If the question is "Who should pay for long-term care?" the average person will answer, "Anybody but me." Next best, they'll say, "Everyone should pay." Hence, the tendency to pass the financing burden on to government. Finally, if nothing else works, most people will prepare to pay their own way. That's when they turn to private insurance.

Winston Churchill said, "You can trust the Americans to do the right thing, but only after they've tried everything else first." So let's ask: What have we tried already in long-term care financing? That is, who does pay for long-term care and what have been the consequences?

Answer: The vast majority of all formal long-term care services are financed by the government.

Although Medicaid pays only half the dollars for nursing home care, it covers two-thirds of nursing home residents and touches nearly 80% of all patient days with its dismally low reimbursement rates.

Even the so-called "out-of-pocket" expenditures for nursing home care -- which are down from 39% to 28% in the past 15 years -- come mostly from Social Security benefits that Medicaid recipients have to contribute toward their cost of care. At 12%, Medicare is a much larger payer for nursing-home care than most people realize.

For home care, only 17% of the costs are paid by patients. The rest comes primarily from Medicare and Medicaid. Now what has this heavy dependency on public financing of long-term care achieved?

We have a severely dysfunctional, welfare-financed, nursing-home-based long-term care system that serves no one well, least of all the poor.

Long-term care today is plagued by institutional bias, too little home and community-based care, inadequate revenue, impending bankruptcies, a dearth of investment capital, staff shortages, access and quality problems, huge tort liability, unaffordable liability insurance, too few full-pay private payers and too many low-pay Medicaid recipients.

How in the world did we get into such a mess in the wealthiest country in the world?

In 1965, Medicaid came along and started paying for nursing-home care. The nursing-home industry saw a huge new source of revenue and naturally built more facilities as fast as they could raise the walls. The public figured nursing-home care was free, so why pay out of pocket for home care or insurance?

That's how institutional bias began and that's why a market for home-care, assisted-living and long-term care insurance did not even begin to develop until decades later. Before long, of course, Medicaid nursing-home costs exploded.

Figuring "they can't charge us for a bed that doesn't exist," the government capped the supply of nursing home beds by requiring certificates of need. But capping supply only drove up the price as nursing homes raised their rates to compensate. So Medicaid capped what it would pay for nursing-home care.

In turn, nursing homes raised rates for private payers to make up the difference. That was the origin of cost-shifting from Medicaid to private payers.

It was also the beginning of the differential between low Medicaid reimbursements, often less than the cost of providing the care, and market-level private-pay rates.

Over time, Medicaid nursing-home census grew and private-pay census declined, as fewer people could afford the higher private-pay rates and Medicaid eligibility became easier and easier to obtain.

A new practice of law, Medicaid estate planning, evolved to impoverish people artificially so they could qualify for Medicaid without spending down their own assets for care. But the average person, in terms of income and assets, could qualify for Medicaid even without such legal machinations because of the program's generous eligibility criteria.

Income is rarely an obstacle to Medicaid long-term care eligibility because all medical expenses, including the cost of private nursing-home care, are deducted from an applicant's income before determining eligibility in most states. In other states, "Miller income diversion trusts" allow people with higher incomes to routinely qualify.

Assets are no obstacle to Medicaid long-term care eligibility because people are allowed to retain unlimited equity in a home, business, car, home furnishings, prepaid burials, term life insurance, etc.

Now, with supply and price capped and Medicaid eligibility easier and easier for their residents to obtain, quality of care became harder and harder for nursing homes to achieve. Thus arose the access and quality problems that led to heavy government
regulation of nursing facilities.

Today, nursing homes are caught between the rock of inadequate Medicaid reimbursement and the hard place of intense quality regulation. Or, as industry executives expressed it to me once: The government expects Ritz Carlton care for Motel 6 rates while imposing a regulatory Jihad.

In the meantime, both Medicaid and Medicare have played a growing role in financing home care, which most people prefer, but that those programs cannot afford to fund adequately.

The end result is that the public has been anesthetized to the risk of long-term care even as state and federal coffers have been emptied by government's efforts to help. It's the same old story: good intentions led to unforeseen and tragic consequences.

That brings us to the most important question -- not who should pay for long-term care. That is really moot. Rather, who WILL pay for long-term care in the future?

Certainly not government. That well is dry. Almost no one is so naïve anymore as to expect a new publicly financed long-term care system to come along.

Those who would add long-term care to Medicare no longer have any credibility. That program already has a $60 trillion unfunded liability and just took on the huge new fiscal responsibility of providing pharmacy benefits to the elderly.

Add to that the impending insolvency of Social Security, the gargantuan unfunded liability of Medicaid long-term care, the cost of fighting the war on terror, and now a $100 billion (or more) charge to rebuild the Gulf coast.

More and more, the hard reality is becoming clear: If you want access to quality long-term care at home, in the community or in the best nursing facilities, you must be able to pay privately for it. As publicly financed long-term care continues to deteriorate, more and more people will turn to their home equity as the only way to pay for acceptable care.

Eight-one percent of people 62 years of age or older own their homes and 74% of those own them free and clear. Nearly $2 trillion is available and easily accessible through home-equity conversion while still retaining use of the home.

When the only choice remaining is "languish in welfare-financed long-term care or spend down your home equity to get quality care," more people will turn to private insurance as a viable alternative.

With more people insured and paying privately at market rates, care choices and quality will improve for everyone, rich and poor alike. With fewer people dependent on Medicaid, the welfare program will be better able to provide a wider range of higher quality care to the genuinely needy. We will get to that point by default simply by staying on the current course. Medicaid will collapse and many people, especially the poor, will
be hurt. Or we can remove the perverse incentives in public policy that currently trap people in institutions on Medicaid.

The single most important step to take is to stop using Medicaid as inheritance insurance for the baby boom generation. We need to tighten eligibility, require spend-down of illiquid home equity as a condition of eligibility, and enforce estate recovery requirements.

We need to stop the abuse of Medicaid by planners who artificially impoverish their affluent clients to qualify them for public welfare. We need to give Medicaid back to the people it was originally intended to serve: the poor and underprivileged. When the choice for most Americans is "pay me now or pay me later," as in the old Fram Oil Filter commercial, most people will do the honorable thing. They will save, invest or insure for long-term care, and everyone will be better off.

The good news about America's long-term care financing problem is this: It has been self-inflicted by well-intentioned, but perversely counterproductive public policy. If we stop doing what we've always done, we'll start getting a different result.

And that is the very definition of sanity, isn't it?