LTC Bullet: Medicaid and Long-Term Care, the Serial, Part 7, the End

Friday, April 24, 2020


LTC Comment:  The full Medicaid and Long-Term Care monograph is 78 pages, so we’re bringing it to you in bite-sized pieces. Here’s the seventh and last one, after the ***news.***

*** SERIAL ENDS, ACTION BEGINS: Today’s LTC Bullet brings you the exciting conclusion of Medicaid and Long-Term Care. In it, we capitalize on the findings in six earlier episodes to explain why and how Medicaid reform is necessary and sufficient to improve long-term care service delivery and financing in the United States. That’s our marker. Future LTC Bullets will move from analysis and recommendations toward advocacy and implementation. The U.S. government having thrown open the monetary and fiscal floodgates, anything is possible now. Will we slip into hyperinflation, depression, and ever greater government dependency or revive private markets, competition and personal responsibility? We’ll tackle that question in a new series of LTC Bullets. Stay tuned! ***

*** IN THE MEANTIME, there’s never been a better time to renew your support for the Center for Long-Term Care Reform. Our work was instrumental in winning federal level public policy improvements in OBRA ’93 (closed Medicaid loopholes and mandated estate recovery) and DRA ’05 (capped home equity exemption and unleashed LTC Partnerships). For the first time in a decade and a half, the potential for reforming Medicaid at the federal and state levels is great again. That is the key to unbridle private long-term care insurance as well. So, please renew and upgrade your Center memberships; subscribe to LTC Clippings; and urge your companies to join the Center as corporate members (making your personal membership free.) Check out our “Membership Levels and Benefits” schedule for all the details. Contact Steve Moses at 425-891-3640 or You can also join or upgrade here: ***



LTC Comment: Episode 1 of our serialization of the Center’s newest report described the current defective method of providing and paying for long-term care. Episode 2 explained how Medicaid became the dominant payor for long-term care, the dire consequences that ensued, and central planners’ futile efforts to fix the broken system. Episode 3 showed how scholars made the same mistakes as policymakers, lamenting long-term care’s problems without analyzing their causes, and recommending more of the same interventions that caused the problems in the first place. Episode 4 focused on how affluent people qualify for Medicaid long-term care benefits, why they ignore the risk and cost of long-term care until they need it, and how the government has tried, mostly unsuccessfully, to curtail artificial self-impoverishment to qualify for benefits. Episode 5 explained how and why most long-term care analysts ignore or misrepresent the vast literature on qualifying for Medicaid long-term care benefits while avoiding spend down of wealth. Episode 6 discussed and gave examples of the evidence that Medicaid’s spend down rules do not prevent middle class and affluent people from taking advantage of the welfare program’s long-term care benefits. In today’s seventh and final episode, Steve Moses capitalizes on the preceding evidence and arguments to explain how long-term care financing policy must change to ensure quality long-term care for all Americans.

Due to email formatting challenges, we’ll leave out the content of the report’s extensive footnotes in this serialized version. But the footnotes are important, and you can find them by clicking through to the unabridged version here. Likewise, citations to sources are given in the form (author, year, page number). To find the full citations for those sources, see the “References” section at the end of the full report.

Here’s the seventh and final episode of “Medicaid and Long-Term Care,” by Stephen A. Moses, Center for Long-Term Care Reform, Seattle, Washington, published January 17, 2020. This paper was presented to The Libertarian Scholars Conference on September 28, 2019 in New York City and to The Cato Institute’s State Health Policy Summit on January 3, 2020 in Orlando, Florida.


   If Medicaid is not the catastrophic poverty-maker it is commonly made out to be, what is it? Simply put, Medicaid has become a long-term care entitlement for middle-class and affluent families. Individuals can ignore the risk of future long-term care expenses, avoid premiums for private insurance, and then protect home equity and other wealth for heirs if such care is ever needed, shifting the cost of long-term care to taxpayers. The consequences of this reality affect every aspect of the long-term care market.

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

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

   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.

   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.

   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

(De Nardi, French and Jones, 2009, pp. 4-580).

   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 (Ibid., p. 281).

   These conditions have prevailed for Medicaid’s 55-year history. They explain why America’s long-term care service delivery and financing system is so dysfunctional. The widespread fallacy of impoverishment sustains this status quo because scholars fail to challenge it. This explains why long-term care dominates Medicaid expenditures but remains impervious to reform.

Policy Recommendations

   Everyone agrees that America’s long-term care services and financing system is broken and unsustainable. But most analysis of the problem fails to address its causes rooted in public financing. The usual result is ever more emphasis on expanding government’s role even further. On that path lies more decline and dysfunction.

   If the fundamental cause of long-term care problems is easy and elastic Medicaid financial eligibility combined with generous federal matching funds to induce Medicaid spending by states, then corrective action must address those causes if it is ever to effect improvements in the symptoms of exploding costs, dubious access and poor quality.

   The best way to eliminate the incentive for states to maximize federal Medicaid matching funds is, for the first time ever, to cap those funds at some reasonable level based on past and anticipated future long-term care expenditures. Without unlimited access to federal funds and with fewer regulatory strings attached to the funds they do receive, states will have an incentive to make the best use of the federal revenue. They will experiment, succeed or fail, and learn from each other, taking full advantage of America’s inimitable federal system.

   On the consumer side, the obvious solution is to eliminate incentives in public policy that discourage early and responsible long-term care planning. One way to do that would be to end all pathways that enable people to qualify for Medicaid while protecting income and assets. If individuals and families truly did face impoverishment when catastrophic long-term care expenditures occur, that risk and cost would move to the top of their retirement and estate planning priorities much earlier. But such an approach would be disruptive, disorienting, and cruel, as well as politically infeasible.

   A less drastic measure would be to eliminate or greatly reduce Medicaid’s home equity exemption. Home equity is seniors’ largest asset. As of the third quarter of 2019, 78.9 percent of people over the age of 65 own their homes (U.S Census Bureau, 2019), and of these 63.2 percent own free and clear of mortgage debt (Census Bureau, 2017). “Housing wealth for homeowners 62 and older continues to grow at a steady clip, reaching a record $7.05 trillion in the fourth quarter of 2018” (Guerin, 2019). Ownership and transfers are easy to track through public records. Transfers of ownership within 20 years of applying for Medicaid could be deemed disqualifying as all transfers of any assets are now, though with only a five-year look-back. With home equity at risk, more people would save, invest or insure for long-term care. If they failed to do that, they would need to use reverse mortgages or some other method of public or private home equity conversion to pay for their care until they became legitimately eligible for public welfare assistance.

   A less politically objectionable approach would be to allow people to receive long-term care help from Medicaid when they need it while retaining even more of their income and assets than is allowed now, but to lien that wealth effectively and recover it after the recipients’ passing, from their estates. Instead of making families run the gauntlet of degrading artificial self-impoverishment methods, let them keep and use what they have saved. As most of elders’ wealth is in their home equity, securing that wealth with a publicly administered and enforced home equity conversion program could reduce the cost of Medicaid and empower far more people to obtain high quality private long-term care in the most appropriate venue. To avoid dependency on Medicaid and the eventual liability of estate recovery, elders and their heirs would have a much stronger incentive to plan early and responsibly for long-term care risk and cost.

   Critics may say we tried that approach with OBRA ’93, which discouraged divestment of wealth and required estate recovery. Unfortunately, that strategy did not work because the legislation left too many loopholes and exclusions enabling divestment and impeding estate recovery. The Medicaid planning bar creatively worked around the new restrictions finding ever more ingenious ways to defeat the policy. Furthermore, states failed to implement; the federal government did not enforce; and the media neglected to publicize the new rules that were intended to encourage people to plan ahead to avoid Medicaid dependency (USDHHS Inspector General, 201482). Consequently, consumer behavior did not change.

   Policymakers should try again and this time eliminate the loopholes, enforce implementation, and publicize the methods and benefits of preparing to pay privately for long-term care. But first, we should all …

Redefine the Problem

   Albert Einstein said “We can't solve problems by using the same kind of thinking we used when we created them.” The kind of thinking that created the long-term care problem is that markets cannot provide the services people need without massive government regulation and financing. No other way of thinking about the problem has been seriously considered heretofore. But some 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.

   Long-term care may not be the titanic crisis it has been assumed to be. For example, in February 2016, the Department of Health and Human Services Assistant Secretary for Planning and Evaluation (ASPE) reported:

Using microsimulation modeling, we estimate that about half (52%) of Americans turning 65 today will develop a disability serious enough to require LTSS, although most will need assistance for less than two years. About one in seven adults, however, will have a disability for more than five years. On average, an American turning 65 today will incur $138,000 in future LTSS costs, which could be financed by setting aside $70,000 today (Favreault and Dey, 2016, p. 1).

That does not sound so daunting, especially if you consider these authors believe half the cost of long-term care will be covered by other payers, including Medicaid. Where would the average person come up with $70,000 today so that it would appreciate from that present discounted value to the $138,000 he or she might need to cover long-term care costs in the future? The extractable home equity of 19.4 million senior households (age 65 plus) at a conservative Combined Loan to Value (CLTV) of 75 percent was $3.1 trillion in 2015, averaging $160,000 per household (Kaul and Goodman, 2017, pp. 2-3 and Tables 1 and 2). If Medicaid did not exempt a minimum of $595,000, more than triple the average extractable home equity amount, a way could be found to earmark enough of it to cover the total cost of most older homeowners’ long-term care. By diverting people with sufficient home equity from Medicaid dependency to financing their own care privately, the fiscal burden on Medicaid could be substantially reduced.

   There is more good news. In June 2019, Johnson and Wang “simulated the financial burden of paid home care for a nationally representative sample of non-Medicaid community-dwelling adults ages sixty-five and older.” They “found that 74 percent could fund at least two years of a moderate amount of paid home care if they liquidated all of their assets, and 58 percent could fund at least two years of an extensive amount of paid home care” (Johnson and Wang, 2019, p. 994). Furthermore: “Nearly nine in ten older adults have enough resources, including income and wealth, to cover assisted living expenses for two years” (Ibid., p. 1000). So, the problem is much more manageable than we thought. All we have to do is persuade people to liquidate all their assets.

   Obviously, there is no incentive for people to liquidate their wealth as long as Medicaid long-term care financial eligibility works the way it does. But if Medicaid’s perverse incentives were changed to encourage responsible long-term care planning and private payment, how would people respond? Home equity conversion could handle much of the financial burden for the majority of home-owning elders. Reverse mortgages would free up cash flow to cover home care expenses or, for people who plan ahead, the extra revenue could be used to fund long-term care insurance premiums.

   Most analysts, however, have written off private long-term care insurance as unlikely ever to penetrate enough of the middle market to become a significant payment source. But they have always assumed that people would need much more coverage at too great a cost to attract enough buyers to make a big difference. That assumption may be wrong. 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 percent of middle-income seniors to afford the product (NIC, 2019, April83).

   Where could consumers find that extra $15,000 to bring the cost of seniors housing into reach? The premium for an annual long-term care insurance benefit of $15,000 would only cost a small fraction of the premium required for the full coverage that consumers find so financially daunting now. Unfortunately, insurance regulations forbid carriers from offering coverage with a benefit of less than $18,000 per year. Once again, well-intentioned regulation stands in the way of sensible long-term care policy and planning.

   Then there is this. A Cato Institute Policy Analysis reports that “Improved estimates of poverty show that only about 2 percent of today’s population lives in poverty, well below the 11 percent to 15 percent that has been reported during the past five decades” (Early, 2018, p. 1). 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” (Ibid., p. 2). 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. … Public policy debate should begin with the realization that only about 2 percent of the population—not 13.5 percent—live in poverty” (Ibid., p. 21).

   Former Democratic presidential candidate New York Mayor Bill de Blasio is correct when he says “There's plenty of money in this country.” He’s mistaken when he adds “it’s just in the wrong hands.” It’s in exactly the right hands, those of the people with personal resources or home equity sufficient to fund their own long-term care and stay off Medicaid. All they need is positive public policy incentives to get them to use it. But, unfortunately, the kind of corrective action needed to achieve that outcome is highly unlikely in the current economic environment of profligate fiscal and monetary policy.

The Broken Rhythm of Reform

   Historically, progress toward making Medicaid a better long-term care safety for the poor—by diverting the middle class and affluent from dependency on it—tends to occur after major economic downturns when state and federal governments face serious budgetary constraints. After most recessions since 1965, congresses and presidents of widely divergent ideological persuasions backed legislation closing Medicaid long-term care eligibility loopholes and encouraging early and responsible long-term care planning. But as each recession was followed by a rapid economic recovery in which budgetary pressure abated, Medicaid long-term care benefits always reverted to virtually universal availability for all economic classes.

   This pattern has changed since the start of the new millennium. After the recession from March 2001 to November 2001 following 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, which imposed the first cap on home equity and expanded the asset transfer look back period, was not signed into law until February of 2006, nearly five years after the start of the previous recession. Economic recovery came and, true to form, enforcement of DRA 2005 declined.

   The new boom ended when the housing bubble burst, causing the Great Recession of December 2007 to June 2009. Again, economic recovery came very slowly. To date, over ten years after the end of the last recession, we have seen no 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, towards proposing yet another compulsory government program funded by taxpayers to expand public financing of long-term care for all.

   What might explain 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 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 normal budgetary 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 burgeoning budgets and debt has subsided 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 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 exceeding $23 trillion and total unfunded entitlement liabilities around $128 trillion, a return to economically realistic market-based interest rates would render the federal government immediately insolvent (The National Debt Clock, 2019).

   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 program cash-flow negative (Burtless, 2011). Boomers began taking Required Minimum Distributions (RMDs) from their tax-deferred retirement accounts in 2016, depleting the supply of private investment capital. They will begin to 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.

   Of course, Medicaid is the main funder of long-term care, but according to the Centers 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” (Truffer, Wolfe, and Rennie, 2016, p. 3). In summary, conditions are coalescing for a potential economic cataclysm in or before the second-third of this century and public officials are almost entirely ignoring the risk.


   America’s long-term care services and financing system is badly broken. An oncoming demographic age wave guarantees the symptoms of its dysfunctionality will get much worse if something is not done. But to address the symptoms of high cost and low quality without reducing reliance on the public financing which caused them will only make matters worse. Unfortunately, that is the course most scholarship on this subject takes, resulting in ever more urgent calls for even more state and federal financial involvement, with citizens compelled to participate and pay. Ludvig von Mises warned: “The goal of their policies is to substitute ‘planning’ for the alleged planlessness of the market economy. The term ‘planning’ as they use it means, of course, central planning by the authorities, enforced by the police power. It implies the nullification of each citizen’s right to plan his own life” (Mises, 1953, p. 436). A better 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.

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