Uncle Sam's unseen health care plan

If you're in the market for long-term-care insurance, take a look at what the government will offer soon. But should you wait for it or buy other coverage now?

[Related content: insurance, health insurance, long term care, insurance rates, Liz Pulliam Weston]

By Liz Pulliam Weston
MSN Money

Tucked inside the health care reform law is a new, little-noticed federal program that could revolutionize long-term-care insurance in the U.S., providing coverage for millions of people who don't have it and easing the strain on unpaid family caregivers.

What does long-term care cost?

It could do that. Or it could be a complete disaster.

First, some background on long-term care, which is the aid provided to people who can't perform some or all of the daily functions of life, such as eating, bathing, dressing or using a toilet:

Most of the 10 million people (.pdf file) who need long-term care in the U.S. are older than 65.

The median income for households headed by people 65 to 74 is $39,000, according to the Federal Reserve. For households headed by people 75 or older, median income drops to $22,800.Health care reform and your retirement

A year in a nursing home costs $72,270 for a semiprivate room, according to the MetLife Mature Market Institute. Help at home costs an average of $21 an hour, so a full-time caregiver would cost $43,680. If a person needed around-the-clock care, you could triple that figure.

These costs typically aren't covered by Medicare, the government health plan for people 65 and older. (Long-term-care costs can be covered by Medicaid, the government health plan for the poor, but usually only after the person's savings have been exhausted.)

You see the problem: The costs of long-term care can be catastrophic, quickly depleting a family's savings. If a disabled person is lucky enough to have a family member to help, there's still a hefty price to be paid. Many family caregivers see substantial drops in income because they work fewer hours or even quit their jobs to look after someone.

A disastrous start

Insurance would seem to be the answer, but the history of the private long-term-care insurance market has been troubling, to say the least. It's a relatively new product, launched in the 1980s, and many insurers initially priced their policies too low. That led to insolvencies and dramatic premium increases. Some people who paid into their policies for years saw their premiums double or even triple, making the coverage unaffordable just as they were most likely to need it.

Furthermore, most private policies won't pay if the care is provided by a family member. Plus there's no such thing as a standardized policy, and varying exclusions, definitions of disability, waiting periods and payout limits make it a confusing product to buy.

So it's not surprising that only about 8 million long-term-care policies are currently in force in the U.S. or that the federal government winds up paying about 60% of long-term-care costs, largely through Medicaid.

Enter the Community Living Assistance Services and Supports (CLASS) Act. CLASS, which was part of the health care reform bill signed into law in March, would provide at least $50 a day for people who needed help with custodial care. The program is required to pay for itself over 75 years; no taxpayer subsidies are allowed.

Have some CLASS

Here's how it will work when it launches in 2013:

Workers will have as-yet-undetermined premiums deducted from their paychecks if their employers choose to enroll in the plan. These employees could opt out of the program if they chose.

If an employer decided not to participate, workers could sign up and contribute on their own. The self-employed and military personnel will also be allowed to participate.

Premiums can be based on age but not health.

Workers will have to pay premiums for five years before becoming eligible for benefits. They will have to be employed for at least three of those years, although they can continue to contribute after leaving their jobs.

By law, caregivers who are family members can't be excluded from payments. That means a spouse, child or other relative who provides care at home can be compensated for it.

There's no provision for coverage for people who are not employed; that was intended to keep people who are already disabled from overwhelming the system. But the disabled who can run their own small businesses could contribute, which could increase the program's costs. Low participation among workers also could doom the program.

"That's a concern everyone has," said Bonnie Burns, a long-term-care insurance expert for California Health Advocates who has written about CLASS. "There can't be any taxpayer funds, and it has to be financially stable."

If healthy people opted out and only at-risk people participated, the program could descend into a "death spiral" in which premiums had to be jacked up to ultimately unaffordable levels.

Buy your own -- or trust the government?

At this point, too much of the program is unknown to determine whether it will be a boon or a bust. If premiums are low enough, the program could offer cheap insurance against catastrophic risk for millions of workers. If the program fails to pay for itself, though, participants risk paying into a system for years with no guarantee the benefit will be there if they need it.

If you're under 40, you're probably not in the market yet for long-term-care insurance and may want to see how CLASS plays out. If you're much older, though, you shouldn't wait to get insurance if you need it -- and you can afford it.

Premiums for coverage are lower the earlier you buy, Burns noted, and you can reduce your non-CLASS coverage later if CLASS proves to be a success. (The average premium for someone who's 50 is about $1,700 annually, compared with $5,700 for someone who starts coverage at 70.)

What you need to know:

Check it out before you decide. The rule of thumb is that unless you're poor or rich, you should at least consider buying long-term-care insurance. (People who don't have much will likely be covered by Medicaid, while people with assets of $2 million and up can probably pay for care on their own, although they may opt to buy long-term-care insurance anyway, to preserve assets for a spouse or other heirs.)

Don't go for the cheapest option. A policy that's significantly cheaper than others either skimps on coverage or is at risk for big premium hikes later, Burns said.

Be prepared to carry some of the costs. A policy that covers all of your long-term-care costs without limits is likely to be prohibitively expensive. You can make the premiums more manageable by agreeing to longer waiting periods, lower daily payments or a limited payout period. Most nursing home stays are two years or less, for example, so you're unlikely to exhaust the benefits if you opt for a three-year plan.

But get the inflation protection. Don't agree to a policy that doesn't increase your benefit over time to match rising costs, Burns said. Remember, you may not use the benefits for decades, and a payout that seems adequate today could fall woefully short in 2030.

Make sure you can afford the premiums now and in the future. The idea with buying long-term-care insurance early is that you "lock in" a low premium -- insurers can't raise your rate as you get older or if your health deteriorates. But insurers can and likely will raise rates for whole classes of customers if it turns out they haven't adequately estimated future costs, Burns said. If your premium is barely affordable now, a single rate increase could force you to drop it, so you would have paid in a lot of money only to ultimately lose coverage.

Get second and third opinions before you buy. Ask competing agents to offer you policies, then carefully read each one and ask questions to clarify anything you don't understand. Take the policies to a neutral third party, such as a financial planner or an elder-law attorney with experience in long-term-care insurance, to get yet another opinion. "This is not a product that you can change, like homeowners or auto insurance," Burns said. "It's a contract for both you and the company, and it could be decades before you find out whether you made a good decision."

Comment

This sounds like a good program, but is hard to envision at this point in time. If it comes down to looking ten years down the road or eating ten days down the road, the choice is obvious.