LTC Bullet: LTC Reflections

Friday, October 14, 2022

Seattle—

LTC Comment: America made great strides toward fixing long-term care until 2006. Then, nothing since. What happened? When will progress resume? We explain after the ***news.***

*** TODAY'S LTC BULLET is sponsored by Claude Thau with BackNine Insurance.  In addition to many unique services to advisors relative to individual, worksite and affinity LTCi (including his revolutionary “Range of Exposure” tool that protects FPs from risks most don’t recognize).  New service: your own free insurance website allowing clients to buy insurance with as little or as much of your involvement as you or they want.  Claude is the lead author of Milliman’s annual Broker World LTCi Survey & a past Chair of the Center for Long-Term Care Financing. Contact him at 913-707-8863 or claude@back9ins.com to kick his tires & discuss how he might help you. ***

*** THE PARAGON HEALTH INSTITUTE published my new study last week titled “Long-Term Care: The Problem.” PHI president Brian Blase summarized the paper and stated: “You can find ‘Long-Term Care: The Problem’ and an executive summary here.” He also announced: “The next paper, ‘Long-Term Care: The Solution,’ will be published early next year and will provide a set of reforms to address the problems caused by misguided government policies.” McKnight’s Senior Living covered the study inPaper analyzes government policy’s role in creating LTC problems” by Kathleen Steele Galvin. ***

 

LTC BULLET: LTC REFLECTIONS

LTC Comment: Long-term care in the USA is fraught with problems. To name a few: dubious access and quality, institutional bias, excessive dependency on inadequate government financing, caregiver shortages, and worn out, financially distressed families struggling to support loved ones in need of help. What went wrong?

I argue in a new paper titled “Long-Term Care: The Problem,” that Medicaid is the primary cause of those dysfunctions. Specifically, availability of Medicaid LTC benefits when care is needed late in life created a moral hazard that discouraged responsible LTC planning while consumers were still young, health and affluent enough save, invest or insure for the risk. Easy access to Medicaid late in life enabled consumers’ denial of LTC risk and cost leaving them nowhere to turn when catastrophic LTC costs ensued except to Medicaid. Too many people dependent on inadequate Medicaid funding led directly to all the other problems cited above. Enough here about that; see the paper for details.

What I want to cover today is a certain mystery. Congresses and presidents from both political parties worked for decades to fix what’s wrong with long-term care and Medicaid. When Medicaid LTC expenditures vastly exceeded original expectations, they set about controlling costs. They imposed financial eligibility restrictions. They required penalties to discourage artificially self-impoverishing asset transfers. They made estate recoveries mandatory. They encouraged private LTC insurance with limited tax deductibility; offered the LTC Partnership program to forgive estate recoveries; and urged the public to “Own Your Future” by preparing for the likely eventuality of needing long-term care one day. All this was done to wean the public off Medicaid and prepare them to pay privately for top quality long-term care in the most appropriate venue if and when they needed it.

Nothing worked fully, but progress was being made until 2006. After that, nothing. What happened? That’s the mystery. Here’s my explanation.

From Medicaid’s early days legislative efforts to control its spending on long-term care and to focus the public on early LTC planning coincided with economic recessions. The economy would tank; politicians couldn’t make budget ends meet; deficits and the national debt grew; pressure mounted to curb spending; and statutory changes were passed to control costs by ensuring Medicaid LTC benefits went only to the truly needy. Consider these examples of recessions that led directly to legislative reforms:

Recessions

Legislation

January to July 1980

Omnibus Reconciliation Act of 1980 imposed the first ever restriction on asset transfers to qualify for Medicaid.

July 1981 to November 1982

Tax Equity and Fiscal Responsibility Act of 1982 authorized state Medicaid programs to penalize asset transfers, place liens on real property, and recover benefits from the estates of deceased recipients

Consolidated Omnibus Budget Reconciliation Act of 1985 attempted unsuccessfully to prohibit "Medicaid qualifying trusts."

Medicare Catastrophic Coverage Act of 1988 required Medicaid asset transfer penalties, mandated a 30-month look back, and capped maximum asset transfer penalties at 30 months.

July 1990 to March 1991

Omnibus Budget Reconciliation Act of 1993 made estate recovery mandatory, expanded the look back period to five years, eliminated the cap on asset transfer penalties, and prohibited “pyramid divestment.”

Health Insurance Portability Act of 1996 made it a crime to transfer assets to qualify for Medicaid (Throw Granny in Jail Act) and Balanced Budget Act of 1997 repealed Throw Granny in Jail and replaced it with Throw Granny’s Lawyer in Jail.

March 2001 to November 2001

Deficit Reduction Act of 2005 placed the first cap on Medicaid’s home equity exemption, limited the half-a-loaf loophole, amended the annuity rules, and unencumbered the Long-Term Care Partnership Program.

After 2000, the linkage between recessions and legislative reform was broken.

A sea change in economic policy around the turn of the century unleashed Medicaid spending. The Federal Reserve forced interest rates down artificially. The U.S. Treasury spent beyond its means. The Federal Reserve monetized the resulting debt. Inflation occurred but it was disguised by rising real estate, stock and bond values. Consumers didn’t feel the pinch. The rest of the world bought our debt, sending the USA valuable goods in exchange for bonds we sold and they bought relying on our promises to repay them. Modern Monetary Theory prevailed.

December 2007 to June 2009 (The Great Recession)

and

February 2020 to April 2020 (Covid 19 Recession)

These recessions spurred no legislation to control Medicaid LTC spending by targeting benefits away from the middle class and toward the truly needy. In fact, they led to ever more generous funding of all Medicaid programs including long-term care. The Covid 19 recession created a tsunami of spending. The federal government prevented state Medicaid programs from culling even ineligible people from the rolls. Enhanced federal matching funds were conditioned upon keeping everyone on Medicaid until the national health emergency (NHE) ended. The pandemic subsided but the NHE has been extended out of fear that millions would be forced off Medicaid when it ends.

What is going on? As long as politicians were under budgetary pressure to control expenditures, they responded with legislation intended to target scarce Medicaid resources to people most in need. Eligibility controls, rules against asset divestiture, and mandatory estate recoveries sent the message that people should plan early and responsibly to save, invest or insure against their personal LTC risk. But after 2006, with the government money spigots wide open and the Federal Reserve liberally monetizing whatever debt the federal government created while forcing interest rates to near zero, pressure to control costs disappeared. Consequently, no further progress was made to ensure Medicaid LTC benefits went only to the genuinely needy. More and more Medicaid became the primary LTC payer for catastrophic costs not only of the poor but of the middle class and affluent as well.

What is changing? We are now experiencing a regression to the mean of economic and political policy making. Excessive government spending during the pandemic created an economic bubble. Too low interest rates caused excessive optimism, malinvestment, booming stock markets, and engorged real estate values. Too much money chased too few goods as the government channeled unearned funds to non-working people and non-producing businesses. The bill for that and for earlier decades of careless spending and irresponsible monetary policy is finally coming due. The price of payment is consumer inflation. All the “generous” government spending over the years that created a national debt currently exceeding $31 trillion is now in collection status. Consumers make the payments for their government’s profligacy at the grocery store, at the gas station, in their monthly rent or mortgage payments, in literally everything they buy.

What does this mean going forward? Careless fiscal and monetary policies unleashed debt and inflation. High inflation makes servicing the huge national debt unsustainable. All of a sudden, politicians at both the state and federal levels are being forced to deal again with budget shortfalls. It’s harder than ever for them to raise taxes, because the pressure of inflation has tapped out tax payers. The pols can no longer get away with printing money and monetizing the debt, because that only increases inflation and tightens the fiscal vise. A long-delayed rendezvous with economic reality is underway.

So here is what I predict. This new economic and political reality will once again force politicians to control Medicaid LTC expenditures. They will need either to revisit the kinds of interventions tried before and reinstate them with stronger enforcement. Or they will have to try something different. I think we’ve learned what does not work. Telling people they could lose their life savings to catastrophic LTC costs when it wasn’t true, did not work. Because the federal and state governments did not adequately enforce income and asset eligibility rules, including asset transfer restrictions, and mandatory estate recoveries, the public was desensitized to LTC risk and remains so.

What are the odds that will change in the future? Nil. When the current recession finally ends and the economy improves, the politicians will return to their usual ways. As soon as the budget pressure is off, they’ll lose interest in controlling Medicaid LTC expenditure. Benefits will continue to flow to the middle class and affluent. States won’t enforce strict eligibility rules or estate recoveries. Moral hazard will reign as before with few people worrying about LTC risk and cost until they need high cost care. Then they’ll turn as they always have to Medicaid and around we’ll go again in this endless negative cycle.

No, we have to do something different. What to do and how to do it is the subject of my next paper for the Paragon Health Institute titled “Long-Term Care: The Solution.” Watch for it early in the next year, but expect clues to its direction in these LTC Bullets, both past and future.