The long-term care financing problem
The long-term care financing problem
Abstract and Keywords
Every developed nation aims to provide assistance to people with long-term care (LTC) needs; motivations for supporting such programs combine a recognition of how vulnerable they are with a strong sense of social obligation, particularly toward the older people who comprise the majority of LTC recipients. And yet, the increasing number of people living to older and older ages, along with advances in medicine that ensure that even those with profound impairments live long lives, creates increasing pressure on LTC systems and the funding that supports them. This chapter looks at how states are adapting to the reality of increasing need and rising costs.
Keywords: long term care, oecd, public expenditures, social services programs, ageing tsunami, compulsory long term care insurance, societal risk, demographic pressures, individual responsibility, social welfare
Every developed nation aims to provide assistance to people with long-term care (LTC) needs. Motivations for supporting such programmes combine recognition of how vulnerable they are with a strong sense of social obligation, particularly towards the older people who comprise the majority of LTC recipients. And yet, the increasing number of people living to older and older ages, along with advances in medicine that ensure that even those with profound impairments live long lives, creates increasing pressure on LTC systems and the funding that supports them. On average across the OECD, it is expected that public LTC expenditures will increase, as a proportion of GDP, from 0.8 per cent in 2010 to 1.6 per cent in 2060 (de la Maisonneuve and Martins, 2013). In conjunction with the more widely recognised crisis in the funding of health services and retirement savings, the growing expense of LTC places pressure on public budgets and reduces funding available for other government services – in some cases, exacerbating political and intergenerational tensions.
Funding arrangements are obviously key to all aspects of performance of LTC systems. This is so not just because of their direct impact on the sharing of the financial burden of care between the state and individuals, but also because by changing the ‘price’ of care faced by service recipients (and often their family) at the point of use, they lead to changes in the patterns of consumption of formal care, therefore affecting the balance between informal and formal care and levels of unmet need.
It is therefore not surprising that many of the most significant LTC reforms in recent years have implied changes in the design of national funding systems. In many instances, funding arrangements have been used to determine directly the care package that is offered by the state. In entitlement systems, in particular, algorithms are used to define the levels of resources available to individuals with different need-related characteristics, as well as with different combinations of income and wealth. Although in some cases these systems allow for flexibility in the allocation to individuals (for instance, in France or Germany they define maximum levels of support for given categories of individuals), in cash-based social security systems such as the Austrian model, funding systems actually dictate the exact level of support that is provided by the state, and how needs are taken into account to define eligibility.
(p.26) At the aggregate level, the proportion of GDP consumed by LTC spending represents a significant issue for governments. Figure 3.1 shows the most recent estimates of spending on LTC across OECD countries, both private and public, as a proportion of GDP. Comparisons across countries are, of course, notoriously difficult to make accurately: the bundle of services included as LTC, as well as other factors, such as the extent of undocumented spending on LTC created by grey markets for care, for example, as well as how other programmes (particularly health or social services programmes) in each country are structured and affect estimates of LTC spending. Despite these limitations, Figure 3.1 shows that LTC costs are significant across a large proportion of OECD countries, and exceed 1 per cent of GDP for 18 of the 25 countries shown.
Whatever the aggregate level of spending, each country makes different choices about how its LTC funds are collected and allocated. Politics is, famously, about who gets what and why. In LTC, the ‘who’ reflects choices about the distribution of the benefits – does everyone benefit, or selected populations only? Are there differences in how different populations are treated? Nearly all states share the goal of protecting the most vulnerable with a minimum safety-net, which is often locally administered. In addition, many states, particularly those that value social solidarity, operate universal programmes that benefit all citizens with support needs, to a lesser or greater extent. How they do so varies dramatically, however, with some states providing income-related benefits while others provide flat-rate benefits to all, while still others provide direct services. As a result of these differences, Figure 3.1 also shows important variations in the balance between private and state contributions to the cost of LTC services, reflecting a combination of differences in cultural attitudes to gender roles, intergenerational transfers and the balance of responsibilities between the state and private individuals. A reflection of these attitudes, the ‘what’, concerns the pool of resources available and how much a particular society wants or is able to invest in LTC – and how that money is raised. Countries may collect funds from general revenue, from a payroll tax, from employers, or via other means. Thus we can see patterns in the range of methods used to fund the programmes, populations covered and the types of coverage provided. However, all states are concerned about the increasing cost of and need for care, and managing costs means managing these different elements of programme design. This chapter looks at how states are adapting to the reality of increasing need and rising costs.
The winding policy reform road
Whereas concerns regarding the so-called ‘ageing tsunami’ have now been voiced for over 30 years (see, for instance, Torrey, 1982), its implications for public finances in general and LTC funding policies in particular have changed over time.
During the 1990s, a number of high-profile changes in funding arrangements across OECD countries aimed to broaden the contributions of the state to LTC costs, in particular, in terms of the universalisation of access to some level of (p.27)
(p.28) financial cover. One of the first and most prominent examples of the growing involvement of the state in LTC financing was the German reform, which brought about the implementation of a pay-as-you-go social insurance system in 1995, with a headline premium rate of 1.95 per cent of income for working-age adults (shared equally between employers and employees). Pensioners, students and unemployed people paid lower rates. The introduction of the German LTC social insurance system recognised LTC needs as a ‘social risk’ that ought to be covered collectively and in such a way as to minimise individuals’ reliance on social assistance (social security benefits) in order to meet social care costs. Overall, the German social insurance system has been built around, and depends on, the care contributions of informal caregivers, with strong cultural (and legal) expectations that the bulk of the support should be provided by family members. This reliance on caregivers was reflected in the 0.25 per cent extra insurance contributions required of childless individuals (who are less likely to receive informal support), and on the reduction in the value of the benefits when taken in cash rather than services, an option chosen by a large majority of cases and typically used to compensate family members for the care they provide.
Following suit, Japan introduced a compulsory public long-term care insurance (LTCI) system (Kaigo Hoken) in April 2000. It put in place a mandatory system covering the whole population from 40 years and older. The scheme mixed contributions from general taxation (both nationally and locally) and also from specific age-related premiums: roughly one-half of revenues would originate from taxation, one-third from premiums from people aged between 40-64 (at a rate of 1 per cent of their income), and one-sixth from people over 65 (according to a fixed tariff of premium rates).
Recipients of the Japanese insurance system were required to make a 10 per cent co-payment (reduced on a means-tested basis for lower-income people). The scheme has been primarily designed to cover the care needs of those aged 65 and over; for adults aged 40-64 the system only covered LTC needs arising from age-related disease (such as early onset dementia, osteoporosis and Parkinson’s disease). The insurance benefits were designed to cover the total costs of care and were high by international standards (see Chapter Four in this volume for a fuller discussion of the relative intensity of state support across national systems). They vary according to the person’s assessed need being classified into seven levels (five care support, and two preventative). Assessment is carer-blind, its design philosophy being that it should help to substitute for informal care rather than complement informal caring, as in Germany. Unlike in many other countries, there is no cash option, and benefits must be taken as formal services in kind.
At the onset of the scheme, accommodation costs in care homes were covered but, in 2005, reforms aimed at controlling the overall costs of the scheme changed the basis of support for these costs from a (full) entitlement basis to a means-tested basis. The 2005 reforms also re-defined (and reduced) levels of support for lower-needs groups. Before 2005, low-need people received care services whereas now they receive (cheaper) preventative services.
(p.29) As in Germany, the introduction in 2002 in France of the allocation personnalisée d’autonomie (APA) was justified in the view that the risk of developing LTC needs should be addressed collectively as a ‘societal risk’. The APA was funded through general taxation but implemented at a regional level. Access to the system was universal, as with the German and Japanese systems, but the amount of support people received was set to depend on their financial means as well as their level of assessed need. In this way people were entitled to state support ranging from 90 to 10 per cent of the assessed care costs depending on the income and assets of the service user. Overall, many service users were responsible for a large proportion of their care charges.
The APA system restricted eligibility to people over 60 years of age. It was defined on the basis of a specific assessment scale (the Autonomie Gérontologie Groupes Iso-Ressources [AGGIR]) with five levels of need reflecting an individual’s capacity to perform activities of daily living (ADLs) and their mental health state. Although service users enjoy considerable freedom in their choice of support services, APA resources cannot be received as a direct payment or used to pay a spouse. In residential care, individuals are responsible for their accommodation costs, supported by means-tested social assistance if they lack sufficient funds.
In addition to the support provided through the APA, the French system offers incentives for individuals to pay for care privately, with people able to partially count these expenditures to offset their income tax liabilities. These are particularly effective for higher-income people, who by definition receive the lowest levels of state support through the APA. With the aim of encouraging the employment of personal and domestic staff in the home, families can deduct from their income taxes half the cost of employing declared workers, up to £10,200 per year (this excludes support purchased through the APA). In residential care, the costs of long-term nursing or residential care are eligible for a tax allowance of 25 per cent, up to £2,100. Furthermore, insurance pay-outs are not taxable and are excluded from the income assessment of the APA means test.
Other systems followed in the steps of Germany, France and Japan. In 2006 Spain, for example, introduced the Ley de la Dependencia that aimed to set, on the basis of a common needs assessment algorithm, minimum levels of financial support for people with LTC needs across all Spanish regions. However, the implementation of the new system has been hampered by problems in the collection of data to judge eligibility for state support, and most importantly, by the advent of the financial crisis soon after its implementation. As a result, the drive towards austerity in public spending has slowed down the roll-out of the national care system, with individuals other than those with the highest levels of need becoming excluded from the scheme, and levels of coverage significantly curtailed relative to the original proposals.
Even prior to the international financial crisis of 2007, and in contrast with the efforts to broaden state financial support described above, some Nordic European countries has started to reduce support in their traditionally comprehensive state-funded (p.30) LTC systems. This process, which represented a degree of convergence in levels of support across European countries at least, was achieved through measures such as increases in user charges (particularly in Finland), toughening of care eligibility criteria, and greater emphasis on the use of market-like allocation mechanisms such as the use of vouchers (Colombo et al, 2011; Vaarama, 2012).
In more recent years, the combined effect on public expenditures of increasing demographic pressures, the financial crisis, and the associated austerity measures has led to a change in the direction of many national LTC funding policy reforms. As a result, many governments are slowing down, stopping, and in some cases reversing the process of universalisation of LTC state support. Instead, the policy emphasis is being placed on developing funding policies that contribute to increasing efficiency in the care system, by ensuring the targeting of available resources on the neediest, and by incentivising private financial contributions in the context of a growing need for ‘individual responsibility’. We review below some of the most notable policy trends seeking to develop new forms of partnerships between the state and private individuals, including a focus on covering catastrophic costs (rather than the ongoing cost of care) and recent expansions in private coverage.
Covering against catastrophic costs
A long-standing social care policy objective in England has been the need to target resources as efficiently as possible (Davies et al, 2000). Already heavily rationed on the basis of a severe income and assets-based means test, over a period of time exceeding two decades, services have become increasingly concentrated on those with the highest needs. Predicated on the need to reduce the risk of institutionalisation, since the 1990s this process has led to continued reductions in the total number of older recipients of local authority-funded social care. As indicated in Figure 3.2, the fall in recipients has accelerated since 2007, fuelled by austerity policies. In contrast with previous trends, however, this fall has been accompanied by real-term reductions in state social care expenditure. Controlling for need and sociodemographic patterns, recent estimates suggest a 39 per cent reduction in the likelihood of receipt of state-supported LTC services among older people over the period 2005/06 to 2012/13 (Fernández et al, 2013).
Not surprisingly, the unprecedented retrenchment of state social care support in England has led to concerns about its impact on the welfare of individuals left with the responsibility to self-fund their care. Given the long-term nature of social care needs, particular concerns have been expressed about the risk of asset depletion linked to the potentially very significant lifetime care costs. These risks are illustrated in Figure 3.3, which depicts the distribution of lifetime care costs for a hypothetical cohort of 65-year-olds in England (as reported in Fernández and Forder, 2011). It shows how even though a sizeable proportion of individuals (approximately a quarter) will not face any significant lifetime (p.31)
In 2010, the English Department of Health set-up a Commission on Funding of Care and Support, led by Sir Andrew Dilnot, tasked with the objective to find a new funding system that would meet the costs of care and support as a ‘partnership between individuals and the state’, and in such a way as to ‘protect their assets, especially their homes’, against the cost of care. In its report, the Commission recommended the introduction (as an addition to the existing means-tested system) of a lifetime cap on private contributions to care costs set at £35,000 (approximately €48,000), together with some changes in the means test asset threshold setting financial eligibility to care. Importantly, the cap would only apply to care costs, with accommodation costs in residential care still being the responsibility of private individuals. The proposed cap on lifetime private care expenditure could be described as a longitudinal extension of the means test, allowing the state to target resources and offer financial protection to those incurring the greatest cumulative care-related financial losses.
The UK government adopted proposals for a lifetime cap in the Care Act 2014. However, the cap was set at a much higher £72,000 (approximately €100,000), thus reducing significantly the number of potential beneficiaries of the policy (as well as its cost to the state). Although the re-election of the Conservative government in the 2015 UK General Election appears to guarantee the implementation of the cap system in April 2016, the planned reforms have come under heavy criticism. In particular, critics have argued that although the explicit aim of the cap is to reduce the risk of asset depletion, in practice it offers little protection against catastrophic costs due to the very high cap threshold, the fact that accommodation costs (equivalent to £230 or €320 per week) are excluded, and that many individuals will be subject to considerable top-ups in order to access residential care homes of reasonable quality. As a result, many individuals could still be expected to contribute significantly in excess of €140,000 before the cap applies to them, and even then would be expected to contribute approximately €14,000 per year in accommodation costs.
Although driven to a lesser extent than the English case by the need to cut public expenditure, the Australian LTC reforms Living Longer Living Better share the principle of targeting care resources on people with the greatest needs and the lowest income and wealth. Enacted into legislation on 26 June 2013, they introduced new means-testing arrangements and the requirement for users to pay fees and charges for LTC services and accommodation costs in residential care. Under the new system, means-testing arrangements take into account income for home care and a combination of income and assets for residential care.
In line with the Dilnot Commission, the new Australian system has put in place a combination of yearly and lifetime caps on private care costs. For home care services, the annual caps for care are set at AU$5,069.84 (approximately €3,600) for older people with income below AU$48,583.60 (approximately €35,000), and $10,139.68 (approximately €7,200) for older people with income (p.33) above AU$48,583.60. For residential care services, the annual cap for care is AU$25,349.21 (approximately €18,000). The lifetime cap for all types of care is set at AU$60,838.12 (approximately €43,000), a level much lower than the English cap.
The reforms also saw the creation of the Aged Care Financing Authority, with responsibility to monitor and advise on fees and charges, including accommodation payments. Although no data appears to be available yet on the number of users reaching the cap, the Australian cap system appears to offer a much greater degree of protection against the risk of catastrophic expenditures, and is therefore more likely to gain public acceptance.
Emergence of private long-term care insurance
In most countries, public financing is insufficient to cover the full cost of LTC for those who need it, whether they receive it at home, in residential settings, or in institutions. Safety-net programmes (often locally administered) typically serve to protect the most vulnerable. However, where there are gaps in coverage, some nations are encouraging – or if not encouraging, enabling – the purchase of private LTCI to fill that gap. Such an approach expands protection against the potentially devastating costs of LTC while limiting government liability for programme expansions. Two countries have seen notable growth in the market for private LTCI – France and Germany – while the country with the largest market for private LTCI, the US, is experiencing something of a crisis.
In the US, private LTCI covers roughly 7.6 million lives – about 12.4 per cent of people 65 and older – and accounts for 7 per cent of national spending on long-term services and supports (LTSS) (excluding spending on assisted living) (Johnson and Park, 2011). However, the private LTCI market is in deep trouble there. Despite relatively strong market penetration, sales have been essentially flat for the past decade, and many insurers have exited the market – about a dozen companies are currently still selling a meaningful numbers of policies, down from the 102 companies the industry reported selling policies in 2002. Trends on the purchasing side are even less promising: over the past 20 years, the average income of LTCI buyers compared to non-buyers has increased, and the average cost of premiums has increased markedly as well (America’s Health Insurance Plans, 2012; Cohen et al, 2013). In short, insurers have chased the high end of the market, offering ever more comprehensive (and expensive) coverage, deterring many potential purchasers with the perceived high cost (and complexity) of products. Moreover, US insurers were hit hard by the recession, so that poor investment returns had a significant impact on their reserves. In addition, they have had difficulty predicting costs and setting premiums appropriately. Thus, higher-than-expected pay-outs (due to people living longer and failing to lapse as expected) as well as greater exposure to risk (due to the potentially large size of pay-outs because of the policies’ generous coverage) have resulted in insurers increasing premiums significantly, screening applicants more closely, or dropping (p.34) their LTCI business entirely – and deterring purchase even further. The future of the private LTCI market in the US is therefore highly uncertain.
Moreover, although the private LTCI market has been encouraged in various ways by government policy, it has failed to achieve important public policy goals: significantly reducing the likelihood of people relying on public safety-net programmes covering LTC (the US Medicaid programme), and protecting financially vulnerable individuals from the financial risks posed by LTC needs. Indeed, LTCI is primarily purchased by upper-income individuals who are arguably able to self-insure, and who are at risk neither of ‘spending down’ to Medicaid (that is, spending all of their resources until they are poor enough to qualify), nor of losing their financial security due to high LTC costs. Attempts to broaden the market – through tax incentives, for example – have evidently failed. However, the current crisis in the market may incentivise insurers to change their tactics to appeal to a broader market; indeed, there are indications that some insurers are investigating innovative strategies for reviving the market (Doty et al, 2015). Given that the political environment in the US makes it highly unlikely that any public solution to the LTC financing crisis will be reached in the short to mid term, innovation by insurers is the best hope for expanded financing for LTC.
In contrast to the stasis in the US market, the French market has expanded remarkably over the past decade, with 5.7 million policy-holders in 2012 (out of a total population of 66 million), up from 1.6 million in 2004 (FFSA, 2009, 2013). Moreover, the French market is growing at a steady rate of roughly 5 per cent per year. Much of that growth has been seen in the group market, which comprises 75 per cent of all policies (FFSA, 2013).
Several reasons have been proposed for the relative success of the French private LTCI market. Probably the most important factor is the structure of the country’s public benefit, which was established in 2002. One of the notable features of the APA is its income-adjusted design, which creates strong incentives for supplementation: upper-income individuals (earning more than €2,927.66 in 2013) pay a 90 per cent co-payment toward their APA benefits. Because nearly all French (96 per cent in 2010) have supplemental private health insurance (OECD, 2012), they are accustomed to purchasing private insurance to top up public benefits. Moreover, the cost of the insurance is currently quite low: €345 per year in 2010 for individual policies, a figure that has remained relatively stable over the past few years. Coverage can be even less costly (an average €322 per year) if the contract covers only ‘severe’ dependency, which about two-thirds do. Group policies are even cheaper: the typical premium averages €74 annually, with 40-50 per cent of the cost borne by the employer (FFSA, 2013). Another factor is that the policies are relatively simple to understand: benefits are paid in cash rather than on an indemnity basis. Consequently, private LTCI in France is held by those most likely to be vulnerable to financial risk: middle-income professionals such as teachers.
However, the low price of the policies comes with a downside. First, and most importantly, the benefit amounts do not come close to meeting the full cost of (p.35) care. It is estimated that the APA and supplemental insurance together cover, on average, only about 32 per cent of the average monthly cost of care (Le Bihan and Martin, 2010). Second, the level of disability required to claim benefits is quite high, particularly if a policy only covers severe dependency. At a minimum, this requires claimants to be bed- or chair-bound and require daily assistance several times a day, or require constant monitoring due to cognitive impairment. Thus, while private LTCI reduces financial risk to some extent, it benefits only the most severely impaired, and covers only a portion of their liabilities. Moreover, it fails to cover those with existing health conditions.
Clearly, private LTCI represents only a part of the LTC financing solution in France, albeit one that appears to be embraced by many French: a surprising 41 per cent support a mixed public–private approach to dealing with the LTC financing problem (Mutualité Française, 2011). This approach has been adopted even by the Socialists: President Hollande recently made several legislative proposals that combine enhancements to the APA benefit with a strengthening of the private LTCI market, although the future of these proposals is unclear. Thus it seems likely that French policy-makers will continue supporting the private LTCI market, if not actively encouraging it to the extent of the previous government.
Until recently, Germany had a fairly limited private LTCI market, covering the roughly 9 per cent of the population that opted out of the public health insurance programme to buy private health insurance; private LTCI was offered as a supplement to private health insurance. From January 2013, access to private LTCI was made available to the wider population, with a goal of enabling them to supplement the public LTCI, which provides a benefit that is widely acknowledged to only partially cover care needs. Indeed, the public LTCI was never meant to cover the full cost of care, nor, in the view of Germans, to replace the primary role of families, neighbourhoods or other forms of voluntary care and support. Promoting a broader private LTCI market is seen as a way to encourage people in Germany to take responsibility for their future LTC needs, and to increase awareness of the need for private provision. As such, the government contributes €5 monthly to premium contributions for qualified plans.
The enabling legislation set a number of minimum requirements around these products, but otherwise left the design of the policies up to the private sector, consistent with Germany’s overall corporatist approach to social welfare. These minimum requirements include, most importantly, a ban on underwriting (that is, taking the applicant’s health status into account when selling a policy), assessing an applicant’s health status, using assessed risk to set premiums, and benefit exclusions are not permitted. Only those already claiming benefits from existing LTCI policies can be prevented from purchasing the new private plans. The amount of insurance premiums depends exclusively on the age of the insured at the time of purchase and on the contracted scope of services, although premiums may not be less than €10 per month, net of the subsidy.
When beneficiaries meet the criteria to qualify for benefits, they receive cash payments based on a three-level classification of need: insurers do not pay providers (p.36) directly and the payments may be used in any way. In this, it replicates one of the notable features of the public LTCI programme – its relative lack of controls over the use of cash benefits. Benefit amounts are tied to the public system’s assessment categories with a minimum benefit at each level of care (for example, €600 per month at care level III) and a maximum not to exceed the public benefit at each level. Further, there is a maximum waiting period of five years before benefits may be claimed. Assessment of care needs is conducted by a quasi-independent body, the same one that determines need for the public programme. Finally, the government set a cap on the insurance companies’ administrative costs.
The initiative has proved highly successful: just six months after its launch, 24 insurance companies offered policies under the new legislation. The insurance industry reports that they sold an estimated 400,000 in total contracts by the end of 2014. Moreover, it is not just older people who are purchasing the products, which bodes well for the future of the market: more than 40 per cent of all policies were purchased by people between 25 and 35 years of age. Overall, about 65 per cent of the newly insured are younger than 50 and only 13 per cent are over 60. Thus, the new private LTCI market represents an important and potentially growing component of the LTC financing picture in Germany.
Retrenchment in the Netherlands
Historically, the Netherlands has had one of the most generous LTC programmes in the OECD. In terms of per capita spending, it ranks highest (paying an average €1,209 per participant in 2010); in terms of proportion of GDP spent on LTC, it ranks second. Moreover, these costs have been steadily rising, up to €20.5 billion in 2008, from €12.8 billion in 1998. The proportion of GDP spent on LTC rose from 2.2 per cent in 1985 to 3.8 per cent in 2009 (OECD) – more than twice the OECD average. About a fifth of the programme’s funding comes from general revenues, with the remainder from payroll deductions of 12.15 per cent of income (up to €32,000), split between employers and employees, and deductibles (Bootsma, 2011). This payroll deduction is far higher than, for example, the deduction that funds Germany’s programme, which is set at 1.95 per cent for most citizens (also split between employers and employees). These high programme costs have resulted in a significant political crisis (in parallel with a similar crisis in the healthcare system) and a consequent overhaul of the LTC system.
The Exceptional Medical Expenses Act (AWBZ) established the programme in 1968. It is the oldest in the OECD and paid out generous benefits, mainly to older people (three-quarters of participants are 65 or older) and physically or mentally disabled people (about 14 per cent are classed as psychiatric patients, which includes people with autism) – generally speaking, eligibility is much broader than in comparable nations. Benefits included nursing home care as well as in-home services. The programme also offered a cash benefit, which paid participants an individual budget that could be used to purchase supportive services. Despite this support for in-home services, the Netherlands has had a far higher rate of (p.37) institutionalisation than comparable nations, with roughly 6.6 per cent of older people living in nursing homes (in 2009), often with acuity levels that, in other countries, would be managed in community-based settings. Roughly 43 per cent of programme participants lived in nursing homes and 57 per cent at home in 2010 (Bootsma, 2011). The programme also covered the cost of semi-permanent hospitalisations. These two elements – the high rates of institutionalisation and the growth of personal budgets – along with broad eligibility requirements, raising quality standards and spillover from other social programmes, seem to have been critical in the programme’s cost expansions (Mot, 2010; Schut 2013).
Given the high costs of the programme, policy-makers have taken radical steps. The first cost-control strategy involved reining in the cash benefit, which was seen as a cost driver. The Persoonsgebonden Budget (PGB) was originally phased in during the 1990s, due to pressure from disability groups. Under the programme, cash is paid at 25 per cent of the cost of in-kind services. Following its launch, enrolment grew rapidly and significantly – from 13,000 in 2001 to 130,000 in 2011 (Bootsma, 2011), comprising roughly 18 per cent of AWBZ participants. Costs increased at an average rate of 23 per cent per year (van Ginneken, 2015). Not only was the benefit seen as too popular, it was thought that it encouraged caregivers to substitute paid for unpaid care. Others attributed the growth in costs to changes in disability programmes: as services for people with autism were shifted to the local level and became less available, increasing numbers applied for personal budgets (White, 2011). Others alleged that fraud was an important factor, particularly given the relatively lax controls built into budgets (van Ginneken, 2015).
Consequently, programme changes have been introduced, some specific to the PGB and some for the programme as a whole. The biggest changes were to the PGB, which has frozen enrolment since 2010; subsequent rule changes will restrict access to the programme in future. These new regulations, in 2012, also introduced fraud prevention and accountability measures. And while personal budgets could formerly be used for people living in nursing homes, they have been restricted to those receiving in-home care (White, 2011; van Ginneken et al, 2012) who are at risk for residential care (Bootsma, 2011). For the AWBZ programme as a whole, tighter eligibility criteria have been introduced, and, to prevent families from substituting paid for family care, the availability of family care is now a factor in determining benefit levels (Schut and van den Berg, 2010).
The programme has also been re-structured. Most importantly, nursing home care is being moved from the LTC programme altogether and into the health programme (Schut, 2013). Other reforms focused on decentralisation, with certain responsibilities and some costs being devolved to municipalities in 2007, creating a split between ‘care’ (including personal and nursing care), which continues to be funded through the AWBZ programme, and ‘social care’ (including domestic help, home adaptations, psychosocial supports, mobility devices and transport), which are now the responsibility of municipalities (Gadsby, 2013). For the care component, purchasing responsibilities for all but a few services are being shifted (p.38) from the municipalities that previously administered the programme (which are viewed as having no incentive to keep costs down) to the same insurers who administer the Netherland’s health programme. Thus, these insurers will be responsible for both the health and LTC needs of their members.
A cautious approach to social insurance in East Asia
Japan, South Korea and Taiwan have evolved a distinctive approach to financing LTC. Generally speaking, they share important features of their social welfare development, such that some scholars have hypothesised a unique East Asian approach. The countries are united by their history of authoritarian rule and Japanese domination as well as their emergence as pluralist democracies with a strongly capitalist bent, sometimes characterised as ‘productivist welfare capitalism’ (Holliday, 2000; Ramesh, 2003; Kwon, 2007; Cheung, 2009). For these countries, a comprehensive welfare programme is seen as a marker of a developed nation. Impetus for introducing the ageing-related components of their welfare systems is spurred by their shared demographics: low fertility rates (1.4 for Japan, 1.25 for Korea and 1.1 for Taiwan; see CIA, 2014) and a rapidly ageing population; Japan stands out in this latter regard, with nearly a quarter of its population already 65 or older. Although the proportion for Taiwan and Korea is currently about 12 per cent, it is expected to increase precipitously, reaching 20 per cent of the population by 2025 in both countries.
All three have progressively introduced key components of a social welfare system, although Japan was by far the earliest to do so, and Taiwan has yet to complete its system by implementing a public LTCI programme. However, Taiwan has been explicitly planning such a programme since at least 2000, and the basic outlines of the programme are agreed (Nadash and Shih, 2013). Implementation in the short to mid term seems certain, with 2016 as the current target date.
Their approach to LTC financing also shares important components, not least because they have openly learned from each other and have taken Germany as a model (Campbell and Ikegami, 2000; Chen, 2005, 2009; Kwon, 2008; Campbell et al, 2010; Huang et al, 2010). All three collect programme revenue through a social insurance mechanism, supplemented by general revenue and co-payments. In Japan, only those 40 years of age and older contribute, while in Korea and Taiwan, all of those with income do, and employers are expected to contribute as well; none of the programmes incorporates means testing, although, in all cases, co-payments are waived or discounted for low-income or poor individuals. Both Japan and Korea restrict benefits to older people and those with ageing-related illness, while Taiwan plans to cover people of all ages who need care. However, while Japan covers a significant proportion of those 65 and older (an estimated 18 per cent of the elderly population; see Campbell, 2014), Korea is proceeding slowly with its programme, covering only about 5 per cent of its older people (Kim et al, 2013); although early Taiwan’s plans for the new programme show (p.39) broader eligibility (about 10 per cent of the elderly; see Lee, 2010), it remains to be seen whether these are implemented.
Pressure to develop LTCI programmes was exacerbated by the introduction of universal health insurance in all three countries. Because they all relied on hospitals as a setting for LTC, control of hospital costs meant finding a way to support vulnerable older people in settings other than hospitals (Kwon, 2008; Tatara and Okamoto, 2009; Tsai, 2009). The solution was, of course, to enable people to be supported at home or in appropriate residential settings, via a separate financing mechanism. However, all three countries faced the same conundrum: without a source of sustainable funding for such services, the appropriate service infrastructure did not exist. Thus, efforts to develop public LTCI also meant grappling with questions around how to set up and regulate service providers. Indeed, in Taiwan, the focus was initially on a bill to finance LTC, but passage was delayed while the legislature tackled the regulatory structure and workforce issues that had to be resolved prior to implementation (Nadash and Shih, 2013), as well as setting exact contribution levels for employees and employers (Tan and Kuo, 2014).
Despite adopting significant design components from Germany, the three countries all chose to eschew cash benefits (in Taiwan and Korea, however, there is flexibility in certain cases – for example, in rural areas where service providers are not otherwise available; see Kim and Choi, 2013). Although the ban on cash payments has much to do with the status of women in East Asia – women’s groups oppose them on the grounds that they potentially lock women into tradition caring roles – it also relates to the need to build a strong provider infrastructure, and to concerns about the quality of care provided by non-professional caregivers. Indeed, this was one of the primary arguments used by women’s groups in their campaign against cash benefits (Campbell and Ikegami, 2000, Kwon, 2008, Nadash and Shih, 2013). Certainly, such a strategy appears to have been successful in Japan, which has seen a considerable expansion of community-based service providers (Campbell, 2014). All three countries allow both for-profit and non-profit providers to participate, with a goal of encouraging competition (on quality, not price – prices are set by government) and promoting choice for participants – although this goal is elusive in many rural areas in Korea and Taiwan, where the provider infrastructure is still lacking.
One option to keep costs down and improve the provider base is to integrate foreign workers into the programmes; this seems all but inevitable in Taiwan, where the vast majority of unskilled LTC workers are already temporary workers from the Philippines, Indonesia and Vietnam (Nadash and Shih, 2013). Korea is cautiously opening its markets to foreigners (while favouring ethnic Koreans living in China and elsewhere; see Um, 2012), and, in a reversal of its previous policies, Japan is currently considering proposals to open care worker jobs to immigrant workers (Campbell, 2014), having already allowed in some foreign nurses (Um, 2012).
(p.40) These three nations all demonstrate a commitment to the social insurance approach to financing LTC, as well as an awareness of the need to prepare for their ageing populations. Japan, as the most mature example of this model, has demonstrated success in progressively monitoring and tweaking its programme over time, keeping costs flat (Campbell, 2014). Korea is proceeding cautiously through limiting eligibility, and it remains to be seen how the programme in Taiwan will evolve. In any case, their approach to LTC financing bears watching.
Funding long-term care services in the future
It might be reasonable to expect that once long-term economic growth returns, governments will seek to increase support for people with LTC needs in society. However, it is unlikely that significant steps towards greater universalisation of state funding will be taken until the fiscal situation improves significantly.
In the interim, new funding reforms are likely to focus on improving efficiency in the use of public funds by helping to ensure that resources are targeted optimally. Improvements in targeting might be achieved, for instance, by concentrating resources on those with the highest needs and those most exposed to the financial risks associated with care needs. As we have seen, cap systems offer one mechanism for targeting resources on longitudinal as well as cross-sectional definitions of need.
In addition, new funding reforms are likely to concentrate on finding arrangements that incentivise private contributions and that (re)define funding partnerships between the state and its citizens. The particular mechanisms chosen will depend on the cultural and administrative preferences of each nation. A particularly culturally sensitive element of the debate concerns the treatment of housing wealth. From many perspectives, housing wealth represents an ideal potential source of resources from which to fund the additional resources required for future LTC systems. Indeed, across the OECD a very significant proportion of the housing wealth is in the hands of older people, who in turn represent the largest group of recipients of LTC services. Paradoxically, however, attempts to draw on housing stock to fund LTC systems have faced considerable public enmity, to the extent that some new funding arrangements have been developed with the explicit goal of protecting housing assets. New ways might be developed to allow homeowners to release housing capital, with products such as equity release and reversed mortgages growing significantly in recent years.
Relatedly, an increasing consensus appears to be forming internationally about the need to decouple hotel or accommodation costs from care costs, and the fact that the funding of hotel costs should be considered as a responsibility of the individual rather than the state.
Overall, and from an economics perspective, LTC funding reforms should generate appropriate incentives, and should consider the nudging effects they might generate. Small user charges at the point of use, for instance, might contribute to improving efficiency by deterring excess demand. Excessive (p.41) co-payments, in contrast, can easily lead to unmet need and disproportionate reliance on informal care.
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