends, then the AV would be 12% higher at age 55.
- Plan 2 has some inflation protection (3% compound inflation), which is more than Plan 1 but still expected to be less than the cost of care trend assumed in this analysis. We estimate that this inflation protection results in a 55-year-old claimant bearing approximately 3% of the cost of covered services.
AV variation over claim age and policy duration
As shown in Figure 2 above, the LTC AV can vary by claim age. While Plan 1’s AV decreases from age 55 to age 97, Plan 2’s AV remains relatively steady across all claim ages. Plan design features impact the AV differently by claim and policy duration, as illustrated in Figures 4 and 5.
- As policy duration increases, the influence of inflation protection increases. Neither Plan 1 nor Plan 2 offers inflation protection sufficient to match our assumed cost of care trend of 3% to 4% (varying by care setting). The impact of this insufficient inflation compounds by policy duration. This is illustrated in Figures 4 and 5, where the cost sharing attributable to inflation increases over time. This is more striking for Plan 1, which offers no inflation, than for Plan 2, which has 3% compound inflation.
- As claim age increases, the influence of benefit period decreases. The relative value of a lifetime benefit period versus a 3-year or 5-year benefit period decreases as insureds age and claimants’ remaining life expectancy and expected length of stay decreases.
Figure 4: AV and cost-sharing components by claim age for Plan 1
Figure 5: AV and cost-sharing components by claim age for Plan 2
As shown in Figures 4 and 5, the influence of other features, such as elimination period and starting daily benefit, are less variable by claim age and policy duration.
Program comparisons and design discussions get muddied quickly on the financing side. Premiums for life versus taxes during working years, government versus insurance carrier versus individual contributions, covering all individuals versus lower-risk individuals, covering all care versus certain care types, and conservative versus aggressive margins are just some examples of important but very difficult pricing elements to consider. Because of those kinds of questions, evaluating programs based on price alone may not produce enough relevant information and may possibly generate misleading conclusions.
LTC Actuarial Value can play an important role and first step in designing and comparing LTC programs. It provides an encompassing view of the amount of coverage provided without the complexities and challenges of comparing prices and financing approaches. This could include applications such as helping a consumer decide among private market insurance plans with varying benefit features or comparing public program options that offer "front-end" or "back-end" coverage. The financing of a program remains one of the most important design elements, but LTC Actuarial Value can help more holistically determine the "value" delivered by the program's coverage in combination with the rates.
1 ASPE Research Brief (August 2022). Long-Term Services and Supports for Older Americans: Risks and Financing, 2022. U.S. Department of Health and Human Services. Retrieved April 3, 2023, from https://aspe.hhs.gov/sites/default/files/documents/8f976f28f7d0dae32d98c7fff8f057f3/ltss-risks-financing-2022.pdf.
2 Genworth. Cost of Care Survey. Retrieved April 3, 2023, from https://www.genworth.com/aging-and-you/finances/cost-of-care.html.