LTC Bullet: What Health and LTC Reform Mean for LTC Providers and Investors

Tuesday, May 18, 2010


LTC Comment: How will health reform and the CLASS Act impact long-term care providers and senior care investors? Some answers and a source for more, after the ***news.***

*** TODAY'S LTC BULLET is sponsored by, LLC, a leader in providing long-term care insurance sales, marketing, and presentation solutions for insurance sales professionals. continues to offer its free LTCi Café Webinar Series. They invite you to attend their next webinar which will be held on May 19, 2010 at 1:00 pm EST entitled "Opening to Close - Bringing Clarity and Direction to Your Sales Interview." This webinar will offer practical solutions to everyday LTCi sales challenges. Stop by and visit today at, register for the LTCi Café and join us for a webinar... it's FREE. is a proud supporter of the Center for Long-Term Care Reform. ***

*** STEVE MOSES will speak on the CLASS Act, health reform and the future of LTC financing near Baltimore, Maryland on Thursday, May 20th. If you would like to attend this NAIFA-MD and MAHU joint educational symposium--the 7th Annual Maryland State Expo--please email Sally Leimbach at for details. ***

*** GAIL SHEEHY keynoted this year's Intercompany Long-Term Care Insurance Conference in New Orleans last March. But evidently she's no friend of long-term care insurance. We got this tip from a corporate supporter of the Center for Long-Term Care Reform: Sheehy was interviewed on the Diane Rehm National Public Radio (NPR) show last week about eldercare/caregiving issues. When asked about her opinion of long term care insurance, she was less than flattering - not at all endorsing such protection. Rather she touted PACE programs through Medicaid as a wonderful service. (PACE is as good as Medicaid gets, but it suffers from inadequate funding like everything in Medicaid.) Listen to the show here. The part in question is around minute 48:25. Diane Rehm comments that most LTC insurance is capped at $115,000 and Ms. Sheehy agrees. The ignorance of influential people in the media who should know better, who have a responsibility to listeners to know better and advise correctly, is mind-boggling. ***

*** IS ATLAS SHRUGGING? Have you seen the comparisons of today's political/economic condition to the story in Ayn Rand's novel Atlas Shrugged? For example: "'Atlas Shrugged': From Fiction to Fact in 52 Years," Wall Street Journal, January 9, 2009. Uncanny in so many respects. Crony capitalists pursue profits through alliances with heavy-handed politicians and bureaucrats claiming the "greater good" as moral justification while productive entrepreneurs are exploited, defeated and ultimately driven from the market in a "strike." If that perspective sounds interesting, you might want to consider The Atlas Society Free Minds 2010 Summer Seminar, June 30 - July 8, 2010, in historic Alexandria, Virginia. Details here. ***



LTC Comment: I was privileged to serve on an audio-conference panel last week with some distinguished experts on the provider and investor sides of the LTC business. The topic was "New Health Care Law Impact on Senior Care Businesses, Investments & Property Values."

Stephen M. Monroe, the interactive conference moderator, is the editor of The SeniorCare Investor and The Senior Care Acquisition Report and Executive Editor of Senior Living Business. The other panelists were Richard K. Matros, Chairman of the Board and Chief Executive Officer of Sun Healthcare Group, Inc. since 2001 and Hedy Rubinger, a partner in the firm Arnall Golden Gregory LLP, whose practice primarily focuses on healthcare, representing all types of healthcare providers as well as investors and lenders.

My job was to bring in perspective about the CLASS Act and prospects for future LTC financing from private insurance, Medicaid, Medicare and other public sources.

In today's LTC Bullet, we bring you the questions laid before this panel on which I was asked to reply and a few notes on my responses. If the Questions pique your interest and you'd like to hear the Answers in complete form, including all the Questions and Answers of the other panelists, a recording of the program is available from the sponsor for $347. Call 1-800-248-1668 or go to and look for "audio conferences."


LTC Comment: The following were preparatory questions the panelists received to pique our thinking in advance. Actual questions asked during the program were not identical, but similar. Likewise, my replies are what I planned to say if I got the chance so some of them made it into to recording and some didn't. If you want to get a handle on what health reform and the CLASS Act mean for long-term care providers and senior care investors, I believe you will find these questions thoughtful and the answers helpful.

To save space, I've omitted here the Qs and A's addressed to the other panelists, but I do want to emphasize the importance of people on the private insurance and public financing side of LTC (our readers) understanding what's on the minds of people struggling with the provider and investment sides of the business. So if you want the whole picture, I say again: a recording of the program is available from the sponsor for $347. Call 1-800-248-1668 or go to and look for "audio conferences."

Health Care Reform and LTC: What it Means for Providers, Costs and Values

May 13, 2010

Draft Q&A

A) Disclosure and Compliance [This section of questions was addressed to the other panelists and focused on the challenges from the health reform legislation for LTC provider companies.]

B) The CLASS Act [most of my participation came in this section]

1) Formally known as the Community Living Assistance Services and Supports Act, or CLASS Act, this relatively small part of the health care reform legislation had already left the station and started on its own legislative track way before the recent health care reform legislation was debated. How did it get incorporated into health reform law and was this expected as the debate moved through Congress? Steve

My reply: The health reform law became a "Christmas tree" with many ornaments added over time, including CLASS. No one really thought it would pass, at least not as originally offered. Efforts were made to fix some of its more egregious shortcomings, but the odd way the legislation prevailed, with the House accepting an already Senate-passed version without a "conference," then modified by "reconciliation" back in the Senate caused us to get what we got.

2) One thing that has always sort of surprised me is why the various industry trade groups, particularly the American Association of Homes and Services for the Aging, were so aggressive in their support of the CLASS Act, when one of the original goals of the act was to be a funding mechanism for seniors to help them stay at home. While an admirable goal, it doesn't exactly help their members, a large number of who are not-for-profit CCRC operators. Steve, why do you think these associations were so in favor of the CLASS Act, and what do you believe they think it would do for their members?

My reply: The push for CLASS came mainly from AAHSA, the trade group for mostly non-profit LTC providers. I think their support for this kind of funding targeted primarily to non-institutional providers was largely because they genuinely care. They're sincere about wanting a good financing source for a full and proper continuum of care. Of course, they are heavily lobbied by groups like ADAPT representing the disabled and demanding more home and community-based care. But, bottom line, all LTC providers desperately need a better funding source than Medicaid, which pays them less, much less, than allowable costs. Unfortunately, the CLASS Act will never help their members.

Questions 3-4 omitted.

5) Will the CLASS Act have any impact on LTC insurance policies, in terms of people either switching to a CLASS policy or just choosing it over LTCi? Steve

My reply: No, except to raise awareness among consumers and businesses and for good comparisons. Take up will be slight. The CMS Actuary says likely only 2% will participate. There is nothing in CLASS for private insurance to "wrap around," so no "LTC Gap" policies like MediGap. CLASS is not "insurance." It does not price and spread risk based on sound actuarial principles. It is rather pre-payment of LTC funded by healthy, insurable people for the benefit of the otherwise uninsurable disabled. Government-induced charity in other words, not real insurance.

6) Some people have stated that the CLASS Act is actuarially sound through 2075, but others believe that within five to 10 years of when the benefits actually start to be paid, it will run into fiscal trouble without major changes to either the premiums, the enrollees or the benefits (perhaps al three). Even Senator Kent Conrad, a Democrat no less, called it a Ponzi scheme last year and vowed to block its inclusion in the bill. Steve, I believe you once referred to the CLASS Act as a fraud. When do you see it failing, and what do you believe the government will do about it?

My reply: It won't fail because it will never be implemented as passed. There has been much confusion over when CLASS starts. It becomes effective January 1, 2011 and many reports have stated that employers will begin deducting premiums from employees paychecks on that date. Not so, the Secretary of HHS has until October 1, 2012 to develop an implementation plan for CLASS. Experts believe nothing much will happen until 2013. By then I predict CLASS will be radically different from what was signed into law on March 23, 2010 if it exists at all in any form.

CLASS has no underwriting so would suffer from severe adverse selection; it sets aside no reserves as all premiums are borrowed immediately by the federal government and replaced with Treasury bonds; CLASS has no contract like private LTC insurance because the Secretary of HHS can change everything as costs exceed revenues; it has no guaranteed benefits or premium levels. The Society of Actuaries and the American Academy of Actuaries have warned about these problems. HHS, the Administration and CMS all know it won't work and they're floundering to find a fix. But there is none. They designed CLASS without taking risk management into consideration. That's like building a moon ship without taking gravity into consideration.

7) Could it work if it was not an opt-out program, if everyone had to pay the insurance premium as part of the payroll tax? Wouldn't that lower the premium for everyone because you would be enrolling 20-somethings who won't need the benefit for another 50 to 60 years, as well as everyone else, healthy or not, removing the adverse selection problem? And wouldn't that provide some stability for the program? Rick, Hedy, Steve

My reply: Cynics say it was an intentional strategy to design CLASS to fail so that the only logical solution would be to make it mandatory. One commentator says making it a mandatory program would bring premiums down to $40 per month. Still, that's a lot of money for what may be an empty promise. Besides, how do you enforce such a compulsory program? Let's see if they're able to implement and enforce the mandatory health insurance coverage and penalties before venturing into more forced insurance.

8) Since it is very likely that the CLASS Act will run into major fiscal problems in 15 years, is it possible as a first step to legislate having the employer pay a matching tax for those enrolled in CLASS, much like Medicare and Social Security? Steve

My reply: I think we're finally crashing into the brick wall of fiscal reality that we've approached for decades. Unfunded liabilities already of Social Security are $17.5 trillion and it's gone cash-flow negative this year, six years before expected; Medicare unfunded liabilities are $89.2 trillion and it's been cash-flow negative for several years already; Medicaid is bankrupting states and the feds. The baby boom is retiring. None of this is sustainable. It's utterly incomprehensible to think private industry can take on more of the burden of funding the existing exploding entitlements, much less add CLASS to the camel's back.

9) Steve, is there any possibility that CLASS will crowd out the private long-term care insurance market?

My reply: CLASS works two ways: it raises awareness but adds anesthesia (about LTC risk and cost) to the body politic. You have to ask why LTC insurance remains a niche product to this day. Medicaid crowds out 2/3 to 90% of the LTCi market (Brown and Finkelstein, Medicaid is easy to get after the insurable event occurs but undesirable. State Medicaid programs have been discouraged from controlling the hemorrhage in Medicaid LTC eligibility by "Maintenance of Effort" (MOE)rules under ARRA (stimulus) and now PPACA (health reform). Thus, I conclude Medicaid is in its dying throes as a LTC funder. It will have to be radically means-tested. That will open the way for reverse mortgages and later LTC insurance to become major LTC funding sources.

Question 10 omitted.

11) What about you Steve, how do the feds just let it blow up? Or don't they, much like Social Security and Medicare?

My reply: I see political rebellion rising. The political earth is shaking. Big changes in the make up of Congress are likely. Whether or not the current party remains in control, spending will be impeded. Stalemate is likely. In the long run, they can't tax more, borrow more, or print money without making the economy worse. Solution: I believe they will be forced to means test all the entitlement programs severely, not just Medicaid, but also the traditional "social insurance" programs like Medicare and Social Security. The welfare state will wither, go out with a whimper not a bang.

C) Medicare and Medicaid Reimbursement

Questions 1-5 omitted.

6) Steve, is there any advice you would give Medicare and Medicaid dependent providers given the future of the Medicaid and Medicare programs, other than run for the hills?

My reply: Yes, sprint to the hills. The only hope for providers is to find a better source of revenue than Medicaid. CLASS isn't it. There are only three possibilities: private pay, reverse mortgages, and LTC insurance. We've almost eliminated private pay by making Medicaid so easy to get. Government policy is to keep Medicaid easy to obtain (Maintenance of Effort requirements) and to make it more attractive (Home and Community-Based Services). We are now approaching the end game. Trends that can't continue, won't (Herb Stein). Medicaid will have to eliminate the home equity and other big exemptions, tighten income eligibility and aggressively enforce liens and estate recoveries. With home equity at risk, reverse mortgages will take off as a funding source for LTC and so in time will LTC insurance. That's the only hope providers have.

Questions 7-8 omitted.

9) And what about the new head of CMS, although not in the job yet? Is there any concern about some of his attitudes and quotes, such as saying that the U.S. health system runs in the "darkness of private enterprise" and that the UK National Health System is the world he would like us to be in? Steve, Rick, Hedy

My reply: There has never been a worse time for an anti-market person at CMS. It's ironic as the United Kingdom is moving toward fiscal conservatism and freer markets while we move in the opposite direction. Europe is on the brink of fiscal catastrophe. The bailout mentality, dependency on entitlements, borrowing are sending economies over the brink. The price of gold is the canary in the financial mine.

10) Anything else on Medicare? Steve

My reply: Medicare is hopeless. It cannot survive in anything like its current form. They've already started means testing it: Part B and Part D premiums rise with income. Watch for more means testing of Medicare and Social Security (already you lose $1 of Social Security for every $2 of earned income over $14,160 at ages 62 to 66; benefits are taxed over $25,000 for individuals and $32,000 for couples; the Administration wants to increase the maximum taxable income above $106,800).

11) What about the Medicaid side of things? What I found astounding was that the health care bill would "solve" part of the uninsured problem by sticking another 18 million or so individuals into the Medicaid system, another bankrupt program. Doctors don't want new Medicaid patients, hospitals don't look too kindly on Medicaid payments, and in most states Medicaid is a losing proposition for skilled nursing providers as well. But with all these new people covered by Medicaid, with a small window where they will be subsidized by the feds before the states have to pay a larger share, what's this going to do to a state's Medicaid budget, and specifically, what is going to be the impact on Medicaid rates for skilled nursing providers? Steve

My reply: Expect constant downward pressure on reimbursement rates. Consider the impact of pressures on Social Security, which is 13% of NH revenues through Medicaid "spend- through," and Medicare 19% of nursing home revenue. Neither program is sustainable indefinitely thus leaving everyone dependent on Medicaid in the lurch: residents, nursing homes and states. The percentage of nursing home costs paid by Medicaid and Medicare has gone up over the past 38 years (from 26.8% in 1970 to 59.2% in 2008, up 32.4 % of the total) while out-of-pocket costs have declined (from 52.0% in 1970 to 26.7% in 2008, down 25.3% of the total). That trend has to reverse before LTC providers' revenue improves.

Question 12 omitted.

13) And then what happens to provider taxes, which has got to be one of the most convoluted things going as a way to raise money for Medicaid. Right now, 38 states have provider taxes as a way to increase the federal match funding under Medicaid. I know that most providers want to keep that money in the system, but is that something that will withstand the test of time with health care reform and all these other mandates that are coming? Steve, Rick

My reply: I call provider taxes "wholesale Medicaid planning." Retail Medicaid planning is the lawyers who artificially impoverish affluent clients to get them into the best facilities. The provider tax gimmick will disappear in the coming fiscal crisis. That's why providers should push for fixing the Medicaid eligibility hemorrhage and for public policy to encourage private funding sources. Because that will happen anyway, by intent or by default.

D) Health Insurance Mandates

Questions 1-3 omitted.

4) What about those companies that are already paying for health insurance? Has anyone heard that some may opt out because it will be cheaper to pay the penalty than to pay the premium? Rick, Steve

My reply: I hear that a lot. The private sector follows incentives AND disincentives. Here's the problem. I've seen it over and over again. Government creates incentives, the private sector adapts, then government changes the rules, and private companies, especially small ones get wiped out. Remember how BBA '97 removed the MCCA '88 punch bowl and drove nursing homes and home health agencies into bankruptcy?

Questions 5-8 omitted.

E) Crystal Ball Questions For All (short, one-word answers)

1) How long will it be before senior care providers will be feeling the impact of health care reform?

My reply: Already if they're affected by early changes. Otherwise, maybe not at all if the expected political earthquake occurs sending everything back to Square One.

2) Will the CLASS Act benefits package be around in its current form in 20 years?

My reply: No. Not a chance. Nor will Medicaid be around in anything remotely approaching its current form in two decades