July 27, 2012 – The Institute for Research on Public Policy (IRPP) released a report comparing three different financing schemes for homecare and long-term care (LTC). The report concludes that a universal public insurance scheme is the best option, compared with private savings and private insurance schemes.
The report assumes the role of government to address this need, arguing that the chosen scheme should be efficient, equitable, respectful of beneficiaries, and inter-generationally fair. The report defines long-term care coverage as services assisting with daily living activities and chronic care, including home and institutional care, as opposed to acute and rehabilitation care.
The need for long-term care is growing
There is valid concern over how to best finance long-term care (LTC) since the aging population needing homecare and LTC is growing while the necessary services are sparse and expensive, where available.
Currently, institutional LTC is publically subsidized in most provinces with a user-pay component that is usually income tested. However, it is a patchwork system where there is significant variance in costs and level of accessibility across regions. For example, institutional care for non-married seniors was approximately $12,000 annually in Quebec and $33,000 annually in Newfoundland in 2008. Home care costs are largely unknown but in the late 1990s, 25% of nursing care and support services provided at home were estimated at an average of $15,000 annually out-of-pocket per patient.
The current state of home and LTC is inadequate, inequitable and inefficient, according to the study’s authors. As a result, it is no wonder that many face anxiety over the vast uncertainty, making it difficult for Canadians to make informed decisions and plan for their needs.
Private savings won’t cover the costs
The study found that saving privately for LTC needs can be prohibitively expensive. For example, assuming that a year in a nursing home costs $60,000, one would need to save approximately $300,000 for an assumed five year stay in a nursing home.
The report highlights two ways in which government can help individuals save. One way is that government can create medical savings account, similar to the Registered Retirement Savings Plan (RRSP), with tax exemptions specifically to cover future LTC services. It can also be similar to the Tax Free Savings Account (TFSA) where the saved income is taxed but income generated by the fund is exempted. Another way is through reverse mortgages, which is done in the UK and France. Basically, individuals sell their houses but remain living in them until they are institutionalized or until their death. While they continue to live in their home, they will receive periodic payments over time for their assets, securing a steady flow of income.
The report states that reverse mortgage may not be best for Canada since few seniors have houses sufficient in value that will cover the cost of formal care services they will need.
Private insurance will leave many uncovered
The study also investigates the case of private LTC insurance, wherein everyone contributes from the start of their working lives and don’t claim any benefit until decades later when they need the LTC services. However, unless it is government mandated, only a few will be insured, and there are three main reasons why:
- Lack of Information – People often lack the necessary information on which to base decisions on private insurance and LTC, which deters them from taking up private insurance. Some assume that LTC is publicly covered and do not need coverage, while others assume low probability of needing LTC. It is more rational for people to contribute later in life when they have a better idea of the kind of long-term care they might need as opposed to contributing at a young age when people are unsure if they will even need the care. But, private insurance works best when we contribute at a young age.
- Market failures – People feel that the value derived from LTC is low relative to the high price of insurance. Generally, people prefer informal care over formal care, viewing LTC as a last-resort option. Therefore, those who are low-risk will not contribute to the insurance pool, leaving the few individuals with large premium costs.
- Unaffordable – One of the main reasons for low private insurance uptake for LTC is that it is unaffordable. Many people have no more income to put towards an additional insurance payment once they have paid for the minimum standard basket of goods and services.
Universal public insurance is the best option
When considering a public insurance scheme, there are issues that must be taken into consideration such as how it should be funded, how should revenues be collected, and whether there should be full or partial coverage. Based on their research, the report recommends that governments should choose the universal public insurance scheme to address the long-term care needs of the country. It recommends that it is open-ended with no cap on necessary coverage, provide full coverage of necessary services, and based on revenues from a sale tax through a segregated fund dedicated to long-term care. Beyond the inadequacies of the private saving and private insurance option, public insurance is preferable because it can provide benefits based on a standardized evaluation of care needs at a lower cost, while also ensuring all Canadians better and more equitable access to long-term care services.
CARP has long advocated for “aging at home”, which includes a better long-term care strategy that takes into consideration the whole person, including their financial needs. In Canada, almost 300,000 Canadians over 65 live in poverty who already struggle to have their basic needs met and would not be able to afford out of pocket long-term care. Therefore, the question of how long-term care can be financed is of particular importance. Governments need to recognize this urgent need and take action to create a sustainable system to help both its current and future aging citizens.