LTC Bullet:  Heed Cassandra on LTC

Friday, January 22, 2016

Seattle—

LTC Comment:  The Trojans ignored Cassandra and Troy fell.  Disregard today’s LTC Cassandras at your peril.  Details after the ***news.***

*** TODAY'S LTC BULLET is sponsored by Claude Thau, a GA whose proprietary tools help advisors find clients and reduce the “Ping-Pong” in the LTCi sales process. Help clients make informed final decisions about buying LTCi in 15-20 minutes!  Gauge a client's true interest in a combo product immediately!  Change work-site LTCi sales from a series of proposal deliveries to a single interactive consultation!  Claude is the lead author of the Milliman Broker World LTCi Survey, one of Senior Market Advisor's 10 "Power People" in LTCi in 2007, a past Chair of the Center for Long-Term Care Financing. Test Claude by calling 800-999-3026, x2241 or email him at claudet@targetins.com to ask questions or get references. ***

*** WIGGIN’ OUT EVENT—We sent the following LTC Clipping on Wednesday:  

1/20/2016, “Austin 'Wiggin' Out' Event Raises Awareness and Dollars to Help Fight Alzheimer's Disease,” Send2Press Newswire

Quote:  “Wearing smiles and purple wigs, a gathering of normally serious professionals mingled festively in ‘Wiggin' Out,’ a fundraising event held at Maggie Mae's in Austin, Texas, Saturday evening, January 16. ‘We achieved two objectives,’ says Denise Gott, CEO of ACSIA Partners, hosts of the event. ‘First, we raised some money [$19,000] to help fight Alzheimer's. And second, we raised awareness of the growing need for long-term care as the disease progresses.’”

LTC Comment: It was a hoot.  I was there to keynote ACSIA Partners’ 2016 Kick-Off Conference earlier in the day.  We published my remarks in last Friday’s LTC Bullet The Long-Term Care Crisis:  Why Now But Not Yet?, January 15, 2016. ***

 

LTC BULLET:  HEED CASSANDRA ON LTC

LTC Comment:  Last July, in “LTC Bullet:  Cassandra’s Quandary,” we explained how the ancient Greek myth applies to modern day long-term care financing:

In the ancient myth, Apollo granted Cassandra the ability to predict the future accurately, but when she declined his romantic advances, he doomed her to be disbelieved.  The evasion of reality and denial of risk surrounding long-term care public policy reminds me of Cassandra’s quandary.  No matter how much irrefutable evidence we adduce for the unsustainability of the current LTC financing system, the stubborn minions of complacency persist and prevail.

We capped that Bullet with this statement:  “So, when will Cassandra’s dire LTC predictions come true?  No later than 2030, but probably much sooner.  We’re compiling and organizing the evidence in one politically prominent state, New Hampshire.  Expect our report in September.”  Well, September 2015 is long past, but finally our report, titled “Cassandra’s Quandary:  The Future of Long-Term Care in New Hampshire” is nearing publication.

Don’t be underwhelmed by the report’s focus on a small state like New Hampshire.  Our analysis applies to the country as a whole and is easily comparable to any other state by applying our “Index of Long-Term Care Vulnerability.”  Besides, what could be more relevant right now than to home in on the LTC financing crisis as it manifests itself in the first-in-the-nation presidential primary state?

Here’s a sneak peak at our findings.  Soon we’ll share the report’s recommendations. 

 


Excerpt from “Cassandra’s Quandary:  The Future of Long-Term Care in New Hampshire” by Stephen A. Moses; to be published soon by
Federalism in Action and the Center for Long-Term Care Reform

Summary

America’s LTC-prone, 85-plus population will more than triple by 2050 (+224 percent); New Hampshire’s will nearly quadruple (+267 percent).  Over one-third of the elderly already have a disability (37 percent); just under one-third in New Hampshire do (32 percent).  Nearly half of nursing home residents suffer from dementia nationally (46 percent); well over half do in New Hampshire (55 percent).  More people are living longer and the longer they live, the more likely they are to succumb to the chronic illnesses of old age and to require extended care.

Medicaid is the dominant payor for long-term care consuming nearly 17.8 percent of  state budgets (much more including federal matching funds); 40.4 percent in New Hampshire.  Long-term care, especially for dual eligibles and the aged, blind and disabled, consumes a disproportionate share of Medicaid expenditures.  State efforts to rebalance from institutional to home care have made Medicaid more attractive and increased expenditures.  Easy access to Medicaid after people need long-term care has crowded out private LTC financing alternatives such as home equity conversion and private long-term care insurance.  Low Medicaid reimbursement has diminished care access and quality for poor and affluent alike.  Medicaid consumes a larger and larger proportion of state budgets and tends to crowd out other spending priorities over time.  Expansion of Medicaid eligibility under the Affordable Care Act (AKA ObamaCare) will exacerbate all these problems.

To survive as the principal funder of long-term care, Medicaid is heavily dependent on federal (57%) and state (43%) funds.  The ratio is 50/50 for New Hampshire.  But the availability of sufficient federal funds in the future is dubious.  Federal debt is huge and growing, nearly $19 trillion as of January 20, 2016.[1]  Infinite horizon unfunded liabilities of Social Security and Medicare are $73.4 trillion.  Federal Medicaid lacks even the artifice of a borrowed “trust fund” to obscure its unlimited general fund liability.  Federal reserve policy has expanded the money supply tremendously and forced interest rates to near-zero creating a risk of higher, possibly hyper-inflation.  Aging boomers have not saved enough.  Low interest rates reduce their retirement incomes, making them more dependent on safety net programs that threaten to explode in cost. 

State funds needed to match the federal Medicaid funds are also vulnerable.  Each new economic bubble bursting—most recently the dot.com (2000) and housing (2008) busts—has brought worsening recessions that devastate state tax revenues and reserves.  Economists worry that the latest bubble, inflated by extremely loose monetary (credit expansion) and fiscal (spending) policy, will bring on a much worse downturn than the Great Recession.[2]  Worst of all, “Policy makers worry fiscal and monetary tools to battle a recession are in short supply ….  The U.S. generally injects cash into the economy through interest-rate cuts, tax cuts or ramped-up federal spending.  Those tools could be hard to employ when the next dip comes:  Interest rates are near zero, and fiscal stimulus plans could be hampered by high levels of government debt and the prospect of growing budget deficits to cover entitlement spending on retired baby boomers.”[3]

If the Age Wave and financing pressures are too great for Medicaid to sustain long-term care financing, where can the country and states like New Hampshire turn?  Unfortunately, potential private sources of LTC financing have been largely crowded out by the relatively easy access to Medicaid in the past.  Medicaid income and asset eligibility rules make it feasible for people with substantial wealth to qualify.  Mandatory estate recovery goes largely unenforced.  Medicaid’s outsized home equity exemption eliminates reverse mortgages as a major source of LTC funding.  A main reason so few people purchase private LTC insurance is that for the past 50 years Americans have been able to ignore the risk and cost of LTC, wait to see if they need extended care and, if they do, qualify easily for public financing while protecting most or all of their estates.  This perverse incentive has discouraged responsible LTC planning and impeded the market for private insurance products that could have relieved the financial pressure on Medicaid.

Underscoring all these practical problems is a broader socio-political malaise.  Over the past eight decades more and more Americans have become dependent on government programs.  Arguably, a growing entitlement mentality has substantially impaired the country’s traditional reliance on personal responsibility, self-sufficiency, independence, and freedom, the building blocks of our earlier economic success. 

Public assistance (Medicaid) pays for nearly half of all births in the U.S. (47.8 percent), though less than a third (29.9 percent) in New Hampshire.  Food stamps sustain one in seven (14.4 percent) of Americans; only one in 12 (8.4 percent) New Hampshirites.  Welfare pays more than work in 35 states, over $19 per hour in New Hampshire, the ninth most generous state.  The nearly bankrupt Social Security Disability Income (SSDI) program crowds out work.  SSDI supports 2.7 percent of Americans, 3.5 percent in New Hampshire.  State and local pensions, on which many depend, are unfunded $3 trillion nationally, $4.6 billion in New Hampshire.  Fully funding them would require tax increases of $1,385 per household per year for 30 years nationally; $1,010 in New Hampshire, which has pre-funded only 56.2% of its pension liability.  Medicaid is the primary payer for 63 percent of nursing home residents; 64 percent in New Hampshire and upwards of 80 percent of all Medicaid nursing home residents have prepaid burial insurance funded by assets exempted from the program’s resource spend down requirements.  This cradle-to-grave public safety net creates a moral hazard, “a situation in which a party is more likely to take risks because the costs that could result will not be borne by the party taking the risk.”[4]

Conclusion

From the foregoing analysis, it is hard to reach any other conclusion than to expect the current long-term care service delivery and financing system to face severe, possibly fatal challenges as the Age Wave crests and crashes on America.  Absent extraordinary improvements in the national and state economies generating huge new revenues to support large and growing public programs and pensions, it is difficult to see how those programs’ and pensions’ promises will be met.  A sensible conclusion is that long-term care scholarship should angle away from narrow, marginal reforms of specific LTC service and financing problems toward comprehensive analysis and potentially radical restructuring with much heavier reliance on private planning and individual responsibility and much less dependency on public programs and funding.

The future prospects for private long-term care financing alternatives are better than they currently appear.  When economic conditions compel Medicaid and Medicare to back off from LTC financing, real asset spend down will rapidly increase; spend down of home equity to fund LTC will accelerate; and as retirement savings and home equity are consumed to pay for long-term care, more and more people will begin to plan early and insure privately for that risk and cost.  Private LTC insurance can become a mainstream financial planning tool, losing its reputation as the “poor relative” of insurance products, as demand and distribution increase. 


 

[1] US Debt Clock.org, http://www.usdebtclock.org/, extracted January 20, 2016.

[2] “We demonstrate that what makes some bubbles more dangerous than others is credit. When fueled by credit booms, asset price bubbles increase financial crisis risks; upon collapse they tend to be followed by deeper recessions and slower recoveries. Credit-financed housing price bubbles have emerged as a particularly dangerous phenomenon.”  Source:  Òscar Jordà, Moritz Schularick, and Alan M. Taylor, “Leveraged Bubbles,” National Bureau of Economic Research (NBER) Working Paper 21486, http://www.nber.org/papers/w21486.

[3] Jon Hilsenrath and Nick Timiraos, “U.S. Lacks Ammo for Next Economic Crisis,” Wall Street Journal, August 17, 2015; http://www.wsj.com/articles/u-s-lacks-ammo-for-next-economic-crisis-1439865442.

[4] Wikipedia definition of “moral hazard,” http://en.wikipedia.org/wiki/Moral_hazard. The definition cited in the text is no longer at this source, but remains an accurate description of moral hazard.