LTC Bullet: The Broken Rhythm of Long-Term Care Reform

Friday, May 19, 2017

Seattle—

LTC Comment: Why did Medicaid long-term care eligibility reforms quickly follow economic recessions until the year 2000, but no longer? The answer follows.

 

LTC BULLET: THE BROKEN RHYTHM OF LONG-TERM CARE REFORM

LTC Comment: Why have we seen no progress for eight years to protect Medicaid as a long-term care safety net for the poor? Why are Medicaid LTC benefits more readily available than ever to middle class and affluent people who failed to plan for long-term care? Why has the previously steady rhythm of long-term care reform been broken? I wrote this article to address those questions.

“The Broken Rhythm of Long-Term Care Reform”
by
Stephen A. Moses

Historically, progress toward making Medicaid a better long-term care safety for the poor tended to occur shortly after major economic downturns when state and federal governments faced serious budgetary constraints. After most recessions since 1965, Congresses and Presidents of widely divergent ideological persuasions backed legislation that closed Medicaid long-term care eligibility loopholes and encouraged early and responsible long-term care planning. But as each recession was followed by a rapid economic recovery and fiscal pressure abated, Medicaid long-term care benefits always reverted to virtually universal availability for all economic classes. That pattern prevailed for the first 35 years of the program, but it ended at the turn of the millennium. It has been eight years since the end of the “Great Recession” in June 2009; the country is mired in a slow, anemic recovery; but we’ve still seen no movement, much less legislation, to target Medicaid’s scarce resources to the needy. Why?

The Rhythm of Long-Term Care Reform

On July 30, 1965, President Lyndon Johnson signed Medicaid into law providing medical assistance on behalf of . . . aged, blind, or permanently and totally disabled individuals, whose income and resources are insufficient to meet the costs of necessary medical services.” The new program’s costs immediately exploded far beyond expectations. The U.S. suffered a recession from December 1969 to November 1970, which sensitized the country to the spiraling guns-and-butter expenditures of the Viet Nam War and Great Society programs. By 1970, a Wisconsin Law Journal article concluded

To evaluate Medicaid at the halfway mark to 1975, i.e., in terms of its ability to provide comprehensive medical care to substantially all needy and medically needy, would show not merely a failure but, perhaps, a disaster.[1]

The country fell into economic recessions again from November 1973 to March 1975 and from January to July 1980. Finally, Congress acted to curtail spiraling Medicaid LTC expenditures. On December 5, 1980, President Jimmy Carter signed the Omnibus Reconciliation Act, imposing the first ever restriction on asset transfers done in order to qualify for Medicaid. Until then, Medicaid “applicants were expressly permitted to transfer resources that otherwise would have disqualified them from receiving any benefits.”[2]

July 1981 to November 1982 brought another recession during which, on September 3, 1982, President Reagan signed the Tax Equity and Financial Responsibility Act authorizing, but not requiring, state Medicaid programs to penalize asset transfers, place liens on real property, and recover benefits from the estates of deceased recipients. Reagan doubled down on April 7, 1986, signing the Consolidated Omnibus Budget Reconciliation Act that restricted the use of Medicaid Qualifying Trusts. He followed through again on July 1, 1988 by signing the Medicare Catastrophic Coverage Act, which made asset transfer penalties mandatory and expanded the transfer of assets look-back period to 30 months.

Unfortunately, these Reagan-era measures were not strongly enforced or publicized. With the economy booming, it was easier for the state and federal governments to pay the still-burgeoning Medicaid bills and avoid the political sensitivity of enforcing restrictions on Medicaid long-term care eligibility. But that changed when the country experienced another recession from July 1990 to March 1991. All of a sudden, state and federal officials were again having trouble making budget ends meet. Congress responded and President Bill Clinton signed the Omnibus Budget Reconciliation Act on August 10, 1993, making estate recovery mandatory, expanding the look back period to three full years, eliminating the cap on asset transfer penalties, and prohibiting “pyramid divestment.” When costs continued to skyrocket, Clinton also doubled down. On August 21, 1996, he signed the Health Insurance Portability and Accountability Act (the “Throw Granny in Jail Law”) making it a crime to transfer assets for less than fair market value for the purpose of qualifying for Medicaid.

But the latter Clinton years brought renewed prosperity as the technology boom intensified. With revenues up and welfare rolls down, why worry about enforcing rules to target Medicaid to the needy? On August 5, 1997, President Clinton signed the Balanced Budget Act repealing the criminalization of asset transfers to qualify for Medicaid, but making it a crime to recommend asset transfers for the purpose of qualifying for Medicaid in exchange for a fee. Shortly thereafter, this “Throw Granny’s Lawyer in Jail Law” was deemed unconstitutional and thus unenforceable. Back to square one.

The Rhythm of Reform Breaks

This historical pattern of rapid statutory action to control Medicaid planning abuse following each economic recession ended with the start of the new millennium. After the March to November 2001 recession resulting from the internet bubble’s implosion, economic recovery came more slowly than before. Likewise, it took much longer for legislation discouraging the excessive use of Medicaid long-term care benefits to be passed. The Deficit Reduction Act of 2005, placing the first cap ever on Medicaid’s home equity exemption, extending the asset transfer look back period to a full five years, limiting the half-a-loaf loophole, amending the annuity rules, and unencumbering the Long-Term Care Partnership Program, was not signed into law by President George W. Bush until February of 2006, nearly five years after the start of the previous recession. Ultimately, economic recovery did come and true to form, enforcement of the DRA ’05 declined.

The next economic boom ended when the housing bubble burst causing the Great Recession of December 2007 to June 2009. Again, economic recovery has come very slowly and meagerly.[3] To date, eight years after the end of the last recession, we have seen neither a full economic recovery nor action to spend Medicaid’s scarce resources more wisely by aiming them toward people most in need. In fact, public policy analysts and advocates are moving in the opposite direction, toward proposing yet another government program funded by taxpayers to expand public financing of long-term care for all.

What Broke this Rhythm of Reform?

What might explain both phenomena, i.e., slower economic recoveries in recent years and less attention to the cost of Medicaid long-term care benefits?

The Federal Reserve forced interest rates to artificially low levels after the internet bubble burst and to almost zero during and since the Great Recession. The consequences of this policy have ramified through the economy in many ways. One way is that government has been able to finance deficit spending and the rapidly increasing national debt at considerably lower carrying costs than before, when interest rates were much higher. By enabling politicians to spend more without facing the previously inevitable fiscal consequences, this new economic policy has attracted greater financial resources, including borrowed funds, into public financing of all kinds and simultaneously diverted private wealth into low-interest-rate-induced malinvestment. Consequently, political concern about mushrooming budgets and debt has abated and no significant effort to preserve Medicaid funds by targeting them to the poor has occurred.

The danger is that just as excessive public spending and private malinvestment in the early 2000s led to the housing bubble and its consequent mid-decade recession, so the current much larger credit bubble driven by excessive government borrowing and spending could lead to an even greater economic collapse. With the current national debt nearing $20 trillion and total unfunded entitlement liabilities around $106 trillion, a return to economically realistic market-based interest rates would render the federal government immediately insolvent.[4]

Rendezvous with the Age Wave Looms

Further exacerbating the problem of long-term care financing is the fact that the long anticipated age wave is finally cresting and will soon crash on the U.S. economy.

Baby boomers began retiring and taking Social Security benefits at age 62 in 2008. At age 65 in 2011, they turned the Social Security and Medicare programs cash-flow negative. Boomers began taking Required Minimum Distributions (RMDs) from their tax-deferred retirement accounts in 2016, depleting the supply of private investment capital. They will reach the critical age (85 years plus) of rising long-term care needs in 2031, around the time Social Security and Medicare are expected to deplete their trust funds forcing them to reduce benefits.

Of course, Medicaid is the main funder of long-term care, but according to the Center for Medicare and Medicaid Services Chief Actuary, in a statement of consummate denial, “. . . Medicaid outlays and revenues are automatically in financial balance, there is no need to maintain a contingency reserve, and, unlike Medicare, the ‘financial status’ of the program is not in question from an actuarial perspective.”[5] In summary, conditions are coalescing for a potential economic cataclysm in or before the second third of this century and public officials are almost totally ignoring the risk.

Conclusion

Old-fashioned monetary and fiscal discipline kept Medicaid long-term care spending somewhat in check during the program’s early decades. Spending skyrocketed all along, but when the country fell into recessions, state and federal legislators responded with measures to reduce the overuse of Medicaid. Those measures helped to discourage prosperous people from ignoring long-term care risk and hence ending up on Medicaid by default.

But any semblance of monetary and fiscal discipline ended after the year 2000. Artificially low interest rates invited deficit spending and enabled politicians to keep Medicaid eligibility very generous without breaking their budgets. Easy access to Medicaid long-term care benefits after care was needed anesthetized the public to LTC risk and cost, impaired the private home care market, and crowded out sources of private funding such as home equity conversion and long-term care insurance.

Consequently, the country is on the cusp of aging demographic and economic crises of historic proportions without the resources to continue funding the current system nor the incentives in public policy to inspire more responsible long-term care planning by the public. The solution, and the only hope for a benign outcome, is to end Federal Reserve manipulation of interest rates and stop federal deficit spending, so we can once again target Medicaid’s scarce resources to people genuinely in need.

While we are unlikely to see such policy changes soon, we definitely should redouble our efforts toward those objectives.


 

[1] Sydney E. Bernard and Eugene Feingold, “The Impact of Medicaid,” Wisconsin Law Review, Wis. L. Rev. 726 1970.

[2] Timothy N. Carlucci, “The Asset Transfer Dilemma: Disposal of Resources and Qualification for Medicaid Assistance,” Drake Law Review, 36 Drake L. Rev. 369 1986-1987

[3] According to the Wall Street Journal, we are experiencing “the weakest pace of any expansion since at least 1949.” Eric Morath and Jeffrey Sparshott, “U.S. GDP Grew a Disappointing 1.2% in Second Quarter,” Wall Street Journal, July 29, 2016; http://www.wsj.com/articles/u-s-economy-grew-at-a-disappointing-1-2-in-2nd-quarter-1469795649.
“Even seven years after the recession ended, the current stretch of economic gains has yielded less growth than much shorter business cycles.” Eric Morath, “Seven Years Later, Recovery Remains the Weakest of the Post-World War II Era,” Wall Street Journal, July 29, 2016; http://blogs.wsj.com/economics/2016/07/29/seven-years-later-recovery-remains-the-weakest-of-the-post-world-war-ii-era/

[4] The “National Debt Clock” (http://www.usdebtclock.org/) places U.S. national debt at $19.9 trillion and unfunded liabilities at $106.0 trillion (cited May 2, 2017).

[5] Christopher J. Truffer, Christian J. Wolfe, and Kathryn E. Rennie, “Report to Congress: 2016 Actuarial Report on the Financial Outlook for Medicaid,” Office of the Actuary, Centers for Medicare & Medicaid Services, United States Department of Health & Human Services, Sylvia Mathews Burwell, Secretary of Health and Human Services, 2016, p. 3; https://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/Downloads/medicaidReport2013.pdf. This identical quote was in the 2013 version of the “Actuarial Report” and was critiqued in S. Moses, “LTC Bullet: Does Medicaid Solvency Matter?,” Friday, October 31, 2014; http://www.centerltc.com/bullets/archives2014/1062.htm