LTC Bullet: So What If the Government Pays for Most LTC, 2002 Data Update

Wednesday, January 21, 2004

Topeka, KS--

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. After the ***news.***

*** The distinguished International Longevity Center, directed by the nationally renowned geriatrician and author Dr. Robert N. Butler, M.D., published the following review of the Center's latest report in the January 2004 issue of it's ILC Policy Report ( "Center for Long Term Care Financing: The Center has released a report entitled 'The Heartland Model for Long-Term Care Reform: A Case Study in Nebraska.' Although the report is rooted in Nebraska and America's Heartland, its analysis and recommendations are national in scope and potential. The report discusses the 'entitlement' mentality that many Nebraskans have of the Medicaid program for long-term care and the cost to the state of providing such care. It recommends various measures to tighten Medicaid long-term care eligibility rules, educate people about the risk of long-term care and the importance of planning for such care, and provide incentives for people to financially prepare for long-term care (such as long-term care insurance and home equity conversions). More information and the report can be found at" [The direct link to our Nebraska report is .] ***

*** The Society of Actuaries' Fourth Annual Intercompany LTCI Conference is rapidly approaching: February 8-11, 2004 in Houston, Texas. You can find complete information on this excellent conference at . Not sure this is the industry meeting for you? If you're a Center donor with access to The Zone, just click here to find our "Virtual Visit" to the last SOA-LTCI conference which was held in Las Vegas, January 26-29, 2003. Our virtual visits to major industry conferences are designed to give you a feel for what the meeting is like, including summaries of sessions, interviews with attendees, photographs of prominent participants, and details about cost and venue. If you haven't Zoned In yet, learn how in the section immediately below titled "LATEST DONOR-ONLY ZONE CONTENT." (Misplaced your user name and password? Just drop a note to or call him at 206-283-7036 for a quick reminder.) ***

*** LATEST DONOR-ONLY ZONE CONTENT: Here's the latest Zone content followed by instructions on how to subscribe so you can receive these critical epistles daily by email.

The LTC Reader # 4-003--LTCI Sex Appeal (LTC is a women's issue. Retirement planning, including LTCI, is critical for women. Here's why.)

LTC E-Alert # 4-004--Pensions and Health Benefits Down, LTCI Up (Collapsing pension and health benefits argue strongly for personal responsibility and LTCI.)

The LTC Data Update # 4-003--If You Think We've Got Problems Now, Just Wait 100 Years (The UN speculates about life spans and related issues a century from now.)

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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. Recently, CMS posted 2002 statistics on their website at The current issue of Health Affairs (Vol. 23, No. 1, January-February 2004, pps. 147-159) contains a summary and analysis of the new data titled "Health Spending Rebound Continues in 2002" written by CMS staffer Katherine Levit and several other authors. Subscribers to Health Affairs can access the full text of the article online after registering at 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: .


"So What If the Government Pays for Most LTC, 2002 Data Update"
Stephen A. Moses

Ever wonder why LTCI sales and market penetration are so disappointing? Or why LTC service providers are always struggling to survive financially and still provide quality care? Read on.

America spent $103.2 billion on nursing home care in 2002. The percentage of nursing home costs paid by government (mostly Medicaid and Medicare) has been going up for the past 14 years (from 49.6% in 1988 to 64.0% in 2002, up 14.4% of the total) while out-of-pocket costs have been declining (from 38.5% in 1988 to 25.1% in 2002, down 13.4% of the total). 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 (49.3% of the dollars in 2002), 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 7.5% of nursing home costs that CMS reports as having been paid by "private health insurance" in 2002. 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 gets reported as if it 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 $28,548 per year (Source: MetLife survey at Assisted Living Survey.pdf ). 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 $36.1 billion on home care in 2002. Medicare and Medicaid paid 55.4% of this total and private insurance paid 18.6%. Only 18.0% 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? Less than 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.

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. Target Medicaid financing of long-term care to the needy and use the savings to fund education and tax incentives to encourage the public to plan early to be able to pay privately for long-term care. For ideas and recommendations on how to implement this solution, see .


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

"Growth in health spending rose from 8.5 percent in 2001 to 9.3 percent in 2002, advancing much faster than the rest of the U.S. economy for the second consecutive year. It rose at more than twice the rate of growth of gross domestic product (GDP, 3.6 percent), causing health spending's share of GDP to rise from 13.3 percent in 2000 (where it had remained largely unchanged since 1993) to 14.1 percent in 2001 and 14.9 percent by 2002. Aggregate health spending climbed to $1.6 trillion, or $5,440 per person. After overall health expenditures are adjusted for economywide inflation, constant-dollar growth rose 7.1 percent per capita in 2002, compared with 4.9 percent average annual growth over the past four decades. . . .

"Home health. Spending for freestanding home health agency services grew by 7.2 percent in 2002, the second consecutive year of expansion, driven mostly by Medicare. Industry growth is beginning to stabilize following a period of changes to Medicare policies. These policies led to a substantial $4.6 billion drop in Medicare spending between 1997 and 1999 that has been partially offset by an increase of $2.9 billion in Medicare spending since then. This rebound in Medicare, the largest single payer for home health services, has been driven by the implementation of the PPS in October 2000. Medicare spending for home health services grew only 0.6 percent in 2000, compared with 17.6 percent in 2001 and 13.3 percent in 2002. Recent rapid growth in Medicare is partly a result of a change in the interpretation of 'homebound' that expanded the number of beneficiaries eligible for services. Countering double-digit growth in Medicare spending, slowing Medicaid spending contributed to the seven-percentage-point deceleration in overall public funding for home health in 2002. . . .

"Nursing homes. Spending for services provided by freestanding skilled nursing care facilities continued at a moderate growth rate of 4.1 percent, slightly slower than the 5.7 percent rate in 2001. This correlates with slow growth in nursing facility capacity and a deceleration in the costs of supplies and services used in the provision of care. Despite a deceleration of 0.8 percentage points in public spending for nursing homes in 2002, the public share of payments rose to 64 percent of overall payments, with Medicaid paying 49 percent. States also are seeking to shift more patients from nursing homes and other institutions to community-based settings as they comply with the Olmstead interpretation of the Americans with Disabilities Act that encourages the treatment of people with disabilities in less restrictive community settings."