LTC Bullet: LTC Policy Blinders
Friday, May 25, 2018
LTC Comment: We explain why and how LTC policy analysts evade facts that contradict their predisposed positions in favor of compulsory government LTC insurance, after the ***news.*** [omitted]
LTC BULLET: LTC POLICY BLINDERS
LTC Comment: How to finance long-term care has bedeviled analysts, public officials, study commissions and families for decades. To little avail. Everyone knows the Rube Goldberg system we have now fails miserably. But no one agrees on how to change it for the better. So it persists.
Lately, however, a consensus is developing around the suggestion that the federal government should compel citizens to participate in a back-end, catastrophic LTC insurance system funded by mandatory payroll taxes. The latest iteration of this idea is “A New Public-Private Partnership: Catastrophic Public and Front-End Private LTC Insurance.”
Over the past three weeks, we have (1) refuted the arguments in that paper (LTC Bullet: Feder Fantasy Fatally Flawed (Cohen Contribution Notwithstanding), May 4, 2018), (2) explained the consequences of the paper’s discounting Medicaid’s role in long-term care financing (LTC Bullet: LTC Evasion, May 11, 2018) and (3) critiqued the paper’s plan to solve problems created by government intervention by adding more of the same (LTC Bullet: Feder/Cohen Proposal Ignores LTC Problems’ Cause, May 18, 2018). In a nutshell, we’ve made the case that ignoring the evidence of Medicaid’s role in long-term care financing led these authors to propose a solution worse than the problem itself.
This week, we explain why and how these authors and others have dodged evidence they should have considered leading them to (1) discount Medicaid’s role and (2) conclude more government intervention is the answer. The following is from “How to Fix Long-Term Care Financing,” published by the Foundation for Government Accountability and the Center for Long-Term Care Reform in July 2017.
Why Do Analysts Wrongly Claim Medicaid Long-Term Care Eligibility Requires Impoverishment?
If people with substantial assets and income can, and do, receive Medicaid-financed long-term care benefits, why do so many analysts say that Medicaid requires impoverishment? The answers lie in a confusion of key concepts and the use of ambiguous language to explain them.
First, analysts wrongly claim Medicaid requires impoverishment because they equivocate on the meaning of “impoverishment.”
Medicaid long-term care eligibility requires inadequate cash flow, i.e. insufficient income, to cover all an individual’s medical and long-term care costs. But it does not require low income, low assets, or financial destitution. Even so, statements like these abound:
Medicaid (the federal-state health care program for the
poor) covers long-term care costs for individuals below certain income
levels, but the deductible for Medicaid is nearly all of an individual’s
income and assets. As a result, Medicaid is the long-term care coverage of
last resort for those with no assets.48
Medicaid is a means-tested welfare program, and eligibility is limited to people who are poor or become poor after incurring high medical and long-term services and supports expenses, and who have very low levels of assets.49
The right conclusion to reach about Medicaid’s role in long-term care financing is that it substantially ameliorates the risk and cost of long-term care, not that it impoverishes people. In the absence of Medicaid, if people truly had to bear the entire cost of long-term care, impoverishment would prevail, reverse mortgages would consume home equity to fund care, Medicaid long-term care expenditures would decline substantially, and many more people would plan, save, invest, and insure for long-term care risk and cost.
Those are not reasons to eliminate or replace Medicaid but rather reasons to target the program to its originally intended recipients — the truly needy — and to increase both positive and negative incentives for the middle and upper classes to prepare for long-term care and avoid Medicaid dependency.
Second, analysts wrongly claim Medicaid requires impoverishment because they equivocate on the meaning of “spend down.”
Real asset spend down comes from expending income and savings for care before applying for Medicaid benefits. Artificial spend down comes from divesting or sheltering wealth by legal or other means to qualify for Medicaid. An expansive legal literature on methods to qualify for Medicaid while preserving wealth began in 1981, immediately after the first restriction on asset transfers was imposed in the Omnibus Reconciliation Act of 1980. It continues today.50 A 2012 article on preserving wealth through Medicaid planning describes the strategy this way:
Medicaid planning may be defined as the process of effectively accessing government resources to pay for long-term health care of a disabled person in the manner that is least financially disruptive to the wellbeing of the person’s spouse and family. These government resources derive primarily from Medicaid.51
The ability to access “government resources to pay for long term health care” in order to preserve the “wellbeing of the person’s spouse and family” sounds highly desirable. Who wouldn’t take advantage of such resources when faced with catastrophic long-term care expenses? In fact, why would anyone plan for long-term care expenses when such an option is available after expensive care is needed and the cost is no longer insurable privately? The reality is that public policy incentives like these discourage early and responsible planning for long-term care and result in excessive Medicaid dependency and cost.
Despite this reality, economists and health policy analysts who write about Medicaid and long-term care financing rarely mention that Medicaid eligibility can be achieved by means other than paying cash for long-term care services. A common error is to claim falsely that Medicaid asset spend down must be done by purchasing medical or long-term care services.
Medicaid requires applicants to spend down their income on medical and long-term care costs to reach allowable income limits. But Medicaid does not require applicants to spend down their assets on medical or long-term care services to reach allowable asset limits. Assets may be divested or spent down in exchange for any exempt product or service without reducing eligibility so long as fair market value is received in the exchange. Spending down one’s income may hurt financially, but spending down one’s assets can be financially painless.
Nevertheless, analysts often refer to asset spend down as though it refers to spending savings on long-term care. For example, an otherwise excellent article by a well-regarded economist on the influence of Medicaid estate recovery on wealth accumulation and decumulation states that “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 $2,000 is reached.”52
Third, analysts wrongly claim Medicaid requires impoverishment because they equivocate on the meaning of “Medicaid planning.”
Analysts seldom cite the extensive legal literature on Medicaid planning nor acknowledge the omnipresent information on Medicaid planning in the popular media and on the internet.53 Instead, when writing about decumulating wealth to qualify for Medicaid, they usually assume and imply that the money is used to purchase long-term care rather than being divested, diverted, or sheltered to achieve eligibility. This ignores Medicaid’s lenient income and asset eligibility criteria that allow people with substantial resources to qualify for long-term care benefits; it ignores the fact that Medicaid rules do not require that assets be spent down for long-term care services; and it evades the reality that information on ways to qualify for Medicaid without paying for care is universally available.
In the rare instance where analysts consider the possibility that people might qualify for Medicaid without spending down wealth, they tend to write only about “asset transfers” without considering other Medicaid planning methods and they often misrepresent the arguments of those seeking to preserve resources for the truly needy.54-56
Asset transfers are very expensive for taxpayers, crowding out resources for the most vulnerable. Transferring assets may have increased Medicaid spending by as much as $1.5 billion in 2014 alone.57-58 But focusing only on asset transfers ignores the more widely practiced techniques of Medicaid planning. Indeed, asset transfers are only the tip of the Medicaid planning iceberg.
Routine practices of eliminating countable assets by converting them into exempt assets, setting up caregiver agreements, employing Medicaid-friendly annuities, or making use of trusts, spousal refusal, or even divorce are far more common than asset transfers. Elder law specialists not only describe these techniques in the estate planning literature but frequently encourage their use.
Unfortunately, analysts rarely consult and almost never cite this legal scholarship, despite its direct relation to the topic at hand. By focusing only on asset transfers, they overlook the far more extensive and costly forms of Medicaid planning.
(See the supplemental bibliography in Appendix I of “How to Fix Long-Term Care Financing” for numerous examples of Medicaid planning techniques that are not based on transferring assets.)
Fourth, some analysts wrongly claim that Medicaid requires impoverishment because they equivocate on the meaning of “out-of-pocket” expenditures for long-term care by claiming they are higher than they really are.
Some analysts say the out-of-pocket share of long-term care expenditures has skyrocketed to more than 50 percent.59 But they arrive at that figure by including room and board expenses in residential care settings — costs that people would incur whether they need long-term care or not — and by excluding Medicare post-acute care expenditures from the total even though Medicare’s relatively generous nursing home and home care reimbursements are the only thing enabling Medicaid to pay long-term care providers less than the cost of providing the care to a majority of long-term care patients.60
In reality, the proportion of long-term care expenses paid by taxpayers has been rising and the proportion paid by families has been declining for half a century. When Medicaid first started paying for long-term care in the late 1960s, out-of-pocket expenditures were very high – upwards of half of all nursing home expenditures. Since then, Medicaid and Medicare spending have increased rapidly and dramatically. Out-of-pocket expenditures declined to around one-fourth of total long-term care expenditures. But even that low figure is misleadingly high because roughly half of it is not savings being spent down as often implied but Social Security and other income being “spent-through” by people already on Medicaid to offset Medicaid’s cost of care as federal law requires.61 To this day, upwards of 85 to 90 percent of nursing home expenditures are accounted for without dipping into personal savings and only 8.9 percent of formal home health care costs were paid out of pocket.62
Nevertheless, analysts continue to argue that out-of-pocket long-term care expenditures are higher than they really are in order to justify new, government-funded long-term care financing programs.
Fifth, analysts wrongly claim Medicaid requires impoverishment because they rely on data, much of it faulty, from HRS and AHEAD surveys.
When economists and health policy analysts claim that older people approaching the need for long-term care retain few assets and spend down rapidly, they generally draw their evidence from survey data provided by the Health and Retirement Study (HRS) and its auxiliary, the Asset and Health Dynamics among the Oldest Old (AHEAD) study. These surveys have information on home values, automobile ownership, liquid assets, farms and other businesses, retirement accounts, and other assets.63
Noteworthy is the fact that each of these financial holdings is either expressly exempt under federal law or easily converted into an exempt asset for purposes of Medicaid long-term care eligibility. For example, between $572,000 and $858,000 of home equity is exempt from eligibility limits, depending on the state.
Additional real estate such as vacation homes may easily be made exempt. As one Medicaid planning attorney explains in his newsletter, a spouse could take out a loan in the amount of the second home’s equity to “reduce its effective value to $0” and then spend the borrowed money on home improvements or invest it in other exempt resources.64 Another estate planner explained that a couple with a second vacation home could simply rent its own home and claim the rental income as necessary for the spouse’s maintenance needs, converting it into a non-countable resource.65
One automobile is exempt regardless of value so long as it is used at least occasionally for the benefit of the Medicaid recipient. Liquid wealth such as bank accounts or securities may be converted from countable to non-countable status by purchasing exempt assets. These strategies typically involve converting countable assets into home equity, a new car, household items, travel, funeral expenses, or burial plots.66
Farms and other businesses, including their capital and cash flow of unlimited value, are exempt without any dollar limit.67
Tax-deferred retirement accounts, including IRAs, Keoghs, and 401(k)s are exempt if the holder is receiving a regular payout.68 Such payouts are required by the time an individual reaches 70.5 years old, though may begin as early as 59.5 years old.
HRS/AHEAD Data are highly questionable.
While the HRS and AHEAD surveys provide the most reliable longitudinal data currently available, they are far from foolproof. One expert found significant data quality issues in the surveys due to “measurement errors in the data, particularly those arising from item nonresponse and from inaccurate respondent reports of the ownership and level of assets.”69 He concluded that the survey data make it “difficult to reach consensus among research studies” because “each author must arbitrarily decide whether to exclude, censor, or impute particular observations.”70 Other researchers have noted similar limitations, explaining that “information on people who are cognitively impaired and who die is derived from proxy respondents, often relatives, who may not know about specific long-term services and supports use or Medicaid eligibility.”71 Given these facts, these surveys provide a dubious foundation on which to generalize about long-term care financing policy.
Furthermore, there are many reasons why survey respondents and their representatives might fail to report income and assets to surveyors or even purposefully misrepresent the facts. People who have reconfigured their wealth to qualify for public welfare benefits may be ashamed of having done so or simply unaware that their heirs did this on their behalf. Seniors reporting on themselves may be cognitively impaired or intimidated by self-interested family members. Heirs who benefit from preserving parents’ estates may prefer to conceal the facts. Lawyers who do Medicaid planning are protected from disclosure by attorney/client privilege, while long-term care providers and Medicaid eligibility staff, who often know which wealthy locals are taking advantage of Medicaid, cannot disclose the information because of legally enforced confidentiality. Getting to the truth in such matters is extremely difficult.
Finally, the HRS/AHEAD surveys pose the wrong questions regarding wealth transfer and do not address the larger issue of Medicaid planning at all. They typically ask if the respondents gave financial help worth more than $500 to any children, not counting shared housing or food costs, within the preceding two years.72 But there are several problems with this question. Transfers of assets relevant to qualifying for Medicaid long-term care benefits are not necessarily done to provide “financial help” to children. Looking back only two years is insufficient, as Medicaid has a look-back period of five years. Finally, focusing as narrowly as the question does on asset transfers ignores the much larger issue of other sophisticated Medicaid planning tactics.73
Sixth, analysts wrongly claim Medicaid requires impoverishment because they do not ask the people who know the truth.
Besides passing over the formal legal literature on Medicaid planning, long-term care scholars have paid little attention to the voluminous testimony of Medicaid staff, financial advisors, Medicaid planners, consumers and long-term care providers about the ease and impunity with which middle and upper-class individuals take advantage of Medicaid long-term care benefits. In the 1990s, The Gerontologist published several articles quoting these sources on that topic, but very little such information has found its way into the peer-reviewed literature since.74 Despite this absence, popular media abound with such examples.
Since 1998, for example, the Center for Long-Term Care Reform has published 144 articles about Medicaid planning.75 Unfortunately, most academic scholars either do not read such material or they think they can ignore anything in it, however conclusive, that contradicts the conventional scholarly wisdom about long-term care financing. Unfortunately, such arrogance has significant consequences not only for taxpayers but ultimately for the truly needy. After all, every dollar spent on Medicaid benefits for middle-class and affluent seniors is a dollar that cannot be spent on the truly vulnerable.
Closing LTC Comment: Why don’t analysts consider the overwhelming evidence about Medicaid’s true LTC financing role? Because taking it into account would overturn their arguments in favor of government control of long-term care financing. How do they evade germane facts? By equivocating on key concepts, relying on highly questionable survey data, and ignoring evidence that contradicts their ideologically biased preferences. Most galling is their casual sophistry, such as brushing off solid proof of Medicaid planning abuse because “no one wants to go on Medicaid,” as Judith Feder claims. Hello. When all your options have run out; when it’s too late to plan, save or insure for long-term care; when you’re facing high expenditures for LTC; when your heirs step in to take early inheritances leaving you dependent on public welfare; you better believe Medicaid becomes very attractive and most people do want it at that stage. In fact, that’s why we’re in the mess we’re in. Evading this reality only sinks us deeper in. We’ll make no real progress to improve LTC services and financing until analysts take their policy blinders off and cope honestly with the truth.
(In the following footnotes, you will find examples of the evasion and misrepresentation of facts that I’ve alleged above with links to articles in which I’ve critiqued those sources. See especially footnotes # 48, 49, 54, 55, 56, 57, 59, and 75.)
48 Sudipto Banerjee, "Effects of Nursing
Home Stays on Household Portfolios," EBRI Issue Brief, no. 372, June 2012,
p. 4; http:// www.ebri.org/pdf/briefspdf/EBRI_IB_06-2012_No372_NrsHmStys.pdf.
Critiqued in S. Moses, "LTC Bullet: Nursing Home Spend Down Misunderstood
and Late-Breaking LTCI Industry News," July 20, 2012; http://www.centerltc.com/bullets/