Financing Care for the Elderly

What it can cost and what you can do to prepare for it.

As more Americans live into their eighties and beyond, more families face the challenge of caring for aging parents. In fact, it's estimated that 40% of today's adults will provide financial support for their parents.1 Of course, money is just part of the picture; caring for parents also demands much time and emotional support. Nevertheless, financial preparation can significantly ease the burden of elder care, which has traditionally been carried mainly by women.

Morgan Stanley Dean Witter has prepared this handout to help you understand your options and plan for the costs of long-term care. It surveys the different types of care your parents may require, the costs involved, and describes public and private resources on which you can draw. It also tells you how to get more detailed information on these issues, as well as how to find elder care organizations and facilities in your local area.

TYPES OF CARE AND WHAT THEY CAN COST

Two main factors affect the cost of elder care:

• What type of care your parents need - the level of skill or training required to provide it
• Where your parents live - at home or in one of several different kinds of elder care facilities

Naturally, living arrangements and types of care may change as your parents grow older or if one or both become ill or disabled.

Types of care

Medical care - provided by a doctor or under a doctor's supervision, in a hospital, clinic or private office, primarily to treat acute illness or injury. Miracles of modern medicine, like heart bypass surgery, pacemakers, corneal transplants and hip replacements, have helped four out of five Americans over 65 remain "functionally healthy,"2 but miracles are costly.

• Most hospital procedures cost thousands of dollars at a minimum, and a prolonged hospital stay can cost hundreds of thousands.

Skilled nursing - provided by a registered nurse or licensed physician

• If your parent receives skilled nursing care at home, assuming three visits per week lasting two hours each, expect annual costs in excess of $12,000.3

Rehabilitative therapy - physical, occupational or speech therapy provided by a licensed therapist, whether for chronic conditions or as part of recovery from an injury. Therapy may be provided at a hospital, a specialized facility or at home.

• Costs may be comparable to those of skilled nursing care.

Care by a licensed nurse's aide or home health aide - basic health services such as monitoring the patient's condition and needs, checking vital signs, changing wound dressings or assisting patients in use of medical equipment.

• For three two-hour visits per week from a licensed nurse's aide, expect a cost of $8,400 per year or more.3

Personal (custodial) care - help with everyday functions - dressing, bathing, toileting, eating, walking, housekeeping, etc. Personal care can be provided by a person with limited training, in a live-in facility or in the home.

• Costs of round-the-clock, in-home care vary widely but can range as high as $200-$300 per day.2

Companion/respite care - periodic visits, generally a few hours long, to keep your parents company and check on their situation. If your parents live alone, a companion can visit them when you can't; if they live in your home, respite care offers you time off.

• This type of care is relatively inexpensive and may be free, for example if provided by volunteers from a church, club, school or other organization.

Living arrangements 4

Home care - Many elderly people prefer to remain in familiar surroundings, and the benefits to their morale can be great. However, contrary to widespread belief, home care is not necessarily the most economical option. It can be inexpensive, but, as indicated above, it can cost even more than nursing home care if your parent requires 24-hour assistance and/or frequent skilled nursing care.

Elders who live in their own homes may have access to community support services that can make their lives - and yours - easier, if you are the primary care giver. Examples include:

• senior centers (which offer social, recreational, health and educational programs)
• adult day care centers (which provide personal care and have nursing services available)
• transportation to medical facilities, senior centers, shopping, etc.
• home-delivered meals and group meals at churches or senior centers.

For low-income families, these services may be free or available for a nominal fee. Middle class and affluent families should generally expect to pay reasonable costs.

Domiciliary care homes - Domiciliary care is a state-supervised arrangement in which families or individuals share their homes with one to three adults requiring personal care - e.g., meal preparation, bathing, grooming, financial or medication management - but not nursing care.

Personal care homes/assisted living homes - These facilities also serve elders requiring personal care but not nursing care. They are licensed to serve four or more individuals. The atmosphere can range from homey to institutional. Personal care and domiciliary care facilities may be less costly than nursing homes, but national cost figures are not currently available.

Nursing homes - Nursing homes are equipped and licensed to provide full-time skilled care. The average cost of long-term care in a nursing home is over $46,000 per year5 and can range much higher for elders requiring special medical services. About 43% of people over age 65 spend at least some time in a nursing home.6 While only 25% stay a year or more and only one in 11 stays five years or more,6 the total expense can be enormous. Nationally, one-third of nusing home expenses are paid by individuals and their families.7 (Most of the remainder is paid by public programs for low-income families.)

Continuing care (life care) retirement communities - These facilities provide a continuum of care, from independent living arrangements (apartments or cottages) for healthy elders to group living accommodations with central dining rooms and social centers to nursing home care for those who become ill or seriously disabled. Residents may be required to pay a steep entrance fee and monthly charges, which may or may not increase when nursing care is required. It's vital to study a particular facility's "resident's agreement," or contract, which, by law, must specify all fees and services, as well as the circumstances under which the agreement may be terminated and refunds made.

WHAT YOU CAN DO

A long-term illness or disability, requiring years of nursing or custodial care, could wipe out a lifetime of savings - your parents' or yours. That's why it's critical to develop a financial plan to protect your parents and reduce the burden on family resources.

Make sure your parents get all the benefits they have coming from public programs and private pensions or retirement plans.

Social Security: Almost all Americans who have worked and paid Social Security taxes are eligible for benefits, which depend on the years worked and wages received (among other factors).

• In 1996 the average benefit paid to a retired single worker was $720 and the maximum was $1,248.
• "Non-working" spouses (unpaid homemakers) are eligible for an additional benefit equal to half that of the working spouse.
• Widows are eligible for survivors' benefits based on their husband's salary history - as are divorced women whose former husbands have died (if the marriage lasted ten years).

Medicare: Available to Americans over age 65 regardless of income, and to certain disabled people under 65, Medicare has two parts:

• Part A, Hospital Insurance covers care in hospitals and skilled nursing facilities, as well as skilled nursing care in the home and hospice care. It is free for people - and their spouses - who worked at least ten years.
• Part B, Medical Insurance covers doctors' services, diagnostic services, outpatient care, equipment such as wheelchairs and oxygen, and certain other items. It is optional and costs $42.50 per month.

On average, Medicare pays less than half of older Americans' health expenses,8 partly because of deductibles and copayments and partly because certain critical services are not covered, notably custodial/personal care (the bulk of nursing home and home care costs), routine and preventive health care, and prescription drugs.

Medicare HMOs are a relatively new alternative to traditional "fee for service" Medicare coverage. Under this "managed care" alternative, Medicare pays in advance for specific services from a network of providers in a local area.

• The primary advantages: (a) There are no deductibles and only modest copayments; and (b) HMOs typically offer preventive services not available under traditional Medicare, such as checkups, dental visits and vision testing.
• The primary disadvantage: Only preapproved services are covered.9

Veterans' benefits: A parent who served in the armed forces may be eligible for free or low-cost care at a Veterans Administration hospital, nursing home, adult day care center, mental health clinic, or be qualified for VA-subsidized home care.

Pension and retirement plans: Be sure your parents have taken steps to secure benefits from all previous employers, including benefits from pension plans, 401(k) plans, profit-sharing plans, etc. If necessary, contact the benefits manager or department at each company yourself. Similarly, be sure your parents have made arrangements for withdrawals from any independent retirement accounts they may have, such as IRAs or Keoghs.

Consider insurance to supplement these benefits:

Medigap insurance: Medigap is designed to "fill the holes" in traditional fee-for-service Medicare coverage - deductibles, copayments and exclusions. About three-quarters of Medicare beneficiaries make use of this supplementary insurance.8 Under a 1992 federal law, insurance companies must offer Medigap insurance in standard "packages," of which there are ten, each providing a different level of coverage. Premiums vary by sex and age as well as type of coverage; at age 65 they can range from about $300 to $1,800 annually.10 While the benefits of each package are identical from company to company, costs may vary by as much as 100%8 - so it pays to shop around. Note, however, that Medigap does not cover most of the costs of long-term care.

Long-term care insurance: Designed to provide coverage for personal/custodial care that is not covered by Medicare or Medigap, long-term care insurance is relatively new and complex.

Policies pay a fixed dollar amount (typically ranging from $50 to $250) for each day in a nursing home; some will also pay for in-home care. Policies usually have waiting periods before benefits start. They may offer unlimited coverage or may have caps - a maximum dollar amount paid, or a maximum number of days covered. They may impose different restrictions on services covered, types of facilities or pre-existing medical conditions.

Premiums generally get higher the longer your parent waits to buy a policy. Costs range from $300 to $1,500 at age 55 to $1,700 to $5,000 at age 75.8 Generally, these policies may make sense for elders who have substantial assets to protect and enough income to pay the premiums comfortably. For help in evaluating different policies, you may want to consult one of the many guides available from government agencies and independent organizations.11

Help your parents make the best use of their assets.

"Reverse mortgages" and home equity loans: Many older people are "house rich and cash poor."

• Reverse mortgages and home equity loans allow them to tap the cash that's locked up in their houses. A reverse mortgage is a long-term series of payments - actually, loans - from a financial institution to the homeowner, which, like a traditional mortgage, is secured by the house. At the end of the payment period, the loan must be repaid, presumably by selling the house.
• With a home equity loan, the institution makes a lump-sum loan or extends a line of credit to the homeowner and the homeowner makes periodic repayments.

Savings and investments: If your parents have liquid assets, be sure they get advice from a qualified financial advisor as to how those assets should be invested in light of their current situation and goals. For most elders their goals may include reliable income and preservation of capital for their own lifetimes and future generations.

Save and invest to provide for your parents.

Finally, in light of your parents' needs and the total resources available to them, estimate the amount of financial help they will need from you. Consult with your own financial advisor to determine the best strategy for building the necessary resources as part of your own long-term financial plan - so your parents can depend on you, as you once depended on them.

HOW TO GET MORE INFORMATION AND ARRANGE SERVICES

Public sources: The Older Americans Act of 1965 established a federal Administration on Aging and a network of State Agencies or Departments of Aging. The states in turn operate a network of agencies at the county level, called County Offices of Services for the Aging (COSAs) or Area Agencies on Aging. The latter are invaluable sources of information on locally available services and may also provide direct assistance in assessing the needs of your parents, establishing contacts with service providers and coordinating services.

Private sources: More than 1,200 companies nationwide provide geriatric care management. They advise on living arrangements, recruit caretakers, consult with doctors, assist in managing the elderly person's finances - and in general perform all the functions that you might provide. Often children who live far from their parents will opt for these services. Fees can be $100 per hour or more. To locate a professionally credentialed care manager in your state, contact National Association of Professional Geriatric Managers, 1604 North Country Club Road, Tucson, AZ 85716, telephone (520) 881-8808.

Publications: Federal, state and local government agencies, as well as numerous nonprofit organizations, provide brief guides on virtually every aspect of elder care, generally free of charge. A sampling of these publications appears at the end of this article and in the Source Notes that follow. Several comprehensive, informative books are also available from commercial publishers. (See the Source Notes at the end of this article for some titles.)

Social Security publications:

To obtain copies free of charge, call 1-800-772-1213

Social Security . . . What Every Woman Should Know (No. 05-10127)

Basic Facts about Social Security (No. 05-10080)

Social Security: Understanding the Benefits (No. 05-10024)

Survivors (No. 05-10084)

Retirement Benefits (No. 05-10035)

Medicare (No. 05-10043)

Social Security: What You Need to Know When You Get Retirement or Survivors Benefits (No. 05-10077)

Publications of the American Association of Retired Persons (AARP)

To obtain copies free of charge, write AARP Fulfillment, 601 E. Street N.W., Washington, DC 20049

Making Wise Decisions for Long-Term Care

Care Management: Arranging for Long-Term Care

Before You Buy: A Guide to Long-Term Care Insurance

A Handbook About Care in the Home

Nursing Home Life: A Guide for Residents and Families

Source Notes

1. Yankelvich Partners Inc.
2. Statistics quoted in Nora Jean Levin, How to Care for Your Parents: A Handbook for Adult Children, Storm King Press, 1993.
3. Source: 1993 study by the American Health Care Association, reported in the NAIC Shopper's Guide (note 7). Costs have probably risen somewhat since the data were collected.
4. General source for the description of living arrangements: Pennsylvania Department of Aging: How to Select Long-Term Care in Pennsylvania.
5. $127 per day ($46,355 annually), according to The New York Times, Sunday, Nov. 30, 1997.
6. Peter Kempner and Christopher M. Murtaugh, "Lifetime Use of Nursing Home Care," New England Journal of Medicine, Feb. 28, 1991.
7. A Shopper's Guide to Long-Term Care Insurance, published by the National Association of Insurance Commissioners (NAIC), 1996.
8. Virginia Schomp, The Aging Parent Handbook, Harper Paperbacks, 1997.
9. States and various private organizations provide detailed comparisons of Medicare benefits under the fee-for-service and HMO alternatives. For example, Medicare Managed Care, Pennsylvania Association of Non-Profit Homes for the Aging, 1996.
10. Medicare Supplement Premium Guide, State of Pennsylvania Insurance Dept., 1996.
11. For example: NAIC Shopper's Guide (note 7); or Before You Buy: A Guide to Long-Term Care Insurance, AARP publication 12893.

The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. This is not a solicitation on Morgan Stanley Dean Witter's part for the purchase or sale of any security or commodity. Morgan Stanley Dean Witter and its Financial Advisors do not provide tax or legal advice. Individuals should consult their personal tax and/or legal advisor before making any tax/legal decisions.

©1998 Morgan Stanley Dean Witter Distributors Inc.
Reprinted with permission.