LTC Bullet:  Losing Principles

Friday, April 29, 2016


LTC Comment:  What’s happening to the basic principles of personal responsibility and self-reliance that validate private insurance?  We reflect after the ***news.*** [omitted]



LTC Comment:   The purpose of insurance is to replace an unpredictable catastrophic risk with the certainty of an affordable premium.  Private insurance depends on individuals taking responsibility for themselves by recognizing risks and taking action to mitigate their personal liability by purchasing coverage.   Social insurance, such as mandatory government programs like Social Security and Medicare, also spread and mitigate risk, but they do not require personal responsibility or individual action.  They’re mandatory, meaning they are imposed on consumers by government compulsion without choice or action by covered individuals.  That’s a major distinction.

The other critical difference between private insurance and social insurance is that the first prices risk, but the latter does not.  For example, you’ll pay more for private life insurance if you smoke, because smokers add more potential expense to the “risk pool.”  Thus, private insurance nudges smokers voluntarily away from the self-destructive behavior of smoking. 

Mandatory social insurance programs work differently.  Everybody pays in and everybody benefits equally, at least in theory and at first.  But because social insurance does not price risk, it rewards irresponsible behavior by shifting costs from independent, self-reliant people to their opposite.  That’s why social insurance programs eventually become insolvent.  They undercut the ethical principles of personal responsibility and self-reliance that make people, economies and societies successful over the long term.  See “The Inherent Individualism of Insurance.” 

From Where We Stand

The Center for Long-Term Care Reform’s latest research project is titled “Medicaid Long-Term Care:  Ensuring Scarce Resources Reach the Neediest People.” We described it in this year’s first LTC BulletCenter Kicks Off New Year With Major Study.”  The study’s goal is to examine two of the most significant Medicaid LTC eligibility characteristics that allow affluent people to access the welfare program’s scarce resources.  These are Medicaid’s large home equity exemption and the so-called Medicaid-compliant annuity.   

Specifically, we seek to understand how often these eligibility factors occur, how much they cost Medicaid, to what extent they are recouped through mandatory estate recoveries, and whether or not their availability to preserve wealth after someone already needs long-term care crowds out other forms of LTC financing.  We set out to answer those questions by inviting state Medicaid programs to participate in the study, making staff and data available for review.  Unlike for dozens of similar studies we’ve conducted over the years (see their reports here), this time we’ve found surprisingly little interest and willingness to participate by state Medicaid agencies.

What’s Changed?

When I first began conducting studies of Medicaid and long-term care financing in the early 1980s, certain ethical principles were taken for granted.  Among those were the belief that individuals are responsible for their own well-being, that public assistance programs should only help people who are unable to take care of themselves, and that because scarce public resources are taken from taxpayers at a substantial cost to the private economy (the only and very fragile source of public funds) those resources should go first to the people most in need.  My sense is that these principles have receded in the public mind, in analysts’ perspectives, and in the outlook and perceived self-interest of politicians, policy makers and public officials.

I’ve already conducted a couple dozen interviews on our current study and that’s the sense I’m getting.  A top-level expert on state Medicaid directors opined they’ve given up on fighting eligibility loopholes.  Other issues consume their attention:  Medicaid expansion under ObamaCare; the transfer of patient responsibility to MCOs (private managed care organizations); and massive “rebalancing” of care from nursing homes to home care.  Nowadays such cost constraint as still exists is focused on risky innovations like managed long-term care and rebalancing instead of controlling eligibility and targeting benefits to the needy.  Besides, why bother to control spending?  Medicaid’s federal matching rate system rewards over-spending.  Should Idaho cut costs when the federal government pads the state’s budget with $2.51 for every dollar the state puts up?  It’s as though public officials have taken the attitude:  “We’re all going to end up on Medicaid anyhow, so why fight it?”

Nor do the states get help from the federal side of Medicaid in controlling access to benefits by the non-needy.  CMS (the Centers for Medicare and Medicaid Services) can’t be bothered with discouraging Medicaid planning or curtailing the use of annuities to divest unlimited assets.  Making Medicaid more attractive to all users is their whole focus with none left over for targeting the program to those most in need.

In previous studies, I’ve received excellent help from State Policy Network members.  These are state-level think tanks dedicated to promoting the freedom philosophy and to finding free-market solutions to social problems.  In the past, SPN members often had excellent relationships with state Medicaid agencies.  They’ve helped me find and interview key state agency officials and gain access to crucial data.  This year most of the state think tanks I’ve contacted are in adversarial relationships with their state agencies due to the controversy surrounding Medicaid expansion under ObamaCare.  The lure of “free” federal money tips the balance in favor of expanding Medicaid and against the free-market think tanks.  So, as much as they believe in what we’re doing and why, the SPN members are fighting other battles these days and can’t be much help to us this time around.

Our Political Representatives

One respondent opined that he was surprised to see even conservative members of Congress defending methods of self-impoverishment to qualify for Medicaid at a recent hearing.  Their reasoning?  “Medicaid requires impoverishment.  How can I blame my constituents for finding ways around the spend down rules?  Why should hard-working, responsible people who did everything right be denied benefits that go exclusively to people who didn’t work, didn’t save and were never responsible?”  I’ve heard and combatted such objections for three decades.  The simple answer is that government can’t do everything for everybody and if it tries there will be nothing left for anybody.  The moral hazard created by eliminating liability after an insurable event has occurred eventually destroys personal responsibility and self-reliance.

Home Equity

Home equity is the biggest asset seniors hold.  In the absence of Medicaid’s home equity exemption (at least $552,000 and $828,000 in nine states, six of which have Republican Governors, go figure), people would use reverse mortgages to help fund the care they need to remain in their homes and out of a nursing home.  I interviewed several experts on reverse mortgages (RMs).  They tell me RMs are rarely used to fund long-term care, which is no surprise of course given the Medicaid exemption.  But recent federal law and regulatory changes have made it even less likely to happen in the future.  New requirements governing credit worthiness of reverse mortgage candidates make it harder than ever for lower income, lower net worth people to qualify.  They’re the very people most likely to need an income supplement to fund long-term care. 

Chicken is to Egg as Entitlement is to Denial

Another related principle that has gone by the wayside is the idea that people and their government should live within their means.  We see statistics all the time warning that most boomers have saved little or nothing toward their retirement.  Why not? 

Are they unable to save because government has taken so many resources out of the private sector that companies can’t create enough jobs?  Or are they unwilling to save because, why bother?  “We’ll have Social Security for income, Medicare for health care, and if it comes to that, Medicaid for long-term care.”  Which came first, government entitlements or the public’s denial and evasion of risk?

And what about the government itself?  When was the last time anyone worried about out-of-control spending?  We’re bumping up on negative $20 trillion according to the National Debt Clock.  That’s more than our annual Gross Domestic Product.  It doesn’t even include some $70-odd trillion in unfunded Social Security and Medicare liabilities. 

Have you asked yourself why families go bankrupt when they spend beyond their means, but governments (usually) don’t?  The answer is that governments push interest rates down to nothing and when they still can’t service their debts, they print money to make up the difference.  If you think that sounds like a credit bubble ready to burst, you’re probably old enough to have lived through the internet and housing bubbles bursting, but too old to “feel the Bern.”

Margaret Thatcher said “The problem with socialism is that you eventually run out of other people's money.”  Yet other people’s money is the input and the output of most politics.  Taxes (input) come from and impair the private economy.  Benefits (output) go to constituents to buy their votes.  Special interests lobby to minimize their inputs and maximize their outputs.  The whole system floats on a sea of increasingly unfounded faith in its continued viability.  The full faith and credit of the United States means a lot until it doesn’t.  A system funded by a fiat currency paying artificially low interest rates on unlimited debts and grounded on such a faulty ethical foundation could collapse at any time.

Winning Principles

We’re losing the principles that made America great and prosperous.  The damage we’re experiencing is self-inflicted.  If we stop doing what we’ve been doing for so long, we’ll get a different result. 

But there’s the rub.  How do we turn this behemoth around?  I’m sorry to say I think it’s too late for better public policy, much less political leaders, to do the job.  Just look at the policies advocated by most of the leading candidates for President.

Alas, we’re most likely headed for a major economic meltdown, more like the Great Depression than the latest recession, severe as it was.  Sooner or later, economic reality prevails and the system of living beyond our means funded by borrowing and spending will collapse like a house of cards.

What happens then will depend entirely on how many of the winning principles that fueled our rise to super-power status have survived and how fast they can reinvigorate the nation.  Ironically, the sooner we face that test, the better chance we’ll have to pass it.

But When?

So when will the financial cataclysm and the test of our underlying values happen?  Sometime between now and 2031 when the boomers start turning 85 and the bottom falls out of Social Security and Medicare.

But no one knows for sure.  They say a “watched pot never boils.”  That’s why you read “potboilers” while you wait.  Just know this:  if you apply enough heat long enough the water inside a tea kettle will boil. 

That’s physics.  In economics, the denouement may take longer, but it’s equally inevitable.