Americans are having a hard enough time saving money for an adequate retirement, but there is one omission—and it’s a major one—that many are making in planning for their golden years. It’s all about long-term medical care, and fewer and fewer American consumers are making room for it in their retirement budgets.
That’s a problem, given the rising cost of long-term care.
According to the Genworth 2012 Cost of Care Study, the cost of long-term medical care has risen significantly over the past five years.
“For example, in 2007 [the] median annual rate for a private nursing home room was $65,700, compared with the 2012 median annual rate of $81,030,” says Robert Cardona LTC Ins. Solutions Inc. “This means that Americans can expect to pay approximately $15,330 more per year today for a nursing home than they had to pay in 2007.”
As the Genworth Survey points out, most people don’t realize that private health insurance does not cover long-term care costs. From the study:
“They usually only cover expenses relating to an illness or injury, and that's only for hospital visits, doctor visits, and prescriptions. Even the most comprehensive private health insurances won't pay for assistance with daily activities. The only private insurance available that offers coverage for such activities is a long term care policy.
Another common misconception is that long term care insurance and disability insurance are the same thing. This is not true. Disability insurance only replaces income when someone gets hurt or ill, but LTC insurance covers home care, assisted living, or nursing home expenses.”
A 2012 study from Fidelity Investments says that a 65-year-old couple retiring in 2012 will pay $240,000 for health care costs in retirement, a 6% rise over 2011, and a number that Fidelity expects to rise significantly over the next decade.
“Today’s workers must understand that the cost of health care is expected to continue rising significantly in future years,” said Brad Kimler, Executive Vice President of Fidelity’s Benefits Consulting business.
“Medical inflation is outpacing salary increases and cost-of-living adjustments for many people. Until that situation changes, it is critical that individuals include healthcare costs in their retirement savings strategies today so they can be prepared to pay their medical bills throughout retirement,” Kimler said.
Then there’s a study from Nationwide Financial that states that Americans nearing retirement age "routinely and wildly" overestimated the amount of healthcare costs covered by Medicare. In fact, Medicare covers 51% of health care services, says the Employee Benefit Research Institute (ERBI).
As Robert L. Reynolds, President and Chief Executive of Putnam Investments, puts it: "It makes no sense at all to talk about retirement savings or lifetime replacement income without talking about healthcare expenses."
What Is Long-Term Care?
Narrowly defined, long-term care services are medical and/or social services meant to aid seniors dealing with disabilities or chronic care needs. The U.S. Department of Health and Human Services says these “services may be short- or long-term and may be provided in a person’s home, in the community, or in residential facilities such as nursing homes or assisted living facilities.” The agency also notes that residential care is far and away the largest long-term, care-related expenditure.
Average Annual Costs of Long-Term Care
So how much do Americans actually pay for long-term medical care? What options do consumers have in paying for long-term care, and are they viable options?
According to Genworth, the 2012 national average cost by care type is as follows:
|Care Type||Annual Cost||5-Year Growth Rate|
|Home Health Aide||$43,472||1.09%|
|Adult Day Care||$15,860||N/A|
|Assisted Living (One-Bedroom)||$39,600||5.71%|
|Nursing Home (Private Room)||$81,030||4.28%|
- The national average monthly base rate in an assisted living community rose 5.6% from $3,293 in 2010 to $3,477 in 2011.
- The national average daily rate for adult day services rose 4.5% from $67 in 2010 to $70 in 2011.
- The national average hourly rates for home health aides ($21) and homemakers ($19) were unchanged from 2010.
Comparably, the MetLife study, the Genworth study and a separate report, this one from Keiro, lays out the average costs for long-term care as follows:
|Care Type||MetLife (2011)||Genworth (2012)||Keiro (2012)|
Nursing Home -
|$214/day||$200/day||$200/day $220/day for Special Care Unit|
Assisted Living -
Includes additional charges
Assisted Living -
|See above||Not available||$200 for medication management|
Sources of Long-Term Care Coverage
By and large, Americans are on their own in paying for long-term care coverage. The federal government, through payroll wage taxes, does offer some financial remedies to help cover the costs of long-term care, including:
Medicare and Medicaid
Seniors who have limited financial resources and meet strict eligibility limits can use Medicare to cover the complete costs of long-term care. But it’s more likely that Medicare will cover partial costs of up to 50%, as the EBRI study indicates.
According to Medicare.gov, Medicaid is a state and federal government program that pays for certain health services and nursing home care for older people with low incomes and limited assets. In most states, Medicaid also pays for some long-term care services at home and in the community. Who is eligible and what services are covered vary from state to state. Most often, eligibility is based on your income and personal resources.
According to government figures, about 49% of all U.S. long-term care costs are paid by Medicaid. Another 20% is paid by Medicare.
Older Americans Act (OAA)
The OAA is a federal program that assists needy U.S. seniors pay for long-term care services. According to LongTermCare.gov, the OAA “provides federal funds to pay for home- and community-based long-term care services for older adults, generally 60 and older, and their families. The focus of these programs is to help older adults remain in the community as independently as possible.”
With the Older Americans Act, long-term care services are provided through state and local agency networks known as the Aging Network. Those services include:
- Nutrition programs such as home-delivered meals for the homebound elderly or meals served in community settings
- Transportation services
- Health promotion services to help prevent disease or manage chronic illnesses
- Personal care assistance and help with household chores and shopping
- Legal assistance and services that protect the rights of older persons such as the long-term care ombudsman program
- Family caregiver services and supports including time off from their responsibility, called respite care
According to language in the OAA, there is “no specific financial eligibility criteria for Older Americans Act services, they are generally targeted for low-income, frail seniors over age 60, minority older adults, and seniors living in rural areas.”
There are two types of long-term care insurance: regular long-term care insurance and limited long-term care insurance. Both offer fixed rates of asset accumulation, and both come with eligibility requirements (determined by the insurer). Payment-wise, regular long-term care insurance costs are paid via ongoing monthly insurance payments (of about $100-$150 per month for decent coverage), while limited insurance coverage is paid via short-term monthly insurance premiums.
Many healthcare consumers turn to family for long-term care financing or for help with actual home-based medical care. Note that even a loving family member likely does not have the professional training that most medical care practitioners possess.
If you are 62-years-old or older, a reverse mortgage can help pay for long-term medical care services. In essence, a reverse mortgage gradually turns equity in a home into cash that the homeowner can use to pay for long-term care (among other things). Those cash reimbursements are tax-free and the loan does not have to be paid until the homeowner moves or passes away.
Seniors can also use the proceeds from an annuity, the sale of a home, or assets built up in a retirement, bank or brokerage to pay for long-term care costs. Also, military veterans can obtain financial help through the U.S. Veterans Administration.
More Information on the Costs of Long-Term Care
For more in-depth information about the costs of long-term care in the United States, check out the following articles:
- Alzheimer’s Care Costs
- Assisted Living Cost
- Continuing Care Costs Overview
- CCRC Costs: How Much Will You Pay?
- Home Care Costs
- Paying for Nursing Home Care
- Retirement Living Cost
Written by senior finance writer Brian O’Connell.