Public insurance best option for looming care crisis

Michel Grignon, Nicole F. Bernier | July 5th, 2012

RBC Royal Bank recently announced it would stop selling a swath of life insurance products, including longterm care insurance, as it struggles to cope with rock-bottom interest rates and volatile equity markets.

This is just one reminder that as the Canadian population ages, we need to start thinking urgently about the best ways to ensure that adequate long-term care will be accessible to every Canadian who needs it. Private insurance is one option, but there are good reasons why it has very low take-up.

We already know that a growing number of frail seniors will require long-term care services to assist them with activities of daily living such as eating, dressing or bathing.

Informal caregivers (mostly dependent seniors’ partners and, to a lesser extent, their children) provide the bulk of seniors’ care – 66 to 84 per cent of it – free of charge.

While it is likely that this will continue to be the case in future years, a growing number of Canadians will also require long-term care services provided by paid workers and professionals. And they will need to have the means to pay for it.

The financing of long-term care is a patchwork. At present, most formal care services provided outside hospitals are not covered under the Canada Health Act and are not very accessible.

The burden of long-term care costs is largely shared by the individuals who require care and their provincial or territorial governments. While institutionalized long-term care is publicly subsidized in most provinces, there is usually a user-pay component, which varies from province to province and depending on whether services are provided in a residential and home-based setting.

Needless to say, Canada’s existing public programs generate significant regional inequities among Canadians and cause great uncertainty for aging individuals.

There are essentially three options available for financing long-term care: private savings, private insurance and social (public) insurance.

Of course, individuals could always be encouraged to start saving early on for any anticipated long-term care costs. But the problem with that approach is that they are likely to end up saving either too much or too little. In reality only about 20 per cent of 65-year-olds today are likely to become so dependent that they require formal care for a period of five years or more. However, for those who will need extensive long-term care, even those with private savings, the costs could easily reach catastrophic levels and certainly be beyond their means.

Some form of insurance is therefore warranted for long-term care. But as the case of RBC demonstrates, private insurance has its limitations. Even in the United States and Singapore, where there is usually strong reliance on markets, there is little demand for private long-term care insurance, mostly as a result of well-known market failures.

For instance, insurers must contend with the systemic risk of cost increases in long-term care services during the long lapse of time between collecting premiums from individuals and their claiming benefits. The only way to reduce that risk is to limit benefits (but insurees are not happy) or have the young pay for the old, but private insurance cannot easily do that. Another issue is policy lapses. Some individuals let their policy lapse, often when they anticipate they will not need long-term care. As a result, insurers cannot offer plans that lock premiums in and older individuals end up paying higher premiums. All this results in higher costs of insurance, which most individuals are not able or prepared to pay. Finally, Americans are reluctant to buy private longterm care insurance because they know they can rely on the safety net (hospitals and Medicaid) to provide for their long-term care needs when their assets are spent down and their income is too low.

While governments could attempt to address some of these market failures, a universal public insurance plan would simply eliminate them. It is not only the most cost-effective option, but it would ensure better equity among dependent Canadians by covering care services provided in both residential facilities and at home.

A universal public insurance would need to be funded through a tax (not necessarily an income tax) increase. But the widespread reluctance among Canadians to accept such a tax increase to provide for future long-term care needs should be overcome, simply because the other options are inefficient (they would cost more) and inequitable.

In the absence of a public plan, Canadians will have to either save large sums of money or buy more expensive and less satisfactory private insurance. Many could be left facing costs that exceed their individual means and may have to do without the long-term care services that their conditions require. Alternatively, many are likely to fall back on the public health care system as a last resort, and this would lead to an inefficient and costly misallocation of Canada’s collective resources.

Michel Grignon is an associate professor in the departments of economics and of health, aging and society and the director of the Centre for Health Economics and Policy Analysis at McMaster University. Nicole F. Bernier is a research director at the Institute for Research on Public Policy. They are the authors of the new study, Financing Long-Term Care in Canada, published by the IRPP and available on www.irpp.org.