LTC Bullet:  Nursing Home Spend Down Misunderstood and Late-Breaking LTCI Industry News

Friday, July 20, 2012


LTC Comment:  A recent EBRI study that claims nursing home stays are wiping out Americans’ savings is based on a fallacy and mistaken.  What’s really happening, after the ***news.*** [omitted]


LTC Comment:  The Employee Benefit Research Institute (EBRI) usually does excellent research and analysis.  But they sure got this one wrong.

According to “Effects of Nursing Home Stays on Household Portfolios,” by Sudipto Banerjee, Ph.D., Employee Benefit Research Institute, Issue Brief #372, June 2012, the cost of nursing home care is wiping out life’s savings, impoverishing families, and leaving them dependent on Medicaid.

Well, that should sound familiar.  It’s how the problem of long-term care financing has always been described.  Wrongly.  What’s different this time is that the EBRI report claims to base the mistaken conclusion on facts.  Specifically:

The data for this study come from the HRS [Health and Retirement Study], a study of a nationally representative sample of U.S. households with individuals over age 50. . . .  The critical cohort for the current study is known as the Study of Assets and Health Dynamics Among the Oldest Old (AHEAD) cohort, which includes individuals born before 1924.

For starters, let’s stipulate that the HRS/AHEAD data is accurate and that author Banerjee correctly describes it when he says:

For those who have lived in a nursing home for six months or more, the median total household wealth was only $5,518.  After respondents' first entries into a nursing home, total household wealth fell steadily over a six-year period. By comparison, household wealth increased steadily over any six-year period for those who never entered a nursing home.  For nursing home entrants, median housing wealth falls to zero within six years after the initial nursing home entry.  Both mean and median levels of every type of wealth are much higher for those who did not use professional home health-care than those who did.”  (p. 1)

Let’s take issue instead with the author’s interpretations and conclusions from the data.  For example:

Medicaid (the federal-state health care program for the poor) covers long-term care costs for individuals below certain income levels, but the deductible for Medicaid is nearly all of an individual's income and assets. As a result, Medicaid is the long-term care coverage of last resort for those with no assets. (p. 4)

What’s Wrong with This Statement and How Does Medicaid LTC Income and Asset Eligibility Actually Work

Clearly, Dr. Banerjee does not understand Medicaid income and asset eligibility rules.  Income almost never precludes Medicaid nursing home eligibility because most states deduct unreimbursed LTC and medical expenses from income before applying income limits.  In other states, Medicaid applicants can divert their excess income into Miller income diversion trusts to qualify.  Virtually anyone with income below the cost of a nursing home, say $75,000 per year, qualifies for Medicaid nursing home benefits based on income. 

Most of their income does have to offset Medicaid’s cost of their care, but that doesn’t preclude Medicaid recipients from protecting most of their assets.  They can keep up to $786,000 in home equity and unlimited personal belongings, term life insurance, prepaid burial funds, an auto, IRAs, all without limit as long as certain generous conditions are met.  A little planning or the help of an elder law attorney can protect hundreds of thousands of dollars more.  Thus, this article’s claim that “Medicaid is the long-term care coverage of last resort for those with no assets” is completely untrue.

Are Assets Really Being Spent Down for Nursing Home Care?

Well, OK, you might say, but what about Dr. Banerjee’s main point that most of the wealth people have before they go into a nursing home is gone after they’ve been institutionalized for six months?  The problem here is that he assumes this wealth is being spent down for care in the nursing home as a private-pay patient.  This is what he says:

Given that the percentage of individuals with LTCI is relatively low among nursing home users, and that Medicare does not cover nursing home stays in many cases, most people have to bear these costs on their own. As a result, their assets are likely to deplete very quickly until the point at which the individual’s costs are picked up by Medicaid. (p. 9)

Unfortunately, Dr. Banerjee’s assumption that because LTC insurance and Medicare aren’t paying, that therefore people must be paying out of pocket for their care is unfounded.  Of course, some do pay privately, at least for awhile.  But private-pay for long-term custodial nursing home care has very nearly dried up.  As of 2010, only 28.3% of nursing home care was paid for “out of pocket,” down from 49.5% in 1970.  (Source, Table 12)  But more importantly, over half of these out-of-pocket costs were really just spend-through of Social Security income by people already on Medicaid!  Furthermore, an additional yet undetermined amount of out-of-pocket costs comes from other private income—not assets.  Bottom line, it is hard to find more than 10% of the cost of nursing home care that could even possibly come from asset spend down.  (For more, see "LTC Bullet: So What If the Government Pays for Most LTC?," 2010 Data Update, Friday, January 13, 2012.)

Correlation is Not Causation:  Where Might the Missing Assets Be Going if Not to Nursing Home Spend Down?

Well, then, what do you suppose is going on that explains Dr. Banerjee’s findings if it isn’t asset spend down?  And how would you go about verifying the real explanation?

Because Medicaid has been paying for most expensive long-term care since 1965, the public has been anesthetized to LTC risk and cost.  That’s why so few people buy LTC insurance and why many believe incorrectly that Medicare pays for LTC.  But people, especially their adult heirs and their elder law attorneys, are not stupid.  As elders begin to approach the age at which long-term care changes from a possibility to a probability, they begin reducing their assets. 

I don’t mean they are necessarily planning explicitly to divest assets for the purpose of qualifying for Medicaid.  They may just be doing routine estate planning, but the bottom-line effect is that net worth declines as nursing home institutionalization approaches, irrespective of the cost of care.

Why might assets decline even more rapidly after nursing home institutionalization occurs?  It turns out that every Medicaid planning attorney knows and every Medicaid eligibility worker is obliged to allow each Medicaid applicant or recipient to use various methods to reduce assets without penalty.

“Say what?,” you ask.  It is true that transferring assets for less than fair market value incurs a penalty (assuming the state catches the transfer and can prove it was done for no other reason than to qualify for Medicaid) equal to the amount of assets improperly transferred divided by the average cost of care in the state.  So if the cost of care is $6,000 per month and you give away $72,000, you’d be ineligible for 12 months.  But Medicaid planners have come up with an ingenious way to circumvent that rule called the “reverse half-a-loaf” strategy.  Here’s how it’s done according to a Medicaid planning internet ad and an elder law newsletter:

[Reverse half a loaf] means that the [Medicaid] applicant will gift all of the excess assets to heirs. They will then be turned down by Medicaid because of that gift. After this, the heirs will gift back [half] the money that will then be used to pay for nursing home care expenses.  (Source, extracted July 16, 2012)


These strategies involve the client's making an uncompensated transfer that will incur a penalty period and then either returning a portion of the gift or using the remaining assets to purchase an annuity or make a loan using a promissory note.  The income from the return, annuity, or promissory note is used to pay the nursing home during the penalty period. (Source, extracted July 19, 2012)

Employing this strategy, the Medicaid applicant in our example becomes eligible in six months instead of 12 and half of the otherwise disqualifying assets have been diverted from care expenses.  But that’s just a drop in the bucket.  People who want to spend down their assets to qualify for Medicaid without purchasing long-term care can do so in many other ways.

Other Reasons and Methods to Divert or Divest Otherwise Disqualifying Assets

If they plan five years in advance, there is no limit on how much future Medicaid applicants can give away without affecting their eligibility.  Medicaid application forms and the eligibility workers who administer them do not even ask about assets given away more than 60 months prior to the application.  It is commonplace for families to plan ahead in this way retaining only enough assets in the elders’ ownership so that they will be eligible for Medicaid when the time comes.  Because the average time between onset and death for Alzheimer’s disease, the single most common cause of long-term nursing home institutionalization, is eight years, a planning horizon of only five years is very easy for families to manage.

Medicaid exempts unlimited home furnishing and personal belongings, assets that would not show up in the net worth measured by the data EBRI used.  Simply purchasing such exempt assets is a commonplace “spend down” method that does not entail purchasing long-term care.

Bottom line, it is quite natural for assets to decline in old age and to decline faster than ever as families anticipate the potential cost of long-term care.  If they plan intentionally to qualify for Medicaid, as they are routinely encouraged to do by thousands of Medicaid planners who advertise copiously on the internet, in newspapers and on the radio, all assets can easily be diverted or divested prior to entering a nursing home. 

Try Googling “Medicaid planning” and see what you get.  Then Google “Medicaid planning in [Your State].”  You’ll be amazed at how easily accessible information is on how to qualify for Medicaid without spending down for care.  If you really want to understand this subject, consult the past 30 years of law journal articles on the esoteric techniques of Medicaid planning.  While high-end Medicaid planning with lawyer-specialists tends to involve only the affluent, many non-attorneys, including former Medicaid eligibility workers, show middle- and lower-middle-class people how to “spend down” without having to pay for LTC.

How Can We Get at the Truth?

Well, then, if national sampling data only tell us that people’s assets decline in old age and that the decline accelerates with nursing home institutionalization, but they do not tell us why or how this happens, then where should we turn?  Certainly, step one is not to assume that people are spending their wealth for nursing home care before qualifying for Medicaid when there is no direct evidence that this is happening.  Instead getting the answer we want is going to require a little more thought and effort.  Here’s why.

What really matters is not how much money people have just before they enter a nursing home or after they’ve been institutionalized for awhile.  What matters is how much money, real property and other wealth they had 15, 20 or more years before they needed long-term care.  What did they own when they could still have afforded to plan responsibly to pay for their own care and avoid Medicaid dependency?

To find this out and get to the bottom of what’s really happening, you need to study a valid random sample of Medicaid LTC recipients intensely.  Find out what they owned 20 years ago or more.  Then check public records to see if and when they transferred a home or other real property.  Check to see what the disposition of other property was.  You’ll have public records for real property, but you’ll have to depend on the cooperation of families to answer questions about the rest of the assets.

Likely Findings

We have no evidence that people are actually spending down large sums of assets for nursing home care.  I do think, however, that a study of the kind I’m recommending will show a certain amount of asset spend down for assisted living, which is 90% private pay and for private-pay home health care.  But a much larger sum than is otherwise recognized will undoubtedly be found to have departed the ownership of the older generation through routine estate planning or intentional Medicaid planning.

One thing’s for sure.  The answers are not to be found where EBRI and Dr. Banerjee looked in the study we’ve just examined.  We will never know the answer until someone does the right kind of study.