LTC Bullet:  The NY Compact:  Analysis, Conclusions, and Recommendations 

Tuesday, July 31, 2007 

Washington, DC-- 

LTC Comment:  Is the New York Compact the future of long-term care financing or the last gasp of an old, failed system?  Details after the ***news.*** [omitted]

LTC BULLET:  THE NY COMPACT:  ANALYSIS, CONCLUSIONS, AND RECOMMENDATIONS 

LTC Comment:  After hearing the elder law bar in New York had a new idea for LTC financing that was winning political proponents and worrying private insurers, we decided to take a closer look.  

We proposed a study of the New York Compact ("LTC Bullet:  LTC Compact Study Proposal," April 19, 2007:  http://www.centerltc.com/bullets/archives2007/690.htm).  We found a sponsor.  We initiated a thorough document review.  We conducted a week of interviews in Albany, NY (May 7-11, 2007).  We distributed a draft report on May 31, 2007 and requested comments from interviewees.  On July 18, 2007, we released the draft report to and requested comments from Center members in "LTC Bullet:  The New York Long-Term Care Compact Proposal" at http://www.centerltc.com/bullets/latest/703.htm.  Finally, we published the final report including review comments on July 27, 2007. 

Read the full and final report titled "The New York Long-Term Care Compact Proposal:  Update, Analysis and Recommendations" by Stephen A. Moses, president, Center for Long-Term Care Reform at http://www.centerltc.com/pubs/NY_Compact.pdf. 

Special thanks for supporting this project are due to Thomas Campbell Jackson, MPH, CEBS.  Mr. Jackson is a private philanthropist from New York, NY with no economic ties to the long-term care insurance or provider industries. 

We published the section of the report that describes the NY LTC Compact proposal two weeks ago.  Following are the sections of our report that cover analysis, conclusions and recommendations regarding the Compact: 

Analysis 

            On the positive side . . . the LTC Compact is an imaginative, politically attractive proposal to reform a hopelessly flawed long-term care service delivery and financing system.  For example: 

Is Medicaid overwhelmed by LTC costs?  Then, bring in more private financing by encouraging the public to pay their "fair share." 

Is the system biased toward nursing home care?  Then, get more people spending their own "pledged" funds so they won't go to nursing homes until they need to medically. 

Are people so overwhelmed by the huge risk and cost of long-term care that they're in denial and fail to act?  Give them a more manageable risk and cost so they'll respond more rationally. 

Do most people fail to buy private long-term care insurance?  Then, define the LTC risk, reduce it by half, and make private insurance more affordable. 

Does the New York LTC Partnership give people lifetime LTC protection while preserving assets, but most people can't afford and don't buy it?  Then, give them a way to preserve substantial wealth for a fraction of the Partnership's premiums. 

Does Medicaid "force" people to spend down into poverty or divest their assets?  Then, give them a more dignified option to pledge half their assets and they'll respond more responsibly. 

Does Medicaid require most income to be contributed toward cost of care?  Then, let people who pledge and spend half their assets keep 75% of their income. 

Does Medicaid pay for a lot of non-LTC expenses that some recipients could afford to pay on their own?  Then, help those people with their biggest expense, long-term care, but let them pay for their other medical expenses not covered by Medicare. 

Do LTC providers complain that Medicaid pays them too little?  Then bump up the reimbursement level 10% for services provided under the Compact subsidy. 

Does Medicaid tie recipients into using only Medicaid-certified providers?  Then, free consumers to use "any willing provider" with their pledged funds and Compact subsidy. 

Does Medicaid impose liens on real property and recover the cost of their care from deceased recipients' estates?  Then, remove that onerous obligation for anyone willing to pledge half their assets up front and pay the Compact's co-insurance and participation fees. 

Are most ways to cut Medicaid costs politically unpopular?  Then, offer a solution that provides something attractive for everyone at an arguably reduced cost. 

But, on the other hand . . . if all this seems too good to be true, here's a plausible reason why.  The LTC Compact proposal addresses the symptoms, but not the causes of New York's long-term care service delivery and financing problems.  Nowhere in the voluminous documentary materials we reviewed nor in the interviews we conducted for this study was there any explanation of why the LTC system is as dysfunctional as it is or how it came to be that way.  There is a huge risk of unintended, negative consequences when policy makers interfere with a marketplace without first understanding why it is the way it is.  For example: 

In the Assembly hearings on the LTC Compact proposal, Aging Committee Chairman Steven Englebright said: 

"Our current long-term care financing structure is primarily private pay and of course, Medicaid, with a small percentage covered by long-term care insurance.  Someone in need of long-term care can expect to quickly exhaust their entire life savings and resources, a very scary proposition to that individual and their spouse."[i]  

Is that true?  No.  There is zero evidence that large numbers of New Yorkers spend down their life's savings for LTC.  Medicaid rules do not require such spending and only a small portion of LTC providers' receipts come from patients' out-of-pocket costs.  Most of these minimal out-of-pocket costs come from income, not assets.  The average New Yorker over the age of 65 who needs long-term care faces little or no obstacle to Medicaid nursing home eligibility based on income or assets.  That's the main reason for Medicaid's institutional bias.  For an explanation of Medicaid LTC eligibility rules, see "Aging America's Achilles' Heel:  Medicaid Long-Term Care."[ii]  For a discussion of Medicaid LTC eligibility specific to New York state, see "The Realist's Guide to Medicaid and Long-Term Care."[iii]  The fact that a relatively small number of affluent New Yorkers divest or shelter assets in excess of Medicaid's already generous eligibility rules--often with the help of professional advisers--only exacerbates the fundamental problem that long-term care is very nearly a free good to which most people feel entitled and for which they qualify easily in New York without spending down significant assets for their own care first. 

The LTC Compact proposal is based on a false premise that Medicaid forces people to spend down into impoverishment for long-term care before receiving public benefits.  If that were true, the public would not be complacent about the risk and cost of long-term care.  Families would pull together, plan early, save, invest and insure for LTC instead of ignoring the problem until a crisis occurs and turning to Medicaid and Medicaid planners.  The reason that long-term care service delivery and financing is so problematical in New York is that, more than any other state in the country, New York has transferred the risk and cost of LTC from consumers to the government.  That's why the public is in denial, doesn't buy private LTC insurance, ends up on Medicaid, and strains the state budget.  Well-intentioned but counterproductive public policy has created a self-fulfilling prophecy that the burden of financing long-term care will fall predominantly on Medicaid. 

Can government continue to fund the lion's share of long-term care either through Medicaid or through a program like the LTC Compact? 

No.  If Medicaid struggles already to carry most of the burden of long-term care financing, it has no hope whatsoever of doing so in the future.  The LTC financing problem goes far beyond the widely recognized fact that aging demographics will deliver more and more elderly people into the long-term care system.  Two federal programs that support Medicaid LTC today are unlikely to do so in the future.  First, generous Medicare reimbursements to LTC providers currently compensate partially for the financial shortfall from grossly inadequate Medicaid reimbursements.  But that won't continue indefinitely, because Medicare has a $75 trillion unfunded liability that will force the program to cut back.  It will be much easier politically for Medicare to reduce reimbursements to LTC providers than to raise payroll taxes or reduce benefits.  When that happens, Medicare will no longer pick up the LTC funding slack left by Medicaid. 

Likewise, Social Security relieves the fiscal pressure on Medicaid, because all LTC recipients have to contribute most of their income toward their cost of care under Medicaid.  Their Social Security income directly reduces Medicaid's expenditures.  That's why Medicaid can cover two-thirds of all nursing home residents nationally while paying less than half the total cost.  But Social Security's unfunded liability is $16 trillion.  The Social Security Administration warns beneficiaries every year that they will receive only 75% of what they've been promised unless that shortfall is fixed somehow.[iv]  Social Security benefit cutbacks won't directly affect Medicaid LTC recipients whose contribution to cost of care will merely be reduced.  But such cutbacks will mainline financial disaster to Medicaid.[v]  

To assume that federal financial support from Medicaid, Medicare and Social Security will continue to supplement state funding for long-term care in the future at levels comparable to those in the past is perilously unrealistic.  Even if the Centers for Medicare and Medicaid Services were to approve a waiver allowing federal money to flow into the LTC Compact to fund its subsidies, which is highly unlikely, such approval would come with no guarantee and little likelihood of continuation indefinitely.  At some point, the state would end up on the horns of a dilemma:  fund the LTC Compact without federal support or renege. 

Is it wise to shift more of the enormous back-end cost of long-term care onto government as the LTC Compact does?  

No.  Leave aside the question of whether or not it is appropriate for tax payers to fund the remaining long-term care costs for wealthy people who pay the first three years of their care.  For reasons just explained, government is not equipped to meet the high cost of long-term care in the future.  But, that's exactly what private insurance IS designed to do.  The purpose of insurance is to replace the small risk of a catastrophic loss with the certainty of an affordable premium.  By changing the role of private insurance to cover comparatively small front-end risks and Medi-Gap-like co-pays and fees, the LTC Compact would prevent private insurance from ever helping with the larger back-end costs of catastrophic long-term care that will sink the publicly financed programs in the future.  

Critical to solving the LTC financing problem is to recognize that easy access to Medicaid has crowded out any significant role for private long-term care insurance.  As Brown and Finkelstein concluded in a paper for the National Bureau of Economic Research:  

We . . . estimate that Medicaid can explain the lack of private [LTC] insurance purchases for at least two-thirds and as much as 90 percent of the wealth distribution . . ..  Medicaid's large crowd out effect stems from the very large implicit tax (on the order of 60 to 75 percent for a median wealth individual) that Medicaid imposes on the benefits paid from private insurance policies.[vi] 

Why then do most studies find that people fail to buy insurance for long-term care because of denial of the risk and cost?  Because no study has ever asked the more important question:  "If long-term care is such a huge risk and expense, how can people be in denial about it and why are they unwilling to pay a fair premium to protect against it?"  The answer is that since 1965, Medicaid has made it possible to ignore the risk of long-term care, avoid the premiums for private insurance, wait to see if expensive LTC services are ever needed, and if so, shift the cost to government.  That's the real reason most people don't plan or insure for long-term care.  It's not that they’re planning to go on Medicaid, but rather that they don't think about long-term care until it's too late for insurance.  Medicaid's generous and elastic LTC eligibility rules, as stretched by Medicaid planning specialists, enable consumers' denial which would otherwise be irrational and self-destructive. 

Would the LTC Compact help providers improve their financial viability by increasing reimbursement rates above Medicaid's penurious levels? 

            Not really and not for long.  For reasons already explained, financial pressures on Medicaid will continue to grow.  Historically, the easiest way for policy makers to constrict Medicaid expenditures during serious economic downturns--when welfare rolls increase and tax receipts decline substantially--has been to cut provider reimbursements.  There is no reason to think that anything different will happen when future recessions occur.  So, even if the LTC Compact brings LTC providers a few more patients paying the Medicaid rate plus 10%, providers will still be locked into the Medicaid base rate which is unlikely ever to keep pace with their costs or inflation.  The only way to ensure that a larger proportion of LTC patients will pay an economically sustainable rate for services is to increase the number of private payers, reduce dependency on Medicaid-based rates, and let the market determine prices.  An added benefit of this approach is that when people are spending their own money (or their insurance benefits) for long-term care, they will seek the lowest cost, least institutional, and best value thus enhancing HCBS and reducing institutional bias in the LTC system. 

Conclusions and Recommendations 

            The New York LTC Compact proposal is a highly creative and politically seductive approach to long-term care financing reform.  Unfortunately, it is based on false premises and would aggravate rather than ameliorate New York's LTC service delivery and financing challenges.  

            Before continuing with consideration of the LTC Compact proposal, responsible officials in New York should undertake to learn precisely why most citizens in the state ignore the risk of long-term care until the only financing alternative available to them is Medicaid.  

Find out how many people dependent on Medicaid for long-term care today could have and would have prepared to pay for their own long-term care privately if Medicaid had not been available for the past forty years to pick up most of the cost after the insurable event has occurred. 

Begin by performing this thought experiment:  if no public funding were available for long-term care, if people had to spend all their income and savings for LTC, and then depend on private charity when their money ran out, would they still ignore the risk and cost?  Would they fail to save, invest or insure? 

The Milliman "score" for a Medicaid scenario requiring a full spend down of all assets including home equity was only $412 million compared to a lifetime cost for an annual LTC cohort under the LTC Compact of $1.6 billion.  That's solid evidence that Medicaid could save huge amounts of money by returning to its original intent, that is, to be a high-quality long-term care safety net for otherwise truly destitute people. 

No one wants to cut Medicaid back that far and it would be politically infeasible to do so.  Now.  But in the future, as the fiscal vise of declining revenues and increasing expenditures closes on Medicaid, Medicare and Social Security, it will become economically infeasible not to cut back dramatically on all public benefits programs. 

Thus, the challenge for public officials is to find a middle way by which to remove Medicaid as a disincentive to responsible long-term care planning without hurting innocent citizens who, heretofore, have had every reason to believe--based on decades of experience--that government would cover their long-term care risk and cost.  One analytical model described in detail in "The Realist's Guide to Medicaid and Long-Term Care"[vii] suggests that any state with very easy Medicaid LTC eligibility rules, generous and attractive Medicaid-financed HCBS, and little estate recovery should expect its Medicaid nursing home census to be very high, home equity conversion for financing LTC to be very low and long-term care insurance market penetration to be minimal.  All three independent and dependent variables apply in New York as the cited report explains.  

So, before experimenting with the LTC Compact approach, New York should conduct a thorough study of a valid random sample of Medicaid long-term care cases.  Subject them to the kind of thorough review eligibility workers rarely have time to conduct.  For example, check with county assessors for property ownership, with county recorders for transfers, with banks and other financial institutions for unreported assets; interview recipients and their families about the eligibility process, e.g. did they consult an attorney?, could they have paid privately for long-term care and for how long?  Then, project the findings to the current caseload and use the result to estimate the likely future Medicaid LTC liability.  

Find out why New York's estate recoveries are so much lower than other states', .2% of LTC expenditures compared to a national average of .61%.  How could New York increase this amount and thereby encourage more people to plan early for long-term care expenses?  

Finally, and most importantly, ask the question:  what was the financial condition of current Medicaid recipients 10 or 12 years ago when they could have, should have and might have saved or insured for LTC if it were not for the perverse incentives in the Medicaid system that discourage early planning and insurance? 

Until New York knows the answers to these questions, experimenting with a new way to extend ever more public benefits to ever more affluent people is to tempt fate and invite future financial disaster.  

Instead of requesting a federal waiver to expand publicly financed long-term care, the state should consider requesting a waiver that would re-target Medicaid to people truly in need.  Then use the savings to incentivize responsible LTC planning through private insurance and reverse mortgages.  In the long run, that's a much kinder and more responsible approach than making promises about long-term care that cannot be kept.