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 (www.flinthills.org)
and the Kansas Health Care Association (www.khca.org),
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, http://www2.ljworld.com/news/2005/sep/30/consultant_medicaid_schemes_common/?city_local.
*** 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
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Go to www.centerltc.com, click on
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He'll start your LTC E-Alerts coming immediately.
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LTC BULLET: LONG-TERM
CARE'S BROKEN WINDOW
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
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
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.