Long-Term Care - A Review of Global Funding Models - Long-Term Care Scheme - Research - 17 March 201

Long-Term Care – A Review of Global Funding Models

by S. Elliott, S. Golds, I. Sissons and H. Wilson

17 March 2014

(Edinburgh)

LONG­TERM CARE – A REVIEW OF GLOBAL FUNDING MODELS

BY S. ELLIOTT, S. GOLDS, I. SISSONS, H. WILSON

[Presented to the Institute and Faculty of Actuaries in Edinburgh, 17 March 2014]

ABSTRACT

This paper looks at alternative longterm care (LTC) funding models and options. It analyses six global models and the potential applications to the UK. The paper provides a demographic overview for each of the six countries to illustrate the increasing global demand for LTC and the funding thereof which is becoming a global critical issue. It examines the approaches each country has taken to address the funding issue with varying degrees of public/private cooperation and partnerships. The authors hope that the lessons learned from these other markets will assist the UK as they try to come to grips with their growing social care funding issue.

KEYWORDS

Longterm care; public/private partnerships; health and social care; selffunders

CONTACT ADDRESS

Sue Elliott, Consulting Actuary, Health & Protection Telephone: +44 (0)780 1247 831; Email: selliott9@sky.com

Sophie Golds, KPMG LLP, 15 Canada Square, London E14 5GL Telephone: +44 (0) 7917 520006; Email: Sophie.golds@kpmg.co.uk

Ian Sissons, Munich Re, 30 Fenchurch Street, London EC3M 3AJ Telephone: +44 (0) 207 718 1445; Email: isissons@munichhealth.com

Hamish Wilson , Hymans Robertson, 20 Waterloo Street, Glasgow, G2 6DB, Scotland, UK Telephone: +44 (0) 141 566 7755; Email: hamish.wilson@hymans.co.uk

1. INTRODUCTION

1. Background

1. The paper will be looking at alternative LTC funding models and options around the globe. It will analyse six countries separately and then look at the potential applications for the UK market.
2. LTC in the main refers to the support provided to the elderly as they lose the ability to look after themselves. It is a combination of medical, nursing, custodial, social and community services designed to help people who have disabilities or chronic care needs, including dementia. Services may be provided in the person's home (i.e. domiciliary), in the community, in assisted living facilities or in care homes.
3. Longevity is increasing as a result of advances in medical technology and treatments. People are living longer but potentially in a more disabled state.

4. The demand for LTC and the funding thereof is increasing globally. Countries are at various stages of this demand and they have taken different approaches to satisfy this demand.
5. Countries need to design programmes that provide independence and financial security for their elderly. This will involve varying degrees of public/private partnership and cooperation.
6. The six countries that are included in the analysis are France, Germany, Japan, Netherlands, UK and US.

2. Structure of the paper

1. This first section provides some background on the growing LTC crisis around the globe.
2. Section 2 provides a geographic overview comparing the six countries including demographic trends, social changes and health care expenditure.
3. Section 3 provides more details at a country specific level which includes more details on the demographics, public systems, private systems, partnerships and lessons learned.
4. Section 4 provides an overview of the UK market and potential overseas applications to the UK.
5. Section 5 sets out the conclusions of our research and analysis and potential next steps.
6. Section 6 provides a glossary and summary of abbreviations used in the paper which the reader may find useful.
7. Section 7 provides the references we used for the research and analysis in our paper.

2. GEOGRAPHIC OVERVIEW

1. This section sets out a comparison of demographic trends, social changes and healthcare expenditure for each of the six countries (where data was available). The countries were chosen either because they were deemed to be relatively successful in the private LTCI market or for their extremes in public versus private partnership.
2. Demographic trends

1. Population projections

• Figures 1 and 2 illustrate the projected demographic pressure as the global population ages.

• Japan has the greatest proportion age 65+ in 2010 at 23%. It also has the greatest projected growth where the proportion is projected to almost double by 2050. In contrast the US has the lowest current proportion age 65+ population and the lowest projected growth. In 2010 the range, across the six countries, is from 13% to 23% and the projected range for 2050 is from 21% to 40%.

• The results for age 85+ are similar with Japan having the highest proportion and the US having the lowest. In 2010 the range, across the six countries, is from 2% to 8% and the projected range by 2050 from 5% to 12%.

Figure 1 – projected population age 65+ (% of total population)

Source: US Census Bureau, International Data Base

Figure 2 – Projected population age 85+ (% of total population)

Source: US Census Bureau, International Data Base

2. Life expectancy trends

• Figures 3a and 3b illustrate the increase in life expectancy over the 20 years from 1990 to 2010.

• For females at birth the US has the lowest starting at age 79 in 1990 and increasing to age 81 in 2010. In contrast Japan has the highest increasing from age 82 in 1990 to age 86 in 2010. The UK has the 2nd lowest life expectancy for the six countries analysed.

• At age 65 the range is not as great as at birth. Japan and France are the highest at about 20 years in 1990 increasing to about 23 years in 2010. The remaining countries are grouped below them at about two to three years less.

• For males the overall life expectancy at birth is about five to seven years lower than females and at age 65 about three to five years lower than females. This gap may however be narrowing.

Figure 3a – Female life expectancy at birth and age 65

Source: OECD Stat Extracts Figure 3b – Male life expectancy at birth and age 65

Source: OECD Stat Extracts

3. Population pyramids

• Figures 4 to 9 set out population pyramids for each of the six countries for 2010 and 2050 (projected). The source for all of the charts is from the US Census Bureau, International Data Base. Ages 45 to 60 represent the "baby boomers" which will be moving to the top of the pyramids and hence making them appear "top heavy".

• The projected increase in the elderly population is most pronounced for Japan.

Figure 4 – Population pyramid (France)

Figure 5 – Population pyramid (Germany)

Figure 6 – Population pyramid (Japan)

Figure 7 – Population pyramid (Netherlands)

Figure 8 – Population pyramid (UK)

Figure 9 – Population pyramid (US)

4. Dependency ratios

• The dependency ratio measures how much the elderly population is dependent

on the working age population. It is defined as:

Dependency ratio (%) = age 65+/ages 15 to 64

• Figure 10 illustrates how the dependency ratio has increased over time from 1960 to 2008 for all six countries. As the age 65+ age group increases and the age 15 to 64 age group decreases it means there are fewer working age population to support the increasing elderly population. Japan had the most significant increase from 9% in 1960 to 37% in 2008 (just over four times). The US showed the slowest growth.

Figure 10 – Dependency ratios

Source: World Bank Group, WDI Online

3. Social changes

2.3.1.Figures 11 and 12 show a decline in marriage rates and an increase in divorce rates which means an increasing number of nonmarried people. As a result more elderly people may be living on their own and having to rely on care from professional caregivers as opposed to care from a spouse (assuming informal care from another family member or friend is not available).

Figure 11 – Marriage rates (per 1000; ages 1564)

Source: US Census Bureau, Statistical Abstract of the US: 2012

Figure 12 – Divorce rates (per 1000; ages 1564)

Source: US Census Bureau, Statistical Abstract of the US: 2012

4. Expenditure on healthcare and LTC

1. Figure 13 shows that France and the Netherlands are all publically funded; whereas, Japan, Germany and the US are 86%, 71% and 59% publically funded respectively. Comparable UK data was not available. However, as per "Fairer Care Funding Analysis and Evidence, Figure 1.2, July 2011", the 2009/10 care expenditure was £7.5 million for public and £8.3 million for private. Also, the proportion of private expenditure has increased for France since these 2009 statistics were published with take up rates being about 15%.

Figure 13 – Public versus private expenditure on LTC as a % of GDP (2009)

Source: OECD Stat Extracts

2. Figure 14 shows that LTC expenditure as a percentage of total healthcare expenditure ranges from as low as 7% (i.e. 0.6/8.4) in the US to as high as 28% (i.e.2.7/9.5) in the Netherlands. For the UK healthcare expenditure was 8.0% of GDP and LTC expenditure was 1.2% of GDP based on the "Economic & Fiscal Outlook, Office of Budget Responsibility 2010".

Figure 14 – Public expenditure on healthcare and LTC as a % of GDP (2009)

Source: OECD Stat Extracts

3. COUNTRY SPECIFIC

1. France

3.1.1. Demographics

• France, like most other developed countries, is experiencing an increased demand for long term care. The OECD projects that the cost of care will increase from around 1.4% of GDP in 2007, 1.7% of GDP in 2008 to between 1.9% and 2.6% of GDP by 2050.

• In 2010:

• France had an endyear population of 65.0 million

• Age 65+ represented 16.1% of the total population

• Age 85+ represented 2.5% of the total population

• Male life expectancy at birth was 78.1 years and 18.9 years at age 65

• Female life expectancy at birth was 84.8 years and 23.4 years at age 65.

• In 2050:

• France's projected population is 72.3 million

• Projected age 65+ is 25.8% of the total population

• Projected age 85+ is 6.1% of the total population.

• Healthy life expectancy from age 65 is estimated at 9 years for males and 9.8 years for females. Healthy life expectancy measures the number of years that a person of a specific age is expected to live without any severe or moderate health problems, which means that they can maintain usual activities.

• 12 million people aged 60 and over (and a third of people aged 75 and over) live in a private home. 28% of the 12 million people aged 60 and over, i.e. 3.2 million (57% of whom are women) are in need of help in their everyday lives. Around 75% of care spend is in institutions and 25% in the home.

3.1.3. Public Systems

• The French LTC system is based on a mix of what the government receives through general taxation (Beveridge) and through national insurance funds (Bismark) models. The French system also relies on families to play a key role in financing and assisting with LTC. Total expenditure was estimated to be as much as 25bn in 2007, with the OECD estimating that public expenditure is 1.7% of GDP in 2008. France is discussing reforms and, potentially, the creation of a fifth social security pillar, so the detail below relates to the current system.

• The French system operates a decentralised model with most of the decisions being made at the "departmental" level where individuals receive a Personalised Autonomy Allocation (APA). The APA is paid to all individuals over the age of 60 who require assistance with activities of daily living. Individuals then use the APA to decide what care to get and where to get it, although expenditure is

supervised and only accredited or approved service providers can be hired. It is available to all individuals with no means testing for eligibility; however the amount of benefit is reduced according to an individual's income. There is a maximum of 90% reduction for the highest earners. The monthly cash allowance varies according to the assessed level of dependence between EUR 530 and EUR 1235 (April 2010). The Government sets a national scale for assessing individuals' needs and the departmental authorities allocate the APA according to these assessments. There were 1.1 million people in receipt of APA in 2008.

• Around 70% of the APA budget is collected through local government funding. The remaining 30% is received from the central government fund, the "National Solidarity Fund for Autonomy" (CNSA). The Central government also sets the priorities for funding it provides through the CSNA. The CNSA is funded through employers' social security contributions and from general taxation. Additional funding comes from the "solidarity day" when employees donate a day's wage to fund care. In 2008 the CNSA budget totalled 17bn.

• The APA is used to meet dependency costs only; individuals must still meet their own hotel costs. Cost sharing for families is an important element of LTC financing. The maximum amount of APA does not cover the total costs of care and families or individuals are expected to make up the difference. In 2007 families paid 650m in copayments. Individuals in institutional care must meet the full costs for a room, food etc unless they receive housing benefits (paid by the local authority).

3.1.4. Private Systems

• The private insurance sector developed slowly in France, but has seen larger growth in recent years. According to the OECD less than 1% of LTC spending in France was from private insurance provision in 2007 but by 2010 15% of the population aged over 40 had a LTC policy. This growth has been mostly attributed to the wide discussions taking place in the media on how to fund LTC and the public becoming more aware of the risks and costs involved, and the gaps in public provision described above.

• Indemnity policies are most common and typically pay out a fixed monthly sum based on the level of dependency. Typically, they provide eligible recipients with a fixed level of monthly benefits for life, once the insured meets criteria set in the policy regarding the level of dependency and waiting period. About 20% of indemnity policies solely cover the risk associated with severe or very severe levels of dependency, while about 80% also cover the risk associated with moderate levels of dependency. A typical policy for a 60 year old would charge an annual premium payment of about EUR 400 and EUR 500 per year (2008 values) to obtain a monthly payment of around EUR 600 in the event of severe or very severe dependency and between about EUR 200 and EUR 400 a month in the event of moderate dependency. Generally, benefits would start to be paid three months after an insured individual qualifies for LTC. Inflation protection is generally provided with both the monthly benefit amount and the premium levels subject to annual increases.

• Some insurance policies have LTC rider benefits, where benefits are paid out of the death benefit or the accumulated savings built into the policy in the event that the policy holder requires longterm care for an extended period of time. These accounted for around 5% of the French market in 2009

• The group LTC insurance market is large, representing about 45% of the LTC insurance contracts in 2009. Employees covered under a group insurance plan are generally required to participate in the plan and employers may pay for a portion of the premium on behalf of the employees. They do not provide coverage for future risks once an individual is no longer working

3.1.5. Partnerships

• There are currently no partnership schemes for LTC in France, other than the mix of public and individual family (sometimes through insurance) can be seen as a social partnership.

2. Germany

3.2.1.Demographics

• Germany has high life expectancy at 77.7 years for males and 82.7 years for females (2011)

• The total population in 2011 was 81.5 million.

• Around 20% of the population was aged over 60 (2010) with this percentage projected to exceed 30% by 2050.

• In 2009 there were 2.4 million of the population with care needs at some level of whom 750,000 were in nursing homes and the remainder at home cared for by relatives (66%) or by care agencies (34%)

3.2.3. Public Systems

• The German long term care system is a mixture of different insurance structures including both social insurance funds and private insurance schemes.

• Social insurance, based on health insurance rather than life insurance principles, was introduced as a compulsory insurance in 1995 with subsequent reform to the structure to enhance the benefits in 2008.

• In 2013 there were 70 million of the population covered by the compulsory social insurance.

• Social insurance operates on a pay as you go structure.

• Benefits may be paid in cash or in kind. Roughly 60% of the total benefit cost is paid in cash.

• As an alternative to the social insurance coverage the high income earners (above 49,000 in 2011), civil servants and the selfemployed may opt for private compulsory insurance coverage instead of the social insurance. 9.5 million of the population had private compulsory insurance in 2013.

• Benefit levels (2012) depend on the care needs. For nursing care the benefit varies between 1,023 per month to 1,850 per month although a higher benefit of 1,918 may be payable in hardship cases. For care in the home the benefit levels vary between 235 per month and 700 per month as a cash allowance. The benefit levels aim to cover only part of the cost.

• Additional benefits are provided for those with cognitive impairment.

• Benefit levels will be reviewed regularly.

• Social funds paid 21.9 billion in benefits in 2012 with roughly half for home care and half for care in a care facility. There were 2.4 million beneficiaries.

• In 2013 contributions to the social insurance are 2.05% of income or 2.3% if aged between 23 and 65 with no children of which 1.025% is paid by the employer. The percentage applies on earnings up to a maximum of 3,937.5 per month.

• Contributions to the private compulsory insurance vary by age from 18.87 per month at age 30 to 59.51 per month (from 2010) with 50% paid by the employer.

3.2.4. Private Systems

• Private insurers offer products on both a life insurance basis and a health insurance basis.

• Life insurance products were introduced from 1985 on a standalone basis covering long term care annuities in conjunction with pension and death benefits. From 1992 a further generation of products were offered including waiver of premium benefits, immediate long term care annuities and deferred long term care annuities. Total policies numbered under 140,000 by 2009.

• Health insurance products were also introduced in 1985 providing daily cash benefits and/or reimbursement of long term care cost. From 1994 further products were introduced to provide top up benefits of additional cost reimbursement and services to the compulsory long term care insurance benefits. Total policies numbered just over 1,600,000 by 2009.

3.2.4.Partnerships

• The structure of the provision for long term care does enable both public and private systems to exist together but the private system sits alongside, rather than integrated with the public system.

3. Japan

3.3.1. Demographics

• Japan has high life expectancies and low birth rates which combined leads to an ageing population. The dependency ratio has also increased from 9% in 1960 to 35% in 2010 (almost quadrupling).

• Informal care at home is also reducing which is putting greater pressure on formal care.

• In 2010:

• Japan had a midyear population of 127.6 million

• Age 65+ represented 23% of the total population

• Age 85+ represented 3% of the total population

• Male life expectancy at birth was 79.6 years and 18.9 years at age 65

• Female life expectancy at birth was 86.4 years and 23.9 years at age 65.

• In 2050:

• Japan's projected midyear population is 107.2 million

• Projected age 65+ is 40% of the total population

• Projected age 85+ is 12% of the total population.

3.3.3. Public systems

• Japan now has five social insurance programmes which cover medical care, pension insurance, unemployment, occupational accidents and longterm care.

• Providing care and public assistance to the elderly is seen as a national responsibility in Japan.

• Japan created its LTC social insurance programme in 2000 (Long Term Care Insurance – LTCI) responding to the difficult demographic challenges such as high life expectancies, low birth rates and a restrictive immigration policy. It covers home care and institutional care but there are no cash benefits. It is a nationally administered programme where the price and benefits are set by the national government but the assessments are made locally.

• Their reforms were aimed at meeting the following key objectives:

• Increasing the level of independence for the frail elderly

• Reducing the burden of home care on their families

• More closely aligning benefits and premiums

• Providing more comprehensive care by integrating medical and long term care programmes

• Reducing the number of hospitalised elderly.

• It is a compulsory scheme for those over age 40 and it offers access to social care for those over the age of 65 on the basis of need alone. Income and wealth are not taken into account in the assessment process. The coverage for ages 40 to 65 is for agerelated diseases such as Parkinson's disease, presenile dementia or stroke.

• It provides benefits based on the level of services required. There are five levels of care with one being the lowest and five the highest. The levels are based on the amount of time necessary to provide the services. Although the assessment is predominantly computerised clinical judgement is still required. It does however provide clarity about eligibility and service provision for individuals. See Figure 15 below for a summary.

Figure 15 – Assessment of care needs, benefits available and user contributions

* The individual is required to pay 10% of this amount

• There is a comprehensive (predominantly computerised) assessment of medical and physical status and it is reviewed every six months. They vary by region and are conducted by experts appointed by local government.

• Creating a diverse provider market – they have created a diverse and large provider market with respect to community care. In reaction to the rising number of dementia cases they have developed group homes with each unit providing care for around nine people within a hometype environment.

• Ensuring quality – monitoring is largely focused on staffing numbers with detailed requirements set out by central government. Inspections have been described as "rather formalistic and paperwork oriented".

• The role of competition and integration – a large scale integrated delivery system alongside smaller providers of services has developed in Japan. Acute care providers have extended their range of services to deliver a lot of this integrated provision.

• Mobilising the community – Japan has focused a lot of attention on dementia and now have a lot of support of volunteers and have raised the awareness thereof.

• The role of care managers – they provide a central point of access for individuals in need of care.

• The programme is designed as a payasyougo system. 90% of the cost of care (regardless of the type of service) is reimbursed provided the services are

rendered by a certified provider. The remaining 10% is an outofpocket co payment subject to a maximum which can vary by income level.

• The 90% is split between a mandatory contribution from those age 40+ and tax revenue (national and local government). The mandatory contribution varies by region and is means tested. For ages 4064 it is about 1% of salary and for ages 65+ it was USD27 per month in 2010.

• In 2009 public expenditure on LTC in Japan was 0.7% of GDP compared to private expenditure of 0.1% of GDP.

• The LTCI compulsory scheme has done well to address a lot of the unmet need, to provide support on a universal needs alone basis and to support informal carers. However, the financial stability of the model is in question under the current cost and eligibility criteria.

3.3.4. Private systems

• There is minimal private LTC insurance in Japan. It is mainly supplemental coverage.

3.3.4.Partnerships

• It is mainly a publicly funded system in Japan.

4. Netherlands

3.4.1.Demographics

• In 2011 the Netherlands had a population of almost 17 million. About 15.2% of the population were over age 65 and 3.9% were 80 years and older. According to CBS by 2050 these percentages are expected to have almost doubled for those over 60 and trebled for those over 80.

• In the Netherlands life expectancy at birth is 81 years, one year higher than the OECD average. Life expectancy is 79 years for males and 83 years for females. (2011).

• In 2010 over 600,000 people in the Netherlands made use of longterm care.

• Around 340,000 of these received this care in their own home .The remaining clients received care within an institution.

3.4.3. Public systems

• AWBZ (Algemene wet Bijzondere Ziektekosten/Exceptional Medical Expense Act)

• The original philosophy underlying the AWBZ was that every person in the Netherlands should be insured against the very high expenses of necessary care, which very few people could afford outofpocket. Experience in other countries has shown that it is difficult to solve this problem with private insurance, due to reasons such as the unpredictable nature of future longterm care costs. Over time the ABWZ scheme has expanded to cover services which cannot be described as catastrophically expensive and costs have ballooned. Debate now centres on limiting the AWBZ entitlements to the most vulnerable persons and the most necessary services. Copayments are already so high for higherearners that some services are only used by the less well off. Consideration is now being given to which problems the system should seek to solve.

• Incepted in 1968, The Exceptional Medical Expenses Act provides for care and support in cases of longterm ill health, handicap or old age, to everyone who lives in the Netherlands.

• It covers home help, nursing, care, treatment and supervision in care homes, nursing homes, or institutions. Care in hospitals and rehabilitation centres also falls under the Exceptional Medical Expenses Act, if the stay lasts longer than 365 days.

• The AWBZ is funded by social insurance contributions from earnings of workers (12.5% of earnings capped at about 4,000 Euros per annum for the employed), pensions of the retired and benefits of the unemployed.

• Contributions are also made to the cost of services with the level of payment based on the user's income. The system is therefore comprehensive but unlike Japan there is no cap on the copayments.

• Personal Budgets (Persoonsgebonden Budget) were introduced in 1995 to encourage:

• A personcentred approach to care with increased choice and to encourage competition between providers.

• Allow choice between inkind care and cash benefits via a Personal Budget (for non institutional care)

• To allow cash benefits to be paid for care provided by friends and family.

• However, from 20022010 Personal Budget expenditure rose by 23% annually (from EUR 414 million to EUR 2.2 billion) whilst the expenditure during the same period on care inkind rose by an average of 4% annually. This led to the withdrawal of the right to personal budgets from 2010 from those who had not already received one and the exclusion of compensation to informal carers.

• The recent changes to the AWBZ may mean that the view held in the Netherlands that the state is the steward for the elderly is no longer financially viable and some responsibility may need to be shifted back to the individual and their family.

• Regional care offices are responsible for organising and purchasing care. The care offices are affiliated with health insurers but run no risk on buying LTC, although they are required to keep costs within the regional and national budgets and to purchase care as efficiently as possible.

• Wmo (Wet Maatschappelijke Ondersteuning; Law on Social Assistance) an act covering social services carried out by local councils. This is not an insurance scheme and is affected by the available funds. Home help is provided under the Wmo by a fund which is not earmarked and therefore encourages efficiency since spare funds can be diverted to other uses.

• ZVW (the Health Insurance Act) all residents of the Netherlands are compulsorily insured according to the Zorgverzekeringswet (Zvw, Health Insurance Act), which means that he or she must take out health insurance. Individuals make incomerelated contributions (6.9% of the first 32,369 euros of annual taxable income) for which they are reimbursed by their employer,

although tax is payable on this benefit. Contributions for the selfemployed are individually assessed by the Tax Department.

• CIZ (Centrum Indicatiestelling Zorg; Centre for Care Assessment):

• Every request for AWBZ care must be assessed by this independent organisation. There are no financial incentives; its financial position is not affected by its decisions.

• Assessment for home help (covered under Wmo) is the responsibility of the local council, which has a financial incentive to restrict eligibility. However the majority of these assessments are also carried out by CIZ, although guidelines would be specified by the council.

• LTC expenditure has risen by 66%, from just over EUR14 billion in 2000 to over EUR23 billion in 2010.

• Netherlands spent 3.5% of its GDP on longterm care in 2008, of which 1.2% was for health related longterm care. It spent a total of 10.8% of GDP on Healthcare in 2009 ranking it 23 in the world (USA16.2% (2), UK 9.3% (39)).

• The Health and Longterm Care integrated budget is approved by each new government for the following four years. If the budget is insufficient to meet the costs, measures must be put in place by the Ministry of Health to balance the budget.

• CostSharing differs between institutional and noninstitutional care. Outside of institutions AWBZ beneficiaries have to pay an hourly rate for care that they receive, with an income and age dependent maximum. Cost sharing for domestic help under the Wmo is structured in the same way but the council can alter the parameters within certain limits.

• There are two levels of costsharing for institutional care; high and low. Costs vary according to the length of time in the institution, whether a spouse is still living independently and level of income. Minimum amounts of remaining income are specified for singles and couples, which they can spend freely on clothes and incidentals.

• Sources of payment are set out in Figure 16 below.

Figure 16 – Sources of payment