LTC Bullet: New LTC Expenditure Data Provide Clues to Low LTCI Sales and LTC Facilities' Financial Woes

Tuesday, January 14, 2003


LTC Comment: Heads up! We're about to explain why long-term care insurance sales have been disappointing and why the nursing home and assisted living industries are in such a woeful financial condition. The explanation is complicated, but hey, if it were simple, everyone else would have figured it out already. After the ***news***.

*** Listen to Steve Moses, President of the Center for Long-Term Care Financing, on Jacqueline Marcell's Internet radio program, "Coping with Caregiving," discussing the importance of early planning for long-term care financing. Jacqueline is the "edu-taining" author of, "Elder Rage, or Take My Father... Please! How to Survive Caring for Aging Parents." The show is available for online 24/7 listening-on-demand at: . Note that you can also listen to an interview with Susan Coronel, Long-Term Care Director of the Health Insurance Association of America, at the same website. Susan is Segment 1. Steve is Segment 6. ***

*** Accurate media coverage of long-term care financing and insurance is critical. Unfortunately, reporters frequently provide bad information and advice to their readers on these subjects. We need to correct them when they get it wrong and congratulate them when they get it right. That's why the Center for Long-Term Care Financing has published our series of "reality check" LTC Bullets which are archived at . Now we want to alert you to a great new resource, "Phyllis Shelton's Media Commentary," in which the well-known LTCI author and trainer provides commentaries on current long-term care stories in the media. Ms. Shelton says: "[LTC insurance is] getting lots of attention, finally, and your clients and prospects will be reading these articles and meeting you at the door with them or bringing them to your office. I'll try to help you formulate responses that emphasize the advantages of long-term care insurance to help you be better prepared to discuss these articles with your clients and prospective clients." She also lathers the reporters when they're right and shaves them when they're wrong. Check it out at . ***

*** Latest donor-only zone content includes:

LTC E-Alert #3-004--HHS Hinders LTC
LTC E-Alert #3-005--Nursing Homes Refute GAO Report that Extra Dollars Didn't Buy More Staff

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 donor zone content and the archives: .

To Zone In, mail your tax-deductible contribution of $150 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 by credit card or direct withdrawal at . ***


LTC Comment: Once a year around this time the Centers for Medicare and Medicaid Services (CMS) report health care expenditure data for the latest year of record. Last week, CMS posted 2001 statistics on their website at . The current issue of Health Affairs (Vol. 22, No. 1, January-February 2003, pps. 154-164) contains a summary and analysis of the new data titled "Trends in U.S. Health Care Spending, 2001" written by CMS staffer Katherine Levit and five other authors. Subscribers to Health Affairs can access the full text of the article online after registering at . Non-subscribers can purchase the article for $9.95 at the same URL. We'll provide some highlights of this article after our analysis of the newest long-term care expenditure data, which follows. You can find the CMS source data at: .


The percentage of nursing home costs paid by government (mostly Medicaid and Medicare) has been going up for the past 13 years (from 49.6% in 1988 to 61.5% in 2001, up 11.9%) while out-of-pocket costs have been declining (from 38.5% in 1988 to 27.2% in 2001, down 11.3%). Source:

So what? The consumer's liability for nursing home costs has gone down precipitously, while the government's liability has increased dramatically. No wonder people are not as eager to buy LTC insurance as insurers would like them to be! No wonder nursing homes are struggling financially--their dependency on stingy government reimbursements is increasing while their more profitable private payers are disappearing.

Unfortunately, these problems are even worse than the preceding data suggest. Over half of the so-called "out-of-pocket" costs reported by CMS are really just contributions toward their cost of care by people already covered by Medicaid! These are not out-of-pocket costs in terms of asset spend down, but rather only income, most of which comes from Social Security benefits, another government program. Thus, although Medicaid pays less than half the cost of nursing home care (47.5% of the dollars in 2001), it covers 70 percent of all nursing home residents. Because people in nursing homes on Medicaid tend to be long-stayers, Medicaid pays something toward nearly 80 percent of all patient days.

So what? Medicaid pays in full or subsidizes almost four-fifths of all nursing home patient days and if it pays even one dollar per month (with the rest contributed from the recipient's income) the nursing home receives Medicaid's dismally low reimbursement rate. No wonder the public is not as worried about nursing home costs as LTC insurers think they should be. No wonder nursing homes are facing bankruptcy all around the United States when so much of their revenue comes from Medicaid, often at reimbursement rates less than the cost of providing the care.

Don't be fooled by the 7.6% of nursing home costs that CMS reports as having been paid by "private health insurance." They derive this number by subtracting all the known costs from 100% and reporting the remainder as private insurance. No one knows how much private health insurance really pays toward nursing home care, because most long-term care insurance pays beneficiaries, not nursing homes. Thus, a large proportion of insurance payments for nursing home care get reported as if they were "out-of-pocket" payments because private payers write the checks to the nursing home and are reimbursed by their LTC insurance policies.

How does all this affect assisted living facilities? ALFs are 90% private pay and they cost an average of $25,000 to $30,000 per year. Many people who could afford assisted living by spending down their illiquid wealth choose instead to take advantage of Medicaid nursing home benefits. Medicaid exempts one home and all contiguous property, one business, and one automobile, all of unlimited value, plus many other non-countable assets, not to mention sophisticated asset sheltering techniques marketed by Medicaid planning attorneys. Income rarely interferes with Medicaid nursing home eligibility unless such income far exceeds the cost of private nursing home care.

So what? For most people, Medicaid nursing home benefits are easy to obtain without spending down assets significantly and Medicaid's income contribution requirement is usually much less expensive than paying the full cost of assisted living. No wonder ALFs are struggling to attract enough private payers to be profitable. No wonder people are not as eager to buy LTC insurance as insurers would like them to be.

The situation with home health care financing is very similar to nursing home financing. According to CMS, America spent $33.2 billion on home care in 2001. Medicare and Medicaid paid 51.5% of this total and private insurance paid 21.1%. Only 19.0% of home health care costs were paid out of pocket. The remainder came from several small public and private financing sources. Data source:

So what? Only one out of every five dollars spent on home health care comes out of the pockets of patients. No wonder they do not feel the sense of urgency about this risk that long-term care insurers think they should. No wonder "Sizable reductions in Medicare payments between 1997 and 1999 led approximately 3,500 agencies to merge, withdraw from Medicare, or close entirely." (See the Health Affairs article referenced above, p. 160).

Bottom line, people only buy insurance against real financial risk. As long as they can ignore the risk, avoid the premiums, and get government to pay for their long-term care when and if such care is needed, they will remain in "denial" about the need for LTC insurance. As long as Medicaid and Medicare are paying for a huge proportion of all nursing home and home health care costs while out-of-pocket expenditures remain only nominal, nursing homes and home health agencies will continue starved for financial oxygen.

The solution is simple. For the answer, read our report titled "LTC Choice: A Simple, Cost-Free Solution to the Long-Term Care Financing Puzzle" at .


Highlights from the Health Affairs article follow (with footnotes omitted):

"ABSTRACT: U.S. health care spending grew 8.7 percent to $5,035 per capita in 2001. Total public funding continued to accelerate, increasing 9.4 percent and exceeding private funding growth by 1.2 percentage points. This acceleration was due in part to increased Medicaid spending in the midst of a recession and payment increases for Medicare providers. Prompted by sluggish economic growth and by faster-paced health spending, health spending 's share of GDP spiked 0.8 percentage points in 2001 to 14.1 percent." (p. 154)

"The fastest-growing spending category in 2001 was prescription drugs (up 15.7 percent)." (p. 157)

"Nursing homes are one of the slowest-growing health care sectors, because of the steady, decade-long decline in age-adjusted use rates. Spending for free-standing nursing homes rose 5.5 percent to $98.9 billion in 2001, the second year of accelerated growth after virtually no growth in 1999. The 1999 slowdown primarily resulted from effects of the Balanced Budget Act (BBA), which sharply reduced Medicare payments to skilled nursing facilities (SNFs). Even though Medicare funds a small share (9 -12 percent) of total spending for nursing home care, its regulations strongly influence the industry.

"The BBA mandated a conversion from a cost-based reimbursement system to a prospectively determined payment system for Medicare SNFs, precipitating a decline of $1.9 billion in Medicare payments in 1999. In response to industry concerns about Medicare payment cuts, Congress modified some of the BBA limitations with temporary Medicare payment increases in the Balanced Budget Refinement Act (BBRA) and in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA). In 2001 these givebacks added $2.6 billion to Medicare nursing home payments, contributing to a 22.3 percent growth in Medicare payments, up from 13.4 percent in 2000.

"The primary payer for nursing home care is Medicaid, accounting for $47.0 billion (48 percent) of all spending (Exhibit 5). Medicaid nursing home spending grew 5.3 percent, slightly less than in 2000 (6.7 percent). In the federal-state partnership, states must contribute funds to obtain a federal match. In an effort to increase state revenues and expand federal financing, some states put in place UPL programs, a controversial strategy resulting in increased federal Medicaid spending with little or no real outlays by the states.

"UPL programs, sometimes referred to as a 'Medicaid loophole,' allow states to reimburse nursing homes owned by county or municipal governments at 'enhanced' rates. The federal match on state Medicaid spending is collected by states. Nursing homes then remand a portion of UPL funds back to states. Estimates of these amounts are excluded from the health accounts.

"Only 38 percent of nursing home care is privately funded either directly from patients and their families or through private health insurance. Private spending grew four percent age points more slowly than did total spending in 2000 and 2001, which suggests a decline in the number of private-pay patients. Industry experts speculate that growth in assisted living facilities may account for part of this loss.

"Home health. The anticipation and implementation of several pieces of legislation, beginning with the BBA and modified by the BBRA and BIPA, have affected overall home health spending. Sizable reductions in Medicare payments between 1997 and 1999 led approximately 3,500 agencies to merge, withdraw from Medicare, or close entirely. Public spending declines began in 1997, as did a deceleration in private spending.

"Following a cumulative Medicare spending reduction of 34 percent between 1997 and 2000, an easing of payment limits helped to increase Medicare spending for freestanding home health agencies by $1.2 billion or 14.4 percent in 2001, as the number of agency closings tapered off. Medicaid home health spending growth doubled--from 8.6 percent in 2000 to 17.3 percent in 2001. Combined Medicare and Medicaid spending rebounded by 15.6 percent in 2001, faster than overall home health spending of 4.5 percent. Consequently, public spending rose to 56 percent of total home health spending ($33.2 billion in 2001).

"Growing shortages of nurses and aides has further limited the service capacity of remaining home health agencies. Thus, home health industry aggregate work hours grew only 0.5 percent in 2001, compared with 1.8 percent in 2000. Remaining agencies may have been more likely to accept Medicare rather than private-pay patients because of the increased profitability of Medicare's prospective payment system (PPS) rates. This in part caused private spending growth for home health services to drop 6.1 percent in 2001. Spillover impacts on other health services may have resulted, as patients sometimes sought care through use of ambulatory and emergency care services or turned to assisted living facilities or private-duty nursing services." (pps. 159-161)