LTC Bullet: Can LTCi Really Work?

Monday, March 30, 2009

Reno, Nevada--

LTC Comment: Today's Bullet is our first LTC Embed report from the policy front at the 9th Annual InterCompany Long-Term Care Insurance Conference in Reno, NV.

*** TODAY'S LTC BULLET is sponsored by Claude Thau, a Master General Agent who serves LTCi producers nationwide. Claude is the lead author of the Towers Perrin Broker World Individual and Group LTCi Surveys. He helps you build whichever market suits you best (individuals, executive carve-out, work-site, affinity, financial institutions, referrals from other professionals, etc.). Claude has been active in the State Partnership movement and campaigns for independent review of LTCi claims. Test Claude by calling 800-999-3026, x2241 to ask questions or get references or email ***



LTC Comment: Expect more LTC Embed reports from the big industry conference in Reno throughout the week.

I'm due to make my presentation in a few minutes. So I thought I'd share a transcript of it with you today.

Its titled "Can LTCi Really Work?" That's a topic that was assigned to me and three others. See what you think of how I answered it.


Can LTCi Really Work?
Stephen A. Moses
The 9th Annual Long-Term Care Insurance Conference
in Reno, Nevada on March 30, 2009


  • To answer that question, you must ask first: Why Hasn't LTCi Worked Yet?
    • 1965: Medicaid crowded out private market for HCBS and LTCi to pay
    • Brown and Finkelstein: Today, Medicaid crowds out 2/3 to 90% of LTCi
    • How Social Security and Medicare enable Medicaid's LTCi "crowd out"
  • Next ask: What Must Change for LTCi to Work?
    • Medicaid LTC eligibility in a nutshell
    • How Medicaid crowds out LTCi
    • Why Medicaid will no longer be able to crowd out LTCi
  • Finally ask: When Will LTCi Work?
    • When will Medicaid fail to crowd out LTCi?
    • Why reverse mortgages to fund LTC will expand before LTCi
    • How LTCi will change from a niche to a mass market within 10 years


The question before us today is "Can LTCi Really Work?"

The answer is "It hasn't yet." And "It coulda, shoulda, woulda worked." And "It will work soon." But "It won't work in time to help most baby boomers."

I'll conclude my remarks with that same statement. I hope by then it will make sense to you.

To answer the question "Can LTCi Really Work?," you need to ask and answer three other questions first:

"Why hasn't LTCi Worked Yet?"

"What Must Change for LTCi to Work?" and

"When Will LTCi Work if It's Going to Work?"

Let's take them one at a time.

Why hasn't LTCi Worked Yet? The answer is so simple and obvious, it baffles me so people few grasp it. In 1965, Medicaid and Medicare made nursing home care free or radically subsidized.

That well-intentioned, but perversely counterproductive, intervention had two major consequences.

  • It crowded out a market for privately financed home and community-based care which gave us the notorious nursing-home-based LTC system we have today, and
  • It eliminated the public's need to plan, save, invest or insure for long-term care leading to the low-quality, government-financed LTC system we have today.

Don't just take my word for it.

Jeff Brown of the University of Illinois and Amy Finkelstein of MIT have published research in peer-reviewed journals with the finding that: Medicaid crowds out two-thirds to 90 percent of the potential market for private long-term care insurance. (Check it out at

But how can that be? Medicaid pays less than half the cost of long-term care. Besides, you have to spend down into impoverishment to get it, right? The program has a poor reputation for problems of access, quality, reimbursement, discrimination and institutional bias. Who in their right minds would plan for Medicaid?

Actually, few people plan to rely on Medicaid for long-term care. It happens by default because Medicaid has made it easy for people not to plan.

Furthermore, although Medicaid pays only 43 percent of LTC costs, it covers two-thirds of LTC recipients and touches nearly 80 of all LTC patient days with its dismally low reimbursement rates which are actually less than the cost of providing the care.

How can Medicaid pay such a small proportion of LTC expenses, pay them at less than cost, and yet cover so many people? Here's how to explain that seeming paradox.

First, despite the conventional wisdom that you have to become poor before you qualify for Medicaid LTC benefits, the truth is that most people qualify quickly, without spending down significantly, if they have a medical need for LTC.

Second, Social Security, which is not usually thought of as a source of funding for long-term care, actually accounts for half the "out-of-pocket" expenditures for LTC reported by the Centers for Medicare and Medicaid Services, fully 13 percent of the total. That's because people on Medicaid have to contribute nearly all of their income toward their cost of care and Social Security accounts for much of their income.

Third, the other way Medicaid can pay for most custodial long-term care at less than cost is that Medicare pays very generously for 18 percent of total long-term care expenditures. Nursing homes and home health agencies actually bring in profits of ten to 15 percent on their Medicare business.

Now switch to our second question.

What Must Change for LTCi to Work?

As long as Medicaid is the dominant payor for long-term care and most people can qualify for its benefits after the insurable event occurs, few will plan early to save, invest or insure for long-term care.

So we have to ask: How can people qualify for Medicaid LTC benefits without spending down? Answering that question requires a brief primer on Medicaid LTC income and asset eligibility.

To qualify based on income anywhere in the USA, your income only needs to be less than the cost of a nursing home. In 35 states with "medically needy" income eligibilty systems, the criteria are even more generous. They subtract your health insurance premiums and other medical expenses from your income before asking if you're poor enough. To qualify for Medicaid LTC benefits, you don't need to be low income. You only need a cash flow problem.

But what about assets. You have to spend down privately for care to only $2,000, right? Wrong, you have to get down to $2,000, but no one cares how you spend your money as long as you don't give it away. Elder law journals say things like "take a world cruise" or "throw a party of Ziegfield follies proportion."

Even more importantly, however, you can retain unlimited assets if you hold them in exempt form. For example:

  • Keep a home and all contiguous property up to a minimum of $500,000 and a maximum in several states of $750,000.
  • Retain a business including the capital and cash flow of unlimited value. It doesn't count.
  • You can have one automobile of unlimited value, and because it's exempt, you can give it away, buy another, give it away, and so on. That's the "two Mercedes rule."
  • Purchase and retain unlimited prepaid burial plans for the Medicaid recipient and family members.
  • You can have unlimited term life insurance. Why would a 90-year-old buy a million dollar term life policy when the premium would almost equal the benefit? Instantaneous self-impoverishment, eligibility for Medicaid's LTC and other benefits, and at death the insurance benefits pass directly to heirs, bypassing Medicaid's estate recovery requirement.

For people who have so much money they can't even qualify based on these already extremely generous rules, there are attorneys who specialize in making affluent people poor, qualifying them for Medicaid, and getting them the best care Medicaid has to offer.

Medicaid planning techniques include spousal annuities, the reverse half-a-loaf strategy, and the currently popular "life care contract." By holding out "key money" so their well-to-do clients can pay privately for awhile, Medicaid planners get them great care, while poor people, who don't have key money end up in Medicaid's less desirable settings.

Now, here's how Medicaid crowds out LTCi. Because Medicaid and Medicare have paid for most LTC since 1965, the public doesn't worry about LTC risk and cost until stricken by chronic illness. Then, it's too late for insurance. Because Medicaid eligibility is so easy to obtain, the path of least resistance at this stage is to become eligible for publicly financed nursing home care.

All right. We've established that Medicaid crowds out most of the market for long-term care insurance and we've clarified how it happens. Now I want to explain why it can't continue doing so and why that means long-term care insurance will emerge in the next few years as more than just a niche market.

There are three main reasons why Medicaid cannot continue crowding out the market for private LTCi.

  • First, Medicaid is already bankrupting state budgets and cannot survive in its current form as a de facto entitlement.
  • Second, Social Security cannot continue indefinitely propping up Medicaid's ability to fund long-term care by offsetting the cost of recipients' care.
  • Third, Medicare cannot continue paying so generously for LTC services so that LTC providers can cover their Medicaid losses by cost shifting.

In other words, none of these three mutually sustaining programs can continue in their current form. When they retrench, the private sector will have to pick up the slack.

So let's conclude by answering our third and last question.

"When Will LTCi Work if It's Going to Work?"

At the beginning of last year, I would have said certainly within 20 years, possibly within ten. Now I'm confident to say the LTCi market will likely take off within ten years, possibly in as few as three to five years.

It will happen in steps.

Publicly financed long-term care will retrench. Medicaid eligibility criteria will be radically tightened. When that happens, middle class and affluent baby boomers will turn first to their savings and then to their home equity to fund LTC. Reverse mortgages will become a major funding source for long-term care. Once home equity is at risk for LTC, however, the next generation will see the value of long-term care insurance and start buying it.

But why is this going to happen now and why hasn't it happened before?

The main reasons are

  • the Age Wave is finally cresting and will crash soon,
  • the economy is already imploding in anticipation of even bigger problems, and
  • expenditures are ballooning of money we don't have and can't get without dire consequences.

Consider the money. Add up the continuing resolution to fund the rest of Fiscal '09 ($410 billion), the proposed Fiscal '10 budget ($3.6 trillion), a $634 billion "down payment" on health reform, the "stimulus" ($787 billion) and an alphabet soup of public and private bailouts (TARP, TALF, etc.). What do you get? Call it $10 trillion of money spent or obligated THAT WE DO NOT HAVE.

That amount is staggering and unprecedented in American history. But it's only 10 percent of the larger unfunded liabilities this country's committed to spend.

The infinite-horizon unfunded liability for Social Security is $16 trillion. Medicare's is $86 trillion. These programs have zero money in their "trust funds," which have already been borrowed and spent by the federal government.

Never mind Medicaid and long-term care. Medicaid doesn't even have a phony trust fund to hide its enormous unfunded spending commitments.

Now, what happens when you spend money you don't have?

Individuals can pay it back out of cash flow and/or borrow more money. Governments have a third option. They can print extra money.

Let's consider all three of the options available to government. What'll happen with each?

If politicians INCREASE TAXES enough to cover these hemorrhaging expenditures and promises, they will destroy the productive economy's ability to generate the profits to tax in the first place. That's an economic whirlpool.

If they BORROW the money, interest on the burgeoning debt will gradually crowd out the very spending they're borrowing to cover and international lenders will demand higher and higher rates of interest. That's a vicious circle.

If they PRINT more money to cover unfunded spending and liabilities, inflation will consume the value instead. That's "stagflation."

Clearly, the federal government has painted us into a fiscal corner from which there may be no collective escape. Individuals, especially the young, and the private sector will bear the burden of a long, slow return to financial stability.

By that I mean this: Because the government can't tax, borrow, or inflate its way out of this mess, they'll have nowhere else to turn but to ratchet down entitlement programs and other public spending.

Medicaid, ostensibly a welfare program, but always before a de facto entitlement, will no longer finance LTC for the middle class and affluent. The best we can hope is to save something for the poor.

Social Security and Medicare will be welfarized. It's already begun with means tests that tax or reduce Social Security benefits and drive up co-insurance for Medicare's Part B and Part D for higher income people.

When current health and LTC reform proposals hit the fiscal wall, government will pull back the traditional social insurance and welfare "safety net" little by little. As that happens, individuals and families will return to savings, private insurance and personal responsibility.

Maybe our Depression-era parents were right after all. Save, invest and insure, they warned. Don't count on anyone else, least of all the government, to bail you out.

So here's the bottom line.

Government made nursing home care free in 1965. That created the system's nursing home bias and impeded the growth of a private long-term care insurance market. But Medicaid LTC is unsustainable in the future, because it and the Social Security and Medicare programs that prop it up, are financially insolvent and will be forced to retrench. When that happens, individuals and families will become responsible for more of the costs of long-term care. Spending quickly through their savings, boomers will tap their home equity with reverse mortgages. And once home equity is at risk, LTC insurance will come to the fore as the financial tool of choice to avoid the newly catastrophic financial risk of long-term care.

Unfortunately, LTC insurance today pays only $3.5 billion of the total $165 billion of long-term care costs. That's only 2.1 percent. Because of its "long tail," LTCi won't help many baby boomers. Even if we insured everyone tomorrow, it would be decades before LTCi would pay their claims. That's why long-term care insurance will remain the poor relative of financial products for the time being, attracting little respect or interest from LTC providers and financiers.

So, back to the question we asked and the answer I offered at the beginning.

"Can LTCi Really Work?"

The answer is "It hasn't yet." And "It coulda, shoulda, woulda worked." And "It will work soon." But "It won't work in time to help many baby boomers."

Thank you.

Stephen A. Moses is president of the Center for Long-Term Care Reform (, a private institute dedicated to ensuring quality long-term care for all Americans. Reach him at or 425-891-3640.