LTC Bullet: How to Improve Medicaid LTC

Friday, July 31, 2020

Seattle—

LTC Comment: Guest author Claude Thau explains how to improve Medicaid LTC after the ***news.***

*** DEBT CLOCK:  U.S. national debt is approaching $26.6 trillion. Average debt per citizen is $80,506, $213,277 per taxpayer and $252,788.84 per family. Unfunded liabilities, including $20.6 trillion for Social Security (over 75 years, but $53 trillion over the infinite horizon) and $31.9 trillion for Medicare, total $153.6 trillion. The Federal Reserve has printed trillions of new dollars unsupported by new goods and services. The pandemic removed all stops on federal spending. Inflation hedge gold and silver prices soar. Yet, as we’ll report next time, analysts know nothing to propose for the long-term care problem besides more government spending, borrowing, printing and regulation. ***

*** WHY JOIN THE CENTER?: The Center for Long-Term Care Reform’s mission is to “ensure quality long-term care for all Americans.” We pursue that goal by conducting research, publishing analysis and recommendations, supporting good public policy, opposing bad policy, and helping everyone who works in long-term care stay on the forefront of professional knowledge and expertise. Find hundreds of our articles, speeches, and reports here. Read 1,285 LTC Bullets, archived chronologically and by topic here. Take our virtual tour of the Center's website here. Review our “Membership Levels and Benefits” schedule here. Regular members ($150 per year or $12.50 per month) receive our LTC Bullets and weekly LTC E-Alerts plus access to our Members-Only Website (The Zone), which is full of special resources including the comprehensive “Almanac of Long-Term Care.” Premium members ($250 per year or $21 per month) receive all of the above plus a subscription to LTC Clippings, our daily alerts pointing you to key articles, reports, or data that LTC professionals need to know before they’re barraged by questions and objections from their prospects and customers. Any individual or corporate member of the Center also has access by phone or email to Center president Steve Moses for questions or comments regarding all aspects of long-term care services and financing. ***

 

LTC BULLET: HOW TO IMPROVE MEDICAID LTC

LTC Comment: What’s right about Medicaid long-term care? What’s wrong? And what should we do about it? Today, we turn over the editorial reins to one of the LTC insurance industry’s leading lights, author, analyst, actuary, and broker general agent Claude Thau. After Claude has his say, I’ll chime back in with an LTC Comment anticipating and answering criticism his proposal is likely to elicit.

The Medicaid long-term care program is complicated. So here’s a brief set up for Claude’s piece:

Medicaid is a means-tested public assistance program; in a word, welfare. To qualify for Medicaid’s long-term care benefits, people must meet defined medical and financial qualifications. The financial qualifications sound very strict—monthly income of $723 or below and no more than $2,000 in countable assets. But in practice, there is no limit on income as long as a Medicaid applicant’s health and LTC expenses are high enough. Most of seniors’ large assets, such as home equity, are exempt, and the rest are easily converted to exempt status. As a rule of thumb, any medically needy senior holding virtually unlimited exempt assets who has income below the cost of a nursing home can qualify anywhere in the country for Medicaid LTC benefits.

That is why Medicaid’s estate recovery requirement is so important. It ensures that affluent people pay back the cost of their care from their estates after they and their last surviving exempt dependent relative pass on. Without estate recovery, Medicaid rewards recipients’ heirs with a taxpayer financed windfall, not for taking care of their parents, but for placing them on public assistance. As Claude points out, the right way to look at generous Medicaid long-term care eligibility tempered by estate recovery—or a private loan program that could serve the same purpose—is to view it as an excellent way to fund long-term care for people who need it, give them the dignity of staying off welfare (it isn’t welfare if you pay it back), and ensure that the public program does not disincentivize early and responsible long-term care planning through private savings, investment and insurance. For a full explanation of Medicaid long-term care benefits and eligibility, see Medicaid and Long-Term Care.

 

Medicaid Long-Term Care Reform Suggestions
by
Claude Thau

Medicaid is a wonderful program. In particular, it makes commercial long-term care services and support (LTSS) available to indigent people.

It is critical that we take steps to enable Medicaid to continue to provide such service. These steps include:

  1. Encouraging non-indigent people to take personal responsibility for their LTSS costs, including, but not limited to, planning in advance
  1. Using available resources most effectively to reduce the burden on Medicaid
  1. Encouraging states to test ideas to help Medicaid

Aspects of the current Medicaid LTSS system

In addition to serving the indigent, Medicaid supports people who are not indigent. If people had to sell their homes to pay for LTC, and then recovered, they could not go back home. Therefore, we pay their LTSS costs, expecting to recover our expenditure from their estate, as required by OBRA 1993 (i.e., we loan them money).

Not only do we pool our money to provide such a loan, we provide that loan on an interest-free basis! And it is a long-term loan, as it does not require repayment until the care recipient dies. If the recipient’s spouse is living in the house, the loan does not have to be repaid until the spouse dies. If disabled or minor children live in the house or if adult children who were caregivers for a couple of years live in the house, the loan continues until they die or sell the house. If siblings were living in the house for at least a year before the care recipient entered a nursing home, the loan extends until their death.

Medicaid reimbursements pay LTSS providers less than the cost of LTSS. At best, they pay marginal costs without contributions to overhead and profit. When budgets are tight, state legislators and governors may slash such payments even further. Meanwhile government pushes provider costs upward with a variety of mandates, such as quality controls, mandatory staff training, etc.

With low reimbursements, LTSS providers cannot pay a competitive salary. So when they train staff, the newly-trained person often secures a higher-paying job in a hospital or elsewhere. The vacancy reduces the quality of care in the facility, and the facility incurs cost hiring a new employee, who typically is less experienced than the person who left.

LTSS providers may suffer 100% annual turn-over, which means some jobs turn over more than once; others not at all. Their best employees leave as they are most in demand, but providers get stuck with their hiring mistakes. Surely, good managers would fire weak performers, right? Unfortunately, it is not easy to fire anyone when you are understaffed. As time goes on, the labor pool quality, as regards caregivers, likely deteriorates. Even outstanding nursing home managers have an extremely difficult time providing excellent care in such an environment.

Private-pay LTSS recipients in Medicaid-certified facilities get “taxed” in three ways to support this system: 1) they pay income taxes to support Medicaid; 2) they pay higher fees to LTSS providers (subsidizing the costs of Medicaid recipients); 3) they can suffer from inferior care in facilities which have many Medicaid clients.

Therefore, some savvy private payors now avoid Medicaid-certified facilities. Instead of being seen as a badge of honor, Medicaid “certification” may be viewed by some people as a public announcement that cost transfer will occur and that care might be inferior.

When our government seeks loan repayment from the Medicaid beneficiary’s estate so that we will be able to loan the money to another individual who needs LTSS, some people bewail the plight of “poor Sarah” who wanted to leave her house to her children, but whose estate had to sell the house because it was partially encumbered by a government lien.

Of course, recouping payments from indigent welfare recipients sounds harsh. However, Sarah and other home-owners were not indigent. We all gave Sarah a 20-year interest-free loan; all we are trying to do is to recover the principal (no interest) so that we can lend the money to someone else.

Encouraging non-indigent people to take personal responsibility

Providing such loans is marvelous, but such loans should be provided through programs outside Medicaid, some of which already exist but suffer from having to “compete” against Medicaid.

When we provide such loans through Medicaid:

a)  Recipients feel uncomfortable being "on welfare." They have scrimped and saved to maintain their independence since their youth. Why should they be placed on a welfare program when they are not indigent?

b)  On Medicaid, they are restricted to Medicaid-certified LTSS providers. They cannot select the facility of their choice; nor can they have a private room; nor can they select an assisted living facility, commercial home care or reward relatives or friends for providing care. Eventually, they’ll be paying for the services with their money. Why should their use of their money be restricted?

c)   Nursing homes, receive inadequate government reimbursement, so they cannot afford to pay competitive salaries. Shouldn’t providers receive full cost for clients who are not indigent?

d)  The government loses revenue and incurs greater expenses.

We can improve this situation by not putting people on Medicaid if their assets could fund their LTSS. Instead, such loans could be financed privately. This simple change would have dramatic impact:

1.       Such care recipients would no longer be upset that they are "on welfare."

2.       They would have flexibility to purchase the kind of care they want, from whomever they want (instead of being assigned shared rooms in nursing homes perhaps not located conveniently for family visits).

3.       Many more care recipients would remain “private payors” rather than being on Medicaid. Providers would benefit from the resultant higher fees.

4.       State and federal governments will benefit from lower expenses and more revenue, that is both above-the-line and below-the-line benefits!

5.       People’s buying decisions would encourage consumer-driven efficiency in the marketplace. Consumer choice and increased profitability (due to fewer low-margin Medicaid clients) would encourage more private investment in LTSS, creating more jobs and better services.

6.        Improved care for LTSS recipients would ease burdens on family members, enabling them to maintain employment and productivity more effectively.

7.       The additional provider revenue would lead to reduced cost transfer (less need for private-pay clients to make up for the low revenue generated by Medicaid LTSS recipients) and improved care.

8.              As everyone expects to have to repay a loan, we avoid the problems of "repaying Medicaid" and "government liens."

Making such a change to Medicaid would reduce state government expenditures in several ways:

a)       There will be many fewer people on Medicaid, so Medicaid payments for LTSS will decrease substantially (benefitting the federal government as well as the state government).

b)       Additional savings accrue from not having to determine whether such people are “Medicaid eligible.”

c)       The cost of processing their Medicaid payments disappears.

d)       The entire administrative effort for recoveries can be dropped.

In addition to the substantial savings in expenses mentioned above, there is an increase in revenue!

  1. The additional income of LTSS providers will be taxable, directly if they retain the money or through their staff if their staff’s salaries are increased.
  1. More people will opt to purchase long-term care insurance (“LTCi”). To the degree that more people buy LTCi, insurers will pay state premium taxes and federal income taxes.
  1. Insurance brokers will pay state and federal income taxes on their commissions.
  1. Residents who use insurance money (rather than personal income or assets) to pay for LTSS will retain greater invested assets which will generate income taxes.
  1. More people will opt for reverse mortgages. Commercial lenders and reverse mortgage brokers who participate in the resultant increase in reverse mortgages will also pay income taxes.

All of the above, except the investment income, involve an additional circulation of money through our nation’s economy, producing additional government income with no offset. Such revenue is significant.

The State also benefits because there will be more investment in LTSS and more consumer control over selection of their LTSS provider. Because of better quality LTSS, some family members are likely to be able to continue to be gainfully employed, thereby generating additional taxable income. In other cases, there will be more incentive for family care-giving.

The National Council on Aging reported that 48% of households headed by someone age 62 or older could get a reverse mortgage, for an average of $72,128/year.[1] That would go a long way toward reducing our Medicaid LTSS budget. The Center for Long-Term Care Reform estimates that $30 billion could be saved annually.[2]

Thus, my #1 suggestion for Medicaid Reform is to discontinue giving loans through Medicaid. Shift such loans to programs established for the purpose of providing loans.

Of course, we could also encourage personal responsibility by making it harder to reposition assets in order to qualify for Medicaid LTSS and by promoting LTCi, reverse mortgages and personal savings. One attractive idea is to permit tax-free and penalty-free withdrawals from retirement savings accounts to purchase LTCi. Another would be to allow reverse mortgages for ages under 62, perhaps with restrictions (such as spousal approval).

Using available resources most effectively to reduce the burden on Medicaid

Currently, life insurance policies with cash value greater than $1500 must be surrendered for their cash value, which must then be spent down, prior to obtaining Medicaid LTSS.

However, those policies are generally worth significantly more than their cash value because the life expectancy of the insured person is relatively short. The greater value can be accessed by creating an irrevocable LTSS account or by selling the policy on the secondary market.

For example, according to “The Treatment of Life Insurance as an Unqualified Asset for Medicaid Eligibility”: “By converting an existing life insurance policy to a long term care Assurance Benefit plan, the owner is spending down the asset towards their cost of care in a Medicaid compliant manner while still preserving a portion of the death benefit. If the insured passes away while spending down via their Assurance Benefit enrollment, any remaining death benefit would pay out to the designated beneficiary without being subject to Medicaid recovery.”

We should attempt to leverage the true value of such insurance policies. In that vein, the National Conference of Insurance Legislators (NCOIL) supports requiring life insurers to inform policy owners about options to consider instead of abandoning an in-force policy. Regardless of whether someone supports such legislation or not, some type of education to help people stay independent and to save Medicaid money is desirable.

This option also allows the owner to preserve a portion of the death benefit throughout the spend-down period, protecting it from Medicaid Recovery legal action against the estate.

Another way to use existing resources more efficiently would be to enact measures that would reduce the cost of liability insurance for LTSS providers. Tort reform could help boost our economy in several respects, well beyond simply the cost of LTSS.

A third way to use available resources more efficiently might be to facilitate use of under-utilized housing for LTSS. For example, many widows took care of their husbands, thereby developing LTSS expertise and now live in an otherwise-empty house with time on their hands and perhaps low income. If neighbors could access these people’s caregiving expertise, we might improve care while reducing expenses.

Encourage states to test ideas to help Medicaid

It may also be a good idea to allow states more freedom to obtain Medicaid waivers to try programs to encourage personal responsibility, reduce costs and leverage resources more effectively. For example, it would be great to find that a package of reform measures stabilizes the system sufficiently to allow Medicaid to pay for more home health care.

Summary

We need to continue to provide LTSS to the indigent and should attempt to improve the quality of that care. Medicaid reform is a topic that deserves a lot of attention. This paper supports the following changes:

  1. Continue to provide loans to people who need LTSS but lack liquid assets, but do so through existing (or new) private lending programs rather than through Medicaid.
  1. Allow withdrawals from qualified retirement accounts to purchase LTCi, without incurring taxes or penalties.
  1. Encourage leveraging the value of life insurance policies rather than having them surrendered for their “cash value.”
  1. Allow reverse mortgages for ages under 62, perhaps with restrictions (such as spousal approval).
  1. Encourage more discussion of ideas to accomplish these goals, such as making it harder to reposition assets in order to qualify for Medicaid LTSS; support and promoting LTCi, reverse mortgages and personal savings; tort reform; and accessing the LTSS skill of people who provided LTSS to a family member until the family member’s death and now have time available to provide care to others.
  1. Grant greater freedom to states to experiment with programs consistent with these goals.

These simple changes would have dramatic impact:

a)       Care recipients with assets would no longer perceive themselves as “being on Medicaid.”

b)       Care recipients would have greater control and flexibility with respect to the care they receive.

c)       More care recipients would remain “private payers” rather than being on Medicaid. Providers would benefit from the resultant higher fees.

d)       Providers will flourish, resulting in more investment and innovation in the area of LTSS.

e)       Family caregivers may be less-burdened, hence may be more productive, stimulating the economy.

f)        Governments will earn more revenue, while also reducing their expenditures.

Republicans should support these ideas because they strongly favor personal responsibility and reducing unnecessary government involvement. Democrats should support these ideas because they focus our limited resources on helping the truly needy.

Claude Thau is National Brokerage Director for USA-BGA (cthau@usa-bga.com) and President of Thau Inc. (consulting; claude.thau@gmail.com).  You can call him at 913-707-8863.

 

LTC Comment: Claude’s ideas are thoughtful and thought-provoking. I share them, but in my mind I can hear the strident objections coming from analysts and advocates who prefer more, not less, government money and regulation in long-term care. So here’s how I’d reply to some of those objections. For a comprehensive response, see Medicaid and Long-Term Care.

Objection: Despite anecdotes about the “wealthy on welfare,” that rarely happens. Most people on Medicaid are poor.

Response: Of course most people on Medicaid are poor. They’re also young women, children or able-bodied adults, not aged, blind or disabled. What matters is that financial eligibility rules for Medicaid long-term care applicants, who are aged, blind or disabled, are extremely generous, a vast literature on how to qualify while preserving assets is readily available, and an army of Medicaid planning attorneys helps even the most affluent fit through Medicaid’s elastic loopholes. In fact, there is plenty of evidence, as summarized in Medicaid and Long-Term Care that people with significant wealth actually do take advantage of these benefits in large numbers. Read it and see.

Objection: As Claude admits, Medicaid has a reputation as a poor program with serious access and quality problems. Why would well-to-do people seek access to a program like that?

Response: Medicaid isn’t such a bad program for people with enough personal wealth to pay privately for a while. Medicaid planning lawyers call that “key money,” because it buys access to the best care. Medicaid planners reassure adult children that it’s OK to take an early inheritance from their parents’ savings in order to qualify them for Medicaid, because they don’t have to worry about the horror stories they hear regarding Medicaid nursing homes’ poor quality. By paying privately for a few months, these affluent clients buy their way into the best facilities. Nursing homes roll out the red carpet for private payers because they charge them half again as much as Medicaid pays. Once in the nice facilities, residents can’t be evicted just because their payment source changes. So the lawyer flips a legal switch, converts the client to Medicaid, and the family gets the dual benefit of avoiding the cost of care and knowing the loved one is in a top quality nursing home. Unfortunately, poor people don’t have key money. They lose everything they’ve saved quickly and they end up in the 100 percent Medicaid hell holes the media write about. For details on “Medicaid estate planning,” including its techniques, availability, and why analysts and advocates ignore or downplay it, see Medicaid and Long-Term Care.

Objection: Home equity is by far the biggest potential source of private financing in Claude’s plan, but most older people receiving Medicaid long-term care benefits don’t own homes. So the potential is very limited.

Response: The key question is not how many people currently on Medicaid own homes. The right question is how many older people on Medicaid owned homes 20 years ago and what happened to that home equity? Was it transferred to heirs five years before applying for Medicaid, making it uncountable in any amount, as all the Medicaid planning lawyers and books urge people to do? It’s a wonder any home equity remains with people after they need long-term care. Yet GAO found that 31 percent of the Medicaid nursing home recipients in its sample owned homes. See Medicaid and Long-Term Care, p. 56 for details and the full citation. If the GAO sample were projectable to the country as a whole, which it is not, it would mean “887,598 Medicaid nursing home recipients nationwide or 275,155 recipients own homes with a median equity value of $50,000, [so] 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.” If this is true, it shows Claude’s proposal has very substantial savings potential. Granted we cannot depend on this particular study, but why aren’t scholars conducting research that is projectable nationwide? For the answer to that question and for an explanation of why analysts have ignored the larger phenomenon of Medicaid overuse by people with significant wealth, see again Medicaid and Long-Term Care.

Objection: Why in the world would we want to fix Medicaid when a much better approach to funding and providing long-term care is available? Just pass and implement a universal public catastrophic long-term care insurance program as proposed by several study groups.

Response: Government funding and regulation of long-term care caused the problems long-term care faces today. Medicaid and Long-Term Care explains in historical detail how that happened. Compelling Americans to buy government-designed insurance they may or may not need or want will only further desensitize the public to the risk and cost of long-term care. The greater probability we face is that government entitlements like Medicaid, Medicare and Social Security will succumb to financial dissolution rather than a new program appearing to cover long-term care. We need more thinking outside the box like Claude Thau’s and less regurgitating worn out policy themes by ideologically biased researchers.


 

[1] National Council on the Aging Press Release and Fact Sheet, "Use Your Home to Stay at Home(tm): Program Study Shows That Reverse Mortgages Can Help Many with Long-Term Care Expenses," April 15, 2004.