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Planning for Long-Term Care Without Public Assistance


Stephen A. Moses

People have always been afraid of dying too soon. Lately, they worry more about living too long. The fear of chronic long-term illness leading to loss of independence and catastrophic health care costs is widespread among the growing ranks of America's elderly. No greater threat to the physical and financial well-being of older people exists. Seniors and their families turn to professionals they trust for guidance in handling this risk. What CPAs tell their clients about financing long-term care may be the most important counsel they ever give. Unfortunately, this subject is muddled with complexity, replete with misinformation, and fraught with malpractice risk. This article explains these pitfalls and plots a safe course around them for professional financial advisers.


The health care minefield that seniors face today will become a thermonuclear time bomb for their children's generation. America's population over age 65 doubled between 1950 and 1980; it will double again by 2030. The segment of the elderly over age 85, by far the most vulnerable, is growing three to four times as fast as the general population. While only 14 percent of the "young-old" (65 to 74) are disabled, 58 percent of the "old-old" (85+) are functionally dependent; 47 percent have Alzheimer's Disease; and 22 percent already live in nursing homes.

The demographic arms race is rapidly careening toward catastrophe. People over 65 have two chances in five of entering a nursing home, one chance in four of staying more than a year, and one chance in 10 of remaining five years or more. Nursing home costs average $30,000 per year within a range of $25,000 to $50,000. These expenses are increasing much faster than general inflation. The hope of avoiding high institutional costs with inexpensive home care is unrealistic. Hour for hour, the cheapest formal home care costs more than full-time nursing home care. Today, most long-term care for the elderly is provided informally, at home and for free, by loved ones. This resource is disappearing, however, as families disperse and women, the principal caregivers, continue to join the work force. Simultaneously, nurses aides at minimum wage to replace the informal caregivers are in scarcer and scarcer supply.

The biggest blow, however, is the lack of financing for custodial long-term care in nursing homes. Medicare is no help. It pays only for skilled, recuperative care of less than a month in duration on average. Medicare supplemental insurance policies offer little assistance. They piggyback on Medicare's severely restrictive eligibility criteria. Veteran's benefits contribute little. They are difficult to obtain already and likely to dwindle rapidly as the number of veterans increases and defense budgets decline.

Finally, people who are waiting for the white knight of national health care to save the day are probably going to be disappointed. In 1992, interest payments on the national debt--which is $4 trillion already and increasing at $400 billion per year--exceeded defense as the single biggest item in the federal budget. Even an inexpensive public program for custodial long-term care would cost $43 billion per annum. Under the circumstances, a big new tax-funded entitlement program is highly unlikely. In fact, we will be lucky to save the entitlements we already have. Half of the American people say Social Security is doomed and experts agree that Medicare will be bankrupt within 10 years.


There is one exception to the rule that government does not pay for custodial nursing home care. Medicaid (Title XIX of the Social Security Act), a jointly funded state and federal program, pays 43 percent of all nursing home costs nationally. By law, medically eligible Medicaid patients receive unlimited, publicly financed, custodial care in nursing homes of their choice.

Medicaid has an ostensible drawback, however. Conventional wisdom, as supported by clear Congressional intent, suggests that people must be poor to receive the program's benefits. Most individuals with more than $2,000 in assets or $422 per month in income do not qualify for Medicaid. Such people are supposedly required to spend down their life savings to the impoverishment level before they become eligible. If this were really true, however, 67 percent of all people in America's nursing homes would not be receiving benefits from Medicaid. After all, only 12 percent of the elderly are poor.

The reality is much more complicated. Two factors explain the anomaly. First, people who need nursing home care are exempted from Medicaid's most draconian financial eligibility limits. In most states, for example, there is no limit on how much income a person can have and still qualify for Medicaid as long as nursing home and other medical expenses are high enough to offset excess income. This is why two-thirds of the elderly poor and half of all poor children are not covered by Medicaid even for acute or emergency care, while people who need nursing home care--the program's most expensive benefit--can qualify with ease despite very high incomes.

Second, even the wealthiest of the wealthy can become eligible for Medicaid nursing home benefits by means of careful legal planning. Anyone, for example, can qualify by sheltering countable resources in an exempt home or by taking advantage of a vast array of special trusts, transfers, or other esoteric technicalities which are tantamount to old-fashioned tax planning. Statutory stumbling blocks like the mandatory 30-month transfer of assets restriction or the optional estate recovery provision are easily circumvented legally.

In recent years, a new legal practice specialty has evolved to take advantage of these Medicaid eligibility "loopholes." Elder law, a new age version of estate planning, legitimately addresses the financial risks of disability during life in addition to the more traditional concern over disposition of assets after death. But good ends are often pursued by dubious means. Medicaid estate planning, the manipulation of income and assets to qualify otherwise ineligible clients for publicly financed nursing home benefits, is the foundation stone of elder law practice.

Whole law firms have sprung up specializing in the arcane field of Medicaid planning. Professional books and law journal articles on sophisticated income and asset sheltering techniques are commonplace. Continuing legal education seminars disseminate tools of the trade nationwide. Several newsletters are published on the subject. Even popular, self-help books for laymen containing boilerplate trusts, and step-by-step divestiture instructions have enjoyed enormous success. Surveying the public policy ramifications of Medicaid planning, syndicated financial columnist Jane Bryant Quinn was moved to ask in Newsweek "Do Only the Suckers Pay?"


What exactly do clients get who succumb to the lure of free nursing home care? Medicaid is public assistance. It is not an entitlement like Social Security or Medicare. Supplicants or their representatives must fill out long, intricate welfare applications. They are required to disclose extensive personal and financial information accurately under penalty of fraud. They become dependent on the whim of social workers and eligibility clerks employed by the state. All but a pittance of their personal income must go toward the cost of their care. Family financial supplementation to augment services is forbidden as it would constitute disqualifying income. Furthermore, Medicaid's reputation for access, quality, reimbursement, discrimination and institutional bias is dismal.

The U.S. General Accounting Office says that patients "...most likely to have to wait for nursing home placement are those...financed by Medicaid." Experts Alice Rivlin and Joshua Wiener of the Brookings Institution write: "Nursing homes whose patients are mostly private generally provide higher-quality care than facilities dependent on Medicaid patients." The Senate Aging Committee explains that "[o]ne reason for poor quality is inadequate and poorly targeted reimbursements by Medicaid/Medicare, which forces some nursing home operators to 'cut corners' on care." The United Seniors Health Cooperative clarifies that "...Medicaid pays nursing homes less than the cost to provide the service...." Patricia Nemore of the National Senior Citizens Law Center charges "[n]ursing homes discriminate against Medicaid recipients..." with private pay requirements, special wings, evictions, and inferior food and services. Medicaid's bias toward nursing home institutionalization instead of home- and community-based care is well known as one of the program's most persistent characteristics.

Nor is Medicaid's largesse to the middle class likely to continue much longer. Total program costs have skyrocketed 10, 18 and 25 percent in the past three years. Medicaid already consumes 14 percent of state budgets. Fiscal trend lines for the program point almost straight upward. The federal government is trying to forbid states to raise extra money by taxing providers because it cannot afford to pay its share of the statutory match. State capitols resound with talk of cutting budgets, raising taxes, and tightening eligibility requirements. Washington, D.C. is abuzz with talk of mandating liens as a condition of eligibility and requiring recovery of benefits from the estates of prosperous recipients. Without a doubt, someday soon, the public policy-makers are going to give Medicaid back to the poor people whom it was originally intended to serve.


Malpractice claims against estate planners are up sharply. Practitioners of Medicaid planning are particularly vulnerable on four counts. First, Medicaid nursing home eligibility is extremely complex. Famous jurists have called it a "Serbonian bog...almost unintelligible to the uninitiated." State and federal statutes, regulations and policies are almost constantly changing. One expert says that nine out of ten attorneys give bad advice on qualifying for Medicaid. This is not a sideline practice for attorneys or financial advisers. Non-specialists should refer all clients who insist on Medicaid planning to carefully pre-screened experts in the field.

The second area of malpractice risk involves determining who the client is. Most Medicaid planning occurs after a person has been institutionalized for a chronic long-term disabling illness. Because 63 percent of nursing home patients are cognitively impaired, the odds are high that an institutionalized person will be mentally incapacitated. Quite often, therefore, it is the family--usually a spouse or children--who ask the attorney or CPA for help. This creates a dangerous conflict of interest. The same people, especially heirs, should not make financial and health care decisions for a vulnerable elder. Anyone involved in Medicaid estate planning, however indirectly, must guard assiduously against this danger.

Third, a very serious failing in the extensive legal literature on Medicaid planning is that it almost never discloses the program's deficiencies. Yet, anyone even vaguely familiar with gerontological scholarship knows the litany of problems recounted above concerning access, quality, et cetera. Medicaid planners and those who intend to refer clients to them should undertake to learn about these negatives. Some elder law attorneys are already practicing a very wise self-defense mechanism. They require clients to sign a form acknowledging awareness of Medicaid's risks and of the potential option to purchase private long-term care insurance.

The fourth area of malpractice risk involves abetting intentional planning for welfare. Most authorities take a very dim view of this practice. Health and Human Services Secretary Louis Sullivan says: "Too many Americans lack access to basic health care; I do not think we can afford to drain the nation's health care program for the poor, in order to support those who can protect themselves." Henry Waxman, whose House subcommittee has jurisdiction over the Medicaid program, has chastised the legalistic "charade" of Medicaid planning which he says short-changes the program's intended clientele: the poor of all ages, pregnant women, children, and the mentally retarded. Under these circumstances, whom besides their legal and financial advisers are the client and his heirs likely to blame if the government stops giving away nursing home care to the middle class?


Once they know the facts, few lawyers or CPAs want to engage in Medicaid estate planning. Given the terrible health and financial risks associated with chronic long-term disabling illness, however, they must be prepared to offer clients sound alternatives in this area. Fortunately, an excellent option is available for most clients.

Medicaid planners acknowledge that their average client has between $100,000 and $200,000 in liquid investments plus a home owned free and clear. Such a client, if reasonably healthy, can purchase excellent private long-term care insurance for a fraction of the interest on his savings. For example, according to the Health Insurance Association of America, the leading long-term care policies cost $658 at age 50; $1,395 at age 65; and $4,199 at age 79 on the average. Such policies cover $80 per day for four years in a nursing home after a 20-day deductible. They include some inflation protection. Obviously, the key is to buy young when the risk, and hence the premiums, are very low.

Private long-term care insurance has received some bad publicity. It is a new, experimental and largely unregulated industry. Caveat emptor definitely applies. On the other hand, most experts agree that some of the 130 companies in the business offer excellent products. Certainly, by comparison with the only other options available--Medicaid or catastrophic spend-down--private insurance is extremely attractive. The trick is to discern the best products of the better companies.

Dozens of pamphlets, magazine articles and books are readily available to help people select the right long-term care insurance product. Just as a CPA's client should not have to learn accountancy, however, financial and legal advisers should not have to become insurance experts. Learn enough to ask the right questions, interview several representatives of the best products, select one or two trustworthy specialists, and then refer eligible clients to them. Return referrals should more than compensate for any lost fees from Medicaid planning.

If the client is too old or too sick for insurance, then recommend private payment for home or nursing home care. Private patients command red carpet access to top quality care. When they spend down to welfare levels, they can convert to Medicaid. At least the probability of remaining in the preferred care situation is greater if one pays privately for awhile. Fortunately, Medicaid now protects spouses and other dependents from impoverishment caused by a family member's long-term care expenses. If heirs object to losing their inheritances, tell them to learn from the experience and buy insurance for themselves.


The risk of chronic long-term disabling illness in old age is big, growing and extremely expensive. Professional advisers and their prosperous clients should ignore the fool's gold of public assistance. Advise every client to buy insurance or to pay privately even if this means consuming an estate. Stay out of the Medicaid trap!

Stephen A. Moses is Director of Research for LTC, Incorporated, a private firm in Kirkland, Washington specializing in long-term care financing and insurance. Previously, he served 11 years as a senior Medicaid analyst with the Health Care Financing Administration and the Inspector General of the U.S. Department of Health and Human Services.

2212 Queen Anne Avenue North, #110, Seattle, Washington 98109 ~ Phone (206) 283-7036 ~ Fax (206) 283-6536

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