LTC Bullet:  Let’s Play LTC Jeopardy

Friday, May 31, 2013

Washington, DC—

LTC Comment:  Good public policy comes down to asking the right questions.  Finally, someone has and we’ll provide the right answers after the ***news.***

*** A VERY THOUGHTFUL PAPER written by an appointee to the new LTC Commission inspired today’s LTC Bullet.  Tomorrow (Friday) morning, you can watch online as its author presents the paper and five experts discuss it.  We highlight this opportunity because it promises to be a very enlightening program and well worth anyone’s time who cares about LTC financing policy.  The details follow. ***

*** AMERICAN ENTERPRISE INSTITUTE ( presents “Long-Term Care: Markets or Mandates?” on Friday, May 31, 2013 from 9:15 a.m. - 11:15 AM Eastern Time at AEI headquarters in Washington, DC.  LTC Commission appointee Mark Warshawsky will “explain the implications of another publicly funded long-term care insurance program. A panel will then debate whether another government program is the best way to ensure that families can afford to provide the necessary services for their aging loved ones.”  Serving on the panel with Steve Moses (representing the market-based position) are Howard Gleckman (who writes op-eds for Forbes), Joshua Wiener (a widely-published LTC analyst who favors public financing) and Matt Salo (Director of the National Medicaid Directors Association).  AEI’s highly regarded analyst Joe Antos will moderate the program.  If you can’t be there in person, check out the live stream here or catch it later in AEI’s archives where the full video will be posted within 24 hours.  For more information, please contact Catherine Griffin at, 202-862-5920. ***



LTC Comment:  When it was announced, no one—I among them—held out much hope for the new “LTC Commission,” created by the oxymoronically named American Taxpayer Relief Act of 2012.  But the first output to come from one of the new commission’s members has me thinking more positively.

Mark J. Warshawsky, Ph.D., who served as Assistant Treasury Secretary for Economic Policy in the G.W. Bush administration, has written a paper titled “Questions for the New Federal Commission on Long-term Care to Address Prior to Legislative Recommendations.”  He’s definitely asking the right questions, as few scholars have, so do click the link and read his paper.  Your time will be amply rewarded.

But right now let’s play a little “LTC Jeopardy.”  As on the TV quiz show, we’ll supply the answers and then see which of Dr. Warshawsky’s questions they resolve.  Because our answers contradict much of the conventional academic wisdom about LTC financing, I think you’ll see why we’re so excited someone’s finally asking the critical questions that only our analysis can explain. 

We’ll close with a final “LTC Comment” that resolves once and for all the puzzling conundrums raised by Warshawsky’s paper.  Ready contestants?  Here goes.

Answer #1:  Well-intentioned but counterproductive public policy, which pays for most expensive long-term care without requiring strict financial eligibility limits, has anesthetized the public to LTC risk and cost resulting in their failure to plan, save, invest or insure and guaranteeing a ever-worsening financial crisis as the Age Wave crests.

MJW’s Questions:  “What has caused this rapid growth in LTC spending? . . .  What role is played by the creation of government funded social insurance and welfare programs? Other factors? Will the rapid growth continue into the near future? The next twenty to thirty years? Over the horizon used by the Trustees of the Social Security and Medicare programs?”  (p. 3)

Answer #2:  Despite decades of wishful thinking by academics and policy makers, providing home care financed by public programs without limiting eligibility to people in financial need does not save money compared to institutional care because home care loses the economy of scale, is very expensive to control for quality, crowds out free family care, invites fraud, encourages Medicaid gaming/dependency, and discourages private LTC planning and personal responsibility.

MJW’s Questions:  “In light of a reported trend in up-coding as well as recent discoveries of outright fraud on Medicare arising from the home health care industry, is growth in this component of spending a source of concern? Can home health care be an efficient replacement of nursing home services, saving the government money, or does it replace free care provided by families and friends and volunteers?”  (p. 3)

Answer #3:  Decades of easy access to publicly funded long-term care through Medicaid, Medicare and the VA has left those programs shackled with trillions of dollars of unfunded liabilities and hopelessly unable to meet the claims of future beneficiaries.

MJW’s Questions:  “In light of the well-established tendency (commonly called moral hazard) for insurance provision to encourage over-spending, is this shift in the sources of funding for LTC [from mostly private to mostly public] efficient, both in terms of government spending and outcomes? . . .  How significant is growing LTC spending in Medicare’s long-standing and deepening deficits and its poor future prospects?  . . .  How significant are the absence of look-back periods and other constraints on program eligibility for the growth in spending by the VA on LTC? . . .  Combining all sources of federal government spending on LTC, and taking a Trustees long horizon approach to evaluating the sustainability of spending and financing, what is the long-term projected status of current law federal government support of LTC?”  (p. 4)

Answer #4:  Asset shifting, or more generally Medicaid planning, is a problem, but the far bigger problem, rarely recognized by analysts including Warshawsky, is that Medicaid LTC eligibility is easy for most middle class people to obtain because income is rarely an obstacle and virtually unlimited assets are exempt.

MJW’s Questions:  “What is the empirical evidence on asset shifting to gain Medicaid eligibility for LTC services? How strong is state-level enforcement of these rules, including collection efforts? What are the administrative systems in place to police compliance with these rules?” (p. 5)

Answer #5:  Because of Medicaid’s generous income and asset eligibility rules, people can ignore the risk of LTC, wait to see if they ever need expensive long-term care, and if they do, qualify easily for the program’s most expensive benefit.  That’s been true since Medicaid began in 1965, so it’s no surprise that most aging Americans don’t make LTC planning or insurance a priority.

MJW’s Questions:  What is the evidence, empirical or logical, that the Medicaid crowd-out explanation for the (growing but still) relatively moderate size of the private LTC insurance market is the (largely) correct one?  (p. 5)

Answer #6:  The fact that affluent people get as much or more Medicaid LTC benefits as poor people is only hard to understand if you assume incorrectly—as most scholars do, including those whose Chicago Fed paper Warshawsky cites—that Medicaid forces people to spend down into impoverishment unless they “shift assets.”  It doesn’t.

MJW’s Questions:  “In particular, does the empirical finding that the well-to-do and long-lived qualify for Medicaid to a surprisingly high degree imply that significant asset transference activity is taking place, or, alternatively, that these households are inadequately protected financially for longevity?”  (p. 5)

Answer #7:  Public information programs about the need to plan for LTC have little effect because they invariably claim that catastrophic asset spend down awaits victims of long-term illness which is not true because public financing is factually easy to obtain and the public simply doesn’t take such scary “education” seriously.

MJW’s Questions:  “How economically significant are the survey results of public confusion about government program coverage for LTC. That is, does lack of knowledge account for why there is not more saving and insurance provision among those for whom advance planning may be possible and sensible (middle class population and above)? If this explanation is important, what are its implications? In particular, can public information campaigns or private marketing help alleviate the knowledge gap?”  (pps. 5-6)

Answer #8:  The LTC Partnership Program only increases LTC insurance sales marginally because forgiveness of the alleged Medicaid spend down requirement, which hardly exists in the first place and likely wouldn’t occur until decades after purchase of a partnership policy, is little incentive to plan or buy.  By targeting Medicaid LTC benefits to people most in need, public policy could unleash an enormous source of new private financing for LTC from home equity conversion and private LTC insurance, which would finally be in demand.

MJW’s Questions:  “Do partnership policies save or cost the government (state and federal) money? Do they expand the LTCI market beyond what it would be otherwise in a leveraged way, for example, through marketing of partnership policies, thereby increasing public knowledge of the limits and deficiencies of public insurance? In the current low inflation environment, is the 5% automatic increase feature for partnership policies still a reasonable requirement? Are there other non-insurance private sources of individual funds of LTC spending whose accumulation can be encouraged? Can Medicaid and Medicare be better structured to incent the wider use of private insurance and/or personal savings accumulated over a working lifetime for LTC?”  (p. 6)

LTC Comment:  Okay, enough with Jeopardy.  Let’s put the Qs & As back into the normal order.  In a nutshell, Mark Warshawsky’s paper asks the following questions either explicitly or by implication: 

If people can’t get government-financed long-term care without spending down their life’s savings into total impoverishment, then . . .

  1. How in the world do affluent people qualify for Medicaid LTC and get as many or more benefits than poor people?
  2. How come the National Health Expenditure Accounts show decades of skyrocketing public LTC costs and plummeting out-of-pocket expenditures?
  3. Why does peer-reviewed research show that Medicaid “crowds out” private LTC insurance?  Are people just ignorant of their catastrophic spend down risk?
  4. Why don’t public education programs convince people to plan for LTC and buy LTC insurance if the risks and costs are so huge?
  5. Why have the LTC Partnerships had so little impact?
  6. Why is private financing of home care minimal while Medicare and Medicaid  home care financing explodes?

The answers to all these questions and many more turn on correcting the fallacious premise that most analysts assume, i.e. that “people can’t get government-financed long-term care without spending down their life’s savings into total impoverishment.”

Here are the facts: 

  1. Income rarely obstructs eligibility for Medicaid LTC benefits because states either subtract medical and LTC expenses from income before determining eligibility (medically needy systems) or they allow Miller income diversion trusts which accomplish the same purpose.  High-income people qualify easily for Medicaid LTC benefits as long as their health care and LTC expenses exceed or closely approach their income.  All they need is a cash flow problem.
  2. Only very high assets interfere with Medicaid LTC eligibility because a home and all contiguous property are exempt from a minimum equity of $536,000 to a maximum in 14 states of $802,000.  On top of that, the following resources are exempt with no dollar limit whatsoever:  one business including the capital and cash flow; one automobile; prepaid burial plans; individual retirement accounts; term life insurance; home furnishings and personal belongings.  Purchasing such exempt assets is a simple, commonplace way to “spend down” to Medicaid’s exceptionally generous asset limits.
  3. Highly affluent people, who still don’t qualify for Medicaid LTC benefits despite these extremely generous rules, can easily reconfigure their income and assets (and avoid mandatory estate recovery) by retaining Medicaid planners who use special trusts, “Medicaid-friendly annuities,” “reverse half-a-loaf” strategies, life care contracts and other sophisticated legal techniques to impoverish them artificially.
  4. Middle class and affluent people on Medicaid occupy the nicest beds in the best LTC facilities because they can afford to pay privately for awhile.  That buys them red carpet access to excellent care, because nursing homes and assisted living facilities desperately need private residents who must pay half again as much on average as Medicaid pays.  Thus poor people are crowded out of the best Medicaid facilities and are forced into the 100% Medicaid facilities that have given nursing home care such a bad name.
  5. Because Medicaid LTC financing has been so easy to obtain after the insurable event occurs and for nearly 50 years, most people don’t think or worry about LTC risk and costs until chronic illness strikes, at which time it’s too late to save, invest or insure and the only way to preserve the estate is to take advantage of Medicaid.  Thus, the problem isn’t that people are ignorant, nor that they are planning consciously to rely on Medicaid.  The problem is that Medicaid has always paid for most expensive LTC which has enabled consumers’ “denial” of the risk.
  6. From these facts, which remain unrecognized in the peer-reviewed LTC financing literature, flow all the anomalies enumerated in Mark Warshawsky’s paper and their resolution.  Easy access to public LTC funding desensitized the public to LTC risk, eliminated demand for home equity conversion or LTC insurance to fund LTC privately, crowded out a market for privately financed home and community-based care, caused decades of explosive public LTC expenditures, and ensures the eventual collapse of the public programs.

But here’s the good news:  if we just stop doing what we’ve always done (giving away free LTC after people need it), we’ll stop getting the same result (exploding public costs, complacent consumers, and minimal private LTC financing).  That’s the formula for sane public policy.

And even better news:  it won’t be hard to do.  Drop the federal home equity exemption from its current stratospheric level to something closer to England’s $36,000 exemption (for all assets including home equity); eliminate the “Maintenance of Effort” requirement in ObamaCare so that state Medicaid programs can tighten LTC eligibility rules within existing federal limits; and encourage state experimentation with tighter financial limits and stronger estate recovery programs designed to encourage early and responsible LTC planning.

Do those things and the puzzling conundrums raised by Mark Warshawsky’s excellent paper will disappear like morning mist in the hot summer sunshine.