Long-Term Catastrophic Care: A Financial Planning Perspective

Abstract

Long-Term Catastrophic Care: A Financial Planning Perspective Abstract This article uses responses to a mail questionnaire survey of financial planning professionals to assess the state of the art in financial planning as it relates to long-term catastrophic illnesses. The reported findings suggest that financial planners give insufficient attention to protecting clients from the potentially devastating financial consequences of long-term illness. Moreover, most clients of planners are generally unaware of this problem. Resulting recommendations include development of better insurance products and implementation of educational efforts in order to enhance consumer awareness. Introduction This article assesses the current state of the art in financial planning as it relates to long-term catastrophic illnesses.(1) Its findings are drawn from responses to a questionnaire mailed to a broad sample of practicing financial planners. The long-term care problem is described; information gathered from the survey of financial planning professionals is presented and analyzed; and a summary and recommendations follow. The Problem In March of 1987 the Subcommittee on Health and Long-Term Care of the House Select Committee on Aging released a report[5] revealing the extent to which Americans are vulnerable to financial devastation resulting from catastrophic illness. According to this report, some 20 million Americans will fall victim to catastrophic illness each year. Of those, one million will be forced into within a year; 5 million will simply go without care; and countless others will suffer great financial hardship paying for the care they desperately need. Source of the Problem Why are so many people unprepared to deal with the financial problems associated with a catastrophic illness? The health coverage of all but a fraction of 1 percent of Americans does not cover long-term care costs which can easily run over $25,000 per year[6]. Medicare, which covers approximately 32 million elderly Americans, pays for doctors' services and acute care provided in the hospital, but does not cover long-term custodial care outside the hospital. Hospitalization and major medical insurance offered predominantly through employers provides health protection to approximately 150 million Americans. In most cases, this insurance mirrors the protection offered through Medicare; coverage is geared toward acute care in the hospital and little if any coverage is normally provided for long-term custodial care. Medicaid pays for a broad range of medical and medically related services including long-term custodial nursing home care. However, to qualify for Medicaid a person must be virtually impoverished. Eligibility in most states requires a person to have less than $1,800 in annual income and $3,000 in assets. Long-term care insurance is now offered by approximately 70 insurance companies.(2) Unfortunately, these policies have not been widely purchased; less than 1 percent of Americans are covered[6]. Current Solutions For the overwhelming majority of Americans not covered by long-term care insurance, the costs of a catastrophic illness must be paid out of personal resources. Because most families cannot sustain the burden of these costs for any lenght of time, they end up spending themselves into and relying on public assistance provided by Medicaid. Ironically, the only widely advocated strategy for dealing with the financial consequences of an uninsured catastrophic illness is to qualify the afflicted individual for Medicaid by transferring his or her assets to another person or legal entity. One problem with this artificial poverty approach is that the asset transfer must be made at least two years prior to Medicaid application. A second problem is the adverse psychological impact on the patient that can result from transferring assets. …