LTC 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 the ***news.*** [omitted]



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 

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 funding. 

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 analysis. 


QUOTE (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."  (p. 335)   

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. 

QUOTES:  "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."  (p. 335) 

"To 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. 

QUOTE:  "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) 

LTC COMMENT:  Whoa!  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. 

QUOTES:  "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)."  (p. 341-42) 

"Individuals 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. 343) 

"Fifty 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) 

"[G]iven its wide variation and uncertainty, LTC need appears to be the archetypal insurable risk that could be spread by insurance, public or private."  (p. 346) 

LTC 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?  Keep reading. 

QUOTES:  "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. 345) 

"Public 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."  (p. 345) 

"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."  (p. 346)      

LTC COMMENT:  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

"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  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:, Table 10 

"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 they should.  

"Bottom 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 financial oxygen." 

QUOTE:  "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."  (p. 347) 

LTC 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 

"The 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

"Note especially "The Realist's Guide to Medicaid and Long-Term Care" at and "Aging America's Achilles' Heel:  Medicaid Long-Term Care" at" 

Microsimulate this truth instead of the usual erroneous conventional wisdom and see what you get.