fair premium for standard risks, the better risks or those unable to
afford the premiums drop out, leaving only the poorer risks. The
reduced premium base requires higher premiums from a smaller
number of people to cover the costs of the poor risks, which leads
to further rate increases, less participation, etc.
In private-sector insurance, the solution is to charge higher
rates to those who have been identified by underwriting as likely to
end up with higher claims. For long-term care insurance, it is also
desirable to charge higher premiums to women and to the elderly.
The reasons are obvious. But Boston College’s Gleckman reports
that while an estimated 39 percent of 60- to 64-year-olds could
afford long-term care coverage, that number falls to 27 percent
of 65- to 69-year-olds, and just 17 percent of 70- to 74-year-olds.
In addition, charging higher premiums to those needing the
coverage because of existing health conditions or on account of
gender or advanced age would be
considered unacceptable in some
countries. And even if such practices were acceptable, they could
be expected (with the exception
of setting rates based on gender)
to result in a premium and participation spiral.
In analyzing CLASS Act provisions in the wake of the passage
of health care reform, researchers Biff Jones and Joseph Barnett
of the National Center for Policy Analysis concluded that the
only way to get healthy people to participate in a program that
overcharges them so as to subsidize the less healthy is to make
the program mandatory. Voluntary insurance, Jones and Barnett argue, is not the answer.
leaving the remaining insurers to assume insurance for the exiting
company’s policies. Again, some insurers will get a disproportionate share of substandard risks, and the pattern will repeat.
In a country the size of the United States, with a large number of insurers and the potential for foreign insurers to enter
the market, it may take some time before it becomes apparent
that mandatory private insurance, at uniform premium rates
and without government involvement, is not viable.
One solution is for the government to provide insurance to
all risks the private insurers are not prepared to accept and
then allocate the cost back to insurers on a proportionate basis.
In addition, there are many different types of social insurance
arrangements that could be used to finance long-term care
insurance. These include general revenues, specific social insurance premiums, and means testing.
Two other observations are in
order. First, surveys of people in
many countries regularly report
that respondents believe the cost
of long-term care should be shared
by the state and the individual. I
emphasize the state component of
financing but recognize that individuals, with the exception of the
extremely poor, should be expected to contribute to their long-term
care expenses. Second, I believe that
long-term care insurance should be viewed as a form of social insurance from an insurance perspective. But it is also possible to
argue for that distinction on the basis of uncertainty, inequalities,
lack of information, or emotional and relationship dimensions.
Because long-term care most
benefits the elderly, there are
questions of intergenerational
fairness. Each country must
decide how much of its tax
revenues it is willing to spend
on its older citizens.
I believe that mandatory insurance will address the coverage
issue. But will private insurers be able to deliver mandatory
long-term care insurance without some form of government
Within the entire population there are certain to be some substandard risks that will incur significantly more in claims costs
than the average insured person. In a mandatory program, the
premiums charged in aggregate very likely will be limited to the
amount of the aggregate incurred claims and some allowance for
expenses. If not, there will be public pressure to reduce the premium rates. Given this potential limitation on total premiums,
the problem for insurance providers will be to get an affordable
mix of standard and substandard risks. Because of the mandatory
nature of the insurance, some insurers inevitably will get a disproportionate share of substandard risks that will make the insurance
unprofitable. At some point, those insurers will exit the market,
What any country will decide is affordable is difficult to predict
and may change over time. It is affected by the social, cultural,
political, and economic traditions, as well as a country’s history.
It also is affected by the other conflicting demands on a country’s
finances. The costs for pensions and health care are projected
to increase more, as a percentage of gross domestic product,
than the costs for long-term care. Because long-term care—and
a significant amount of other health care expenditures—most
benefits the elderly, there are questions of intergenerational fairness. Each country must decide how much of its tax revenues it
is willing to spend on its older citizens.
DOUG ANDREWS, a fellow of the Society of Actuaries,
the Canadian institute of Actuaries, and of the institute and
Faculty of Actuaries, is a senior lecturer at the University of
Southampton’s School of Mathematics in Southampton, england.