LTC Bullet: HEC of a Way to Pay for LTCi

Wednesday, April 7, 2004

Mobile, AL--

LTC Comment: Home equity is the biggest asset seniors have and long-term care insurance is the best way to protect it, but neither home equity conversion nor private LTC insurance is a widely popular product. Why? The answer after the ***news.***

*** Medicaid planning is more than ever the cash cow of the elder law profession. Two lawyers and a dozen paralegals can pull down multi-million dollar revenues running a Medicaid eligibility assembly line. That reality motivated this quote from a disenchanted former Medicaid planner: "Elder law attorneys have become to the elderly what fisherman are to fish." It is no discredit to the honorable practice of elder law to point out that egregious Medicaid planning is unworthy. Every occupation has its bad practitioners. ***

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*** 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 #4-012--Never Say Never on a Nursing Home (The strain of caregiving for a parent while nurturing a new romance argues strongly for LTC insurance.)

LTC E-Alert #4-019--Why Smokers Too Need LTCi (New research shows smokers decline cognitively five times as fast as non-smokers.)

Don't miss our "virtual visits" to major LTC industry conferences in The Zone. You'll find our comparison of the conferences, session summaries, interviews and pictures at http://www.centerltc.com/members/index.htm .

Individual donors of $150 or more and corporate donors to the Center for Long-Term Care Financing receive our daily email LTC Bullets, LTC E-Alerts, LTC Readers, and LTC Data Updates for a full year. You'll also get access to the donor-only zone where these publications are archived along with other donor-only features. 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 archives: http://www.centerltc.com/members/index.htm . If you do not already qualify for The Zone, 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 mailto:damon@centerltc.org your preferred user name and password (up to 10 characters each). You can also contribute online by credit card or direct withdrawal at http://www.centerltc.com/support/index.htm . ***

LTC BULLET: HEC OF A WAY TO PAY FOR LTCI

LTC Comment: Policymakers have known for 15 years that seniors' home equity is the answer to a daunting demographic dilemma: who will pay for the boomers' long-term care? But they've been puzzled by an apparent mystery. If long-term care is such a huge risk, why do most aging Americans fail to buy long-term care insurance, much less use home equity conversion to pay for it?

Anyone who understands Medicaid and Medicare, just shakes his or her head at such confusion and mutters "Well, duh!" Medicaid exempts the home and all contiguous property regardless of value. Few states have effective estate recovery programs. Medicare has no means test or recovery mandate at all. If home equity is not at risk for long-term care costs, why would anyone expect seniors to use it to pay for LTC or to buy insurance against a risk they don't believe they face?

Comes now the federal government with a sweetener. Maybe, the policymakers figure, if we give people a $2,000 discount on their reverse annuity mortgage (RAM) loans, they'll take more of them out to pay for LTCi. Unfortunately, that strategy won't work any better than the Long-Term Care Insurance Partnership program persuaded more people to buy LTC insurance. The Partnerships tried to incent people to buy more LTCi by forgiving an imaginary spenddown liability that doesn't exist in the first place for all intents and purposes.

Bottom line, large numbers of people will not purchase home equity conversion or long-term care insurance, much less use the one to buy the other, until Medicaid long-term care eligibility rules are changed to put home equity--seniors' biggest asset by far--at risk for long-term care. As long as Medicaid remains "inheritance insurance" for the baby boom generation, guaranteeing they'll inherit their parents' biggest asset, you can expect the HEC and LTCi markets to under perform, and Medicaid--sooner rather than later--to collapse.

The agonizingly frustrating irony is that the whole problem of long-term care financing is so easy to fix. Simply extend the transfer of assets lookback period to capture a more reasonable planning horizon (say eight years instead of three) and require that home equity be consumed for long-term care by means of a reverse mortgage before Medicaid eligibility is granted. That strategy encourages people to use their home's value to remain at home and delay or prevent Medicaid dependency. It also gives them a strong incentive to use home equity to obtain private LTC insurance. Home ownership is a matter of public record so tracking it and requiring its use for long-term care before public welfare kicks in is easy.

This simple change would drastically reduce the cost of Medicaid, enable the program to provide better access to a wider range of higher quality care, empower more seniors to purchase quality care in the private market at the most appropriate level, pump much needed financial oxygen to all levels of the long-term care provider system, and unleash the markets for private home equity conversion and long-term care insurance, thus creating jobs and increasing tax revenues. Everybody wins.

Unfortunately, most academics and policymakers are still a long way from seeing the problem clearly, much less reaching the right conclusion about the solution. Following are excerpts from and a link to a recent policy paper linking HEC and LTCi. This is a thoughtful and useful paper, but we'll focus our comments on areas of disagreement or where clarification is needed.

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Alexis Ahlstrom, Anne Tumlinson, Jeanne Lambrew, "Primer: Linking Reverse Mortgages and Long-Term Care Insurance," March 18, 2004, The George Washington University, Washington, DC. Read this paper in full at http://www.brookings.org/dybdocroot/views/papers/orszag/20040317.pdf . Read an overview at http://www.brookings.org/views/papers/orszag/20040317.htm .

Quote: "For those who exhaust their savings and continue to need medical care, and for those with limited incomes and assets, Medicaid may pay for their care. Medicaid, by default, has become a major financer of LTC, paying for nearly half of all nursing home care." (p. 3)

LTC Comment: In truth, the impact of Medicaid and Medicare financing on the public's sense of urgency and personal responsibility regarding LTC is much larger than this paper comprehends. There is no evidence of widespread catastrophic spenddown to qualify for Medicaid LTC. The "spenddown studies" of the late '80s and '90s showed the opposite is true. Approximately 80 percent of all formal home care and nursing home care in the US is paid for directly or indirectly by government, or by private income, not assets. See "LTC Bullet: So What If the Government Pays for Most LTC, 2002 Data Update," Wednesday, January 21, 2004 at http://www.centerltc.com/bullets/archives2004/481.htm for explanation and documentation.

Quote: "The rationale behind the LTC insurance-reverse mortgage link is that it allows seniors to tap into the value in their homes while protecting their retirement income and other assets from the potentially catastrophic costs of long-term care. To the extent that people purchase LTC insurance, thus reducing the number of people who 'spend down' to Medicaid, this proposal could help relieve the strain on state and federal budgets." (p. 4)

LTC Comment: A key element completely missing from this paper is the recognition that Medicaid exempts the home and all contiguous property regardless of value and rarely captures the home value later through estate recovery. Without home equity at risk, seniors lack the incentive to use it for LTC. That's why reverse mortgages and LTC insurance are not popular already. Simply jawboning people to use either product will not work in the absence of Medicaid eligibility changes that place home equity at risk. Even tax incentives or "spenddown forgiveness" have little effect on consumers' interest in home equity conversion or long-term care insurance as long as Medicaid protects their assets.

Quote: "Using a reverse mortgage to purchase long-term care insurance has the potential to help protect peoples' retirement savings, limit the financial responsibility of the Federal and State governments, and provide care options suited to the individual needs of the elderly. However, neither a reverse mortgage nor LTC insurance is right for everyone. Listed below are key issues raised by the linkage. . . . Currently, the average age of a person getting a reverse mortgage is 75 years old, while the average age at time of purchase of a LTC insurance policy is 64 years old. People cannot even qualify for a HECM until they are 62 years old. The optimal time to buy a LTC insurance policy is not necessarily the optimal time to take out a reverse mortgage, and vice versa." (p. 12)

LTC Comment: The age difference in purchasing LTC insurance or obtaining a reverse mortgage is not really a problem. If and when people perceive a need to use private insurance to protect their wealth, including their home equity, from long-term care expenses, they will tend to buy the product when they are younger and it is less expensive. In fact, the average age of purchase of LTCi has been declining for many years. The fact that reverse mortgages are not available until age 62 is also no problem because people are not as likely to need supplementary income to pay LTCi premiums unless they wait to purchase the insurance until they are older and the premiums are higher. The two products actually fit together very well with respect to the age of potential consumers.

Quote: "Results from the 2000 HUD evaluation of the HECM program indicate that reverse mortgage borrowers tend to be single, low-income, and have few assets other than the home. These people may not be able to afford LTC insurance even with a loan, and may value LTC insurance less than someone with a spouse and significant assets to protect would. To date, most purchasers of LTC insurance have been in middle to upper income households, with resources to purchase LTC insurance without needing to borrow the equity in their home. There may be very few people for whom this policy makes sense." (p. 13)

LTC Comment: The main reason to buy LTC insurance is not asset protection. It is rather to maintain control and independence in the choice of the level and quality of long-term care. Medicaid eligibility is easy to obtain after the insurable event occurs, but usually results in welfare-financed nursing home institutionalization. Even people of moderate income and assets, who could easily qualify for Medicaid, benefit by combining their home equity with other possible resources--such as financial help from adult children--to purchase LTC insurance which will empower them to obtain quality long-term care in the private market at the most appropriate level. Unfortunately, current Medicaid eligibility rules militate against such planning by rewarding heirs for taking early inheritances and placing parents in nursing homes on public assistance. Remove these perverse incentives, and families will pull together in positive ways to help their aging relatives prepare for the risk and expense of long-term care.