FINANCIAL PLANNING FOR LONG-TERM CARE

Financial planning for retirement or "old age" is typically based on factors that are fairly well known and more or less under personal control. That is, most people choose when to retire, know the profile and amounts of their retirement income resources, and more or less know (or can control) many, if not most, expenses. In contrast, planning for long-term care is planning for the unknown.

The United Seniors Health Council, a non-profit organization that advises consumers on long-term care issues, reports that at any one time only 6 percent of people over age sixty-five live in a nursing home, and that only half of people age eighty-five and older need help with everyday activities of daily living (ADLs). Very few people, however, can look ahead twenty or thirty years and truly know if they will be one of the fortunate 94 percent or healthier 50 percent who will not need some form of long-term care in old age. Thus, financial planning for long-term care is based on (at least) four interconnected unknowns: (1) How long will I live? (2) Will I be healthy or not? (3) How much will health care and long-term care cost? (4) How will I be able to afford those costs?

In this context it is not surprising that over 80 percent of the American public, middle-agers (ages forty-five to sixty-four) even more than older people, are worried that the unknown costs of long-term care will erode their retirement income and assets. Consequently, this overview of financial planning for long-term care considers the following four topics: (1) Who should plan for long-term care? (2) What are the financial characteristics of long-term care? (3) What are the financial choices and options in paying for long-term care? (4) What professionals, organizations, and information sources are available to inform this planning process?

Who should financially plan for long-term care?

The old and the old and frail. Over the course of human history most of the improvement in life expectancy has taken place in the past several hundred years, much of it in the past few decades. Improvements in life expectancy at birth (forty-seven years in 1900 vs. seventy-six years in 2000) have been substantial, but the more directly relevant trends are improvements in life expectancy at the older end of the life cycle. For long-term care financial planning a key question is, for example: How likely is it that a sixty-five-year-old will live to age ninety? As reported in a special U.S. Census Bureau analysis of trends in aging, in 1940 the probability that a sixty-five-year-old would survive to age ninety was 7 percent. By 2000 this figure had more than tripled: there was a 26 percent chance that a person celebrating his or her sixty-fifth birthday in 2000 would live to age ninety—and the percentage was estimated to increase to 42 percent by 2050.

As is well documented, however, adding years to life does not always mean adding robust, healthy years. Research using standardized measures of ADLs demonstrates that significant decreases in personal capacity and increased need for regular (e.g., daily) assistance take place as people age from their mid-seventies to mid-eighties and older. Table 1 documents this substantial increase in the need for daily assistance. While the actual percentage of older people requiring such daily assistance is comparatively small—306 per 1,000 (or 30.6 percent) at age seventy-five to eighty-four need daily help in taking a bath—the acceleration of the rate from that age range to age 85+ is substantial: bathing assistance, 171 percent; dressing, 130 percent; and toileting assistance, 149 percent. From the perspective of planning for long-term care, few people know if they will be part of the lucky 69 percent or the unlucky 31 percent who need assistance.

Middle-agers. Although long-term care services are used primarily by people in their eighties and older, financial planning for long-term care is, or should be, largely a task of middle age for two reasons. First, as financial gerontologist Davis Gregg argues, middle age is the stage in the human wealth span when retirement planning should take place. The earlier financial planning takes place, the better, but certainly by age fifty planning should be under way. The relative balance between accumulated income and anticipated expenses should be estimated and examined. The potential costs of long-term care, even if not precisely knowable in numerical terms, should be included in the estimates.

A second middle-age dimension of long-term care financial planning focuses on the middle-agers as the children of elderly parents. One of the less publicized consequences of longer life expectancy is that nowadays many more middle-agers will have surviving parents than was the case in the recent past. As reported by historical demographer Peter Uhlenberg, as recently as 1940 the probability that a fifty-year-old would have both parents alive was only 8 percent, compared with 27 percent in 2000. And the probability that a sixty-year-old child will have at least one parent still alive had increased to 44 percent in 2000 from only 13 percent in 1940.

The public image of middle-agers as a generation "sandwiched" between dual responsibilities to children and to aging parents is much less accurate than it was in 1985 or 1990. Figure 1 shows the ratio of the number of teenage children per middle-ager compared to that of elderly parents per middle-ager. This "support ratio" for teenagers has been declining, while starting in 2000 the elderly-parent support ratio has increased substantially. As American families move into the twenty-first century, middle-agers appear to have more parents than they have teenage children. Financial planning for long-term care includes planning for parents as well as for oneself.

Financial characteristics of different kinds of long-term care

First and foremost, long-term care is not simply synonymous with nursing homes. Consequently, financial planning for long-term care is not concerned only with nursing homes. As it has developed since 1980, long-term care includes a range of options, and the financial planning process should systematically evaluate the nature of and the trade-offs among the financial and nonfinancial characteristics of these different kinds of long-term care.

"Long-term care" typically refers to chronic, long-lasting care rather than to care that is more or less completed in a few weeks or months following an illness or hospitalization. This time dimension is important to recognize because some of the care services and facilities (e.g., a nursing home) can offer both short-term rehabilitative care after surgery and long-term residential care in the same building. Knowing that "nursing home care" is not identical to "long-term care" and understanding this difference is financially important.

In particular, most health insurance will pay for care in a nursing home that is short-term, posthospital recuperative care but will not pay for chronic long-term care that may be provided in the same facility. The national Medicare program, for example, embraces such a distinction: it pays for short-term care after surgery that can take place in a nursing home but does not pay for chronic care. Because of confusion surrounding this distinction, national studies of financial literacy concerning health, finance, and long-term care have found that many people incorrectly believe that Medicare will pay for chronic long-term care—a mistake which can have severe financial consequences for those who hold this view.

The term "long-term care" most often (but not exclusively) concerns older people whose increasing physical or mental frailty leaves them unable to fully take care of themselves. At its most general level, long-term care refers to a broad range of supportive services that includes personal, social, and residential as well as medical services. Variations on long-term care include the number and intensity of these kinds of services as well as the residential context in which they are delivered. For some older people long-term care may begin and end with assistance with shopping or cooking, and transportation to the doctor as they continue to live in their own home or apartment. For others, long-term care is full-time, medically driven nursing care in a government-licensed residential institution. Different points on this continuum of course imply different levels of cost and financial planning. The following discussion is only an introduction to home care, assisted living, and nursing homes, and is not intended as a complete consumer's guide to the many and increasingly available variations within each general type.

Home care. Most older persons prefer to stay in their own home rather than move to an "institution." The accomplishment of this goal is a function of the older person's needs plus the capacity of the family, community, and financial resources to bring the required personal and medical services into the home setting. While the psychosocial desire to stay at home is often paramount, some people may view home care as a financial question, asking if (or assuming that) home care is substantially less expensive than institutional care.

The most accurate answer to this financial question is "maybe." If family and friends will provide most of the personal, medical, social, home chore, and transportation services, then costs will certainly be lower. If, however, even some of the care is provided by paid caregivers or through a commercial home care service, then the following questions become relevant: Who will identify, screen, and choose the caregivers? Who will monitor caregiver performance and pay the bills? Who will be responsible for tax, insurance, and other legal and procedural details? In sum, home care is not always preferable to institutional care, at least from a financial and administrative perspective. The Encyclopedia of Home Care for the Elderly (Romaine-Davis et al.) and Hiring Home Caregivers: The Family Guide to In-Home Eldercare (Susik) illustrate the breadth and complexity of the home care approach.

Assisted living. Between traditional nursing homes and home care is assisted living. In years past such labels as "board and care homes" and "congregate housing" were used to identify residences where older people receive meals, housekeeping services, and some protective oversight, but relatively few health or therapeutic services. In some cases the "facility" was nothing more than the unused bedrooms of an elegant old home, now rented to reasonably healthy and ambulatory older people, with hotel-like rather than hospital-like accommodations.

The growth of assisted living as a separate kind of long-term care is a reflection of the growth and financial resources of the older population, the increasing capacity to remain healthy and reasonably independent at advanced age, and the continuing negative images of nursing homes as "old people's homes" and "institutions." Thus, as the architect and gerontology professor Victor Regnier notes, "assisted living is a long-term care alternative which involves the delivery of professionally managed personal and health care services in a group setting that is residential in character and appearance in ways that optimize the physical and the psychological independence of residents."

The key elements of the definition are "independence" and "residential in character." As the commercial assisted living industry has grown, many facilities provide greater support for higher levels of frailty and dependence; many (depending on state laws and regulations) have professional nurses on site and medical staff on call, and provide regular health monitoring, pharmaceutical management, and physical therapy. While there are many factors that contribute to the various amounts charged by different assisted living facilities (such as location, size of staff, elegance of housing, choices and specialties of meals, availability of health-related services), two generic financial alternatives should be evaluated.

The hotel model vs. the condo model. Most assisted living residences operate financially on a residential hotel model, meaning that the resident pays a monthly rental; there may or may not be a binding annual contract. For the monthly fee the resident receives a private (or semiprivate) room including a bathroom with shower or tub; housekeeping and linen service; and two or three meals per day served in a congregate dining room. The cost of the basic monthly room, board, and service may vary within the same facility depending on the size of the room and its location within the building. Some facilities offer rooms to be shared by two roommates or a married couple.

The condo model includes the same range of housing and services, the main difference being that the older person purchases the residence. This model of assisted living is often known as the continuing care retirement community (CCRC). Because the down payment can be quite expensive—from $50,000 to $200,000—these facilities and their services and meals are designed for the more affluent. Within the facility the residential space can vary from a small efficiency apartment to a two- or three-room apartment or town house designed for a married couple.

The "continuing care" feature of CCRC facilities implies that in addition to residential and assisted care services, the resident is purchasing more extended, future-oriented, contractually defined long-term care services. (In earlier years CCRCs were known as life-care communities.) CCRCs typically have hospital or nursing home "wings" as part of the main building (or campus), or have access to such facilities and services nearby.

One unique financial planning issue concerns the facility's rules about the refund of the substantial down payment if the resident dies or moves elsewhere. Some facilities define the buy-in money not as an actual purchase but as advance payment, a kind of mandatory endowment to support the enterprise. They typically offer return-of-payment schedules linked to length of residence. For example, the down payment may be returned minus 2 percent per month; if the resident moves out after twelve months, then 24 percent of the down payment is retained by the CCRC and the remainder is refunded. Given the substantial amounts that are involved, these financial considerations become as important as the personal, location, service, ambience, meal, and other elements of the decision process.

Costs and levels of service. Assisted living facilities charge for personal and health services using either of two basic approaches. In some facilities there is no separate charge for the assistive services; all residents pay the same amount, incorporated into their monthly fee. In this approach healthier, less dependent residents are subsidizing the greater service utilization of the more frail residents. The implied financial and social ethic is that eventually most residents will use additional services, without an increase in their fees, and so the cost-benefit ratio balances out.

Many assisted living facilities use the level of service required as a basis for differential costs per resident. Upon entry to the facility the new resident receives a physical, cognitive, and health assessment, and may enter as a "basic independent services" resident or be assigned to one of three or four higher service levels. The cost of the required level is added to the basic room and board costs.

A hybrid of these two financial approaches is one in which there is a single flat fee for all residents but (like a hotel) with additional charges for services as needed (e.g., requesting room service for meals, asking for additional transportation services, using optional health-related services, etc.).

Some facilities take the view that charging for specific services could inhibit an older person from requesting needed services. Professional assisted living should encourage people to take their meals, to be involved in social activities inside and outside the facility, and to remain as vital and independent as possible. To charge older persons, many of whom are children of the Depression, may encourage them to skip a meal or decline an invitation, in order to save money. Considering the contrasts between these fee for service vs. pooling of risk approaches, careful long-term care planning requires consumers to understand and evaluate the financial consequences as well the psychosocial implications.

Nursing homes. Although long-term care is not synonymous with nursing homes, nursing homes are the most identifiable kind—and symbol—of long-term care, and remain the most prevalent kind of long-term care. According to data reported by the U.S. Health Care Financing Agency (HCFA), in 1997 there were seventeen thousand Medicare/Medicaid certified nursing homes in the United States, representing some 1.8 million beds. A full explanation of the variation in nursing home care is beyond the scope of this entry. Dozens of books are available on how to choose a nursing home, what to look for in a visit to potential residence, and the current rules concerning public payments for nursing home care (through the Medicaid program). Good places to start are the articles on nursing homes in this volume and in the Encyclopedia of Financial Gerontology. Both general information and consumer choice guides are presented on the Medicare Web site and on the Web sites (included in the bibliography) of the American Association of Homes and Services for the Aging and the American Health Care Association, whose members include nonprofit and for-profit nursing homes, respectively.

The important financial issue to note at this point is the substantial cost of long-term care in nursing homes. In addition to the residential and personal care provided, as in assisted living facilities, by their very nature nursing homes provide much more intense, higher-level health and medical services to their residents. Nursing homes are licensed by state government agencies, and certified by the Centers for Medicare and Medicaid Services (CMS) to receive Medicare and Medicaid payments. These licenses and certifications determine the medical services that must be present in the nursing home, as well as the staff and licensing requirements for various levels of professional nurses, medical doctors in residence or on call, other health practitioners, and a variety of other health, hospital-like, and protective services.

All of these services are costly, so the monthly cost for nursing home care is substantially greater than for home care or assisted living. Federally collected data show that in 1995 the cost of care in the average nursing home was $127 per day, or over $46,000 per year. It is also important to note that nursing home costs vary substantially from state to state and from city to rural areas within states, including costs of $200 per day in some parts of the country. Clearly, in evaluating the financial dimensions of long-term care planning, average numbers are only vague guides, and consumers should identify the most recent nursing home costs for the specific geographical area that is likely to be chosen.

Financial planning to pay for long-term care expenses

Although the numbers are different, the process of financial planning for long-term care is essentially the same as other financial planning for retirement and older age. At base, financial planning is an exercise (or series of exercises) that compares known and estimated information about various expenses with estimates of the financial resources that are available or expected to be available to cover those expenses. The previous paragraphs focused on the costs-expenditures side of the equation, identifying some of the choices and variables involved in estimating the future costs of home care, assisted living, and nursing homes. It cannot be overemphasized, however, that the costs of all long-term care services and facilities vary and change from year to year, from place to place, and in response to the level of an older person's physical and mental health status. Consequently, all financial planning for long-term care must be continuously re-examined in light of these changing (i.e., increasing) financial costs.

In one sense financial planning for long-term care is relatively easy for people who are already engaged in retirement financial planning. Information for the input side of the equation is already at hand: income from Social Security, employee pensions, continued full-time or part-time employment, other forms of savings and investments, home equity, and possible inheritances are already identified and estimated.

The expenditures or output side of the equation has also been somewhat identified as part of the larger financial planning process, including such items as children's or grandchildren's college education or other kinds of family support, future household expenses, taxes, debt reduction, payment for health insurance above and beyond Medicare, travel and recreation, and bequests.

In other words, the only task at issue is to add in the estimated costs of long-term care. In this context the previous discussion of home care, assisted living, and nursing homes should be of value. Each type of long-term care has its own set of choices, characteristics, and costs. Since the process of financial planning includes the development of alternative scenarios, with alternative estimates of both income and expenditures, long-term care financial planning should consider the desirability, likelihood, and costs of alternative kinds of long-term care.

Personal choices and values. All of the financial options that are examined as part of the alternative long-term care planning scenarios also should be evaluated in terms of nonfinancial personal values. This is especially critical when a middle-age child is involved in long-term care planning with, or for, an elderly parent. The following are just some of the values questions that should be part of the overall long-term care financial planning process. It should be emphasized that since the answers to some of these questions will likely change as the elder (parent or self) becomes less healthy, updated answers should be included as part of the continuing financial planning process.

• Where does the older person want to live? In the same neighborhood as now? Where he or she lived as a young person or was born? Near a child or sibling? Near a current doctor? In the same neighborhood as church or synagogue? In a warmer climate?
• How realistic is it that family and friends can provide some or most of the personal and residential care likely to be needed?
• How devastating would it be if the older person had to leave the house or apartment that is now home? Is the older person willing to sell the house? If able to stay in the house, is he or she willing to apply for a "reverse mortgage," converting home equity to cash in order to pay for home care services, even though this means "going back into debt" as well as spending the equity that might have been bequeathed to children?
• More generally, how important is it to not spend money so as to leave a bequest to family and friends, or to a charity or religious congregation?
• To what extent is the older person willing to rely on public programs usually reserved for people with low income to subsidize his or her long-term care costs?

Overall, because long-term care is a component (albeit a potentially costly future component) of later life expenditures, it should be included in a family's general financial retirement plan. Even though some elements of the planning process, such as future costs and future probability of needing long-term care, are not easily calculated—or perhaps because they are not easily calculated—alternative scenarios that include a comprehensive range of long-term care decisions alongside financial and nonfinancial choices should be part of the overall financial planning process.

At the same time, financial literacy in the realm of aging, health, and long-term care is an important element of long-term care planning. It is especially important to understand that "usual" sources of health care finance are not available to pay for long-term care. For example, Medicare does not pay for chronic care in nursing homes. But because Medicare does pay for short-term, posthospitalization rehabilitative care (which can, and often does, take place in a nursing home), the American public continues to believe, incorrectly, that Medicare pays for long-term nursing home care. Similarly, family health insurance, Medigap insurance policies, and HMO health coverage typically do not pay for long-term chronic care. Physician services and medical procedures can continue to be received by older people who live in long-term care facilities and pay for them by Medicare, Medigap, and health insurance; such health insurance does not, however, pay for the residential and personal care that are the hallmark of long-term care. This is clearly a case of "what you don't know can hurt you."

Additional information. The bibliography at the end of this entry provides a fairly broad range of focused long-term care resources, including both general long-term care financial educational and background information, as well as checklists and interactive financial calculators for "testing" alternative financial planning scenarios. In addition, several aspects of long-term care financial planning are discussed elsewhere this volume.

Medicaid is a federal program administered under state auspices and regulations that provides health insurance for people who are low income or medically indigent. These health services include long-term care for those who are eligible for Medicaid coverage. Medicaid has become the single largest payer of nursing home bills in the country.

All families are familiar with life insurance, home (fire) insurance, and automobile insurance. In recent years, insurance policies have also become available to pay for some or all the costs of future long-term care. Many people resist long-term care insurance because they question whether they will ever really need it (they might stay healthy forever, or they might die before needing long-term care). Yet fire and auto insurance are purchased with the expectation and hope that they will never have to be called upon. A complete long-term care financial planning process should at least consider the characteristics and costs of such insurance.

Finally, there are several more general considerations that are connected to the financial planning for long-term care, including compiling up-to-date files of all financial and health records; and having a current will or other estate planning processes and documents; and having a health care power of attorney and living will to express preferences for end-of-life treatment.

Neal E. Cutler

See also Assisted Living; Continuing Care Retirement Communities; Home Care and Home Services; Long-Term Care Insurance; Medicaid; Medicare; Nursing Homes; Retirement Planning.

BIBLIOGRAPHY

Cutler, N. E. Advising Mature Clients: The New Science of Wealth Span Planning. New York: John Wiley and Sons, 2002.

Cutler, N. E. "Divine Benefit vs. Divine Contribution Pensions: Approaches to Monitoring Improvements in American Retirement Income Security over the Next Decade." Journal of Applied Gerontology 20 (December 2001): 480–557.

Cutler, N. E. "The False Alarms and Blaring Sirens of Financial Literacy: Middle-Agers' Knowledge of Retirement Income, Health Finance, and Long-Term Care." Generations 21 (Summer 1997): 34–40.

Cutler, N. E. "Geriatric Assisted Living: When Mom and Dad Can't Live Alone Anymore." Journal of the American Society of CLU & ChFC 50 (March 1996): 29–33.

Cutler, N. E. "Money, Health, and Aging Consumers: Ongoing Challenges and New Opportunities for Financial Planning." Journal of Financial Services Professionals 55 (March 2001): 52–59.

Cutler, N. E. "Retirement Planning and the Cost of Long-Term Care: Battling the Fear of the Unknown." Journal of the American Society of CLU & ChFC 50 (November 1996): 42–48.

Gregg, D. W. "Human Wealth Span: The Financial Dimensions of Successful Aging." In Aging, Money, and Life Satisfaction: Aspects of Financial Gerontology. Edited by Neal E. Cutler, Davis W. Gregg, and Powell M. Lawton. New York: Springer, 1992. Pages 169–182.

Higgins, D. P. "Continuing Care Retirement Communities." In Encyclopedia of Financial Gerontology. Lois A. Vitt and Jurg K. Siegenthaler. Westport, Conn.: Greenwood Press, 1995. Pages 90–94.

National Council on the Aging. American Perceptions of Aging in the 21st Century. Washington, D.C.: National Council on the Aging, 2002.

Phillips, C. D., and Hawes, C. "Nursing Homes." In Encyclopedia of Financial Gerontology. Edited by Lois A. Vitt and Jurg K. Siegenthaler. Westport, Conn.: Greenwood Press, 1995. Pages 385–390.

Regnier, V. A. Assisted Living Housing for the Elderly: Design Innovations from the United States and Europe. New York: Van Nostrand Reinhold, 1994.

Regnier, V. A. Design for Assisted Living: Guidelines for Housing the Physically and Mentally Frail. New York: John Wiley and Sons, 2002.

Romaine-Davis, A.; Boondas, J.; and Lenihan, A. Encyclopedia of Home Care for the Elderly. Westport, Conn.: Greenwood Press, 1995.

Susik, H. Hiring Home Caregivers: The Family Guide to In-Home Eldercare. San Luis Obispo, Calif.: Impact Publishers, 1995.

Uhlenberg, P. I. "Mortality Decline over the Twentieth Century and Supply of Kin over the Life Course." The Gerontologist 36 (1996): 681–85.

United Seniors Health Council. Private Long-Term Care Insurance: To Buy or Not to Buy? Washington, D.C.: USHC, 2001.

U.S. Bureau of the Census. 65+ in the United States. Current Population Reports, Special Studies, P-23-190. Washington, D.C.: U.S. Government Printing Office, 1996. Figure 3-2.

INTERNET RESOURCES—GENERAL

www.aoa.gov U.S. Administration on Aging, links to all federal programs involving long-term care, and to virtually every national organization involving aging and older Americans.

www.medicare.gov The U.S. Centers for Medicare and Medicaid Services (CMS) Official Medicare Website includes "Nursing Home Compare" online.

www.nlm.nih.gov/medlineplus Free public access to NIH Medline health databases.

www.ElderWeb.com Links to thousands of aging sites, with good organization subsets, including a Living Arrangements section (assisted living, nursing homes) and Financial Planning and Legal Affairs sections.

INTERNET RESOURCES—LONG-TERM CARE PROVIDERS, ANALYSIS, AND INFORMATION

www.UnitedSeniorsHealth.org United Seniors Health Council, excellent nonprofit long-term care educational and counseling organization.

www.nahc.org National Association for Home Care.

www.vnaa.org Visiting Nurses Associations of America.

www.ALFA.org Assisted Living Federation of America.

www.ccal.org Consumer Consortium on Assisted Living.

www.ahca.org American Health Care Association (for-profit nursing homes).

www.aahsa.org American Association of Homes and Services for the Aging (nonprofit nursing home organization).

INTERNET RESOURCES—FINANCIAL AND LEGAL INFORMATION

www.naela.org National Academy of Elderlaw Attorneys.

www.aicpa.org/assurance American Institute of CPAs' new elder assurance specialists.

www.usatoday.com/money and www.quicken.com/retirement/planning These two sites include a number of interactive calculators to examine retirement savings, investments, insurance, college tuition planning, and related topics, along with comprehensive discussions of inflation, wills and trusts, taking care of parents, and related topics on financial planning for retirement and later life