LTC Bullet:  The Arrogance of LTC Analysts’ Elitism

Friday, December 4, 2015

Seattle—

LTC Comment:  Arrogance, ideological bias and elitism spoil the recent research of abundantly endowed LTC analysts.  We explain after the ***news.*** [omitted]
 

LTC BULLET:  THE ARROGANCE OF LTC ANALYSTS’ ELITISM

LTC Comment:  Medieval philosophers built castles of elegant logic into the sky.  Starting with arbitrary rationalistic premises they constructed fanciful mental models of “true” reality.  But their simulations bore little resemblance or connection to the real world.  Consequently, human society and economics remained mired in misery and poverty for centuries.  Scientific method grounded in objective reality ended such philosophical and methodological error in the hard sciences unleashing the industrial revolution and the prosperity much of the world enjoys today.  Unfortunately, the same cannot be said for much of what passes for social science today.

Recent research in our very own field of long-term care financing is a case in point.  Based on false premises, arrogantly self-confident analysts backed by a richly financed think tank, advocacy organization and trade association have presumed to tell us how we should pay for long-term caregiving.  I refer of course to the recent article in Health Affairs titled “Financing Long-Term Services and Supports:  Options Reflect Trade-Offs for Older Americans and Federal Spending” which summarized research conducted by the Urban Institute and financed by the SCAN Foundation and Leading Age.  Let’s dissect that article, pinpoint its most fundamental errors, and explain why its advice that government should compel Americans under threat of force to pay for each other’s long-term care is mistaken and misguided.

Quote:  “Medicare does not provide coverage for extended LTSS.  Medicaid does, but only for people who meet state-specific eligibility standards that limit benefits to those who have disabilities and very limited income and wealth.  However, because people with LTSS needs may qualify for Medicaid after they deplete most of their resources, Urban Institute projections indicate that Medicaid will pay for about one-third of lifetime costs associated with severe LTSS needs for people turning sixty-five today.”  [p. 2, emphasis added]

LTC Comment:  Therein lies the fallacy that undermines these analysts’ whole evidentiary and logical structure that follows.  If Medicaid long-term care benefits required “very limited income and wealth” after recipients “deplete most of their resources,” our LTC financing system would not be in the mess that it’s in.  If that were true, responsible people would plan, save, invest and insure to avoid a catastrophic spend down scenario.  But it is not true and so most people don’t plan ahead for LTC costs and risks that are predominantly covered, and have been for 50 years, by Medicaid. 

Surely analysts who represent themselves as experts on Medicaid long-term care benefits must know that the program’s financial eligibility rules allow recipients to have incomes up to the cost of a nursing home plus virtually unlimited assets held in exempt form with any excess easily transferred or sheltered by a Medicaid planning attorney.  I wouldn’t accuse these analysts of ignorance or dishonesty so the only plausible explanation I’m left with is ideological bias that blinds them to the reality of how Medicaid actually works.

Quote:  “Because private insurance is not widespread and public financing is available only for people who have few financial resources or who have already spent nearly all of their resources, older adults with severe LTSS needs will pay about half of their expenses out of pocket.” (p. 2)

LTC Comment:  The article’s authors double down on the same error.  Because they assume incorrectly that people only get Medicaid LTC benefits after spending down into impoverishment, they accept without challenge that “older adults with severe LTSS needs will pay about half of their expenses out of pocket” which is also untrue.  Out-of-pocket nursing home costs have declined from 49.5% in 1970 to 29.4% in 2013, down 20.1% of the total while only 8.1% of home health care costs were paid out of pocket in 2013.  (For sources, see “LTC Bullet:  So What If the Government Pays for Most LTC?, 2013 Data Update.”  Furthermore, half of the “out-of-pocket” expenses reported by the Centers for Medicare and Medicaid Services (CMS) actually come from Social Security benefits that Medicaid recipients are required to contribute to offset Medicaid’s cost for their care.  In other words, these out-of-pocket costs are spend through of income from another fiscally vulnerable government program, not spend down of personal assets.

Quote:  “The average American turning sixty-five today will incur about $138,100 in future lifetime expenses for severe long-term care needs, according to Urban Institute projections.  These future expenses could be financed by investing $69,500 at age sixty-five, under the assumption that the investment earns average returns.” (pps. 1-2)

LTC Comment:  Gee, not so bad.  All we need to set aside to cover future LTC costs is $69,500.  Sounds doable.  The article tells us just a little further on:  “In 2014, people ages sixty-five and older had median financial assets of only $76,000 and median home equity of only $80,000.”  (p. 2)  Consider what this means. 

First, the financially median elderly person has enough wealth to cover the “future lifetime expenses for severe long-term care needs.”  Second, the financially median elderly person does not need to cover those expenses out of pocket, because he or she already qualifies for Medicaid LTC benefits!  Medicaid exempts a minimum of $552,000 of home equity up to a maximum of $828,000 in 14 states, so $80,000 in home equity is no obstacle anywhere in the country.  Cash resources of $76,000 are disqualifying for a single individual though usually not for a married person, but such an amount can be converted easily and virtually instantaneously into any of a long list of exempt assets, e.g. home improvements, a new car, furniture, personal possessions of almost any kind, etc.  No wonder most people with moderate and even substantial income and assets don’t worry about future LTC costs when they have so many bigger and more imminent financial worries to consider.

Finally, what about the analysts’ assertion that “These future expenses [$138,100] could be financed by investing $69,500 at age sixty-five, under the assumption that the investment earns average returns.”  I ran the numbers using the Bankrate Simple Savings Calculator here and found that one would need to get over 4.9% annual interest over the 14-year life expectancy of someone 65 years of age today (see the life expectancy table here).  Where can you get such a return reliably?  Answer:  nowhere, thanks to the Federal Reserve’s nearly-decade-long zero-interest rate policy (ZIRP).

Quote:  “Private insurance could help shield middle-income people from this financial risk. However, the market penetration of private long-term care insurance has been limited because of high premiums, the potential for Medicaid to crowd out demand for private coverage, and adverse selection—which limits the size of the market and drives up premiums.”  (p. 2)

LTC Comment:  Having asserted incorrectly that most people have to spend down into impoverishment before getting LTC help from the government, these analysts seek to show that private insurance is no solution, but the reasons they give are mostly wrong or misleading.  Do high premiums impede LTCI market penetration?  Of course, but why are premiums high?  First, because long-term care is expensive.  There’s nothing we can do about that.  If every tenth house burned down, fire insurance wouldn’t be cheap either.  But the other main reason for high LTCI premiums is government interference in the market.  By making LTC free after the insurable event occurs through Medicaid and by forcing interest rates down to nothing through the Fed, government forced product demand down and premium rates up.  Nor is adverse selection a cause of higher premiums.  Successful insurance carriers control adverse selection through good underwriting, which by the way, social insurance eschews.

Quote:  “Surveys show that while consumers demand a balance between price and benefits, their top priority is low cost.  None of the alternatives we modeled were able to resolve this major challenge.”  (p. 9)

LTC Comment:  Well, hello!  Everyone wants something for nothing.  The real problem is not that we can’t give them something for nothing, i.e. low cost LTCI.  The real problem is that we’ve been doing precisely that for half a century by making Medicaid LTC benefits easily available after the insurable event occurs.  Clearly, these authors are using the “Fallacy of Impoverishment” to lead us to a conclusion that the only solution for long-term care financing is to force people against their will to pay even greater job-killing payroll taxes than they already do in order to create another underfunded entitlement program that further weakens their sense of personal responsibility and efficacy. 

Quote:  “Each mandatory program would enroll more than 95 percent of the population. Access to this insurance would be especially beneficial to middle-income consumers, many of whom are unlikely to be able to afford voluntary insurance.” (p. 9)

LTC Comment:  People can't afford long-term care insurance voluntarily but society can afford it if forced on them?  In actuality, costs will be much greater when everyone is insured because everyone will have an incentive to maximize benefits.  This is the fundamental fallacy of “social insurance.”  It spreads risk but, unlike real private insurance, it does not price risk.  Without underwriting and risk-based premiums, social insurance rewards irresponsibility and punishes responsible behavior.

Quote:  “If the primary purpose is to significantly increase insurance coverage, the mandatory programs we modeled would be far more successful than the voluntary ones. If the major aim is to reduce Medicaid costs, the comprehensive and backend mandatory programs would be most beneficial.” (p. 10)

LTC Comment:  Well, surprise, surprise.   Compulsion is more effective than persuasion if all you care about is forcing people to do something they don’t want to do.  Did we need the DYNASIM modeling software to tell us that?  If you really want to reduce Medicaid costs, you don’t need a new “comprehensive and backend mandatory program” to do so.  All you really need to do is reconfigure Medicaid so that it works the way this article inaccurately assumes it already works.  To wit:  eliminate the income and asset eligibility loopholes, stop the Medicaid-compliant annuity abuse, radically reduce or eliminate the home equity exemption, and strictly enforce mandatory estate recoveries. 

When people find they are actually responsible for their own long-term care expenses, they’ll quickly learn to save, invest and insure for those risks. For those who don’t or can’t prepare in that way, Medicaid will be a better program with more resources to cover many fewer people with less need for institutional bias to discourage participation.  Home equity conversion and reverse mortgages will generate huge amounts of private financing to help LTC providers give better care.   As the next generation watches their inheritances going to fund their parents’ private long-term care, they’ll decide traditional and asset-based private LTC insurance options are not so prohibitively expensive after all.  It’ll take a decade or so to sort out, but if instead we pursue a compulsory, tax-funded social insurance solution as these analysts propose, the whole government-based house of cards will collapse in a decade or two as the aging demographic nemesis prevails.

Final LTC Comment:  Now you can see why I titled this LTC Bullet “The Arrogance of LTC Analysts’ Elitism.”  These analysts are arrogant because they seek to impose their policy preferences on others by means of government force.  They’re elitist because they think the American people are too stupid or self-indulgent to take personal responsibility for themselves.  The sad irony is that the “solution” they arrogantly propose is precisely what causes people to slide toward greater dependency on government.  I could draw on any number of sagacious quotes by America’s founders to nail this point down, but let’s close with this apt comment instead:

“There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for him.”  ― Robert A. Heinlein, The Moon is a Harsh Mistress