Long term care costs to increase 30% by 2050

The cost of long-term care (LTC) will rise by 30% in today’s prices, maybe more, over the next 50 years in four of the world’s most developed countries, new research shows.    The three-year research project has found that ageing populations and the changing structure of the traditional family unit are largely to blame for soaring care costs.

The research, which was conducted by three actuarial science (the study of pensions and insurance risk) experts at Cass Business School , City of London , in conjunction with a Swedish economist, has profound implications for current LTC systems in the UK , Germany , Japan and Sweden .

As the baby boomers exit the labour market in the UK, the number of elderly requiring LTC will increase from 2.2 million today to 3 million by 2050. This is likely to see an increase in care costs from £11 to £15 billion by 2050 in today’s prices. This is equivalent to an increase from 1 to1.3% of every UK citizen’s salary over the period. A pessimistic prediction will see costs rise to 20 billion or the equivalent of 1.8% of every UK citizen’s salary by 2050.

In most cases the increase in demand for LTC is the same across all care settings (residential and nursing homes) but the most noticeable increase is in demand for formal home care which is projected to be almost 60% above the current level in 2040.

One of the researchers, Ben Rickayzen, says this increase reflects a global change in family makeup. “Currently, approximately 70% of LTC is provided informally by relatives and friends. But with a trend towards smaller families where children live further away from their parents, the traditional nuclear structure can no longer be relied upon as a source of care in old age.”

This substantial increase in demand means that formal care settings such as residential homes are likely to become much more expensive in the future. Rickayzen says it is this change that will have the greatest impact on skyrocketing care costs.  He says it will also mean those working in formal care could see substantial wage increases as demand grows.

Optimistic predictions suggest the current level of informal care will be able to support the increase in demand but pessimistic predictions indicate the UK will have a shortfall of three million informal carers by 2050 (assuming that each carer is working 20 hours per week).

The Research also shows:

·        The LTC systems of the countries studied are substantially more favourable to women

·        The UK has the cheapest but least comprehensive LTC system

Women benefit financially over men in long term care provision

In monetary terms, all of the LTC systems studied are extremely favourable to women, the research has shown.

In the UK , women get the equivalent of £1.33 more in return for each pound spent on LTC than their male counterparts. Rickayzen says this is largely due to the fact that women live longer than men and are more likely to become disabled. The nature of their disability is also more likely to require expensive care.

“While this may seem unequal on the face of it, it needs to be remembered that married women are likely to be the providers of informal care to their husbands before they themselves need it. Therefore, in countries where a high percentage of the population marry, an unequal distribution of resources is inevitable.”

Comparatively speaking, the British system is favourable to young males and females, particularly young women in the high-income bracket. However, middle aged British woman would fare better under the Swedish system, irrespective of income. Older people fare better in Japan and Sweden . Sweden is the most favourable system for older people on all income levels.

When considering the value for money of each public LTC system, The Swedish and UK systems offer better returns for middle aged and old males, whereas the Japanese system is more favourable for young individuals. For females, the Swedish system is favourable, apart from for young women, where the Japanese system is preferable. The UK system favours low income earners while the Japanese system favours high-income earners.

UK offers cheapest but least comprehensive LTC system

The UK offers the cheapest LTC system but it is also the least comprehensive of those countries studied.

Comparisons of the different systems have shown that if the UK adopted a Swedish-style system it would benefit females, older people and low income-earners, whereas young people would be the clear losers. This is due to the fact that a very comprehensive system benefits people with low incomes and greater needs (generally speaking, this is women and older people).

A switch to a Japanese style system would benefit young people since they play a minor role in financing the system. A switch to the German system would not benefit any group because it offers few improvements to most people while using a regressive method of financing.

Rickayzen says, “the Government has two options. It can continue to offer a no frills long-term care policy that provides a bare minimum service, relies heavily on informal care and will see some people falling through the gaps. Alternatively, it can adopt a more comprehensive system that provides a better service but costs a lot more. This would require a major overhaul of our current tax and legislation laws.

“It seems more probable that the UK will continue on its current path and this could see a rise in the demand for private LTC insurance. However, based on the UK experience to date, and despite UK insurers’ best endeavours, the market for LTC insurance remains very weak.”

“If demand for private LTC insurance does significantly increase, a key question for researchers and insurers will be to identify the stage of life when an individual is most susceptible, and therefore inclined to buy, LTC insurance., This will help insurance companies’ design appropriate products to target customers and suppliers of LTC.”

Rickayzen adds that it might be worthwhile for insurers to develop more products which enable homeowners to release the equity in their property to pay for LTC when it’s required.

Background

There is global trend towards an ageing population in developed nations, especially as the baby boomers begin to exit the labour market. There is widespread concern that this will swell demand for LTC services in the near future and create huge public expense. Long term care is administered to those who rely on others to fulfil their social, personal and medical needs. It is usually reserved for the very old but also applies to those with disabilities.

Each of the countries studied has differing LTC strategies. However, they all have an ageing population and have undergone some sort of LTC reform in recent years. Up until now there has been little in the way of comparative analysis to help governments decide on their future approach to the provision of LTC.

A synopsis of each country’s current LTC system:

Sweden – provided to every citizen and services are predominately publicly owned. Funding is decentralised to local authorities and the national government takes a regulatory role.

Germany – Have universal compulsory LTC insurance, effectively a tax on wages, that covers 90% of the population. Most of the rest of the population have signed up to voluntary private insurance.

Japan – Universal and compulsory social insurance that is financed partly from general taxation and partly from contributions from the older half of the population.

UK – Eligibility to free or subsidised care is based on means testing with homes taken into account as assets. NHS and local authorities provide LTC, which has led to regional variations in how LTC is funded. There is only a small market for voluntary private LTC insurance.

Full research title: An International Comparison of Long-Term Care authored by Martin Karlsson, Department of Economics, European University Institute, Florence ; Les Mayhew, Professor of Statistics, Cass Business School ; Robert Plumb, Lecturer in Actuarial Science, Cass Business School ; Ben Rickayzen, Senior Lecturer in Actuarial Science, Cass Business School . The research project received funding from the Faculty and Institute of Actuaries .

Cass Business School , City of London was formerly known as City University Business School . The School offers a full range of top-ranked undergraduate, specialist masters and MBA degrees and has extensive executive education programmes. We currently have 2500+ students with 100 full-time and more than 150 part-time staff. The school undertakes research of national and international significance and supports almost 100 PhD students.

For more information, or to get a copy of the report, call Caleb Hulme-Moir 0207 040 5147 or 07800 854 970

  (8/5/04)