Bullet: Why They Don't Buy
Wednesday, October 11, 2006
San Antonio, TX
LTC Comment: What
is the true, hidden reason most people who need it do not buy long-term
care insurance? The answer
and hard evidence to prove it, after the ***news.***
*** WEALTHY SENIORS SAY TAKE MY MONEY, PLEASE.
you know that "Seventy-Two Percent of Affluent Parents Encourage
Financial Advisors to Play Proactive Role in Facilitating Wealth
Transfer Discussions with Heirs."
Check it out at http://www.insurancebroadcasting.com/100406-2.htm.
No wonder so many people qualify for Medicaid long-term care
without spending down their own assets for care.
They have few resources left after "wealth transfers"
are done. ***
*** POLL. My
sense is that the Deficit Reduction Act of 2005 is not having anything
like the impact on long-term care awareness and planning that it should
have. States are
implementing the portions of the DRA that make Medicaid more attractive
as a long-term care payor, but they're dragging their feet about
implementing the new eligibility rules on asset transfers, home equity
caps, and Medicaid planning restrictions.
Likewise, the feds are pushing the popular portions of the DRA
and laying back on the politically sensitive parts.
The media aren't publicizing the DRA changes as they should be.
LTCi producers and reverse mortgage lenders aren't selling to the
DRA provisions nearly enough. Consequently,
consumers remain in the dark and aren't responding to the increased need
to save, invest and insure against long-term care risks and costs.
How do you see it in your area?
Is the DRA getting the play it should?
with your thoughts. The
Center for Long-Term Care Reform wants to design a strategy to
supercharge the DRA as a catalyst to wake up consumers to the need for
LTC planning. You're ideas
and suggestions are welcome. ***
LTC SUMMIT REMINDER: If you
have not yet registered to attend the National LTC Producers Summit
(Nov. 5-7, Austin, TX) what are you waiting for?
Over 500 of the nation's leading LTCi sales and marketing experts
are already registered and this event will likely sell out as it has in
prior years. Early
registration for the Summit has already ended but you can save $100 off
the regular registration rate by writing "Center LTC" in the
Discount Code box on the registration form.
The Summit is organized by the American Association for Long-Term
Care Insurance and is truly an outstanding industry gathering.
For more information, visit the Association's Website
or call their offices at (818) 597-3227. ***
LTC BULLET: WHY
THEY DON'T BUY LTCI
LTC Comment: Ask
long-term care insurance agents why most people they offer the product
to don't buy. They'll
invariably give you one or both of the following reasons:
denial and affordability.
There are simple explanations why consumers don't
think they need long-term care insurance and believe it is too
People remain in denial because they are not at
risk financially. Government
pays for most long-term care.
People think long-term care insurance is too
expensive, because they don't believe they need it to protect their
assets. And they're right. They'll believe LTCi is too expensive at any price as long as
that is true.
In other words, consumers are not as ignorant or
parsimonious as the insurance industry thinks they are.
They behave rationally in light of public policy incentives that
discourage long-term care planning by bailing out even the affluent
after the insurable event occurs.
Heretofore, however, we have not had the hard
evidence to prove irrefutably that government financing of long-term
care crowds out the market for private insurance.
Now we do.
The following study establishes beyond any credible
doubt the fact that Medicaid financing of long-term care radically
reduces the market for LTC insurance.
And, even more significantly, this study demonstrates that the
easier Medicaid benefits are to obtain, i.e. the higher the allowable
asset exemptions in a state, the less likely people are to purchase
long-term care insurance.
Following is the study's abstract and a citation so
you can check it out for yourself.
(The paper is available for purchase at the URL cited.)
R. Brown, Norma B. Coe, Amy Finkelstein, "Medicaid Crowd-Out of
Private Long-Term Care Insurance Demand:
Evidence from the Health and Retirement Survey," National
Bureau of Economic Research, NBER Working Paper Series, Working Paper
12536, September 2006, http://www.nber.org/papers/w12536.
"This paper provides empirical evidence of Medicaid crowd
out of demand for private long-term care insurance.
Using data on the near- and young-elderly in the Health and
Retirement Survey, our central estimate suggests that a $10,000 decrease
in the level of assets an individual can keep while qualifying for
Medicaid would increase private long-term care insurance coverage by 1.1
percentage points. These
estimates imply that if every state in the country moved from their
current Medicaid asset eligibility requirements to the most stringent
Medicaid eligibility requirements allowed by federal law--a change that
would decrease average household assets protected by Medicaid by about
$25,000--demand for private long-term care insurance would rise by 2.7
percentage points. While
this represents a 30 percent increase in insurance coverage relative to
the baseline ownership rate of 9.1 percent, it also indicates that the
vast majority of households would still find it unattractive to purchase
private insurance. We
discuss reasons why, even with extremely stringent eligibility
requirements, Medicaid may still exert a large crowd-out effect on
demand for private insurance."
Comment: Although a 30
percent increase in long-term care insurance is nothing to sneeze at,
the true potential increase in the LTCi market from targeting Medicaid
to the genuinely needy is much, much greater than this study suggests.
is true because of a fundamental flaw in the NBER study. The study only considers the crowd-out effect incidental to
state-by-state variance in the level of liquid assets protected.
It completely ignores the impact of illiquid assets routinely
protected from Medicaid spend-down in every state by federal law.
Such assets include a home and all contiguous property up to a
maximum at state option of $750,000; a business including the capital
and cash flow of unlimited value; prepaid burial funds of any value;
unlimited term life insurance coverage; home furnishings and other
personal items of any value; and many other possessions of limited
value. (For documentation
of these exemptions and citations to federal law and regulations
establishing them, see "Aging America's Achilles' Heel:
Medicaid Long-Term Care" at http://www.cato.org/pubs/pas/pa549.pdf.)
potential combined value of illiquid assets not counted in determining
Medicaid long-term care eligibility far exceeds the relatively
insignificant protection of liquid assets that leads the NBER
researchers to conclude that Medicaid crowds out a large portion of the
long-term care insurance market.
wait, studies have shown that most people who rely on Medicaid for their
long-term care do not have homes, businesses, or other items such as
those listed above, which, if they did have them would be exempt.
Doesn't that fact mean that Medicaid's exemption of such illiquid
assets is irrelevant to the potential LTCi crowd-out effect?
And this is the key factor other researchers do not grasp.
It is not what people have when they are already on Medicaid that
affects their failure to buy long-term care insurance.
By the time they are on Medicaid, the decision to buy or not to
buy long-term care insurance is ten, fifteen, twenty or more years
behind them. In the
intervening time, they have--or their heirs have on their
behalf--divested, sheltered or spent-down assets that would have
prevented Medicaid eligibility.
you want to know the full crowd-out effect of Medicaid on long-term care
insurance sales, therefore, try this thought experiment.
if tomorrow the American public were informed and convinced that
government is getting out of the long-term care financing business
altogether? (We're not
advocating this; just consider what would happen.)
For example, no more custodial nursing home care paid for by
Medicaid; no more home health care visits financed by Medicare; no more
publicly financed home and community-based services from any source.
No more long-term care paid for by government regardless of
anyone's income or assets, however destitute they might be.
that were the reality, people would no longer have the luxury of denial
about long-term care risk and costs.
Affordability would be much less of an issue as people would put
such a high priority on having long-term care insurance protection that
they would stretch their budgets to afford it.
They'd use home equity conversion if necessary to generate
premium dollars to protect their home and other assets, which were no
longer protected by government funding.
recognizing that elimination of all government financing of long-term
care is neither desirable nor feasible, what if Medicaid's generous
exemptions of illiquid assets were cut back considerably and the fact
well publicized? That is
the research query academics should explore.
If people knew twenty years in advance of their need for
long-term care that, for example, the transfer of assets look-back
period was ten years (as in Germany) instead of five; the home equity
exemption was $36,000 (as in England) instead of $500,000; and that the
exemptions for businesses, prepaid burials, term life insurance and
personal possessions were severely cut back, they would think twice
before engaging in the self-deceit that long-term care planning is
unnecessary or that private LTC insurance is unaffordable.
remains to dismiss one other countervailing point the NBER paper makes.
It suggests that because Medicaid is a "secondary payor,"
i.e. it pays only after other sources of income, including insurance,
have been used up, no reduction of Medicaid's asset
"disregards" will significantly lower the program's crowd-out
effect on long-term care insurance.
In other words, if I know I won't be able to get Medicaid until
I've used up all my long-term care insurance benefits, Medicaid in
essence constitutes an "implicit tax" discouraging the
purchase of long-term care insurance.
Why buy LTCi when all it does is make it harder for me to get
free or subsidized long-term care from the government?
way to eliminate Medicaid's implicit tax on long-term care insurance is
to eliminate all Medicaid's income and asset protections.
That way the only path to avoid destitution incidental to high
LTC costs would be to buy insurance.
Getting Medicaid after total income and asset spend-down would
not be a disincentive to purchasing LTCi.
There would be no implicit tax on long-term care insurance.
total elimination of Medicaid's income and asset protections is not
feasible, we can surely reduce the program's implicit tax on long-term
care insurance by cutting back on the program's excessively generous
exemptions. That would help
send the message to consumers that long-term care is a personal
responsibility for which they should plan.
It would reduce Medicaid dependency and help protect that program
as a safety net for people truly in need.
It would enhance the markets for private long-term care insurance
and home equity conversion, thus creating jobs, increasing tax revenues,
and pumping more desperately needed private financing into the long-term
care service delivery system. It
would help long-term care providers by making them less dependent on
Medicaid penurious reimbursement rates.
And it would mean better care across a wider spectrum of services
for more people, whether they are private payers or dependent on
And all it would take is some clear thinking on the part of researchers and some political will on the part of public policy makers. With those changes in effect, the rest would fall into place as consumers follow their self-interest as they always do. Without the current subsidies that disincentivize them from responsible planning and attract them to public dependency, they'll do the right thing and the long-term care financing crisis will begin to fix itself.