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Presentation on

"The CLASS Act and the Future of Long-Term Care Financing"

by Stephen A. Moses

for the Society of Actuaries "Living to 100" Symposium

January 5, 2011 in Orlando, Florida

Slide 1: "The CLASS Act and the Future of Long-Term Care Financing"

by Stephen A. Moses, president, Center for Long-Term Care Reform, Seattle, Washington

Good morning, ladies and gentlemen.

I'm sorry I cannot be with you in person because of a family medical emergency. Please direct any questions or comments to me by phone or email.

I'm speaking today about the CLASS Act and the likely future of long-term care financing.

 

Slide 2: Overview

  • What is the CLASS Act?

CLASS became law as part of "health reform" when President Obama signed the Affordable Care Act on March 23, 2010.

One of the CLASS program's biggest proponents described it as a "New voluntary nationwide long term services and supports insurance program for persons with disabilities and seniors with chronic illness."

That definition sets CLASS apart from the government program that has dominated long-term care financing since 1965.

  • CLASS is the Non-Medicaid program

CLASS definitely is the non-Medicaid program.

Whereas Medicaid is a means-tested public welfare program, CLASS is social "insurance" into which people pay premiums and earn "entitlement" to benefits.

Whereas Medicaid pays mostly for nursing home care, CLASS provides funds that can be used for "long term services and supports," including home and community-based care.

Whereas Medicaid reimburses care providers directly, CLASS puts money in the hands of patients and their families to purchase care as they see fit.

Whereas Medicaid has different benefits and eligibility rules in every state, CLASS is consistently the same nationwide.

Whereas Medicaid shortchanges younger disabled people in favor of frail and infirm elders, CLASS does not discriminate.

  • Will CLASS solve or aggravate problems?

Bottom line: the CLASS program attempts to correct or at least ameliorate major problems with America's long-term care service delivery and financing system, problems that are often associated causally with Medicaid.

These problems include (1) limited access to care, (2) dubious quality, (3) inadequate provider reimbursements, (4) discrimination against Medicaid recipients, (5) institutional bias, and (6) loss of independence and control.

So, hooray for the CLASS Act's goals. But will it resolve or aggravate these shortcomings in the current system?

 

Slide 3: Understanding the LTC Status Quo

  • How did we end up with a welfare-financed, nursing-home-based LTC system?

One of the biggest mistakes policy analysts and legislators make is to attack the symptoms of social problems instead of their causes. The only way to avoid that error is to understand how those problems came to exist in the first place.

  • Brief history of LTC services and financing

So, how did the United States come to have a welfare-financed, nursing-home-based long-term care system that serves no one well?

In 1965, at a time when many more people were living longer and dying slower, with fewer women at home to provide free care, Medicaid made nursing home care easily available at little or no cost. I provide more detail in the paper and in my other publications, but in a nutshell:

Easy access to government-financed nursing homes stunted the development of a privately financed home and community-based services infrastructure, crowded out a market for home equity conversion or private insurance to fund long-term care, and caused Medicaid expenditures to explode rapidly.

Therein lie the origins of the long-term care service delivery and financing problems we still face today, including institutional bias, budgetary strains, low provider reimbursements, caregiver shortages, excessive Medicaid dependency, and disappearing private-pay census and funding sources.

  • Unintended consequences of well-intentioned but counter-productive policies

Our current dysfunctional long-term care system is the logical and inevitable consequence of the well-intentioned but counter-productive policy to fund nursing homes through a welfare program.

Unfortunately, instead of addressing the cause, i.e. easy access to government-subsidized nursing home care, most academics and the state Medicaid programs they influence, have tried to fix the symptoms, i.e., institutional bias and high costs.

Slide 4: Can Medicaid rebalance it's way to solvency?

The holy grail of recent long-term care financing policy is the idea that by "rebalancing" from funding nursing home care to supplying home and community-based services instead, Medicaid can give more people long-term care services they prefer at lower cost.

  • Are HCBS cheaper than institutional care?

But are home and community-based services really less expensive in the long run and across the whole society?

Most research suggests they are not. In general, home and community-based care delays but does not replace nursing home institutionalization. Also, home care is labor intensive and lacks the economy of scale of a nursing facility. It ends up costing more, not less.

  • The woodwork effect

Furthermore, when Medicaid pays for more home care--which people prefer--and for less nursing home care--that most would rather avoid--the program attracts more participants.

People already financially eligible are more likely to rely on Medicaid and others are more apt to self-impoverish intentionally to qualify when they perceive that the program provides more desirable services.

  • How to avoid the pitfalls of rebalancing

To summarize the argument so far: Medicaid-funded institutional care crowded out a private market for home and community-based care and led to our welfare-financed, nursing-home-based, prohibitively expensive long-term care system.

But efforts to counteract the system's deficiencies by rebalancing to provide more home care only made Medicaid more attractive and increased rather than decreased its costs and problems.

The only way Medicaid can afford to offer a full continuum of long-term care services to all recipients is to reduce the number of people who end up dependent upon the program.

Slide 5: Why does Medicaid pay for most long-term care?

But that brings up the question "Why does Medicaid--a means-tested, public assistance program--pay for most long-term care in the first place?"

Isn't it supposed to be a safety net for a relatively small number of truly needy people?

Don't people have to spend down into impoverishment before they get help from Medicaid?

  • The fallacy of impoverishment

That perception of Medicaid is what I called the "fallacy of impoverishment" in a 1990 Gerontologist article. In fact, most Americans qualify quite easily for Medicaid-financed long-term care. The financial eligibility rules are much more generous and elastic than commonly realized.

  • How Medicaid LTC eligibility actually works
    • Income
    • Assets

Anyone with income below the cost of a nursing home qualifies based on income anywhere in the United States. Applicants may need an "income diversion trust" in "income cap" states, but they'll be able to shelter much more income in "medically needy" states, the majority.

Exempt assets are virtually unlimited including a home and contiguous property up to an equity value of at least $500,000 and as much as $750,000 in some states, plus one business, one car, prepaid burials, household goods, and term life insurance of unlimited value. Anyone with excess assets can make them non-countable by purchasing exempt assets such as these.

  • Medicaid planning

For people who still don't qualify based on their income and assets, a cottage industry of Medicaid planning specialists eagerly provides advice on how to self-impoverish by means of special annuities, trusts, life care contracts and other legal gimmicks.

Slide 6: Summary and Relevance of the CLASS Act

Now, let's return to the CLASS Act.

  • Will CLASS fix what's wrong?

Will CLASS fix the problems that Medicaid has caused? I don't think so.

  • Take up low because of Medicaid crowd out

Most people do not worry about long-term care until they or a loved one need it. Then the path of least resistance is to qualify for Medicaid. CLASS does nothing to change that. In fact, its five-year wait for benefits equals Medicaid's five-year asset-transfer look back period.

  • Private LTCI already pays for HCBS but people don't buy

Private long-term care insurance already pays for the whole continuum of long-term care including home care, adult day care, respite care, assisted living and skilled care if needed. But most people don't buy it. CLASS will have the same problem.

  • Public sees LTC as a right, an entitlement because of Medicaid and Medicare

More than four decades of easy access to Medicaid-financed long-term care has anesthetized the public to its risk and cost. The public sees LTC as a right, as an entitlement--because of Medicaid and Medicare. CLASS does not change that.

  • Adverse selection

Because CLASS lacks the routine medical underwriting essential for all true health or long-term care insurance, it will attract participants most likely to claim its benefits. It will repel people with better health prospects who can get more protection for less cost from private insurance or simply "go bare" and count on Medicaid and Medicare.

  • One size fits all

Although CLASS lacks Medicaid's state-specific variations, its one-size-fits-all structure precludes adapting the program to fit the special needs of individuals and families in the manner private insurance policies can.

Slide 7: Conclusion

  • CLASS tries to fix LTC without accounting for why it's broken

The CLASS Act attempted to fix what's wrong with long-term care services and financing without first asking why the system is broken.

  • Addresses symptoms, not causes

CLASS addressed the symptoms of our long-term care problems, but not the causes.

Are most people uninsured for long-term care? Yes, but CLASS will not change that because it does not address the cause: decades of easy access to Medicaid.

Do long-term care providers discriminate against Medicaid recipients? Yes, but CLASS will not change that because it will not provide enough revenue for beneficiaries to afford market-based private-pay service rates.

  • Access? Medicaid co-opted private HCBS.

Do too few people get the home care services they prefer? Yes, but CLASS will not change that because wide publicity about Medicaid "rebalancing" has further desensitized the public to the risk and cost of long-term care.

  • Quality? Medicaid paid too little.

Is long-term care quality a problem? Yes, but CLASS will not change that because of low participation, very limited payments, and likely rapid insolvency.

  • Institutional bias? Medicaid paid for nursing homes.

Do too many people end up in nursing homes on public welfare? Yes, but CLASS will not change that either because few good risks will enroll for the same reason they shun private insurance, their denial enabled by traditional Medicaid financing.

 

Slide 8: The Future of Long-Term Care Financing

So, to conclude, what is the most likely future for long-term care services and financing?

  • No change until we address the causes, not just the symptoms

More of the same. I predict the CLASS Act will be repealed before it is implemented as so many have recommended, including President Obama's "Debt Commission."

But if it is implemented as currently configured, it will fail shortly after it is put in place as predicted by most professional actuaries who have examined the program.

If CLASS is somehow modified so that it reflects some level of actuarial competence, achieves lower premiums and higher benefits, or if it is made "mandatory," it could possibly be made to sputter along for awhile.

  • But policy makers keep making Medicaid more attractive and easier to get

But policy makers keep making Medicaid appear more attractive. The media and "Medicaid planners" keep making Medicaid benefits easier to get.

Just as private long-term care insurers have never fully realized that Medicaid is their biggest competitor, siphoning off the middle and affluent markets they could have otherwise captured, so CLASS advocates have been blindly optimistic that their Rube Goldberg alternative could do better.

  • CLASS will flounder

My best guess of what to expect for long-term care services and financing is that . . .

CLASS will flounder . . .

  • Medicaid will have to cut back radically, when support from Social Security and Medicare end

State Medicaid programs will cut back radically to survive as federal-match bonuses from the "stimulus" disappear July 1, 2011, as 16 million new recipients are added by "health reform" in 2014, and as support from Social Security and Medicare declines as I explained in my paper.

  • Boomers will spend through savings and home equity

Boomers, only one-third of whom have saved enough for their retirement income security, have set aside almost nothing to meet future acute and long-term care costs. They will quickly spend through their savings and home equity if they need long-term care after they can no longer rely on Medicaid.

  • Reverse mortgages and private LTCI will flourish

Reverse mortgages will become the dominant funding source for middle class and affluent home owners who require long-term care once Medicaid's home equity exemption has been eliminated or radically reduced as it will have to be.

As soon as Medicaid no longer operates as free inheritance insurance for heirs, more and more people will purchase private long-term care insurance to avoid the new, and this time very real risk of asset spend down.

  • Medicaid will do a better job for fewer people

Now that I've depressed you all sufficiently, let me close on an upbeat note. We will get through this.

When it is no longer available to middle class and affluent people after the insurable event occurs, Medicaid will be able to do a better job for fewer dependents at less taxpayer expense.

In time, most people will see the real risk and cost of long-term care. They will prepare to be able to pay privately for long-term care if and when the need arises.

Private revenue will supply much needed financial oxygen to the service delivery industry. People spending their own money or their private insurance benefits will not go to nursing homes until they need them medically. So institutional bias will disappear.

When most patients pay market-based rates, long-term care providers will prosper, pay better salaries, and grow. So problems of access, quality and caregiver supply will disappear. Desperately needed private debt and equity capital will pour into the long-term care services industry when it is profitable again.

When people know they must pay for their own long-term care, the reverse mortgage and long-term care insurance industries will prosper and grow. So there will be more jobs created and increased tax revenue.

Bottom line, if we stop doing what we've always done in long-term care services and financing, we'll get a different result. Because CLASS does nothing to replace Medicaid as the dominant LTC payer, it will lead to more of the same.

According to Albert Einstein, doing the same thing over and over again and expecting a different result is . . . well, let's be tactful and just say . . . not very useful.

Thanks for your attention.

 


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