LTC Bullet: LTCI Defeatism
Friday, April 1, 2016
LTC Comment: LTC insurance leaders should not surrender to government-financed long-term care based on ideologically biased policy analysis grounded in misleading data and fallacious arguments. We say “Revolt!” after the ***news.***
*** MEDICAID FOR THE RICH REVOKED: In a surprise reversal of their decades-long policy of easy access to Medicaid LTC benefits, federal authorities dropped the welfare program’s home equity exemption from over a half million dollars to under $50,000 and slammed the door shut on Medicaid-compliant annuities which enabled applicants to divest hundreds of thousands of dollars immediately before qualifying for benefits. A top-ranking official sheepishly acknowledged: “We’ve diverted desperately needed scarce public resources from the truly needy to relatively affluent people for decades. That ends today. No longer will Medicaid discourage responsible long-term care planning or crowd out better LTC financing alternatives like private insurance.” Yeah, right. Dream on. April Fools! ***
*** WHO YA GONNA CALL? What if you’re speaking with a couple about LTC insurance protection and one of them qualifies, but the other doesn’t? This week, two of the Center’s “Regional Representatives” brought to our attention alternate approaches to that problem. Barbara Franklin of Charleston, South Carolina sent a flyer from The Krause Agency that proposed: “Instead of both clients ending up with no long-term care plan, you can offer them both an option. The healthy spouse would purchase the long-term care policy they were approved for, and the ineligible spouse would plan to use Medicaid, the governmental program that pays for the majority of long-term nursing home costs in the United States.” The flyer offered a “Medicaid Compliant Annuity” as the solution. Barbara editorialized “Ugh!” and I agreed. A couple days later, I heard from Romeo Raabe of Green Bay, Wisconsin that whenever he encounters a split decision on LTCI, one spouse accepted and the other declined, he proposes an “Immediate Care” policy, an impaired risk, medically underwritten annuity that pays for quality care privately and keeps the otherwise uninsurable individual off Medicaid. I could hardly imagine a starker comparison between an improper and an appropriate use of an annuity for funding long-term care. For more, see LTC Bullet: LTC Annuities: To Get or Avoid Medicaid?, Friday, June 19, 2015 and LTC Bullet: Medically Underwritten Annuities for LTC, Friday, May 15, 2015. ***
*** HAPPY ANNIVERSARY: The Center for Long-Term Care Reform is 18 years old today. Steve Moses and attorney David Rosenfeld founded the Center with help from then-LTCI insurer General Electric on April 1, 1998. The Center’s mission “to ensure quality long-term care for all Americans” remains unchanged to this day. We thank our many providers of financial and moral support for your long and strong dedication to our common goals. Heed the message of today’s LTC Bullet and fight on! ***
LTC BULLET: LTCI DEFEATISM
LTC Comment: I came away disheartened from the recent LTC insurance conference in San Antonio. Not that it wasn’t a fine, well-conceived and flawlessly executed industry meeting. It was. See our virtual visit to it here.
What deflated my spirits was a strain of discouragement and defeatism that pervaded some of the sessions. According to Wikipedia, “Defeatism is the acceptance of defeat without struggle.” Here’s why I got that impression.
Most of the break-out sessions I attended at the conference were in the “Alternative Solutions” track. One of those sessions focused on new research about private long-term care insurance and was excellent. But other sessions covered three recent studies that reached many wrong conclusions. Those studies were funded by the SCAN Foundation and reported by the Bipartisan Policy Center, Leading Age, and the LTC Collaborative. I call these well-financed organizations with big bull horns the “Four Horsemen of the LTCI Apocalypse” for reasons that will become obvious as you read on.
The thrust of the Alternative Solutions sessions was that although “insurance” has an important role to play in long-term care financing, the potential scope for private insurance is extremely limited by unaffordability, inadequate demand, and commercial unviability, so that social insurance in the form of mandatory, catastrophic coverage of LTC risk is unavoidable by default.
Should LTC Insurance Admit Defeat?
That’s not depressing in itself, because it is refutable as I show below. What’s bothersome is that some of the leading lights of the long-term care insurance industry seem to be buying into such a narrative.
They praise the research, reports and recommendations coming from the Four Horsemen. They acknowledge that private LTCI’s role is severely limited. They accept that the only solution may be to ally private LTC insurance on the front end with a mandatory government program on the back end. They sound whipped.
I say bunk! Don’t give in. Never give up. Think. Fight back. Here’s some ammunition.
The Best Offense is a Good Defense and Vice Versa
Ceding the moral and financial high ground to government-financed long-term care is a huge mistake. Whatever shortcomings private LTC insurance may have, they pale in comparison to the proven failures of social insurance programs as demonstrated by their trillions of dollars of unfunded liabilities and their disastrous prognosis for the future. As we explain in “Cassandra’s Quandary,” LTC expenditures will spike in 2031 as boomers start turning 85 in the same decade that Social Security and Medicare run out of IOUs in their phony “trust funds.” It would be supremely unwise to double down on government’s mistakes of the past in a futile attempt to fund LTC in the future.
Relinquishing the back end of LTC financing to the government is a fatal concession. It betrays the true principle of private insurance, which is to replace the small risk of a catastrophic loss with the certainty of an affordable premium. Taking on the front-end risk of LTC would demote private LTCI to the status of Medi-Gap, which is mostly pre-payment for care and not genuine insurance at all.
We must make the most of private LTCI and not heed the siren’s call of an easy government solution. Social insurance cannot work in the long run. While it spreads risk, it does not price risk. It forces everyone to participate and then gives each the same benefits regardless of character or conduct thus creating moral hazard, rewarding irresponsible behavior, and punishing conscientious people. “Social insurance” is an oxymoron, a contradiction in terms. See “The Inherent Individualism of Insurance.”
Besides, the Four Horsemen’s arguments about long-term care are fallacious.
The Fallacy of Impoverishment
They say Medicaid requires impoverishment, but that’s untrue. Anyone with income below the cost of a nursing home can qualify for Medicaid LTC based on income. Countable assets retained must be minimal, but exempt assets are virtually unlimited, including at least $552,000 of home equity and, with no limit at all, one business including the capital and cash flow, term life insurance, prepaid burial expenses, Individual Retirement Accounts, one auto, and personal belongings. Add hundreds of thousands of dollars more in sheltered or divested assets with the help of a Medicaid planner using special trusts, transfers or annuities. Don’t believe “The Fallacy of Impoverishment,” which I refuted in this Gerontologist article 26 years ago.
The 53 Percent Hoax
The Four Horsemen say that 53 percent of all long-term care costs are paid for out of pocket, implying people all across America are spending down their life’s savings for long-term care before turning to Medicaid. Where do they get such a number? It’s double the true figure of out-of-pocket spending (OOPS)? They get it by including assisted living which is nearly all private-pay (81 percent) and by excluding Medicare as though it does not pay for long-term care. Why is including assisted living and excluding Medicare deceptive?
Including payments for assisted living facilities (ALFs) in long-term care expenditures is misleading, because ALFs provide room and board primarily and care secondarily. As one tax expert explains: “Nursing homes are primarily used for medical care, and medical care is always deductible. Assisted living is not necessarily there for medical reasons. It’s often a safety or companionship issue, so an assisted living facility is not usually deductible.” Money spent for assisted living is largely money that would have been spent for food and lodging anyway in the absence of a care component. That may be why assisted living costs $120 per day on average whereas nursing homes cost $220 per day (for a semi-private room.)
Excluding Medicare from long-term care expenditures seriously distorts LTC financing. It is true Medicare pays mostly for short-term post-acute and rehabilitative care provided in nursing homes and by home health agencies. But it pays generously compared to Medicaid. Without Medicare, most long-term care providers could not survive on the revenue they receive from Medicaid, at less than the cost of the care, or from a dwindling supply of private payers. Take generous Medicare reimbursements out of the long-term care financing equation, as the Medicare Payment Advisory Commission often recommends to Congress, and the whole government-financed house of cards collapses.
Out-of-pocket spending for long-term care is much lower than the Four Horsemen acknowledge. CMS reports OOPS for 2014 as 26.5 for nursing homes and only 8.9 percent for home health care costs. See “LTC Bullet: So What If the Government Pays for Most LTC?, 2014 Data Update,” Friday, December 11, 2015. What’s more, half of what CMS reports as OOPS is actually spend-through of income, mostly from Social Security, by people already on Medicaid. So what? It’s still people spending their own money for their care, isn’t it? Yes, but two critical points apply. First, Social Security may have to cut back substantially on benefit payments someday, which would throw Medicaid programs and LTC providers that depend on Medicaid into financial chaos. Second, heirs don’t count on getting their parents’ income, which ends when they die. So expenditure of income for long-term care does not disincentivize taking advantage of Medicaid. But Medicaid does provide free inheritance insurance for heirs by protecting substantial assets, making qualification for Medicaid very desirable. That’s why Medicaid crowds out all forms of private LTC financing.
The Red Herring of Affordability
Its critics say LTC insurance is unaffordable. But affordability is relative. Early policies were underpriced and their purchasers got a great deal. LTCI is still a good deal--even after premium increases forced on the industry by irresponsible government monetary policy made interest rates too artificially low to grow reserves adequately. So, blame the culprit (government) and not the victim (LTCI).
Furthermore, LTCI affordability should be measured against the real risk of catastrophic LTC expenditures. But government also took real LTC risk off the table by making Medicaid the de facto catastrophic coverage plan for most Americans, including the rich according to analysts at the Chicago Fed. It’s no wonder people remain in denial about LTC and think long-term care insurance is unaffordable. Since 1965, most have successfully ignored the risk, waited to see if they ever need expensive extended care and, if and when they do, transfer most of the cost to the government thus indemnifying and desensitizing the next generation to LTC risk.
We Already Have a Back End Government Program for Long-Term Care So Give It a Chance to Work
It’s called Medicaid. It was conceived as a safety net to care for people who were unable to care for themselves: the truly needy. It was supposed to protect only those with too little income and assets to manage on their own. But Medicaid transformed in time into the dominant payer for most Americans in need of expensive long-term care. We need to give Medicaid back to the poor, eliminate the eligibility loopholes abused by the affluent, tighten eligibility in general, enforce estate recoveries, educate the public about Medicaid’s deficiencies and the benefits of private financing, support the LTC Partnership program, end the crowd-out of private financing alternatives, and unleash the power of free-market forces to save Medicaid and private long-term care insurance.
So, buck up, LTCI team. You not only have more to offer toward the solution of LTC financing than government; you’ll be the primary LTC financing source one day, when the bottom finally falls out of those doomed unfunded entitlement programs. Shake off your doldrums. Take your critics on, boldly. When the Four Horsemen point to the mote in LTCI's eye; hit them with the log in their own.