The Long-Term Care Graduate Seminar
Stephen A. Moses
The following is a transcription (updated as of January 20, 2014) of the
two-hour program presented dozens of times to highly positive reviews
during the Center for Long-Term Care Reform's 2008 National Long-Term Care
We offer this transcript in response to the many requests from audience
members. Find testimonials about the program here:
Each seminar began with a presentation about the "LTC Tour" including a
slide show of the "Silver Bullet of Long-Term Care" at numerous state
capitals. See the slideshow at
When there were long-term care insurance agents in the audience, I began
the program in the following way. Otherwise it began with "The Elephant,
The Blind Men and Long-Term Care."
Has anyone in the audience ever sold a long-term care insurance policy?
Good, quite a few of you.
Well, now, I'm confused. Why do you need more training on long-term care
I mean, after all, we know 70 percent of all people over the age of 65 are
going to need some long-term care. We know 20 percent will require five
years or more.
[Source: Peter Kemper, Harriet L. Komisar, and Lisa Alecxih, "Long-Term
Care Over an Uncertain Future: What Can Current Retirees Expect?,"
Inquiry, Vol. 42, Winter 2005/2006, pps. 335-350,
We know long-term care is a very expensive prospect, whether it's provided
in a nursing home, in assisted living, or in a person's own home.
I assume you do not get in front of people with the offer of private
long-term care insurance as a solution to this problem unless and until
you've qualified them, both medically and financially. Surely, you
wouldn't want to waste their time or yours.
So, here's my problem. You know they need it. You know they can afford
it. You've answered all their objections. So I assume this is a
slam-dunk sale, right? Do you ever still have the experience of offering
this product to qualified people who need it, and they don't buy?
Let the record show that there was a titter of amusement at that
Well, then, I don't understand. What do they tell you to get you to leave
without a signed contract?
Audience: "It costs too much."
Moses: "Right, I'd rather spend dollar-dollars later than nickel-dollars
now." Makes no sense. What else?
Audience: "My kids will take care of me."
Moses: "Sure, I'm just fine with my daughter or daughter-in-law having to
quit her job or take early retirement so she can change my diapers
someday." Anything else?
Audience: "Denial, I'll never go to one of those places."
Moses: "Yeah, I'll never go to one of those places. I'd shoot myself
first. That's usually the guy right? Macho man. Here's the truth. At
age 85, there's a 47 percent probability you'll already have Alzheimer's
Disease. Two-thirds of all residents in long-term care facilities are
cognitively impaired. The reality, Mr. Jones, is that when it comes time
to use it, you won't remember why you bought the gun!
"Or, when you have the stroke, you'll be on a cruise ship, where they
don't let you take firearms aboard."
Now, the reason I begin the program in this way is to show you that the
excuses people give to get you to leave without a signed long-term care
insurance contract have very little to do with the real reasons they don't
buy. Something else is going on under the surface.
But, what? That's what today's program is about. I estimate that 80
percent of the American public who could, should and would buy long-term
care insurance never even rises to the level of concern about the issue to
ask "who pays?"
In fact, I'd say the American public has no idea who pays for long-term
care. They don't know if it's Medicaid, Medicare, or Santa Claus. Nor do
Furthermore, even if they do wonder who pays for long-term care, they have
a pretty good idea that somebody must pay. After all, you don't see
Alzheimer's patients dying in the gutter.
In other words, for most people, the issue of long-term care probably
doesn't even reach the level of full consciousness in their minds. So you
never see them.
And for the 20 percent of the potential LTCI market that you do get in
front of, usually because they've been through a crisis with a family
member recently, you only sell a third to a half for the same reason.
They just don't believe they're as at risk as you're saying.
My goals in today's program are threefold:
First, I want to show you why the public remains asleep about the risk and
cost of long-term care.
Second, I want to show you why everything is about to change.
And third, I want to explain how you can help more people protect
themselves against the real LTC risk and cost in the meantime.
Here's the danger:
If your clients are looking through the rear-view mirror at the issue of
long-term care, what they are probably seeing is how Mom and Dad or
Grandpa and Grandma got nursing home care funded by Medicaid.
If you can help them look through the windshield, however, what they're
going to see is a brick wall of fiscal reality approaching at 100 miles an
The way long-term care has been funded in the past is about to change
dramatically. Individuals and families will be much more personally
responsible for their own care in the future than they have been in the
past. Understanding why long-term care is the way it is today is critical
to preparing for how long term care will be funded in the future.
I'm going to approach today's topic from three different angles.
First, we'll look at the big picture, the long-term care service delivery
and financing system in terms of its full complexity.
Second, we'll trace the history of long-term care service delivery and
financing in order to understand how the system became so dysfunctional.
And third, we'll analyze the current system in order to explain what has
to change and how and when it will change.
The Elephant, the Blind Men, and Long-Term Care
There is an old East Indian allegory about an elephant and some blind
men. It goes like this. Six blind men approached an elephant. Depending
on what part of the elephant they touched, each thought he was grasping
something entirely different.
One blind man touched the trunk and assumed it was a hose. Another blind
man touched the tail and thought it was a rope. A third blind man patted
the flank of the elephant and assumed it was the side of a barn.
The point of this story is that with any complex entity, until you
understand each of its facets and all of their interrelationships, you
really don't know with what you're dealing.
It seems to me that the old story of the elephant and the blind men is a
perfect analogy for the complex issue of long-term care. If you're
looking at long-term care only from the perspective of long-term care
insurance, you're not really seeing the whole picture.
The same holds true for all the other blind men of long-term care. I mean
by that, there are several interest groups or stakeholders concerned about
long-term care. They each view the elephant of long-term care very
differently, and very provincially.
Let me show you what I mean. If I asked you to name one of the blind men
of long-term care, one of the key interest groups in the issue of
long-term care, what would you say?
Audience: "The government?"
Moses: Exactly. The government pays for the vast majority of all
expensive long-term care in the United States. Medicaid and Medicare are
the heaviest funders of nursing home care and home health care. Medicaid,
especially, is the 800-pound gorilla of long-term care financing.
Medicaid funds most nursing home care, and a good portion of home health
care in the United States. But Medicaid is bankrupting the states. It
accounts for 22 percent to 25 percent of state budgets and long-term care
is a third to a half of the average state's Medicaid expenditures.
Medicaid long-term care costs are breaking the bank.
Despite these huge expenditures, Medicaid can't afford to pay adequately
for long-term care. That's true already, and will be more true in the
future, when the baby boomers retire and ultimately need long-term care
themselves. Medicaid reimburses nursing homes less than the cost of
providing the care: $7.7 billion annually and $24.26 per Bed Day less
[Source: "A Report on Shortfalls in Medicaid Funding for Nursing Center
Care," January 2014,
How do nursing homes survive under those circumstances? I'll explain that
later in the program. I'll also explain why it can't continue
So, when the government looks at the elephant of long-term care, it sees a
gigantic fiscal black hole. Government can't afford to fund the long-term
care it pays for today, much less in the future. Yet government continues
to pay for most long-term care not only for the poor, but for the middle
class and affluent as well.
What might be another blind man of long-term care?
Audience: "The public, consumers, people who need long-term care."
Moses: Absolutely, somebody has to receive the care, right? So what
does the public see when it looks at the elephant of long-term care?
The public's response to long-term care is "what, me worry?" Most people
have no idea who pays for long-term care. They're in denial. Hence the
cliché among long-term care insurance agents: "Denial is not a river in
But here's the problem: if long-term care is such a huge risk and cost,
how can the public remain in denial? What enables their denial?
Do you think it could have something to do with the fact that since 1965,
the United States government and state governments have paid for most
long-term care provided in nursing homes or through home health care?
There is another blind man of long-term care, closely related to the
public, but different enough for us to identify it separately.
The third blind man of long-term care is the "senior advocates."
Now, when I ask about organizations that represent seniors and advocate on
their behalf, what comes to your mind?
Moses: Right, but also the Alzheimer's Association, the National Council
on the Aging, the American Society on Aging and many, many others.
What role do these groups play? Are they strong advocates for personal
responsibility and private financing to supplement public financing of
long-term care? Are they wonderful sources of medically and financially
qualified leads for private long-term care insurance producers?
The answer to these questions is "no." Instead of warning their members
that long-term care will require more personal responsibility in the
future and urging them to save, invest or insure for the risk, these
groups often pooh-pooh LTC insurance, saying most people are too young,
too old, too rich or too poor to buy it. They are principally focused on
attracting more financing for long-term care from the government. But as
we've already established, the government has no extra money for LTC
programs. It's a hopeless task to squeeze more blood out of that turnip.
There's also a subcategory of the senior-advocacy blind man of long-term
care. That's the elderlaw bar, including the Medicaid estate planning
attorneys who help affluent people self-impoverish to become eligible for
Medicaid. We'll talk more about these people and how they do what they do
later in the program. For now, it's important to recognize that the more
people depend on scarce government financing of long-term care, the harder
it is for the government to provide quality care to people truly in need.
So, how about another blind man of long-term care? What's another group
critical to providing long-term care?
Audience: "Nursing homes?"
Moses: Correct, but home care providers and assisted living facilities
also. Were talking about the providers of long-term care. Here it's
important to distinguish between providers who receive most of their
funding from government versus providers who receive most of their funding
from private sources.
Nursing homes and home health care agencies are largely funded by Medicaid
and Medicare. Consequently, the tremendously powerful trade associations
representing nursing homes and home care agencies are principally focused
on getting the government to provide more reimbursement to them. Most of
their revenue has always come from government. So that's where they focus
their lobbying and public policy advocacy efforts. They don't spend much
time or money on encouraging responsible long-term care planning for the
I think you will agree that LTC providers are rarely good sources of
qualified leads for private long-term care insurance. These organizations
are struggling to survive next week, next month, next quarter. That's why
they are not particularly concerned about who's going to pay the bills 15
or 20 years from now when someone who buys a long-term care insurance
policy today might finally go on claim.
Assisted living facilities, on the other hand, are in a completely
different position. Their funding comes 87 percent from private sources
AHCA/NCAL Issue Brief, 8/7/13], mostly out-of-pocket expenditures by
residents and their families. So, you would think that assisted living
facilities would be focused on increasing private financing of their
services, including through private long-term care insurance. But they're
Why? Assisted living facilities are also struggling financially. They
too can't wait 20 years for more private payers. In the meantime, they
are tempted to take more Medicaid money, even at rates less than the cost
of providing the care, because any reimbursement is better than none for
an empty bed.
Thus, assisted living facilities are hurt in two ways. Medicaid
subsidized nursing home care draws away potential assisted living
residents and assisted living facilities are tempted to accept
prohibitively low-reimbursement Medicaid residents as a way to fill beds.
I've published in assisted living trade journals in the past warning that
industry against the mistake of taking the same Primrose Path as nursing
homes toward more and more dependency on public financing. [Stephen A.
Moses, "The Sirens' Call, the Primrose Path, and Assisted Living,"
Assisted Living, Vol. 2, No. 2, April 2004, p. 27; http://www.centerltc.com/pubs/Articles/sirens_call.htm.]
A fifth blind man of long-term care is the financiers. These are
the people who provide the debt and equity capital to build, operate, and
maintain long-term care facilities. The LTC financiers represent Wall
Street. They represent investors. If they can make more money in a
sector of the economy other than long-term care, that is where they will
invest their investors' capital. Capital always migrates to its highest
and best use.
The financiers have been burned by long-term care in the past. In the
late '80s and early '90s, they invested heavily in assisted living
facilities. They assumed that nursing home care was highly undesirable
and that the public was spending down into impoverishment for nursing home
care, so that if assisted living facilities (ALFs) were built, the new
service modality would be much more attractive to consumers. They
invested heavily in these beautiful Victorian mansions, but found the new
ALFs could not fill fast enough to be profitable and provide the expected
investment returns. Wall Street, once burned, remained twice cautious.
Several years ago, I attended a conference of the
National Investment Center for the Seniors Housing and Care Industry,
NIC, an educational and trade association for LTC financiers. The first
evening I found myself in a giant Washington, DC hotel auditorium. There
were blinking neon lights in the shape of cocktail glasses. The room was
full of distinguished gentlemen in three-piece suits. I thought I'd hit
the mother lode. "Follow the money," they say. "Show me the money."
That's the key to understanding any industry, I thought. If I can just
show these people how vulnerable long-term care is to public financing and
what a great potential private financing through long-term care insurance
would have, they should get on board.
Boy, was I wrong. I found out they only look at specific projects. "Do
the demographics justify building a facility in this particular location
at this particular time?" is the only question they ask. They gave no
level of concern to the fact that public financing of long-term care is
collapsing and private financing of long-term care is not increasing. In
fact long-term care insurance is of no concern to them at all. LTC
insurance paid $6.6 billion in claims in 2011 (AALTCI,
2012), but that's within a market of over $229 billion a year as of 2012 (CLTCR,
2014). Long-term care insurance isn't even a flyspeck on the windshield
of the larger long-term care marketplace. And it won't be a significant
factor to these investment advisors in the future, because too few people
are purchasing long-term care insurance for the product to play an
important role in funding long-term care in the foreseeable future.
Nevertheless, investors in long-term care are taking a larger interest
lately. I've been invited to consult with many Wall Street people on the
wisdom of investing in long-term care service delivery and financing. But
the bottom line right now is that investors can make more money in other
sectors of the economy than in long-term care. Consequently, we have a
dearth of debt and equity capital to fund long-term care.
This is a serious problem, because America's nursing home infrastructure
is antiquated. The average nursing home in the United States is 37 years
old. The average life expectancy of a nursing home is only 40 years. The
Age Wave is about to crest and crash on long-term care service delivery in
the United States. Yet, we have an institutional bias in the system, an
excessive dependency on nursing home care. We have an underdeveloped home
and community-based services infrastructure. And we lack the investment
capital to deal with these shortages.
Well, there is one more blind man of long-term care, can you tell me what
it might be?
Audience: "Long-term care insurance?"
Moses: Correct. I always put the long-term care insurance industry under
the elephant's tail. [Laughter] You'll see why.
What does the long-term care insurance industry see when it looks at the
elephant of long-term care? Well, 30 years ago the LTCI industry looked
at long-term care and said:
"Wow! What an opportunity! 77 million baby boomers are getting older.
Everyone knows that most people have to spend down their life savings
before they get any help from the government. Then all they get is
nursing home care, which nobody wants. So, if we just offer an insurance
product to help them spread that risk and purchase the care they want,
it's bound to be popular and very profitable."
Is that how it turned out? Not by a long shot. Although actuaries who
were around at the beginning have told me they expected 75 percent of all
Americans to be protected for long-term care by now, the actual market
penetration for private long-term care insurance is less than 10 percent
Long-term care insurers got into the business with stars in their eyes.
Companies, brokers and agents entered the industry with high
expectations. They made a few revolutions and headed out the other side
of the revolving door. Turns out long-term care insurance is much harder
to sell than was originally thought. A key goal of today's program is to
explain why that is and what has to change to fix it.
Those are the six blind men of long-term care. We've now taken the
elephant of long-term care apart. Here's what we found.
The government funds most long-term care but can't afford to do so in the
The public is asleep about the risk of long-term care because the
government has paid for most of it since 1965. So the public is about to
get a rude awakening as government is forced to withdraw slowly from
widespread LTC funding.
Senior advocacy organizations, instead of working to wake the public up to
the need for long-term care planning, have put all their lobbying energy
and resources into promoting more government financing of long-term care.
But that's a dead end.
And ironically, at least for the time being, the easiest money of all to
be made in long-term care is made by Medicaid planning attorneys who wave
a magic legal wand and make the financial liability for long-term care
disappear for their affluent clients--after the insurable event has
Long-term care providers are hooked on "LTC crack." They invest all of
their energy, resources and money into squeezing more revenue out of the
government. But again, that's beating a dead horse, drilling a dry hole.
Nursing homes remain a powerful lobby because they get and have gotten so
much government financing for so long. Home and community-based services
providers have little clout, because the government co-opted a private
market for their services by paying mostly for nursing home care for over
Long-term care financiers are few and far between, because they can make
more money for their investors in other sectors of the economy. Hence, we
have a shortage of debt and equity capital to build, operate and maintain
long-term care facilities in the United States at the very time the
demand for long-term care is about to explode.
And finally, long-term care insurance remains a stunted market, because
the government has paid for most long-term care since 1965, the public is
asleep about the risk, and the long-term care providers are hooked on
Get the picture? What a mess! When you look at the whole elephant of
long-term care, take it apart and put it back together again as we just
have, what you see is a very complicated interrelationship between a lot
of interconnected parts resulting in a totally dysfunctional whole.
How in the world did our country's long-term care service delivery and
financing system get into such a dangerous mess? That's where we're going
next with today's program.
History of LTC and Why it Matters for Financial Advisors and LTCI
I want to change gears now and take another approach to the LTC issue. We
have established so far that the elephant of long-term care is a very
complicated animal. It's comprised of many competing interest groups,
each and all of which have something to gain from continuation of the
We've established that the United States has a welfare-financed, nursing
home based long-term care system in the wealthiest country in the world
where nobody wants to go to a nursing home. And yet most people are
asleep about the risk and cost of long-term care. Until we understand how
this status quo came to be and why, we can hardly expect to identify the
right corrective actions.
So I want to turn now to the history of long-term care service delivery
and financing. How did we get into the mess we're in?
Something really important happened in 1965. Two new government programs
were established. Do you know what they were?
Right, Medicare and Medicaid.
Medicare, of course, was designed to provide acute health care to the
elderly. But Congress decided that something really needed to be done for
low income people as well. So they added Medicaid as kind of an
afterthought to Medicare. Then, as an afterthought to that afterthought,
Congress decided that something should also be done for aging Americans
who need long-term care. So they added nursing home care to Medicaid for
people over the age of 65.
In the beginning, there were no transfer of assets restrictions
interfering with eligibility for Medicaid long-term care. There was no
estate recovery mandate requiring people with sheltered wealth to pay back
the cost of their care. If you were over the age of 65, it was easy to
get the government to pay for nursing home care.
The public isn't stupid. They figured: "You mean, if we want to take
care of Grandma at home, we'll have to pay for it 100 percent out of our
own pockets? But if we put her in a nursing home, the government will not
only pay for her care but send in surveyors to make sure she receives
quality care? That's a no-brainer."
The nursing home industry isn't stupid, either. They said. "You mean the
government is going to put a giant pot of money out in the middle of the
country, somewhere around Kansas or Nebraska, and all we have to do is
build nursing homes, offer the beds to people who want long-term care, and
the government will pay? Terrific. Bring it on."
Medicaid Nursing Home Costs Explode
P.J. O'Rourke, the political satirist, likes to say "If you think health
care is expensive now, just wait until it's free."
For all intents and purposes, the government made nursing home care free
That had the effect of crowding out a market for privately financed home
and community-based care. Why pay out of pocket for home care services,
adult day care, respite care or assisted living, when the government
provides nursing home care?
For the same reason, a market for long-term care insurance to pay for home
care and nursing home care was slow to develop and remains stunted to this
By the mid-1970s, I was working for the Health Resources Administration in
Rockville, Maryland. That's part of the U.S. Public Health Service. I
saw what happened next, up close and personal.
Predictably, the cost of Medicaid financed nursing home care exploded.
The public filled new nursing home beds as fast as the nursing home
industry could build them. "Roemer's Law" said: "A built bed is a filled
The government looked at the exploding cost of nursing home care and
concluded that something had to be done. But instead of addressing the
cause--that is, the fact that government had made nursing home care free
or radically subsidized resulting in higher construction, utilization and
expenditures--they attacked the symptom, the increasing costs.
The government figured "they can't charge us for a bed that doesn't
exist." So, state governments began to require nursing homes to get
permission before they build new facilities. Nursing home companies had
to obtain a "certificate of need" or CON before building new skilled
Now, this arrangement was fine with the nursing home industry. For anyone
already in that business, the Certificate of Need only meant that they now
had a government-enforced monopoly. They might not be able to build more
nursing homes, but neither could their potential competition. Since the
nursing homes' growth was restricted by this limit on supply, however, the
industry simply started charging more for the beds they already had.
That was predictable. In any economic system, when supply goes down or is
artificially restrained from going up, price tends to increase. You don't
need a PhD in economics to figure that out, but the government didn't see
the consequences coming.
The cost of Medicaid financed nursing home care continued to explode.
Once again, the government knew it had to take action. And once again, it
failed to address the cause--i.e., free government financed nursing home
care--and went instead after the symptom--skyrocketing costs caused by
increasing charges to Medicaid by the nursing home industry.
So the government told the nursing home industry they could no longer
charge whatever they wanted to charge for nursing home care. Medicaid
capped its reimbursement rates. This was the origin of the differential
between the very low Medicaid reimbursement rates for long-term care and
the relatively high private pay rates. Today, Medicaid pays only about
two-thirds of the private-pay rate for nursing home care. Private payers
have to pay half again as much as Medicaid reimburses for people in the
same nursing home, sometimes in the same room as the private payers.
With supply AND price capped, what do you think happened to demand? Of
course, demand went through the roof. In the mid-1980s, nursing homes
were 95 percent occupied. At the same time, hospitals were only 55
percent to 60 percent full. If a nursing home was willing to accept
Medicaid's low reimbursement rates, it could fill all of its beds . . . no
matter what kind of care it offered. Consequently, quality of care
collapsed in principally Medicaid-financed nursing homes.
Once again, Congress took note. Even though quality plummeted, costs
continued to explode. True to form, however, government attacked the
symptom (poor quality) instead of the cause (public financing). So
Congress went to the nursing home industry and said, in paraphrase:
"This is America. We cannot tolerate poor quality of care in our nursing
homes. You must improve the care. You must hire more nurse's aides; you
must train them better; you must pay them more. Make sure you dot every I
and cross every T according to stricter regulations. And if you don't, we
will hit you with fines and other penalties."
That was OBRA '87, the Omnibus Budget Reconciliation Act of 1987.
Thankfully, it worked, and quality of care in America's nursing homes is
top notch today. [Audience snickers.] Well, not exactly. If anything,
the problems are worse than ever now, 27 years later.
But when OBRA '87 passed, the nursing home industry wasn't displeased.
They said, in essence, "We're not in this business just to make a lot of
money. We want to provide loving and compassionate care. We love the
idea that you want us to hire more people, train them better and provide
higher-quality care. Only one question though, how much more are you
going to reimburse us under Medicaid to make this possible?"
And the government responded "Money? We don't have any of that. We just
demand that you do all these new things."
Nursing Homes Sue Medicaid
Well, now the nursing home industry was caught between the rock of
inadequate reimbursement and the hard place of mandatory quality. If they
tried to attract more private payers at the higher private-pay rate, they
were accused of discriminating against Medicaid recipients. If they tried
to cut costs, they were accused of providing poor care. It was a hopeless
situation. So the nursing home industry turned to the courts.
Under the "Boren amendment," which was part of OBRA '81, the nursing home
trade associations in many states began suing their state Medicaid
programs for higher reimbursement under Medicaid. The Boren amendment
said in essence: "State Medicaid nursing home programs must provide
sufficient reimbursement for an effective facility to provide decent
care." That's a paraphrase, but pretty close.
[For the precise language, see Joshua M. Wiener and David G. Stevenson,
"Repeal of the 'Boren Amendment': Implications for Quality of Care in
Nursing Homes," at
Who do you think won most of those lawsuits? There's an old saying that
"you can't fight City Hall," so you might think the State Medicaid
programs prevailed. But the truth is, the state nursing home associations
won most of those Boren suits. They forced Medicaid to increase
reimbursements for nursing home care.
So, what do you think the government did next? You guessed it. Congress
repealed the Boren Amendment in the Balanced Budget Act of 1997. Since
then, there has been no floor under Medicaid reimbursement for nursing
home care. Nevertheless, long-term care costs continue to increase and
quality remains questionable.
Medicaid LTC Eligibility Bracket Creep
While all this was going on, another situation developed. Most people who
needed long-term care were receiving it in nursing homes because an
alternative market for home and community-based care had been crowded out
by free nursing home care. So people were finding themselves in nursing
homes, often in semiprivate rooms, paying privately, but sharing a room
with a person on Medicaid.
The people paying privately, or their representatives, noticed that the
person on Medicaid may have had more money throughout most of their lives
than the person paying privately. Because of Medicaid's reduction in the
reimbursement rate it was willing to pay nursing homes, private payers
came to be paying half again as much on average as Medicaid was paying for
Medicaid recipients. That's called "cost shifting." Naturally, this
created a temptation on the part of the private payers to find a way to
qualify for Medicaid. If they could get onto the program, it would pay
not only for their nursing home care, but for other, ancillary services
that Medicaid often pays for but Medicare doesn't, such as foot care, eye
care, dental care and residual pharmaceuticals after Part D.
By the early 1980s, there developed a sub-practice of law, called
"Medicaid estate planning" designed to help middle-class and affluent
people self-impoverish in order to become eligible for Medicaid. I call
this process of extending Medicaid eligibility to more and more prosperous
people "eligibility bracket creep." As Medicaid LTC eligibility expanded,
it created even more financial pressure on Medicaid and reduced the number
and percentage of people in nursing homes who were paying at the higher
private pay rate. Thus, eligibility bracket creep exacerbated all the
problems we've discussed so far regarding access to and quality of care.
Congress Acts to Discourage Medicaid Abuse
Beginning in 1982, Congress tried to get control of Medicaid LTC
eligibility. The first major measure in this direction was the Tax Equity
and Fiscal Responsibility Act of 1982, or TEFRA '82. TEFRA authorized
state Medicaid programs for the first time to (1) penalize asset transfers
done for the purpose of qualifying for Medicaid, (2) place liens on real
property in order to hold that property in a recipient's possession during
their period of Medicaid eligibility, and (3) to recover the cost of their
care from the estates of deceased recipients.
The critical thing to understand about TEFRA '82 is that it was entirely
voluntary. States could implement these new programs or not at their own
discretion. In 1983, I was the Medicaid State Representative for the
state of Oregon in the Seattle Regional Office of the Health Care
Financing Administration (the predecessor organization of the current
Centers for Medicare and Medicaid Services or CMS). It was my job to make
sure that the federal laws and regulations governing Medicaid long-term
care were properly implemented by the state government. The federal
government partially funds and oversees Medicaid. State governments
partially fund and administer the program. So the Medicaid State Rep's
job was to be the linchpin between the federal and state Medicaid
In Oregon, I came across this interesting program called "Medicaid estate
recoveries." It purported to recover five percent of the cost of Oregon's
nursing home program, or about $5 million a year. That was back then.
It's more like $20 million a year now.
Imagine my confusion when I discovered this program. By that time I had
already worked a total of ten years in federal welfare programs. I
thought I knew how they worked. When you're poor . . . when you're
destitute . . . when you have nothing left . . . you can apply for public
assistance, and the government helps you with cash or, in Medicaid's case,
with medical or long-term care services. That's how it was with the old
Aid to Families with Dependent Children Program. I thought it was the
same with Medicaid.
So how could it be that people who are poor and destitute enough to
qualify for Medicaid would spend years in a nursing home at enormous
expense to the state and federal governments, and then, after they die, a
little state like Oregon recovers nowadays $20 million out of their
estates? Where did all that money come from?
That question really fascinated me. So, in 1983 I conducted a study, the
objective of which was to ask and answer the question "What if every state
in the country recovered from estates at the same rate as Oregon?"
I quickly realized that to do this study, I would have to understand how
Medicaid eligibility works. In other words, how could people with
substantial income and assets qualify for Medicaid in the first place?
What I learned is that income is rarely an obstacle to qualifying for
Medicaid. I also found that assets, ostensibly limited to only $2000,
were rarely an obstacle to qualifying for Medicaid. That's because
unlimited assets could be held in exempt form. We'll discuss Medicaid
income and asset eligibility in detail later in this program.
Until 2006, for example, there was no limit on the amount of home equity
that could be exempted. One home and all contiguous property, regardless
of value, was disregarded. It was no wonder, therefore, that people could
qualify for Medicaid, receive free or subsidized nursing home care and
other medical services indefinitely, and still have substantial assets in
The report I prepared for the Health Care Financing Administration in
1985, titled "The Medicaid Estate Recoveries Study," is available at
http://www.centerltc.com/mer_study.pdf. What I found was that most
states had not aggressively implemented TEFRA '82. Most states had put in
place some form of the transfer-of-assets restriction, but back then it
was limited to a two-year look-back and no more than a two-year penalty.
Only two states had implemented TEFRA liens. And while 15 or 16 states
had implemented estate recoveries, most had not done so in such a way as
to maximize estate recoveries. My state of Oregon was an exception in
After I drafted this report, I forwarded it to a number of people
interested in long-term care financing, including several scholars and
federal agencies like the General Accounting Office (GAO is now known as
the Government Accountability Office) and the Office of Inspector General
(OIG) of the Department of Health and Human Services (DHHS). Although
HCFA discouraged my work and refused to publish it, the DHHS Inspector
General loved it and hired me out of the Health Care Financing
Administration to conduct a more comprehensive national study and write a
report titled "Medicaid Estate Recoveries." That report is still available
to read on the OIG's website at
http://oig.hhs.gov/oei/reports/oai-09-86-00078.pdf. (Cut and paste
this link into your browser if it does not come up otherwise.) GAO also
followed up with a national study on which I consulted. Read that report
My report for the OIG explained how people with substantial income and
assets could qualify routinely for Medicaid. It estimated that nearly
$600 million could be recovered from estates, if every state in the
country performed at the same level as Oregon. The report warned that as
long as people with substantial income and assets could qualify easily for
Medicaid, there would be very little market for private LTC financing
alternatives; Medicaid long-term care expenditures would continue to
explode; little privately financed home and community-based services
infrastructure would develop; quality of care would continue to decline
due to Medicaid's notoriously low reimbursement rates; and, if something
weren't done about these problems, within 30 years the cresting of the Age
Wave would crush the existing long-term care financing system.
Here we are 26 years later and everything I predicted in that early OIG
study has come true or is about to!
COBRA '85, MCCA '88, OBRA '93, HIPAA '96, BBA '97 and DRA '05
In 1985, in the Consolidated Omnibus Budget Reconciliation Act of
that year, Congress took the next step to rein in abuse of Medicaid LTC.
COBRA '85 put a stop to "Medicaid qualifying trusts." MQTs had become the
technique of choice for elderlaw attorneys to impoverish their affluent
senior clients and qualify them for Medicaid nursing home care. COBRA '85
changed the rules, but did not grandfather in people who already had
Medicaid qualifying trusts. Many individuals and families were hurt. A
lot of elderlaw attorneys were embarrassed professionally. But that
didn't stop them from finding new ways to focus on qualifying affluent
clients for Medicaid financed long-term care.
The Medicare Catastrophic Coverage Act of 1988 (MCCA '88) was the
next step in this process. MCCA '88 was mostly about Medicare, but it did
have some provisions that affected Medicaid long-term care eligibility.
The most important change was, for the first time, to require state
Medicaid programs to penalize asset transfers for less than fair market
value done for the purpose of qualifying for Medicaid long-term care
benefits. MCCA '88 required state Medicaid programs to look back 30
months for inappropriate asset transfers. It established an ineligibility
penalty equal to the amount of assets transferred for less than fair
market value for the purpose of qualifying for Medicaid divided by the
average cost of a nursing home in the state. For example, give away
$80,000 to qualify for Medicaid in a state where nursing home care
averaged $8,000 per month and you'd be ineligible for 10 months from
the date of the transfer. The italicized point will be very important
later. MCCA '88 also established a limit of 30 months as the maximum
penalty for asset transfers. In other words, if you gave away $1 million
within 30 months of applying for Medicaid, your transfer of assets penalty
would still be only 30 months.
In 1993, the Omnibus Budget Reconciliation Act of that year
implemented most of the recommendations from my 1988 "Medicaid Estate
Recovery" report for the Office of Inspector General [http://oig.hhs.gov/oei/reports/oai-09-86-00078.pdf,
you may have to cut and paste this link into your browser]. OBRA '93
extended the look-back period for asset transfers to a full three years
(36 months) for most improper transfers and to five years for transfers
into or out of a trust. The law also eliminated the limit on the
eligibility penalty. Now, if you gave away $1 million within three years
of applying for Medicaid, you would be permanently ineligible for all
intents and purposes. OBRA ’93 made estate recoveries mandatory for the
OBRA '93 also eliminated the Medicaid planning gimmick of "pyramid
divestment." Before OBRA '93, the elderlaw bar had figured out that
because transfer of assets eligibility penalties were allowed to run
concurrently, they could jettison lots of money very quickly for their
affluent clients while minimizing any transfer of assets penalty. On
their websites, they published schedules that showed exactly how much to
give away each month to take full advantage of this loophole. They could
actually spend you down from $1 million to nothing in a period of about a
year. This was possible because, for example, instead of giving away all
the money in one month and incurring the maximum penalty, you could give
away smaller amounts each month and, because the penalties ran
concurrently from the date of the first transfer, you'd be out of money
and eligible for Medicaid in only a fraction of the time originally
intended by Congress. This so-called pyramid divestment was no longer
allowed after 1993. But the elderlaw bar was very creative and opened
many new "loopholes" to replace this one.
A Political Earthquake
Something big happened in American politics in 1994. Anybody recall what
it was? Remember the "Contract with America," Newt Gingrich? The
Republicans took over both houses of Congress.
Who was president at the time? Right, Bill Clinton.
Clinton was well known for something in particular. [Audience snickers.]
I'm referring to President Clinton's frequent statement that he would
"change welfare as we know it." And he did. He added a work requirement
to the welfare (Aid to Families with Dependent Children or AFDC) rules and
reduced the welfare rolls by two-thirds, a tremendous success.
The new Republican Congress and President Clinton were alarmed by the
exploding Medicaid long-term care costs. They were frustrated that none
of the government's efforts since 1982, which were intended to control the
abuse of Medicaid long-term care resources, had worked. So they decided
to stop the overuse of Medicaid once and for all. In 1996, in the
Health Insurance Portability and Accountability Act (HIPAA '96 or the
Kennedy/Kassebaum Act), they made it a crime to transfer assets for less
than fair market value for the purpose of qualifying for Medicaid. To do
so, according to HIPAA '96 would be punishable by a fine of up to $10,000
and a jail term of as much as a year.
Now, remember the senior advocates? They were one of the blind men of
long-term care we talked about. The senior advocates and their
organizations looked at this new rule with alarm and decided to fight it.
They called HIPAA '96 the "throw granny in jail law." Okay, this was one
measure to control Medicaid abuse that even I didn't favor. It seemed to
me like a stupid, ham-handed way to deal with the problem, which is
actually fairly simple to fix.
But when Congress repealed the throw granny in jail law in the Balanced
Budget Act of 1997 (BBA '97) and replaced it with the "throw granny's
lawyer in jail law," that made a lot more sense to me. Why penalize the
victim, when you should be going after the culprit? For awhile, the
Medicaid planners' big conventions, held at luxury resorts twice a year,
were more like funeral dirges than professional meetings. (I used to
attend those sessions to keep an eye on the Medicaid planners and report
their egregious methods to the media until they blackballed me by closing
their conventions to non-attorneys.)
Unfortunately, the "throw-granny's-lawyer-in-jail law," which threatened a
year in jail and/or a $10,000 fine for recommending (in exchange for a
fee) that a client transfer assets to qualify for Medicaid, was
unconstitutional. Janet Reno, who was Bill Clinton's Attorney General at
the time, looked at the law and concluded it would be unenforceable. How
could you hold an attorney legally culpable for recommending a practice
that was legal again after the "throw-granny-in-jail law" was repealed?
So, there we were in the late 1990s, 15 years after Congress had taken the
first steps in TEFRA '82 to control the abuse of Medicaid, right back
where we'd started. Costs continued to explode. More and more people
were qualifying for Medicaid-financed long-term care. Private payers were
disappearing. Quality of care continued to decline. The public remained
asleep about long-term care risk and cost. Neither private insurance nor
home equity conversion contributed significantly to LTC costs. And the
Age Wave was a decade and a half closer to wiping out the LTC safety net.
From Boom to Bust
Now, what was the economy like in the late 1990s? Good or bad?
Right, those were boom years. The Internet bubble. The new economy.
Everyone's 401(k) was on its way to becoming an 802(k). In my experience,
when the economy is good, when tax receipts are up, and when welfare rolls
are down, it is extremely hard to get the attention of politicians and
public officials to the issues of controlling Medicaid costs and
encouraging personal responsibility and long-term care planning.
But, exactly the opposite is true when the economy goes into the tank.
When welfare rolls are up and tax receipts are down, state legislatures,
governors and other public officials become much more amenable to reason
and evidence about the need to control Medicaid long-term care
expenditures. After September 11, 2001, as the economy went rapidly into
recession, state officials became far more sensitive to the need to spend
Medicaid's scarce resources effectively and efficiently.
When governors could not make their budget ends meet and because, unlike
the federal government, they are constitutionally required to work within
their budgets, we were able to get their attention. In 2005, I was funded
by the American Health Care Association, the big proprietary nursing home
and assisted living trade association, to spend half time for six months
in Washington, DC. My objective was to explain to all of the "blind men
of long-term care," the key stakeholders in the LTC issue, the need to
control Medicaid long-term care expenses and encourage private financing
alternatives for long-term care.
I testified before Congress on April 27, 2005; I gave briefings on Capitol
Hill; I met with all the key interest groups, including long-term care
providers, LTC insurers, the National Governors Association, the National
Reverse Mortgage Lenders Association and dozens of others. In fact, I
sought out and met with anyone and everyone who had any role in or concern
about long-term care financing . . . and would listen.
My co-founder of the Center for Long-Term Care Reform, an attorney by the
name of David Rosenfeld, after leaving the Center in 2001, ultimately
became the Chief Health Counsel to the House Energy and Commerce
Committee, the germane committee for Medicaid in the United States House
of Representatives. David wrote much of the Deficit Reduction Act of
2005 and guided it through the shoals of political opposition.
On February 8, 2006, President Bush signed the DRA '05. It had passed by
a single vote. Vice president Cheney had to be transported back from the
Middle East to cast the deciding vote in the Senate. As soon as the law
was signed, senior advocacy organizations and Medicaid planning attorneys
filed lawsuits against it. All of this litigation was thrown out of
The DRA '05 took some giant steps in the direction of controlling Medicaid
eligibility. For the first time ever, it put a limit on the amount of
assets that could be exempted in a home and contiguous property. The
limit was placed at $500,000 ($543,000 as of 2014 in 37 states) or up to
$750,000 ($814,000 as of 2014 in 13 states and DC) at the option of a
state legislature. That is a step in the right direction. By the time
the Deficit Reduction Act passed, however, the recession that made it
possible had ended. When state governments were under severe budgetary
constraint, the National Governors Association had actually advocated in
writing for a limit on the Medicaid home equity exemption of $50,000. We
got half a million and that's significant, but it isn't enough to solve
An LTC Tour Anecdote
Let me tell you an anecdote from our
2008 National Long-Term Care Consciousness Tour that helps make the
point about Medicaid's home equity exemption.
When I was in Washington, DC with the
Silver Bullet of Long-Term Care, I received an e-mail from the Prime
Minister's office of the United Kingdom. They wanted to know if it would
be all right to send over a delegation to speak with me, and others, about
long-term care financing. It seems Great Britain is unable to pay for its
socialized acute care health system, much less for long-term care. They
would love to have a private long-term care insurance market to help
defray the public cost of funding long-term care.
But when they looked at the United States, where it is commonly understood
that no one qualifies for help with their long-term care costs until they
have spent down into total impoverishment, they wondered: "If Americans
can't sell long-term care insurance in their dog-eat-dog, capitalist
system, how could we ever hope to develop a long-term care insurance
market in a socialized health care system like England's?" (My
I invited the U.K. delegation of two experts on aging to join me in the
Silver Bullet at a very nice RV park on the outskirts of DC. I picked
them up in the truck at the end of the D.C. Metro Green line, and drove
them to the Airstream trailer. It was a hot and humid day, so we had the
air conditioning on. The three of us sat in that little 16-foot trailer
for three hours talking about long-term care financing.
I learned something very interesting. In the United Kingdom, all you can
shelter in home equity while getting the government to help with your
long-term care costs is $40,000. We are 10 to 20 times more generous with
our scarce public resources for long-term care in the United States as
they are in their socialized health care system.
More on the DRA
The Deficit Reduction Act of 2005 also extended the look-back period for
asset transfers from three years to five years for all transfers. That
sounds impressive until you realize that the look-back period on asset
transfers in Germany, another European socialized health care system, is
ten years! Transfer assets for less than fair market value within ten
years of applying for public assistance to help with your long-term care
costs in Germany, and you run the risk of their pursuing recovery from the
people, probably your relatives, to whom you gave the money.
One of the most important changes the DRA '05 made was to eliminate the
single most prevalent Medicaid estate planning gimmick at the time. That
was the so-called "half-a-loaf" strategy. Instead of giving away $100,000
and incurring a 20 month transfer of assets penalty, people would give
away $50,000, incur half the penalty, i.e., 10 months, hide the
rest of the money and become eligible after the penalty ran its course,
without ever spending any of their own money for long-term care. The
Deficit Reduction Act ended this practice by starting the eligibility
penalty at the date someone would have otherwise become eligible for
Medicaid if the rule hadn't changed. Previously, the penalty began at the
date of the transfer, a practice which enabled the half-a-loaf strategy.
Now, the penalty begins (usually) at the date of Medicaid application.
Ironically, this was a DRA provision the nursing home lobby opposed. They
worried that people who had transferred assets would end up on their
doorstep destitute, unable to pay their own way for long-term care, but
also ineligible for Medicaid. In other words, nursing homes figured
they'd end up with a lot more "charity" cases. I explained to them at the
time that this would not happen, at least not in significant numbers,
because the new rule eliminated the practicality of giving away half of
one's assets to become eligible for Medicaid more quickly. In the future,
no attorney in his or her right mind would recommend that people transfer
assets in the same old way to qualify for Medicaid, because that strategy
would no longer work and would leave the lawyers vulnerable to malpractice
suits. To date, I have heard no evidence that the worry of the nursing
home industry has materialized. By eliminating the half-a-loaf strategy,
people who would have used that trick are now having to spend their money
for long-term care or they divest or shelter it in some other way.
Long-Term Care Partnership Program
Finally, the DRA ’05 reinvigorated the LTC Partnership Program. LTC
Partnerships had been around since 1992. The idea behind them was to
incentivize people to purchase LTC insurance by forgiving some of the
prospects’ Medicaid spend down liabilities. The offer: buy LTCI, use it,
and the Partnership policy holder could go onto Medicaid while retaining
assets up to the amount of insurance purchased and used instead of having
to spend down to $2,000. Under a Robert Wood Johnson Foundation grant,
four states—California, New York, Connecticut and Indiana—piloted the
program. A variation, in New York alone, allowed holders of special
Partnership policies to retain all their assets and still receive lifetime
Medicaid LTC benefits.
As these pilot projects were gearing up in the early 1990s, they were
derailed by Henry Waxman, a liberal Congressman from California. Waxman
considered Medicaid to be welfare and inappropriate for people with
substantial resources to receive. So, when the Omnibus Budget
Reconciliation Act of 1993 made recovery from the estates of deceased
Medicaid recipients mandatory, Congressman Waxman insisted that assets
sheltered by Partnership policies for purposes of initial Medicaid
eligibility, should nevertheless, not be exempted from estate recovery.
That rule took the steam out of the Partnership movement. A Partnership
policy holder could preserve substantial wealth and qualify for Medicaid,
but at death that wealth became recoverable by the state to recoup
Medicaid funds expended on the policyholder’s behalf.
For over a decade, the Partnership program languished. Then, in the DRA
’05, the OBRA ’93 estate recovery mandate was eliminated as against
Partnership policies. They resurged and became available in half or more
of the states. LTC insurance sales in the original four pilot states
increased on the margin. Similar results are expected in the new
Partnership states, especially in those that endorse and promote the
policies officially. Nevertheless, two factors impede Partnership sales.
First, Medicaid LTC eligibility remains easily available to middle-class
and affluent people without significant spend down so that the
Partnerships’ spend down forgiveness is less of an incentive than it would
otherwise be. Second, Medicaid LTC has such a dismal reputation for
problems of access, quality and impending insolvency that consumers who
know the program are not likely to want to rely on it. Certainly,
Medicaid is unlikely ever to pay for the kind and quality of home care and
assisted living that are routinely available through private LTC insurance
[See Stephen A. Moses, "The Long-Term Care Partnership Program: Why It
Failed and How to Fix It," in Nelda McCall, editor,
Who Will Pay for Long
Term Care?: Insights from the Partnership Programs, Health
Administration Press, Chicago, Illinois, 2001, pps. 207-222;
Recent LTC History
America’s post-Internet-boom, early-2000s recession led to passage of the
DRA ’05 with its new constraints on Medicaid LTC financial eligibility.
As so often happened in the past, however, soon after the new legislation
passed, the economy improved, welfare rolls went down, tax receipts
improved and public officials at the state and federal levels lost their
enthusiasm for enforcing the new restrictions. In California, for
example, Medi-Cal (California’s name for Medicaid) didn’t implement
mandatory changes required by the DRA ’05 such as the longer lookback
period for asset transfers and the cap on home equity. Nor did the
federal government enforce the law, allowing California to flout it with
impunity and other states to get by with only half-hearted enforcement.
[Source: Stephen A. Moses,
Medi-Cal Long-Term Care: Safety Net or Hammock?, Center for Long-Term
Care Reform and Pacific Research Institute, January 2011]
Medicaid planners found new ways to circumvent the DRA’s stronger
spend-down rules, replacing for example the newly proscribed “half-a-loaf”
strategy with a clever “reverse half-a-loaf” gimmick whereby their
affluent clients could use promissory notes or annuities to “cure” an
asset transfer penalty and achieve the same objective to preserve half the
assets. Medicaid-compliant annuities re-emerged in popularity allowing
“millionaires” to qualify easily for LTC benefits according to MaineCare
(Maine’s name for Medicaid) eligibility workers.
[Source Stephen A. Moses,
The Maine Thing About Long-Term Care Is That Federal Rules Preclude a
High-Quality, Cost-Effective Safety Net, Center for Long-Term Care
Reform and the Maine Health Care Association, November 2012]
Thus, by 2007, easy access to Medicaid LTC benefits was returning to its
historical norm. Then the economic cycle clobbered America again. In
2008, the “Great Recession” began. Once more, state and federal tax
revenues plummeted, welfare rolls skyrocketed, and huge state and federal
budget shortfalls developed. In other words, the stage was set for
another round of legislative and administrative initiatives to reduce
Medicaid expenditures, tighten eligibility rules, curb Medicaid planning
abuses, and protect the LTC safety net for people most in need. But this
time, it didn’t happen. Why?
Maintenance of Effort
The American Recovery and Reinvestment Act of 2009 (ARRA ’09) was
signed into law by President Obama on February 17, 2009. This “stimulus”
law ultimately pumped $831 billion into the economy according to the
Congressional Budget Office. State Medicaid programs were among the
biggest beneficiaries of the ARRA ‘09’s largesse receiving approximately
$100 billion in extra funds from an increase in federal Medicaid
matching funds. But this windfall had a string attached. To qualify for
the additional revenue, states had to agree not to tighten their Medicaid
eligibility rules. This “maintenance of effort” (MOE) requirement
prevented states from reducing Medicaid expenditures during the economic
downturn by means of targeting scarce resources to the neediest
The ARRA ‘09’s MOE restriction expired at the end of June 2011, at which
time state revenues plunged as federal matching fund rates reverted to
pre-stimulus levels. A state that had been getting three dollars in
federal matching funds for every dollar it put up now was getting only two
federal dollars for every state dollar. Simultaneously, due to the
reduced economic activity incidental to the ongoing economic downturn,
other state revenues from sales and income taxes declined as well. But
Medicaid costs continued to increase rapidly as they always do when the
economy falters. This would have been the perfect time to control the
Medicaid eligibility hemorrhage by targeting the program’s scarce benefits
to citizens who needed them most.
By this time, however, a new MOE rule applied which prohibited any
reduction in Medicaid financial eligibility. The Patient Protection
and Affordable Care Act of 2010 (PPACA ‘10, AKA health reform or “ObamaCare”)
required maintenance of effort upon penalty of the loss of all federal
Medicaid funds. Under PPACA ‘10, however, the states received no
bonus in federal matching funds for complying with MOE. Thus, with flat
or falling state government revenues, state Medicaid programs all across
the country were locked into retaining the generous Medicaid LTC financial
eligibility they had implemented during better economic times. If they
acted to reduce Medicaid LTC eligibility even within limits allowed by
federal law before imposition of the MOE requirement, they could lose all
federal Medicaid funds.
Then in June 2012 the United States Supreme Court ruled that, although
ObamaCare is constitutional, states can nevertheless opt out of its
Medicaid expansion provision without losing federal matching funds for the
rest of their Medicaid programs. Arguably, states that choose not to
expand Medicaid under PPACA should therefore not be constrained by the
law’s MOE provision for the same reason. Some legal and policy experts,
as well as the state of Maine, have made that case, but so far
unsuccessfully based on interpretations from the Centers for Medicare and
Medicaid Services (CMS, the federal agency that oversees Medicaid) and the
Congressional Research Service.
Thus, faced with widespread budget shortfalls and doubtful new revenues
sufficient to close the gaps, states have only two ways to constrain
costs: cut benefits or cut providers. With eligibility cuts out of
bounds due to MOE, the states’ only options, besides shifting funds from
education or some other budget category, are to eliminate desperately
needed services or to reduce provider reimbursements. Cutting services
hurts the most needy. Provider reimbursements are already minimal and
further cuts could lead to facility closures and other LTC provider
shortages. At present, the maintenance of effort requirement is the
biggest obstacle to Medicaid LTC reform, which is stymied so long as MOE
remains in effect.
The Patient Protection and Affordable Care Act of 2010 (PPACA ’10) or
“health reform” was signed into law by President Obama on March 23, 2010.
By far its most important impact on long-term care financing was its
provision regarding maintenance of effort as already explained. But
ObamaCare attempted to address LTC financing in two other potentially
important ways. One was the “CLASS Act,” an acronym standing for
Community Living Assistance Services and Supports. While not formally
repealed, CLASS died for all practical purposes when it became clear the
pseudo-LTC-insurance program was financially infeasible to implement. I
explained the problems and deficiencies of CLASS in a
2011 speech to the Society of Actuaries "Living to 100" Symposium.
The aborted program does not warrant further consideration.
The other way ObamaCare addressed long-term care was with several special
programs and pilots designed to encourage more public financing of home
and community-based services (HCBS). These are described in an October
2011 report by the Kaiser Family Foundation titled “State
Options That Expand Access to Medicaid Home and Community-Based Services.”
They need not concern us here, because, as the following section explains,
publicly financed HCBS on a wide scale are not financially sustainable,
impede a private market for home-based care, and discourage responsible
long-term care planning.
The Home Care Panacea
There is one other important development we should discuss that was going
on simultaneously with the history of LTC recounted above. For many
years, at least since the early 1980s, academics and government officials
have been enamored with the idea that Medicaid's long-term care financing
crisis could be relieved by paying for less nursing home care, which is so
expensive, and paying for more home and community-based care, which is
ostensibly less expensive AND the venue of care that most people prefer.
The idea is that taking care of people in their own homes or in the
community must be cheaper than maintaining them in a nursing home. Data
often cited at the individual level seem to show that home care is cheaper
than nursing home care. The error is in projecting such individual
savings to the society as a whole.
None of the research shows that home and community-based care saves money
compared to nursing home care overall. Community-based care usually only
delays institutional care. Between them, expanded home care plus eventual
nursing home care end up costing more in the long run than nursing home
care alone. There are many reasons for this. One reason is the economy
of scale that comes from taking care of a larger number of people in an
institutional setting. Another reason is that people who are enabled to
remain at home and maintain their independence and control, tend to be
happier. They live longer and die slower, ending up in a nursing home
sooner or later anyway. Not a single state has reduced the overall cost
of nursing home and home health care by diverting more people to home
care. The combined costs continue to rise everywhere, year after year.
This is not to say we shouldn't find a way to fund home and
community-based care. It only means that to think funding home care
instead of nursing home care will save money is unreasonable.
For every person in a nursing home in America today, there are two or
three of equal or greater disability, half of whom are bedbound,
incontinent or both, who remain at home. They are able to stay home
because their families, mostly daughters and daughters-in-law, struggle
heroically to keep them out of a nursing home. When government starts
providing long-term care that they want (home care) instead of long-term
care that they don't want (nursing home care), people come out of the
woodwork to take advantage of it. That drives up Medicaid LTC
Furthermore, if all it gets you is into a nursing home, you might be
reluctant to seek the advice of an attorney to self-impoverish in order to
qualify for Medicaid. But when Medicaid planning will get you access to
home care services, adult day care, respite care, and even assisted
living, you will be much more likely to seek out the elderlaw attorney.
Medicaid financed home and community-based care encourages the practice of
Medicaid estate planning.
And Medicaid financed home and community-based care is deadly to the
marketability of private long-term care financing alternatives, such as
reverse mortgages or long-term care insurance. The big benefit of being
able to pay privately for long-term care is the ability to command
red-carpet access to top-quality long-term care at the most appropriate
level and in the private marketplace. To the extent the government
conveys to the American public that you can achieve the same benefits
financed by Medicaid, Medicaid will continue to explode in costs and
reverse mortgages to fund long-term care in the short-term and LTC
insurance to fund long-term care in the long run will remain stunted.
So far in this class, we've analyzed the big picture of long-term care
service delivery and financing by means of the analogy of the elephant,
the blind men and long-term care. We showed that America has a
welfare-financed, nursing home-based long-term care system in the
wealthiest country in the world where no one wants to go to a nursing
home, but nevertheless, most people fail to plan responsibly for long-term
care. They remain in denial about this risk and cost.
Next, we traced the history of long-term care service delivery and
financing in order to explain how we got into this mess in the first
place. We showed how Medicaid began financing nursing home care in 1965,
which crowded out markets for privately financed home and community-based
care and private insurance to pay for long-term care. We saw how the cost
of Medicaid LTC, predictably, exploded and that the government responded
first by capping the supply of nursing home beds with certificate of need,
and then by capping the price, thus creating excessive demand for Medicaid
financed nursing home care. With an artificially shrunk bed supply and
artificially low reimbursement rates, nursing homes could fill up, no
matter what quality of care they offered. So, quality plummeted, but
measures to demand higher quality failed because there was no additional
money to pay for them.
By then, nursing homes were virtually the only venue of care available.
People who were paying privately half again as much as Medicaid paid were
eager to become eligible for Medicaid. After all, the government
pressured nursing homes to provide equal care to everyone whether Medicaid
or the resident paid. That led to an explosion in eligibility, what I
earlier called eligibility bracket creep, which the government has been
trying since 1982 to control and discourage. Finally, efforts to
ameliorate the symptom of excessive nursing home expenditures by providing
home and community-based care to more people only exacerbated the cost
problems while further desensitizing the public to LTC risk and cost by
leading them to believe Medicaid would pay for desirable long-term care
So, that's how America's dysfunctional long-term care service delivery and
financing system came to be.
I want to change focus now and approach the long-term care issue from a
different angle. Let's apply a conceptual analysis to the problem.
The Welfare Paradigm
I'd like to describe for you what I believe to be the most common
description of the long-term care service delivery and financing
marketplace. I call it the "welfare paradigm." It goes like this:
"In America today, we're living longer and dying slower. It's a very
expensive prospect. Most people spend down into total impoverishment
quickly. Congress once said the average family spends themselves into
total destitution for long-term care in an average of only 13 weeks! Once
people are completely destitute, they qualify for Medicaid, and Medicaid
is already under water financially. With the onslaught of the baby boom
generation, Medicaid will be totally overwhelmed. Woe is me, what can we
possibly do about this massive problem?"
Does that sound familiar? This is how I see the problem described in all
the popular newspaper and magazine articles I read. It's certainly the
way the long-term care problem is described in training classes provided
by long-term care insurance carriers. Even scholars who ought to know
better articulate the same platitudes. But is it correct?
Let's think about consumer behavior and see if it follows reasonably from
the welfare paradigm. If people are spending down into total
impoverishment all across the country; if long-term care is wiping out one
of every 10 people financially; wouldn't you expect individuals and
families to be worried about this? Are they? No, the public is in
"Denial." That just doesn't make any sense if the cost and risk of
needing long-term care is so great.
If people are spending their own money for LTC down to total
impoverishment, where would you expect them to seek care? Would they go
straight to a nursing home, the least desirable and most expensive venue
of care? Or would they seek the least institutional, most desirable kinds
of services such as chore services, home care, adult day care, respite
care, or assisted living if they need an increased level of care.
Wouldn't they pursue all these options before going to a nursing home?
You'd think so. But, is that what they do? No, in the United States the
principal venue of long-term care is the nursing home. We have an
underdeveloped home community-based services infrastructure. It just
makes no sense if you assume that people are spending their own money for
What is the single biggest financial resource older people possess?
Right, their homes. Somewhere around 83 percent of seniors own their
homes and roughly 74 percent own them free and clear. There is $4.2
trillion worth of home equity held by people over the age of 62 in the
United States. Is there a financial product that enables older people to
take the equity out of their home in small or large amounts without having
to leave their home and without having to make monthly payments? Of
course, it's called a reverse mortgage.
Are reverse mortgages used extensively to fund long-term care? No, almost
never. I've done dozens of state level studies of long-term care
financing. (You can find several of them at
http://www.centerltc.com/reports.htm.) I always interview reverse
mortgage lenders for these studies. To the person, they tell me almost no
one takes out a reverse mortgage in order to fund long-term care. If the
welfare paradigm is true, it makes no sense that people fail to draw on
their single biggest asset to enable them to purchase the most desirable
level and kind and quality of care . . . and stay in their own home.
Finally, the way we protect ourselves for most catastrophic risks in
America is through private insurance. We all have health insurance,
automobile insurance, and fire insurance, etc., but too few of us
have long-term care insurance. The market penetration for private
long-term care insurance is under ten percent. If the welfare paradigm
accurately describes the long-term care marketplace, it simply makes no
sense that so few people buy private insurance to protect against the high
risk and cost of long-term care.
In other words, if the welfare paradigm is correct, consumer behavior
doesn't follow at all. It's a total disconnect. I don't know how to
explain it. Either consumers are totally irrational or long-term care
insurance agents are completely incompetent. I don't think either of
those explanations work either.
Most consumers are not financially incompetent. They know the value of
money. This is especially true of people who accumulated enough wealth to
need to protect it with a private insurance policy. Generally, they
accumulated their wealth because they know how to use private sector
financial planning tools. So I don't think we can blame consumers.
How about long-term care insurance agents? Are they incompetent? I don't
think so. I've worked closely with these people for 30 years. In my
experience, it takes a very special person to succeed as a long-term care
insurance agent. In fact, I have my own certification for successful
long-term care insurance producers. I call them AMGs. That stands for
altruistic, masochistic geniuses, because that's what it takes to sell a
product the government's been giving away since 1965.
I decided a long time ago that the welfare paradigm does not explain
consumer behavior adequately. So, I went back to the drawing board and
came up with another explanation. I call this the "entitlement paradigm."
The Entitlement Paradigm
I'm going to describe it to you now, but I want to ask you to do something
for me. Suspend your disbelief at first. Pretend like you're going into
a play or a movie. Just let it wash over you and think about whether the
entitlement paradigm is a better explanation of consumer behavior than the
welfare paradigm. Later, I'll give you the evidence that supports the
entitlement paradigm and refutes the welfare paradigm.
The entitlement paradigm goes like this: "In America today, we're living
longer; we're dying slower; and it's a very expensive proposition. You
may die with your boots on, in which case you're home free . . . sort of.
But if you get one of the chronic illnesses of old age--Alzheimer's,
Parkinson's, or if you have a stroke--and you need expensive long-term
care, somebody else pays." Never mind who pays, for now.
If the entitlement paradigm is true, if you can ignore the risk of
long-term care, avoid the premiums for private insurance, wait and see if
you get sick and if you ever need expensive care, somebody else pays . . .
would you expect consumers to be worried about the risk of long-term
care? Of course not. If the entitlement paradigm is true, it makes
perfect sense for the public to be in denial about LTC risk and cost. Why
bother to ask "who pays?" if somebody does?
Where would you expect people to go to get their care? If nursing home
care is free, but consumers have to pay out of their own pockets for any
other kind of long-term care, where would you expect them to go? If the
entitlement paradigm is true, it makes perfect sense that the venue of
care which government has made free or radically subsidized-- nursing home
care--is the dominant venue for care. Institutional bias and the absence
of a home and community-based services infrastructure follow logically
from the entitlement paradigm hypothesis.
How about home equity conversion? Would you expect people to take the
equity out of their home through a reverse mortgage to fund LTC when
Medicaid exempts the home and all contiguous property up to, at a minimum,
one-half million dollars? Probably not. The lack of a market for reverse
mortgages to fund long-term care also makes perfect sense if the
entitlement paradigm is correct.
Finally, long-term care insurance. You can't sell apples on one side of
the street when they're giving them away on the other. Now, you and I
know that the apples they're giving away on the other side of the street
are full of worms. But most Americans don't realize that yet. They don't
find out until a loved one begins a long-term care crisis. And that's why
we have a vestige of a market for long-term care insurance today. The
front cusp of the baby boom generation, people in their late 50s or early
60s, are going through long-term care crises with their parents nowadays.
Those are the people buying long-term care insurance to the extent anyone
is. If we wait 18 years for the entire baby boom generation to go through
this process, we'll have a strong market for long-term care insurance.
But by then, the publicly financed long-term care system will have
collapsed long ago.
Evidence for the Entitlement Paradigm and Against the Welfare Paradigm
So, what is the evidence for the entitlement paradigm and against the
welfare paradigm? There are really three kinds. If the entitlement
paradigm is a better explanation of the long-term care system than the
welfare paradigm, I should be able to explain (1) how people with
substantial income and assets qualify for Medicaid, (2) how most long-term
care in this country is funded without using personal assets, and (3) why
Medicaid asset spend-down is much less common than commonly understood.
Let's examine Medicaid asset spend-down first. In the middle 1980s, it
was commonly believed that most people--50 percent to 75 percent--who
entered nursing homes were private pay at admission and, because of the
enormous cost of their care, quickly spent down into impoverishment before
becoming eligible for Medicaid. I always said back then that it made no
sense to spend down for long-term care. Medicaid rules don't require it.
People would only spend down if they were ignorant of the eligibility
rules, failed to get the advice of a Medicaid planning attorney, or had a
moral compunction against taking advantage of the welfare program.
In the late 1980s and early 1990s, roughly three dozen so-called "Medicaid
spend down studies" were conducted. These studies found that despite the
conventional wisdom that most people enter nursing homes private pay, the
truth was that only ten percent to 25 percent entered private pay and
converted to Medicaid. Seventy-five percent to 80 percent of all new
nursing home admissions were Medicaid eligible from the start.
Furthermore, these Medicaid spend down studies did not distinguish between
people who spent down the old-fashioned way, by writing big checks every
month to the nursing home until they became eligible for Medicaid, and
people who spent down the new-fangled way, by writing one check to a
Medicaid planning attorney and becoming instantaneously eligible for
The motivation behind the Medicaid spend down studies was to prove the
conventional wisdom that people all across the country were spending down
into total impoverishment for long-term care. The goal was to produce
convincing evidence to support a government takeover of long-term care
financing. Remember, those were the days when Hillary Clinton was
developing and promoting a government-controlled health-care system to
include long-term care as well as acute care. To their consternation, the
researchers who conducted the Medicaid spend down studies discovered
exactly the opposite of what they set out to prove. Their findings
ratified the entitlement paradigm and supported my position.
Medicaid Eligibility for Long-Term Care
So, there is no empirical evidence of widespread catastrophic spend down
for long-term care. But if people are ending up on Medicaid who have
substantial income and assets, how can that possibly be? Isn't Medicaid a
means-tested public assistance program? Medicaid is welfare, isn't it?
The answer is "Yes, but."
Let's examine Medicaid eligibility for long-term care. First it's
important to understand that to qualify for Medicaid long-term care,
people must have a nursing home level of medical need. But, that's not
what I want to focus on today. We will examine instead the financial
criteria to qualify for Medicaid. These are two: income eligibility and
Income Eligibility for Medicaid LTC
Let's take income eligibility first. The conventional wisdom--what most
articles in the media say and what most people are taught by the insurance
carriers--is that Medicaid long-term care eligibility requires low
income. It's common to read that your income must be "below the poverty
level" before you can qualify for Medicaid to fund your long-term care.
You'll see statements like that not only in the popular media, but in
peer-reviewed journal articles written by "experts" who ought to know
The idea that Medicaid nursing home eligibility requires extremely low
income is wrong. No such requirement exists. The rule of thumb is that
anywhere in the United States, if your income is below the cost of a
nursing home, you're eligible for Medicaid to fund your nursing home
care. In 15 states, the so-called "income cap states," you may have to
obtain a "Miller income trust," which allows you to divert excess income
away from disqualification. But in the other states, the 35 so-called
"medically needy states," the rules are even more generous. In addition
to deducting the cost of your nursing home care from your income,
medically needy states also subtract the coinsurance and deductibles for
Medicare, coinsurance and deductibles for a Medicare supplemental
insurance policy, and all of the medical expenses seniors have that
Medicare doesn't pay for, such as foot care, eye care, dental care, and
residual pharmaceutical costs after Medicare part D.
Thus, Medicaid nursing home eligibility does not require low income by any
stretch of the imagination. That's not to say that income is not an
issue. You do have to have a cash flow problem, that is to say, not
enough income to cover all of your medical expenses. But, what does
nursing home care cost in your state? Usually, it's $6,000 to $8,000 per
month. Is that low income? Of course not. But if your income is below
that level, you will be eligible to have Medicaid fund your long-term care
as long as you're willing to go to a nursing home.
Income eligibility restrictions for the very-limited home and
community-based care that Medicaid may pay for under "waivers" is
sometimes stricter. This is another reason why Medicaid financing leads
to the institutional bias in America's long-term care system.
Income Eligibility for Married Couples
Ever since the Medicare Catastrophic Coverage Act of 1988, married couples
have been able to preserve much more income and assets than individual
recipients can. Let's digress for a moment to explain this.
Before MCCA '88, Medicaid long-term care financing had a serious problem
called "spousal impoverishment." Medicaid then and now requires that
people in nursing homes on Medicaid contribute their income toward their
cost of care--all but a small "personal needs allowance" of $30-$50
usually. In most cases, the man would be the first to go to a nursing
home, and most of the family income would be in his name, especially in
this older generation. Grandpa would go to the nursing home, most of his
income would have to be used to offset the cost of his care to Medicaid,
and Grandma would be left at home with, back then, only about $350 a month
in income. She might be left so short of cash as to be eating cat food or
so went a common complaint.
In 1988, Congress stepped in and resolved this problem by guaranteeing
community spouses of institutionalized Medicaid recipients up to $1,500 a
month of income and half the couple's joint assets not to exceed $60,000.
This "spousal impoverishment" protection was set to increase with
inflation each year. As of 2014 community spouses are protected up to
$2,931 per month in income and $117,240 in assets. Medicaid's spousal
impoverishment protections may be below today's middle class income and
asset standards, but that's why they're called "spousal impoverishment"
protections. The purpose of Medicaid has never been to replace personal
savings, investments or insurance for long-term care, nor has it been to
protect middle-class inheritances from the risk of parents' needing
Asset Eligibility for Medicaid Long-Term Care
Let's consider asset eligibility for Medicaid long-term care now. Almost
everything you read on the subject says that people must spend down for
long-term care until they get to the impoverished level of $2,000 in total
assets. First of all, that $2,000 level is cash, negotiable securities,
or anything that can be easily converted to cash. Is it true that you
must spend down your savings for long-term care to get to that
$2,000 level before you become eligible?
No, no, no. No one cares how you spend the money to get to that level as
long as you don't give it away without compensation. All you have to do
is obtain fair market value for the assets you spend. Elder law journal
articles suggest such methods as taking a world cruise or throwing a party
of "Ziegfield Follies proportion" to get down to the $2,000 level. So,
eat, drink and be merry, for tomorrow your nursing home care will be free,
thanks to Medicaid.
In addition to the $2,000 of cash or negotiable securities which you're
allowed to keep and receive Medicaid financed nursing home care, you can
also retain a home and all contiguous property up to at least half a
million dollars ($543,000 as of 2014) in equity. Some states, including
California, New York and Idaho, have opted to allow their citizens to
retain three quarters of a million dollars in home equity ($814,000 as of
2014) while receiving Medicaid financed nursing home care. People who
live in the states that have kept the more responsible $543,000 limit
should realize they're paying up to half the cost of Medicaid in states
that have decided to be much more generous. That's because federal taxes
support 57 percent of the cost of Medicaid on average nationally. What's
worse, New York, for example, not only allows people to retain $814,000 in
home equity while receiving Medicaid financed nursing home care, the
state's Medicaid program also pays for unlimited 24-hour-a-day home care
with no transfer of assets restriction. Your tax dollars at work!
Besides the home equity exemption, Medicaid exempts one business including
the capital and cash flow of unlimited value. Some years ago in Indiana,
the real estate industry and the elderlaw bar got into cahoots. If
someone wanted Medicaid to fund nursing home care, but they had $200,000
to $300,000 too much in assets, their real estate agent would buy a rental
house for them and their Medicaid planning attorney would write that off
as a business for the client while taking a nice big legal fee for
himself. A new rental house would not throw off enough income to make the
person ineligible for Medicaid. Income, as we explained already, is
rarely an obstacle to qualifying for Medicaid nursing home care. A rental
house is a business, so it would be exempt. The client gets instantaneous
self-impoverishment and eligibility for Medicaid, not only for the nursing
home care, but in many cases for ancillary services that Medicaid pays for
and Medicare doesn't.
Medicaid exempts one automobile of unlimited value as long as it is used
in some way for the benefit of the Medicaid recipient. So take Grandma
for a ride in the country once in a while. That counts. And because the
automobile is exempt, it obviously does not affect a person's Medicaid
eligibility if it's given away. You can have one automobile. So giving
it away doesn't affect your eligibility. Thus, you can give away one
Mercedes, buy another, give it away and so on until you get down to that
$2,000 asset limit. The elderlaw bar calls this the "two Mercedes rule."
[See "LTC Bullet: SSI Expands Medicaid's 'Renoir' and 'Two Mercedes'
Medicaid exempts prepaid funeral plans in unlimited amounts, not only for
the Medicaid recipient, but for everyone in the Medicaid recipient's
immediate family. In a study I did some years ago in New Jersey, I found
a case that sheltered $35,000 in a prepaid funeral plan in order to
qualify Grandma for long-term care. So if you ever wanted your very own
pyramid, ladies and gentlemen, this is your chance.
Medicaid exempts one term life insurance policy of unlimited value for
purposes of determining nursing home eligibility. Now, why would a
90-year-old buy a million dollar term life policy? The premium would be
roughly the same as the benefit. Well, the answer is very simple.
Instantaneous self-impoverishment. You make $1 million go away, but it is
not a transfer of assets for less than fair market value to qualify for
Medicaid because you get full value from the life insurance benefit.
There is no cash value so it doesn't affect your asset eligibility for
Medicaid. When you die, the benefit passes directly to your heirs without
going through a probated estate. So you have evaded the Medicaid estate
[You can find hyperlinks to the federal laws and regulations governing the
Medicaid exemptions summarized above in the footnotes of "Aging America's
Achilles' Heel: Medicaid Long-Term Care," a monograph I wrote for the
Cato Institute, at
http://www.cato.org/pubs/pas/pa549.pdf and on pages 8 and 9 in my 2012
report for the Maine Health Care Association titled “The Maine Thing About
Long-Term Care Is That Federal Rules Preclude a High-Quality,
Cost-Effective Safety Net,” at http://www.centerltc.com/pubs/Maine.pdf.]
Medicaid Estate Planning
Obviously, the basic eligibility rules for Medicaid financed long-term
care are very generous. What we've covered so far is nothing more than
the fundamental rules that anyone who applies for Medicaid will be advised
about by the eligibility workers at their local welfare office. Over and
above these already extremely generous eligibility rules, however, there
are special sophisticated legal techniques available to people with
hundreds of thousands of dollars who want to get the government to pay for
their long-term care. These sophisticated techniques include special
annuities, trusts, life care contracts, reverse half-a-loaf strategies,
and many, many others.
We will not take time to delve into these special legal techniques,
because they affect only a small percentage of all Medicaid cases.
Researchers found that only one percent of nursing home cases involve
asset transfers to qualify for Medicaid. They concluded that those asset
transfers probably only cost the Medicaid program $1 billion a year. My
reaction to this is "Wow! That's terrible." Besides, asset transfers are
only a relatively minor one of the hundreds of Medicaid planning
techniques in widespread use, so the true total may be much higher. But
still, it probably isn't much in the greater scheme of things. After all,
people have to have hundreds of thousands of dollars over the basic
Medicaid eligibility requirements before it's cost-effective to hire an
attorney at $200-$500 billable hours to impoverish themselves. Obviously,
not many older people have that kind of money. The travesty is that so
many people who do have that kind of money take advantage of Medicaid,
which is supposed to be a safety net for the truly poor.
There is a rule of thumb for the cost in attorneys' fees to
self-impoverish after the long-term care insurable event has already
occurred and become eligible for Medicaid. It costs about the same as one
month in a nursing home private pay. OK, so it's cheaper for an older
couple to qualify for Medicaid after they need care than the cost of
annual premiums for LTC insurance they may never need! No wonder so few
people buy LTC insurance.
But, many people ask me: "Why would anyone want to go to one of those
awful Medicaid nursing homes?" Even if they're no longer insurable,
wouldn't they prefer to spend their own money rather than go to a "welfare
home." There is an answer for those questions, and it reveals the tragic
irresponsibility of the Medicaid estate planning bar.
Medicaid planning attorneys routinely tell their clients, who are usually
the adult children or heirs of the impaired elderly and not the vulnerable
elderly themselves, that they shouldn't worry about their parents ending
up in the notoriously poor-quality Medicaid nursing homes. They tell them
something like this:
"Don't worry about the horror stories you've heard about Medicaid nursing
homes. We know which are the best homes. We're pillars of the community
and highly respected. We'll make sure that your loved ones get into the
relatively few nursing homes that don't have very many Medicaid
recipients. Because they have mostly high paying private residents or
Medicare patients, their cash flow is much greater than nursing homes that
have to depend primarily on Medicaid. Generally, their staff don't even
know who's on Medicaid and who is paying privately.
“How do we get your Mom or Dad into one of the nice places? Easy. When
we get rid of your folks half a million to one million dollars in order to
qualify them for Medicaid, we'll hold out $50,000 or $60,000 in 'key
money' so they can pay privately for a period of time. Because nursing
homes are reimbursed less than the cost of providing the care by Medicaid,
they have to do all they can to attract private payers who pay half again
as much as Medicaid. If you're a private payer, the best nursing homes
roll out the red carpet to attract you. Once you're in, however, they
can't kick you out just because your source of payment changes. State and
federal law prohibits them from doing so. So your Mom or Dad gets into
the nicest nursing home; they pay privately for a few months or a year;
and then, we flip a switch and convert them to Medicaid.”
The use of "key money" allows affluent people to transfer the financial
liability for long-term care to the taxpayers and to the nursing home
owner who then gets less from Medicaid than the cost of providing the
care. But the biggest victims of this legal scam are the poor who have to
depend on Medicaid for their care. They don't have key money to buy their
way into the nice places. The tragic inequity in the system is that the
nicest beds in the best nursing homes become occupied by people who would
have, could have, and should have either paid their own way or planned
responsibly to save, invest or insure for long-term care.
Because of "key money" abuse, the poor end up in 100 percent Medicaid
nursing homes. These are the kinds of places that 20/20 went into
with their mini-cameras to show people lying in their own waste with
bedsores down to the bone. I don't like to bring the program down to this
level, but it's important that you understand just how tragically critical
all of this information is. The next time you hear Medicaid planning
attorneys justifying what they do as no different than tax planning, think
about the effect that affluent people taking the best beds in the nicest
nursing homes has on the ability of poor people to get access to decent
Who Pays for Long-Term Care?
The third form of evidence for the entitlement paradigm and against the
welfare paradigm that I'll share is to explain how most expensive
long-term care in our country is funded without requiring the use of
anyone's personal assets.
For details and hard numbers, please refer to "LTC Bullet: So What if the
Government Pays for Most Long-Term Care, 2012 Data Update" at
http://www.centerltc.com/bullets/latest/1027.htm. Every year when the
Centers for Medicare and Medicaid Services make available the latest
expenditure data for nursing home and home care, I publish a "LTC Bullet"
titled "So What if the Government Pays for Most Long-Term Care?" Check
out the LTC Bullets archives at
www.centerltc.com each year in January to find that publication for
any year of interest.
We only have time in today's program to hit some of the key points.
Bottom line, we can account for 85 percent to 90 percent of the entire
cost of nursing home care and home health care in the United States
without touching a penny of anyone's assets.
For example, nine of every ten dollars spent for home care in the United
States comes either directly from Medicaid, Medicare or private insurance
or from the spend-through of Social Security income by people already on
Medicaid. Only one dollar out of 13 (7.8%) remains that could possibly
come from out-of-pocket expenditures. Most people spend their income for
long-term care first before they tap into their assets.
I'll go into a little more detail on nursing home care. Approximately
30.6 percent of the entire cost of nursing home care nationally comes from
Medicaid. One's initial reaction to that figure may be to think the
remainder must be coming out of people's savings to fund their long-term
care. Not so. Another 22.7 percent comes from Medicare. Out-of-pocket
expenditures are reported by CMS to be 28.6 percent.
But these numbers are extremely misleading. For example, look at the 28.6
percent that CMS reports as out-of-pocket expenditures. First of all,
that 28.6 percent figure itself is only a little more than half what it
used to be 40 years ago (49.5 percent). Furthermore, half of the current
28.6 percent, or 14 to 15 percent of the entire cost of nursing home care
nationally, is nothing more than the spend-through of Social Security
income by people who are already on Medicaid!
What's more, the 7.9 percent that CMS calls "Private Health Insurance" is
really a made-up figure. Most people see that number and assume it stands
for private long-term care insurance. It doesn't. CMS derives it by
starting with the total spent for nursing home care annually, subtracting
all the sources of funds they're aware of, and calling whatever remains
"private health insurance." Some of it may be private LTC insurance, but
it also includes health insurance, major medical and Medi-Gap payments.
Besides, it's a specious number in the first place.
The 53.3 percent of nursing home costs that come directly from Medicaid or
Medicare have to be added to the 14 percent of out-of-pocket costs that
are really Social Security income spend-through. Already we've accounted
for over two-thirds of the entire cost of nursing home care nationally
without touching any assets. Something more comes from private health
insurance. Other forms of income besides Social Security are most likely
spent for nursing home care before assets. The result is that it's very
easy to get to 85 percent to 90 percent of the entire cost of nursing home
care nationally without touching anyone's assets.
This is an extremely important observation. It is easy to understand how
Medicaid crowds out so much of the market for long-term care insurance
when you realize that most assets are not at risk to fund long-term care
and that long-term care insurance is usually marketed as asset
Another LTC Tour Anecdote
When the Silver Bullet of LTC and I were in the Midwest, we made a stop at
the University of Illinois in Urbana-Champaign. I wanted to speak there
with the University's Karnes Professor of Finance, Dr. Jeffrey Brown.
Jeff Brown and his colleague Amy Finkelstein, currently at MIT, conducted
some amazing research on Medicaid and long-term care insurance. They
concluded that Medicaid crowds out two-thirds to 90 percent of the entire
potential market for private long-term care insurance. Don't take my word
for it. Search for their names on the National Bureau of Economic
Research's website at www.nber.org. You'll find several of their articles
including the one that makes that amazing claim.
As incredible as it seems to most people, their conclusion was no surprise
to me. For reasons explained already in this program, it's obvious
Medicaid interferes with the marketability of private LTC insurance. What
confused me in reading Brown and Finkelstein, however, was their
explanation of the crowd-out phenomenon. It didn't convince me. I wanted
to explain to them what I've already told you today about how easy it is
for people with substantial income and assets to qualify for Medicaid
nursing home benefits. That's why I stopped in for a visit with Dr.
Brown. It was a very rewarding hour. He invited me to participate in
their future research on this topic. For now, however, just put that
startling fact--that Medicaid crowds out two-thirds to 90 percent of the
market for LTCi--in the back of your mind. We'll refer to it several
times in what follows.
So far in this program, we looked at the big picture of long-term care by
examining the elephant, the blind men, and long-term care. We showed how
the various stakeholders in long-term care try to make the status quo work
for themselves. They focus mostly on getting more money out of the
government and concentrate too little on encouraging personal
responsibility and private financing.
We then turned to the history of long-term care financing and discovered
that our main problem, the main cause of the current welfare-financed,
nursing home-based long-term care system, is that the government stepped
in and distorted the market for long-term care in 1965. By making nursing
home care free or radically subsidized, government intervention had the
effect of crowding out private markets for home and community-based
services or long-term care insurance.
Next, we examined the welfare paradigm of long-term care, which is the
most common explanation of the long-term care issue, and found it to be
wanting. So we considered the entitlement paradigm, a radically different
and counterintuitive explanation, but we found it to explain consumer
behavior with regard to long-term care much better than the welfare
Finally, we examined the evidence in favor of the entitlement paradigm and
we found that the entitlement paradigm not only explains the marketplace
of long-term care better than the welfare paradigm does, but it comports
more closely with the facts about long-term care spending.
What's Going to Happen Next?
So, what's going to happen next? Can Medicaid go on as the primary funder
of long-term care in the United States? If not, what will replace it?
And what will the consequences be for long-term care providers, insurers,
caregivers and care recipients? Let's examine these questions.
Anyone who reads the newspaper or watches the news on television today
knows that Medicaid is in a world of hurt financially. Since the Great
Recession of 1989, the economy has been in a down draft. State Governors
have trouble making ends meet in their budgets. We hear about states
cutting back on their Medicaid budgets. It's looking more and more like
Medicaid cannot go on paying for the vast majority of all nursing home
care, much less a good portion of home and community-based care through
various "waiver" programs. Further exacerbating that problem is the
counter-intuitive action of many states actually to expand Medicaid
under the Affordable Care Act. So, point one, Medicaid is already in
But there are two other federal programs that prop up Medicaid's ability
to fund long-term care, and hence Medicaid's ability to crowd out the
market for private financing alternatives like reverse mortgages and
long-term care insurance. These two programs are Social Security and
Now when I tell experts in long-term care financing that Social Security
and Medicare are critical props under Medicaid's ability to fund long-term
care, they tend to look at me like I'm crazy. Everyone knows Social
Security doesn't pay for long-term care. Anybody familiar with LTC
financing knows Medicare doesn't pay for long-term care. Sure, Medicare
pays for some nursing home care, but only short-term rehabilitative
services, under very limited circumstances; 20 days full pay; another 80
days with a big deductible. Obviously, neither Social Security nor
Medicare pays for long-term care. So how can I say that Social Security
and Medicare are critical to Medicaid's ability to fund long-term care and
hence Medicaid's ability to crowd out most of the market for private
How Social Security Props Up Medicaid LTC
As we've explained already, when you're receiving long-term care on
Medicaid, you have to contribute nearly all of your income toward your
cost of care. Where does a lot of the income of elderly people,
especially those who are in nursing homes on Medicaid, come from? Right,
from Social Security. In fact, as we explained earlier, 14 percent of the
entire cost of nursing home care nationally, is nothing more than the
spend through of Social Security income by people already on Medicaid.
Now, what do we know about Social Security's financial stability? Will it
go on paying for such a big portion of long-term care? Most of you used
to receive a notice from the Social Security Administration (SSA) each
year, right? SSA discontinued the practice of sending these notices
effective 2011. They told you how much Social Security will pay if you
work until age 62, 66, or 70 before claiming benefits. Those notices
boldly announced that unless by some miracle Social Security is able to
climb out of the fiscal hole that it's in, the program will only pay you
76 percent of what they're still telling you now to expect. Social
Security had a $23.1 trillion infinite-horizon unfunded liability as of
2013. [Source: “Why the Government Needs to Budget Over the Infinite
Horizon, Yahoo Finance, June 13, 2013,
It will be a huge challenge for the United States government to find a
way to fill that financial hole. If it doesn't, at some point, everyone
on Social Security will take a 24 percent cut.
If you're a senior in the community depending on Social Security for your
retirement income, a cut of that size hurts severely. But if you're in a
nursing home on Medicaid, you don't care. Well, you're probably
cognitively impaired, so you don't know. But if you did know, you
wouldn't care because you have to contribute all but a pittance of your
income toward your cost of care anyway. So it's Medicaid that will take
Medicaid will be devastated by the cost of losing that much Social
Security spend-through income. Medicaid already reimburses nursing homes
less than the cost of providing the care on average, so they can't take a
cut of that size out of the already impecunious reimbursement rates for
long-term care providers. When the Social Security cut-back happens, it
will be a disaster to Medicaid long-term care AND devastating to
Medicaid's ability to crowd out the market for private financing
How Medicare Props Up Medicaid LTC
How does Medicare prop up Medicaid's long-term care funding? Medicare
pays only 23 percent of nursing home costs annually. That's much less
than what Medicaid pays. But here's the difference: Medicare pays very
generously for the relatively small proportion of nursing home revenue
that it supplies. Nursing homes actually make a ten percent to 15 percent
profit on the services they provide that are paid for by Medicare.
Unfortunately, Medicare had a $43 trillion infinite-horizon unfunded
liability as of 2013. [Source: “Medicare by the Scary Numbers,” Wall
Street Journal, June 24, 2013, http://online.wsj.com/news/articles/SB1000142412788732339380457855546195925657]
Medicare's financial hole is nearly double Social Security’s. Now, here's
the problem. There is an agency of government called MedPAC, the Medicare
Payment Advisory Commission. Every year MedPAC proposes to Congress that
they should stop paying skilled nursing facilities so much money under
Medicare. They say: "Those people are making a killing on Medicare.
It's unconscionable." That's MedPAC's attitude.
The nursing home industry responds saying: "Okay, we are making a profit
on Medicare residents, but the problem is we're losing our shirts on
Medicaid, which pays for most of the nursing home care in this country.
We have to have the extra reimbursement from Medicare to survive providing
custodial long-term care to most Americans under the Medicaid program."
MedPAC replies: "Hey, not our problem, our portfolio is Medicare and
Medicare only. Go talk to those people who fund Medicaid and get them to
pay you more adequately."
But, who pays for Medicaid? Right, the state and federal governments and
they're completely broke. Remember the Elephant, the Blind Men and
Long-Term Care? State and federal governments are bankrupt. They just
haven't done the numbers honestly yet.
MedPAC and the Bush Administration tried hard to cut Medicare
reimbursements to nursing homes in 2007. The nursing home industry barely
dodged that bullet when the economy was good. There is no way they'll
avoid the hit in the future with the economy struggling, welfare rolls up,
and tax receipts down.
MedPAC, Congress and state governments have Medicare and Medicaid
financing of long-term care in their sights. Medicare cannot go on
supporting Medicaid's ability to fund most long-term care and hence
Medicaid's ability to crowd out private financing alternatives will be
radically diminished . . . and soon! The latest development is that
“health reform” created a super-MedPAC called the Independent Payment
Advisory Board that, when implemented, will have much more power to force
Medicare reimbursement rates down.
Who is David Walker and Why Does He Matter?
David Walker used to be the Comptroller General of the United States, the
person in charge of the Government Accountability Office or GAO. Walker
is an expert on Social Security and Medicare. He became extremely
concerned about those two programs' unfunded liabilities. Several years
ago, as Comptroller General, he started what he calls the "Fiscal Wake-Up
Tour." He gave speeches to anyone who would listen about the dismal
financial outlook for America's social insurance programs.
Actually, Walker's Wake-Up Tour was part of the inspiration for our
National Long-Term Care Consciousness Tour, which was narrower in scope,
but had the same objective.
Here's what David Walker told audiences all across the country about
Social Security and Medicare. In order to make ends meet in those two
programs alone, not counting Medicaid and long-term care, we would have to
either double the payroll taxes or reduce the benefits by half.
Do any of you think that's going to happen? Can you imagine a politician
going to a potential constituent and saying: "Mrs. Jones, I want your
vote. My platform is to double your taxes and reduce your benefits by
half?" How long do you think such a person would remain a politician?
Certainly not past the next election.
Well, if the government is not going to double your taxes or reduce your
benefits by half, but they have to do something to get out from under the
$66.1 trillion unfunded liability of Social Security and Medicare, what
you think they will do?
The Welfarization of Medicaid, Medicare and Social Security
I believe their strategy will be gradually to pull back the social safety
net that has been available in the United States ever since 1935. That
safety net, starting with the implementation of Social Security, provided
not only for the poor, but for the middle class and affluent as well.
Medicaid and Medicare were added in 1965 and they too supported all
economic levels of society in one way or another. What I think will
happen next is that government will slowly, but irreversibly, means test
the traditional social safety net programs. Not only Medicaid, but Social
Security and Medicare as well. They're going to welfare-ize the
traditional social insurance programs.
And it has already begun . . .
Take Medicaid for example. You probably thought, because it was a welfare
program, Medicaid forced people into impoverishment before they could take
advantage of it. That was before you heard me talk. Now you know that
Medicaid, at least for long-term care financing, has always been a de
facto entitlement. But Medicaid cannot continue as such.
We traced the history earlier of how the federal and state governments
have attempted to get hemorrhaging Medicaid eligibility under control. We
discussed the expansion of transfer of assets restrictions, Medicaid
estate recoveries, loophole closings, and so on. That process will
continue; it will speed up; and it will become much stricter and more
aggressively enforced. Medicaid will not go on much longer sheltering up
to three quarters of a million dollars in home equity while acting as free
inheritance insurance for the baby boom generation against the risk their
parents will need long-term care. Our best hope now is that if we act
soon we may be able to preserve a decent Medicaid LTC safety net for the
truly destitute. But even that modest goal is doubtful now. The poor
will be hurt most by Medicaid's collapse.
But what about the traditional social insurance programs, Social Security
and Medicare? These programs were always considered to have much greater
dignity than welfare. They had no stigma attached. You paid your
"premiums," i.e. payroll taxes, and you were "entitled" to your
"benefits." It didn't matter if you were Bill Gates or Warren Buffett.
But that can't continue and isn't continuing. Social Security and
Medicare are gradually becoming means tested. They're being converted
from social insurance programs into welfare programs.
Welfarizing Social Security
Take Social Security, for example. If you decide to take Social Security
benefits at age 62, but you want to continue working, after a very low
threshold of $15,480 (as of 2014) in annual income, Social Security begins
to take away one dollar of your benefit for every two dollars of your
earned income. [Source:
http://www.ssa.gov/oact/cola/rtea.html] It’s one dollar for every
three dollars of earnings above $41,400 for people attaining their normal
retirement age in 2014. That's a way to place a means test, an income
test on your access to the Social Security benefit. It is precisely the
opposite incentive that we should have in public policy. We need as many
older people continuing to work and pay into Social Security as we can
possibly encourage to do so. And yet public policy creates this incentive
in the opposite direction.
You have to pay federal income taxes on Social Security as an individual
if your total income exceeds $25,000. Couples with income over $32,000
have to pay.
President Obama has proposed re-starting the Social Security payroll tax
at an annual income of $250,000. Currently (2014), you only pay Social
Security taxes on the first $117,000 of income. For incomes above that
level no one pays any Social Security payroll tax now. [Source: http://www.ssa.gov/policy/docs/quickfacts/prog_highlights/index.html]
So what would it mean to require people to pay Social Security tax on
income over $250,000? Well, who makes over a quarter million dollars a
year? Small business owners mostly. They tend to reinvest a good portion
of their income into their businesses, thus creating 70 percent of all
jobs in the United States. Add an extra 6.2 percent payroll tax on their
own income and another 6.2 percent for their employees, and small business
owners will be much less likely to expand their businesses and hire more
people. Adding such a punishing tax could easily reduce the total
revenue to Social Security.
An Apolitical Point
Now, I don't like to focus on people's politics. I don't care whether
you're a Democrat or a Republican, a liberal or a fiscal conservative.
Fiscal conservatives tend to think we should steward our scarce public
resources very carefully, so they're an easy sell. But sometimes
Democrats and liberals are less quick to see the benefits of what I'm
saying. They like to help people, especially the poor, but also
middle-class people. The way I explain the issue to fiscal liberals and
Democrats, therefore, is like this: "Why in the world would you want to
use your scarce public welfare resources to indemnify affluent heirs of
well-to-do seniors? They're probably all a bunch of Republicans, anyway."
What about Medicare? Has it been welfarized yet? Are there any means
tests that have been put in the way of accessing Medicare benefits?
Indeed there have. In 2007, for the very first time, the Part B premium
increased with a beneficiary's income level. And it increases radically
at higher income levels. Also, the premium for Part D, the pharmaceutical
program that increased Medicare's unfunded liability by $11 trillion, is
also tied to income.
The higher your income, the higher your "premiums" for these formerly
social-insurance, but increasingly welfare programs.
The Bottom Line
No matter how you look at it, individuals and families will be much more
personally responsible in the future: not only for their long-term care
security, but I believe also for their retirement income and even for
their acute health care security. This will become, and is already
becoming, obvious as the pressures mount on Medicaid, Medicare and Social
Security with the aging of the baby boom generation.
Historically, we had a very large baby boom generation paying into the
social insurance programs to support a relatively small World War II
generation. That's all about to change. A much larger generation drawing
resources out of these programs will depend on support from a much smaller
generation. Gen X or Gen Y, the Millenials, or whatever you want to call
them. Within a very short number of years, it will take two workers to
support each aging baby boomer. So, the demographic and financial numbers
just don't add up. There's no way each working couple can carry one of us
aging boomers on their backs and still live a good life, raise and support
children, and continue to finance all the other things Americans want
their government to do.
So, in closing, here's my message to you. First, take responsibility for
yourself and for your own families. Make sure you are prepared. Second,
warn everyone who's life you touch about what's coming and encourage them
to take personal responsibility. Third, realize that this is not only a
personal responsibility, but almost a civic duty.
There's an old saying: "The best way to help the poor is not to become one
And yet that is exactly the perverse incentive built into current public
policy, which says: "Don't worry about long-term care; wait and see if you
ever need it; and if you do, simply impoverish yourself artificially, give
your kids an early inheritance, and take advantage of the public welfare
program to fund your long-term care."
The late economist Herbert Stein used to like to say that trends which
can't continue, won't. The trend toward more government dependency and
less personal responsibility for long-term care is clearly one that can't,
and therefore, won't continue.
You owe it to yourselves and to your families, to your prospects and to
your clients, to tell them the truth, the whole truth about what's likely
to happen next. But that can be a ticklish problem. You don't want to
use scare tactics and much of what I presented in this class is very
Hopefully your conscience will suffice to ensure that you don't overdo
this information. Nevertheless, you should also always assume that the
insurance commission has a little eye in the sky watching everything you
do. But that's why I publish two weekly newsletters, LTC E-Alerts
and LTC Bullets. The purpose of those publications is to provide
you with reliable third-party sources that can say what needs to be said
without your having to say it so directly yourself. I draw on all kinds
of sources, including the Government Accountability Office, the
Congressional Budget Office, think tanks like the Urban Institute,
Brookings, and Cato, peer-reviewed journal articles, and so on.
Send your e-mail address, phone number, and other contact information to
info@centerLTC.com and we'll be happy to add you to the mailing list for
these publications for a month, free of charge. If after that you find
value in our publications and from the back end of our website, "The
Zone," then join the Center and become part of the solution.
Finally, one last point, especially for financial advisors who don't
currently market LTC insurance or reverse mortgages. You don't have to
sell these products, but you do have a moral and fiduciary responsibility
to your prospects and clients to get them protected against the risk and
cost of long-term care.
So, if you're going to stick to your knitting and leave long-term care
alone, then get your clients protected for LTC by forming a professional
relationship with LTC specialists you trust. Trade referrals or split
commissions. Do whatever you have to do to make if work professionally
for you and the LTC specialists.
That's how to make it a Win/Win/Win for your clients, for you, and for the
AMGs struggling to sell long-term care insurance.
Thank you for your attention.