LTC Bullet:  Why They Don't Buy LTCi 

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.  Did 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  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?  Email 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. *** 

*** NATIONAL 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 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 expensive.  

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.) 


Jeffrey 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, 

Abstract:  "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." 


LTC 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.   

This 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  

The 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. 

But, 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? 

No!  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. 

If you want to know the full crowd-out effect of Medicaid on long-term care insurance sales, therefore, try this thought experiment.   

What 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. 

If 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. 

Now, 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. 

It 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? 

The 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.   

If 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 Medicaid. 

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.