LTC Bullet: Use Your Home to Stay . . . Off Medicaid!
Tuesday, February 8, 2005
LTC Comment: A new report on the use of home equity to prevent or delay
long-term care institutionalization is excellent. But it vastly underestimates
the potential decrease in Medicaid spending and the potential increase in LTC
insurance sales. More after the ***news.*** [omitted]
LTC BULLET: USE YOUR HOME TO STAY . . . OFF MEDICAID!
LTC Comment: Dr. Barbara Stucki's new report, published by the National Council on the Aging with support from The Robert Wood Johnson Foundation and the Centers for Medicare and Medicaid Services, is titled "Use Your Home to Stay at Home: Expanding the Use of Reverse Mortgages for Long-Term Care: A Blueprint for Action." It is an exceptionally good public policy paper which you can and should read in full at http://www.ncoa.org/attachments/ReverseMortgageReport3%2Epdf . In the meantime, check out the NCOA's press release announcing publication of the study and summarizing its content after the following comments.
Having pronounced this study "superb" in last week's LTC Bullet and "excellent" this week, we won't dwell here on what's right about it. That'll be obvious when you read it. Rather, here are our criticisms. They're vital but easily fixable if and when policy makers see the light.
The report vastly underestimates the potential savings to Medicaid from home equity conversion. It suggests "savings to Medicaid ranging from about $3.3 to almost $5 billion annually in 2010 . . . ." (p. 36). We, however, recently estimated a potential savings to Medicaid of $20 billion per year from reverse mortgages . . . almost immediately. ("How to Save Medicaid $20 Billion Per Year AND Improve the Program in the Process," http://www.centerltc.com/pubs/howtosavemedicaid.pdf ).
What's the difference? The NCOA report only recommends that people use their home equity voluntarily instead of making reverse mortgages a precondition of eligibility for Medicaid long-term care benefits. Because Medicaid exempts the home and all contiguous property regardless of value and estate recovery is easy to evade, merely jawboning people to use their home equity before applying for Medicaid won't work. Why encumber your home equity if Medicaid will let you keep it, pass its value to your heirs, and still pay for your long-term care?
Besides, the report's argument against making spend-down of illiquid home equity mandatory is specious: "If reverse mortgages became mandatory to qualify for Medicaid, the healthy spouse who is still living at home could be left without any assets. Many could become trapped in an inappropriate living situation because they no longer have the financial resources to move out of a house that has become unsafe or too much to handle." (p. 62). In truth, ever since the Medicare Catastrophic Coverage Act of 1988, community spouses have been assured an income and asset floor that has increased with inflation up to as much as $2,377.50 per month of income and half the joint assets not to exceed $95,100 as of 2005. If that isn't enough, or if the community spouse would have nothing left after spending down home equity, then special hardship waivers could and should apply as they do for other areas of Medicaid eligibility.
The primary point to remember is that as long as home equity remains exempt and reverse mortgages are voluntary, Medicaid will remain "inheritance insurance" for the baby-boom generation. Until that fundamental fact changes, few seniors will use their home equity to fund long-term care; most will end up in nursing homes on Medicaid; and Medicaid will continue to spiral down toward total fiscal collapse.
Our second criticism of the NCOA report bears on its downplaying the potential of home equity conversion to fund long-term care insurance premiums. (We heard that the original draft of the report was much more positive toward private LTCi before it underwent multiple layers of review.) Why does NCOA think reverse mortgages can't help much with LTCi premiums? The report gives two main reasons:
First: borrowing through a reverse mortgage to buy long-term care insurance would be expensive and seniors would rather preserve the value of their homes to pass on to heirs in their estates. (pps. 14-15)
Well, duh! Naturally that's true and it will remain true as long as home values are protected by Medicaid and are not at risk for long-term care costs. If home equity were put at risk for LTC, thus relieving the fiscal burden on Medicaid and taxpayers, the market for private LTC insurance would explode, people would gladly tap a portion of their home equity to protect the rest of their estate, and baby-boomers would get the clue that Medicaid is no longer protecting their inheritance, so they would insure also.
What's so hard to understand? People respond to incentives and Medicaid is full of perverse incentives that discourage responsible long-term care planning. Change the incentives and the results will change. Remember the definition of insanity? This isn't rocket science, as Beltway policy wonks like to say.
The NCOA report's other objection to the use of home equity conversion for LTC insurance revolves around the notion that people who take out reverse mortgages tend to be too old to qualify for affordable LTC insurance premiums. (pps. 33-34)
That argument is also unfounded. People who take out reverse mortgages today tend to be older and poorer because--under current public policy incentives--most people resort to reverse mortgages only when they're old and poor. It's a tautology or at best a self-fulfilling prophecy. Reverse mortgages have only become popular recently because interest rates have collapsed and older people use their home equity as a checking account to maintain their standard of living in the absence of the interest on savings to which they were previously accustomed. If people had to use their home equity for long-term care before becoming eligible for Medicaid, they would take out the home equity conversion loans at younger ages when LTC insurance is less expensive. In other words, the wide-open Medicaid home exemption deflates and delays the market for reverse mortgages by rewarding the early transfer of housing assets and by diverting housing wealth to heirs.
Nothing complicated here. If you stop giving away free long-term care to people with large home equities (and to people who transferred homes only a few years before applying for Medicaid), they will plan early to save, invest or insure for long-term care. They'll use their home equity to buy long-term care insurance if they qualify and to pay for home and community-based care, if they don't. They'll get better access to a wider range of higher quality long-term care when they can choose and pay for their own care. Medicaid will be a better program for the genuinely needy when it has fewer dependents to support. Taxpayers will get relief. Providers will have more revenue to fund quality care. The home equity conversion and LTC insurance markets will expand, generating more jobs and more tax revenue. Everybody wins, except the Medicaid planners.
All it takes is some clear thinking, a willingness to follow the logic where the evidence leads, and some political gumption.
Strike the part about gumption. It will soon be political suicide to ignore this problem. If nothing is done, Medicaid long-term care costs will crowd out almost everything else in government budgets within a decade or two. Can you see state legislators telling their constituents they'll have to close schools in order to preserve Medicaid LTC benefits for prosperous seniors with big home equities? Ain't gonna happen.
Why not fix the problem now before fatal damage is done to America's long-term care safety net?
Following is NCOA's press release announcing the report:
NCOA Study Shows Reverse Mortgages Can Help Seniors Pay for Long Term Care at Home. January 26, 2005. For Immediate Release. Contact: Scott Parkin (202) 479-6975
WASHINGTON -- A study released today by The National Council on the Aging (NCOA) shows that reverse mortgages can be used by over 13 million Americans to pay for long-term care expenses at home, allowing many to remain as independent and in their homes longer.
"The study shows that reverse mortgages have significant potential to help many seniors pay for help at home or to make home modifications. It also points to the need for strong consumer safeguards and lower transaction costs if these loans are to appeal to the millions of older Americans who could potentially benefit," said NCOA president and CEO James Firman.
According to the study, there are some 9.8 million elder households (aged 62 and older) that are dealing with an impairment that can make it hard to live at home. In total, these households could access as much as $695 billion through reverse mortgages. For individuals, the extra cash could go a long way to help with family caregiving and other long-term care expenses. For example, a borrower aged 75 years old with a home worth $100,000 could receive a reverse mortgage loan that could pay them $500 a month for almost 12 years.
"This is an important study that, for the first time, shows that elderly homeowners, many with chronic conditions, can use reverse mortgages to pay for care at home," said Jim Knickman, vice president for Research at the Robert Wood Johnson Foundation. "We hope that these findings will prompt new thinking into how the nation addresses the challenge of financing long-term care."
Reverse mortgages are loans that allow homeowners aged 62 and over to convert home equity into cash while living at home for as long as they want. Borrowers continue to own their homes, and do not need to make any monthly payments. Instead, they can choose to receive the funds as a lump sum, line of credit, or as monthly payments (for up to life). The loan comes due only when the last borrower moves out, dies or sells the home.
The "Use Your Home to Stay at Home: Expanding the Use of Reverse Mortgages to Pay for Long Term Care" report, funded by the Centers for Medicare and Medicaid Services and the Robert Wood Johnson Foundation, also shows how reverse mortgages can alleviate financial pressure not only for individuals and families, but also for state Medicaid programs and the federal government. Increasing the market for reverse mortgages could save Medicaid $3.3 billion (with a four percent take up rate) annually by 2010.
"Many seniors and their families can benefit from effective ways to pay for the long term care services they need, in the setting they prefer," said Dr. Mark McClellan, administrator of the Centers for Medicare & Medicaid Services. "NCOA's report shows that reverse mortgages can provide real help in financing long term care needs."
However, there are several obstacles to their growth for this purpose. For example, the NCOA study shows that while two-thirds (67 percent) of older homeowners today have heard of a reverse mortgage, only 9 percent indicate that they are likely to use this financing option to pay for assistance at home. Many worry that they risk impoverishment, or won't be able to leave a legacy to their children if they tap home equity. The cost of these loans, and current Medicaid policies on how reverse mortgages affect eligibility for long-term care benefits, also appear to be barriers.
"We need expanded public education, and additional work to explore how to reduce the cost of tapping home equity, to strengthen consumer protections, and promote innovation," said Barbara Stucki, PhD, project manager for NCOA's Use Your Home to Stay at Home project. "Overcoming these obstacles will mean that reverse mortgages can play an important role in helping many older Americans pay for the supportive services they need to continue to live at home safely and comfortably."
According to Firman, NCOA will continue to play a leadership role in promoting the appropriate use of reverse mortgages to help pay for long term care at home.
Founded in 1950, The National Council on the Aging is a national network of organizations and individuals dedicated to improving the health and independence of older persons; and increasing their continuing contributions to communities, society, and future generations. For more information on NCOA, visit www.ncoa.org.