LTC Bullet: Milken Groupthink Fumbles LTC Financing
Friday, April 16, 2021
LTC Comment: You might expect innovative ideas from the Milken Institute, but when it comes to long-term care financing, all you get is ideological retreads. We explain after the ***news.***
*** TRUST ACT NEWS: We have big news about the state insurance program to fund long-term care that the Milken Institute and a bevy of study groups in recent years have hung their hopeful hats on. Stephen D. Forman of Long Term Care Associates reported yesterday that: “the Washington State House concurred with the amendments passed by the Senate, approving SHB 1323 by a final vote of 58 – 39. Now that it moves to Governor Inslee’s desk for signature, we can safely call it a “done deal”—including the new opt-out deadline of November 1st, 2021. That’s a big deal because it means Washingtonians have one last chance to escape the Evergreen State’s oncoming long-term care straightjacket by purchasing real LTC insurance protection in the private market. Let the fire sale begin! ***
*** ILTCI CONFERENCE NEWS: The 2021 Intercompany Long-Term Care Insurance Conference kicked off on Tuesday, April 13. Its unique virtual format this year worked well, enabling 1500 participants to track information-rich presentations on a wide range of topics, but not without some electronic glitches. The keynote speaker, who signed in from Australia at 2am the following day, couldn’t complete his talk. I monitored four hours of break-out sessions on which I’ll report in a LTC Bullet after the conference concludes. I’ve also asked some LTCI experts to report on sessions they attend. We’ll bring you their feedback as well. Kudos to organizers Barry Fisher of Ice Floe Consulting and Vince Bodnar of Oliver Wyman and the teams they recruited to design and implement the program. Four more days of the conference remain:
Tuesday, April 20th, 12pm – 4pm ET
Tuesday, April 27th, 12pm – 4pm ET
If you haven’t already, register and attend this extraordinary, free resource here: https://iltciconf.org/sessions-at-a-glance/. Show your appreciation for the program’s sponsors by visiting their online exhibits and considering their products and services. ***
LTC BULLET: MILKEN GROUPTHINK FUMBLES LTC FINANCING
LTC Comment: The Milken Institute, chaired by former junk-bond king, now philanthropist Michael Milken, modestly bills itself as a “catalyst for practical, scalable solutions to global challenges.” Toward that end they “conduct research and analysis and convene top experts, innovators, and influencers from different backgrounds and competing viewpoints.” Lately, the Milken Institute tackled the problem of providing and financing long-term care for the broad American middle class. Last week it published “New Approaches to Long-Term Care Access for Middle-Income Households,” a timely look at a critical topic that begs for fresh analysis and ideas.
Did the Milken Institute deliver? Yes and no. The report does a yeoman’s job of describing the problem. It offers creative ideas to address service delivery problems, proposing for example a “Medicare Advantage Demonstration Project” and that the country should “Scale Up Integrated Care Programs.” But when it comes to how to pay for long-term care, the report founders as its many predecessors have done. It makes no attempt to understand why long-term care financing is so inadequate in the United States. It parrots the prevailing academic shibboleths, ignores critical facts, and proposes nothing new or promising. We get no original analysis or ideas. We’re asked to hang our hopes on a fatally flawed exercise in political futility, the LTC Trust Act in Washington State.
What went wrong? Following are quotes from the Milken Institute’s “New Approaches to Long-Term Care Access for Middle-Income Households” followed by our comments.
Milken: “In November and December 2020, the Milken Institute … brought together a highly engaged group of experts from government and academia, as well as health care, insurance, long-term care delivery, senior housing, technology, and finance. Long-term care is a complicated issue, and many experts, organizations, and government entities have been working for decades to develop better ways to address this need.” (p. 2)
LTC Comment: There is a reason why groups of all sorts have studied long-term care ad nauseam for decades unsuccessfully. Brought together to summon and balance many different perspectives, such groups can never agree on anything beyond marginal variations from conventional wisdom. The conventional wisdom is that government must do something. The right approach is instead to ask and explain why the problems exist before proposing to add more government funding and regulation, which may, arguably, have caused or contributed to the problems in the first place. Read our Medicaid and Long-Term Care for that analysis.
Milken: “The access, delivery, and financial challenges are too vast for either the private or the public sectors to shoulder alone.” (p. 2)
LTC Comment: Agreed. But we already have a public/private approach to LTC financing. It is supposed to work like this: People pay their own way until they can’t and Medicaid picks up the difference. That doesn’t work, you say? Well, the right answer is to fix it, not to impose a compulsory new government program burdened with another insolvent “trust fund,”
Milken: “But middle-income households cannot qualify for Medicaid without spending down their assets to meet the strict income limits.” (p. 4)
LTC Comment: This is the false premise that dooms Milken to invalid conclusions. Most large assets, including nearly all home equity, seniors’ biggest resource, are exempt for determining Medicaid LTC eligibility. Non-exempt assets are easily converted to exempt status. Excess income must be applied to the cost of care, but that’s a relatively small co-insurance to pay in exchange for receiving expensive long-term care at Medicaid’s discounted rates. Estate recovery is easily evaded and MACPAC recently proposed to hobble that program further. Medicaid is a time-delay trap that anesthetizes the public to LTC risk and cost until a care crisis occurs and then ameliorates the otherwise catastrophic financial consequences. That is the real reason long-term care is in the mess it’s in. Again, see Medicaid and Long-Term Care.
Milken: “In 2010 the Affordable Care Act (ACA) established the Community Living Assistance Services and Supports (CLASS) Act, which would have provided a federally administered and voluntary long-term care insurance (LTCI) program. Ultimately, however, lawmakers deemed the program financially untenable and repealed it in 2013.” (p. 5)
LTC Comment: Why did CLASS fail? Advocates say because it was voluntary. So what they want is a program that is mandatory, that removes the freedom of the marketplace and substitutes the compulsion of government. That’s a Faustian bargain, the wages of which will come due when profligate public spending ends in spiking consumer inflation.
Milken: “Beginning in 2022, Washington will fund its mandatory program through a payroll tax of 58 cents for every $100 of income for all W-2 workers in the state; self-employed workers can participate if they choose.” (p. 5)
LTC Comment: So all rally around Washington State’s new program, but look what that leads to …
Milken: “And in November 2020, voters rejected a referendum to expand the types of investments available to the program’s trust fund to include private equities. As a result, the trust fund investments remain limited to corporate bonds and certificates of deposit. These restrictions will cause the current level of payroll tax to be inadequate for funding the program in the long term, according to a study by Milliman.” (p. 6)
LTC Comment: So, we not only have to force people to participate in government-mandated LTC insurance, we have to risk their “trust fund” by investing it in private equities that are vulnerable to collapse in value. Such a government gamble is likely to leave the Washington State program no better off than the Social Security and Medicare “trust funds” which contain nothing but federal IOUs.
Milken: “A recent AP poll shows that 67 percent of respondents had done little to no planning for LTC, and 57 percent mistakenly believe that Medicare will cover their LTC costs. According to Vanguard, in 2019, the average 401(k) account balance for those 65 and older was $216,720, and the median was $64,548.20. These amounts are wholly inadequate when one considers that costs rise proportionally to the complexity and duration of care, quickly exhausting the personal savings of individuals with severe and extended care needs.” (p. 6)
LTC Comment: Wouldn’t you think Milken, et al., would wonder why most people don’t plan for long-term care, when the risk and cost is so high, the media badgers them incessantly that they’ll lose their life savings if they don’t plan, and they’re “quickly exhausting” their personal savings when “severe and extended care needs” occur. The answer is that people would plan if they were suffering those catastrophic consequences, but they’re not. There is no evidence of widespread catastrophic LTC spend down. That’s why the Milken report cites none.
Milken: “Over the past 15 years, the number of LTC insurers in the market dwindled from over 100 in 2004 to about a dozen in 2018. This is attributed in part to inaccurate actuarial assumptions on older policies and the high levels of losses that insurers sustained. (p. 6)
LTC Comment: LTC insurance carriers didn’t get all their actuarial assumptions correct, but that was not all their fault. The Federal Reserve forced interest rates arbitrarily and artificially to near zero making it impossible for carriers to get the return on reserves they reasonably expected. Medicaid made access to expensive long-term care available to middle class and affluent people after the insurable event occurred obviating demand for the product. Bottom line, government interference in the LTC insurance marketplace is the bigger cause of its dysfunction.
Milken: “Most important, Lab participants noted, there are no current complementary public and private LTCI solutions.” (p. 11)
LTC Comment: That is not true. As mentioned above, there is a public/private solution in place. This is it: Medicaid for the indigent, home equity spend-down for the middle class, and private insurance for the upper middle class and affluent. The problem is that by exempting home equity from LTC risk and cost, and by allowing generous eligibility with many elastic loopholes, Medicaid has short-circuited a system that could work very well. I explain that system in “LTC Bullet: The Key to LTC” and I provide a full explanation of why and how most analysts evade the reality of Medicaid’s perverse incentives that discourage responsible long-term care planning in Medicaid and Long-Term Care.
Milken: “As we stand in early 2021, however, COVID-19 has decimated state budgets, making it more difficult to secure funding or the political will to raise the taxes necessary to build state-level public long-term care programs.” (p. 11)
LTC Comment: All the more reason to look for private sector solutions that build on the Medicaid LTC program for the needy that is already there. The government has no money other than what it borrows or prints. Tax revenues cover less than half of federal spending, according to the US Debt Clock. When the cost for that profligacy comes due in the form of inflation, the idea government can fund big new programs for long-term care on the backs of taxed out consumers will be even more far-fetched than it is already.
Milken: “Because the Lab focused on middle-income access to affordable LTC, the discussion does not extend to Medicaid coverage of LTC.” (p. 13)
LTC Comment: It is beyond bizarre that people who call themselves experts are unaware that Medicaid is the primary payer for expensive long-term care not just for the poor but for the middle class as well. That fact is well-established in the academic literature.
Milken: “As noted, participants agreed that a private funding source would be most expedient and politically feasible to conduct the demonstration. Many argued that the regulatory approval needed for a CMS-sponsored project would present too many constraints.” (p. 17)
LTC Comment: That is a tacit acknowledgement that government won’t help; in the end, we’ll have to rely primarily on the private sector. Better to do that sooner than later in order to save what can be saved of the Medicaid safety net for people in true need.
Milken: “Lab participants were in remarkable agreement that the public and private sectors should work together to design complementary insurance programs and products to provide coverage that would offer financial protection and reduce reliance on Medicaid.”
LTC Comment: The “solution” Milken proposes—front end compulsory public program, private wrap-around coverage, and Medicaid for the back end—won’t save Medicaid anything unless financial eligibility for Medicaid is changed to eliminate its easy access. People will use the government program, skip voluntary private LTCI, and go on Medicaid as they do now. Fix that so that Medicaid truly requires either spend down up front or pay back from estates, and you won’t need new government and private insurance programs. With the right incentives, the system will right itself.
Milken: “In addition, stakeholders reiterated that expanding Medicare to include LTC benefits could be a viable and efficient path forward.” (p. 25)
LTC Comment: That would be like adding deck chairs to the Titanic after the incident with the iceberg.
Milken: “The Lab recommends that policymakers first select their funding mechanisms and set funding levels, and then build out a benefit package to fit that budget.” (p. 27)
LTC Comment: Well that makes sense but it is certainly not what Washington State did. Its politicians came up with a rather meager benefit and they’re now struggling to find a way to fund it. Like the CLASS Act in that respect, it will likely fall of its own weight.
Milken: “In terms of financial solvency, policymakers must first determine if the program is prefunded or pay as-you-go. They will have to create a trust fund and ringfence those dollars. … As noted, Washington voters turned down a referendum in late 2020 that would have expanded investment options for the state’s LTC trust fund. Projections now show a major shortfall in the state’s future fund balances that state lawmakers will have to address in the coming years by increasing the payroll tax, reducing benefit levels, or putting the issue to voters again.” (p. 29)
LTC Comment: How do you “ringfence” a “trust fund” that must be filled with risky investments to have any chance for long-term solvency?
Milken: “One innovative approach to lowering premium levels and boosting uptake could be through the utilization of reinsurance. … Notably, many reinsurers left the LTC insurance market because of significant past losses.” (p. 31)
LTC Comment: The only “reinsurer” they’ll ever find for a program like this is the federal government’s power to tax, borrow, print and spend money citizens will repay through inflation in the end. To find the reinsurer of last resort, look in a mirror.