LTC Bullet: Why Does Georgetown Dodge RAMs?
Tuesday, April 12, 2005
LTC Comment: A new report on home equity conversion from the Georgetown LTC
Financing Project downplays the importance of reverse annuity mortgages (RAMs)
for financing long-term care. We present an opposing view from the National
Council on the Aging. After the ***news.*** [omitted]
LTC BULLET: WHY DOES GEORGETOWN DODGE RAMS?
LTC Comment: The Georgetown University Long-Term Care Financing Project has a worthy goal. According to its website at http://ltc.georgetown.edu/ , the purpose of the "project is to elevate discussion of policy initiatives to improve long-term care financing that assures access to needed long-term care." Its latest output is "Home Equity Conversion Mortgages and Long-Term Care," by Mark Merlis, March 2005. Check it out at http://ltc.georgetown.edu/pdfs/hecmfullreport.pdf .
We think this new report underestimates the potential of reverse mortgages to help finance long-term care. So we asked the author and publisher of another recent report on the subject to respond. Their comments follow below. But first, here's our take in briefest form.
We think the Georgetown report AND its responders vastly underestimate the potential of home equity conversion to improve long-term care and reduce Medicaid expenditures. Neither adequately confronts the real problem holding back RAMs and private LTC insurance. To wit, Medicaid long-term care eligibility rules exempt the home and all contiguous property regardless of value. Furthermore, estate recovery requirements, intended to capture home equity on the back end, are easy to evade and rarely enforced effectively. Consequently, unless and until Medicaid rules change, (1) home equity is not at risk for long-term care, (2) people don't and won't tap their home equity in large numbers to pay for long-term care, (3) private insurance for long-term care will remain a minor niche market, and (4) America's welfare-financed long-term care safety net will continue to disintegrate. We've published a simple solution that could unleash the potential of home equity conversion and private insurance to save Medicaid and improve long-term care. Read "How to Save Medicaid $20 Billion Per Year AND Improve the Program in the Process" at http://www.centerltc.org/pubs/howtosavemedicaid.pdf .
Now to the response by Barb Stucki and her colleagues at NCOA. Dr. Stucki is the author of "Use Your Home to Stay at Home: Expanding the Use of Reverse Mortgages for Long-Term Care: A Blueprint for Action," published in January by the National Council on the Aging. Read it in full at http://www.ncoa.org/attachments/ReverseMortgageReport3%2Epdf or check out excerpts and our review of the report titled "LTC Bullet: Use Your Home to Stay . . . Off Medicaid!" at http://www.centerltc.com/bullets/archives2005/536.htm .
"GROWING EVIDENCE OF THE POTENTIAL OF REVERSE MORTGAGES TO SUPPORT AGING IN PLACE"
By Barbara R. Stucki, Howard Bedlin, and Jay Greenberg - National Council on the Aging
In January, the LTC Bullets highlighted a new study by the National Council on the Aging (NCOA) entitled "Use Your Home to Stay at Home," that shows the potential of using reverse mortgages to help older Americans pay for long-term care at home. The recent release of another report, "Home Equity Conversion Mortgages and Long-Term Care" by Georgetown University (GU), further emphasizes the growing interest among policymakers to assess the appropriate use of private funds in the mix of long-term care financing.
Both of these studies agree on many points. One of the most important is that millions of older homeowners in this country could benefit from using a reverse mortgage for long-term care. The data suggest that these loans could pay for many years of home and community services, and help postpone the need for assistance from Medicaid. Both studies also found that reverse mortgages can provide additional funds for a broad range of older homeowners, including Medicaid beneficiaries.
The NCOA and GU reports stress that using a reverse mortgage to pay for long-term care insurance is problematic. It can be very costly and inefficient for borrowers since they would be paying both insurance premiums and interest on the loan for many years. In addition, borrowers who use the proceeds of their loan for insurance face the risk of lapsing their coverage if premiums increase substantially, or they run out of loan funds before they need care. Innovative insurance products may be able to address some of these issues. Families with moderate incomes could also rely on home equity to pay for help at home and purchase more limited insurance to cover the high cost of facility care.
The main difference between these two studies is their assessment of the role that reverse mortgages will play in financing our nationís long-term care needs. The GU report concludes that these loans will only have a limited impact, especially when comparing the funds available to current or likely Medicaid beneficiaries ($4.2 billion in 2000) to total Medicaid expenditures for long-term care for seniors ($42 billion). However, the GU analysis likely understates the true potential of home equity. Since borrowers must live in the home as their primary residence, it is more realistic to compare potential loan amounts to public expenditures for services at home. When contrasted with the amount Medicaid spent on home and community services in 2000 ($7.1 billion), $4.2 billion in reverse mortgage funds could be a substantial additional resource for people who need assistance to age in place.
Reverse mortgages also have the potential to reduce dependence on Medicaid by lowering the risk of spend-down. This is especially important to moderate income families who can pay for everyday expenses but not substantial out-of-pocket costs for home care ("tweeners"). The NCOA study estimates that 3.3 million older households at financial risk for spending-down could potentially obtain $209 billion in total from reverse mortgages. Reducing the risk of spend-down could save Medicaid about $3.3 to almost $5 billion annually in 2010, depending on market penetration rates.
Reverse mortgages will not solve all of our nationís long-term care financing problems. But the estimated $953 billion potentially available from these loans could be a powerful mechanism for driving change in the delivery, as well as financing, of home and community services. By helping seniors age in place, these loans could enhance government efforts to rebalance our countryís long-term care system toward increased community-based services. Having money of their own to pay for long-term care allows elders to maintain their dignity, as well as retain independence and control over their lives. Immediate access to funds that can be used for any purpose should appeal to older Americans and can encourage greater personal responsibility for long-term care through the voluntary use of reverse mortgages.
Reverse mortgage loans can also pay for early interventions, such as home modifications, that could reduce the risk of accidents. Since more than one-third of seniors fall each year, the potential savings to public programs could be considerable. According to an AARP study, Medicaid paid about $4.4 billion in direct medical and long-term care costs in 2000 for seniors who had to go to the emergency room due to a fall.
As the population ages and the pressure on state Medicaid budgets rises, it becomes increasingly important to find effective ways to improve our long-term care financing system. Both the NCOA and GU studies provide compelling evidence that reverse mortgages could increase the funds available to older homeowners to pay for home and community-based long-term care. To realize this potential, we need to explore ways to reduce the cost of reverse mortgages. Educating consumers and senior advisors can also raise awareness and help ensure that this financing option is used appropriately. The NCOA study found that adult children are far more comfortable with the idea of using home equity than their parents. Conversations about reverse mortgages could serve as an important catalyst to help families plan for their long-term care needs.
Funding the growing demand for long-term care is a major national challenge that will require increased spending by both the public and private sectors. Instead of examining reverse mortgages in isolation, policymakers should leverage limited housing assets by promoting this financing option as part of a public-private effort to fund services for aging in place. This can open new possibilities for a more coordinated financial approach that can reduce the risk of institutionalization and enhance quality of life for older Americans.