When it comes to paying for long-term care, public and private options can both fail

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John O'Connor
John O'Connor

What happened last week in Washington was not exactly highlight reel material. That is, unless you want to showcase public sector dysfunction.

In fact, part of our government actually shut down Tuesday. That unfortunate result was the residue of an ongoing partisan fight over the new health law.

Small surprise that a new poll finds public support for Congress has dipped to an abysmally low 10%. As my old Marine Corps drill sergeant liked to say, these guys would screw up a two-car funeral.

Our lawmakers' incompetence leaves many concerned about future Medicare and Medicaid funding, which just happens to pay for most of our nation's long-term care services.

But before the privatize-everything crowd completely takes over, let's remember this salient fact: The private sector doesn't always get payments right either.

In fact, two private sector solutions for funding long-term care — insurance and reverse mortgages — won't be making highlight reels anytime soon either.

Remember how private long-term care insurance was going to become THE major payer for long-term care? That was a pretty safe assumption two decades ago, when dozens of major insurance firms were leapfrogging into the market. This private-sector funding option was making many providers downright giddy. And why wouldn't they be? Full-freight payments for services? So long, Uncle Sam, and hello, Snoopy!

But things haven't exactly turned out as predicted. For a variety of reasons that include public indifference and bad actuarial assumptions, many people continue to view private long-term care insurance as a questionable hedge.

Now that the likes of MetLife, Prudential Financial, Unum Group and Allianz are no longer writing new policies, Genworth and John Hancock have become the last major insurers standing.

And Genworth could be next to leave the party. Thomas McInerney, the firm's chief executive, recently told investors he's leaning on state insurance regulators to approve huge rate hikes on policies written prior to 2001, and for smaller premium increases on policies written since.

And what happens if Genworth also exits the long-term care insurance business? For now, the firm insists that won't happen. But if Genworth doesn't get its regulatory wishes, or if it fails to attract mostly healthy new policy buyers? Well, let's just say there's precedent for divestiture.

Which brings us to reverse mortgages. These too were also once hailed as a promising funding mechanism for long-term care. A reverse mortgage is a loan that uses the home's equity as capital. These loans differ, however, in that they do not have to be paid until the last surviving homeowner permanently moves out of the property or passes away.

Simple enough concept. What could possibly go wrong? Well, if just your spouse is listed as the borrower, you could end up facing property foreclosure if you don't have the good sense to pass away first.

That's exactly what happened to Robert Bennett after his wife died in 2008.

But last week, a federal court rejected this interpretation of a law. That's good news for Bennett and the nearly 600,000 borrowers with federally insured reverse mortgages through the Federal Housing Administration. But it's not such good news for the program itself, which is already staring at massive losses.

The FHA last week said that it will get a $1.7 billion infusion from the Treasury because the agency has burned through its reserves. Most of those losses are in the reverse-mortgage program, officials added.

So should we be blaming the government or the private sector? How about neither? Maybe the real problem is that paying for long-term care will require better answers than either sector has offered so far.

John O'Connor is Editorial Director at McKnight's.


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Daily Editors' Notes

McKnight's Daily Editors' Notes features commentary on the latest in long-term care news and issues. Entries are written by Editorial Director John O'Connor, Editor James M. Berklan, Senior Editor Elizabeth Newman and Staff Writer Marty Stempniak.