LTC Bullet: Feder/Cohen Proposal Ignores LTC Problems’ Cause

Friday, May 18, 2018


LTC Comment: We explain how government intervention caused the dysfunctions in long-term care that Feder/Cohen seek to correct with more government intervention, including institutional bias, poor access and quality, excessive dependency on family caregiving, inadequate financing, and lack of insurance, after the ***news.*** [omitted]



LTC Comment: “If you are unable to understand the cause of a problem, it is impossible to solve it.” – Naoto Kan

“We cannot solve our problems with the same thinking we used when we created them.” – Albert Einstein

That’s good advice that Judith Feder, Marc Cohen and Melissa Favreault ignored in their recent proposal for LTC financing reform: A New Public-Private Partnership: Catastrophic Public and Front-End Private LTC Insurance.”

They tell us “Current U.S. policy toward the financing of long-term services and supports (LTSS) underserves people who need care, overburdens families who care for them, and strains state budgets supporting Medicaid services when personal resources fall short. The fundamental LTSS financing problem is the absence of an effective insurance mechanism to protect people against the costs of extensive LTSS they may require over the course of their lives.” (p. i)

All right, but why? Blank out. They say nothing about how these problems came to exist or why they persist so intractably. Instead, these advocates proceed immediately to prescribe a complex, top-down, payroll-financed, heavily bureaucratic and compulsory new government LTC program. This is folly.

We’ve already explained that Feder/Cohen’s fundamental error was discounting Medicaid’s role in LTC financing (“LTC Bullet: Feder Fantasy Fatally Flawed (Cohen Contribution Notwithstanding))” and we addressed the consequences of their evading that reality (“LTC Bullet: LTC Evasion”).

Let’s consider today the diametrically different conclusions and recommendations one reaches by analyzing and understanding the problems of LTC service delivery and financing first before proposing solutions.

The following is adapted and updated from a series of seven “briefing papers” we published in 2012 titled “How to Fix Long-Term Care.”

Briefing Paper #1: The History of Long-Term Care Financing, or How We Got Into This Mess

The Status Quo

Long-term care (LTC) service delivery and financing in the United States are fraught with problems. Families provide most LTC for free, but suffer enormous financial and emotional strain. We have too many nursing homes and not enough home care. Medicaid and Medicare pay for most expensive LTC, but they are short of funds. LTC is a high probability and very expensive, yet too few people save or insure against the risk. Many end up as dual eligibles, the most costly of Medicaid's and Medicare's beneficiaries. Access to LTC and quality of care are always in doubt. Capital is in short supply to build, operate and maintain LTC facilities or to support home care services. Bankruptcies and closures loom. Yet America's demographic age wave is only beginning to crest.

What Should We Do?

This is the first question most people [including Feder/Cohen] ask, but it is the wrong question. To address the dysfunctional status quo without first examining why it exists can lead to more of the same expensive interventions that have already failed. For example, here’s the typical academic’s approach to address these problems:

Free care stresses families? Subsidize them. Too little home care? Make Medicaid buy more. Medicaid and Medicare lack funds? Tax and spend more. LTC insurance is unpopular? Subsidize it. Too many dual eligibles? Manage them better. Access and quality problems? Hire more surveyors and increase penalties. Too little capital and investment? Offer tax incentives (more tax expenditures). Bankruptcies threatening? Increase reimbursements. Can't afford boomers' entitlements? Borrow more. Bottom line: Find yourself in a hole? Dig faster. Keep doing what you’ve always done and hope for a different result.

The Right Question

Lincoln said: "If we could first know where we are and whither we are tending, we could better judge what to do and how to do it." (House Divided Speech, 1858) Faced with any problem, the right question to ask first is: How did we get into this mess? Otherwise, we run the risk of doing more of what caused the problem in the first place. Before we propose LTC solutions, we should ask "How did long-term care come to be the way it is today?"

History of LTC Financing or How We Got Into This Mess

By 1965, most of the 20th century's life span extension had already occurred. People lived longer and died slower often from the chronic illnesses of old age. Increasing numbers lived long enough to need LTC. Medicaid began to pay for nursing home care. Initially, the new program had no penalty for transferring assets to qualify and no requirement for recovery of benefits paid from recipients' estates. Virtually anyone could qualify easily for Medicaid-financed LTC.

Several things happened as a result. The public placed aging parents in nursing homes paid for by the government instead of paying for home care themselves. The nursing home industry expanded to take advantage of the new government funding source. Thus began the heavy use of nursing homes or "institutional bias," the lack of a privately financed home and community-based services market, and the absence of private LTC financing alternatives, such as home equity conversion or LTC insurance.

The 1970s

Political satirist P.J. O'Rourke says "If you think health care is expensive now, just wait until it's free." With nursing home care virtually free, Medicaid LTC expenditures exploded, rising from $900 million in 1970 to $7.1 billion in 1980. In response, government capped the bed supply by requiring "certificates of need" before new nursing homes could be built. Medicaid could not be charged for beds that didn't exist went the reasoning.

But limiting their ability to expand gave existing nursing homes a government-enforced monopoly. To compensate for limits on growth, they began charging Medicaid higher rates. Government responded by capping the rates nursing homes could charge. This was the origin of "cost shifting," which resulted from the differential between low Medicaid reimbursement rates (about 2/3 of private-pay rates) and much higher private-pay rates (about 1.5 times the Medicaid rate on average).

The 1980s

With nursing home supply and prices capped, and few controls on Medicaid LTC eligibility, demand soared. Costs continued to explode, rising from $7.1 billion in 1980 to $16.4 billion in 1990. Unable to build more beds or charge Medicaid more, nursing homes cut corners on quality to make ends meet.

By the mid-1980s, reports of dismal conditions in America's nursing homes led to Congressional action. The Omnibus Budget Reconciliation Act of 1987 required nursing homes to improve care or face legal and financial penalties. But OBRA '87 provided no extra Medicaid funds to finance the mandated improvements.

Caught now between the rock of inadequate reimbursement and the hard place of mandatory quality, nursing homes started suing state Medicaid programs for higher reimbursements. They won most of these lawsuits based on the 1981 "Boren Amendment" which required Medicaid to pay at least minimally adequate rates. But Congress repealed Boren in 1997 leaving no floor underneath Medicaid nursing home reimbursements.

The 1990s

Several cross currents developed in the 1990s, as Medicaid nursing home expenditures continued to rise from $16.4 billion in 1990 to $31.9 billion in 2000. Private payers declined as people, enticed by free or subsidized Medicaid benefits, found more and more creative ways to qualify for the program. Out-of-pocket expenditures fell from 49.5% of nursing home revenues in 1970 to 32.5% in 2000, while Medicaid's share of costs increased from 23.3% to 37.4% in the same period.

Starting with the Tax Equity and Fiscal Responsibility Act of 1982 and continuing through the Deficit Reduction Act of 2005, the federal government tried to restrain the growth of Medicaid LTC expenditures by closing income and asset eligibility loopholes and by mandating recovery from recipients' estates. Briefing Paper #3 in this series, on "Medicaid Planning for Long-Term Care," covers those developments in detail and explains their failure to restrain costs significantly.

Simultaneously, throughout the 1990s and up to the current day, state and federal policy makers, encouraged by academic researchers, have argued that Medicaid can reduce costs by "rebalancing" from nursing home care to home and community-based services (HCBS). Briefing Paper #4 in this series, on "Rebalancing Long-Term Care," explains that Medicaid's combined nursing home and HCBS expenditures have continued to increase in every state despite efforts to rebalance. This trend will continue absent restraints on Medicaid's generous eligibility criteria, which are described in Briefing Paper #2, titled "Medicaid Long-Term Care Eligibility."

The 2000s

A strong economy during the late 1990s, with lower welfare rolls and higher tax revenues, deflected political attention from Medicaid's growing role as the dominant LTC payer for most Americans. After 9/11, the internet bubble's collapse and the ensuing recession, state and federal officials began to worry about Medicaid LTC again and more than ever.

In the first decade of the new century, Medicaid nursing home expenditures moderated somewhat growing only 41.1% from $31.9 billion in 2000 to $45.0 billion in 2009. Total LTC costs did not decline, however, because Medicaid's home health care expenditures soared 113% from $11.5 billion in 2003 to $24.3 billion in 2009.

Meanwhile in the Deficit Reduction Act of 2005, the federal government tried to restrain Medicaid LTC growth by tightening eligibility criteria and encouraging the purchase of private long-term care insurance. In the same legislation, however, it made qualifying for Medicaid more attractive than ever by encouraging the program to offer more of the home care benefits people prefer and less of nursing home care they'd rather avoid.


The preceding thumbnail history of long-term care services and financing answers the key question we posed at the beginning: How did we get into this mess? It suggests that our search for solutions should look in a different direction than increasing government intervention and financing, which clearly has not worked. For example:

Do families provide most LTC for free, but suffer enormous financial and emotional strain? Medicaid crowded out a market for affordable home and community-based services and discouraged private financial products to pay for them by subsidizing nursing home care.

Do we have too many nursing homes and not enough home care? Medicaid made nursing home care free in 1965, leaving lighter care the responsibility of families and making nursing homes the dominant venue for custodial care.

Are Medicaid and Medicare short of funds for LTC? By paying for most expensive LTC since 1965, these public programs exploded in cost while discouraging other venues for care and hampering potential private sources of payment.

Do few people save or insure against the high risk and cost of LTC? Easy access to Medicaid benefits after the insurable event occurred desensitized the American public to LTC liability resulting in their failure to plan early to save, invest or insure for LTC.

Do too many people end up as dual eligibles, the most costly of Medicaid and Medicare beneficiaries? Medicaid's home equity exemption, which was unlimited until 2006 and is still at least $572,000 [as of 2018], prevented the use of home equity to fund LTC privately which could have delayed or prevented Medicaid dependency altogether for many duals.

Are access to LTC and quality of care always in doubt? By dominating long-term care financing and paying too little to ensure quality care, Medicaid created a serious drag on access and quality.

Do we lack adequate capital to build, operate and maintain LTC facilities or to support home care services? Capital migrates to its highest and best use. Because of Medicaid's low reimbursement rates, profitability in the LTC sector is too low to attract enough investment capital.

Do LTC bankruptcies and closures loom? Medicaid's easy availability and low reimbursement rates caused cost shifting from public to private patients who gradually converted to Medicaid in large numbers leaving LTC providers without adequate revenue.

The Future

Medicaid's heavy spending on LTC services created a perverse incentive that discourages responsible LTC planning and private financing. Government spending and interference in the LTC financing market caused the problems the system faces. More government spending and interference will exacerbate rather than ameliorate these problems.

Most measures currently under consideration to improve LTC services and financing, such as subsidizing family caregivers, rebalancing to more desirable home care services, and offering tax incentives for private insurance or investment, would increase public expenditures just when they need to be reduced. [Let us add the new Feder/Cohen proposals for higher payroll taxes to fund compulsory public LTC insurance to the list of potential counterproductive government interventions.]

America's demographic age wave is only beginning to crest. Soon it will crash as 76 million baby boomers retire, stop paying payroll taxes, and start drawing benefits from entitlement programs that are already facing unfunded liabilities in the trillions of dollars. The question we should be asking now is "How can we preserve Medicaid as a quality safety net for people in need while reducing instead of increasing the program's LTC expenditures? The remainder of these Briefing Papers will explain how that can be done.

LTC Comment: To summarize, ignoring how long-term care services and financing became so dysfunctional led Feder and Cohen to propose more of the same kind of government interference that created those problems in the first place. This outcome is potentially even more tragic than it is ironic. Implementing their recommendations would make long-term care services worse, financing less, and the human tragedy graver. Ironically, doing the opposite, reducing government interference in long-term care, by targeting Medicaid to the truly needy and using some of the savings to incentivize responsible LTC planning, would improve and expand long-term care services, enhance private sources of funding, and finally relieve the caregiving burden on families and loved ones.

See the aforementioned “Briefing Papers” and “How to Fix Long-Term Care Financing” for a fuller exposition of these arguments, conclusions and recommendations.

Next week: why analysts like Feder, Cohen and Favreault wrongly claim Medicaid LTC requires impoverishment, which mistaken claim results in their making such potentially disastrous policy recommendations. Are they blinded by ideology? Do they rely on faulty data from the HRS and AHEAD surveys? Is it confusion, contempt or fear that prevents them from considering evidence that contradicts their assumptions? All of the above? Don’t miss the exciting conclusion of our LTC Bullet series critiquing the Feder/Cohen/Favreault proposals.