LTC  Bullet: Where Long-Term Care Went Wrong and How to Fix It

Friday, January 3, 2020


LTC Comment: Officials and analysts attack the symptoms of long-term care dysfunction (exploding costs, nursing home bias, and poor quality) without addressing the cause (easy access to Medicaid for consumers and strong incentives for states to maximize federal Medicaid matching funds). Everything follows from that observation after the ***news.***

*** TODAY'S LTC BULLET is sponsored by Claude Thau, whose revolutionary “Range of Exposure” tool projects clients’ likelihood (joint for a couple) of spending $100,000; $250K; $500K or over $1,000,000 on LTC, based on their personal characteristics, and estimates how much of their cost in each range would be covered by various traditional or linked insurance designs. He also offers other ways to educate and help clients make informed final decisions in 15-20 minutes! Change work-site LTCi from a series of proposal deliveries to an interactive consultation! Claude is the lead author of Milliman’s annual Broker World LTCi Survey & a past Chair of the Center for Long-Term Care Financing. You can reach him at 913-403-5824 or ***

*** MEDICAID AND LONG-TERM CARE: Our monograph of that title will be published later this month. It fully develops and documents the argument I make in the following speech. Stay tuned. Pre-publication copies of the monograph are available now to Center members upon request. Just email ***


LTC Comment: I’m in Orlando today speaking at the Cato Institute’s State Health Policy Summit. My topic is “How to Provide Long-Term Care to a Burgeoning Elderly Population.” The first point I make about that subject is that providing long-term care isn’t the problem. Paying for it is. If it were not for our thoroughly dysfunctional long-term care financing system, we’d have plenty of money and willing providers to render top quality care. 

So, what’s wrong with long-term care financing? How did it get that way? And what has to change to fix it? That’s the gist of my talk. Here’s the text:

“How to Provide Long-Term Care to a Burgeoning Elderly Population”
Stephen A. Moses, Center for Long-Term Care Reform
The Cato Institute’s State Health Policy Summit,
in Orlando, Florida, January 3, 2020

First of all, providing long-term care isn’t the problem. Paying for it is.

So, I’m going to define the long-term care financing problem. Then I will explain how and why it exists with some historical background. Finally I will identify and explain the fundamental obstacle to solving the problem, which is: both government and scholars have focused corrective action on symptoms of the problem instead of its causes.

If we change our focus to causes instead of symptoms, the long-term care problem is easily solved. You’ll see what I mean.

When we’re finished today, especially if you go on to read the monograph “Medicaid and Long-Term Care,” you will understand the long-term care financing crisis and what has to change to resolve it.

Long-term care includes a broad range of social, medical and custodial services that caregivers provide for three months or longer to help disabled people of any age perform activities of daily living such as eating, bathing, and toileting. Our focus is long-term care for the aged.

Let’s stipulate to the magnitude of the problem to save time. You know we have an aging baby boom generation. They’re already stressing Medicare and Social Security. They’ll overwhelm Medicaid, the dominant long-term care payer, when they start turning 85 in 2031. The U.S. age 85+ population, the cohort with the highest long-term care need, will triple between 2015 and 2050.

After age 65, people have a 70% probability of needing extended care, a 48% chance of needing paid care at an average lifetime cost of $138,100, but a 2% probability for everyone and a 5% probability for long-term care users of needing ten years or more costing hundreds of thousands, even millions of dollars. This disproportion makes the risk highly insurable, though insurance has been minimal so far, for reasons I’ll explain.

Care is very expensive wherever received: Nursing homes average $7,500 to $8,500 per month; Assisted Living costs $4,000 or more per month; home care runs about $4,195.

The U.S. spent $366.0 billion on long-term care in 2016. Families and friends provided an additional half-a-trillion dollars’ worth of unpaid care, at huge financial and emotional distress.

Clearly the juxtaposition of these risks with the demographic Age Wave makes the future of long-term care financing highly problematical.

So far, the U.S. has limped along with a severely dysfunctional long-term care service delivery and financing system.

Government pays for over 70% of long-term care, mostly through Medicaid, a means-tested public welfare program. Costs are high and rapidly increasing. The system has a strong nursing home bias even though everyone dislikes nursing homes. Access to preferred home care is very limited. Low reimbursements from Medicaid prevail, often below the cost of providing the care. Quality is dubious in all care venues. The resultant tort liability is astronomical. Private payers at market rates have dwindled as Medicaid has expanded to pay for 2/3 of nursing home residents. Neither home equity conversion nor private long-term care insurance pays for much long-term care. It really is a mess!

What went wrong? Here’s some history.

Long ago, we had indoor relief, that is, poor houses, in the U.S. But that system gave way by the 20th century to cash benefits for the elderly from Old Age Assistance and Social Security. With government cash in hand, seniors had money to purchase residential care. So nursing homes profited and proliferated.

In 1960, the Medical Assistance for the Aged (MAA) program made health care available to people sixty-five and older who had low or moderate incomes. It also required states to match available federal funds. That was a huge new source of funding for long-term care, further subsidizing the nursing home business.

The same Kerr Mills statute radically changed eligibility for nursing home care by adding people who “were not sufficiently needy to qualify for cash assistance to cover their ordinary expenses, but who were unable to pay their medical expenses.” Those are the so-called medically needy recipients.

In 1965, the Medicaid program institutionalized these features but also eliminated strict eligibility criteria, transfer of assets restrictions, and mandatory liens which had been commonplace before. Medicaid had no restrictions on asset transfers to qualify until 1980. Anyone could give away everything and qualify immediately.

These features—to wit, medically needy eligibility exclusively for nursing home care, which included normal costs of living as well as health care, funded with virtually unlimited federal and state matching funds and with no limits on asset transfers to qualify—guaranteed Medicaid would explode in cost from the outset, perpetrate a nursing home bias in long-term care services, discourage development of a private home and community-based care market, and crowd out private long-term care financing sources. That’s exactly what it did.

The government responded by attacking the symptoms (exploding costs, nursing home bias, and poor quality), instead of the causes (i.e., strong financial incentives for states to maximize Medicaid spending and the perverse incentives encouraging consumers to rely on Medicaid rather than pay privately for long-term care.) For example:

State governments capped nursing home supply by requiring Certificates of Need on the principle “they can’t charge us for a bed that doesn’t exist.”

But capping supply, just made nursing homes charge more. So Medicaid capped reimbursement driving the Medicaid rate down to only 70% of the private pay rate on average.

But higher private-pay rates drove private payers to find ways to qualify for Medicaid. Consequently, private-pay nursing home revenue plummeted from 49% in 1970 to 27% in 2017.

Nursing home occupancy skyrocketed to 95% in the 1980s because beds were easy to fill if owners were willing to accept Medicaid’s low reimbursement rates.

But low rates and heavy demand led to poor quality. So Congress passed the Omnibus Budget Reconciliation Act of 1987 demanding better care, more caregivers and added training, but without providing more funding.

Caught between the rock of inadequate reimbursement and the hard place of mandatory quality, nursing homes sued under the 1980 Boren Amendment, which ensured at least minimal reimbursement levels. They usually won. So Congress repealed the Boren Amendment leaving no floor under Medicaid reimbursements.

Several congresses and presidents tried to control exploding Medicaid eligibility by closing eligibility loopholes and requiring estate recoveries. When nothing worked, Speaker Gingrich and President Clinton backed legislation in 1996 making it a crime to transfer assets to qualify for Medicaid. But opposition to this “Throw Granny in Jail” law got it replaced one year later by the “Throw Granny’s Lawyer in Jail” law. Neither approach succeeded; easy access to Medicaid long-term care continued.

Next Medicaid tried to save money by “rebalancing” from expensive nursing home care to presumably cheaper home care but they eventually learned home care tends only to delay institutionalization and ends up costing more in the long run. Government funding for combined institutional and home care continued to increase year after year.

Government policy tried to encourage private long-term care insurance but failed at that too. Long-Term Care Partnerships, designed to forgive spend down liability equal to the amount of insurance purchased and used, didn’t work because there was no real spend down requirement in the first place. A tax deduction for premiums when total medical expenses exceeded 7.5% of adjusted gross income didn’t work because people who qualified financially were too sick to qualify medically for long-term care insurance.

The 2010 ObamaCare law introduced the CLASS Act designed to entice people into voluntary public long-term care insurance, but that turned out to be another unfundable debacle, quickly repealed.

The latest government interference in the long-term care financing market is centrally planned reimbursement reform. They’re trying to convert from traditional fee-for-service to so-called value-based reimbursement. Managed care, prospective payment and bundling are the watch words of the day. They add an extra middleman and more regulations between providers and patients who are already severed by the Medicaid bureaucracy.

Why does this heavy dependency on Medicaid matter? Medicaid is the sine qua non of the long-term care financing problem.

Medicaid spending is not equally proportioned among recipients. Women, children and working age adults comprise 77% of Medicaid enrollees, but consume only 38% of spending while the aged and disabled are 23% of enrollees and consume 61% of expenditures.

Long-term care users, who are only 6% of enrollees, consumed 42% of total Medicaid benefit spending for both institutional and non-institutional long-term care.

Clearly, Medicaid is the tail that wags the long-term care dog.

What do scholars and analysts have to say about Medicaid and the long-term care financing crisis? They’ve approached these topics in the same way government did. They bewail the symptoms of the problem (high cost, nursing home bias and poor care) without analyzing or addressing the causes, which are easy access for consumers to Medicaid and strong incentives for states to maximize federal Medicaid matching payments.

I cite many examples of this analytical irresponsibility in the “Medicaid and Long-Term Care” monograph. These include studies, commission reports, and articles from the Pepper Commission in the 1990s to a barrage of publications by think tanks, advocacy organizations and Health Affairs articles over the past few years.

Besides focusing on symptoms and ignoring causes, this scholarship also has in common a misunderstanding and underestimation of the impact of Medicaid long-term care eligibility. That is the missing link we must understand to crack this issue wide open.

Nearly all scholars, not to mention politicians and bureaucrats, assume Medicaid long-term care eligibility requires impoverishment. They cite rules that seem to say eligibility requires retention of no more than $2,000 in assets and $723 per month of income. That’s literally true, but it almost never applies because of other more generous rules that supersede.

The rule of thumb is that anyone with income below the cost of a nursing home can qualify for Medicaid long-term care benefits based on income. That’s because most states apply “medically needy” rules allowing people to deduct their actual medical and long-term care expenses from their income in order to qualify. As nursing homes are very expensive, most middle class people qualify easily based on income.

On the asset side, retainable wealth is virtually unlimited. Besides the $2,000 everyone can keep, federal Medicaid rules allow recipients to retain home equity of at least $595,000 and up to $893,000 in some states. Also, regardless of value, recipients may retain one income-producing business, their Individual Retirement Accounts, one automobile, personal effects including heirlooms, term life insurance, and prepaid burial plans. Mandatory estate recovery, introduced in 1993, is easy to dodge.

Married couples get special consideration. At-home spouses may retain a Community Spouse Resource Allowance of half the couple's joint assets up to $128,640. The Minimum Monthly Maintenance Needs Allowance allows the community spouse to receive up to $3,216 of the Medicaid spouse’s income. These allowances increase annually with inflation.

Self-help books and articles on how to take advantage of Medicaid’s generous long-term care eligibility rules abound. State Medicaid eligibility workers are often eager to help applicants find ways to qualify while minimizing spend down for their care.

Beyond the ubiquitous consumer information on Medicaid planning, there is a large and always expanding professional legal literature on the topic. I give many examples of the popular and legal literature on qualifying for Medicaid in the “Medicaid and Long-Term Care” monograph and in dozens of national and state-level studies available at

Strangely, however, most long-term care analysts ignore these easy pathways to Medicaid long-term care eligibility. Why?

An easy explanation is ideological bias. As they ignore causes and focus on symptoms, analysts invariably recommend more government funding and regulations to solve problems that, as we’ve shown, were actually caused by excessive government funding and regulations.

How and why they do this is highly nuanced. They evade and equivocate on key concepts and facts. For example:

Impoverishment: They say things like “Medicaid only covers the long-term care costs of the indigent.” Synonyms for “indigent” include “poor, impecunious, destitute, penniless, poverty-stricken, down and out, pauperized, and without a penny to one's name.” Given Medicaid’s generous income and asset eligibility allowances described above, saying Medicaid requires indigence is obviously false.

Spend down: Analysts routinely claim applicants must spend down their assets to qualify for Medicaid. But there is no requirement to spend down assets for care. Applicants can spend down unlimited amounts for any good or service for which they receive market value, including a lavish birthday party or world travel. Applicants can also purchase unlimited exempt assets, like a new car or more expensive home. I give many examples in the monograph. Spend down studies from 30 years ago and more recently purport to document spend down, but they only prove people have transitioned to Medicaid eligibility, not that they spent down for care.

Asset decumulation: Research shows asset decumulation in old age is much less than economic models predict. People hold on to their assets tenaciously until just before death. Medicaid’s generous income and asset rules enable them to do this even if they need long-term care. The fact that Medicaid offsets upwards of one quarter of the lifetime medical and long-term care expenses of high income households is staggering and belies the common presumption that people must spend down into impoverishment to obtain benefits.

Median wealth: Analysts focus on people with median or less income and assets, but they routinely evade the more interesting questions of whether and how people with much higher wealth qualify for Medicaid. I show in the paper how most Medicare beneficiaries with income and assets above the median qualify for Medicaid if they need long-term care without spending down assets significantly.

Medicaid planning: While most analysts ignore the role of sophisticated legal self-impoverishment to qualify for Medicaid, if they do mention this common practice, they focus only on “asset transfers.” Asset transfers are not insignificant as they cost Medicaid as much as $1.7 billion per year. But they are not nearly as common as other Medicaid planning techniques such as purchasing exempt assets like a car or house, setting up a Medicaid Asset Protection Trust, or creating a Medicaid-friendly annuity. Medicaid planning is far more important than most analysts acknowledge but formal Medicaid planning itself pales in significance compared to the basic eligibility rules that allow most middle class people to qualify without employing sophisticated legal machinations.

Out-of-Pocket Expenditures: Many analysts overestimate out-of-pocket expenditures in order to promote the need for more government spending. They claim half the cost of long-term care is paid out of pocket. They make that claim by including room and board expenses in residential care settings—costs that people would incur whether they need long-term care or not—and by excluding Medicare post-acute care expenditures, which are critical to sustain Medicaid’s viability as the dominant long-term care financing source. Actual out-of-pocket expenditures are closer to 25% and half of those are spend-through of Social Security income by people already on Medicaid.

Faulty data: When economists and health policy analysts claim that older people approaching the need for long-term care retain few assets and spend down rapidly, they generally draw their evidence from survey data provided by the Health and Retirement Study (HRS) and its auxiliary, the Asset and Health Dynamics among the Oldest Old (AHEAD) study. But these data sources do not include actual assets spent for care. They are based on self-reported information that people have very strong incentives to misrepresent. I explain in the monograph why the HRS and AHEAD data cannot be trusted.

So what evidence can I adduce that Medicaid long-term care eligibility is routinely achieved without significant spend down of assets either because of Medicaid’s basic eligibility rules or with the help of sophisticated Medicaid planning?

Anecdotal evidence abounds, but hard empirical evidence is very limited, because analysts and think tanks avoid the research that needs to be done to establish the facts.

I recount such anecdotal and empirical evidence as does exist in the monograph. I’ve also personally conducted many national and state-level studies available at that estimate the incidence of Medicaid planning. I also quote state Medicaid eligibility workers in these studies about their anger and frustration because it’s hard for them to qualify poor people for care, while the middle class and affluent qualify easily, often with flawless applications and documentation prepared by their law firms.

Only one promising empirical study has been done so far. But GAO downplayed its findings and completely missed their significance.

In 2014, the Government Accountability Office analyzed a random, but non-generalizable, sample of 294 Medicaid nursing home applications in two counties in each of three states: Florida, New York, and South Carolina. The summary results are telling:

“GAO identified four main methods used by applicants to reduce their countable assets—income or resources—and qualify for Medicaid coverage: 1. spending countable resources on goods and services that are not countable towards financial eligibility …; 2. converting countable resources into noncountable resources that generate an income stream for the applicant, such as an annuity or promissory note; 3. giving away countable assets as a gift to another individual …; and 4. for married applicants, increasing the amount of assets a spouse remaining in the community can retain, such as through the purchase of an annuity.” (GAO, 2014, unnumbered “GAO Highlights” page).

This is exactly what we would expect, but when GAO recounts the magnitude of these practices, they largely miss their significance.

For example, nearly 75% of applicants owned non-countable resources; the median amount of which was $12,530. If generalizable nationally, which it’s not, 665,700 Medicaid nursing home residents sheltered over $8.3 billion in non-countable resources or 42.4 percent of the $19.7 billion Medicaid paid for their nursing home care.

39% of GAO’s sample owned burial contracts and prepaid funeral arrangements with a median value of $9,311. If generalizable nationally, $3.2 billion or 6.3%  of total Medicaid nursing home expenditures are diverted from funding long-term care to relieving families of the final expenses for their loved ones. This is a bonanza for the funeral industry and for heirs.

GAO found 44% of approved applicants had between $2,501 and $100,000 in total resources, and 14% had over $100,000 in total resources. 887,598 nursing home residents receive Medicaid. If generalizable nationwide and 14% of them, or 124,264 recipients, possessed $100,000 or more in non-countable resources, that is at least $12.4 billion or 3.4 times the $3.7 billion Medicaid spent for their nursing facility care.

GAO found median home equity to be $50,000, ranging from $0 to $700,000, among the 51 applicants (out of 91 total homeowners or 31 percent of the sample) for whom they were able to determine it. Most home equity is non-countable, up to as much as $893,000 in some states as of 2020. Thus 100 percent of their sample’s home equity was non-countable.

If 31% of 887,598 Medicaid nursing home recipients nationwide or 275,155 recipients own homes with a median equity value of $50,000, then at least $13.8 billion worth of their home equity is non-countable, a figure that is 1.7 times the annual $8.1 billion cost of their care. 

Did it not behoove GAO to dig a little deeper? How much money could Medicaid save by making nursing facility care available only after home equity is spent down by means of private or commercial home equity conversion methods?

GAO also failed to develop the implications of similar findings for other Medicaid planning techniques such as personal care contracts, spousal refusal, annuities, and reverse half-a-loaf strategies.

Finally, GAO acknowledged their analysis was based entirely on case records. No further verification was done. This totally discredits their limited findings because state and federal re-reviews of welfare cases historically have shown substantial error rates in case records when they are verified externally and thoroughly.

Bottom line, this kind of study should be done on a nationally generalizable basis with complete external verification of case records by checking bank records, property ownership, property transfer and IRS records. Until we conduct such a study, the true financial impact of easy access to Medicaid long-term care will remain unknown.

Ramifications: What does all this mean? If it’s not a catastrophic poverty-maker, what is Medicaid?

1.     By making nursing homes virtually free in the mid-1960s, Medicaid locked institutional bias into the long-term care system, crowded out a private market for the home care seniors prefer, and trapped the WW II generation in sterile, welfare-financed nursing facilities.

2.     By reimbursing nursing homes less than the cost of care, Medicaid guaranteed America’s long-term care service delivery system would suffer serious access and quality problems.

3.     By underfunding most long-term care providers—leading to doubtful quality—Medicaid incentivized plaintiffs’ lawyers to launch giant tort liability lawsuits, extract massive financial penalties, and further undercut providers’ ability to offer quality care.

4.     By making public financing of expensive long-term care available after the insurable event occurred, Medicaid discouraged early and responsible long-term care planning and crowded out the market for private long-term care insurance.

5.     By compelling impoverished citizens to spend down what little income and savings they possessed in order to qualify for long-term care benefits, Medicaid discouraged accumulation and growth of savings among the poor, reducing their incentives to improve their stations in life.

6.     By allowing affluent people to access subsidized long-term care benefits late in life, Medicaid encouraged accumulation and growth of savings among the rich who could pass their estates to their heirs whether they were stricken by high long-term care expenditures or not, contributing to inequality.

Policy recommendations: The cause of long-term care problems is easy and elastic Medicaid financial eligibility combined with generous federal matching funds that induce greater Medicaid spending by states. Corrective action must address those causes if it is to effect improvements in the symptoms of exploding costs, institutional bias and poor quality. The solution is not complicated:

1.     Cap federal Medicaid long-term care matching funds for states.

2.     Allow states more control of Medicaid long-term care financial eligibility so they can target resources to the truly needy and encourage others to save, invest or insure for long-term care

3.     Eliminate or greatly reduce Medicaid’s home equity exemption. Let people keep and live in their homes, but when the last exempt surviving relative dies, recover all costs from estates so Medicaid does not continue giving windfalls to heirs for ignoring long-term care planning. Finally …

4.     We should redefine the problem: Recent research suggests how we might reconceptualize the quandary we are in so that it is not such a huge challenge and may in fact be amenable to a market-based solution.

a.     For example, 52% of Americans turning 65 today will develop a disability serious enough to require long-term care, although most will need assistance for less than two years. On average, an American turning 65 today will incur $138,100 in future long-term care costs, which could be financed by setting aside $70,000 today, given the time-value of money. That’s not so daunting. Home equity conversion could cover that cost for many if Medicaid didn’t exempt so much home equity.

b.     In June 2019, Johnson and Wang found that 74% of seniors could fund at least two years of a moderate amount of paid home care if they liquidated all of their assets, and 58% could fund at least two years of an extensive amount of paid home care. Furthermore: “Nearly nine in ten older adults have enough resources, including income and wealth, to cover assisted living expenses for two years.” So, the problem is much more manageable than we thought. All we have to do is persuade people to liquidate all their assets. That obviously won’t happen until we eliminate Medicaid’s perverse incentives that discourage paying privately and encourage denial of long-term care risk and cost.

c.     The National Investment Center (NIC) recently reported that reducing the annual cost of seniors housing by $15,000, from $60,000 to $45,000 per year, would expand the middle market for seniors housing by 3.6 million individuals enabling 71% of middle-income seniors to afford the product. Consumers could find that extra $15,000 in very inexpensive private LTCI if public policy didn’t choke the long-term care insurance market.

d.     Finally, a Cato Institute Policy Analysis reports that only about 2% of today’s population lives in poverty, well below the 11% to 15% that has been reported during the past five decades.

How can that be? “By design, the official estimates of income inequality and poverty omit significant government transfer payments to low-income households; they also ignore taxes paid by households.”

What is the bottom line? “The net effect is that pretax data overstate the true income of upper-income households by as much as 50 percent, and missing transfers understate the true income of lower-income households by a factor of two or more” (Ibid., p. 4).

The rich are poorer and the poor, richer than we thought. “More than 50 years after the United States declared the War on Poverty, poverty is almost entirely gone.”

Broken rhythm of reform: If this is all so obvious, why aren’t the necessary reforms being implemented?

Progress toward improving Medicaid long-term care for the poor while diverting others to private pay options usually occurs when state and federal budgets are tight as in recessions. That’s when we got mandatory estate recovery and closed some eligibility loopholes in the Omnibus Budget Reconciliation Act of 1993. The same happened after the recession of the early 2000s when the Deficit Reduction Act of 2005 passed putting the first cap ever on the home equity exemption.

But we’ve had no further progress since the DRA ’05, despite the Great Recession of 2008. Why?

We’ve experienced much slower, steadier economic recovery this time than before. The Federal Reserve forced interest rates artificially to near zero, which encouraged more deficit spending. Irresponsible fiscal policy sustained excessive Medicaid long-term care spending and promoted private mal-investment. Nowadays, no one cares about burgeoning debt. We’ve blown up a huge economic bubble that could burst at any time.

Simultaneously the Age Wave is cresting and about to crash, making the situation truly ominous as the second third of this century approaches.
a.     Boomers started taking Social Security at age 62 in 2008
b.     At age 65 in 2011 they sent Social Security cash flow negative
c.     Boomers started taking Required Minimum Distributions from their retirement accounts in 2016, depleting private investment capital
d.     Boomers reach the critical age (85 years plus) of rising long-term care needs in 2031, around the time Medicare (2026) and Social Security (2035) are expected to deplete their trust funds, forcing them to reduce benefits.

This whole house of cards is going to come crashing down by 2031.

My Conclusion: The best course is to reduce states’ dependency on federal funds, target scarce public resources to people who need them most, and let free market incentives and products take care of the rest.

The prospects of that happening at present are nil. So the single most important thing we can do for now is conduct generalizable studies of Medicaid long-term care cases at the state and national levels to demonstrate exactly how much damage Medicaid does to the long-term care system and to show how much could be saved by fixing it.

Then, when the current asset bubble bursts and state and federal budgets need relief, we’ll have the data to demonstrate where Medicaid went wrong and how to fix its most expensive component, long-term care.

Thank you.