Bullet: Microsimulate This!
Tuesday, March 28, 2006
LTC Comment: The
fundamental things apply as time goes by--like "garbage in, garbage
out." Take for example a
recent Inquiry article that estimates future public and private LTC
costs. Our critique follows after
TODAY'S LTC BULLET is sponsored by the American Association for Long-Term
Care Insurance (AALTCI) which recently published an excellent 2006 LTCi
Sourcebook containing the latest industry data and statistics.
All new AALTCI members receive the 2006 Sourcebook along with numerous
other benefits, including Jesse Slome's LTCi Sales Strategies magazine.
AALTCI membership ($49 for 1 year, $99 for 3 years) is available to all
individuals who are active in the LTCi industry.
For details, visit AALTCI's Website:
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LTC BULLET: MICROSIMULATE
LTC Comment: Heaven
knows that people--including policy analysts, legislators, policy makers, senior
advisors and just plain folks--desperately need reliable information on the
risks and costs of long-term care.
Therefore, the article by Peter Kemper, Harriet L. Komisar, and Lisa Alecxih titled
"Long-Term Care Over an Uncertain Future:
What Can Current Retirees Expect?" and published in the Winter
2005/2006 issue of the journal Inquiry (Vol. 42, pps. 335-350) is a
welcome addition to the literature. (You
can purchase a .pdf of this article for $10 at www.inquiryjournal.org.)
We won't take issue with the article's estimates of LTC
incidence which are well within the ranges of earlier research.
We do believe, however, that mistaken assumptions lead the authors to
some incorrect conclusions about LTC costs and probable sources of future
We wonder what the output would show if the authors input
reality, instead of mistaken assumptions, into their microsimulation model.
To explain, here are quotes from the article followed by our comments and
(this is the article's "abstract"):
"The leading edge of the baby boom generation is nearing retirement
and facing uncertainty about its need for long-term care (LTC).
Using a microsimulation model, this analysis projected that people
currently turning age 65 will need LTC for three years on average.
An important share of needed care will be covered by public programs and
some private insurance, but much of the care will be an uninsured private
responsibility of individuals and their families--a responsibility that will be
distributed unequally. While over a third of those now turning 65 are projected to
never receive family care, three out of 10 will rely on family care for more
than two years. Similarly, half of
people turning 65 will have no private out-of-pocket expenditures for LTC, while
more than one in 20 are projected to spend $100,000 or more of their own money
(in present discounted value). Policy
debate that focuses only on income security and acute care--and the
corresponding Social Security and Medicare programs--misses the third, largely
private, risk that retirees face: that of needing LTC."
COMMENT: So far, so good, except
for that sentence that says five percent of people over 65 can expect to spend
$100,000 or more of their own money for long-term care.
Doesn't that sound kind of low? Does
it leave you thinking "no wonder so few people buy insurance for long-term
care." The risk is low (one in
twenty) and at least the lower end of the cost ($100,000) is reasonably
self-insurable by the kind of upper-middle-class people most likely to purchase
private insurance. Hold that
thought as we review the remainder of the article.
Maybe people really don't have a clear and accurate idea of the true risk
and cost of long-term care.
"Medicaid pays for
LTC, but only for those with limited income and assets.
This means individuals must have low income and savings, or must exhaust
their financial resources, if they are to qualify for Medicaid coverage."
determine Medicaid’s role in nursing home care, the model simulates Medicaid
eligibility, including the process of individuals using their income and drawing
down their assets to pay for LTC, some to the level of Medicaid
eligibility." (p. 340)
LTC COMMENT: Big
mistake. Assuming that Medicaid LTC
eligibility requires the applicant to "spend down" for long-term care
is a fatal flaw in the Inquiry article.
Here the authors display their misunderstanding of Medicaid long-term
care eligibility by presuming conventional wisdom that is wrong.
First, there is no upward limit on income or assets for people to qualify
for Medicaid LTC benefits. "Low
income and savings" are not required for Medicaid eligibility by any
stretch of the imagination. Income
can be unlimited if medical expenses, including private nursing home costs and
all other medical costs not covered by Medicare, are high enough as they almost
invariably are for people applying for Medicaid LTC benefits.
Assets can be unlimited if they are held in exempt form (such as $500,000
of home equity, and a business, car, term life insurance, prepaid burials, etc.
of unlimited value).
Second, even when people have excess income and assets,
there is no requirement that they spend down their wealth specifically for
long-term care to reach Medicaid's generous eligibility limits.
They can spend their assets on anything they like, including a world
cruise or a party of "Ziegfield-follies" proportion, according to the
elder law attorneys who counsel artificial self-impoverishment.
Finally, the "Medicaid spend-down" studies of the late 1980s
and early 1990s showed no evidence of widespread, catastrophic spend down of
assets for long-term care. In fact,
upwards of 80 percent of all nursing home residents are Medicaid-eligible at
admission. Historically, even those
who entered nursing homes private pay didn't necessarily spend down for care;
they could qualify by artificially impoverishing themselves for the price, in
attorney's fees, of one month in a nursing home as a private payer.
"In general, the model projections assume that current policy and
behavior continue into the future. For
example, Medicaid benefits and income and asset eligibility requirements are
assumed to continue unchanged." (p. 338)
Stop right there. Medicaid
income and asset eligibility requirements changed radically before this article
even went to print. The Deficit
Reduction Act of 2005 placed a limit of $500,000 on Medicaid's home equity
exemption, moved the transfer of assets lookback period from three to five
years, eliminated the single biggest Medicaid planning ploy--the half-a-loaf
strategy--by moving the penalty period forward in time, and closed several other
egregious loopholes related to annuities, life estates, and treatment of income. Furthermore, given the exploding costs of Medicaid and the
pressures these expenditures bring to bear on state and federal budgets, further
constraints on Medicaid spending--especially its most expensive component which
is long-term care--are inevitable. To say that "Medicaid benefits and income and asset
eligibility requirements are assumed to continue unchanged" is Pollyannaish
palaver guaranteed to anesthetize the public further to the real LTC risks and
costs they face.
"While an estimated 31% of
people currently turning 65 will not need any LTC before they die, 20% will need
care for more than five years. Indeed,
those in the top 10% with respect to years of care need will account for 37% of
the total years of care needed by the cohort (not shown)."
also differ widely in their projected use of facility care.
While 63% of people in the cohort will not use any nursing home or
assisted living care, 8% will spend more than five years in facilities.
The model projects that 35% of the cohort will use nursing home care,
with 5% spending more than five years in nursing facilities.
Fewer people will use assisted living facilities.
The model estimates that 13% of the cohort will use this type of care, 1%
for more than five years." (p.
percent of the retiring cohort will have no out-of-pocket expenditures for LTC,
but 6% will incur out-of-pocket expenditures with a present value of $100,000 or
more." (p. 345)
wide variation and uncertainty, LTC need appears to be the archetypal insurable
risk that could be spread by insurance, public or private."
COMMENT: OK, now you're talking.
LTC risks and costs affect people disproportionately and therefore they
lend themselves to mitigation by means of insurance. The purpose of insurance is to replace the small risk of a
catastrophic loss with the certainty of an affordable premium.
So, this is very hopeful. Surely
the remainder of the article will show how private long-term care insurance will
take on a bigger and bigger share of long-term care costs as public programs
like Medicaid and Medicare recede into the background.
But, no, just the opposite. LTC
insurance will continue to languish even though private expenditures will
continue to increase and public programs will continue to carry the bulk of the
cost. Say what?
"Because only 3% of people in the cohort are projected to use
services paid for by private LTC insurance, out-of-pocket spending dominates the
private expenditure distribution." (p.
programs and private insurance will pay for 55% of paid care received either at
home or in facilities. The
remaining 45% of LTC expenditures will be paid for out of pocket."
"The role that
private LTC insurance can play in spreading risk is relatively small for a
number of reasons. . . . Public
insurance could be enacted to spread the uninsured risk of incurring substantial
out-of-pocket expenditures . . .. The
principal obstacle to doing so is political. . . .
Incremental expansion of Medicaid coverage by raising financial
eligibility limits or making home and community-based services or personal care
mandatory benefits also could be enacted to improve access to LTC services.
However, this would not insure against the risk of incurring
out-of-pocket expenditures as would private or public insurance."
Above, we saw the garbage going into this microsimulation; now we see the
garbage coming out. By assuming incorrectly that people have to spend most of
their own money for long-term care before qualifying for Medicaid, this
microsimulation model reaches the inevitable and mistaken conclusion that a much
larger share of long-term care costs are today and will be in the future paid
privately than is actually true. Nevertheless,
the authors expect private long-term care insurance to remain insignificant even
though they acknowledge expansion of Medicaid and Medicare are unrealistic, an
illogical conclusion. They reach
for explanations of why consumers don't buy much long-term care insurance but
they miss the whole point. People
don't buy LTCi because the government gives away most formal long-term care.
As we explained
recently in an article titled "So What if the Government Pays for Most
Long-Term Care, 2004 Data Update" at http://www.centerltc.com/bullets/archives2006/601.htm:
"America spent $115.2 billion on nursing home care in
2004. The percentage of nursing
home costs paid by government (mostly Medicaid and Medicare) has gone up over
the past 16 years (from 49.6% in 1988 to 58.2% in 2004, up 8.6% of the total)
while out-of-pocket costs have declined (from 38.5% in 1988 to 27.7% in 2004,
down 10.8% of the total). Source:
Table 8. (Note:
The current version of this table has dropped 1988 data.
Data cited here for 1988 are taken from the version of this table posted
by CMS in January 2004.)
"So what? The
consumer's liability for nursing home costs has gone down precipitously (from
38.5% in 1988 to 27.7% in 2004, a decline of 28.1%), while the government's
liability has increased dramatically (from 49.6% in 1988 to 58.2% in 2004, a
rise of 17.3%). No wonder people
are not as eager to buy LTC insurance as insurers would like them to be!
No wonder nursing homes are struggling financially--their dependency on
stingy government reimbursements is increasing while their more profitable
private payers are disappearing.
"Unfortunately, these problems are even worse than the
preceding data suggest. Over half
of the so-called 'out-of-pocket' costs reported by CMS are really just
contributions toward their cost of care by people already covered by Medicaid!
These are not out-of-pocket costs in terms of asset spend down, but
rather only income, most of which comes from Social Security benefits, another
government program. Thus, although
Medicaid pays less than half the cost of nursing home care (44.3% of the dollars
in 2004), it covers two-thirds of all nursing home residents.
Because people in nursing homes on Medicaid tend to be long-stayers,
Medicaid pays something toward nearly 80 percent of all patient days.
"So what? Medicaid
pays in full or subsidizes four-fifths of all nursing home patient days.
If it pays even one dollar per month (with the rest contributed from the
recipient's income), the nursing home receives Medicaid's dismally low
reimbursement rate. No wonder the
public is not as worried about nursing home costs as LTC insurers think they
should be. No wonder nursing homes
are facing insolvency all around the United States when so much of their revenue
comes from Medicaid, often at reimbursement rates less than the cost of
providing the care.
"Don't be fooled by the 7.8% of nursing home costs
that CMS reports as having been paid by 'private health insurance' in 2004.
They derive that number by subtracting all the known costs from 100% and
reporting the remainder as private insurance.
No one knows how much private health insurance really pays toward nursing
home care, because most long-term care insurance pays beneficiaries, not nursing
homes. Thus, a large proportion of
insurance payments for nursing home care gets reported as if it were
'out-of-pocket' payments because private payers write the checks to the nursing
home but are reimbursed by their LTC insurance policies.
This fact further inflates the out-of-pocket figure artificially.
"How does all this affect assisted living facilities?
ALFs are 90% private pay and they cost an average of $34,860 per year
(Source: MetLife survey at http://www.metlife.com/WPSAssets/84989326101130770986V1F2005%20Assisted%20Living%20Survey.pdf). Many people who could afford assisted living by spending down
their illiquid wealth choose instead to take advantage of Medicaid nursing home
benefits. Medicaid exempts one home
and all contiguous property, one business, and one automobile, all of unlimited
value, plus many other non-countable assets, not to mention sophisticated asset
sheltering techniques marketed by Medicaid planning attorneys.
Income rarely interferes with Medicaid nursing home eligibility unless
such income far exceeds the cost of private nursing home care.
"So what? For
most people, Medicaid nursing home benefits are easy to obtain without spending
down assets significantly and Medicaid's income contribution requirement is
usually much less expensive than paying the full cost of assisted living.
No wonder ALFs are struggling to attract enough private payers to be
profitable. No wonder people are
not as eager to buy LTC insurance as insurers would like them to be.
"The situation with home health care financing is very
similar to nursing home financing. According
to CMS, America spent $43.2 billion on home health care in 2004.
Medicare and Medicaid paid 69.7% of this total and private insurance paid
12.0%. Only 11.3% of home health care costs were paid out of pocket.
The remainder came from several small public and private financing
sources. Data source:
"So what? Only
one out of every nine dollars spent on home health care comes out of the pockets
of patients. No wonder they do not
feel the sense of urgency about this risk that long-term care insurers think
line, people only buy insurance against real financial risk.
As long as they can ignore the risk, avoid the premiums, and get
government to pay for their long-term care when and if such care is needed, they
will remain in 'denial' about the need for LTC insurance.
As long as Medicaid and Medicare are paying for a huge proportion of all
nursing home and home health care costs while out-of-pocket expenditures remain
only nominal, nursing homes and home health agencies will remain starved for
"Policy debate that
focuses only on income security and acute care—and the corresponding Social
Security and Medicare programs—misses the third risk that retirees face:
that of needing LTC. That
risk is substantial; under current Medicare and Medicaid policy much of it is
the uninsured private responsibility of individuals and families.
And the uninsured risk is not easy to spread."
COMMENT: Well, at least they have
that last point right. Long-term
care is critical, maybe even more critical than retirement and acute care
security. What these authors miss
entirely, however, is why we have the problem and what we have to do to fix it.
Ironically, that's the easy part. To
quote further from "So What
if the Government Pays for Most Long-Term Care, 2004 Data Update" at http://www.centerltc.com/bullets/archives2006/601.htm:
solution is simple. Target Medicaid
financing of long-term care to the needy and use the savings to fund education
and tax incentives to encourage the public to plan early to be able to pay
privately for long-term care. For
ideas and recommendations on how to implement this solution, see www.centerltc.com.
especially "The Realist's Guide to Medicaid and Long-Term Care" at http://www.centerltc.org/realistsguide.pdf
and "Aging America's Achilles' Heel: Medicaid
Long-Term Care" at http://www.centerltc.com/AgingAmericasAchillesHeel.pdf."
this truth instead of the usual erroneous conventional wisdom and see what you