Prior to 2006, the primary unmet healthcare need for retirees has been coverage of prescription drugs. Up to this point, Medicare has been providing retirees with coverage for most other acute services, including inpatient hospital, physician and outpatient hospital services. Beginning in January 2006, a new component of Medicare (Part D) will cover a portion of the prescription drug costs.

Now, the primary healthcare hole in the safety net for elderly Americans is the lack of adequate long-term care (LTC) coverage. Given the growing population of elderly baby-boomers, escalating nursing home costs, and extended average life expectancy, their financial situation is extremely challenging. All other healthcare coverage, including employer coverage and Medicare, focuses on acute services. However, the introduction of Medicare Part D creates an opportunity to redirect resources from the prescription drug costs to this needed coverage.

Consider the following comparative analysis of the value of Part D and LTC costs. Part D estimates are based upon the employer dropping drug coverage in favor of Part D (the employer could also receive a direct subsidy from the government while maintaining drug coverage). The LTC costs are based upon $150 per day in the nursing home, some portion of which may be covered by the employer. The 2005 annual drug costs and frequencies were obtained from the Milliman Health Cost Guidelines 65+ and the LTC cost estimates were determined using Milliman Long Term Care Guidelines.

(The above costs are for illustration only and are not appropriate for financial decisions. Actual costs will vary, depending upon individual circumstances.)

From the employer’s perspective, the savings from Medicare Part D present an opportunity for replacing current and future retirees’ drug benefits with LTC coverage. And, since LTC frequencies are dropping and unit costs are fixed, such coverage should be much less risky to employers than prescription drug coverage, which has increasing utilization and cost trends. Therefore, since Part D will reduce prescription drug benefit accrual, this will free up resources to provide LTC benefits for retirees and simultaneously reduce the employer’s future risk.

Why is true group long-term care so important?

• Many Americans will have no way to pay for long-term care services when they are needed.
• Insurance for long-term care will not become widespread if only available on an individual basis, which means that the change will need to come first from employers.
• Group coverage needs to include employer contributions to make it affordable to employees and vesting to make it affordable to employers.