LTC Bullet: How Medicaid Crowds Out LTC Insurance

Wednesday, February 23, 2005


LTC Comment: You can't sell apples (LTCi) on one side of the street when they're giving them away (Medicaid LTC benefits) on the other. More after the ***news.***

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LTC E-Alert #5-013--Insurance Agent Recommends $405K Single Premium Immediate Annuity to Get Medicaid (How can responsible professionals compete with that deal?)

LTC E-Alert #5-014--Dychtwald on Older Workers (Honorary Center Board member has a major interview in Boomer Market Advisor magazine.)

The LTC Reader #5-008--How Medicaid Crowds Out Private Health Insurance (People with employer health insurance often take advantage of Medicaid instead.)

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LTC Comment: Late last year, two economists at the National Bureau of Economic Research (NBER) published research papers that try to explain the relationship between Medicaid long-term care benefits and the market for private long-term care insurance.

They conclude that ". . . Medicaid can explain the lack of private insurance purchases for at least two-thirds and as much as 90 percent of the wealth distribution . . ." and that ". . . public policies designed to stimulate private insurance demand will be of limited efficacy as long as Medicaid continues to impose this large implicit tax."

Last week, the economists' data, arguments and conclusions were the subject of a presentation and panel discussion sponsored by the American Enterprise Institute (AEI).

Today's LTC Bullet provides abstracts of the two papers, links to where you can obtain the full texts, and access to a video of the AEI program.

We close with a critique of the case that Medicaid crowds out LTCi. Preview: 40 years of easy access to generous Medicaid LTC benefits has obviously impeded the market for private LTCi, but much more so and for different reasons than these authors or their reviewers realize.


Abstracts of the two papers:

Jeffrey R. Brown and Amy Finkelstein, "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," NBER Working Paper No. 10989, issued in December 2004, NBER Website, Monday, February 21, 2005, .

"We show that the provision of even incomplete public insurance can substantially crowd out private insurance demand. We examine the interaction of the public Medicaid program with the private market for long-term care insurance and estimate that MEDICAID CAN EXPLAIN THE LACK OF PRIVATE INSURANCE PURCHASES FOR AT LEAST TWO-THIRDS AND AS MUCH AS 90 PERCENT OF THE WEALTH DISTRIBUTION, even if comprehensive, actuarially fair private policies were available. Medicaid's large crowd out effect stems from the very large implicit tax (on the order of 60 to 75 percent for a median wealth individual) that Medicaid imposes on the benefits paid from private insurance policies. Importantly, Medicaid itself provides an inadequate mechanism for smoothing consumption for most individuals, so that its crowd out effect has important implications for overall risk exposure. AN IMPLICATION OF OUR FINDINGS IS THAT PUBLIC POLICIES DESIGNED TO STIMULATE PRIVATE INSURANCE DEMAND WILL BE OF LIMITED EFFICACY AS LONG AS MEDICAID CONTINUES TO IMPOSE THIS LARGE IMPLICIT TAX." (Emphasis added.)

Jeffrey R. Brown and Amy Finkelstein, "Supply or Demand: Why is the Market for Long-Term Care Insurance So Small?," NBER Working Paper No. 10782, issued in September 2004, NBER Website, Monday, February 21, 2005, .

"Long-term care represents one of the largest uninsured financial risks facing the elderly in the United States. Whether the small size of this market is driven primarily by supply side market imperfections or by limitations to demand, however, is unresolved, largely due to the paucity of data about the structure of the private market. We provide what is to our knowledge the first empirical evidence on the pricing and benefit structure of long-term care insurance policies. We estimate that the typical policy purchased by a 65-year old has an average pricing load of about 18 percent and has a very limited benefit structure, covering only one-third of the expected present discounted value of long-term care expenditures. These findings are consistent with the presence of supply side market imperfections. However, we also find enormous gender differences in pricing -- typical loads are 44 cents on the dollar for men but better than actuarially fair for women -- that do not translate into differences in coverage. And, although purchased policies provide limited benefits, we demonstrate that more comprehensive policies are widely-available at similar loads, but are rarely purchased. THESE FINDINGS SUGGEST THAT WHILE SUPPLY-SIDE MARKET IMPERFECTIONS EXIST, THEY ARE NOT THE PRIMARY CAUSE OF THE SMALL SIZE OF THE PRIVATE LONG-TERM CARE INSURANCE MARKET." (Emphasis added.)


The American Enterprise Institute's program titled "Does Medicaid Crowd Out Private Long-Term Care Insurance?" took place on Thursday, February 17, 2005 in Washington, D.C. It was described on AEI's website as follows:

"Medicaid finances care for 70 percent of all people in nursing homes and covers half of all the money spent for long-term care. The strain on state budgets is intense, and the National Governors Association has demanded federal relief. Private long-term care insurance could reduce some of those spending pressures, but few people buy such coverage today. Is Medicaid making its own problems worse by discouraging people from investing in long-term care insurance?

"Professor Jeffrey Brown of the University of Illinois will present a new study of Medicaid crowd-out (co-authored with Dr. Amy Finkelstein). A panel of experts will offer their critique of the study, and assess the barriers facing private long-term care insurance."

The moderator was Joseph R. Antos, AEI. The discussants were Robert B. Friedland, Georgetown University; Stuart Hagen, Congressional Budget Office; Mark R. Meiners, George Mason University.

You can find the video, speaker biographies, PowerPoint slides, etc. online at:,eventID.1014, .


LTC Comment: By all means, read the Brown and Finkelstein paper and watch the AEI program. But when you do, keep this fundamental fact in mind. Neither the authors nor the discussants who criticize their paper take into account how Medicaid eligibility really works. All of them accept at face value "The Big Lie About Medicaid LTC," i.e. that access to free or subsidized Medicaid reimbursement requires catastrophic spend-down into "impoverishment."

Here's how their uncritical acceptance of the Big Lie affects the argument that Medicaid crowds out LTCi. If people really did have to spend down assets into impoverishment before qualifying for Medicaid, that spend-down would constitute a very substantial "deductible" that would make Medicaid relatively unattractive as compared to private LTCi with its much smaller deductibles, usually 100 days of self-paid care or less. Add to this the negative feature of Medicaid's substantial "co-insurance," i.e. the requirement that Medicaid recipients must contribute most of their income toward their cost of care, and private LTCi might have a fighting chance to compete with Medicaid.

Nevertheless, Brown and Finkelstein conclude that, even in spite of these two negatives--only one of which is real--Medicaid still crowds out most demand for private LTC insurance. If Brown and Finkelstein, and their reviewers, understood how Medicaid LTC eligibility actually works instead of uncritically accepting the Big Lie, they could confirm their hypothesis that Medicaid crowds out private LTCi insurance absolutely. None of the arguments raised by their critics would contradict them.

The truth is that Medicaid does not require impoverishment, only a cash flow problem. The Big Lie that Medicaid LTC benefits do require impoverishment is a persistent myth that undermines all efforts to improve Medicaid.

The vast majority of seniors who need intensive long-term care can qualify for Medicaid if their income is less than their total medical expenses, including their private nursing home care costs and all their medical expenses Medicare does not cover, e.g. eye care, foot care, dental care, and pharmaceuticals (until January 2006).

Assets are no obstacle to qualifying for Medicaid LTC benefits, because Medicaid exempts a home and all contiguous property, one business including the capital and cash flow, a car, burial expenses, term life insurance, etc., all of unlimited value. Anyone with too many nonexempt assets can convert them to exempt assets instantaneously to qualify for Medicaid.

On top of these facts is the tip of the iceberg, i.e. egregious Medicaid planning through trusts, annuities, life care contacts, half-a-loaf transfers, and dozens of other strategies that allow people with income and assets many times Medicaid's ostensible limits to qualify without spending down.

These are the facts about Medicaid LTC eligibility, the Big Lie to the contrary notwithstanding. No one who accepts the facts about Medicaid instead of the lie doubts that Medicaid chills the market for private insurance.

If you can ignore the risk of long-term care, avoid the premiums for private insurance, wait to see if you ever need expensive care, and then transfer the huge cost of care to Medicaid, why would you worry enough about long-term care to plan early and save, invest or insure?

Uncritical acceptance of the Big Lie about Medicaid has led the program to the verge of fiscal collapse. It lacks the resources to pay adequately for quality nursing home care, much less home and community-based services (HCBS). The poor, whom Medicaid should serve first, are hurt the most because they lack the "key money" to access the best nursing home beds.

Discontent with Medicaid-financed nursing home care has led some members of the public to spend their own money for home care, assisted living, and the private insurance to pay for them. That's why HCBS, assisted living and private LTCi have achieved some slight commercial traction in the past decade.

Re-target Medicaid so that it goes only to the genuinely needy and private long-term care insurance will become a viable product. So will reverse mortgages and other kinds of home equity conversion. With increased private financing, the HCBS and assisted living infrastructure will grow, improve, and prosper.

Does Medicaid crowd out these products today? Of course. You don't need a lot of economic mumbo jumbo to see that. Just open your eyes to the reality of Medicaid eligibility and its soporific effect on the public's concern about LTC risk and cost.

For a comprehensive explanation and all the hard evidence you need to reach these conclusions independently, read "The Realist's Guide to Medicaid and Long-Term Care" at .

For further evidence and substantiating analysis, see the many other reports, articles and speeches at . Anyone who has been exposed to this evidence and analysis has no right to faulty reasoning and denial based on the Big Lie.