LTC Bullet--Denial is Not a River in Egypt

Friday, September 27, 2002

Dallas, TX--

LTC Comment: Are you puzzled by the lackluster market penetration of long-term care insurance? Do you blame the public? Are they too stupid to realize the risk of LTC and that Medicare is no solution? Do you blame the industry? Are LTC insurers too incompetent to design or sell products people want? We've heard both explanations many times. Neither is accurate. If you want to know the real reason LTC insurance has not taken off yet, read Steve Moses' provocative article "Denial is Not a River in Egypt" following the news items below. Note to editors: if you would like to publish this article, please contact Steve Moses directly at 206-283-7036 or .

*** "The Great LTC Debates" are coming November 17 to 19, 2002 in St. Louis. Get all the details online. Go to for the conference brochure and to for the full line-up of sessions and speakers. Center President Steve Moses will debate National Academy of Elder Law Attorneys President-Elect Bill Browning on November 18, 2002. Don't miss this great debate: "Medicaid Planning: Damned or Destined." Just write "Center LTCF" in the RED SUBTOTAL box on the printable registration form and deduct $50 from the cost. Only $345 for early registrants. ***

*** And don't forget! You can attend an LTC Graduate Seminar sponsored by the Center for Long-Term Care Financing on November 20--the day after the Great LTC Debates conference--at the same St. Louis hotel. Save another $25 if you attend both events (otherwise the Grad Seminar is $225). Just hit reply and let us know to hold a place at the LTC Graduate Seminar for you. The Center's LTC Graduate Seminar is advanced training for experienced and successful senior financial advisers, including LTCI carrier executives whom we especially encourage to attend. The all-day program is receiving rave reviews from appreciative attendees. Get all the details at: . ***

*** New content added today to the donor-only zone includes "The LTC Week in Review for September 23-27, 2002: LTC E-Alerts #226-#230." Every LTC E-Alert contains some news or information that will help people understand the need to prepare early for the risk and cost of long-term care. If you already qualify for The Zone, you can click the following link, enter your user name and password, and go directly to the latest E-Alerts: .

LTC E-Alert #226--Help for Seniors' Pharmacy Costs
LTC E-Alert #227--Do HMOs Cut LTC Costs by Encouraging Suicide?
LTC E-Alert #228--Lawsuits Hike LTC Costs Too
LTC E-Alert #229--Feds Cave on State Medicaid Bailouts--WA, WV, AL
LTC E-Alert #230--Home Health Hopelessness

To Zone In, mail your tax-deductible contribution of $100 or more to the Center for Long-Term Care Financing, 2212 Queen Anne Avenue North, #110, Seattle, WA 98109. Then email your preferred password and user name (up to 10 characters each). You can also contribute online at . ***


"Denial is Not a River in Egypt" by Stephen A. Moses

With the Age Wave about to crest and crash in a few years, why are long-term care insurance sales flat? After 25 years of earnest effort and with decades of promising demographics ahead, why is the industry struggling?

If you ask these questions to anyone in the long-term care insurance business, you'll get the same answer: DENIAL. Supposedly, the American public evades and ignores the huge objective risk and cost of long-term care. The only solution, therefore, is to shock people with more education (scary statistics) and lure them to private insurance with positive incentives (tax deductions or Medicaid spend-down forgiveness). This diagnosis and prescription is so common that its catch phrase has become a cliché: "Denial is not a river in Egypt."

Denial is the problem, all right. But not the public's denial. Rather, the major obstacle to LTCI market growth is the insurance industry's denial regarding some critical long-term care marketplace realities. If we face these facts instead of evading them, apply some common sense, and observe a few universally accepted values, politically feasible public policy solutions will follow logically.

So, first the facts.

The vast majority of all nursing home services ($92.2 billion) and home care ($32.4 billion) in the United States was paid by direct or indirect government funding or by patients' income (not assets) in 2000. Consider nursing homes first. The percentage of nursing home costs paid by government has been going up for the past decade (from 49.2% in 1990 to 60.6% in 2000, up 11.5%) while out-of-pocket costs have been declining (from 37.5% in 1990 to 27.0% in 2000, down 10.5%). Still, this data vastly underestimates the impact of government funding on the nursing home market. For example, although Medicaid pays only 48.1% of the cost of nursing home care nationally, the program covers 70% of nursing home residents and it pays something toward the cost of nearly 80% of all patient days.

How can this be and why does it matter? Medicaid nursing home recipients must contribute most of their income toward their cost of care. Thus, Social Security benefits and private income supplement Medicaid nursing home payments. But if Medicaid pays even one dollar toward the cost of a resident's care, the nursing facility receives Medicaid's low reimbursement rate. This is true even if the Medicaid recipient is paying most of the cost of his or her own care. Thus, Medicaid has a devastating effect on the financial viability of nursing homes (by dragging reimbursement down for over three-fourths of patient days) while simultaneously reducing the personal financial impact of nursing home costs on more than two-thirds of nursing home residents.

What's more, over half of so-called "out-of-pocket" nursing home costs, reported by CMS (the Centers for Medicare and Medicaid Services, formerly HCFA) as 27.0% in 2000 and expected to fall to 23.1% by 2010, are really just "spend-through" of Social Security income contributed toward their cost of care by people already on Medicaid. Now, back out Medicare's 10.3% of nursing home costs plus a couple more percentage points from other government programs (such as the VA) and 8.1% that CMS says comes from "private health insurance" (not LTCI as no one knows how much LTCI pays toward nursing home care) and you're left with no more than 15% of the cost of nursing home care nationally that could possibly have come from asset spend-down. That's not enough asset risk to instill a sense of urgency in the U.S. population, but it's more than enough government financing of nursing home care to enable the public's pervasive sense of "denial." (Source of data:

Now consider home care. CMS reports that America spent $32.4 billion for home health care services in 2000. Of this total, public funding sources, including Medicare and Medicaid, paid 52.2%, up from 51.6% in 1990, and expected to increase to 59.6% in 2010. Private health insurance and other private funds paid 28.3%, down from 30.3% in 1990, and expected to decline further to 22.1% by 2010. Bottom line, in the year 2000, Americans were only "out-of-pocket" for 19.6% of home health care expenses, less than one dollar out of five. Thus, with over 80 percent of the cost of home care covered by third party payers other than long-term care insurance, it is not surprising that the public is "in denial" about the risk and cost of home care expenses. (Source: )

The simple truth, about which the long-term care insurance industry itself has been in denial, is that all but a small percentage of nursing home and home care services in the United States are paid for without touching anyone's assets. This should no longer come as a surprise. In the late 1980s, over two dozen so-called "Medicaid spend-down studies" proved that conversion from private-pay to Medicaid in nursing homes occurred in only 15% to 25% of cases instead of the 50% to 75% previously believed. Furthermore, none of these studies distinguished between people who spent down the old-fashioned way, by writing big checks every month, and people who spent down the new-fangled way by means of Medicaid planning (artificial self-impoverishment). We know now that nearly 80% of new nursing home residents are already on Medicaid when they enter the facility. Of course, Medicare nursing home and home care benefits do not require any spend-down and are routinely available to all beneficiaries who qualify medically.

But how can it be true that Medicaid spend-down is relatively insignificant when Medicaid is a poverty program that requires income under the poverty level and asset impoverishment? Simple. Medicaid does not require a low income. It only requires that recipients have a cash flow problem. In most states (with "medically needy" eligibility systems), one can have any amount of income and qualify for nursing home benefits as long the income is insufficient to pay all of one's medical expenses, including private nursing home care. In other states (with "income cap" eligibility systems), recipients whose income exceeds the 2002 limit of $1,635 can siphon any excess into a Miller income trust (authorized by the Omnibus Budget Reconciliation Act of 1993) to become immediately eligible. Of course, the community spouse of an institutionalized Medicaid recipient can also retain up to $2,232 per month (as of 2002) of income since the Medicare Catastrophic Coverage Act of 1988 eliminated the problem of spousal impoverishment.

But what about assets? Don't they have to be spent down to no more than $2,000? Assets have never been a significant obstacle to Medicaid nursing home eligibility for most Americans. Over half the net worth of the median elderly household is in a home. Under Medicaid, the home and all contiguous property is exempt regardless of value. One business including the capital and cash flow of unlimited value is also exempt. So also is one automobile exempt, with no limit on its value if it's used at least occasionally for the infirm elder's benefit. The same is true for a prepaid burial trust and term life insurance in any amount. Exempt household furnishings are theoretically limited in value but this is rarely checked or verified by state officials. If a Medicaid nursing home applicant cannot fit his or her assets into these generous exemptions, there are thousands of Medicaid estate planning attorneys eager to help them circumvent the rules with a myriad of more sophisticated artificial impoverishment techniques. These include trusts, annuities, self-canceling installment notes, life-care contracts, and many, many more.

For 37 years, the American people have been able to ignore the risk of long-term care, avoid the premiums for private insurance, and receive publicly financed professional nursing home and home care services if and when they need them, with most of their assets protected and with only their income as co-insurance. Consequently, the public's "denial" regarding the risk of catastrophic asset spend down makes perfect sense. They don't buy long-term care insurance because they don't think they need it. They don't think they need it because the government has been giving it away for nearly four decades.

What has changed is that the nursing home care government pays for has deteriorated in quality to the point where no one wants it. Unfortunately, most people do not awaken to this reality until too late. After being stricken by Parkinson's, Alzheimer's or stroke, families face a Hobson's choice. They can take advantage of Medicaid's deficient institutional care and preserve assets or they can spend down assets to obtain quality home care, assisted living or nursing home care in the private market. Unfortunately, too many people still choose the Medicaid option, especially when adult children who do not want to lose their inheritances get involved. Easy access to Medicaid nursing home benefits without a significant spend-down liability undermines the public's sense of urgency about long-term care and deflates the demand for private long-term care insurance.

Unless and until America controls the hemorrhage of government financing for long-term care, private financing through long-term care insurance and home equity conversion will never thrive. Until private financing of long-term care becomes the primary source of revenue to providers, America will continue to suffer with an institution-based, welfare-financed system of extended care. Fortunately, the situation is far from hopeless. The whole problem has been caused by well-intentioned, but perversely counterproductive public policy. If we quit doing what we've always done, we'll stop getting the results we've always gotten.

What's the answer? Give Medicaid back to the poor. Eliminate all income and asset exemptions that make prosperous people eligible for Medicaid benefits. With fewer people dependent on Medicaid, the program will be able to offer top quality home care, assisted living and nursing home care to all recipients. For the middle-class home owners thus eliminated from Medicaid eligibility, give them a line of credit on their estates fully collateralized by their estates and repayable only after the death of their last surviving, exempt, dependent relative (e.g., a spouse, elderly sibling, or disabled adult child.) This "LTC Choice" program could be administered responsibly and profitably by private financial institutions with a federal loan guarantee program. With the supplemental income drawn through these lines of credit from their otherwise illiquid assets, infirm seniors could purchase quality long-term care services at the most appropriate level of care in the private market place. The whole continuum of care providers--home care, assisted living, and nursing homes--would thrive because of this huge new source of private payers. Because assets truly would be at risk under this system, far more people would buy private long-term care insurance or tap the equity in their homes through reverse mortgages, thus supercharging the insurance and financial services industries, which in their turn pay taxes and employ workers.

The good news about long-term care financing is that the big problems we face are self-inflicted and easy to solve. All we have to do is confront the marketplace realities instead of ignoring them and adjust public policy accordingly. With a real risk of spend-down, most people will buy LTC insurance. Those who go bare for long-term care, but have significant income and assets, will use those resources to obtain the best possible services the private market has to offer. When those resources run out, they will qualify for a financially reinvigorated Medicaid program that pays market rates and commands access to quality care across the whole spectrum of care for its dramatically reduced numbers of dependents. Everyone wins, except perhaps the parasites of poverty who profit from the current system by manipulating its loopholes to benefit their affluent clients. And denial will no longer be an issue.

If you find this analysis and proposal of interest, please review the study prospectus at this link: . The Milliman USA, Inc. and Center for LTC Financing Long-Term Care Financing Study will test the hypothesis that easy availability of Medicaid and Medicare LTC benefits impedes the marketability of private LTC insurance. We seek sponsors to help guide and fund this project.

Stephen A. Moses is president of the Center for Long-Term Care Financing in Seattle, WA. Reach him at or 206-283-7036. Or visit The Center for Long-Term Care Financing is a charitable, nonprofit think tank and public policy organization with the mission of ensuring quality long-term care for all Americans. Subscribe to the Center's free online newsletter "LTC Bullets" by emailing your request to