We can't plan adequately for eldercare needs without knowing the costs, so we need to quantify those costs. In searching for statistical information on the costs of aging, I was not able to find everything I was looking for, but I did find a number of interesting statistics which cast some light on what people over age 65 might expect to pay for housing and care-related expenses as they age.
Average life expectancy has increased by about 15 years since the Social Security program was implemented in the 1930s. If the eligibility age for Social Security and Medicare had increased along with the average life expectancy, it would have risen from age 65 to age 80 by this time. If people were retiring at that later age, the funding problems for the Social Security and Medicare programs would be eliminated, but our lives and expectations would be far different!
We can't plan adequately for eldercare needs without knowing the costs, so we need to quantify those costs. In searching for statistical information on the costs of aging, I was not able to find everything I was looking for, but I did find a number of interesting statistics which cast some light on what people over age 65 might expect to pay for housing and care-related expenses as they age.
Average life expectancy has increased by about 15 years since the Social Security program was implemented in the 1930s. If the eligibility age for Social Security and Medicare had increased along with the average life expectancy, it would have risen from age 65 to age 80 by this time. If people were retiring at that later age, the funding problems for the Social Security and Medicare programs would be eliminated, but our lives and expectations would be far different!
Life expectancy changes once one reaches age 65, since not everyone will reach that age. If one lives to age 65, they can now expect to live 16-19 more years. By 2050, when the baby boom generation retires, average remaining life expectancy at age 65 is expected to be over 20 years. That 20 year period is what we need to plan to fund.
The population over age 65 are very disproportionate users of healthcare. Although they represent 12% of the total population, they account for 36% of total national healthcare expenditures, 36% of hospital stays (admissions), and nearly 50% of all days in the hospital!
People over age 65 have far higher medical expenses than those under age 65, and the projections are that their costs will rise at a far faster rate than healthcare costs for younger people. By 2005, non-institutionalized people over age 65 may average over $14,000 per year of healthcare expenses, over four times the cost of those under age 65. Because these statistics are for the community-based population, this figure does not include the cost of long term care.
The average cost of medical expenditures for the community-based population over age 65 is primarily for hospital costs, but physician, home health, and prescription medicines also represent significant expenditures. Of particular interest is the projected $1,000 of annual cost for prescription medicines, a cost which is not covered by the standard fee-for-service Medicare program.
Looking at the source of payments for these healthcare costs provides some insight into the need for insurance. Only about half of these costs are covered by Medicare, a fact which many people are unaware of. The remaining half of per capita expected costs, about $7,000 a year in 2005, must be paid for out-of-pocket, or by Medicaid or private insurance.
The out-of-pocket expenditures of all Medicare beneficiaries highlight the gaps in the Medicare program. Although hospital costs made up the largest part of the incurred costs, they are a very small part of the out-of-pocket expenses of the average Medicare beneficiary since hospital care is well covered by Medicare. The biggest out-of-pocket expenses are for long term care, pharmacy, and dental expenses, most of which are not covered by Medicare, and for physician services not covered by Medicare. Some of this out-of-pocket expense is in the form of patient deductibles and co-insurance for covered care, and some for uncovered services.
Most people who have Medicare insurance will need supplemental insurance to cover some of the significant co-insurance and deductibles left by Medicare. This insurance could be provided by a private commercial Medigap policy. Medigap policies were standardized by the federal government into 10 policies, called Plan A through Plan J, so that beneficiaries could more easily compare policies from one insurer to another.
Even with this standardization, premiums vary considerably. In this example, taken from data posted by the Illinois Department of Insurance on their Web site, the cost of Medigap policies in the Chicago area varies from $440/year to $5,600/year, depending on the plan, the insurance carrier, and the age at which it is purchased!
Older people will generally elect Medicare Part B coverage, which requires a premium paid to the federal government. That premium is currently about $45/month. This provides coverage for physician and other charges.
The Part B premium is also required if a beneficiary elects a Medicare HMO as an alternative to standard Medicare. A Medigap policy would not be needed for a beneficiary who elects a Medicare HMO, and the HMO premiums are generally less than Medigap premiums, but there are trade-offs for that lower premium, since the Medicare HMO controls which providers and what services the beneficiary can use. There have also been problems when Medicare HMOs have dropped out of the program, requiring the beneficiaries to find alternatives.
Older people may also want to purchase long term care insurance. The premiums for long term care insurance vary widely based on the age at which it is purchased, the sex of the beneficiary, the amount of coverage elected, the waiting period, and a host of other options.
Just to provide a simple example of the potential gross cost of insurance premiums which would accumulate over the 20 years of retirement, this chart shows that gross, non-inflated, insurance premium costs could be $50,000 to over $100,000 over that time, a significant expense many people fail to plan for.
Complicating the planning for the cost of insurance premiums is the fact that health insurance premiums don't move up steadily with inflation, but instead fluctuate widely. For example, Medigap premiums shot up sharply in 1995 after several years of slow growth.
There are a number of types of healthcare used by older people. They are paid for in very different ways, resulting in the need to plan for how all types of care will be funded. Nursing home care is primary funded by Medicaid, the state-run welfare program for people who have exhausted their assets. This is sometimes because people exhaust their assets paying for the nursing home bills, and sometimes because they anticipate the need for nursing home care and gift or spend their money down to a level where they qualify for services. Contrary to what many people believe, most nursing home care is not covered by Medicare, and even when it is covered, the co-insurance is significant, nearly $100/day after the 20th day. Days of care not covered by Medicare or Medicaid must be paid for by private long term care insurance policies or paid for out-of-pocket.
Medical home health care is well-covered by Medicare. People on Medicaid find home health services are limited, since the states have generally concluded it is more cost-effective to provide care in an institutional setting.
Assisted living is a fairly new level of care. It is appropriate for people who are not able to manage for themselves at home, but who don't require 24 hour a day nursing care or daily therapy. This is a type of care which is highly desirable to consumers, but it cannot be funded by Medicare, and there are few places in the country which are licensed to take Medicaid payments. Consequently, the money for this type of service often has to come from private long term care insurance or out-of-pocket.
Independent living is the lowest level of care. People in independent living are still able to take care of themselves and remain independent, but benefit from socialization, transportation, a dining room, or housekeeping services. On average, people in these types of facilities are about 75. At younger ages, most people would not see the benefit to moving out of the family home.
People don't generally move into assisted living facilities until a later date, and they average 83 years old and stay about two years. Nursing home residents average age 85 and stay there an average of 1-2 years.
One common reason for the need for either assisted living or nursing home care is dementia, most commonly Alzheimers. About 1/3 of assisted living residents and about 1/2 of nursing home residents have dementia problems. Dementia is difficult to handle in a person's home unless a full-time caregiver is available, which is not always the case. Even when a caregiver is available, they may not be able to manage a patient with aggression, nighttime wandering, or other common manifestations as Alzheimers progresses.
Another reason why a person may need to move to assisted living or a nursing home is that they require assistance with the activities of daily living (ADLs). These include needs for assistance in dressing, bathing, eating, toileting, or moving around. When people require help with multiple ADLs, it may be difficult or impossible to provide that help in the person's home. Over 50% of people over age 85 require assistance with ADLs.
Interestingly, only a small percentage of the population over age 65 is institutionalized. Even at age 85 and over, 85% are still living in some non-institutional setting.
One sign of the changing ways we provide care to older people is the decline in the average length of stay in a nursing home. That has dropped from 34 months in 1985 to 28 months in 1995, a six-month reduction!
It's important to understand the real likelihood of the need for nursing home care, and the length of time it might be needed, in order to plan and purchase appropriate levels of insurance. Generally, about 40% of people who spend time in nursing homes stay for less than one year, 30% stay 1-2 years, and 30% stay over 2 years.
These numbers will probably change as patterns of use of long term care changes. Assisted living facilities are drawing many people who would have been in a nursing home in the past, and as they become more widely available and affordable, the use of assisted living will probably impact these statistics.
Costs vary widely from region to region, but these are some statistics which compare the costs of different types of healthcare.
Costs also vary widely depending on the level of services provided in different long term care settings.
Just to get some idea of the gross dollars at stake, this chart shows the non-inflated, accumulated cost of spending different amounts of time in assisted living and nursing home facilities, including potential entrance fees (which may or may not be required, and which also vary widely in amount.) As you can see, the potential cost is several hundred thousand dollars.
The potential costs are significant, easily accumulating to a hundred thousand dollars or more. Yet most people are unaware of these costs and do not plan for them. Appropriate planning can have a real impact on actual costs, by doing things like selecting the right insurance for the right situation, and understanding all the alternatives available in order to choose the most cost-effective solutions to problems.