LTC Bullet: How Careless Economists Boosted LTC Risk
Friday, December 12, 2014
LTC Comment: We explain how Boston
College economists generated poor long-term care planning advice that
national media unfortunately amplified, after the ***news.*** [omitted]
LTC BULLET: HOW CARELESS ECONOMISTS INCREASED LTC RISK
LTC Comment: Substantive ignorance and sophisticated economic modeling do not mix well. A recent case in point is “Long-Term Care: How Big a Risk?,” by Leora Friedberg, Wenliang Hou, Wei Sun, and Anthony Webb of the Center for Retirement Research at Boston College. Read the “brief” describing their research here.
The authors are accomplished economists. We won’t challenge their methodology or technical findings, which are very interesting. They “show that previous research understates the risk of going into care but overstates the average duration of stay of those ever institutionalized.” (p. 1) They conclude that “This finding strengthens the claim that . . . few individuals would choose to buy insurance even if they were rational, far-sighted, and well-informed.” (p. 5)
That conclusion is not valid. It ignores what truly “rational, far-sighted, and well-informed” consumers need to know, but don’t, about Medicaid LTC benefits. To wit, Medicaid is a means-tested public assistance program, i.e., welfare. It has a dismal reputation for problems of access, quality, inadequate reimbursement, discrimination, institutional bias, and loss of independence and control. People who pay privately for long-term care command red-carpet access to high quality care at the most appropriate level including care in their own homes. Medicaid dependents take what they can get, usually underfunded nursing home care. Armed with this substantive knowledge, informed consumers are wiser to ignore advice based purely on econometric analysis.
Yet due to these authors’ failure to acknowledge Medicaid’s shortcomings and because of the media’s unquestioning distribution and faulty interpretation of their findings, a terribly irresponsible message was sent to consumers, most of whom remain inadequately informed to make smart LTC planning decisions. For example:
11/11/14, “Here’s a New Reason to Think Twice Before Buying Long-term Care Insurance,” by Penelope Wang, Time
11/12/14, “Maybe You Don't Need Long-Term Care Insurance After All,” by Ben Steverman, Bloomberg
11/14/2014, “'Spending down' for Medicaid is the most practical LTC financing plan for most Americans, researchers assert,” by Tim Mullaney, McKnight's LTC News
Econometricians Make Poor Financial Planners
These technically proficient economists’ substantive ignorance contributed in another way to their mistaken conclusions and the bad advice that followed in the media. In the first paragraph of their article, they say “Medicaid only covers the long-term care costs of the indigent.” (p. 1) If that were true, if people really had to become impoverished before getting help from Medicaid, they would worry about LTC risk and cost. They would plan responsibly and purchase LTC insurance, often with the financial help of potential heirs, even at elevated premium levels. But the assertion that Medicaid only covers LTC costs for the “indigent” is so patently and demonstrably false it is frightening to comprehend how it, and so many other assertions like it, routinely pass by peer reviewers and find their way into otherwise reliable professional journals.
What is the truth? Medicaid covers not only the indigent but the majority of all Americans who need expensive long-term care, including the middle class and many of the affluent. That fact is so well established that it boggles the mind how serious scholars so commonly ignore it. Here’s a primer on how Medicaid financial eligibility rules allow, in fact encourage, people with substantial wealth to qualify for its LTC benefits.
Financial Eligibility for Medicaid LTC Benefits
Income rarely interferes with Medicaid LTC eligibility because most states deduct private medical and LTC expenses from income before asking if someone is “poor” enough to qualify. Even states with “income caps” are compelled by federal law to allow “Miller income diversion trusts,” which similarly sidestep ostensible income limits. The rule of thumb across America is that anyone 65 or older with the appropriate level of medical need who has income less than the cost of a nursing home (currently $77,380 per year for a semi-private room) qualifies for Medicaid LTC benefits based on income. Median U.S. income is $32,000; the 90th percentile reaches $77,500. Clearly, Medicaid LTC does not require “low income” as is routinely asserted in the academic and popular literature. All one needs is too little income to pay for all one’s medical and LTC expenses.
Because income does not disqualify most applicants for Medicaid LTC benefits, the program’s supposedly strict asset spend down requirements are critically important. If they don’t work as intended, the program will not prevent excessive utilization by the well-to-do. There again, popular and academic sources routinely claim incorrectly that people must spend down privately for LTC until impoverished before Medicaid will help. Three points regarding that fiction:
First, it does not matter how people spend down their assets to meet Medicaid’s limit on countable assets, usually $2,000. As long as they purchase items for fair market value (FMV) it does not matter what they buy. Medicaid planning attorneys have recommended big parties or world cruises as spend down strategies. They routinely offer lists of exempt assets--such as bigger homes, expensive cars, or new furniture--that families can buy to get an infirm elder’s assets down to the needed level.
Second, uncounted assets are virtually unlimited. These include equity in a home and all contiguous property of between $552,000 and $828,000 as of January 1, 2015. Medicaid LTC applicants and recipients may also retain--without any dollar limit--a business including the capital and cash flow, one auto, home furnishings, personal belongings, prepaid burial plans for self and immediate relatives, and their Individual Retirement Accounts. Such uncounted assets often amount to hundreds of thousands of dollars according to Medicaid eligibility workers we’ve interviewed and quoted in numerous reports here.
Third, Medicaid LTC applicants who still have too much income or assets can retain professional counsel to help them self-impoverish artificially. An internet search for “Medicaid planning” will reveal thousands of such advisors, their advertisements, and their dubious methods. Medicaid planners’ major strategies include “Medicaid-friendly annuities,” reverse half-a-loaf strategies, and irrevocable income-only trusts, but their legal quivers are full of simple and complicated techniques to justify their big fees. The average cost in legal fees to qualify someone in need of care quickly for Medicaid LTC benefits is roughly equal to the cost of one month in a nursing home private pay.
The dictionary defines the noun “indigent” as a needy person (synonyms: vagrant, homeless person, down-and-out, beggar, pauper, derelict, have-not) and the adjective “indigent” as poor or needy (synonyms: impecunious, destitute, penniless, impoverished, insolvent, poverty-stricken.) If people had to become genuinely indigent before receiving help from Medicaid for LTC expenses, the market for private LTC insurance would be vastly larger than it is now. People would tap their home equity to supplement their incomes so they could afford LTCI premiums, instead of sheltering as much wealth as possible in their homes to qualify for Medicaid. Families would pull together to buy LTC insurance for their aging loved ones instead of tearing themselves apart fighting over the spoils of impoverishing their elders via Medicaid planning. Attorneys and financial planners would strongly recommend LTC insurance if they could not rake in big fees converting affluent citizens into beggars dependent on Medicaid’s “low cost care of uncertain quality.”
Facts have consequences. By focusing only on technical economic analysis and ignoring the substantive reality of how Medicaid actually works, these authors, this work, and the misbegotten reporting it engendered increased consumers’ LTC risk, swelled Medicaid’s liability for future LTC costs, and further damaged the struggling LTC insurance industry’s prospects. Instead of solving the long-term care insurance puzzle (i.e., why so few people buy LTCI) as they claim, these researchers compounded the conundrum by ignoring its cause and the main obstacle to its solution.