LTC Bullet: How Much Could Medicaid Save?

Friday, May 12, 2017

Seattle—

LTC Comment: If Medicaid did not exempt up to $840,000 of home equity, how much could taxpayers save and what would happen to long-term care access and quality? Answers after the ***news.***

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LTC BULLET: HOW MUCH COULD MEDICAID SAVE?

LTC Comment: Medicaid is at the center of the current debate over repealing and replacing ObamaCare. But most of that discussion centers on acute care for low-income young people, the side of Medicaid that touches the most individuals, but costs disproportionately less than long-term care for the elderly. Let’s consider instead how changing Medicaid’s treatment of home equity for the elderly in need of long-term care could save much more money and improve care access and quality in the process.

If Congress and the Trump Administration eliminated Medicaid’s $560,000 to $840,000 (depending on the state) home equity exemption for long-term care eligibility, how much could taxpayers save on Medicaid expenditures and what would the ramifications be for care access and quality? To answer this question requires taking into account the disproportionality of Medicaid long-term care spending by enrollee type and eligibility status.

Total Medicaid spending for federal fiscal year 2015 was $545.1 billion (3.0 percent of Gross Domestic Product), but these funds were not distributed evenly among enrollees.^[1]-[2] Medicaid’s long-term care recipients consume an uneven share of total program expenditures. For example, people eligible for Medicaid and Medicare or "dual eligibles" accounted for 36 percent of Medicaid spending in 2010, although they comprised only 14 percent of Medicaid recipients.^[3] These dual eligibles are heavy users of long-term care, which comprised 65 percent of their Medicaid expenditures.^[4] The aged, blind and disabled--also heavy users of long-term care--are one-fourth of Medicaid recipients (24 percent) but account for nearly two-thirds of program costs (63 percent), whereas younger recipients, mostly poor women and children, are three-fourths of the recipients (75 percent) but consume only a little more than one-third of the cost (36 percent).^[5]-[6]

Researchers and policy makers are trying to find ways to manage dual eligibles more cost-effectively, but no one, until now, has focused on how to prevent people from becoming dual eligibles in the first place. Because dual eligibles and the aged, blind and disabled (ABD) consume a disproportionate share of Medicaid's total resources, every actual or potential dual eligible, ABD or long-term care recipient diverted from Medicaid dependency will result in a highly leveraged savings to the Medicaid program. In other words, prevent Medicaid dependency for even a small number of these heavy long-term care users, and the savings will be extraordinarily high.

Why do people become dual eligibles and how could they be diverted from that fate? Easy access to Medicaid long-term care eligibility after care is needed has discouraged early and responsible long-term care planning. People who come to need long-term care, but failed to plan for it, ultimately end up with very limited income and assets. Whether they qualify for Medicaid genuinely by spending down their wealth for care or artificially by taking advantage of the program’s generous exemptions, eligibility loopholes or Medicaid planning, such people automatically become dual eligibles when they turn 65 years of age and qualify for Medicare.

The greatest asset they retain, and often preserve for heirs by avoiding estate recovery, is their home equity. If home equity were at risk to pay for long-term care, it would take longer for homeowners to qualify and fewer people would end up as Medicaid recipients. Therefore Medicaid would have fewer dual eligibles to support for shorter periods of time.

Medicaid spent $139 billion on 9.6 million dual eligibles in 2010.^[7] Fifty-nine percent of dual eligible enrollees were 65 years of age or older and accounted for 60 percent of Medicaid spending on dual eligibles.^[8] Thus, 5.7 million dual eligibles over age 65 consumed $83.4 billion for an average of $14,632 per dual. Further, we know that 76 percent of Medicare beneficiaries owned home equity in 2016 and their median equity was $70,950.^[9] These figures are very conservative predictors of home equity conversion’s potential to fund long-term care, because the percentage of homeowners and their equity in their homes may well have been much higher a decade or two earlier, when they could have taken measures to protect their homes’ value by saving, investing or insuring against long-term care risk.

If Medicaid no longer exempted home equity from long-term care risk and cost, those 76 percent of Medicare beneficiaries with median home equities of $70,950, and especially those with equities above the median whom Medicaid currently protects up to $560,000 to $840,000 (greater than the 95^th percentile) would be strongly incentivized to plan for long-term care. Otherwise, if they came to need expensive paid care and lacked other resources, they would need to take out reverse mortgages to fund the care and thus deplete their home equity, ultimately becoming dependent on Medicaid but only after spending down their real estate wealth.

What might the potential savings to Medicaid be? If one in five of the 5.7 million age-65-plus dual eligibles in 2010 had taken measures earlier to protect their home equity from long-term care spend down, the savings to Medicaid would have been $16.7 billion (20 percent of the $83.4 billion actually spent in that year).

Is such a reduction in dual eligibles feasible? The actual reduction would probably be even greater. According to the National Council on the Aging,

With an estimated amount of over $72,000 available on average to older households from these loans, reverse mortgages can help impaired elders pay for several years of daily home care visits, over a decade of out-of-pocket expenses and respite for family caregivers, or substantial home modifications.^[10]

That much money added to other income and assets and used for long-term care, especially private home and community-based services, could delay or prevent Medicaid eligibility for millions of Americans. The savings to Medicaid would easily exceed $20 billion per year in combined state and federal expenditures, probably much more. Over time, Medicaid savings would increase rapidly beyond these initial estimates as more and more people plan ahead to pay their own long-term care expenses by means of real asset spend down (instead of Medicaid planning), home equity conversion or private long-term care insurance, a product whose market will only expand if and when it becomes needed to protect home equity from long-term care expenses.

The potential benefits to America’s long-term care service delivery and financing system from engaging home equity to fund care go far beyond Medicaid savings.

• Spending their own money, consumers will purchase care they prefer, aging in place instead of being drawn into institutional settings that Medicaid often requires.

• Paying private market rates for care, consumers will command red-carpet access to top quality care instead of relying on Medicaid’s notoriously meager reimbursement rates.

• Medicaid itself, with fewer expensive dual eligibles to support, would have more resources to provide better care in the most appropriate settings for people genuinely in need of the help.

Drawing the enormous potential resource of home equity into the financing of long-term care would thus improve care access and quality for all people irrespective of their private-pay or Medicaid status. It would also create new jobs in the reverse mortgage and long-term care insurance businesses generating substantial new tax revenue and further strengthening the economy. Most importantly, putting home equity to work funding long-term care would finally end the perverse incentive in public policy that discourages planning ahead and leaves too many people dependent on public welfare.