Tax incentives for long term care insurance haven't worked, UH Manoa study shows

University of Hawaiʻi at Mānoa
David Nixon, (808) 956-7718
Public Policy Center
Kristen Bonilla, (808) 956-5039
External Affairs & University Relations
Posted: Nov 28, 2006

HONOLULU — Over a dozen states have wasted taxpayer dollars subsidizing long term care insurance that would have been purchased anyway, according to a new report released today by the College of Social Sciences‘ Public Policy Center at the University of Hawaiʻi at Mānoa.

The report, "State Programs to Encourage Long Term Care Insurance," examined the most recently available sales data for long term care insurance, and found that the populations in those states providing a subsidy are not purchasing more long term care insurance for themselves.

"The logic of our study is very straightforward: if the state subsidies were working, we would see substantially more long term care insurance being purchased in those states," said Professor David Nixon, author of the study. "We don‘t see that pattern. The subsidies are not working."

There are 76 million baby boomers about to reach retirement age in the United States. The Department of Health and Human Services estimates that 40 percent of those 65 and older will need some long term care. Long term care in a nursing home can cost $75,000 to $100,000 a year, depending on where a person lives, while in-home care can also be extremely expensive, especially if round-the-clock or skilled nursing care is needed.

The way many middle class people are increasingly dealing with this is to spend or shield their nest-egg savings, and then start drawing benefits from the program for the poor—Medicaid. However, if that pattern continues, state governments will be fiscally unable to cope as Medicaid claims quadruple over the course of only 15 years.

States are hoping to encourage private purchases of long term care insurance, but so far the proportion of the population that self-insures for long term care is well below 10 percent. Many states are also looking at tax credits or other subsidies to encourage self-insurance for long term care and to shield state coffers from the onslaught of baby boomer seniors, but that approach has not worked so far, according to the study.

Currently, the federal government allows deductions from adjusted gross income for premiums paid for long term care insurance, but only to the extent that total medical deductions exceed 7.5 percent of income. For most people, that very high threshold means the federal deduction is unavailable to them. But states have stepped in to allow deductions for long term care insurance premiums on state income tax. Perhaps as many as 25 states provide some kind of special tax treatment for long term care insurance policies. The typical subsidy allows a taxpayer to deduct the full premium from state adjusted gross income.

"Unfortunately, in many states, the subsidy is pretty meager," noted Nixon. "For example, a 50-year-old woman might expect to pay $2,000 a year for an average long term care insurance policy. If she lives in Alabama, the premium is fully deductible on her state income tax form, but the tax rate in Alabama is only 5 percent, so the deduction is only worth about $100."

Some states have provided tax credits, and taken other steps to provide a more generous subsidy. For example, as much as 25 percent of the premium gets returned to a purchaser in North Dakota. A few states have even provided tax credits for employers who purchase long term care insurance for their employees. But the report finds that even the most generous subsidies have been insufficient to induce additional people to purchase long term care insurance for themselves.

Another noteworthy aspect of the study is that it examined the Long Term Care Partnership programs that might be brought to Hawaiʻi. New York, Connecticut, Indiana, and California created the Partnership programs in the early 1990s as a way to encourage more widespread purchase of long term care insurance. People in these states who purchase qualifying policies are allowed to shield their assets and perhaps draw Medicaid if and when they use up their insurance benefits.

That‘s a potentially important carrot for the many people worried about spending themselves into impoverishment with long term care costs. If the insurance actually helps shield the state from caring for those people under Medicaid at the beginning of their long term care, it can be advantageous for the state. However, the report found that private purchase of long term care insurance is not any better than expected, given the health, income, and family structure patterns in those states.

"Partnership policies have proved to be only a small segment of the long term care insurance market in those states. The Long Term Care Partnership programs have not panned out as a magic bullet for the long term care problem, either," Nixon concluded. "Worse yet, they might be expanding the population eligible for Medicaid benefits. We need some very careful research on that front before proceeding."

The full paper and a policy brief are available online at

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