LTC Bullet:  A Brief History of Long-Term Care Financing

Monday, January 27, 2014


LTC Comment:  How did America’s LTC service delivery and financing system become so dysfunctional?  A brief history follows the ***news.***

*** CENTER PREZ Steve Moses is back from the AICPA (American Institute of Certified Public Accountants) Advanced Personal Financial Planning Conference at the Aria Resort and Casino in Las Vegas.  There he presented a “Long-Term Care Intensive” which included two key sections of our “Long-Term Care Graduate Seminar”:  “The Elephant, the Blind Men and Long-Term Care” and “The History of Long-Term Care” to a highly attentive and appreciative audience. ***

*** BULK MAIL MISHAP.  Our bulk mail sending program was down for a few days.  Hence we’re sending this Bullet today instead of last Friday.  Your next LTC E-Alert will arrive on schedule next Monday.  Thanks for your patience. ***

*** CLTCR Premium Membership  --  Center for Long-Term Care Reform premium members receive our full suite of individual membership benefits including:  our LTC Bullets and E-Alerts; access to our Members-Only Zone website and Almanac of Long-Term Care; subscription to our Clipping Service; and email/phone access to Steve Moses for 24-hour turnaround queries.  Our Premium Membership is designed to give you a competitive advantage in your long-term care profession. Your increased knowledge of the critical issues and challenges we face in the field of long-term care service delivery and financing equals improved professional success for you and better LTC services for your clients and for those who have no choice but to rely on scarce public resources.  Premium Membership is $250 per year, paid up front or monthly by automatically recurring credit card payments.  Contact Damon at 206-283-7036 / to start your Premium Membership immediately or go directly to our secure online subscription page and sign up for as little as $21 per month. ***


LTC Comment:  Once a year we update the Center for Long-Term Care Reform’s “LTC Graduate Seminar.”  Center members have access to this 44-page transcription in The Zone here.  Reading it is a great way to review the big picture about long-term care financing.  For access, you’ll need your user name and password.  For a reminder or to join the Center and get access to everything we do including The Zone, contact Damon at 206-283-7036 or

Today for everyone, including non-members, we offer a special peek at one section of the LTC Graduate Seminar.  What follows is a 15 page history of long-term care services and financing in the United States since the establishment of Medicaid and Medicare in 1965.  We hope you find it interesting and helpful in understanding this complicated topic.  There is much more in the LTC Graduate Seminar than this, however.  If we pique your interest with the history section below, check out the rest of the document including these informative sections:

The Elephant, the Blind Men, and Long-Term Care
The Welfare Paradigm
The Entitlement Paradigm

Medicaid Eligibility for Long-Term Care
Medicaid Estate Planning
Key Money
What's Going to Happen Next?
How Social Security Props Up Medicaid LTC
How Medicare Props Up Medicaid LTC
The Welfarization of Medicaid, Medicare and Social Security
The Bottom Line


History of LTC and Why it Matters for Financial Advisors and LTCI Producers

I want to change gears now and take another approach to the LTC issue.  We have established so far that the elephant of long-term care is a very complicated animal.  It's comprised of many competing interest groups, each and all of which have something to gain from continuation of the status quo.

We've established that the United States has a welfare-financed, nursing home based long-term care system in the wealthiest country in the world where nobody wants to go to a nursing home.  And yet most people are asleep about the risk and cost of long-term care.  Until we understand how this status quo came to be and why, we can hardly expect to identify the right corrective actions.

So I want to turn now to the history of long-term care service delivery and financing.  How did we get into the mess we're in?

Something really important happened in 1965.  Two new government programs were established.  Do you know what they were?

Right, Medicare and Medicaid. 

Medicare, of course, was designed to provide acute health care to the elderly.  But Congress decided that something really needed to be done for low income people as well.  So they added Medicaid as kind of an afterthought to Medicare.  Then, as an afterthought to that afterthought, Congress decided that something should also be done for aging Americans who need long-term care.  So they added nursing home care to Medicaid for people over the age of 65.

In the beginning, there were no transfer of assets restrictions interfering with eligibility for Medicaid long-term care.  There was no estate recovery mandate requiring people with sheltered wealth to pay back the cost of their care.  If you were over the age of 65, it was easy to get the government to pay for nursing home care.

The public isn't stupid.  They figured:  "You mean, if we want to take care of Grandma at home, we'll have to pay for it 100 percent out of our own pockets?  But if we put her in a nursing home, the government will not only pay for her care but send in surveyors to make sure she receives quality care?  That's a no-brainer."

The nursing home industry isn't stupid, either.  They said.  "You mean the government is going to put a giant pot of money out in the middle of the country, somewhere around Kansas or Nebraska, and all we have to do is build nursing homes, offer the beds to people who want long-term care, and the government will pay?  Terrific.  Bring it on."

Medicaid Nursing Home Costs Explode

P.J. O'Rourke, the political satirist, likes to say "If you think health care is expensive now, just wait until it's free."

For all intents and purposes, the government made nursing home care free in 1965. 

That had the effect of crowding out a market for privately financed home and community-based care.  Why pay out of pocket for home care services, adult day care, respite care or assisted living, when the government provides nursing home care? 

For the same reason, a market for long-term care insurance to pay for home care and nursing home care was slow to develop and remains stunted to this day.

By the mid-1970s, I was working for the Health Resources Administration in Rockville, Maryland.  That's part of the U.S. Public Health Service.  I saw what happened next, up close and personal.

Predictably, the cost of Medicaid financed nursing home care exploded.  The public filled new nursing home beds as fast as the nursing home industry could build them.  "Roemer's Law" said:  "A built bed is a filled bed." 


The government looked at the exploding cost of nursing home care and concluded that something had to be done.  But instead of addressing the cause--that is, the fact that government had made nursing home care free or radically subsidized resulting in higher construction, utilization and expenditures--they attacked the symptom, the increasing costs.

The government figured "they can't charge us for a bed that doesn't exist."  So, state  governments began to require nursing homes to get permission before they build new facilities.  Nursing home companies had to obtain a "certificate of need" or CON before building new skilled nursing facilities.

Now, this arrangement was fine with the nursing home industry.  For anyone already in that business, the Certificate of Need only meant that they now had a government-enforced monopoly.  They might not be able to build more nursing homes, but neither could their potential competition.  Since the nursing homes' growth was restricted by this limit on supply, however, the industry simply started charging more for the beds they already had.

That was predictable.  In any economic system, when supply goes down or is artificially restrained from going up, price tends to increase.  You don't need a PhD in economics to figure that out, but the government didn't see the consequences coming.

The cost of Medicaid financed nursing home care continued to explode.  Once again, the government knew it had to take action.  And once again, it failed to address the cause--i.e., free government financed nursing home care--and went instead after the symptom--skyrocketing costs caused by increasing charges to Medicaid by the nursing home industry. 

So the government told the nursing home industry they could no longer charge whatever they wanted to charge for nursing home care.  Medicaid capped its reimbursement rates.  This was the origin of the differential between the very low Medicaid reimbursement rates for long-term care and the relatively high private pay rates.  Today, Medicaid pays only about two-thirds of the private-pay rate for nursing home care.  Private payers have to pay half again as much as Medicaid reimburses for people in the same nursing home, sometimes in the same room as the private payers.

Quality Collapses

With supply AND price capped, what do you think happened to demand?  Of course, demand went through the roof.  In the mid-1980s, nursing homes were 95 percent occupied.  At the same time, hospitals were only 55 percent to 60 percent full.  If a nursing home was willing to accept Medicaid's low reimbursement rates, it could fill all of its beds . . . no matter what kind of care it offered.  Consequently, quality of care collapsed in principally Medicaid-financed nursing homes.

Once again, Congress took note.  Even though quality plummeted, costs continued to explode.  True to form, however, government attacked the symptom (poor quality) instead of the cause (public financing).  So Congress went to the nursing home industry and said, in paraphrase:

"This is America.  We cannot tolerate poor quality of care in our nursing homes.  You must improve the care.  You must hire more nurse's aides; you must train them better; you must pay them more.  Make sure you dot every I and cross every T according to stricter regulations.  And if you don't, we will hit you with fines and other penalties." 

That was OBRA '87, the Omnibus Budget Reconciliation Act of 1987.  Thankfully, it worked, and quality of care in America's nursing homes is top notch today.  [Audience snickers.]  Well, not exactly.  If anything, the problems are worse than ever now, 27 years later.

But when OBRA '87 passed, the nursing home industry wasn't displeased.  They said, in essence, "We're not in this business just to make a lot of money.  We want to provide loving and compassionate care.  We love the idea that you want us to hire more people, train them better and provide higher-quality care.  Only one question though, how much more are you going to reimburse us under Medicaid to make this possible?"

And the government responded "Money?  We don't have any of that.  We just demand that you do all these new things."

Nursing Homes Sue Medicaid

Well, now the nursing home industry was caught between the rock of inadequate reimbursement and the hard place of mandatory quality.  If they tried to attract more private payers at the higher private-pay rate, they were accused of discriminating against Medicaid recipients.  If they tried to cut costs, they were accused of providing poor care.  It was a hopeless situation.  So the nursing home industry turned to the courts.

Under the "Boren amendment," which was part of OBRA '81, the nursing home trade associations in many states began suing their state Medicaid programs for higher reimbursement under Medicaid.  The Boren amendment said in essence:  "State Medicaid nursing home programs must provide sufficient reimbursement for an effective facility to provide decent care."  That's a paraphrase, but pretty close. 

[For the precise language, see Joshua M. Wiener and David G. Stevenson, "Repeal of the 'Boren Amendment': Implications for Quality of Care in Nursing Homes," at]

Who do you think won most of those lawsuits?  There's an old saying that "you can't fight City Hall," so you might think the State Medicaid programs prevailed.  But the truth is, the state nursing home associations won most of those Boren suits.  They forced Medicaid to increase reimbursements for nursing home care. 

So, what do you think the government did next?  You guessed it.  Congress repealed the Boren Amendment in the Balanced Budget Act of 1997.  Since then, there has been no floor under Medicaid reimbursement for nursing home care.  Nevertheless, long-term care costs continue to increase and quality remains questionable.

Medicaid LTC Eligibility Bracket Creep

While all this was going on, another situation developed.  Most people who needed long-term care were receiving it in nursing homes because an alternative market for home and community-based care had been crowded out by free nursing home care.  So people were finding themselves in nursing homes, often in semiprivate rooms, paying privately, but sharing a room with a person on Medicaid. 

The people paying privately, or their representatives, noticed that the person on Medicaid may have had more money throughout most of their lives than the person paying privately.  Because of Medicaid's reduction in the reimbursement rate it was willing to pay nursing homes, private payers came to be paying half again as much on average as Medicaid was paying for Medicaid recipients.  That's called "cost shifting."  Naturally, this created a temptation on the part of the private payers to find a way to qualify for Medicaid.  If they could get onto the program, it would pay not only for their nursing home care, but for other, ancillary services that Medicaid often pays for but Medicare doesn't, such as foot care, eye care, dental care and residual pharmaceuticals after Part D.

By the early 1980s, there developed a sub-practice of law, called "Medicaid estate planning" designed to help middle-class and affluent people self-impoverish in order to become eligible for Medicaid.  I call this process of extending Medicaid eligibility to more and more prosperous people "eligibility bracket creep."  As Medicaid LTC eligibility expanded, it created even more financial pressure on Medicaid and reduced the number and percentage of people in nursing homes who were paying at the higher private pay rate.  Thus, eligibility bracket creep exacerbated all the problems we've discussed so far regarding access to and quality of care.

Congress Acts to Discourage Medicaid Abuse

Beginning in 1982, Congress tried to get control of Medicaid LTC eligibility.  The first major measure in this direction was the Tax Equity and Fiscal Responsibility Act of 1982, or TEFRA '82.  TEFRA authorized state Medicaid programs for the first time to (1) penalize asset transfers done for the purpose of qualifying for Medicaid, (2) place liens on real property in order to hold that property in a recipient's possession during their period of Medicaid eligibility, and (3) to recover the cost of their care from the estates of deceased recipients.

The critical thing to understand about TEFRA '82 is that it was entirely voluntary.  States could implement these new programs or not at their own discretion.  In 1983, I was the Medicaid State Representative for the state of Oregon in the Seattle Regional Office of the Health Care Financing Administration (the predecessor organization of the current Centers for Medicare and Medicaid Services or CMS).  It was my job to make sure that the federal laws and regulations governing Medicaid long-term care were properly implemented by the state government.  The federal government partially funds and oversees Medicaid.  State governments partially fund and administer the program.  So the Medicaid State Rep's job was to be the linchpin between the federal and state Medicaid programs.

In Oregon, I came across this interesting program called "Medicaid estate recoveries."  It purported to recover five percent of the cost of Oregon's nursing home program, or about $5 million a year.  That was back then.  It's more like $20 million a year now. 

Imagine my confusion when I discovered this program.  By that time I had already worked a total of ten years in federal welfare programs.  I thought I knew how they worked.  When you're poor . . . when you're destitute . . . when you have nothing left . . . you can apply for public assistance, and the government helps you with cash or, in Medicaid's case, with medical or long-term care services.  That's how it was with the old Aid to Families with Dependent Children Program.  I thought it was the same with Medicaid. 

So how could it be that people who are poor and destitute enough to qualify for Medicaid would spend years in a nursing home at enormous expense to the state and federal governments, and then, after they die, a little state like Oregon recovers nowadays $20 million out of their estates?  Where did all that money come from?

That question really fascinated me.  So, in 1983 I conducted a study, the objective of which was to ask and answer the question "What if every state in the country recovered from estates at the same rate as Oregon?" 

I quickly realized that to do this study, I would have to understand how Medicaid eligibility works.  In other words, how could people with substantial income and assets qualify for Medicaid in the first place?  

What I learned is that income is rarely an obstacle to qualifying for Medicaid.  I also found that assets, ostensibly limited to only $2000, were rarely an obstacle to qualifying for Medicaid.  That's because unlimited assets could be held in exempt form.  We'll discuss Medicaid income and asset eligibility in detail later in this program. 

Until 2006, for example, there was no limit on the amount of home equity that could be exempted.  One home and all contiguous property, regardless of value, was disregarded.  It was no wonder, therefore, that people could qualify for Medicaid, receive free or subsidized nursing home care and other medical services indefinitely, and still have substantial assets in their estates. 

The report I prepared for the Health Care Financing Administration in 1985, titled "The Medicaid Estate Recoveries Study," is available at  What I found was that most states had not aggressively implemented TEFRA '82.  Most states had put in place some form of the transfer-of-assets restriction, but back then it was limited to a two-year look-back and no more than a two-year penalty.  Only two states had implemented TEFRA liens.  And while 15 or 16 states had implemented estate recoveries, most had not done so in such a way as to maximize estate recoveries.  My state of Oregon was an exception in that regard.

After I drafted this report, I forwarded it to a number of people interested in long-term care financing, including several scholars and federal agencies like the General Accounting Office (GAO is now known as the Government Accountability Office) and the Office of Inspector General (OIG) of the Department of Health and Human Services (DHHS).  Although HCFA discouraged my work and refused to publish it, the DHHS Inspector General loved it and hired me out of the Health Care Financing Administration to conduct a more comprehensive national study and write a report titled "Medicaid Estate Recoveries." That report is still available to read on the OIG's website at (Cut and paste this link into your browser if it does not come up otherwise.)  GAO also followed up with a national study on which I consulted.  Read that report at

My report for the OIG explained how people with substantial income and assets could qualify routinely for Medicaid.  It estimated that nearly $600 million could be recovered from estates, if every state in the country performed at the same level as Oregon.  The report warned that as long as people with substantial income and assets could qualify easily for Medicaid, there would be very little market for private LTC financing alternatives; Medicaid long-term care expenditures would continue to explode; little privately financed home and community-based services infrastructure would develop; quality of care would continue to decline due to Medicaid's notoriously low reimbursement rates; and, if something weren't done about these problems, within 30 years the cresting of the Age Wave would crush the existing long-term care financing system.

Here we are 26 years later and everything I predicted in that early OIG study has come true or is about to!

COBRA '85, MCCA '88, OBRA '93, HIPAA '96, BBA '97 and DRA '05

In 1985, in the Consolidated Omnibus Budget Reconciliation Act of that year, Congress took the next step to rein in abuse of Medicaid LTC.  COBRA '85 put a stop to "Medicaid qualifying trusts."  MQTs had become the technique of choice for elderlaw attorneys to impoverish their affluent senior clients and qualify them for Medicaid nursing home care.  COBRA '85 changed the rules, but did not grandfather in people who already had Medicaid qualifying trusts.  Many individuals and families were hurt.  A lot of elderlaw attorneys were embarrassed professionally.  But that didn't stop them from finding new ways to focus on qualifying affluent clients for Medicaid financed long-term care.

The Medicare Catastrophic Coverage Act of 1988 (MCCA '88) was the next step in this process.  MCCA '88 was mostly about Medicare, but it did have some provisions that affected Medicaid long-term care eligibility.  The most important change was, for the first time, to require state Medicaid programs to penalize asset transfers for less than fair market value done for the purpose of qualifying for Medicaid long-term care benefits.  MCCA '88 required state Medicaid programs to look back 30 months for inappropriate asset transfers.  It established an ineligibility penalty equal to the amount of assets transferred for less than fair market value for the purpose of qualifying for Medicaid divided by the average cost of a nursing home in the state.  For example, give away $80,000 to qualify for Medicaid in a state where nursing home care averaged $8,000 per month and you'd be ineligible for 10 months from the date of the transfer.  The italicized point will be very important later.  MCCA '88 also established a limit of 30 months as the maximum penalty for asset transfers.  In other words, if you gave away $1 million within 30 months of applying for Medicaid, your transfer of assets penalty would still be only 30 months.

In 1993, the Omnibus Budget Reconciliation Act of that year implemented most of the recommendations from my 1988 "Medicaid Estate Recovery" report for the Office of Inspector General [, you may have to cut and paste this link into your browser].  OBRA '93 extended the look-back period for asset transfers to a full three years (36 months) for most improper transfers and to five years for transfers into or out of a trust.  The law also eliminated the limit on the eligibility penalty.  Now, if you gave away $1 million within three years of applying for Medicaid, you would be permanently ineligible for all intents and purposes.  OBRA ’93 made estate recoveries mandatory for the first time.

OBRA '93 also eliminated the Medicaid planning gimmick of "pyramid divestment."  Before OBRA '93, the elderlaw bar had figured out that because transfer of assets eligibility penalties were allowed to run concurrently, they could jettison lots of money very quickly for their affluent clients while minimizing any transfer of assets penalty.  On their websites, they published schedules that showed exactly how much to give away each month to take full advantage of this loophole.  They could actually spend you down from $1 million to nothing in a period of about a year.  This was possible because, for example, instead of giving away all the money in one month and incurring the maximum penalty, you could give away smaller amounts each month and, because the penalties ran concurrently from the date of the first transfer, you'd be out of money and eligible for Medicaid in only a fraction of the time originally intended by Congress.  This so-called pyramid divestment was no longer allowed after 1993.  But the elderlaw bar was very creative and opened many new "loopholes" to replace this one.

A Political Earthquake

Something big happened in American politics in 1994.  Anybody recall what it was?  Remember the "Contract with America," Newt Gingrich?  The Republicans took over both houses of Congress. 

Who was president at the time?  Right, Bill Clinton. 

Clinton was well known for something in particular.  [Audience snickers.] 

"Not that!" 

I'm referring to President Clinton's frequent statement that he would "change welfare as we know it."  And he did.  He added a work requirement to the welfare (Aid to Families with Dependent Children or AFDC) rules and reduced the welfare rolls by two-thirds, a tremendous success.

The new Republican Congress and President Clinton were alarmed by the exploding Medicaid long-term care costs.  They were frustrated that none of the government's efforts since 1982, which were intended to control the abuse of Medicaid long-term care resources, had worked.  So they decided to stop the overuse of Medicaid once and for all.  In 1996, in the Health Insurance Portability and Accountability Act (HIPAA '96 or the Kennedy/Kassebaum Act), they made it a crime to transfer assets for less than fair market value for the purpose of qualifying for Medicaid.  To do so, according to HIPAA '96 would be punishable by a fine of up to $10,000 and a jail term of as much as a year.

Now, remember the senior advocates?  They were one of the blind men of long-term care we talked about.  The senior advocates and their organizations looked at this new rule with alarm and decided to fight it.  They called HIPAA '96 the "throw granny in jail law."  Okay, this was one measure to control Medicaid abuse that even I didn't favor.  It seemed to me like a stupid, ham-handed way to deal with the problem, which is actually fairly simple to fix.

But when Congress repealed the throw granny in jail law in the Balanced Budget Act of 1997 (BBA '97) and replaced it with the "throw granny's lawyer in jail law," that made a lot more sense to me.  Why penalize the victim, when you should be going after the culprit?  For a while, the Medicaid planners' big conventions, held at luxury resorts twice a year, were more like funeral dirges than professional meetings.  (I used to attend those sessions to keep an eye on the Medicaid planners and report their egregious methods to the media until they blackballed me by closing their conventions to non-attorneys.)

Unfortunately, the "throw-granny's-lawyer-in-jail law," which threatened a year in jail and/or a $10,000 fine for recommending (in exchange for a fee) that a client transfer assets to qualify for Medicaid, was unconstitutional.  Janet Reno, who was Bill Clinton's Attorney General at the time, looked at the law and concluded it would be unenforceable.  How could you hold an attorney legally culpable for recommending a practice that was legal again after the "throw-granny-in-jail law" was repealed?

So, there we were in the late 1990s, 15 years after Congress had taken the first steps in TEFRA '82 to control the abuse of Medicaid, right back where we'd started.  Costs continued to explode.  More and more people were qualifying for Medicaid-financed long-term care.  Private payers were disappearing.  Quality of care continued to decline.  The public remained asleep about long-term care risk and cost.  Neither private insurance nor home equity conversion contributed significantly to LTC costs.  And the Age Wave was a decade and a half closer to wiping out the LTC safety net.

From Boom to Bust

Now, what was the economy like in the late 1990s?  Good or bad?

Right, those were boom years.  The Internet bubble.  The new economy.  Everyone's 401(k) was on its way to becoming an 802(k).  In my experience, when the economy is good, when tax receipts are up, and when welfare rolls are down, it is extremely hard to get the attention of politicians and public officials to the issues of controlling Medicaid costs and encouraging personal responsibility and long-term care planning.

But, exactly the opposite is true when the economy goes into the tank.  When welfare rolls are up and tax receipts are down, state legislatures, governors and other public officials become much more amenable to reason and evidence about the need to control Medicaid long-term care expenditures.  After September 11, 2001, as the economy went rapidly into recession, state officials became far more sensitive to the need to spend Medicaid's scarce resources effectively and efficiently. 

When governors could not make their budget ends meet and because, unlike the federal government, they are constitutionally required to work within their budgets, we were able to get their attention.  In 2005, I was funded by the American Health Care Association, the big proprietary nursing home and assisted living trade association, to spend half time for six months in Washington, DC.  My objective was to explain to all of the "blind men of long-term care," the key stakeholders in the LTC issue, the need to control Medicaid long-term care expenses and encourage private financing alternatives for long-term care.

I testified before Congress on April 27, 2005; I gave briefings on Capitol Hill; I met with all the key interest groups, including long-term care providers, LTC insurers, the National Governors Association, the National Reverse Mortgage Lenders Association and dozens of others.  In fact, I sought out and met with anyone and everyone who had any role in or concern about long-term care financing . . . and would listen.

My co-founder of the Center for Long-Term Care Reform, an attorney by the name of David Rosenfeld, after leaving the Center in 2001, ultimately became the Chief Health Counsel to the House Energy and Commerce Committee, the germane committee for Medicaid in the United States House of Representatives.  David wrote much of the Deficit Reduction Act of 2005 and guided it through the shoals of political opposition. 

On February 8, 2006, President Bush signed the DRA '05.  It had passed by a single vote.  Vice president Cheney had to be transported back from the Middle East to cast the deciding vote in the Senate.  As soon as the law was signed, senior advocacy organizations and Medicaid planning attorneys filed lawsuits against it.  All of this litigation was thrown out of court.

The DRA '05 took some giant steps in the direction of controlling Medicaid eligibility.  For the first time ever, it put a limit on the amount of assets that could be exempted in a home and contiguous property.  The limit was placed at $500,000 ($543,000 as of 2014 in 37 states) or up to $750,000 ($814,000 as of 2014 in 13 states and DC) at the option of a state legislature.  That is a step in the right direction.  By the time the Deficit Reduction Act passed, however, the recession that made it possible had ended.  When state governments were under severe budgetary constraint, the National Governors Association had actually advocated in writing for a limit on the Medicaid home equity exemption of $50,000.  We got half a million and that's significant, but it isn't enough to solve the problem.

An LTC Tour Anecdote

Let me tell you an anecdote from our 2008 National Long-Term Care Consciousness Tour that helps make the point about Medicaid's home equity exemption.

When I was in Washington, DC with the Silver Bullet of Long-Term Care, I received an e-mail from the Prime Minister's office of the United Kingdom.  They wanted to know if it would be all right to send over a delegation to speak with me, and others, about long-term care financing.  It seems Great Britain is unable to pay for its socialized acute care health system, much less for long-term care.  They would love to have a private long-term care insurance market to help defray the public cost of funding long-term care. 

But when they looked at the United States, where it is commonly understood that no one qualifies for help with their long-term care costs until they have spent down into total impoverishment, they wondered:  "If Americans can't sell long-term care insurance in their dog-eat-dog, capitalist system, how could we ever hope to develop a long-term care insurance market in a socialized health care system like England's?"  (My paraphrase.)

I invited the U.K. delegation of two experts on aging to join me in the Silver Bullet at a very nice RV park on the outskirts of DC.  I picked them up in the truck at the end of the D.C. Metro Green line, and drove them to the Airstream trailer.  It was a hot and humid day, so we had the air conditioning on.  The three of us sat in that little 16-foot trailer for three hours talking about long-term care financing. 

I learned something very interesting.  In the United Kingdom, all you can shelter in home equity while getting the government to help with your long-term care costs is $40,000.  We are 10 to 20 times more generous with our scarce public resources for long-term care in the United States as they are in their socialized health care system.

More on the DRA

The Deficit Reduction Act of 2005 also extended the look-back period for asset transfers from three years to five years for all transfers.  That sounds impressive until you realize that the look-back period on asset transfers in Germany, another European socialized health care system, is ten years!  Transfer assets for less than fair market value within ten years of applying for public assistance to help with your long-term care costs in Germany, and you run the risk of their pursuing recovery from the people, probably your relatives, to whom you gave the money.

One of the most important changes the DRA '05 made was to eliminate the single most prevalent Medicaid estate planning gimmick at the time.  That was the so-called "half-a-loaf" strategy.  Instead of giving away $100,000 and incurring a 20 month transfer of assets penalty, people would give away $50,000, incur half the penalty, i.e., 10 months, hide the rest of the money and become eligible after the penalty ran its course, without ever spending any of their own money for long-term care.  The Deficit Reduction Act ended this practice by starting the eligibility penalty at the date someone would have otherwise become eligible for Medicaid if the rule hadn't changed.  Previously, the penalty began at the date of the transfer, a practice which enabled the half-a-loaf strategy.  Now, the penalty begins (usually) at the date of Medicaid application. 

Ironically, this was a DRA provision the nursing home lobby opposed.  They worried that people who had transferred assets would end up on their doorstep destitute, unable to pay their own way for long-term care, but also ineligible for Medicaid.  In other words, nursing homes figured they'd end up with a lot more "charity" cases.  I explained to them at the time that this would not happen, at least not in significant numbers, because the new rule eliminated the practicality of giving away half of one's assets to become eligible for Medicaid more quickly.  In the future, no attorney in his or her right mind would recommend that people transfer assets in the same old way to qualify for Medicaid, because that strategy would no longer work and would leave the lawyers vulnerable to malpractice suits.  To date, I have heard no evidence that the worry of the nursing home industry has materialized.  By eliminating the half-a-loaf strategy, people who would have used that trick are now having to spend their money for long-term care or they divest or shelter it in some other way.

Long-Term Care Partnership Program

Finally, the DRA ’05 reinvigorated the LTC Partnership Program.  LTC Partnerships had been around since 1992.  The idea behind them was to incentivize people to purchase LTC insurance by forgiving some of the prospects’ Medicaid spend down liabilities.  The offer:  buy LTCI, use it, and the Partnership policy holder could go onto Medicaid while retaining assets up to the amount of insurance purchased and used instead of having to spend down to $2,000.  Under a Robert Wood Johnson Foundation grant, four states—California, New York, Connecticut and Indiana—piloted the program.  A variation, in New York alone, allowed holders of special Partnership policies to retain all their assets and still receive lifetime Medicaid LTC benefits.

As these pilot projects were gearing up in the early 1990s, they were derailed by Henry Waxman, a liberal Congressman from California.  Waxman considered Medicaid to be welfare and inappropriate for people with substantial resources to receive.  So, when the Omnibus Budget Reconciliation Act of 1993 made recovery from the estates of deceased Medicaid recipients mandatory, Congressman Waxman insisted that assets sheltered by Partnership policies for purposes of initial Medicaid eligibility, should nevertheless, not be exempted from estate recovery.  That rule took the steam out of the Partnership movement.  A Partnership policy holder could preserve substantial wealth and qualify for Medicaid, but at death that wealth became recoverable by the state to recoup Medicaid funds expended on the policyholder’s behalf. 

For over a decade, the Partnership program languished.  Then, in the DRA ’05, the OBRA ’93 estate recovery mandate was eliminated as against Partnership policies.  They resurged and became available in half or more of the states.  LTC insurance sales in the original four pilot states increased on the margin.  Similar results are expected in the new Partnership states, especially in those that endorse and promote the policies officially.  Nevertheless, two factors impede Partnership sales.  First, Medicaid LTC eligibility remains easily available to middle-class and affluent people without significant spend down so that the Partnerships’ spend down forgiveness is less of an incentive than it would otherwise be.  Second, Medicaid LTC has such a dismal reputation for problems of access, quality and impending insolvency that consumers who know the program are not likely to want to rely on it.  Certainly, Medicaid is unlikely ever to pay for the kind and quality of home care and assisted living that are routinely available through private LTC insurance policies.

[See Stephen A. Moses, "The Long-Term Care Partnership Program:  Why It Failed and How to Fix It," in Nelda McCall, editor, Who Will Pay for Long Term Care?: Insights from the Partnership Programs, Health Administration Press, Chicago, Illinois, 2001, pps. 207-222;]

Recent LTC History

America’s post-Internet-boom, early-2000s recession led to passage of the DRA ’05 with its new constraints on Medicaid LTC financial eligibility.  As so often happened in the past, however, soon after the new legislation passed, the economy improved, welfare rolls went down, tax receipts improved and public officials at the state and federal levels lost their enthusiasm for enforcing the new restrictions.  In California, for example, Medi-Cal (California’s name for Medicaid) didn’t implement mandatory changes required by the DRA ’05 such as the longer lookback period for asset transfers and the cap on home equity.  Nor did the federal government enforce the law, allowing California to flout it with impunity and other states to get by with only half-hearted enforcement. 

[Source:  Stephen A. Moses, Medi-Cal Long-Term Care:  Safety Net or Hammock?, Center for Long-Term Care Reform and Pacific Research Institute, January 2011]

Medicaid planners found new ways to circumvent the DRA’s stronger spend-down rules, replacing for example the newly proscribed “half-a-loaf” strategy with a clever “reverse half-a-loaf” gimmick whereby their affluent clients could use promissory notes or annuities to “cure” an asset transfer penalty and achieve the same objective to preserve half the assets.  Medicaid-compliant annuities re-emerged in popularity allowing “millionaires” to qualify easily for LTC benefits according to MaineCare (Maine’s name for Medicaid) eligibility workers.

[Source Stephen A. Moses, The Maine Thing About Long-Term Care Is That Federal Rules Preclude a High-Quality, Cost-Effective Safety Net, Center for Long-Term Care Reform and the Maine Health Care Association, November 2012]

Thus, by 2007, easy access to Medicaid LTC benefits was returning to its historical norm.  Then the economic cycle clobbered America again.  In 2008, the “Great Recession” began.  Once more, state and federal tax revenues plummeted, welfare rolls skyrocketed, and huge state and federal budget shortfalls developed.  In other words, the stage was set for another round of legislative and administrative initiatives to reduce Medicaid expenditures, tighten eligibility rules, curb Medicaid planning abuses, and protect the LTC safety net for people most in need.  But this time, it didn’t happen.  Why?

Maintenance of Effort

The American Recovery and Reinvestment Act of 2009 (ARRA ’09) was signed into law by President Obama on February 17, 2009.  This “stimulus” law ultimately pumped $831 billion into the economy according to the Congressional Budget Office.  State Medicaid programs were among the biggest beneficiaries of the ARRA ‘09’s largesse receiving approximately $100 billion in extra funds from an increase in federal Medicaid matching funds.  But this windfall had a string attached.  To qualify for the additional revenue, states had to agree not to tighten their Medicaid eligibility rules.  This “maintenance of effort” (MOE) requirement prevented states from reducing Medicaid expenditures during the economic downturn by means of targeting scarce resources to the neediest applicants. 

The ARRA ‘09’s MOE restriction expired at the end of June 2011, at which time state revenues plunged as federal matching fund rates reverted to pre-stimulus levels.  A state that had been getting three dollars in federal matching funds for every dollar it put up now was getting only two federal dollars for every state dollar.  Simultaneously, due to the reduced economic activity incidental to the ongoing economic downturn, other state revenues from sales and income taxes declined as well.  But Medicaid costs continued to increase rapidly as they always do when the economy falters.  This would have been the perfect time to control the Medicaid eligibility hemorrhage by targeting the program’s scarce benefits to citizens who needed them most.

By this time, however, a new MOE rule applied which prohibited any reduction in Medicaid financial eligibility.  The Patient Protection and Affordable Care Act of 2010 (PPACA ‘10, AKA health reform or “ObamaCare”) required maintenance of effort upon penalty of the loss of all federal Medicaid funds.  Under PPACA ‘10, however, the states received no bonus in federal matching funds for complying with MOE.  Thus, with flat or falling state government revenues, state Medicaid programs all across the country were locked into retaining the generous Medicaid LTC financial eligibility they had implemented during better economic times.  If they acted to reduce Medicaid LTC eligibility even within limits allowed by federal law before imposition of the MOE requirement, they could lose all federal Medicaid funds.

Then in June 2012 the United States Supreme Court ruled that, although ObamaCare is constitutional, states can nevertheless opt out of its Medicaid expansion provision without losing federal matching funds for the rest of their Medicaid programs.  Arguably, states that choose not to expand Medicaid under PPACA should therefore not be constrained by the law’s MOE provision for the same reason.  Some legal and policy experts, as well as the state of Maine, have made that case, but so far unsuccessfully based on interpretations from the Centers for Medicare and Medicaid Services (CMS, the federal agency that oversees Medicaid) and the Congressional Research Service. 

Thus, faced with widespread budget shortfalls and doubtful new revenues sufficient to close the gaps, states have only two ways to constrain costs:  cut benefits or cut providers.  With eligibility cuts out of bounds due to MOE, the states’ only options, besides shifting funds from education or some other budget category, are to eliminate desperately needed services or to reduce provider reimbursements.  Cutting services hurts the most needy.  Provider reimbursements are already minimal and further cuts could lead to facility closures and other LTC provider shortages.  At present, the maintenance of effort requirement is the biggest obstacle to Medicaid LTC reform, which is stymied so long as MOE remains in effect.


The Patient Protection and Affordable Care Act of 2010 (PPACA ’10) or “health reform” was signed into law by President Obama on March 23, 2010.  By far its most important impact on long-term care financing was its provision regarding maintenance of effort as already explained.  But ObamaCare attempted to address LTC financing in two other potentially important ways.  One was the “CLASS Act,” an acronym standing for Community Living Assistance Services and Supports.  While not formally repealed, CLASS died for all practical purposes when it became clear the pseudo-LTC-insurance program was financially infeasible to implement.  I explained the problems and deficiencies of CLASS in a 2011 speech to the Society of Actuaries "Living to 100" Symposium.  The aborted program does not warrant further consideration.

The other way ObamaCare addressed long-term care was with several special programs and pilots designed to encourage more public financing of home and community-based services (HCBS).  These are described in an October 2011 report by the Kaiser Family Foundation titled “State Options That Expand Access to Medicaid Home and Community-Based Services.”  They need not concern us here, because, as the following section explains, publicly financed HCBS on a wide scale are not financially sustainable, impede a private market for home-based care, and discourage responsible long-term care planning.