Reforming Long-Term Care Arrangements in Japan

Introduction

Elderly individuals face a significant risk of finding themselves alone, sick, and poor. Fortunately, Japanese benefit from a comprehensive safety net provided by public pensions, public health insurance and most recently public long-term care insurance (LTCI). However, Japan is rapidly aging and the costs of public LTCI are increasing rapidly, and it is likely that copays will have to be increased and/or coverage levels reduced. This essay explores who needs and provides LTC services and uses insights from a comparison of LTC arrangements in Germany and the USA to propose strategies for filling the coverage and financing gaps of a smaller public LTCI program in Japan.

Demand for Long-Term Care Services

Long-term care differs from acute care in its nature and objectives. Acute care addresses intense, transient health events with the goal of cure or recovery. Long-term care offers support with daily activities and chronic health issues and aims to decelerate the progression of decline and enhance the quality of life. In Japan, 69% of individuals aged 65 and older will need long-term care before they die, and women are more likely to require care than men. On average, women need care for 12 years, compared to 8.7 years for men.

A Comparative Analysis

When contemplating policy reforms of LTC arrangements in Japan it is helpful to compare who provides LTC services and how these services are financed in Japan, USA and Germany.

Provision of Long-Term Care Services

Long-term care services are provided informally by family and friends, formally at home by professional care providers, and in the more serious cases in assisted living facilities. Informal care in Japan accounts for 44% of the total, formal care at home for 40%, and formal care in nursing homes for 16%. In contrast, the USA relies heavily on informal care (75.5%), with much lower percentages for formal care at home (11.5%) and in nursing homes (5%). Informal care (54%) is also large in Germany with formal care at home and in nursing homes accounting for 24% and 7%, respectively.[1] The direct costs of formal care are higher than informal care because a large fraction of it is provided by family members.

Financing Long-Term Care Services

The financing of total long-term care services including assistance with daily living activities and medical care varies significantly between Japan, the USA, and Germany. In Japan, the costs are covered through a combination of out-of-pocket payments (7.7%), public funding (46.1%), and compulsory premiums (46.2%). The USA has a more diverse financing structure, with out-of-pocket payments (19%), public funding (29%), compulsory premiums (42%), and voluntary insurance (10%). Moreover, most of the public funding in the US is for medical care. The majority of long-term care expenses are paid for out-of-pocket. Germany relies heavily on public funding (70%), with out-of-pocket payments (24%), compulsory premiums (2%), and voluntary insurance (4%).[2]

Summary

Japan's approach to long-term care differs from that of Germany and the USA. Japan provides more formal care at home and in nursing homes and the share of informal care is relatively small. It is important to emphasize that Japan provides quality LTC services at a good price. Assisted livings costs are much lower in Japan than the other two countries and out-of-pocket cost are also lower in Japan.

The Current State of Private LTCI

A common feature of Japan, Germany and the USA is that the private LTCI market is small in all three countries. Private LTCI ought to be an attractive option for individuals, nursing home care is costly and the risk of a nursing home stay is significant. In joint research with Kopecky and Koreshkova (2019, Econometrica) we attribute low private LTCI take-up rates to three factors.

1. Administrative Costs: The costs associated with selling and paying claims for LTCI are higher than for other life insurance products.
2. Adverse Selection: Individuals with a higher risk of needing long-term care are more likely to purchase LTCI, leading to higher premiums.
3. Public Insurance: The availability of public insurance crowds out the demand for private LTCI.

Another factor that has received attention in the behavior finance literature is

4. Cognitive Biases: It is uncomfortable for a 35 year-old to contemplate let alone act on the risk of an adverse event that won’t occur until they reach the age 85. As a result of present bias, many individuals defer the purchase decision until they are in their late 50s or 60s and know more about their nursing home entry risk. Unfortunately, the cost of providing private insurance to the elderly is high due to adverse selection and those who wait too long to apply find themselves facing high premia or seeing their applications turned down.

The Conundrum

The fiscal cost of providing public long-term care is rising at an unsustainable pace and the conundrum Japan faces is how to rein in public insurance without increasing out-of-pocket costs and/or reducing benefits. One possibility is to further enhance the productivity of formal long-term care services in nursing homes and other care facilities. However, Japan already provides a high quality of formal care at LTC facilities at a much lower cost than Germany or the US. Additional improvements in productivity are likely to be limited. Thus, individuals with LTC needs are likely to pay more and receive less public assistance.

Two Strategies for Coping with Less Public LTCI

1.New Private Long-term Care Insurance Products

Recent reforms in Japan's pension system present new opportunities for private LTCI issuers. Companies are shifting from defined benefit to defined contribution plans, such as 401k plans and iDeCo (individual defined contribution pensions). These plans allow employees and individuals to choose how their savings are allocated and decide between lump-sum payments or annuities upon retirement.

Annuities and Long-Term Care Risk

Annuities provide a fixed monthly payment for life, making them suitable for individuals expecting a long, healthy life. Traditional annuities have low internal rates of return. New variable annuity and indexed annuity products are more popular because they offer higher returns. Unfortunately, these products do not provide effective insurance against a lengthy nursing home stay. Adding a LTCI rider to these products does because it provides higher monthly payments if the annuity holder experiences a long-term care event.

A New Opportunity

The advent of defined contribution pension plans provides a new way to market LTCI. Current LTCI insurance products are marketed to individuals directly. Instead, I propose that LTCI riders be marketed by life insurance companies as a group insurance product to defined contribution plan administrators. Defined contribution (DC) plan administrators manage employee retirement saving accounts. This is a competitive market and DC plan administrators compete by offering new products to employers that have amenity value to their employees. One recent successful innovation in financial products for DC plans are target date funds. These funds, which automatically adjust an individual’s portfolio as the person ages, have been found to correct misperceptions by employees about the best way to allocate their retirement savings. Younger workers also have misperceptions about LTC risk and including LTCI riders in DC plans provides similar benefits.

2.Supporting the provision of informal long-term care services.

Promoting long-term care by family members

Most informal care is provided by family members and other members of the local community in Germany and the US. Informal care services are smaller in Japan but still significant. Managing late-stage dementia is best left to formal care providers. But informal care can delay and even prevent nursing home entry for the elderly. Those needing assistance usually prefer to receive it from family and friends instead of strangers and regular face to face interactions with family and friends reduces the pace of cognitive deterioration. Moreover, informal LTC services are much cheaper than formal care services. Barczyk and Kredler (2018, Review of Economic Studies) find that small financial subsidies encourage family members to offer help. Germany and the US offer financial incentives for family members who provide informal care services. The US exempts a family member who lives with and provides informal care services to a parent from inheritance taxes on the home and Germany allows public long-term care beneficiaries to receive a cash benefit and compensate family members who provide informal LTC services. Japan doesn’t offer these incentives. Small financial incentives could benefit both the recipient and their assisting family member.

Promoting Informal Care by Others

The structure of families in Japan has changed. Traditionally, most informal care services were provided by women family members. However, labor force participation of married women has increased, families are smaller, and cohabitation of parents and adult children is less common. Given these changes in family structure, informal care by family will only be a part of any effort to maintain or possibly even boost informal care provision. Life expectancy in Japan has increased, while retirement ages have remained relatively stable. This has resulted in a large number of retirees aged 65-75 who are young and healthy. Long-term care risk increases with age peaking in the 80+ age group. Thus, young retirees are a new potential source of informal caregivers. Actions by local governments to foster bonds among younger retirees within their cohort and with older cohorts create social interactions that are health preserving. Parks & recreation, community center activities that support hobbies, learning and cultural activities and festivals make the community stronger and strong communities provide more informal care for members who experience adverse events.

Closing Remarks

Aging is ongoing in Japan and the demand for long-term care services will continue to increase rapidly. Developing and marketing new LTC financial products to employers will ease the burden on households who require these services if the products address cognitive biases that lead individuals to wait too long to provision for LTC risk. Informal care has traditionally been the biggest pillar of long-term care. It remains significant today but is shrinking. Small, targeted subsidies to the family and the community can buttress informal LTC service provision and also enhance welfare of the elderly who receive care from loving family members and good friends.