Should we care about Long Term Care?

What is Long Term Care (LTC)?

LTC is the provision of care for someone who no longer is able or wishes to live independently. This care can be provided and absorbed by the family within the home or may require leaving the home for a separate facility. In some instances retirement, assisted living and LTC can be offered within the same residence. Our discussion will focus on the cost of LTC outside the family home in a private facility.

The insurance industry, about more of which below, requires a more detailed definition of LTC to determine when benefits are payable. Most insurance plans require that at least two activities of daily living cannot be performed without substantial help to qualify for benefits.

Activities of Daily Living:

• Bathing
• Dressing
• Toileting
• Transferring (e.g. moving from a chair or out of a bed)
• Continence (controlling both bladder or bowel functions)
• Eating.

In addition, LTC benefits can be paid if cognitive impairment is sufficiently severe that continual supervision is required to protect the individual.

Long Term Care in Canada

Key facts about LTC facilities and their residents in Canada:

• 85% of LTC residents require extensive help with getting out of bed, eating or toileting
• 90% have some form of cognitive impairment
• 46% exhibit some level of aggressive behaviour related to cognitive impairment or mental health condition
•  The average wait for placement in a LTC home is 161 days
• The wait list for beds is 33,080 and is growing at approximately 15% a year²
• 70% of LTC residents are female.

Plainly, LTC homes provide care at a vulnerable period in our lives. If required, it would be natural to feel that our loved ones or ourselves are going to get the best care possible. The cost of care is our next consideration.

The cost of Long Term Care

The annual cost of LTC in a private facility in Ontario falls in the range $40,000 -$100,000 and is not subsidized by the government. Government run, or subsidized, nursing homes are a lower cost alternative and private care in the home can be a more expensive option than a private LTC residence.

The duration of LTC is a major source of uncertainty when trying to estimate future costs: while two thirds of LTC beds are needed for less than two years, a small fraction are required for more than five years. The average stay in a LTC facility is about 18 months so, for most of us, there is nothing long term about LTC, especially if placement periods continue to grow. Those of us who live the longest are more likely to need LTC. In one US study³, the impact of LTC costs was zero for two thirds of cases but $600,000 in one in twenty cases. It is the small probability event that is potentially financially ruinous that may be of most concern. Typically we look to insurance to provide protection against these types of risks.

Long Term Care Insurance

LTC insurance is not very popular in Canada, with less than 1% of Canadians holding LTC insurance policies.⁴ This is not unusual; across the OECD less than 2% of TC expenditure is financed through private insurance. Both RBC and Manulife have withdrawn from the Canadian LTC insurance market⁵.

Some of challenges with LTC insurance are:

• Coverage is subject to strict underwriting conditions. Asthma and sleep apnea are just two conditions that would preclude coverage. By age 61 only half of applicants meet the underwriting conditions.
• Premiums are higher the later you start and can be increased by the insurer after 5 years. If you stop paying the premium you lose both your coverage and the premiums paid.
• Benefits are usually paid out based on the loss of two of the ADLs discussed above. This can be a subjective assessment made by an insurance company representative.
• Even after the claim is approved there is typically a waiting period of 90 days before benefits start.
• Coverage is limited to 2-5 years, so the most worrying case of extended LTC may only be partially covered.

The problems with LTC insurance are clear:

• when you need the coverage (or are prompted to think about it by the experience of an elderly parent or relative) you can’t afford the premium, or you are ineligible
• Your coverage may not cover the very situation you are most worried about.

Self-insuring for Long Term Care

In the table below we provide estimates of the key variables that impact the cost of LTC, based on actuarial data⁶.

Source: as cited, plus PWL Capital calculations

We describe each column in turn:

(A)   Is the age group.

(B)   Is the probability that someone in the age group will need LTC for the first time. We used the data for females. Males typically have a lower probability as they have a higher mortality.

(C)   Rather than use the average LTC stay (18 months) we use a much more conservative estimate. Only 10% of LTC residents stay longer than the value specified.

(D)   The net cost is the average cost ($80,000) of LTC in today’s dollars, less an estimate ($30,000) for the costs saved (meals, housing) by being in the LTC resident. These costs vary according to individual circumstances.  Costs are in current dollars.

(E)    Total expected cost = B x C x D.

(F)    Total Cost, assuming LTC is required = C x D.

We can see that the probability of needing LTC increase rapidly with age. Fewer than 1 in 100 people will need LTC in the age range 65-74, for example. The length of stay decreases with age because of increasing mortality, and a higher portion of residents having a short-term prognosis. A high probability of needing LTC is associated with a low duration of care, and this limits the rise in the Total Expected Cost (E).

Your attitude to risk will determine whether you focus on column E or F. Some readers will feel that small probability events are not worth worrying about, irrespective of cost. Others will prefer to manage their affairs s if LTC is a certainty and to be financially prepared for that eventuality. Those readers should focus on the last column. Potential costs in excess of $200,000 are certainly material for most

retirees. Fortunately, most retirees funding private LTC have equity in their house upon retirement, so the house can be a contingent asset. For a retired couple, there is the possibility that one person requires LTC while the other is still living at home which would prohibit a sale of the home and require either a loan or reverse mortgage. Vettese⁷, in a comprehensive look at LTC, suggests that this situation persists for a long period in only 3% of cases.

Our discussion has been on private LTC, and is one of most expensive options, second only to private nursing in your own home. For many, focusing effort on an enjoyable healthy lifestyle in retirement may be the most appealing risk mitigation strategy. In conversations with clients, a realistic assessment of the costs and the probability of incurring those costs, coupled with a discussion of their attitudes to risks in retirement seems the best way of reaching an informed decision.

¹ Society of Actuaries, “Long-Term Care Experience,” Study Report 6, 1984-2008 (June 2011)
² https://www.oltca.com/OLTCA/Documents/OLTCA_LTC101_May2018.pdf

³ Vickie Bajtelsmit and Anna Rappaport, “The Impact of Long-Term Care Cost on Retirement Wealth Needs,”Society of Actuaries, 2014
⁴ https://evidencenetwork.ca/the-real-costs-of-long-term-care-for-canada/
⁵ https://insurance-journal.ca/article/manulife-exits-the-long-term-care-insurance-market/
⁶ Society of Actuaries, “Long-Term Care Experience,” Study Report 6, 1984-2008 (June 2011)
⁷ Fred Vettese, “The Essential Retirement Guide: a Contrarian’s Perspective”, 2016