LTC Bullet: LTC Calculation
Friday, February 16, 2018
LTC Comment: We explore why socialism always fails, especially when applied to long-term care, after the ***news.***
*** SUBSCRIBE TO LTC CLIPPINGS: We scan the news searching for data, articles and reports you need to know about. Then we send you a brief email (like the one below) with title, author, source link, a representative quote, and our brief analysis. LTC Clippings help you stay at the forefront of professional knowledge. To subscribe, contact Damon at 206-283-7036 or email@example.com. ***
*** SAMPLE LTC CLIPPING: 2/14/2018, “National Health Expenditure Projections, 2017–26: Despite Uncertainty, Fundamentals Primarily Drive Spending Growth,” by Gigi A. Cuckler, Andrea M. Sisko, John A. Poisal, Sean P. Keehan, Sheila D. Smith, Andrew J. Madison, Christian J. Wolfe, and James C. Hardesty, Health Affairs
Quote: “National health spending growth is expected to average 5.5 percent per year for 2017–26 and to reach $5.7 trillion by 2026 (exhibit 1). Over the same period, growth in the nation’s gross domestic product (GDP) is expected to be 4.5 percent per year. This 1.0-percentage-point differential is expected to result in an increase in the health share of the economy from 17.9 percent in 20161 to 19.7 percent in 2026.”
Ben Franklin would remind us that spending beyond our means is
problematical. But what’s really interesting about this latest iteration
of CMS’s annual projection of the next decade’s national health
expenditures is that it doesn’t mention long-term care! Oh, you can find
“home health care” and “nursing care facilities” in the detailed tables,
but LTC isn’t highlighted for consideration in the analysis as in past
years. Nevertheless, nursing facility care is expected to grow from
3% annually in 2013 to 5.3% by 2026,
topping around $261 billion in expenditures by 2026. Likewise, home health
care, rising 5.1% in 2013 will be going up 6.7% annually by 2026 to $172.6
billion. Dramatic numbers, but evidently not worth highlighting in CMS’s
analysis which focuses mostly on acute care. ***
LTC BULLET: LTC CALCULATION
LTC Comment: Why doesn’t socialism work? Why does “from each according to his ability to each according to his needs” lead inevitably to dysfunctional states like the Soviet Union and Venezuela. Why do socialists’ good intentions always end in disaster?
Socialism’s Fatal Flaw
The Austrian economist Ludvig von Mises answered these questions. He said the problem with socialism is that it has no means of economic calculation. It lacks data reflecting consumers’ preferences because it has no market prices. With no way to know who wants what based on their willingness to spend their hard-earned money, socialist economic systems must rely on decisions by some authority about what and how much to make. Sooner or later, such an authority unconstrained by market prices, destroys the economy by trying evermore desperate measures to fix it.
Here’s why. In a free market, people buy what they want and pass over products or services they prefer less. Entrepreneurs anticipate what people want and/or what they might want if a new product or service were created. Every purchase by a consumer is a bit of information for entrepreneurs. It says at this price for this item, the consumer would rather have the item than the money and the entrepreneur would rather have the money than the item.
Billions of transactions like that across a national economy provide invaluable information to investors, entrepreneurs and consumers alike. Investors gauge the economy’s direction and choose what kinds of businesses to support with their capital and from which to withdraw their support. Entrepreneurs who calculate correctly, prosper. Those who miscalculate disappear. The system is self-regulating with consumers the biggest beneficiaries. Consumers gravitate to the products and services that please them most, thereby voting, as it were, for more of this, less of that, and so on.
From this complex interaction comes, some say miraculously, order out of seeming chaos. Left to themselves, markets adjust to reward smart investment, punish careless or wishful thinking, and deliver the closest approximation to what consumers want and the greatest quantity of what they prefer.
A fully socialist economy lacks the data private markets deliver. When the government owns the means of production and people can only buy or bypass what the central planners decide to produce, there is no market to produce the data needed to choose rationally what should be produced and in what amounts. It takes a while for collapse to occur because socialist systems can rely temporarily on vestigial domestic markets or market data from freer systems elsewhere, but sooner or later economic miscalculation leads to rationing, price controls, suppression, repression and failure.
What about a third way? Can’t government intervene in markets to make them work better without destroying them entirely? Suffice it to say, poison in any dosage is still poison. It’s beyond my scope here to explain why interventionism leads directly, albeit more slowly, to the same disastrous outcome. Read Mises or other Austrian economists for that.
My purpose here is to draw the analogy to what’s wrong with long-term care financing. The government began interfering in long-term care services and financing many decades ago. But let’s begin this analysis in 1965 with the start of Medicaid and Medicare. Before then most long-term care was provided by families as now, only more so. When needs exceeded what families could provide, Mom and Pop care homes were the rule. Often churches and other philanthropic organizations provided help. Big commercial nursing home companies were far fewer than today. Assisted living didn’t exist at all. Most paid care came out of private pockets, not from government or insurance, whether public or private.
But by 1965, life spans were starting to expand into lengths that lead inevitably to more chronic illnesses of old age. The age wave was only just beginning, but it was clear something had to change. We’ll never know how long-term care services and financing might have evolved if the government had not stepped in to “fix” this increasingly inadequate pre-1965 system. But we can surely speculate. What if consumers had been left to their own devices in the sixties as more and more people began to need long-term care? What if we’d allowed a free market in long-term care services to find its way, generate market data measuring consumers’ preferences, and point investors and entrepreneurs toward inventing and financing better LTC mousetraps?
A Free Long-Term Care Market
As more and more people lived long enough to require long-term care, individuals and families would have realized they had to expect and meet such needs. Entrepreneurs would have offered home and community based services as it became obvious that people preferred receiving care at home and were much more willing to spend their own money for such care than to enter expensive institutional settings. When necessary to provide semi-acute or recuperative care, skilled nursing facilities would have persisted, but not as providers of custodial care, which is much more efficiently and humanely provided in smaller settings such as Dr. Bill Thomas’s Green Houses.
As time went on and more and more people needed longer and more intense, and hence more expensive long-term care, economic solutions would have evolved to pay the costs. Home equity conversion could have provided trillions of dollars to ensure millions of families had the money to afford top quality long-term care at whatever acuity level and venue they needed and preferred.
Gradually, as it became obvious that the risk of expensive long-term care was sufficiently great to warrant private insurance protection, as for other similar risks such as major medical, fire, or life, long-term care insurance products would have been offered. Those probably would have made some actuarial errors. But over time actuaries--in the absence of government-induced distortions like easy access to Medicaid and artificially low interest rates--would have discovered and corrected those errors leading to stable products as in other lines of insurance.
We would have ended up with a mostly privately financed long-term care system providing a continuum of care with most people getting care at home by families or professionals funded from personal savings and/or insurance. Assisted living as we know it now would likely have evolved much earlier than it did. Skilled nursing facilities would be far fewer in number having never provided custodial care for a majority of people in need of long-term care. Skilled nursing facilities would be much more closely integrated with hospital care and much more focused on easing the transition from acute care to health and recuperation.
What about the poor? Who would take care of them? We’d have many fewer poor to help without perverse incentives in Medicaid preventing people from planning, saving, investing or insuring for long-term care. For example, in the absence of Medicaid’s huge home equity exemption, many of the income-poor, house rich elderly would have better access to higher quality care by using the wealth hidden in their homes to stay in their homes. The genuinely needy who truly must have help would be served, as they were before the Great Society programs intervened, by fraternal organizations, churches, and other philanthropic organizations.
The Unfree Long-Term Care Market
What happened instead? Government intervened in 1965 and we can see the dysfunctional results all around us. Medicaid made nursing home care virtually free. The public stopped worrying about long-term care risk and cost. With a government created monopoly on long-term care, the nursing home industry exploded in size and lobbying power. As Medicaid expenditures, skyrocketed, reimbursements were reduced to compensate. With reimbursements less than the cost of care, access and quality plummeted. Private payers shrank in numbers when they had to make up the shortfall in Medicaid reimbursements. More and more people sought the advice of lawyers who could artificially impoverish them to qualify for Medicaid. Families tore themselves apart fighting over the spoils, i.e. Mom and Dad’s estate, as preserved by shifting the long-term care cost to tax payers.
Responding to these and other problems, well-intentioned analysts, public officials and politicians wracked their brains to find solutions. But invariably they made the problems their earlier interventions had caused, even worse. They capped bed supply when Medicaid costs exploded causing nursing homes to sue successfully for higher rates. Then they capped rates creating the fateful differential between higher private pay and impecunious Medicaid rates. When quality suffered, they demanded higher quality without providing adequate funding. Then, when quality didn’t improve, they imposed regulations and inspections that made quality care even more difficult to provide. The inevitable results were huge tort liability suits punishing hapless Medicaid nursing homes for providing the low quality of care the government was willing to finance.
Now, some 53 years after Medicaid arrived to fix long-term care, the “experts” want to add more government money and regulation. You can’t extinguish a fire by dowsing it with gasoline. More of the same intervention that caused long-term care’s problems in the first place will not solve them.
What should we do instead? Give the private long-term care services and financing markets some room to breathe. Back off government intervention enough to allow those markets to generate the kinds of data that investors, entrepreneurs and consumers need to chart a better course. What exactly might we try?
In “How to Fix Long-Term Care Financing,” I explained the problems created by government intervention much more thoroughly and I outlined the needed corrections in greater detail than I can do here. Check it out, but here are the key corrective measures we could take to reduce the negative influence of public policies on long-term care services and financing.
1. Return Medicaid to its true purpose as a long-term care safety net for the poor, not the primary long-term care funding source for all Americans.
2. Toward that end, eliminate Medicaid’s gigantic home equity exemption so that people have reason to access trillions of dollars of wealth to purchase quality long-term care.
3. Eliminate other eligibility loopholes, especially “spousal refusal” and “Medicaid-friendly annuities” that allow the wealthy to co-opt Medicaid funds that should go to the poor instead.
4. Re-direct gerontological research from focusing on alleged impoverishment to analyzing (1) how many Medicaid long-term care recipients own homes and with what values, (2) what their economic status was ten or twenty years before needing long-term care, when they still might have — with the right incentives and absent the existing disincentives — taken measures to prepare for long-term care and avoid Medicaid dependency, and (3) what happened to the wealth they formerly possessed and to what extent it was expended for long-term care or used or transferred in some other way.
5. Give state Medicaid programs more authority and flexibility to experiment with measures like these either by block-granting the program (less money, more flexibility) or by creative use of “1115 waivers,” a well-established means to try out new approaches.
In other words, little by little remove the counterproductive government interventions in long-term care which have prevented the free market from developing the data and sending the signals that consumers, investors and entrepreneurs need to make wise decisions.
Do this and we’ll see entrepreneurial creativity unleashed. We’ll see new products and services evolve that better meet consumers’ needs. We’ll see a flood of private funding flow through to long-term care providers raising access and quality for all. We’ll see fewer people dependent on public programs and therefore more public resources available for those who need them most. As more people have to spend more of their own money, including their home equity, on long-term care, we’ll see more of them planning earlier to prepare for long-term care risks and costs. We’ll see products like reverse mortgages and private long-term care insurance prosper as never before, bringing more jobs and tax revenue to the economy.
It boils down to a simple truth: don’t expect a different result until you stop doing what you’ve always done. Get out of the way and let “LTC Calculation” in a free market point the way to a better long-term care system.