LTC Bullet:  Why Don’t More People Buy LTC Insurance?

Friday, July 13, 2012—

Seattle—

LTC Comment:  Distinguished researchers have taken another stab at this perennial question, but they still miss the blindingly obvious answer, which follows after the ***news.***

*** TODAY IS FRIDAY THE 13TH:  Be careful out there!

*** 3 IN 4 NEED MORE.  Check out this video of a local morning show’s coverage of the 3in4NeedMore campaign. ***

*** CLIPPING SERVICE.  Did you know the Center for Long-Term Care Reform offers a “clipping service.”  Here’s how it works.  Steve Moses reads everything published about LTC services and financing.  Then he selects the most important three articles per day (on average) and emails them to subscribers.  Each email includes a title, representative quote, a link to the full article online, and sometimes a sentence or two of interpretation.  The idea is to reduce your own online research time and keep you on the cutting edge professionally.  Our clipping service is available to all “Premium Members” of the Center ($250 per year or more.)  Already a regular member at $150?  Upgrade for $100 now.  Not a member?  Subscribe to the clipping service for only $120 per year, or $10 per month.  Contact Damon at 206-283-7036 or damon@centerltc.com.  Following are just two examples of what you missed this week if you’re not a clipping service subscriber. ***

*** MR. LONG-TERM CARE.  Remember Mr. Long-Term Care, Martin Bayne, from a decade or so ago?  He was an LTCI broker/dealer who came down with young-onset Parkinson's Disease, but continued to publish his strong opinions on LTC financing in print and electronically.  Martin wrote this article, which appeared July 9 in the Washington Post. That newspaper edited out the section where Martin talks about the cost of LTC and says his long-term care insurance policy paid most of his $700,000 worth of care.  (The full piece, including the section about LTCI, is published in the current issue of Health Affairs.  If you'd like to see it, go here.  If you don't have a subscription to Health Affairs, you can purchase access to the article for $12.95.)  Here's that little detail the Washington Post neglected to mention:  "To date, my care has cost well over $700,000, with the lion's share of that coming from a long-term care insurance policy I had the foresight to purchase in my early forties. Because of my still relatively young age, the final price tag might well be in excess of $2 million." ***

*** MAINTENANCE OF ENTROPY.  "In a letter to the nation’s governors, Health and Human Services Secretary Kathleen Sebelius warned that 'the court’s decision did not affect other provisions of the law' governing the joint federal-state health insurance program for the poor and disabled. A White House official said that means states are still barred from reducing eligibility for Medicaid."  Full article here.  

LTC Comment: There will be a lawsuit challenging this interpretation, which is clearly insupportable. The "maintenance of effort" (MOE) rule in ObamaCare threatens states with loss of all federal Medicaid funds if they tighten eligibility, including eligibility for LTC benefits. The Supreme Court decision clearly prohibits a penalty of that kind if states choose not to expand Medicaid coverage under ObamaCare. This matters hugely because allowing the MOE rule to stand prevents states from implementing critical measures to discourage "Medicaid estate planning," protect benefits for the truly needy, and encourage responsible LTC planning.  It is truly a “maintenance of entropy” rule. ***

 

LTC BULLET:  WHY DON’T MORE PEOPLE BUY LTC INSURANCE?

LTC Comment:  If I had a sawbuck ($10) for every academic who’s tried to answer that question in the past two decades, we could quit fundraising for the Center right now.  Unfortunately, researchers invariably approach the issue in the wrong way:  by asking people why they buy or don’t buy the coverage.  Of course, people answer the surveyors’ queries.  It is the polite thing to do.  The problem is that most people don’t actually know why they buy or don’t buy.  They may think they know, but a fundamental reality of the long-term care financing marketplace trumps their stated reasons and is the true explanation of why so few people buy the product.

I’ll give you the true explanation in a moment but first, let’s look at a brand new example of the wrong way to probe the question.  The June 2012 issue of Health Affairs, a distinguished peer-reviewed health policy journal, contains an article titled “Long-Term Care Insurance Demand Limited by Beliefs About Needs, Concerns About Insurers, and Care Available from Family.”  The authors are well-known and highly regarded scholars, all with doctorates in economics, who have published on the topic before:  Jeffrey R. Brown, Gopi Shah Goda, and Kathleen McGarry.  You can get the gist of their methodology and findings from the article’s “Abstract,” which follows.  (If you want all the details, but lack a subscription, Health Affairs will sell you access to the article for $12.95 here.)

“ABSTRACT:  In spite of the high costs and major financial risks involved in long-term care, the majority of older Americans do not own long-term care insurance. We conducted a survey designed to learn more about the role of the following four broad factors in affecting the demand for longterm care insurance: preferences and beliefs, such as notions about the likelihood that one will become disabled; substitutes for insurance, such as savings that could be spent on long-term care; substitutes for formal care, such as care provided by family members; and features of the private market, such as concerns about the high costs of coverage. We found evidence that each of these factors was important in explaining low demand for long-term care insurance. For example, people who believed they might need long-term care were more likely to purchase long-term care coverage. People who had alternative ways to pay for care, such as through savings, or those who could use unpaid care from family members, were less likely to purchase insurance. Features of the private market, such as peoples lack of trust in insurers and the high cost of coverage, made people less likely to buy long-term care insurance. We conclude that policy interventions designed to address only one factor limiting the purchase of long-term care insurance are unlikely to dramatically increase demand for long-term care insurance.”

Now, first of all, isn’t it great that academics can actually make a living doing studies which inform us that:

  • Folks who are pretty sure they’ll experience an insurable event are more likely to insure against it.
  • Someone with plenty of money to self-insure is less likely to buy insurance.
  • Anybody who figures they can get somebody else to help if the insurable event occurs is less likely to insure.
  • And, consumers who expect the insurance industry to go broke might tend to go without this expensive coverage.

Only in America!  Nowhere else would such self-evident truths command big research grants to discover them.

The Real Reason Most People Don’t Buy LTCI

Let me now give you the real reason so few people buy private long-term care insurance.  Guess what?  You can’t find this reason by simply asking people.  You have to understand the long-term care financing system and, even more importantly, you must apply some thought and analysis.  Here goes:

Medicaid and Medicare pay most of the cost of expensive long-term care in the United States and they have done so since 1965.  Contrary to popular belief, as often repeated without foundation in the academic literature, it is not true that families’ life’s savings must be wiped out by care costs before the government steps in to pay.  In fact, income level almost never prevents Medicaid long-term care eligibility nor do excess assets create an obstacle if they’re (1) held in exempt form, (2) divested or (3) hidden by legal means or otherwise.  It is, and has been for nearly five decades, easy for most people to qualify for Medicaid LTC benefits after they need care and without significantly spending down their assets.  No wonder most people don’t buy private LTC insurance.

Does that Mean People Are Planning to Go on Medicaid?

But wait, those researchers remind me:  “Our survey respondents don’t tell us they fail to buy LTC insurance because they’re planning to go on Medicaid.”  Well, hello, that’s the point!  Most consumers don’t think about long-term care until they need it at which point they qualify easily for Medicaid.  The important question is “Why don’t people think about LTC risk and cost before they need expensive care?”  The answer is that Medicaid has paid for most of it since 1965, anesthetized the public to the risk, and left most of them oblivious to the issue, which is why they answer researchers questions the way they do, e.g., it costs to much, Medicare will pay, my kids will take care of me, etc.

Why Don’t Researchers Ask and Answer the Right Question?

OK, if asking people why they don’t buy LTC insurance won’t produce a reliable answer to the question, why don’t researchers examine the role 47 years of easy access to Medicaid LTC benefits may have had in deflating the LTC insurance market?  The answer is that the researchers don’t believe Medicaid LTC benefits are easy to get.  They accept, without questioning it, the conventional wisdom that Medicaid requires impoverishment and is only available to “low income” people who have already spent down their life’s savings to the poverty level.  Because that myth is demonstrably untrue (for proof, see just about any article, speech or report here), we might reasonably ask, why do academics and the media who follow them continue to accept and repeat it? 

Could it be because just about everything the government publishes seems to suggest that Medicaid LTC benefits require impoverishment?  Here’s a case in point.

No Wonder Analysts Think Medicaid LTC Requires Impoverishment

The Congressional Research Service (CRS) recently published a memorandum to congressional offices titled “Financial Requirements for Determining Medicaid Eligibility for Long-Term Services and Supports.”  (Never mind the awkward neologism, “Long-Term Services and Supports.”  They mean long-term care.)  We’ve posted the CRS memo on the Center’s website here.  Have a look.  It is a relatively clear explication of the highly complex rules governing eligibility for Medicaid long-term care benefits.  But let me pull just two quotes for you to consider:

Quote #1:  “For 2012, the SSI rules [governing Medicaid LTC eligibility] specify that recipients must have monthly income at or below $698 for an individual (or $1,048 for a couple), about 75% of the federal poverty level (FPL), and countable resources at or below $2,000 for an individual (or $3,000 for a couple) to qualify.” (pps. 3-4)

Quote #2:  “States may also offer other optional Medicaid eligibility pathways for certain ABD individuals which use more liberal standards for income and resource counting than specified under SSI.12 Section 1902(r)(2) of the SSA gives states flexibility to modify SSI program rules with respect to counting income and resources for the purposes of determining Medicaid eligibility. Most states use Section 1902(r)(2) to ignore or disregard certain types of income and resources, thereby extending Medicaid to ABD individuals with resources too high to otherwise qualify.”  (p. 4)

Now, if you just read Quote #1, I think you could be excused for thinking that Medicaid LTC eligibility rules are quite draconian indeed.  Monthly income of $698 or less and assets of $2,000 or below.  Wow!  That is definitely poverty level.

Now look at Quote #2 and see if you come away with a different understanding.  If you read closely, you’ll notice that states may offer “more liberal standards for income and resource counting . . . thereby extending Medicaid to ABD [aged, blind and disabled] individuals with resources too high to otherwise qualify.”

But do either of these quotes or reading the whole memorandum give you even a glimmer of how Medicaid long-term care eligibility actually works?

Well, Moses, tell us how it actually works and then we’ll decide.

All right, here goes.

How Income and Asset Eligibility for Medicaid LTC Actually Work

Most states use “medically needy” income eligibility systems, which means they deduct the cost of private nursing home care and other medical expenses seniors incur that aren’t covered by Medicare—such as foot care, eye care, dental care, and residual pharmaceutical costs after Part D—from applicants’ incomes before determining whether they meet Medicaid’s ostensibly draconian income eligibility rules.  Low income isn’t remotely required.  All the applicant needs is a cash flow problem after paying for his health and LTC expenses privately. 

The net effect is that income almost never disqualifies anyone for Medicaid nursing home benefits.

“Wait,” you respond, “some states have income cap eligibility systems which disqualify anyone with income over $2,094 per month.”  Sorry, but that hasn’t been true since Congress, in the Omnibus Budget Reconciliation Act of 1993, approved the use of “Miller income diversion trusts” to circumvent income caps.  For all intents and purposes, anyone with income below the cost of a private nursing home qualifies for Medicaid nursing home benefits anywhere in the USA.  The average cost of a semi-private nursing-home room in 2012 is $200 per day or $73,000 per year according to Genworth.  Not exactly low income.

Asset Eligibility for Medicaid LTC

So much for the naďve notion that Medicaid requires “low income.”  But what about assets?

Quote #1 says an individual can’t have more than $2,000 of countable assets.  That much is true, but the common belief that applicants must spend down to that level for their own care is not true.  It doesn’t matter how you get down to $2,000 as long as you don’t give away your savings for less than fair market value.  So take a world cruise or throw a big party or add a room to your exempt home or buy new furniture.  That’s what elder law attorneys often recommend.  They maintain long checklists of exempt assets which they advise clients to purchase in order to reduce otherwise countable wealth.

But the real kicker in Quote #1 is that it refers only to the limit on “countable assets.”  So, no problem.  Just convert your countable assets to exempt assets, which include:

  • A home and all contiguous property up to an equity value of $786,000 as long as the applicant expresses a subjective "intent to return" to the home.  Federal law guarantees exempt home equity of at least $525,000, as of 2012 increasing with inflation.
  • One business including the capital and cash flow of unlimited value is exempt. Rental property may be exempt if it is "used in whole or in part as a business or as a means of self-support" and is "not just investment property."
  • Household goods and personal belongings, including "heirlooms," are totally exempt.
  • One automobile of unlimited value if used for the benefit, medical or otherwise, of the Medicaid recipient.  Because it is exempt, giving away an auto is not a transfer to qualify for Medicaid, so such a gift incurs no eligibility penalty. You can buy and give away expensive cars until you get down to the $2,000 level.
  • Unlimited prepaid burial plans for the Medicaid recipient and everyone in his or her immediate family.
  • Unlimited term life insurance by means of which the owner can evade Medicaid estate recovery.
  • Individual Retirement Account assets and pensions in the applicant's or recipient's (AR’s) name are uncounted as long as the AR is receiving periodic interest and principal payments.

Eligibility Rules Are Even More Generous for Married People

As generous as these basic eligibility rules are for individuals, married applicants qualify even more easily. Spousal impoverishment protections passed in the federal Medicare Catastrophic Coverage Act of 1988 (MCCA '88) ensured that spouses of Medicaid recipients would no longer be driven into poverty by rules that require healthy spouses to contribute toward the cost of caring for their husbands or wives.

MCCA '88 provided that the community spouse of an institutionalized Medicaid recipient would be allowed to retain at least half the couple's joint assets not to exceed $60,000 and up to $1,500 per month of income, adjusted annually for inflation.  Today, thanks to the inflation adjustment, community spouses may retain up to $2,841 per month of income and $113,640 in assets.

Medicaid Planning

Note that we haven’t even touched yet on the legal techniques used by Medicaid planning attorneys to impoverish affluent clients artificially.  These methods include special trusts, annuities, life care contracts, reverse half-a-loaf strategies and a whole arsenal of even-more-arcane methods.  While only the tip of the iceberg, these poverty-making gimmicks are cost-effective for qualifying relatively affluent people for Medicaid.  A rule of thumb is that the cost in attorney’s fees to qualify an affluent senior for Medicaid LTC benefits is equal to the cost of one month in a nursing home private pay.  Because the Medicaid planners’ prosperous clients can afford to retain enough “key money” to buy their way into the nicest facilities, they effectively crowd poor people out who then end up in less desirable Medicaid-only facilities.

Conclusion

Well, folks, there you have it.  Prestigious scholars pull down big research grants to tell you profound truths like these:  people don’t buy LTC insurance because it’s expensive, or they’re in denial, or they think someone else will take care of them.  But the real reason people don’t buy LTCI lies fallow of serious research digging.  Except here.  You can read our dozens of state-level and national studies elaborating on how easy Medicaid eligibility crowds out the market for LTC insurance on the Center for Long-Term Care Reform’s website:  http://www.centerltc.com/reports.htm.  Find scores of articles and speeches on the same theme here:  http://www.centerltc.com/articlesspeechesandreports.htm.  

So don’t pull your hair out wondering why people don’t buy LTC insurance.  They don’t buy because the government gives it away.  The most important take away from today’s LTC Bullet, however, is that the government is broke and cannot go on paying for most expensive LTC in the USA for much longer.  When Medicaid clamps down on middle-class and affluent utilization of scarce public welfare dollars for LTC, as it inevitably must, the LTCI uninsured will have to pay their own way.  They’ll spend down savings and home equity quickly.  But within a few years, the next generation—having lost their inheritances—will get the message and buy LTCI.

I wonder if the academics and media will figure this out before it actually happens.

(The Employee Benefit Research Institute [EBRI] recently published a study that purports to show that large percentages of people spend down into impoverishment before qualifying for Medicaid LTC benefits.  We’re aware of their report, which is based on fallacious reasoning, and will refute it in a future LTC Bullet.)