Federal Employees News Digest

Informed Investor: Nursing Home Prices Expected to Continue to Skyrocket

A previous “Informed Investor” column discussed the decrease in long term care (LTC) insurance policy sales and the addition of hybrid policies (combined life and LTC insurance or annuities) to pay for the increasing cost of LTC. LTC insurance policy premium costs are soaring for a number of reasons. This column looks into the US nursing home costs, and in particular discusses what has happened in US nursing home prices in recent years, and what is expected to happen with respect to these prices in the future.

Georgetown University Medical Center conducted a study of US nursing home prices for the period 2005 through 2010. The study revealed that LTC costs in the United States are increasing at a far greater pace than overall inflation. Additional data showed the upward trend has continued since 2010. To make matters worse, many nursing home residents who do not own LTC insurance - this includes many federal annuitants and spouses - must spend down the bulk of their life savings before qualifying for federal assistance in the form of Medicaid. The latter trend is intensifying and expected to get worse. Life savings include home equity, traditional IRA’s, Roth IRA’s, Thrift Savings Plan (TSP), and other qualified retirement plans, and non -retirement assets such as investment assets held in brokerage accounts.

Future health care costs are increasing at a rate exceeding the general inflation rate. Recently retired federal employees (most of whom are the so-called “baby boomer” generation) need to be especially concerned as to how they will pay for future LTC costs and specialty prescription drugs if needed. But younger generations need to be concerned as well. Generation X, millennials, and Generation Z need to be concerned as they too face a bleak future when it comes to future LTC costs. Individuals who have disabilities, dementia, or Parkinson disease face perhaps nursing home stays in the future that could deplete their savings. 

According to a recent Department of Health and Human Services report, nursing homes have long been a source of financial drain on retirees and, as such, constitute one of the greatest risks retirees face when it comes to managing their retirement assets. The unfortunate thing is that the annual cost for nursing home care will continue to grow at a rate much faster than the consumer price index for urban workers (CPI-W), which is used to determine annual cost-of-living adjustments (COLAs) for federal annuitants and Social Security recipients.

The problem of rising nursing home costs is further aggravated by the fact that nursing home care is an industry that requires significant “hands-on” attention, and technology cannot eliminate many jobs. While the labor market for nursing homes is already tight, uncertainty over US immigration rules may further reduce available health workers. According to the Urban Institute, during 2017 immigrants made up 23.5 percent of formal and non-formal LTC employment sector workers.

The “baby boomer” generation is in their 60’s and 70’s and approaching their 80’s, which means that many of them will need nursing home care or other types of LTC. This generation is rather large, with few of them having saved enough to pay for extensive nursing home stays and other types of LTC such as performed in the home. A minority of “baby boomers” purchased LTC insurance, and many of those who did in the 1990’s and early 2000’s can no longer afford the premiums and as a result have dropped their LTC insurance policies.

Some states have started to implement programs to pay for LTC. The state of Washington passed legislation in April 2019 that will implement a 0.58 percent payroll tax that would give Washington state residents up to $36,500 to pay for LTC services. Payroll tax withholding will begin in 2022, and state residents can start withdrawing to pay for LTC services starting in 2025. But that is just one state.

Finally, there is the possible Medicaid option. Medicaid is a federal government-sponsored program in which individuals who are “impoverished” may be able to qualify for assistance to pay for a nursing home stay. The federal government provides Medicaid funds to the states and the states develop guidance for determining which state residents are considered “impoverished” for the purpose of qualifying for Medicaid assistance. With either a CSRS or a FERS annuity and TSP retirement income lasting a lifetime for federal annuitants, it is rather doubtful that the average federal annuitant would qualify for Medicaid assistance. But perhaps the worst part of qualifying for Medicaid assistance is that the qualifying individual must go to a Medicaid-approved facility. Medicaid does not pay for LTC services performed in an assisted living care facility or at home. The qualifying individual must reside in a Medicaid-approved nursing home facility. To qualify, the individual is forced to spend down financial assets, with certain restrictions and limitations.

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant and IRS Enrolled Agent in Silver Spring, MD.  Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652.

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