LTC Bullet: Long-Term Care Financing Update

Friday, January 7, 2022

Seattle—

LTC Comment: The political environment for long-term care financing is realigning. Policies impossible yesterday will become likely tomorrow. Read on after the ***news.***

*** ILTCI EARLY BIRD DISCOUNTS expire soon. So grab yours by January 14 to get $100 off the cost of admission. Conference planners report: “We have a full schedule in place for our in-person conference March 20-23rd at the Raleigh Convention Center in North Carolina. Our agenda includes over 45 educational sessions with ample time for networking and reconnecting with colleagues. Our session schedule is in the works right now and will be announced in February. We also still have some room for exhibitors and sponsors! Please contact us at info@iltciconf.org if you are interested in either opportunity to showcase your products and services to our attendees. Sponsorship Opportunities are going quick. ***

*** “THE GREAT LONG-TERM CARE COMPROMISE” is the title of an article by Center president Steve Moses in the current issue of Broker World. In it he proposes a radical new way to structure long-term care financing public policy. Here’s an excerpt: “The Great Long-Term Care Compromise invites social insurance advocates to relinquish their demand for compulsory universal participation. It requires free market advocates to agree with mandatory participation for all who do not opt out. If both sides can make those concessions, we can quickly get everyone covered for long-term care now and for the future.” Read the article here and let us know what you think. ***
 

LTC BULLET: LONG-TERM CARE FINANCING UPDATE

LTC Comment: Center for Long-Term Care Reform president Stephen Moses delivered the following presentation by webcast to staff and agents of GoldenCare on Wednesday, January 5, 2022.

Steve is available to address audiences on the past, present and future of long-term care by webcast or in person. Contact the Center for Long-Term Care Reform at 206-283-7036 or info@centerltc.com for details.

Good morning,

One year ago tomorrow I spoke to you about long-term care financing. That evening a mob penetrated the U.S. Capitol building. What a tumultuous year it’s been politically ever since.

Long-term care financing public policy is no exception. The country seems to have tiptoed up to the edge of a precipice in social policy … and then paused.

The Biden Administration’s Build Back Better plan would be the biggest expansion of America’s welfare state since the New Deal of the 1930s, as big if not bigger than the Great Society programs of the 1960s.

It looks now like Build Back Better, including its proposed $400 billion expansion of Medicaid home and community-based care, will either fail or be vastly scaled back.

The country seems to be stepping back from the brink of socialism. So it is a very good time to review the roles of government, on the one hand, and markets on the other in our economy.

What works best to make the most of America’s great resources? How does public vs. private financing impact our ability to provide quality long-term care for all Americans?

I know you’re interested in the Washington Cares Fund, its future prospects and its likely impact on the LTC insurance market.

I will cover that, but I want to put it into a broader context. What led up to WA Cares? Why has it dominated the headlines lately? What else is happening? Where is all this heading?

I’m going to cover six topics briefly. You can refer to the electronic outline GoldenCare is providing for details, including links to many published articles where I develop these ideas much more fully.

These are my six topics for today:

   1.   What is the LTC problem? I won’t spend much time on this as you are already experts.
   2.   Then I’ll discuss three approaches to correct the long-term care problem.
   3.   Third, in general, what’s better? Government or market-based solutions and why?
   4.   Next, how have government or market-based solutions actually played out in long-term care?
   5.   Fifth, I’ll mention some new research that suggests LTC isn’t such a huge problem after all.
   6.   Finally, I’ll suggest the best course for public policy going forward

So, first, what is the long-term care problem. In a nutshell, too many people living longer and needing help with activities of daily living for extended periods of time.

70% will need some long-term care, but only one quarter will require help involving catastrophic costs. Most of those extremely high costs are currently covered by government programs like Medicaid, Medicare and the VA. Those public programs are underwater financially already and extremely vulnerable in the future.

But private sources of long-term care financing are drying up. Private pay nursing home revenue is down to 7.4% from closer to half 50 years ago. Long-term care insurance never really caught on despite your best efforts. Home equity is rarely used to fund long-term care.

Families are suffering to provide care for “free.” Even paid caregivers are in short supply due to the hard, dangerous work, low wages, and vaccine mandates. Most people prefer home care but government pays primarily for institutional care.

It looks like all these problems are getting worse and worse. The pandemic exacerbated all of them.

So, second, what should be done? There are three primary options.

1.  Do nothing. That’s an option we’ve not employed since the 19th century. But, try this thought experiment:

What if there were no Medicaid program to pay for catastrophic long term care costs? How would consumers behave? Odds are people would worry about the risk of having a severe, expensive need for long term care in the future. They would save, invest, or insure to spread the risk. Unprepared people who were stricken would rely on private charity or use their home equity to fund care as most elderly own homes. Spending their own money for long term care, patients and families would seek home- and community-based care instead of nursing homes. With private asset spenddown, including potentially $9 trillion of home equity, flowing through the long term care services industry, access and quality of care would improve for everyone. Potential profits would supercharge entrepreneurs to discover and offer new and better care options. The relatively small numbers of genuinely needy people who remain could be served by private charity and/or a vastly scaled down public assistance program funded by a fraction of the savings from ending the Medicaid LTC program.

Voila! Problem solved. Except free market solutions are out of favor, so what’s another way?

2.  Second, consider the “social contract for long-term care.” This is actually the system in effect now, although it is mostly unenforced. It goes like this:

If you are stricken by a need for long-term care that you cannot afford, we help you even if you are not poor. Assuming you’re eligible medically, and hold all but $2,000 of your assets in exempt form such as home equity, you’ll qualify for Medicaid long-term care benefits as long as your income is (1) less than the cost of a semi-private nursing home bed, about $93,072 per year, and (2) insufficient to cover your private uncompensated medical and long-term care expenses. But this benefit comes with the quid pro quo of mandatory estate recovery. So if you want to stay off Medicaid with all its shortcomings and avoid having to pay for it in the long run anyway, plan ahead and buy LTC insurance.

I won’t take time today to explain how and why even upper middle class people qualify for Medicaid LTC benefits without spending down assets significantly. You can find that in the outline and in many of my publications.

Why didn’t this “social contract for long-term care” work? The states didn’t implement estate recoveries effectively, the federal government didn’t enforce the program aggressively, the media didn’t publicize it. So the public remained in ignorant bliss, uninsured for long-term care, and ultimately dependent on Medicaid.

Now, MACPAC (the Medicaid and CHIP Payment and Access Commission) wants to water down estate recovery, making it voluntary and further debilitating the social contract.

Still, the social contract for long-term care is salvageable and may well be the course the country takes in the end.

3.  Social insurance is the third approach to solving long-term care and by far the most popular option among what I’ve called the InLTCgentsia, the researchers, analysts, advocates, politicians, policymakers, etc. that are constantly opining about long-term care.

Social insurance is compulsory, universal and paid for by employers and workers through payroll deductions. Think of Social Security and Medicare. Every few years some author, commission or consortium proposes creating a new federal social insurance program to cover long-term care. Or they just want to shoehorn it into Medicare. These federal plans have always failed.

So now states are picking up the mantle. The one furthest along is Washington, the Evergreen State. The WA Cares Fund passed in 2019. It imposes a .58% payroll tax effective January 1, 2022 and promises to pay $36,500 to people who vest after 10 years of paying into it.

But before it could be implemented, WA Cares was hit by a storm of problems and opposition. Its opt-out escape hatch launched a fire sale of private LTC insurance that overwhelmed and quickly shut down the LTC insurance market in the state.

Besides being underfunded by about $15 billion, WA Cares required workers who live out of state who would not be eligible for benefits to contribute to the fund. Likewise, it made no provision for people who are about to retire and would pay in but not qualify for benefits.

These and many other problems led Governor Inslee only days before the program’s scheduled start to call a halt. Well, sort of. He enjoined the legislature to revisit WA Cares to try and fix its problems. Confusingly, he told employers they could either collect the payroll taxes or not, but regardless, they would be liable to pay them to the state if the legislature doesn’t repeal or modify the program to relieve them.

In other words, WA Cares is a total mess reminiscent of previous attempts to impose government social insurance for long-term care, such as the CLASS Act. Hopefully, other states reported to be considering a similar program are taking note and will back off.

A few of those states are …

(a)   California

(b)  Minnesota

(c)   Hawaii

(d)  Maine

(e)   Michigan

Why do all programs of this kind fail? What’s wrong with social insurance? The fundamental problem is that social insurance spreads risk, but does not price it. Everyone is charged the same “premium” or tax regardless of the risk they bring into the risk pool. So in effect, social insurance punishes good behavior with higher rates and rewards bad behavior with lower rates. It is inequitable. It treats some people (poor risks) better than other people (good risks).

Private insurance, on the other hand, spreads, but also prices risk. You pay more for life insurance if you smoke, for example. So private insurance rewards good behavior with lower rates and punishes bad behavior with higher rates. Private long-term care insurance ensures that beneficiaries pay only for the risk they bring into the risk pool. Private insurance is equitable. It treats everyone the same based on the risk they bring to the pool.

Why is social insurance so popular now after decades of failure to prevail? The answer is Modern Monetary Theory. The idea that government deficits don’t matter has taken over politics. No one cares anymore about the nearly $30 trillion national debt or that government spends each year almost double what it takes in through taxes, borrowing or printing the remainder.

Probably that whole house of cards will collapse in time. The resulting consumer price inflation flaring right now suggests the denouement is not far off. But in the meantime Modern Monetary Theory has seduced politicians and the experts who advise them. Until it does collapse, we’ll see more and more efforts at the state and federal level to impose long-term care social insurance programs on the country.

Now, for our third topic of the day, what is the fundamental difference between government solutions and private sector solutions to social problems like long-term care?

Private-market forces prevail in independent living, somewhat less so but predominantly, in assisted living and further less but considerably in home care.

Government funding and regulation prevail in home care, skilled nursing and, less so but significantly, in assisted living.

By most measures, the more market-based independent and assisted living sectors fare better economically over time than the more government-dependent nursing home and home health sectors.

Why is this so? Certain fundamental economic principles apply. Government is public, collectivist and bends toward socialism. Markets are private, individualistic and they’re maximized by capitalism.

Government subjects can only vote yes or no (that is, they accept) this or that politician or ballot measure with no gradations for preference, amount or quality. But in the market, free-acting consumers vote with their dollars (that is, they choose) whatever they want in the quantity and quality they desire.

In government, politicians compete by satisfying interest groups with benefits paid for by others, and with quality and efficiency notoriously absent. In markets, entrepreneurs compete by creating or identifying and meeting consumers’ needs based on quality and efficiency.

In government, the Federal Reserve sets interest rates based on balancing political powers and influence resulting in asset bubbles, malinvestment and economic inequality. In markets, millions of transactions between willing buyers and sellers create spontaneous economic order, set interest rates (the price of money) through supply and demand, and generate price data that tell investors and businesses how much of which products and services to produce.

Because of long-term care’s heavy reliance on centrally planned government financing, America’s long-term care system does not produce the price data investors would need to allocate resources in the most productive and beneficial way.

For these reasons, the less government controls long-term care and the more markets prevail, the better off consumers will be.

Our fourth topic of the day examines this point more closely. How do these principles play out specifically in the field long-term care? 

The history of long-term care is a tension between public and private financing. Medicaid made public financing of long-term care easy to get after care is needed. It paid not only for long-term care, but also for health care, room, board, and laundry.

Consequently, the public didn’t worry about long-term care, didn’t buy insurance for it, and ended up on Medicaid. Government costs exploded. Access and quality suffered. Nursing home care prevailed despite the public’s preference for home care. In other words, government made a mess of long-term care.

The private sector—markets—have mitigated some of this damage. Assisted living came along in the 1980s and offered nicer facilities at half the cost of nursing homes, but fully private pay. People were actually willing to pay out of their own pockets to avoid Medicaid nursing homes.

Unfortunately, the assisted living industry is following nursing home down the primrose path of accepting Medicaid. ALF operators figure it’s better to get Medicaid’s low reimbursement than to have an empty unit. 16.5% of ALF residents receive Medicaid now and it’s growing.

Home care is similar. Government has failed to “rebalance” from nursing homes to home care despite decades of trying. But home care companies like Amada, for example, routinely search for customers who have LTC insurance, help them get all the benefits they’re entitled too and counsel them on using home equity or life settlements to fund their care privately as well. In other words, the private sector plays a critical role in helping consumers find ways to pay privately for the home care they prefer, but government has failed to provide.

Government went a long way to ruin LTC insurance by giving away what producers are trying to sell and by forcing interest rates to zero which compelled carriers to raise premiums, which alienated LTCI prospects and clients.

The private sector did the right thing, raising premiums to ensure benefits would be paid when due, unlike Social Security and Medicare which have huge unfunded liabilities and will never keep the promises they’ve made.

The private LTCI market licked its wounds and responded creatively with new hybrid products.

In other words, what government fouled up, the private sector goes a long way to fix. The lessons of long-term care history are clear. Public programs have diverted the public from responsible planning and left too many people dependent on welfare-financed nursing home care. The private sector has interceded repeatedly with preferred options such as assisted living, private insurance and home care.

Our fifth topic is new research that concludes long-term care may not be such a titanic problem after all.

Recent research shows that half of people turning 65 will incur LTC expenses, those expenses will average only $138,000, and that the people needing long-term care could handle that cost by investing only $70,000 today. That doesn’t sound so intimidating.

Other research shows 74% could fund two years of paid home care by liquidating all of their assets, and 58% could fund two years of extensive paid home care.

Of course people will not liquidate their assets to pay for LTC as long as Medicaid financial eligibility works the way it does. So, fix Medicaid. Don’t impose a massive new compulsory payroll tax on everyone to fund a universal program that isn’t needed.

NIC, the National Investment Center, says 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.

Where could consumers find that extra $15,000? The LTCI premium for an annual policy of $15,000 would be a tiny fraction of the premiums consumers find so financially daunting now. Unfortunately, insurance regulations forbid carriers from offering coverage with a benefit of less than $18,000 per year. So, fix LTCI regs.

We should explore further the possibility that private LTC insurance, home equity conversion, and private savings could meet this less daunting challenge of providing quality long-term care to most Americans if government would just get out of the way.

Finally, our sixth and last topic of the day. What is the best course of action going forward?

Stop doing what we’ve always done that created long-term care’s problems. Reduce government’s role in financing and regulating long-term care. Cut federal financial participation in state Medicaid programs. Enforce Medicaid financial eligibility rules and estate recovery. Eliminate or radically reduce Medicaid’s home equity exemption to encourage the use of home equity conversion to fund long-term care privately. Close Medicaid financial eligibility “loopholes” and discourage Medicaid estate planning as inequitable, favoring the well-to-do over the poor.

Encourage personal responsibility for long-term care. Use some of the savings from tightening Medicaid to incentivize responsible LTC planning. Consider recommendations from NAIC’s 2017 report “Long-Term Care Federal Policy Options to Present to Congress” such as … Permit distribution from 401(k), 403(b) or Individual Retirement Account (IRA) to purchase LTCI with no early withdrawal tax penalty. Consider the AHIP proposal to allow employers to offer long-term care insurance under a cafeteria plan.

Publicize Medicaid’s estate recovery obligation. Make sure the public understands LTC is a personal responsibility: you either pay now or pay later. Encourage all forms of private LTC financing: Savings and investment. Private LTC insurance, both traditional and hybrid. Reverse mortgages and other kinds of home equity conversion. Life settlements also.

Finally, consider “The Great LTC Compromise.” That’s the title of my article in the current, January 2022 issue of Broker World magazine. If we can’t stop the drive for federal or state level LTC social insurance, then let’s at least demand they maintain an opt out by purchasing private LTCI. That ensures at least some people will be protected when the social insurance “entitlement” programs become insolvent.

I’ll conclude there but before we go to questions, let me just say a few words about my organization, the Center for Long-Term Care Reform.

The Center is a private think tank dedicated to ensuring access to quality long-term care for all Americans.

We do research and public policy advocacy aimed at convincing consumers to take the risk of long-term care seriously and plan early to save, invest and insure against that risk.

We publish two online newsletters, LTC E-Alerts and LTC Bullets.

We conduct and publish national and state-level studies and reports.

We speak at conferences and testify before state legislatures and Congress.

The Center is a membership organization with individual memberships beginning at $150 per year.

For more information, go to www.centerltc.com or contact me at 425-891-3640 or smoses@centerltc.com.

Thanks for your attention. That’s a lot to digest in a short time. Do you have questions?