LTC Bullet: Levy's Cadette on LTC Financing Policy

Thursday, May 8, 2003

Santa Fe, NM--

LTC Comment: Few scholars understand the complicated relationship between public and private financing of long-term care. When we find one who does, like Walter Cadette of the Levy Economics Institute, we're very pleased to bring his ideas to you. More after the ***news.***

*** Several states in fiscal crisis are following the Center for Long-Term Care Financing's advice. They're attempting to target scarce Medicaid LTC resources to the genuinely needy while encouraging affluent seniors to pay their own way. Connecticut, Minnesota, Wisconsin and Massachusetts have requested federal waivers to permit them to tighten their Medicaid eligibility rules. See, for example, Patrick Howe, "States target retirees hiding cash to get Medicaid," in the Arizona Republic, . Now add the previously ultra-generous State of New York to the list. Legislation introduced in the State Senate would dramatically strengthen New York's Medicaid income and asset eligibility rules. Among other things, the bill, introduced by Senator Raymond A. Meier, would eliminate New York's egregious "spousal refusal" loophole, extend the asset transfer look back period from three to five years, and place additional limits on the use of trusts to qualify for Medicaid LTC benefits without spending down. The text of the bill is available at . Simply insert this bill number: S4627. Center President Stephen Moses briefed Senator Meier, the bill's sponsor, on the deleterious and expensive effects of over-the-top Medicaid planning in a personal briefing on March 26, 2003. ***

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LTC Comment: Walter M. Cadette is a senior scholar at The Levy Economics Institute-- . The following excerpts are from Levy Institute Policy Note 2003/3, "Caring for a Large Geriatric Generation: The Coming Crisis in U.S. Health Care." You can order a hard copy of the entire "Note" at . An electronic version will be posted at sometime soon. We featured Cadette's work twice before in "LTC Bullet: New 'Cadette' in the LTC Financing Battle" on March 27, 2000--

and in "LTC Bullet: Levy's Cadette Strikes Again" on June 1, 2000-- . Our thanks go to the Levy Institute for permission to republish these excerpts.

"The time has more than come to begin planning seriously for the aging of the baby boom generation. The need for planning goes beyond concerns about the solvency of Social Security and Medicare. Another crisis looms in the form of a huge bill for the care of baby boomers who in their old age will need help dressing, eating, taking medication, and performing other daily tasks. Under the current system, most nursing home care is paid for by Medicaid-a program designed primarily to subsidize the acute care of indigent families. This arrangement diverts health care resources from their intended use, thwarts the development of a long-term-care insurance system, and provides meager resources to heavily burdened providers, forcing them to skimp on care needed by a vulnerable population. . . .

"Coping with the financial stress on Social Security and Medicare will be relatively easy, as well-established financing vehicles are in place. Dealing with the jump in the number of so-called old-old will be much more difficult. Indeed, no mechanism now exists for the financing of long-term care save Medicaid, which, as conceived in the 1960s, was meant to pay for the acute care of the most indigent families, not the long-term care required by the majority of frail elderly residents of nursing homes. The private insurance market, in contrast, fills a tiny fraction of the need. Few families have the resources to finance out of pocket either nursing home care or equivalent at-home care, which in New York State, for example, can easily cost upwards of $100,000 a year (Gregory and Gibson 2002).

"The consequences of Medicaid financing are troubling for the frail elderly and for the nation at large. The lack of any serious national debate about those consequences is even more troubling. . . .

"However one defines long-term care, it is clear that Medicaid is the dominant payer. That is certainly true of the portion of nursing home care, almost all of it custodial, for which virtually no private financing mechanism exists. Two out of three nursing home residents receive Medicaid, which pays approximately 80 percent of the cost of care as measured by resident-days (Moses 1999). [Clarification: Medicaid pays at least part of the cost of care for nearly 80 percent of all nursing home patient days at a reimbursement rate that is on average only two-thirds of the private-pay rate (S. Moses).] Thus a large majority of the institutionalized disabled elderly receive care funded by a program intended for welfare recipients and governed by traditional welfare rules, such as those stipulating asset and income limits. Only about 5 percent of the bill is paid by insurance; the rest, out of pocket. Medicaid in effect has become a nearly universal form of long-term-care insurance, albeit with strict asset and income limits. . . .

"The first consequence of this funding system is that almost one-fourth of the Medicaid budget is diverted from the acute-care needs of the indigent population (Levit et al. 2003, 158). Some states provide extensive coverage to the indigent, but this is hardly true of the nation as a whole. In parts of the South and West, the qualifying income levels are especially low. Congress and the states have had the opportunity to raise the standards, to finance both the acute-care needs of the poor and the nursing home care of qualifying frail elderly. However, having the opportunity and taking it are two different things when the nation's accounts tend toward large deficits, as they have except during the late 1990s.

"Second, Medicaid financing of long-term care yields two-tier care. Nursing homes are often unwilling to accept Medicaid recipients (or those who are unlikely to remain private payers for long), except when they can bill Medicare for rehabilitation services. The admission process at many of the best-run institutions is grounded not in need, but in the ability to pay. Because of long-standing budget constraints, Medicaid typically pays 20 to 30 percent less than a private-pay resident-and often as much as 50 percent less. It is a simple business decision to accept the private payer, especially since decades of "certificate of need" regulation, an important supply limitation, have kept nursing homes operating at or close to capacity. We all have to be grateful for those religious institutions that do not operate for profit, but even they are hard pressed to accept Medicaid beneficiaries. God, after all, does not pay the utility bill, or meet the payroll at the end of the week.

"The problem is not only two-tier care, but also second-rate care. Certainly there are many fine nursing homes, staffed by heroes and saints. But reimbursement rates, even in relatively high-income states like New York, cannot possibly provide for first-rate care. There are too few aides and nurses for too many residents; too few porters for too many residents; and too little physical therapy to accommodate too many residents. Indeed, no physical therapy is offered unless the patient's prognosis points to improvement in the impaired skill. Thus, no reimbursement is available if the aim is merely to prevent the skill-ambulation, for example-from atrophying. So atrophy it does.

"Nursing homes strive not to provide first-rate care in any idealized sense, but care that is achievable within the payment limits of the state and federal governments. Such care requires countless compromises: chairs that recline too much for residents to get out of easily (also a threat to ambulation); wheelchairs that, however uncomfortable, are efficient for transporting residents around the building; lift contraptions that, however frightening to residents, ease their transfer from bed to chair. There is only so much even heroes and saints can do on a shift.

"The final consequence of a welfare model for long-term care is the creative accounting it encourages. Limits on assets and income, a necessary part of any welfare mechanism, are easily met with the help of elder-care lawyers, who abound in high-income states like New York. How many of us have friends who could not imagine admitting that they cheat on their taxes but who would willingly tell us, "Mom turned over the house and the bank account to me on the advice of a lawyer"? Is this, as the elder-care lawyers claim, perfectly legitimate estate planning? Or is it, as many of the rest of us would claim, welfare fraud?

"In all too many cases, Medicaid has become a guarantee of an inheritance. It is one thing for the elderly to "spend down" their resources and qualify legitimately for welfare funds. It is quite another to transfer assets in order to qualify. Indeed, it is hard to conceive of a system more conducive to abuse of the elderly. Surrendering assets to children robs the elderly not just of their assets, but of financial independence itself. Worse, these machinations lead to undue institutionalization; once their assets are transferred, the elderly are impoverished and thus eligible for Medicaid.

"The financial burden that such a system-relying heavily on welfare and on out-of-pocket payments-imposes on a spouse remaining in the community is also unwholesome. To be sure, the income and asset limits for a nursing home resident's spouse are significantly higher than they are for, say, an institutionalized widow or widower (whose monthly allowance barely covers a few magazine subscriptions and a haircut). New York State, for example, allows spouses to keep about $2,200 per month of income; some states, such as Alabama, use the federally mandated minimum spousal income of $1,492 (CMS 2003). Spouses can keep half of a couple's financial assets, up to a maximum of $90,660 (CMS 2003). Even these higher limits, however, make independent living difficult. The caps often lead to "spousal refusal"-a way of getting Medicaid for a spouse in need of nursing home care without meeting the asset and income limits. This is an understandable response-especially for relatively young spouses who are still employed. No such financial responsibility is imposed on a son or daughter, or even on a parent with a disabled adult child. These, however, are ethical issues beyond my brief. . . .

"One of the most distressing aspects of a welfare model is that it undermines an insurance model for which long-term care is ideally suited. . . . Why the insurance market for long-term institutional care has failed to develop is no mystery: Medicaid can be relied on in the vast majority of cases if and when the need arises. The nursing home bills will be paid by government, and the bills will not eat into the elderly person's legacy. So why incur years of premiums for private insurance when, with a bit of planning, government will be the insurer? . . .

"In an ideal world, the best solution would be to have Medicare pay for the early use of long-term care, extending the principle of Medicare payment for some short-term services. Little distinction of any economic relevance exists between acute care and chronic care, especially for those who suffer from multiple problems of aging.

"Longer-term stays in a nursing home would be covered by private insurance, subsidized by tax credits scaled to income to make premiums affordable (Cadette 2000). The same caveat about universal insurance applies here too, however: Long-term-care coverage will remain on the back burner until the nation addresses the issue of the uninsured working poor.

"In the meantime, the government should tighten Medicaid eligibility by lengthening the period that applicants must wait for coverage after transferring assets to their heirs. As long as the nation is unwilling to mandate private coverage for long-term care and subsidize it, or unwilling to institute social insurance, any effort to shift to an insurance model will be hamstrung by the ready availability of public aid. The object is not to deny needed support to the disabled elderly, but to make it more costly for people to rely on Medicaid in the first instance."