LTC Bullet:  The Future of Long-Term Care Seen Through the Prism of History

Friday, November 13, 2015

Seattle—

LTC Comment:  Big changes are afoot in government financing of post-acute and long-term care--changes that will rattle private LTC financing options as well.  We present the big picture after the ***news.***

*** TODAY'S LTC BULLET is sponsored by Claude Thau, a GA whose proprietary tools help advisors find clients and reduce the “Ping-Pong” in the LTCi sales process. Help clients make informed final decisions about buying LTCi in 15-20 minutes!  Gauge a client's true interest in a combo product immediately!  Change work-site LTCi sales from a series of proposal deliveries to a single interactive consultation!  Claude is the lead author of the Milliman Broker World LTCi Survey, one of Senior Market Advisor's 10 "Power People" in LTCi in 2007, a past Chair of the Center for Long-Term Care Financing. Test Claude by calling 800-999-3026, x2241 or email him at claudet@targetins.com to ask questions or get references. ***

*** CLTCR Premium Membership  --  Center for Long-Term Care Reform premium members receive our full suite of individual membership benefits including:  our LTC Bullets and E-Alerts; access to our Members-Only Zone website and Almanac of Long-Term Care; subscription to our Clipping Service; and email/phone access to Steve Moses for 24-hour turnaround queries.  Our Premium Membership is designed to give you a competitive advantage in your long-term care profession. Your increased knowledge of the critical issues and challenges we face in the field of long-term care service delivery and financing equals improved professional success for you and better LTC services for your clients and for those who have no choice but to rely on scarce public resources.  Premium Membership is $250 per year, paid up front or monthly by automatically recurring credit card payments.  Contact Damon at 206-283-7036 / damon@centerltc.com to start your Premium Membership immediately or go directly to our secure online subscription page and sign up for as little as $21 per month. ***

*** FRIDAY THE 13TH:  Don’t let superstitious fear of the unknown keep you from reading today’s LTC Bullet which presents a truly scary scenario about the future of LTC financing, but with a happy ending for those who persevere. ***

 

LTC BULLET:  THE FUTURE OF LONG-TERM CARE SEEN THROUGH THE PRISM OF HISTORY

LTC Comment:  In last week’s LTC Bullet:  A New Revolution in Long-Term Care Financing . . . by Government we provided a summary of the coming upheaval in public LTC financing and how it fits in with the history of government involvement in the long-term care market.  This week we present the bigger picture.

For starters, check out this presentation by Brian Ellsworth of Health Dimensions Group on “The Emerging World of Value-Based Payment.”  It will tell you everything you need to know about the trends I’ll critique below. 

In a nutshell, the Centers for Medicare and Medicaid Services (CMS) seeks to change both programs LTC payment systems to reward quality instead of quantity.  Sounds good, right?  But why does government pay for most LTC in the first place?  Why does it have to revolutionize its reimbursement methods to ensure quality?  Why can’t people simply choose the LTC services and providers they prefer without the long arm of the law needing to intervene? 

Those are the questions I tried to answer in my presentation Tuesday at a conference in Dallas.  Following is a transcription of my remarks.  You’ll see why I think the whole publicly financed long-term care house of cards may soon come crashing down.

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The Future of Long-Term Care Seen Through the Prism of History
by
Stephen A. Moses

If value-based payment is good enough for Medicare, it should be good enough for McDonald’s too. 

A monopsonistic, government-based nutrient payer could ensure quality food distribution by paying for value instead of quantity.

We could reimburse prospectively for dietary-related groups of alimentary consumption episodes rewarding lower food poisoning levels with five-star ratings.

“What if I want a Big Mac,” you ask?  Tough luck.  Too many calories for too little nutrition.  The re-hospitalization risk is off the chart.

Why do we have prospective payment systems, bundling, managed care, and value-based payment in health care but not in food distribution?

Why is government micro-management of long-term care service delivery and financing the wave of the future?

Well, it’s been a slippery slope for 50 years.  Santayana said:  Remember history or you’ll repeat it.  We’re not just repeating the mistakes of the past, we’re doubling down.

So, how did we get into this mess?

Once upon a time, long-term care was a Mom and Pop arrangement.  Mom and Pop took care of Grandpa and Grandma, usually as a family, sometimes as a business.

Then, in 1965, government stepped in to help.  At first, Medicare and Medicaid paid generously on a fee-for-service basis--initially to win passage of those programs and later to sustain support for them from business and political interests.

Medicare was to be “social insurance” for acute health care with premiums paid and benefits received by all.

Medicaid was to be a safety-net for long-term care, a means-tested public welfare program.

Remember that distinction between social insurance and welfare.  We’ll return to it.

In the beginning, Medicaid offered only nursing home care.  This was the origin of the welfare-program’s infamous “institutional bias.”

And in the beginning, Medicaid had no asset transfer restrictions nor any estate recovery requirement.  Access to publicly funded nursing home care was easy and practically universal.

Now, people aren’t stupid.  They saw that Medicaid would pay for Grandma in a nursing home, but they’d be burdened by personal caregiving or face cash out of pocket for any other kind of care.

Why pay for home care, adult day care, respite care or assisted living, when the government provides nursing home care? 

Unsurprisingly, a private market for home and community-based services did not develop in those early years.  There was no financial incentive for entrepreneurs to build a better long-term care mouse trap.

The same generous nursing home policies also stunted a budding private long-term care insurance market in the mid-1970s.  Why insure privately for a risk and cost the government already pays for?

The nursing home profession was pretty savvy also.  They saw a huge new funding source in Medicaid and Medicare.  Naturally, nursing homes adapted to take full advantage of the opportunity.  They formed powerful interest groups to influence public LTC policy.

So what do you think happened by the early 1970s?  P.J. O'Rourke, the political satirist, likes to say "If you think health care is expensive now, just wait until it's free."  Of course, the cost of Medicaid financed long-term care exploded.

Did the government respond by addressing the cause of this cost inflation—easily available free long-term care paid for by Medicaid?

No.  Government attacked the symptom of bulging budgets instead. 

Figuring nursing homes couldn’t charge for beds that don’t exist, the public pontiffs of health policy imposed “certificate of need” requirements severely limiting new construction.

But you don’t need a Ph.D. in economics to understand what happens in any market when you artificially cap supply.  Prices tend to increase and that’s exactly what happened. 

Nursing homes said:  “We can’t build more beds?  Fine, we’ll charge you more for the ones we already have.  Thanks, by the way, for protecting us from new entrants into our business.”

So, government finally got the message and curtailed the cause of the problem, free Medicaid-financed nursing home care, right?  Wrong.  The Medicaid monarchs capped nursing home reimbursement instead. 

This was the origin of the differential between low Medicaid reimbursements (often less than the cost of providing the care) and market-based rates half again higher but dwindling in total as private-payers followed public policy incentives and migrated to Medicaid.

Now, put your economists’ hats back on.  With supply and price capped, what do you think happened to demand?  Correct, it went through the roof!  Nursing home occupancy in the mid-1980s jumped to 95 percent at a time when hospitals were little more than half full.

If a nursing home was willing to accept Medicaid's low reimbursement rates, it could fill all of its beds . . . no matter what kind of care it provided.  Consequently, quality of care collapsed in principally Medicaid-financed nursing homes.  Or so the public powers-that-be concluded.

True to form, government attacked the symptom (poor quality) instead of the cause (public financing).  As if wishing could make it so, Congress simply mandated higher quality, more nurses’ aides, better training and so on in the Omnibus Budget Reconciliation Act of 1987.

Thankfully, this time federal command and control worked.  Expenditure growth abated and quality improved—NOT. 

Now caught between the rock of inadequate reimbursement and the hard place of mandatory quality, the nursing home profession had no place to turn but to the courts.

Suing under the 1981 “Boren Amendment” which required state Medicaid programs to reimburse nursing homes adequately so they could provide good care--lo and behold--state nursing home associations won most of those lawsuits.

Who says you can’t fight city hall?

But then, what do you think the government did next?  You guessed it.  Congress repealed the Boren Amendment in the Balanced Budget Act of 1997.  Since then, there has been no legal floor under Medicaid reimbursement for nursing home care, yet costs continued to grow insupportably.

Now, while all this was going on another situation developed.  Private payers in nursing homes, paying half again as much as Medicaid for the same semi-private room, began to wise up. 

They rebelled against this “cost shifting” toward them by seeking ways to qualify for Medicaid themselves.  After all, state and federal laws require the same quality of care regardless of payment source.  So why not?

Some Medicaid eligibility workers were only too eager to help families who faced a long-term care crisis by stretching Medicaid’s already elastic financial eligibility rules in their favor. 

Other workers tried to solve the national debt by strictly enforcing the most draconian rules keeping even the poorest families off Medicaid. 

A special practice of elder law evolved to impoverish wealthier clients artificially in order to qualify them for LTC benefits.

In other words, Medicaid long-term care eligibility became a crap shoot with the lucrative benefit passing to people lucky enough to get a lenient eligibility worker or wealthy enough to consult a Medicaid planning attorney.

Not that it was ever very hard to qualify for Medicaid long-term care benefits.  Despite the common misconception that you must be “low income” to get Medicaid, the fact is that anyone with income below the cost of a nursing home, upwards of $80,000 per year on average, is eligible based on income. 

Consequently, two out of five people receiving Medicaid LTC benefits have incomes between $51,000 and $217,000 per year or more.  More than two-thirds getting Medicaid LTC have incomes between $30,000 and infinity.  Only for the low income?  Hardly.

What about assets?  The usual limit of $2,000 in cash or equivalents is unquestionably poor.  But to get to that level, you can spend down on anything, not just care.  Lawyers advise world cruises, big parties, better cars and larger houses to dispose or shelter excess assets.

Furthermore, virtually unlimited exempt resources don’t even count toward the asset limit.  These include . . .

At least $552,000 in home equity and--with no dollar limit at all--one business including the capital and cash flow, Individual Retirement Accounts, one automobile, term life insurance, prepaid burial plans, home furnishings, and personal belongings.

If you still have too much money, your friendly local Medicaid planner will wave a magic legal wand and reduce the surplus to a level below the welfare program’s income and asset limits. 

Cost in attorneys’ fees to become eligible for Medicaid after you already need care?  About the same as one month in a nursing home private pay, maybe $6,000 or $7,000.

In the early ‘80s, Congress began to attack the problem of Medicaid eligibility abuse with a long series of statutes:

TEFRA (the Tax Equity and Fiscal Responsibility Act of 1982) for the first time authorized state Medicaid programs to impose asset transfer penalties, liens on real property and estate recoveries.  But these measures were only voluntary.

MeCCA (the Medicare Catastrophic Coverage Act of 1988) required state Medicaid programs to penalize asset transfers made for the purpose of qualifying for public benefits within 30 months of application.

OBRA ’93 (the Omnibus Budget Reconciliation Act of that year) made estate recoveries mandatory, expanded the asset transfer look-back period to 36 months, and eliminated the previous 30-month cap on the asset transfer penalty.

When none of these measures worked as hoped, Congress and President Clinton stepped in with HIPAA (the Health Insurance Portability and Accountability Act of 1996) which made it a crime to transfer assets for less than fair market value for the purpose of qualifying for Medicaid.

Senior advocates and the elder law bar called this the “Throw Granny in Jail Law,” so Congress repealed that provision in the Balanced Budget Act of 1997 and replaced it with the “Throw Granny’s Lawyer in Jail Law” making it a crime to advise a client in exchange for a fee to transfer assets to get Medicaid.

When that law was deemed unconstitutional because it held lawyers culpable for recommending a practice made legal again when Congress repealed “Throw Granny in Jail,” public policy intended to save Medicaid for the needy was dead in the water again.

Nothing more happened until the Deficit Reduction Act of 2005 put the first cap ever on Medicaid’s home equity exemption.  It started at $500,000 or $750,000 at state legislatures’ discretion and has increased with inflation to range today from $552,000 to $828,000, from four to seven times the average senior’s home equity.

The DRA ’05 also extended the transfer of assets look-back to five years and closed several loopholes such as the “half-a-loaf” strategy, but it left other gimmicks used to qualify millionaires for Medicaid in effect such as the “Medicaid-compliant annuity.” 

Now, let’s pause for a moment and review.  Government intervened in the long-term care marketplace 50 years ago by providing nursing home care to infirm seniors with most of their assets exempt from spend down and most of their income (largely Social Security benefits) as co-insurance. 

This caused Medicaid LTC expenditures to skyrocket leading to federal and state initiatives to control costs by capping supply and price which drove up demand, undercut quality, reduced private-pay census, and crowded out private markets for long-term care insurance or home equity conversion (to fund LTC) and for home and community-based services (to provide care).

Meanwhile, from the early 1980s forward, another theme developed which was aimed at addressing the problem of escalating Medicaid LTC costs without confronting their real cause.

Academics and government officials became enamored of the idea that Medicaid's long-term care financing crisis could be relieved by paying less for expensive nursing home care and more for lower-priced home and community-based services.

The idea is that taking care of people in their own homes or in the community must be cheaper than maintaining them in a nursing home.  Data often cited at the individual level seem to show that home care is less expensive than nursing home care. 

But this reasoning commits the fallacy of composition, inferring that potential savings for specific individuals are additive to the society as a whole. 

In fact, available research does not show that home and community-based services save money compared to nursing home care overall. 

Community-based care usually only delays institutional services.  Between them, expanded home care plus eventual nursing home care end up costing more in the long run than nursing home care alone. 

That fact is borne out by historical data showing continued growth in total Medicaid long-term care expenditures.  While nursing home costs have leveled out considerably, the home care side of Medicaid continues to grow rapidly.

Here’s the point:  providing long-term care in the most appropriate and desirable setting is a worthy goal to pursue.  But it does not save money.

For every person in a nursing home or assisted living facility in America, there are two or three of equal or greater disability, half of whom are bedbound, incontinent or both, who remain at home.  They are able to stay home because their families, mostly daughters and daughters-in-law, struggle heroically to keep them out of an institution.

When government starts providing long-term care that they want (home care) instead of long-term care that they’d prefer to avoid (nursing home care), people come out of the woodwork to take advantage of it.  That too drives up overall Medicaid LTC expenditures.

Finally, Medicaid financed home and community-based care is deadly to the marketability of private long-term care financing alternatives, such as reverse mortgages or long-term care insurance. 

The big benefit of being able to pay privately for long-term care is the ability to command red-carpet access to top-quality long-term care at the most appropriate level and in the private marketplace. 

To the extent the government conveys to the American public that consumers can obtain the same benefits financed by Medicaid, Medicaid will continue to explode in costs and reverse mortgages to fund long-term care in the short-term and LTC insurance to fund it in the long run will remain stunted.

What a mess!  Here it is in a nutshell.

Easy access to Medicaid-financed nursing home care prevented the development of a private market for home and community-based services. 

Explosive cost growth led to ultimately unsuccessful government efforts to control the supply, price, quality, type and access to Medicaid funded care.

Notoriously low Medicaid reimbursement rates for two-thirds of nursing home residents were partially counterbalanced by relatively generous Medicare reimbursement levels for post-acute and home health care.

As good business people, the nursing home profession pursued the incentives in public policy by reaching out for higher paying Medicare post-acute patients and by seeking fewer lower-paying long-term Medicaid custodial care residents.

That caused the balance of Medicare financing to shift significantly from nearly all acute care toward much more post-acute and long-term care. 

Between 1990 and 2013, long-term care—defined as nursing home and home health care—remained roughly eight percent of total National Health Expenditures.

During the same period, however, the proportion of long-term care expenditures funded by Medicare more than tripled from 9 percent in 1990 to 29 percent in 2013.  Long-term care increased from 4.5 percent of total Medicare expenditures to 11.7 percent in those 23 years.  (CMS-NHE Data)

Consider what this means.  Our current long-term care financing system depends, and has depended for decades, on generous and growing Medicare reimbursements for home care and nursing home care balancing meager Medicaid reimbursements for the majority of people dependent on either or both programs.

As worries about Medicare’s solvency grew throughout the 2000s, federal policy makers looked for new ways to control public LTC expenditures.  CMS hit upon the idea of

driving reimbursement toward “quality” instead of “quantity” as a way to reduce long-term care cost growth in Medicare and Medicaid.

In other words, this latest push by government to manage the LTC service delivery and financing system is designed to fix or at least mitigate problems that were actually caused by earlier government market interventions.

As always before, these new interventions address symptoms—high costs, low quality  and public-policy-induced market dysfunction—instead of the real causes, perverse incentives created by earlier government intercessions.

The risk is that further interference in an already fragile LTC market will turn everything topsy-turvy just as the age wave begins to crest and the entitlement programs’ unfunded liabilities begin to come due.

Remember what I said at the beginning of this talk about how Medicare began as “social insurance” and Medicaid as welfare? 

Ironically, political pressure is building now to means-test, that is to say welfarize, Medicare.  I’ve already shown how Medicaid has become a de facto entitlement, the dominant LTC funding source for all economic levels of Americans.

The net effect of this long historical process is that public financing of long-term care has expanded beyond government’s ability to pay while private LTC financing has dwindled almost to disappearance.

The public does not know who pays for long-term care, but they know someone must pay.  You don’t see Alzheimer’s patients dying in the gutter.

The result is a public asleep about the risk and cost of long-term care and dependent by default on a mostly publicly financed LTC service delivery system that may be on its last legs, unable to squeeze more and better care out of more and more intrusive regulations and mandates.

In a free market consumers rule.  They demand quality and volume.  If they don’t like what they get, they vote with their pocket books and move on to products and providers they prefer.

Competition to provide the best care at the lowest price in the most appropriate settings could and would solve the LTC service delivery and financing problems that have been created by government’s interventions, however well-intentioned those interventions may have been.

Do you have any doubt that long-term care services and financing in the United States would be better if government had left the market alone and allowed competition and the profit motive to make the best possible care available at affordable levels?

Would the poor suffer?  More than they do now?  Hardly.  There would be room for a real safety net paying market rates for the full continuum of care.  Such a safety net might even be possible without public funds, relying entirely on charity and philanthropy. 

But, that is not the course we’re on.  Let’s get back to reality.  I fear we’re headed toward a perfect economic storm when interest rates finally increase making service of our massive public debt unsustainable and leading to a severe retrenchment in Medicaid and Medicare long-term care financing. 

Such an outcome is very nearly inevitable.  The Federal Reserve and the U.S. Government cannot ignore economic gravity forever.  Sooner or later debt and unfunded promises come due.

But to end on a more positive note, if the worst does happen, we’ll be forced to get back to methods and strategies that are more in keeping with the traditional American values of independence, personal responsibility, self-sufficiency and hard work.

I predict that as government is compelled to withdraw from LTC financing dominance:

Medicaid will have to become a real welfare program.  Its home equity exemption will disappear or be radically reduced.  Consumers will use their home equity to pay privately for long-term care.  They’ll employ reverse mortgages for that purpose. 

That new source of private financial oxygen will reinvigorate all providers across the whole continuum of long-term care.

Over time, after watching their own inheritances consumed by their parents’ long-term care costs, the next generation will finally see the merit of private LTC insurance and begin to buy it.

Medicare will stop being “social insurance” paid for by and available to all.  It will be means-tested and become a program for the poor, and hence, as the saying goes, “a poor program,” like Medicaid. 

Acute health care will drift away from mostly public funding toward mostly private financing through health savings accounts and high-deductible insurance.

After 50 years of consuming our economic seed corn by moving ever more fully away from private and toward public financing of long-term care, demographic and economic reality will force us back to the kind of freer market that made the country great in the first place.

Now, before I conclude and turn to your questions, let me anticipate your first query.  You might ask:

“Well Steve, you’ve painted a pretty dismal picture.  Why are you so worried that this whole publicly financed long-term care house of cards may soon come crashing down?”

I’m glad you asked.

My organization, the Center for Long-Term Care Reform, has developed a tool to measure and analyze that risk.

We call it the “Index of Long-Term Care Vulnerability.”  We’ve applied the Index to the LTC service delivery and financing systems in four states so far:  Virginia, New Jersey, Georgia, and most recently, New Hampshire.

You can find our reports on each of those projects by opening the link on my handout which will take you to an online version of the handout where all the links in it are live.

Our Index of LTC Vulnerability analyzes the sustainability of current long-term care systems by examining published data in each of seven key issue areas.  These are:

  • Aging demographics:  how many 85 year olds are in the pipeline?  Answer:  Too many; more than triple what we’re dealing with now by 2050.
     

  • Morbidity:  how sick will they be?  Answer:  Too sick.  Recent optimistic compression of morbidity predictions are not bearing out due to the obesity epidemic.
     

  • Medicaid:  how viable is the welfare program as a source of future LTC financing?  Answer:  Not very based on expenditure trends, ObamaCare expansion, easy income and asset eligibility, inadequate reimbursement and cost shifting, dual eligibles, rebalancing and managed care challenges.
     

  • Federal revenue:  can revenue from taxation and borrowing sustain the federal share of Medicaid?  Answer:  Almost impossible when interest rates increase because of elevated debt and entitlement liabilities and high state matching rates exacerbated by provider taxes and recessions.
     

  • State revenue:  can state economies generate enough revenue to fund their share of Medicaid?  Answer:  Very doubtful based on rankings of states’ fiscal policies by Cato, Forbes, Mercatus, the Pew Charitable Trust, and the Urban Institute.
     

  • Private financing alternatives:  could genuine asset spend down, higher estate recoveries, reverse mortgages and private LTC insurance relieve the financial pressure on Medicaid and, if so, how much?  Answer:  Plenty if Medicaid financial eligibility rules were tightened and enforced.

    Finally,
     

  • Entitlement mentality:  to what extent has easy access to all forms of public assistance undercut the willingness and ability of the American people to fend for themselves?  Answer:  A lot based on metrics like dependency on Medicaid, food stamps, welfare, and disability, but we won’t know how much until we see what happens when people do have to fend for themselves.

The Index of Long-Term Care Vulnerability comes with an interactive score sheet which allows the user to apply weights and scores for each factor of analysis in order to estimate, albeit subjectively, the potential vulnerability of the national and each state’s long-term care service delivery and financing system. 

Check it out and let me know what you think.

Well, that’s my take on where we are, how we got here, and what’s likely to happen next.  Thanks for your attention.  I’ll be glad to answer questions.