Long Term Care Insurance: Long Term Care Costs & Economics

Long Term Care Insurance: Long Term Care Costs & Economics

A new report from Genworth (via NY Times) reports that Long Term Care costs are rising, but with a bit of a twist.  There’s an emerging disparity between the growth rate in facility care costs and the growth rate in home health care costs.  The report cites much higher growth rates in costs for LTC administered in facilities, while at-home care has seen only modest growth of about one percent over the past five years.

The Economic Realities of the 2000s

Looking all the way back to the late 90s and the dot-com bust of 2000, the economy has had a storied decade on bust, boom, and bust. The idea of a “company job” with pension, security, and long-term loyalty has been all but thrown out the window, pushing more and more people into small businesses, entrepreneurial endeavors, and even temporary jobs in fields like home health care.  This wave of competition for Home Care jobs and formation of new Home Care agencies has helped put the brakes on cost growth.

While it’s relatively easy to start a home health agency and hit the streets with a marketing plan, opening a Long Term Care facility such as a nursing home or assisted living facility can have much higher barriers to entry.  Many nursing homes are owned by large corporations or REITs that specialize in Long Term Care facilities.  With fewer direct competitors in the market, there’s been a larger spike in Long Term Care prices for facilities.

Will The Baby Boomers Change Everything One More Time?

A wave of future potential customers for nursing homes is coming, and it’s called the Baby Boomer generation.  Smart planning is being done right now to devise ways to accomodate this demand and profit from the inevitable demographic shift that the US will see.  The number of new customers will be unprecedented on the demand side, but what will happen on the supply side?  While we’ve seen growth in home health agencies over the past ten years, we predict the next ten years will add growth in facilities catering to LTC patients, from Assisted Living to Nursing to Continuing Care.

Entry of new participants to the market should help put a cap on the growth in costs related to Long Term Care administered at facilities.  While facilities will grow, there will be little slow down in the growth rate of home health agencies.  After all, 75% of Long Term Care Insurance claims start at home.

Inflation Protection

All of this is relavent if you’re shopping for Long Term Care Insurance.  One of the largest decisions you face as a shopper revolves around your choices for inflation protection.  In a nutshell, inflation protection grows your benefit as time goes on, generally at a fixed rate of 3%, 4%, or 5% compounded.  A policy that pays $4,000/mo today will grow to $7,203 using a 4% increase over fifteen years, according to the Compound Interest Calculator from MoneyChimp.

If you’re deciding what level of inflation protection to buy on your Long Term Care Insurance policy, consider the dynamics of the free enterprise system and how they may affect you going forward.  After all, the next twenty years will look nothing like the past twenty years.

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