LTC Bullet: CBO Says Medicaid Crowds Out LTC Insurance

Wednesday, June 16, 2004

Seattle--

LTC Comment: Remember you heard it here first! But isn't it great that Congress has acknowledged that public financing of LTC chills the market for private financing alternatives? More after the ***news.***

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LTC BULLET: CBO SAYS MEDICAID CROWDS OUT LTC INSURANCE

LTC Comment: We've hammered home the point repeatedly for years. Easy access to free or subsidized Medicaid and Medicare financing of nursing home and home health care for nearly four decades has anesthetized the public to the risk and cost of long-term care. Today, we're paying the price. We have a welfare-financed, nursing home based LTC system that is falling apart at the seams.

The first step to fix the problem is to recognize what caused it. That's why the recent CBO report excerpted and linked below is so important. It isn't perfect, as we'll point out, but at least it recognizes the connection between generous public financing of long-term care and the dearth of private financing alternatives as a result.

What's the answer? Target public LTC financing more narrowly to the genuinely needy and it will do a better job for fewer people. Everyone else will get the message, insure or use their home equity, and save the provider system by paying privately. Leave things as they are now, however, and the whole system will collapse when the boomers retire and approach senescence.

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Citation: The United States Congress, Congressional Budget Office, "Financing Long-Term Care for the Elderly," April 2004, http://www.cbo.gov/showdoc.cfm?index=5400&sequence=0 . Excerpts from the reports "Summary" follow:

"Currently, elderly people finance LTC services from a variety of sources including private resources-personal savings, care donated by friends and family, and LTC insurance -and with assistance from public programs such as Medicaid and Medicare. Incentives inherent in that financing structure have led to increased reliance on-and spending by-those public programs and may have discouraged seniors and younger Americans from purchasing LTC insurance to pay for their care." (p. ix)

"In 2004, out-of-pocket spending (excluding donated care) is expected to account for about one-third of total estimated LTC expenditures." (p. ix)

LTC Comment: True but misleading. At least half of so-called out-of-pocket spending for long-term care comes from Social Security income that people on Medicaid are required to contribute toward their cost of care. There is no evidence of widespread spend down of personal assets for long-term care expenses. See our LTC Bullet "So What If the Government Pays for Most Long-Term Care" at http://www.centerltc.com/bullets/archives2004/481.htm for a more complete explanation of public and private financing sources.

"In 2004, spending from private LTC insurance, which is a relatively new insurance product, is expected to account for about $6 billion, or 4 percent, of total LTC expenditures." (p. x)

LTC Comment: No one knows how much private insurance pays for long-term care but the industry estimated total paid claims last year at around $1 billion, one-sixth of the figure cited above. The confusion derives from data reported by the Centers for Medicaid and Medicare Services (CMS). CMS reports percentages for "private health insurance" (PHI) payments for long-term care. Most people, even scholars who should know better, assume that PHI is the same as long-term care insurance. It is not. Most long-term care insurance pays beneficiaries who then pay their providers. Those payments are reported as "out-of-pocket" costs by CMS. CMS derives PHI by deducting all known sources of LTC financing from 100% and reporting the remainder as private health insurance. PHI includes major medical and Medicare supplemental insurance payments to long-term care providers which are measurable, but the larger figure is derived based on no hard data. Again, see our LTC Bullet "So What If the Government Pays for Most Long-Term Care" at http://www.centerltc.com/bullets/archives2004/481.htm for a more complete explanation of public and private financing sources.

"Underlying the set of decisions a person makes in preparing financially for future long-term care needs is the availability of publicly funded programs for long-term care, primarily Medicare and Medicaid. In 2004, the portion of total LTC expenditures attributable to those two programs together is likely to reach nearly 60 percent. Medicare does not cover long-term care per se but has become a de facto LTC financier through its coverage of care in skilled nursing facilities (following hospitalization) and its home health care benefit. Medicaid is the dominant public insurance program for long-term care. Not only does it cover the care of people with very low income, but its eligibility rules permit middle-income people-even seniors whose income in retirement leaves them fairly comfortable-to qualify for coverage by exhausting, or 'spending down,' their income and assets. Thus, people who fail to make their own preparations for long-term care needs can eventually qualify for Medicaid if they become impaired."
(pps. x-xi)

LTC Comment: CBO underestimates the impact of Medicaid on long-term care by focusing only on the percentage of expenditures. People on Medicaid must contribute most of their income toward their cost of care. Therefore, nearly 70 percent of nursing home residents are on Medicaid even though Medicaid pays less than half the cost of nursing home care nationally. Because Medicaid residents are the longest stayers, Medicaid reimbursement touches nearly 80 percent of all nursing home patient days. These measures are much more important than the pure dollar figures because Medicaid reimburses nursing homes so little for care. Even if most of the bill is paid by the recipient's income, nursing homes still receive the stingy Medicaid reimbursement rate. This is an important reason why nursing home quality is such a big problem. Again, see our LTC Bullet "So What If the Government Pays for Most Long-Term Care" at http://www.centerltc.com/bullets/archives2004/481.htm for a more complete explanation of public and private financing sources.

"Future demographic changes are likely to result in increased demand for long-term care, placing growing fiscal pressure on the public programs that pay for much of it today. Those changes may also indirectly affect informal care by reducing the number of people who might provide LTC services. In addition, the current financing structure creates incentives that discourage people from preparing to finance their own care, encouraging them to rely instead on public LTC insurance." (p. xi)

"The availability of Medicaid benefits for long-term care skews people's decisions about purchasing private coverage. Many people who believe that they could meet the financial qualifications for Medicaid may view it as a substitute for private insurance. The public coverage that Medicaid provides is not a perfect substitute; for example, it does not protect a person's wealth (people are generally obliged to exhaust their own resources before becoming eligible for coverage) and may not be able to provide the same quality of care and array of choices that would be available to someone with private LTC insurance. But many people may prefer to accept those drawbacks rather than pay premiums for private insurance. (p. xi)

LTC Comment: The idea that Medicaid "does not protect a person's wealth" is preposterous. Medicaid LTC recipients are allowed to keep a home and all contiguous property, a business including the capital and cash flow, term life insurance, one automobile, etc., etc.--all of unlimited value. Medicaid planners protect much more still. Estate recoveries are rarely enforced aggressively and are easy to avoid. One prominent failure of the CBO report is that it almost entirely ignores how easy Medicaid long-term care eligibility is to obtain without spending down significantly.

"Medicaid's free coverage may also deter people from purchasing private insurance even if they do want to protect their assets or secure higher-quality care than they could receive through Medicaid. Medicaid is a means-tested program; people who set aside savings or obtain private insurance cannot qualify for benefits for as long as their private resources last. The more people save or the more insurance they purchase, the less likely they are ever to qualify for Medicaid benefits. Thus, people who buy insurance pay more than just the premiums; they also give up the value of future Medicaid benefits for which they might have been eligible." (pps. xi-xii)

LTC Comment: And that's not even the half of it! Private payers with LTC insurance are quadruply taxed. They pay taxes to support Medicaid. They pay premiums for private insurance. Then they pay higher private pay nursing home rates through "cost shifting" to compensate for Medicaid's low reimbursement rates. Finally, they are being asked in many states to pay additional "bed taxes" to generate revenue that state Medicaid programs can use to seek additional federal matching funds. No wonder so few people buy LTC insurance. When will the insurance and provider industries mobilize to do something about this?

"Private insurance could be made more attractive to consumers by . . . taking steps to remove or lessen what is sometimes termed Medicaid crowd-out- the dampening effect that the availability of Medicaid's LTC benefits has on sales of private LTC insurance policies. (p. xiii)

LTC Comment: Hear, hear!