What’s Bad for GE Will Be Worse for America
General Electric’s multi-billion-dollar loss in a unit that sold long-term-care insurance is a blow from which the iconic company is still reeling. But it’s also a harbinger of a much greater challenge for society at large: paying to care for the growing number of Americans who can’t look after themselves.
GE’s travails stem from the early 1990s, when insurance companies began developing a new line of business, offering policies that, in return for regular premium payments, would cover the cost of a nursing home or other long-term care if the need arose. With the baby-boom generation approaching retirement, sales took off. By 2007, some 7 million policies were in force, generating almost $10 billion a year in premiums.
The insurers miscalculated. Claimants lived longer than expected -- perhaps because people prudent enough to buy the insurance were more careful about staying healthy. But longer lives meant more people needing long-term care. Medical costs rose, and investment returns fell short. To cover their obligations, companies had to increase premiums (as far as regulators allowed) and, like GE, take big charges against earnings. Penn Treaty was forced into liquidation, leaving policy holders to rely on meager state guaranty funds.
Tempting as it may be to blame regulators, that wouldn’t be fair. True, they could have allowed more premium increases sooner, and they should always demand that companies have ample equity to absorb losses. They’ll need to investigate GE’s accounting. But new insurance products are inherently risky, and companies are bound to make mistakes. Officials shouldn’t be expected to catch risks that actuaries can’t foresee.
Rather, the debacle illustrates a troubling truth: Private insurance can’t handle this problem by itself.
By 2050, the U.S. will have almost 90 million people aged 65 and over, and more than half will need long-term care at some point. Yet only a sliver of that group can afford the premiums insurers require. As of 2015, private insurance covered less than 10 percent of U.S. spending on long-term care -- and the private market has been shrinking.
Medicare covers only a short period of care after a person has been hospitalized. That leaves Medicaid, the state-administered program for the poor. But it kicks in only after people have burned through their assets -- precisely the outcome that insurance is meant to avoid. The paperwork involved is a protracted ordeal, especially for those with physical and mental impairments, suddenly thrust into poverty.
The challenge is to design a safety net that will deliver long-term care when it’s needed -- without making people destitute first, yet without burdening taxpayers unduly. This isn’t only a matter of compassion: There’s a strong economic argument as well. The cost of long-term care weighs heavily on the economy, as family members step in to do what the health-care system does not. The lifetime cost to caregivers in forgone wages and other losses has been put at $3 trillion.
The scale of the problem is daunting -- but the issue isn’t going away. Future editorials will look more closely at possible solutions.
--Editors: Mark Whitehouse, Clive Crook.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com .