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Milliman USA, Inc. and Center for LTC Financing

Long-Term Care Financing Study


Experts in the long-term care insurance industry have long predicted a “breakthrough” in sales.  Many placed their hope in tax deductibility, but passage of the Health Insurance Portability and Accountability Act of 1996 had little effect.  Some believe that publicity about the Federal Employees LTC program could break the market wide open, but others expect only marginal gains.  Could it be that genuine "above-the-line" tax deductibility is the answer or will that high hope prove to be just another red herring also?

Why are LTC sales lagging expectations?  Given the obvious importance of protecting oneself from impoverishment caused by a long-term illness, why are only seven percent of seniors covered by long-term care insurance?  For retirees, the risk is urgent yet those who are at risk do not seem to feel the urgency.  Why not?

One possible answer to this question has been proposed by the Center for Long Term Care Financing in their report titled "LTC Choice:  A Simple, Cost-Free Solution to the Long-Term Care Financing Puzzle."  If the Center’s theory is correct, a critical obstacle to substantial growth in the sale of private long-term care insurance is the socialization of long-term care risk through the current Medicaid system. 

The Center theorizes that a different approach to the government's funding of long-term care through Medicaid could reestablish the individual’s sense of responsibility to prepare for long-term care.  That in turn could substantially reduce the financial threat to Medicaid and bring about the long expected breakthrough in the sale of private long term care insurance.

We propose to test the Center for Long-Term Care Financing’s theory so that policymakers, consumers, and insurers can make better-informed decisions regarding the appropriate means of funding long term care.

Impact on Insurers

A proper understanding of the relationship between the current funding of LTC through Medicaid and the public’s perception of the need for private long term care insurance will enable a rational discussion of the problem.  This knowledge will help insurers to understand where best to focus their efforts to bring about beneficial changes in public policy and regulation.  Appropriate changes may result in the purchase of long- term care insurance by a much higher percentage of seniors.  This growth in market penetration would be a financial bonanza for insurers.

Impact on Providers

Long-term care providers--including home care agencies, assisted living facilities and nursing homes--desperately need more market-rate private-payers.  Medicaid and Medicare pay too little for long-term care to sustain providers' profitability.  Most Americans cannot afford to pay privately and few have long-term care insurance.  Any change in public policy which tips the balance of payment away from government programs toward private financing will benefit all long-term care providers.  This project may point to public policy that could increase the number of private payers both from insurance and from private, currently illiquid resources.


Long-term care mystifies the experts.  This market seems to defy the basic laws of economics.  For example:

·        The risk and cost of chronic long-term illness is high, but the public remains in denial about long-term care. 

·        People prefer home care and assisted living over nursing homes, but our long-term care service delivery system retains a bias for institutional care. 

·        Many seniors are “house rich, cash poor,” but few of them use home equity conversion to purchase long-term care or insurance. 

·        The need for home care, assisted living, or nursing home care touches most families, but only seven percent of seniors and barely any of the baby boomers have purchased private long-term care insurance. 

·        Demand for long-term care is high and growing, but our service delivery and financing systems are in shambles with widespread bankruptcies, low stock values, scarce capital, worsening quality problems, severe staff shortages, serious tort liability, and inadequate liability insurance. 

·        Aging demographics portend a serious long-term care crisis in the future, but financiers, providers, and insurers of long-term care are already leery of investing in this market and growing more so.

Why does this marketplace present so many puzzles?  According to conventional wisdom …

·        Vast numbers of older Americans are stricken by chronic illness.

·        They lack the income to pay for expensive long-term care.

·        So, they spend down quickly into impoverishment.

·        And they become dependent on public welfare in the form of Medicaid nursing home benefits. 

·        Nevertheless, most people cannot afford the premiums for private long-term care insurance.

·        Consequently, a bad situation compounds itself into a rapid downward spiral.

For ease of reference, let's refer to these tenets of the conventional wisdom regarding long-term care as the "welfare paradigm."  If this welfare paradigm is accurate, consumer behavior makes little sense.  Surely, if the risk and cost of long-term care are so great, we would expect people …

·        To be worried about long-term care, not in denial

·        To demand low-cost home and community-based services, instead of nursing home care

·        To tap their home equity for home care and assisted living, rather than spending down in a nursing home

·        To stretch financially to buy private insurance, not to tempt fate by “going bare”

But consumers do none of these “logical” things in significant numbers.  Why?


What if the conventional wisdom about long-term care--the welfare paradigm--is wrong?  What if people can ignore the risk of long-term care, avoid the premiums for private insurance, wait to see if they ever need expensive long-term care, and if so, shift the cost of that care to someone else?  Let's refer to this radically different perspective on long-term care as the "entitlement paradigm."  If the entitlement paradigm pertains, then consumer behavior makes perfect sense …

·        People are in denial about long-term care, because someone or something pays for care.

·        They end up in nursing homes instead of in the home and community-based care they prefer, because free and subsidized care is available almost exclusively in nursing homes.

·        They do not tap the equity in their homes, because the primary payor of long-term care exempts home equity in determining eligibility for benefits.

·        And, they don’t buy long-term care insurance because they are not genuinely at risk of catastrophic financial loss.

Is this entitlement paradigm a better descriptor of the long-term care marketplace than is the welfare paradigm?  Yes.  Medicaid nursing home benefits are readily available to middle-class people without their having to spend down significantly.  (For proof of this statement, see "LTC Choice:  A Simple, Cost-Free Solution to the Long-Term Care Financing Puzzle" at ; "The Myth of Unaffordability:  How Most Americans Should, Could and Would Buy Long-Term Care Insurance" at Report.pdf ; and "The LTC Triathlon:  Long-Term Care's Race for Survival," at .) 

For example, income rarely stands in the way of Medicaid nursing home eligibility.

·        Thirty “medically needy” states deduct all medical expenses not covered by Medicare, including the cost of private nursing home care, from a person’s income before determining eligibility. 

·        In 20 “income cap” states, Medicaid applicants can redirect excess income into a "Miller income trust" to achieve immediate income eligibility as authorized by federal law (OBRA '93). 

Neither are assets a serious obstacle to Medicaid nursing home eligibility.

·        Although Medicaid only allows $2,000 in nonexempt assets, recipients may retain unlimited exempt assets including a home and all contiguous property, one business including the capital and cash flow, an automobile, and a burial trust fund, all of unlimited value, plus liberal personal property and home furnishings, and many other, smaller assets. 

·        Sophisticated applicants or those with legal advisers can also utilize systematic divestiture, irrevocable trusts, annuities, self-canceling installment notes, life care contracts and numerous other technical legal devices to impoverish themselves artificially, virtually overnight. 

·        "Mandatory" estate recovery is as easy to avoid as Medicaid eligibility is to achieve in the first place.

If Medicaid eligibility is readily available to the middle and upper-middle class without spending down, then why do so many prosperous Americans spend down their life savings catastrophically in nursing homes?  They don't! 

·        Medicaid pays for 48 percent of all nursing home care, up from 44 percent in 1990. 

·        Medicare pays for 10 percent of nursing home care, up from three percent in 1990. 

·        Out-of-pocket expenditures account for only 27 percent of nursing home expenses, down from 38 percent in 1990.  Furthermore, over half of so-called "out-of-pocket" costs are really just spend-through of Social Security income of people already on Medicaid. 

·        Nearly 80 percent of all people who enter nursing home are already eligible for Medicaid benefits, and almost 80 percent of all nursing home patient days are paid, at least in part, by Medicaid. 

·        If we turn from nursing home care to home health care, we find a similar situation.  Medicaid and Medicare pay almost half of all home care costs, while out-of-pocket expenditures account for less than one-quarter of the total and private insurance covers most of the remainder. 

The only valid conclusion we can reach is that the vast majority of all expensive formal home health and nursing home expenses are paid directly or indirectly by the government or by private (although not LTC) insurance.  The public contributes very little out-of-pocket, and that, mostly from income, not assets.  There is no evidence of widespread catastrophic spend down for home care or nursing home care.  In fact, all the available evidence suggests the opposite, that catastrophic spend down is uncommon. 

Thus, while the public may not know who pays for long-term care, they are correct in their belief that somebody pays.  Their conclusion that long-term care is not the significant financial risk it is commonly made out to be is therefore rational and understandable.  To convince the public that long-term care is a significant financial risk and that they should strive to afford private insurance will therefore require a major change in public policy as it applies to eligibility for home health and nursing home benefits under Medicaid.


In a nutshell, nearly everyone buys private insurance against the risk of death, injury, illness, fire, auto and other accidents.  Few buy insurance against the risk of floods, hurricanes, earthquakes or crop failures.  Why?  The answer is simple.  Government policy routinely indemnifies uninsured victims of floods and hurricanes, etc.  Such people routinely rebuild on flood plains and beaches.  They remain uninsured and the cycle continues.  People without private insurance who die unexpectedly or suffer a house fire, however, are rarely indemnified by the government.  They are usually out of luck.  Is there any wonder, therefore, that most people buy life insurance and fire insurance, but few purchase flood or earthquake insurance?  If the Center for Long-Term Care Financing's analysis is correct, long-term care insurance is much more like flood insurance than it is like life insurance.  We need to ask whether people would be more likely to buy long-term care insurance if the government indemnity against this risk did not exist or if it were less generous.


If current public policy--which allows middle and upper-middle income people to qualify for long-term care benefits without spending down--results in…

·        excessive Medicaid dependency,

·        non-use of home equity for long-term care expenses, and

·        low long-term care insurance sales, then…

A change in public policy to require an actual spend down of assets and income would…

·        reduce Medicaid long-term care expenditures,

·        increase the use of home equity for long-term care expenses, and

·        enlarge the demand for private long-term care insurance.

In the absence of such a change, the already unsatisfactory status quo will continue to deteriorate…

·        Medicaid nursing home costs will continue to explode,

·        Medicaid's ability to provide quality long-term care for the poor will continue to erode, and

·        long-term care insurance sales will decline, remain flat or increase only slowly.

Project Proposal

We propose to test this hypothesis by answering two questions:

1.      If Medicaid required the politically infeasible standard of total impoverishment including spend down of all assets currently exempted and all income with no provision for spousal support or personal needs of the recipient, what would be the effect on Medicaid long-term care expenditures and on the demand for private long-term care insurance?

2.      Instead of the foregoing draconian measure, what would be the effect of giving all persons with income or assets a line of credit secured by their estates to supplement their income so they could purchase long-term care of their choice in the private market?  Under this option, participants would retain the use of their assets (home, personal effects, etc.), but gradually surrender their equity, which would be repayable after death of the last surviving dependent relative.  They would go on Medicaid only after their entire estate equity has been consumed on paper and is secured for recovery after death.  (See "LTC Choice:  A Simple, Cost-Free Solution to the Long-Term Care Financing Puzzle," a report by the Center for Long-Term Care Financing for details-- .)

Presumably, people who truly stand to lose their savings to the cost of long-term care would be more likely to plan early and save, invest or insure to cover the cost of long-term care.  To the extent they did so, they would be less likely to end up needing a line of credit on their estate or requiring public welfare benefits.  This change in public policy would relieve the fiscal burden on tax payers and the Medicaid program, while simultaneously expanding the market for private long-term care insurance and increasing desperately needed private-pay revenue for providers.  The purpose of this project is to model both of these public policy changes, estimate the impact on consumer behavior, and price out the effect on Medicaid expenditures and long-term care insurance sales.

Benefits for Sponsors of this Study

Study sponsors will have exclusive access to the study findings for six months following issuance of the final report, during which time they can use the results exclusively for marketing and/or public policy advocacy.

If this study's hypothesis proves to be true …

i.e., if implementation of a genuine Medicaid spend down would reduce Medicaid expenditures and invigorate the private long-term care insurance market while empowering more seniors to access quality long-term care with their own resources,

then lawmakers, public administrators, taxpayers, and LTC insurance marketers will have a new, mutually beneficial, public policy option to consider that advances all their interests and around which they can rally.

·        Study sponsors could put their early access to this information to good use by focusing sales and marketing much more heavily on access to quality care at the appropriate level and less heavily on asset protection.

·        Study sponsors would also have a head start in working with public policy makers to reconfigure incentives to discourage excessive Medicaid dependency and encourage greater reliance on private long-term care insurance.

If, alternatively, the hypothesis proves false …

i.e. if having truly to spend down before qualifying for Medicaid nursing home benefits has little or no effect on consumers' proclivity to purchase LTC insurance or on the level and cost of Medicaid dependency,

then policy makers and LTC insurance marketers can have greater confidence in their current approaches to address the LTC service delivery and financing challenges. 

America's long-term care service delivery and financing system is already failing miserably.  It has no hope of providing for the long-term care needs of the baby boom generation in the future.  This study posits and proposes to test a hypothesis that explains current deficiencies and points toward a solution.  Sponsors of the study have a unique opportunity to promote the public good (an improved long-term care system) while simultaneously promoting their own self-interest (greater profitability for long-term care insurance and long-term care providers).  

Other Benefits of Sponsorship

Sponsors will be invited to participate in the survey of critical assumptions as well as the identification of expert advisors.

Sponsors will be invited to observe and participate in developmental meetings with the expert panel that will oversee this project.  This provides an opportunity to stay well informed of the status and developing results as the project progresses.

Sponsors will be provided detailed results from the study (beyond what is published for public release) that they may use for strategic planning, public policy influence, etc.

Sponsors may have access to the study's models to test alternative assumptions that may be of interest in a particular region or market segment, if they desire to invest in this additional research.


This research will be conducted in four phases:

Phase I – Literature Search and Focus Groups

A search of the literature on insurance and risk will be conducted to determine what evidence exists regarding why people choose to insure against one risk and not to insure against another risk.  Focus groups will be asked to respond whether they would or would not insure against a series of different kinds and degrees of risk.  A "baseline" will be determined based on current long-term care risk and actual Medicaid expenditures and long-term care insurance market penetration. 

Phase II – Development of “Impoverishment” Model

A model will be developed to test the impact on Medicaid expenditures if total impoverishment (with no asset exemptions or transfers allowed) were required before Medicaid covered LTC expenses.  This model will also estimate the resulting impact on the demand for private LTC insurance.   The model will measure the impact based on a range of assumptions for each of the critical variables.  The sensitivities of these assumptions will be tested.

Phase III– Advisor Survey

A series of interviews and/or surveys will be conducted with identified experts to determine a range of assumptions that is reasonable for each of the key variables identified.  These assumptions will be tested in the “Impoverishment” model to determine appropriateness and to assist in narrowing the range to a “most likely” range.

Phase IV – Development of “Secured Equity” Model

A variation of the “Impoverishment” model will be developed to test the impact on Medicaid expenditures and private LTC insurance demand resulting from the less draconian “Secured Equity” approach.

Project Staffing

Stephen Moses, President of the Center for Long Term Care Financing has commissioned this study and will provide expert advice on the "Secured Equity" or "LTC Choice" proposal.  Mr. Moses is widely recognized as an expert and an innovator in the field of long-term care.  During the past twenty years, he has been Director of Research for a long-term care insurance marketing company, a senior analyst for the Inspector General of the U.S. Department of Health and Human Services, and a Medicaid state representative for the Health Care Financing Administration (now CMS).

An expert panel has been established to oversee the project and assure that the assumptions and methodology are impartial and withstand the scrutiny expected.  The model testing the Center’s hypothesis will be developed by the staff of Milliman USA’s Tampa, Florida office under the supervision of the expert panel.  This panel will consist of the following people:

·        Darrell Spell, Principal with Milliman USA’s Tampa, Florida office will chair the expert panel.  Darrell has been working with LTC insurance since 1989.  He has extensive experience in all aspects of the development and management of health products for the senior market.  He also has extensive experience in development and design of other individual health products.

·        Dawn Helwig, Principal with Milliman USA’s Chicago, Illinois office.  Ms. Helwig specializes in the development and analysis of senior health products, other individual health products, as well as small group health products.  She has experience in plan design, development, pricing, and implementation of health policies for insurance companies and managed care organizations.

·        Mark Litow, Principal with Milliman USA’s Milwaukee, Wisconsin office.  Mr. Litow specializes in individual healthcare programs and evaluation of healthcare reform proposals.  He assists clients with pricing, valuation of reserves, appraisals of blocks of business, and analysis of risk sharing arrangements.

Project Funding

The expert panel for this project estimates its cost at approximately $120,000.  The "charter" sponsorship fee for the study is $10,000.  This fee applies to those companies that commit to the project by October 31, 2002.  Companies signing up after that date face a higher enrollment fee of $12,000.  If sponsors participate and funds are collected in excess of the level required to conduct the project, sponsoring companies will have the option to receive a proportionate refund or to contribute the balance remaining to the Center for Long-Term Care Financing, a 5.01(c)(3) charitable organization.  The Center for Long-Term Care Financing and Milliman USA reserve the right to withdraw the study if too few companies enroll to support the substantial costs of conducting this research.

About the Center for Long Term Care Financing…

The Center for Long-Term Care Financing is a 5.01(c)(3) charitable, nonprofit, nonpartisan think tank and public policy organization.  The Center advocates public policy to target scarce public long-term care resources to the genuinely need and to encourage everyone who is young, healthy and affluent enough to take responsibility for their own long-term care planning.  The Center publishes a free online newsletter called LTC Bullets and maintains a highly informative website at  Center staff write for publication and speak publicly throughout the United States in professional venues including law, aging, accountancy, and insurance.

About Milliman USA…

Milliman USA, Inc. is a national firm of actuaries and consultants founded in 1947 in Seattle, Washington.  Internationally, Milliman is a member of a formal alliance of leading independent actuarial and consulting firms operating in 20 countries throughout the world.

Milliman has cultivated a stellar reputation for quality and excellence in all areas of actuarial services, especially long term care.  They are the leading provider of long term care consulting services to insurers in the U.S.  Their reputation for independent thinking and unsurpassable quality, combined with their depth of long term care talent, make them the ideal firm to test the Center’s proposals.

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