LTC Bullet: Medicaid, Home Ownership and Long-Term Care Financing
Friday, July 7, 2017
LTC Comment: Medicaid’s estate recovery requirement induces aging Americans to reduce home ownership and decrease home equity in order to qualify for Medicaid long-term care benefits: we explore how this occurs and to what extent after the ***news.***
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7/5/2017, “Poor Patient Care at Many Nursing Homes Despite Stricter Oversight,” by Jordan Rau, New York Times
Quote: “While special focus status is one of the federal government’s strictest forms of oversight, nursing homes that were forced to undergo such scrutiny often slide back into providing dangerous care, according to an analysis of federal health inspection data. Of 528 nursing homes that graduated from special focus status before 2014 and are still operating, slightly more than half — 52 percent — have since harmed patients or put patients in serious jeopardy within the past three years. . . . Yet, despite recurrences of patient harm, nursing homes are rarely denied Medicare and Medicaid reimbursement.”
LTC Comment: Most nursing homes rely primarily on reimbursement from Medicaid at less than the cost of care. So it’s no wonder care quality suffers, but Medicaid can’t always deny reimbursement. Who would provide care of any quality if it did? The only answer is to stop trapping the middle class on Medicaid and pull more private financing at market reimbursement rates into long-term care. No amount of “oversight” can make up for inadequate funding. ***
LTC BULLET: MEDICAID, HOME OWNERSHIP AND LONG-TERM CARE FINANCING
LTC Comment: Does Medicaid’s estate recovery mandate cause people to reduce their home ownership and equity in contemplation of qualifying for the program’s long-term care benefits?
That’s the question a Syracuse University economics graduate student (now a Kent State Associate Professor of Economics) set out to answer in 2009. Her conclusion is one of the most important articles in the economics and health policy literature bearing on long-term care financing, to wit:
Nadia Greenhalgh-Stanley, “Medicaid and the housing and asset decisions of the elderly: Evidence from estate recovery programs,” Journal of Urban Economics, Vol. 72, 2012, pps. 210-224.
By all means, read the full article. What follows here are key quotes from it with our comments further drawing out the ramifications for Medicaid and long-term care insurance.
NGS: “Using data from 1993 to 2004 in the Health and Retirement Study on elderly individuals, I find that state adoption of estate recovery programs makes the elderly decrease homeownership by 4.6%, decrease home equity by 15%, and also decrease the housing share of the elderly wealth portfolio. State adoption of these programs results in elderly baseline homeowners being 33% less likely to own their homes at death and more likely to use a trust as a substitute to housing in order to preserve assets and carry out bequest motives at death.” (Abstract, p. 210)
LTC Comment: What this means is that whether they do it consciously or not, people respond to states’ implementation of Medicaid estate recovery programs by reducing their home ownership and equity substantially and by finding other means than Medicaid’s previously unencumbered home equity exemption to protect their wealth from long-term care risk and cost. But the numbers are even more significant than they may seem at first.
NGS: “While 4.6% may seem like a small percent effect, it is actually quite large when measuring a change in the homeownership rate. . . . [Federal laws] to incentivize and increase homeownership are often deemed to be successful if they can change homeownership by a mere 1% or more. . . . Clearly finding a homeownership change of 3–5% is a very large impact and therefore, the 4.6% decrease in the homeownership rate for the elderly is economically significant.” (p. 217)
LTC Comment: What about the 15% decrease in home equity? How meaningful is that?
NGS: “When considering how big these changes in home equity are, it is important to consider their size in comparison to other findings in the literature, specifically in comparison to maintenance and depreciation. I estimate state adoption of these laws decreased home equity by 15%. Putting this into further perspective, Harding et al. (2007) find that home equity decreases at a rate of 2.5% per year gross of maintenance and decreases at a rate of 2% per year net of maintenance. This further shows that I am measuring a very substantial impact on home equity.” (p. 218)
LTC Comment: What about the use of a “trust as a substitute to housing in order to preserve assets and carry out bequest motives at death.” (p. 210)
NGS: “The total impact of recovery, the sum of TEFRA [Tax Equity and Fiscal Responsibility Act of 1982] liens and ERP [estate recovery program] coefficients, is an increase in trust participation at death of 63.1%.” (p. 221)
LTC Comment: So, what do these dramatic findings mean for long-term care financing?
NGS: “When facing these large and uncertain expenses of a nursing home and long-term care, which are the type of expenses older individuals should insure themselves against, the elderly have four options for insurance. First, they can self-insure by accumulating assets as a buffer for these uncertain future nursing home costs. Secondly, they can self-insure by having their kids provide informal long-term care services, which can be carried out through either intergenerational or inter vivos transfers, in which care is provided in exchange for bequests. Third, they could buy market services in the form of private long-term care insurance. . . . Finally, they can use government provision of insurance. Once the government intervenes in the provision of long-term care insurance, crowd-out of private behavior becomes an issue. The extent to which social insurance crowds out private behavior is a perennial topic in economics.” (p. 211)
LTC Comment: So, how exactly might public funding of long-term care inhibit savings and private insurance against that risk and cost?
NGS: “In this situation, government crowd-out of private behavior can happen in two ways. First, after the availability of government insurance, individuals who previously had chosen to self-insure through the accumulation of assets would anticipate the government coverage and decide to accumulate fewer assets. In other words, there would be an implicit spenddown of assets due to the expectation of government financed insurance, which could be carried out through higher consumption in the years prior to a nursing home. Second, Medicaid’s role as a payer of last resort may directly crowd out demand for private long-term care insurance, see Brown et al. (2007) and Brown and Finkelstein (2008).” (p. 211)
[NB: These Brown and Finkelstein articles showed that availability of Medicaid long-term care benefits after care is already needed crowds out between two-thirds and 90 percent of the demand for private LTC insurance.]
LTC Comment: Now, to show how and why people might reduce their income and assets in preparation for potential future Medicaid long-term care eligibility, Professor Greenhalgh-Stanley turns to a discussion of Medicaid eligibility and spend down rules. In this section I believe she erred in ways that undercut the full significance of her dramatic findings.
NGS: “Spend-down of assets occurs as individuals are required to contribute liquid resources toward the cost of their care until the typical state threshold of $2000 is reached. Importantly, this limit excludes the home and primary vehicle.” (p. 211)
LTC Comment: Actually, there is no such rule. Medicaid does not require that assets be spent down for care. The only requirement is that spent assets receive “fair market value” in the exchange. So, to reach the $2000 asset threshold, people can and often do, purchase exempt assets, which include far more than just the “home and primary vehicle.” Some additional examples of exempt assets unlimited by any dollar amount are one business including the capital and cash flow, IRAs in payout status, term life insurance, prepaid burial funds, home furnishings and personal belongings. (I sourced these exemptions to their roots in federal law and regulations in “Medi-Cal Long-Term Care: Safety Net or Hammock?,” 2012, pps. 20-21.) Medicaid planning attorneys have long check lists of exempt assets which they encourage their clients to purchase in lieu of spending money on long-term care. By assuming incorrectly that people must spend down their savings for care, the author overstates the difficulty of qualifying for Medicaid long-term care benefits and therefore understates the significance of her finding that people structure their assets to qualify for Medicaid.
I should also point out the irony that many people convert countable assets such as cash, stocks or bonds into exempt home equity by remodeling a home, buying a more valuable house, or prepaying a mortgage. This is the opposite of the home equity decumulation behavior Dr. Greenhalgh-Stanley identifies, but it has the same effect of accelerating eligibility for Medicaid benefits. Are not people who do this vulnerable to estate recovery, however? Not likely, as federal law and regulations make estate recovery quite difficult and the same Medicaid planners who facilitate eligibility in the first place also utilize every legal means to avoid estate recovery for their clients as well. If it were not for this countertrend adding to home equity among aging homeowners, the author probably would have found even more reduction in home ownership and equity ahead of needing long-term care.
NGS: “Spend-down of income occurs as an individuals’ excess income, defined as income above the state’s income threshold, is placed toward the cost of their care.” (pps. 211-212)
LTC Comment: Now, that statement is correct. Medicaid does require income to be spent for care (or other health-related expenses including insurance premiums) down to the states’ income eligibility limits. Probably, this requirement regarding income is the source of the confusion regarding spend down of assets, which error occurs often in the health policy literature.
NGS: “Conclusion: Medicaid’s higher implicit tax of holding owner-occupied housing
from state adoption of ERPs and TEFRA liens induced three primary behavioral changes as follows: the elderly to decrease their homeownership while alive and at death, decrease home equity and the housing share of the wealth portfolio, and increase trust participation at death.” (p. 221)
LTC Comment: Well, yes, very dramatic results. But the full reality is much greater still. Aging Americans jettison much more than home equity to qualify for Medicaid. When they decrease the “housing share of the wealth portfolio,” they employ many ways to exempt that newly-non-housing wealth from Medicaid spend down rules as well. How? To learn that you need to be familiar with a large and growing formal legal literature on Medicaid planning. Since 1981, in hundreds of legal treatises, peer-reviewed journal articles, and popular media outlets, elder law attorneys have trained their colleagues and shown their clients how to qualify quickly and easily for Medicaid long-term care benefits without spending down savings for care. Unfortunately, most economists and health-policy-analysts are unfamiliar with that literature. So they vastly underestimate the impact of easy access to Medicaid after care is needed on financial planning, saving, investment, insurance and wealth decumulation behavior by the aging.
Closing LTC Comment: I wrote the following excerpt in a 1988 DHHS Inspector General Report titled “Medicaid Estate Recoveries: National Program Inspection,” five years before Congress and President Clinton accepted that report’s recommendations and made estate recoveries mandatory. The decades since have shown, as Dr. Greenhalgh-Stanley’s article ratifies, that estate recoveries influence consumer behavior as regards wealth management and long-term care planning. If state Medicaid programs had implemented estate recoveries more fully; if the federal government had enforced the mandate more effectively; and if the media had publicized estate recovery so more people knew about it while they were still able to save, invest or insure for long-term care, more of the salutary outcomes I predicted would have occurred. But that’s not how history played out. So I’ve come to believe the only solution is to reduce or eliminate Medicaid’s home equity exemption so that people with significant real wealth utilize reverse mortgages to pay for their long-term care until they become genuinely needy and properly eligible for public assistance. I’ve written at length elsewhere about the benefits that would accrue from implementing such a reform.
Excerpt from “Medicaid Estate Recoveries: National Program Inspection,” Department of Health and Human Services, Office of Inspector General, Office of Analysis and Inspections, Region IX, Seattle, Washington, June 1988.
“A large nontax revenue source generated by Medicaid estate recoveries could be recycled to help the truly destitute. It is possible, however, that enhanced estate recoveries would have more far-reaching effects on long-term care funding. Faced with the certainty--which is almost nonexistent today--that accepting care from Medicaid means paying back the cost out of one’s estate, people might seek other alternatives. Such alternatives include Social Health Maintenance Organizations (SHMO's), continuing care communities, targeted savings accounts and private long-term care insurance. To pay for these nonpublic assistance options, the elderly would have to turn more to private home equity conversion or to assistance from their adult children. It is their children, after all, who stand to inherit whatever property remains after the costs of long-term care are paid and who currently reap the windfall of Medicaid subsidies. We must emphasize that the issue is enrichment of nonneedy adult heirs, not denial of care to the elderly. For those who opt to rely on Medicaid, or have no other choice, eligibility conditional upon a promise (secured by an automatic lien) to repay benefits from their estates would assure all elderly people of (1) access to care, (2) retention of home property as long as it is needed by spouse and dependents, and (3) the dignity of paying their own way in the end.” (pps. 47-48)