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LTC Bullet:

Levy's Cadette Strikes Again

Thursday June 1, 2000

Seattle--

Our March 27, 2000 LTC Bullet "New 'Cadette' in the LTC Financing Battle" introduced Walter M. Cadette, a senior scholar at the Jerome Levy Economics Institute. Cadette and the Levy Institute have published another "Policy Note" of interest to Bullets readers. "Health Care Finance in Need of Rethinking" is number four in the Institute's Year 2000 series. Read or download it at www.levy.org. While this piece deals with health care financing in general, here's a taste of it bearing on long-term care financing:

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"Inevitably, much of the rise in the share of GDP dedi cated to health care in the next several decades will reflect increased need for long-term care. Not only will an unusually large generation approach old age, life expectancy will continue to rise with medical advances. Many more Americans, the prospect is, will fall victim to the chronic diseases of old age and will require years of home care and, in all too many cases, years of institutionalized care.

"The nation is not equipped to deal with this even tuality. Nor is there public discussion about the problem, in contrast to the attention paid to the long- run actuarial deficits Medicare and Social Security face. And, yet, the problem arises out of the very same demographics.

"By default rather than design, the nation has fash ioned a welfare strategy for long-term care, pushing Medicaid far afield of its original purpose of financing the medical care of the indigent, in particular those on Aid to Families with Dependent Children and succes sor welfare programs. Strikingly, more than a third of the Medicaid budget is dedicated to long-term care, most of which finances the stay of disabled elderly in nursing homes. The care of two out of three nursing home residents is paid, in whole or in part, by Medicaid.

"A welfare model has also led to two-tier nursing-home care. Private payers, irrespective of their need for care, are typically given preferential treatment in admissions; Medicaid beneficiaries are often consigned to second- rate facilities because the budgets set by state govern ments (albeit with heavy federal funding) do not stretch to pay comparable fees.

"A welfare model, moreover, has been an open invita tion to transfer assets to heirs in advance of the need for nursing-home care. To be sure, asset and income limits are an inherent part of any welfare grant; they are designed to ensure that the available resources go to those with the greatest need. In practice, however, Medicaid finances the nursing-home care of many others. Asset and income limits have given rise to a whole industry of estate planners adept at helping people meet the letter, although not the spirit, of the limits.

"Insurance--public or private or some combination of the two--would be a greatly better answer to the nation's long-term care needs. Indeed, long-term care is almost perfectly suited to an insurance model. Two out of five Americans over age 65 will spend some time in a nursing home. For most, their stay will be only for a few months, say, for rehabilitation following hip replacement or a stroke. Medicare ordinarily pays most of the costs asso ciated with such stays. However, one in ten Amer icans over 65 will require care for five years or more and will incur costs that if paid directly from individual or family assets would bankrupt most families. If every family were to try to save to meet the cost of such a stay, the resulting saving would be excessive. Pooling of the needed saving through insurance pre miums is the natural economic response, but one frustrated by apparent market failure.

"It is not a failure of the insurance market per se. Easy access to Medicaid all but forecloses the chances of developing a broad market for long-term care insurance. And, absent adequate public funding for alternative forms of care, easy access to Medicaid for nursing home care has led to excessive institu tionalization of the disabled elderly.

"The challenge for government is to shift the financing of long-term care toward an insurance, and away from a welfare, model. The well-being of all the disabled elderly in need of Medicaid benefits is at stake because of two-tier care practices--a problem that promises to worsen as economies mandated by the Balanced Budget Act, for Medicaid as well as Medicare, take full effect over coming years. At stake also is 'honest government'--one that not only does not fund inheri tance protection but that also genuinely protects those with greatest need. Clearly, however, an in surance model cannot be developed as long as most Americans needing long-term care can turn to a safety net in the first instance."

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Right on! Congratulations to Cadette and the Levy Institute for hammering home yet again the essence of America's long-term care financing problem and the key to its solution.