LTC Bullet: Of Floods, Insurance and Long-Term Care

Friday, September 8, 2017


LTC Comment: What do flood insurance and LTCI have in common? The answer after the ***news.***

*** WE’RE OUTA HERE: The Center for Long-Term Care Reform doesn’t take many breaks but we’re going to take one this month. Steve is back-packing into the Grand Canyon followed by further national park excursions in the “Silver Bullet of Long-Term Care.” We’ll be back in full force after the first week in October. Premium-member subscribers to LTC Clippings will continue to receive their e-missives, but these may arrive in clumps depending on when we can access the internet to pull down the LTC news. Thank you for supporting the Center for Long-Term Care Reform. We’ll see you again in a month. ***



LTC Comment: The awful on-going natural disaster in Houston and southeast Texas is unfortunately not a one-off. The sad fact is we’ve seen this movie before and we’ll probably see it again soon, maybe as early as this weekend with Irma bearing down on Florida. It’s too late for those just devastated, but there is a lesson to be learned from these calamities about how to spread and mitigate catastrophic risk in the future.

There are two kinds of private insurance: the kind people routinely buy and the kind they usually don't. The first category includes life insurance, fire insurance and auto insurance. The latter category includes flood insurance, earthquake insurance, crop insurance and, alas, long-term care insurance. What characteristic distinguishes each of these two kinds of insurance?

If you die, or your house burns down, or you have a car wreck and you are uninsured, it is bad news. You are out of luck and out of pocket! On the other hand, if your property floods or your home quakes or your crop fails or you need long-term care, the government is there to help you with loans, subsidies, grants, and public assistance. In a nutshell, people buy insurance when they face a real financial risk; but when they don't, they don't.

After the great Mississippi River floods of 1993, Center for LTC Reform President Stephen Moses (at that time Director of Research for LTC, Inc.) published an article titled "Of Floods, Insurance and Long-Term Care" (LTC News & Comment, Volume 4, No. 1, Sept. 1993, pps. 11-12.) We repeat that article below as it elucidates the point just made about who buys insurance for what and why.

But first, it’s interesting to note a few things about the conditions it describes as of 1993, 24 years ago.

Now a trip down LTC memory lane:

“Of Floods, Insurance and Long-Term Care” (published September 1993)
Steve Moses
Director of Research, LTC, Incorporated

            This year's [1993] sodden catastrophe in America's heartland is a perfect analogy for the crisis in long-term care financing. The "flood of the century" swamped thousands of homes, dislocated millions of people, and destroyed countless farms and businesses. Costs may reach $20 billion or more. State and federal governments acted immediately to provide emergency aid. Politicians inundated the media with promises that tax-financed indemnification would follow. Although most of the damaged property was located on flood plains, few property owners had private insurance to cover the risk of flooding. Why?

            "My home-owners' policy will protect me," some claimed. "The water could never reach me here in a hundred years," many affirmed. "Flood insurance is too expensive," most said. Local officials and bankers frequently bent the rules to approve building permits and bank loans without the technically required flood insurance. No one said "I'm not going to buy insurance, because the government will pay if the worst happens." But, vaguely and evasively, everyone knew it was true. If the floods came, the political compassion combine would replace any natural harvest lost.

            Now compare the crisis in long-term care financing. Nine percent of seniors will spend 5 years or more in a nursing home at an average cost exceeding $30,000 per year. People over 85 who are the most vulnerable to long-term institutionalization are the fastest growing population cohort in America. Nursing home costs tripled between 1980 and 1991 (from $20 to $60 billion) and they are projected nearly to triple again between 1990 and 2000 (from $53 to $147 billion). Clearly, long-term care risk dwarfs flood risk. Predictably, the government response has been commensurately large. Two-thirds of all patients in America's nursing homes receive Medicaid. Although Medicaid pays only 48% of nursing home costs directly, Social Security pays another 18% indirectly as the Medicaid patients' contribution to cost of care. Medicare and the Department of Veterans' Affairs picked up another 6% or so in 1991 bringing the government's nursing home contribution to well over 70% of total costs. Finally, Hillary's health care honchos are promising even further expansion of public benefits for long-term care. Although nursing home institutionalization is the single biggest financial risk senior Americans face, only 4% of them have private long-term care insurance and private insurance contributes less than 4% to national nursing home costs. Why?

            "My Medicare supplement policy will protect me if I have to go to a nursing home," some claim. "It won't happen to me; I'm too healthy," many affirm. "Long-term care insurance costs too much," most say. Elder law attorneys and many Medicaid eligibility workers bend the rules to qualify prosperous people for the welfare program's nursing home benefit. No one says "I'm not going to buy insurance, because the government will pay if the worst happens." But, subconsciously, everybody knows this is true. The reality is that if nursing home care becomes necessary, someone else usually pays. Who knows or cares whether the payer in fact is Medicare or Medicaid, Uncle Sam or Santa Claus? 

            The main purpose of private insurance is to replace a small risk of catastrophic loss with the certainty of an affordable premium. In a free market, private insurance also performs another vital function; it prices risk. Voluntary exchanges between willing sellers (insurers) and willing buyers (insureds) determine actuarially sound premium levels. Premiums tell the public as accurately as humanly possible what the precise danger is of living on a flood plain or "going bare" for long-term care. Given this information, rational people who are free to choose can make intelligent decisions in their own best interests.

            Ironically, for all its good intentions and altruistic justifications, government distorts this risk calculation and dangerously misleads the public by providing tax-financed grants or subsidies to indemnify the uninsured. By reducing or disguising actual risks, the government discourages responsible people from buying private insurance and rewards the irresponsible for failing to do so. This is the real reason why so few people have flood, crop, earthquake or long-term care insurance, self-serving evasions ("it won't happen to me" or "insurance costs too much") to the contrary notwithstanding. When insurance truly costs too much, it means the risk is too great to take, by definition! If the government rebuilt every home that burned down, no one would buy fire insurance either.

            If this assessment of the marketplace is correct, the solution to the long-term care financing crisis is simple: stop giving away free care to people who can afford private insurance. If we do this, everyone who can will buy long-term care insurance, stay off Medicaid, and leave the welfare program to the poor people who need it. The humane way to achieve this goal is to end Medicaid divestiture and require estate recovery of sheltered wealth. That way, we deny care to no one who needs it, but neither do we reward people who fail to insure. Miraculously, this is exactly what the government intends to do if legislation restricting Medicaid planning and mandating estate recoveries, which is now pending in Congress, passes. We are on the verge of a revolutionary breakthrough in long-term care financing!

             Curiously, however, the government has not yet figured this out. President Clinton's economic plan estimates savings of $395 million over 4 years by closing Medicaid loopholes and recovering from estates. The Senate Finance Committee puts the figure at $1.1 billion over 5 years. The Congressional Budget Office bumps the estimate to $1.8 billion, increasing in the out years. All three vastly underestimate the potential savings. They take into account only the projected revenues from estate recoveries and the direct cost avoidance from closing loopholes. They completely miss the big impact of the pending legislation--the change it will engender in consumer behavior.

            When Medicaid is harder to get and has to be paid back out of the estate in the long run anyway, i.e. when there is no more free ride, people will plan ahead, buy insurance and avoid Medicaid. In Wisconsin, we found that a 10% drop in the Medicaid census of the state's nursing homes (from 65% to 55%) would save $106 million or 20% of the Medicaid nursing home budget. A comparable drop in Medicaid census nationally, all other things being equal, would save $4.1 billion per year! But a 10% drop in Medicaid census is an extremely conservative goal. When the choice is "pay me now" for long-term care insurance, or "pay me later" for estate recoveries, people will search for creative ways to afford private insurance and the access to quality care that it assures.

Research shows that 57% of homeowners can afford long-term care insurance with nothing more than the proceeds of a reverse annuity mortgage, but Medicaid currently exempts the home regardless of value so there is no incentive to tap this resource. Heirs get a windfall from Medicaid now for ignoring long-term care risks, but with their inheritances at stake, they will help their parents to purchase private insurance. When unleashed by the new restrictions on Medicaid nursing home benefits, these two potential financing sources will make long-term care insurance affordable for the vast majority of seniors in America. Then, we will finally see the full impact of private insurance on the long-term care financing problem. [End]

LTC Comment: That was my view in 1993 when Congress was considering and soon passed legislation to close many Medicaid eligibility loopholes and make estate recoveries mandatory. Of course, the future did not play out exactly as I’d hoped over the next 24 years. States didn’t implement the new rules fully. The federal government didn’t enforce them aggressively. The media didn’t report the new personal liability for LTC costs. So consumer behavior changed little.

Consequently, here we are nearly two and a half decades later with Medicaid still the dominant payor for long-term care, with home equity protected from long-term care costs by a welfare program at the expense of the poor, and with the private LTC insurance market shrunken and hurt. We’re just that much closer to a rendezvous with demographic destiny that will devastate the public programs which created this moral hazard and injure especially the people dependent on them.