LTC Bullet:  Long-Term Care's Broken Window

Monday, October 3, 2005 


LTC Comment:  The "broken window" fallacy in economics goes a long way to explain bad long-term care policy analysis.  More after the ***news.*** 

*** MORE KANSAS COVERAGE.  The comprehensive coverage continues to pour in about three "Legislative Long-Term Care Academies" presented last week across the length and breadth of the Sunflower State.  Sponsored by the Flint Hills Center for Public Policy ( and the Kansas Health Care Association (, the LTC Academies featured the Chairman of the Kansas House Appropriations Committee and the President of the Center for Long-Term Care Reform.  Check out this story about the Lawrence, Kansas version of the program by reporter Dave Ranney:  "Consultant:  Medicaid Schemes Common," Lawrence Journal World, September 30, 2005, *** 

*** GAO ON LTC.  The deadline for publication of the Government Accountability Office's report on Medicaid estate planning and transfer of assets is today.  We'll be watching for it and you'll know what it says as soon as we do.  Will GAO cover up the problem as the study's Congressional requestors hoped?  Or will GAO document exactly how widespread and fiscally damaging Medicaid planning abuse truly is?  Stay tuned for the answer soon. *** 

*** LTC E-ALERTS.  But if you want all the insider details and the frankest analysis, you won't find it on the Center for Long-Term Care Reform's public "LTC Blog."  We save the good stuff for members, the people who help us financially to fight the fight for rational LTC policy.  So join us.  Subscribe to the Center's daily publications.  It's easy,  Go to, click on the "Subscribe to the Center" button, and pony up.  Or simply contact Damon at 206-283-7036 or .  He'll tell you how to join.  He'll start your LTC E-Alerts coming immediately.  And he'll set you up with a user name and password for access to the Center's Members Only website zone. ***


The economic fallacy of the broken window goes like this.  Breaking a window isn't such a bad thing.  Think about all the economic activity it causes that would not have happened otherwise.  A factory has to produce a replacement pane.  A glazier installs the new window.  Maybe a painter touches up the trim.  Each is paid.  Then all involved spend their new found income on other things. This fresh economic activity ripples indefinitely through the system.  Everyone wins. 

Obviously, this is nonsense.  It ignores the simple truth that if the window had not been broken, the labor and financial resources that had to be used to fix it could have and would have been used for other more productive economic purposes.  As Frederic Bastiat explained over 150 years ago, the broken window fallacy comes from taking account of economic activity that is seen (fixing the window) and ignoring activity that is unseen (everything that could have been done if the window had not been broken).  In other words, the window's owner would have spent or saved his money if he hadn't had to fix the window.  Either way, the economy would have been better off, with more spending or more investment capital than otherwise. 

Explained in this way, one wonders how any sensible person could be so foolish as to defend breaking windows in order to encourage economic activity.  And yet, politicians do it all the time when they talk about long-term care.  Last week, the Minority Leader of the Kansas House of Representatives and a prominent Kansas Senator made the same fallacious argument.  They reasoned that the jobs and economic activity resulting from Medicaid-financed nursing home care are so important to the economy in Kansas that desperately needed Medicaid reforms should not be implemented. 

Now, it is true that nursing homes are often the biggest local employers, especially in rural and economically poor areas of Kansas.  And, especially in such areas, Medicaid is the primary payor for long-term care.  Thousands of certified nursing assistants, nurses, and administrators are employed to provide critically needed services to nursing facility residents throughout Kansas and the United States. 

Unfortunately, it is also true that Medicaid pays notoriously low reimbursement rates to nursing homes.  Low reimbursements make it difficult or impossible for nursing homes to attract and retain qualified employees.  Bad medical outcomes sometimes occur as a result.  Falls or bed sores often lead to litigation, big punitive settlements, higher liability insurance premiums, and therefore even less revenue for patient care.  In a vicious economic circle, the availability of Medicaid reduces private financing of long-term care leading to more Medicaid dependency, higher costs, fewer resources, and worsening medical outcomes.  Medicaid is the broken window of long-term care. 

What if we were not so dependent on Medicaid to finance long-term care?  What if we eliminated the loopholes and elasticities in Medicaid eligibility so that the welfare program only paid for people truly in need?  If that were true, most people would buy long-term care insurance.  Others would use their home equity to pay for care.  With more people paying privately from these sources at full market rates, all levels of long-term care service delivery would be healthier economically. With fewer people dependent on Medicaid, the welfare program itself could afford to pay adequately for all levels of care instead of paying poorly for nursing home care alone.  

With more revenue flowing through the long-term care service delivery system, LTC providers could afford to pay caregiving staff generously enough to attract and retain high quality workers.  Both private-pay and Medicaid recipients would receive better care.  Competition for customers would ensure quality care, thus obviating the need for heavy government regulation.  Bad medical outcomes would decline, thus reducing lawsuits and keeping more money in the service delivery system and out of the hands of tort lawyers and their windfall-seeking clients. 

Bottom line, good long-term care service delivery and financing can be a boon to the economy.  But too much reliance on Medicaid financing is just the opposite.  It chills the market for private insurance.  It discourages home equity conversion.  And it anesthetizes the public to the risk of long-term care, a socially suicidal effect especially as the demographic onslaught of baby boomers begins. 

The Medicaid window is already broken.  The fact that Medicaid now pays most of the cost, but far too little to sustain a quality long-term care system is no reason not to fix it.  It is a strong reason, rather, to reform Medicaid, target it to the needy as originally intended, and unleash the economically healing potential of private LTC financing alternatives.