Financing eldercare (Note)

Abstract :

• This article highlights the challenges associated with financing dependency.
• Two sub-issues overlap: improving the care of dependency and demographic changes;
• Private long-term care insurance is a very imperfect substitute for public funding.
• It is important to consider the effects of policies on family caregivers, who take on a significant portion of the needs associated with dependency.
• Improvements in productivity in the long-term care sector are uncertain.

This article puts into perspective the various challenges related to dependency and the trade-offs that need to be made. It discusses various financing options and highlights the limitations of private long-term care insurance in addressing the challenges of dependency, even though it may provide better coverage for certain risks at the individual level.

From the strike by staff at nursing homes for dependent elderly people (EHPAD) to President Macron’s statements in a recent interview, the issue of financing dependency has recently returned to the headlines. Today, understaffing in EHPADs creates situations that are often considered unacceptable for patients, families, and staff, who are poorly paid given the burden they bear. Furthermore, at the individual level, public programs to address long-term care only cover part of the costs incurred. What are the challenges and possible choices in light of this situation?

Why is dependency so costly?

Dependency is expensive. Or rather, responding adequately to the needs generated by dependency is costly. To understand why, we need to return to a basic economic concept: productivity. In general, a technology is said to be productive if it saves labor, i.e., if it allows large quantities of goods or services to be produced with relatively little labor. At the macroeconomic level and in the long term, the standard of living is fundamentally linked to changes in productivity: if the average standard of living in France is much higher today than it was two hundred years ago, it is because we are producing much more while working less. In other words, advances in technology and production organization have made it possible to save on labor.

However, this increase in productivity over time can vary greatly from one sector to another: industry has seen much higher productivity gains than many services. This is the case for those generally related to dependency. Even today, providing quality services for highly dependent elderly people requires a large staff. And it is not certain that current technological advances will lead to real improvements in a service where human contact is often highlighted as a key factor in well-being.

The situation may be different when it comes to home care, where the main issue is supervision, which tends to place a heavy burden on family caregivers. Innovative housing structures or robotic technologies to compensate for certain losses of autonomy could potentially reduce these supervision needs while increasing the well-being and autonomy of certain dependent elderly people. In any case, these developments remain uncertain.

This last point leads us to mention a significant cost of dependency that does not appear directly in budget reports: that of informal care, often provided by family members. In 2011 in France, the cost of dependency was estimated at between €41 and €45 billion (approximately 2% of GDP), of which €23.5 billion was covered by public spending (€12.2 billion for care, €8.1 billion for assistance with daily living tasks, and €3.3 billion for accommodation) and €7 to €11 billion (between 17% and 25% of the total) corresponding to a monetary valuation of informal care (Bozio et al., 2016). Furthermore, informal care can have medium- or long-term consequences at the individual level that are generally not taken into account in these calculations, particularly in terms of health or labor market participation.

Given current budgetary constraints, there is a significant risk that incentives will push some decision-makers to implement policies that shift part of the burden of dependency onto informal caregivers. It is natural that the sharing of dependency costs should be part of the debate. However, care must be taken to ensure that the terms of this sharing take into account all the consequences without underestimating certain ones because they are diffuse, more difficult to measure, and do not appear in budget statistics. Today, for example, the way in which public assistance for dependency works tends to favor home care, without this necessarily always being the optimal solution (Wéber, 2011; Bozio et al., 2016).

Ultimately, dependency is costly because it is labor-intensive, and its cost goes beyond what is measured in public or national accounts. Only half of the total cost of dependency is financed by public expenditure, with the other half being borne by individuals or families in monetary or in-kind form.

What resources are needed?

To assess the economic issues raised by dependency, particularly in relation to the situation in nursing homes, it is important to divide it into two parts.

The first part concerns the resources, mainly human, that are mobilized for a given type of dependent elderly person. Although international comparisons are difficult to make due to the absence of standard measures, it seems that the staff-to-resident ratio in specialized institutions is rather low in France compared to other OECD countries.Increasing these staff-to-resident ratios to improve the well-being of nursing home residents and staff would automatically increase the cost per resident. This raises the question of what constitutes acceptable care and what is its cost per resident? There may be many answers to this question, but given the understaffing in some institutions, the cost is undoubtedly much higher than the resources currently being allocated. For example, the director of the Association of Directors Serving the Elderly (AD-PA) estimates that €10 billion more is needed compared to the current situation,[2]which is about half of the public expenditure devoted to dependency.

Furthermore, care professions are unattractive due to difficult working conditions, a lack of recognition, and low salaries. This is to such an extent that recruiting staff can be difficult. An increase in the ratio of staff to patients could make these professions less difficult and therefore more attractive. However, attracting enough people to these professions is likely to be difficult without significant salary increases. This is especially true given that most of these professions require a certain level of qualification. Taking this constraint into account, it is therefore possible that the financial requirements may in fact be higher than those generally put forward.

The second economic issue relates to demographic change, which will automatically increase the share of GDP allocated to dependency while service quality remains constant. Budgetary pressure will therefore increase. For example, the DREES’s central scenario indicates that the weight of public spending on dependency is expected to increase from 1.05% of GDP in 2011 to 1.77% in 2060, due to demographic changes (REF). While it already appears difficult today to provide high-quality care for dependency given the budgetary constraints, this problem is therefore set to intensify.

Financing arrangements

This issue raises the question of financing. One possibility is increased public funding for dependency. This raises the question of trade-offs: reducing spending on other objectives, allowing deficits to grow, or increasing taxes. There are many possible methods, too many to discuss here. However, whichever method is chosen raises the question of how to distribute the financing of dependency between different socio-economic categories and different age groups. It also raises the question of the quality of dependency care we are prepared to finance, given the trade-offs involved.

Another possibility that is sometimes put forward would be to encourage the development of voluntary long-term care insurance (for example, through tax deductions). The general functioning of these products is fairly simple. An individual taking out this type of policy pays a monthly or annual premium from the start of the policy and is covered for all or most of the expenses incurred in the event that they need long-term care services. Until now, demand for private long-term care insurance has remained low in developed countries. In the United States, where we have access to numerous studies and where long-term care poses a significant financial risk for retirees (as the associated expenses are not well covered by public programs), only around 10% of retirees have this type of insurance. Furthermore, this market is not functioning very well.

Several of these dysfunctions may be linked to the fact that these insurance policies are long-term contracts. From the insured’s point of view, there is first of all a counterparty risk. For example, an individual taking out insurance at age 60 may wonder whether, at age 85, 25 years later, the insurance company will be able to honor its commitments if he or she needs to use long-term care services. From the insurers’ point of view, a comparable risk exists. Policyholders may decide to stop paying their premiums and thus abandon their long-term care insurance, which can potentially create a financial imbalance for the insurer. In addition, certain variables can be difficult to predict in the long term (such as inflation, interest rates, and even demographic variables), making it difficult to manage such products. Partly to protect insurers from these risks, US law allows an insurance company to increase its policyholders’ premiums if it loses money on its long-term care insurance contracts. Currently, for example, US insurer MassMutual wants to increase the premiums paid by its policyholders by 77%. MassMutual is not an isolated case, and the number of new subscribers is trending downward. InCanada, two major market players have decided to withdraw from the long-term care insurance market.

These various factors tend to make the purchase of private long-term care insurance unattractive to people who might otherwise be interested in this type of product. In addition, insurers generally refuse to insure people at risk (those in poor health), and only the wealthiest are likely to be able to afford this type of product. Therefore, basing a long-term care policy primarily on the development of long-term care insurance (which is uncertain, as we have seen) may create an equity problem. For these various reasons, it is unclear whether policies aimed at developing long-term care insurance will be able to meet most of the current needs in terms of long-term care and address the concerns that have recently been raised.

Conclusion

Caring for dependent persons is a major challenge for our aging societies, which are seeing an increase in the number and proportion of dependent elderly people. This challenge is all the greater because high-quality care still requires a large workforce. This workforce can be provided by professionals (e.g., staff in nursing homes), but is often provided by relatives (often women). Our societies are therefore faced with difficult choices: improve care for dependency and increase its budgetary weight beyond the increase generated by demographic changes alone, or accept a quality of care that is often considered insufficient.

Furthermore, it is important to consider all the consequences of the choices that are made. Insufficient resources risk placing the burden of dependency on family caregivers, with potentially significant negative consequences (health, family life, career development, etc.). Promoting individual choice to meet certain needs by favoring the long-term care insurance market appears uncertain. Numerous examples show that this market does not function well and that this type of solution can lead to problems of fairness.

References

Bozio Antoine, Gramain Agnès, and Martin Cécile, « Quelles politiques publiques pour la dépendance ? » (What public policies for dependency?), Notes du conseil d’analyse économique, No. 35, October 2016.

Davidoff Thomas, « Long-Term Care Insurance, » in Handbook of Insurance, Springer, pp. 1037-1059, 2013

Dormont Brigitte, Martin Cécile, « The Effectiveness of Nursing Homes in France, » 2011

Fang H., « Insurance Markets for the Elderly, » in Handbook of the Economics of Population Aging, North Holland, Vol. 1, Ch. 5, pp. 237-309, 2016

Fujisawa Rie and Colombo Francesca, « The Long-Term Care Workforce: Overview and Strategies to Adapt Supply to a Growing Demand, » OECD Health Working Papers, 2009

Norton Edward C., « Long-Term Care, » in Handbook of Health Economics, North Holland, Vol. 1 Part B, Ch. 17, pp. 955-994, 2000

Norton Edward C., « Health and Long-Term Care, » in Handbook of the Economics of Population Aging, North Holland, Vol. 1, Ch. 16, pp. 951-989, 2016

OECD, « Health at a Glance, » 2017

Wéber Florence, « Disability and Dependency: Human Tragedies, Political Issues, » CEPREMAP 2011