LTC Bullet: WISHful Thinking

Friday, August 20, 2021

Seattle—

LTC Comment: Hope springs eternal among the LTC anointed that one more government program forced on the public at the expense of the productive economy can reduce the damage done by its many failed predecessors. Analysis of the WISH Act follows.

 

LTC BULLET: WISHful THINKING

LTC Comment: Thomas Sowell’s A Conflict of Visions contrasts people with “constrained” vs. “unconstrained” visions of the world. Those with the constrained or “tragic” vision see human limitations and focus on systemic analysis and marginal improvements. There are no solutions, only tradeoffs, for those with the tragic vision. Those with the unconstrained vision, The Vision of the Anointed, believe everything is possible. All it takes is for the best and the brightest to apply their superior intelligence and understanding to a problem and, voila, solutions emerge. But so do unintended, often disastrous, consequences.

We’ll have more to say about the LTC anointed in a future LTC Bullet, but suffice it here to say there’s no question which vision of the world the authors of the article we’ll review today share. Instead of focusing on the historical failure of government to solve the long-term care financing problem after decades of trying, they think one more attempt with the same approach applied by smart people with the best of intentions will have a better result. They’re unconstrained by any analysis or understanding of how the long-term care service delivery and financing system in the United States became so dysfunctional. So, anything seems possible to them.

Marc A. Cohen and Stuart M. Butler published “The Middle Ground For Fixing Long-Term Care Costs: The WISH Act," in the Health Affairs Blog on August 9, 2021. Their article reviews and strongly recommends a new, compulsory social insurance program for long-term care recently introduced in Congress. Quotes from their article and our comments in reply follow.

Cohen/Butler: “Roughly one week before Americans celebrated the July 4 holiday, Representative Thomas Suozzi (D-NY) introduced a revolutionary bill (H.R. 4289) designed to repair our broken system for financing long-term services and supports (LTSS). The ‘WISH Act’—Well-Being Insurance for Seniors to be at Home—is based on an idea first put forward by a group of long-term care experts known as the Long-Term Care Financing Collaborative, which was convened in 2012 by the Convergence Center for Policy Resolution and included the authors of this blog post. The [LTC Collaborative] idea was developed further in a 2018 paper presented at the Bipartisan Policy Center. If enacted, the WISH Act could significantly transform our LTSS financing system by harnessing the best of what the public and private sectors can jointly do to solve a problem that neither sector seems able to solve on its own. And it does this in a fiscally responsible way.”

LTC Comment: If public policy proposals are only as good as the research on which they’re based, the WISH Act is handicapped from the start. We have critiqued and rejected both of the studies cited in the article as foundational for the WISH Act. “LTC at a Crossroads” (June 3, 2016) addressed the “LTC Cooperative’s” proposal and “Feder Fantasy Fatally Flawed (Cohen Contribution Notwithstanding)” (May 4, 2018) analyzed the 2018 Bipartisan Policy Center paper. Both studies share these shortcomings: (1) They begin by describing long-term care’s problems without asking or answering why and how the problems came to exist in the first place. Thus they run the risk, and do in fact, recommend more of the same government policies that caused the problems. (2) Both mistakenly assume wide swaths of the public are spending down their life’s savings for long-term care based on the “Fallacy of Impoverishment.” (3) Both ignore the vast legal and popular literature on qualifying for Medicaid LTC without spending down, so they assume incorrectly that “big data” from the HRS/AHEAD/Rand studies on asset decumulation prove LTC spend down is widespread. (4) Both equivocate on Medicaid planning by suggesting it means only “asset transfers,” which are a relatively small part of the wide range of techniques to qualify without spending down assets. (5) They equivocate on “spend down” and “transitions” by assuming that any transition to Medicaid means someone had to spend down savings before becoming eligible. (6) They equivocate on “out of pocket” expenses, making them seem larger than they really are by including residential care and excluding Medicare post-acute care expenses from LTC costs. These points are fully explained in “LTC at a Crossroads” and developed further in Medicaid and Long-Term Care. For our review and critique of 100 similar studies and proposals, see “LTC Center Standing Guard,” May 14, 2021. How these points and principles undercut the WISH Act’s approach is explained below.

Cohen/Butler: “The legislation seeks to address the growing problem that needing LTSS for a long spell and, particularly, receiving them in a nursing home, can be financially devastating even for middle-class Americans with significant savings. A year in a two-bed nursing-home room can cost upwards of $93,000, causing many to exhaust their funds and become reliant on Medicaid.”

LTC Comment: The assertion that large numbers of people exhaust their wealth paying for nursing home care before qualifying for Medicaid is often made even in peer-reviewed journal articles. But you will never find a citation to evidence supporting the claim. That is because there is none. According to the National Investment Center’s “NIC Skilled Nursing Data Report” covering data through May 2021, private-pay nursing home revenue mix has plummeted to 7.0%, compared to 49.5%, 20.4%, and 10.8% for Medicaid, Medicare and Managed Medicare, respectively. Most of the small remaining private payments to nursing homes are for short-term sub-acute and rehabilitative care not for the kind of long-term custodial care that Cohen/Butler claim is wiping out the savings of so many. This is a prime example of scholars using the “fallacy of impoverishment” to justify big new government programs. Furthermore,

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. (Medicaid and Long-Term Care, p. 65)

Obviously, most people aren’t liquidating their assets to fund long-term care or those expenditures would show up in the data for out-of-pocket spending. Nor are people going to start liquidating assets to purchase long-term care as long as Medicaid is so easy to get after extended care is needed. How to remove this obstacle to private financing and responsible long-term care planning is explained below.

Cohen/Butler: “In theory, private insurance is the appropriate tool for protection against such a risk. But the private long-term care insurance market has been declining over the past two decades, with fewer than 10 percent of Americans having policies. … There are multiple reasons for the condition of the insurance market. One is the widespread but erroneous belief that Medicare will pay for LTSS, combined with confusion about what private long-term care policies cover, and an aversion among consumers to the policy’s upfront cost.”

LTC Comment: People don’t buy LTC insurance because they think Medicare pays for long-term care? Maybe, but there is some justification for the public’s seeming misapprehension when Medicare and Managed Medicare contribute 31.2% of nursing home revenues as referenced immediately above. Still, let’s stipulate that Medicare doesn’t pay a large share of the long-term care expenses that Cohen/Butler claim are catastrophically impoverishing so many. No matter; Medicaid does. So if you reconfigure the statement to read “People don’t buy LTC insurance because they think Medicaid pays for long-term care” you’d be much closer to the truth. But there is still a nuance of difference. In truth, most people don’t know who pays for long-term care. It doesn’t matter to them. They can ignore LTC risk, wait to see if they ever need care, and if they do, Medicaid usually pays and its financial eligibility rules are so generous and elastic that most people qualify without spending down assets significantly. Fifty-six years of that being true has essentially anesthetized the public to LTC risk, virtually eliminated potential demand for private LTC insurance, and left most of the middle class unprotected and dependent on Medicaid when they need expensive extended care.

Cohen/Butler: “Agreement on a policy solution has long been stymied by a fundamental philosophical conflict between those who would limit public policy to the promotion of private insurance as the only appropriate policy for protecting private resources and those who regard public insurance as essential to the assurance of adequate, affordable protection for all.”

LTC Comment: That statement is personally galling. I know of no one among academic or popular writers who has ever advocated limiting “public policy to the promotion of private insurance as the only appropriate policy for protecting private resources.” Yet that position has been attributed falsely to me. To be very clear, my position is that America has a social contract for long-term care that includes both public and private contributions. It was established in the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93) which made Medicaid estate recovery mandatory. This was the plan Congress and President Clinton had in mind at that time: when people need long-term care they can’t afford, Medicaid will provide the care as long as the applicant’s income is below the cost of a nursing home and most retained assets, allowed to be virtually unlimited, are held in exempt form. The only quid pro quo was that after the Medicaid recipient dies, the estate must reimburse Medicaid for the cost of the care provided. That contract still exists although it is under attack by the Medicaid and CHIP Payment and Access Commission (MACPAC).

The social contract for long-term care created in 1993 failed to solve long-term care’s problems because states did not implement its estate recovery provisions aggressively; the federal government did not enforce the requirements; the media did not report the new estate recovery liability; and so the public remained unaware of the need to save, invest or insure for long-term care in order to avoid Medicaid dependency and estate recovery risk. The Medicaid estate planning bar flourishes by helping their affluent clients evade estate recovery at the same time and in the same manner as they qualify those clients for Medicaid by means of artificial impoverishment. We should enforce estate recovery, prohibit Medicaid planning, stop exempting home equity from LTC responsibility, and publicize the fact that long-term care planning is a personal responsibility. In other words, we should fully implement the long-term care social contract as should have been done, but wasn’t, in the 1990s. That would change the incentives for long-term care planning so that they encourage personal savings, investment and insurance instead of desensitizing the public to LTC risk resulting in their dependency on public assistance in the end.

Cohen/Butler: “The WISH Act, however, steers a careful middle course. It combines public and private roles in ways that would promote comprehensive insurance protection while strengthening the private insurance industry. It does so by creating a modest ‘catastrophic’ public program to limit exposure for LTSS costs that modest- and middle-income people can reasonably be expected to manage, either through reliance on family caregivers, personal resources, or on private insurance. In this way, the WISH Act gives private insurers the opportunity and greater actuarial certainty to design insurance as a gap-filler (much like private Medigap insurance does for health costs).”

LTC Comment: Here wishful thinking borders on full-fledged fantasy. Even a “modest catastrophic” benefit sends the worst possible message to consumers: “don’t worry about long-term care; the government has you covered.” Private insurers won’t want to fill the public program’s gaps for reasons I’ll explain below. Middle income people won’t buy more private policies for the same reasons they don’t buy them now; Medicaid picks up catastrophic costs already and the WISH Act does nothing to change that.

Cohen/Butler: “The likely result: Many more middle-income people would buy private policies that, combined with the new public insurance, would provide nearly comprehensive insurance protection against LTSS costs. This fundamental idea is key to the WISH Act: using limited public insurance in part to help stabilize private insurance.”

LTC Comment: It is not necessary to create a new economy-debilitating compulsory payroll-funded catastrophic LTC financing program to solve the problems long-term care faces. All that’s needed is to recognize that Medicaid is America’s catastrophic LTC financing system and restore it to its original purpose. Retarget Medicaid’s benefits to people most in need. Eliminate or radically reduce its home equity exemption. Close its many other egregious eligibility loopholes; and enforce estate recovery. When long-term care really is a potential financial catastrophe that threatens even home equity, people will save, invest and insure against that risk. Furthermore, it does not require a new government program to make adequate private LTC insurance affordable to middle-income people.

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, April). 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. (Medicaid and Long-Term Care, pps. 65-66)

That is how to make adequate private LTC insurance affordable to middle-income people when they’ve come to want the coverage after Medicaid no longer obviates the need for it. The best solution is to reduce dependency on government not expand it with a big new program.

Cohen/Butler: “Under the legislation, the public program would begin paying a benefit only after an individual has a LTSS need that lasts for at least one to five years—depending on income. … Thus, the amount of time a family would wait to receive the public insurance benefit would be directly related to their income history so that those with lower incomes have to wait less time to receive benefits. This scaled, income-based waiting period is designed to target benefits to middle-income households and protect them from financial ruin.”

LTC Comment: Actually “this scaled, income-based waiting period” is a means test. In other words, the WISH Act would create another welfare program. It is not social insurance as its authors intend it to appear. Ironically, the welfare programs we already have—Medicaid and Supplemental Security Income (SSI)—have gradually become entitlements accessible to people of substantial means as a result of eligibility bracket creep and lack of financial eligibility enforcement. On the other hand, the programs billed as social insurance—Social Security and Medicare—have been welfarized with the addition of extra costs for higher income people. America already has too many middle-class people dependent on government social insurance and welfare programs. We should go in the opposite direction, not add more of the same.

Cohen/Butler: “The WISH Act would also strengthen private insurance by using public insurance to address a part of the risk that is hard for the private insurance market to predict: the costs associated with long-duration LTSS need. Historically, the unpredictability of these costs has discouraged insurers from offering policies in this market. But having a well-defined public insurance program in place would stabilize the market and make it more appealing to new entrants.” 

LTC Comment: That statement displays a fundamental misunderstanding of the role of private insurance. The purpose of insurance is to replace the small risk of a catastrophic loss with the certainty of an affordable premium. The private insurance industry is uniquely qualified to perform that role responsibly in actuarially sound ways that the government has shown it is incapable of doing. Filling gaps with private coverage as the WISH Act proposes and Medi-Gap policies do is not insurance. It is dollar cost averaging which lacks the leverage against risk that real insurance provides. By taking over the catastrophic health risk, Medicare ruined genuine private health insurance for the elderly and placed an insupportable burden on the U.S. economy which has no hope of covering that program’s unfunded liabilities, currently $33.2 trillion according to the US Debt Clock. To add more to government’s catastrophic promises at this stage is unwise and irresponsible.

Cohen/Butler: “The largest public payer of LTSS is the Medicaid program. While it pays for more than half of all LTSS, however, it covers support services only after people expend most, if not all, of their personal resources. … The WISH Act would have a dramatic impact on state Medicaid programs, helping to stem expenditure growth and in a manner that also advances health equity. Indeed, by covering long-duration LTSS needs, which are the primary driver of LTSS costs, the WISH program would reduce Medicaid expenditures by at least 23 percent, based on an analysis of a similar approach.”

LTC Comment: The WISH Act would not reduce Medicaid LTC expenditures at all, much less by 23 percent. That’s because the proposed legislation does nothing to change Medicaid’s hemorrhaging financial eligibility system. The idea that Medicaid LTC benefits are only available “after people expend most, if not all, of their personal resources” insults the intelligence of anyone who knows how Medicaid actually works. Income only obstructs eligibility if it exceeds the cost of a nursing home, $7,750 per month on average, hardly low income. Virtually all large assets are exempt including $603,000 or $906,000 of home equity depending on the state and, with no limit on the amount, one vehicle, prepaid burial expenses, term life insurance, one business including the capital and cash flow, IRAs in payout status as most are for older people due to required minimum distributions, household goods and personal belongings, including expensive “heirlooms.” Elder law attorneys expand these already generous rules to qualify their affluent clients by means of special trusts, annuities, and spend down gambits.

Absent estate recovery, which most states do not pursue aggressively, Medicaid operates to preserve substantial assets for heirs at the expense of taxpayers. Heirs who receive large bequests because their parents’ long-term care costs were paid by Medicaid are not likely to purchase long-term care insurance for themselves. If Medicaid operated as it should, as a safety net for the poor, there would be no credible need for a program like the WISH Act proposes. People would know LTC is a personal risk and cost. They would use personal savings and home equity conversion to purchase their preferred kind of high quality care in the private market. In time, more would buy private LTCI to protect their savings and home equity. Fewer people would need Medicaid leaving the program with more resources to provide better care to truly needy recipients. Everyone can benefit by reducing government interference and funding instead of expanding both.

Cohen/Butler: “One of the shortfalls of the CLASS Act was that its design made it fiscally unsustainable, leading to its repeal in 2013. In contrast, the WISH Act is financed much like a typical insurance program, with a payroll premium offsetting program costs. In this case, 0.6 percent of wages would be collected from all participants (half from employees and half from employers). Like Social Security, full benefits would be available after 40 quarters of work. Pro-rated benefits would be available after six quarters. This structure would fund projected benefits and administrative expenses without general revenue.

“What does this mean for a typical worker? In early 2020, median weekly earnings for full-time wage and salary employees were $936. Thus, for such full-time employees, a total of $5.62 per week ($292 per year) would be set aside into a trust fund to pay for future catastrophic LTSS needs.”

LTC Comment: This is so much verbal slight-of-hand. CLASS failed because it was voluntary. It didn’t force people to participate under penalty of law as the WISH Act would. Structuring another quasi-welfare program on the model of Social Security, whose current unfunded liabilities are $21.4 trillion, is folly. Putting a median-income worker’s payroll tax into another “trust fund” that government will spend immediately and replace with IOUs it can never satisfy will be no consolation. Furthermore, what the “InLTCgentsia” never seem to grasp is that pulling $5.62 per week out of workers’ income and the same amount from their employers, which might otherwise have increased workers’ income, is a drag on the productive economy. We see the “benefits” they allege, but the opportunity cost—all the things productive people might have done with the wealth expropriated by government—goes unseen.

Closing LTC Comment: The essence of the Cohen/Butler case for the WISH Act is that

(1) Catastrophic spend down for nursing home care is wiping out the savings of large numbers of Americans. That is false. All but 7% of nursing home revenue comes from government programs. Is it long-term home health care, instead of nursing homes, that is wiping out so much wealth? No, only 11% of home health care expenditures are out-of-pocket. Most (85.3%) come from Medicare, Medicaid, and private health insurance with the remainder deriving from several small public and private financing sources.

(2) Private LTC insurance failed because insurers are afraid of catastrophic risks. That is false. Insuring catastrophic risk is the appropriate role for private insurance, one which government has proven fiscally incompetent to manage.

(3) People don’t buy private LTC insurance because it is too expensive. That is false. The main reasons private LTC insurance has languished are that (a) government forced interest rates artificially low making returns on reserves inadequate to avoid premium increases that alienated potential customers, and (b) after the insurable event occurs, Medicaid gives away the protection insurers were trying to sell when the need for expensive long-term care was still an insurable risk. If Medicaid did not crowd out private LTC insurance, people could purchase smaller amounts of it at much lower cost to close the remaining $15,000 gap identified (above) by NIC.

(4) We can’t possibly meet the long-term care needs of middle-income Americans without forcing them into another mandatory payroll-funded government Ponzi scheme like the ones that are already impossibly over extended financially. That is false. Long-term cares problems were created by decades of government financing that incentivized the public to ignore LTC risk, remain financially unprepared, and rely on public welfare if and when the need arose. Remove those perverse incentives and most people will do the right and responsible thing.