by: Stephen A. Moses
An excerpt from The Heritage Foundation's
"Heritage Lectures: How To Cope With The Coming Crisis In Long-Term Care" #658
April 27, 2000
First, let me say that Richard Teske is correct when he recommends above-the-line federal tax deductibility or tax credits as a means to encourage the middle class to purchase long-term care insurance. Such positive incentives are necessary, and they will help relieve the pressure on Medicaid and Medicare over time.
The Failure to Plan
Unfortunately, tax incentives for the purchase of private long-term care insurance by themselves will not be sufficient to solve the problem. People do not fail to buy long-term care insurance because it has not been fully tax-deductible. They do not buy it because they do not think they need it. They do not think they need it because the government has been paying for long-term care for 35 years through Medicare and Medicaid.
In other words, our federal government has anesthetized the public to the real costs and risks of long-term care. Thus, most of our problems in long-term care service delivery and financing have been self-inflicted by well-intentioned but counter- productive public policy. If we just stop doing what we have always done, we will stop getting the same negative consequences. On the other hand, if we keep pursuing the failed policies of the past, we should expect the disastrous consequences to become much worse as the baby boom generation ages and their health declines.
The evidence to defend my thesis is much stronger than I will be able to present to you in the short time available. So I would suggest you visit the Center for Long-Term Care Financing's Web site at www.centerltc.com. We offer two major white papers on this issue: "LTC Choice: A Simple, Cost-Free Solution to the Long- Term Care Financing Puzzle" (1998) and "The Myth of Unaffordability: How Most Americans Should, Could and Would Purchase Private Long-Term Care Insurance" (1999). These reports are available for free to legislators and the media. The Center also publishes news and commentary on the long-term care financing issue in a free online newsletter called "LTC Bullets." Finally, we prepared an "LTC Pledge for Baby Boomers" for today's event. The pledge lists facts everyone should know and commitments everyone should make to prepare for catastrophic long-term care expenses. (A copy of the pledge is appended to these remarks.)
Now, why has America's long-term care public policy failed? In a sentence, we have been trying to solve the wrong problem. We have treated long- term care as if it were a welfare issue. For example, consider how it is usually described: People are living longer and dying slower, often in nursing homes, at great expense. They quickly spend down their life savings and collapse into the social safety net. Consequently, Medicaid and Medicare expenditures to cover these costs have skyrocketed; and the only practical solution is to increase taxes and spend more for publicly financed long-term care.
If this scenario were true, however, consumers would be scared to death about the danger of catastrophic long-term care spend-down. Are they? No. The public is notoriously in denial about the risk of long-term care.
If catastrophic spend-down were commonplace, we would expect people who need long-term care to seek out the lowest cost, most desirable venues in which to receive care. Do they? No. America's home and community-based services infrastructure is grossly underdeveloped and starved for financial Oxygen.
If their life savings were truly at risk, consumers would delay their admission to expensive nursing homes as long as possible, and use institutionalization only as a last resort. Is that what happens? No. Most people go straight to a nursing home when they require formal long-term care. The institutional bias in America's service delivery system is infamous.
Before the elderly would sell their homes and "spend down" into impoverishment, most would tap their home equity--which constitutes 70 percent of the net worth of the median elderly household-- through a reverse annuity mortgage, or some other method of home equity conversion. Do they? No. There is very little demand for home equity conversion despite strong government efforts to encourage it.
Finally, with everything at stake, surely most consumers would protect themselves against the risk of costly long-term care in the same way they protect against other catastrophic risks, by purchasing private insurance. Do they? No. Only 7 percent of seniors and virtually none of the critical baby boom generation have obtained private insurance for long-term care.
RESPONDING TO INCENTIVES
What is going on? Are aging consumers completely irrational? I do not think so. Remember, we are talking about the generation of Americans who struggled through the Depression, fought World War II, scrimped and saved to put aside a small nest egg, and will not part with their rainy day fund without giving that decision the most careful consideration. These folks--our parents-- know the value of a dollar and they are careful shoppers.
What else might explain their failure to take catastrophic long-term care spend-down seriously? Suppose, just for a moment, that we have been trying to solve the wrong problem. What if long-term care is not really a welfare problem as we thought, but is rather just the opposite, an entitlement problem?
What if the following were true? In America today, you can ignore the risk of long-term care, avoid the premiums for private insurance, wait to see if you ever become chronically ill, and if you do need expensive long-term care someday, the government will pay for it. If this "entitlement paradigm" is accurate, then consumer behavior makes perfect sense. For example:
Obviously, if the welfare paradigm is wrong and the entitlement paradigm is right, America's long- term care financing problem is very different than we have assumed, and it will be much easier to solve. So, what is the evidence?
Despite the conventional wisdom that Medicaid long-term care eligibility requires impoverishment, the truth is quite different. Income rarely stands in the way of eligibility. Most states have "medically needy" Medicaid programs. They deduct all medical expenses including the full cost of private nursing home care from applicants' income before determining their eligibility. In the remaining states that have income cap eligibility systems, anyone can siphon excess income into a "Miller trust" to qualify. Married couples may shelter even more income. The bottom line is that only approximately the top 10 percent of elderly Americans are excluded from Medicaid nursing home eligibility based on income.
The infamous Medicaid asset limit of $2,000 is meaningless. Medicaid recipients also can retain a home and all contiguous property regardless of value, a business including the capital and cash flow of any value, other personal property with no practical limit on its value, and one automobile of unlimited value. Because the car is exempt, giving it away is not a "transfer of assets for less than fair market value for the purpose of qualifying for Medicaid," so one can give a car away, buy another, give it away, and so on until the $2,000 asset limit is reached. Medicaid planning attorneys call this technique the "two Mercedes rule." Of course, Medicaid planners also have a long list of far more sophisticated legal gambits, including the use of "Medicaid annuities," complicated "income-only" trusts, care-giving contracts, and many, many others. Numerous best-selling guidebooks provide advice and boilerplate legal forms to help families self-impoverish their elders without the help or expense of an attorney. Efforts by the President and Congress to control and even criminalize Medicaid planning have been circumvented by the elder law bar.
The reality is that America's nursing homes contain few residents who pay privately and could not shift the cost of their care to Medicaid within 30 days, if they chose to do so. The elastic loopholes in Medicaid eligibility rules are notoriously easy to stretch. In fact, even though fewer than 12 percent of the elderly are poor, Medicaid already pays for two-thirds of all nursing home patients and for 80 percent of all nursing home patient-days in the United States. We previously thought that this strain on Medicaid was caused by the widespread catastrophic spend down of middle-class Americans who were overwhelmed by the high cost of private nursing home care. The conventional wisdom was that 50 percent to 75 percent of nursing home residents entered as private payers, spent down to poverty, and qualified soon for Medicaid. We know now, because of two dozen empirical studies published in peer-reviewed academic journals, that only 15 percent to 25 percent of nursing home patients enter as private payers and later convert to Medicaid--and that this includes people who spend down by hiring an attorney to achieve artificial impoverishment.
If what I have been saying is true, however, it ought to be possible to account for the cost of nursing home care in the United States without dipping significantly into anyone's assets. In 1997, the latest year for which data are available, Medicaid paid 48 percent of America's $83 billion annual nursing home bill, about the same percentage it paid in 1985. Medicare paid more than 12 percent, a big jump from less than 2 percent in 1985. So- called out-of-pocket payments contributed only 31 percent toward nursing home costs, down from more than 44 percent in 1985. The term "out-of- pocket" is quite misleading, however, because it includes Social Security income that Medicaid recipients are required to contribute toward the cost of their care. This Medicare "spend through" actually accounts for nearly 13 percent of the entire cost of nursing home care nationally. Now add in 10 percent to 20 percent of nursing home costs that come from private pension or investment income, which most people would use to pay for nursing home care before dipping into their assets.
In total, we have indeed accounted for upwards of 85 percent to 90 percent of the entire cost of nursing home care in the United States drawing only on direct and indirect government payments, supplemented by private income, but without using even one dollar of anyone's savings. Furthermore, nursing home care is not the whole story. Medicare pays generously for long-term home care benefits as well. Those costs are up from $2 billion in 1988 to $20 billion in 1997. That is an increase from 23 percent of total home health expenditures in 1985 to 42 percent in 1997. Home care out-of- pocket costs also have declined commensurately.
Clearly, public financing of long-term nursing and home health care has risen sharply in the past decade, whereas private out-of-pocket expenditures have fallen precipitously. No wonder people can evade the high cost of long-term care indefinitely. No wonder they end up in nursing homes on Medicaid or getting extended home care benefits from Medicare. No wonder people do not plan early and buy insurance. No wonder they think long-term care insurance is "unaffordable." The only conclusion we can reach logically is that the welfare paradigm, which has guided public policy heretofore, is wrong and that the entitlement paradigm is correct.
That being the case, what should we do?
We have already tried some pretty draconian measures. The Omnibus Budget Reconciliation Act of 1993 closed several loopholes and mandated recovery from the estates of deceased Medicaid recipients. Subsequent legislation even attempted to throw "granny" and her lawyer in jail for transferring assets or recommending that step to qualify for Medicaid. Such after-the-fact penalties did not work. The eligibility rules are just too porous and politically sensitive to enforce effectively. By the time people are stricken with Alzheimer’s disease, Parkinson's disease, or a stroke, it is too late for them to resist the temptation to take advantage of public programs to pay for their long-term care. By then, the infirm seniors are no longer in control of their own lives and savings.
Most experts agree that it is usually the adult children of today's vulnerable elderly who instigate Medicaid planning to protect their own inheritances by placing their parents in a nursing home on welfare. Clearly, we never can solve this problem unless we attack it before the catastrophic event occurs.
We need a positive incentive for most Americans to take the risk of long-term care seriously, to plan early, to save or insure fully, and to stay off Medicaid. The public policy proposal we recommend at the Center for Long-Term Care Financing is called "LTC Choice."
The first step of LTC Choice is to implement a comprehensive, government-sponsored education program to apprise the public of the true risks and costs associated with long-term care.
The second step is to offer the public a choice-- one either must save or insure for the risk of long- term care, or sign an LTC Contract that explicitly acknowledges one's estate is at risk for the cost of long-term care before government assistance will become available. So far, this policy is no different than the spend-down liability presumed to exist already but which in fact does not.
Step three is to give Americans who fail to save or insure a better way to obtain long-term care than they have now. We should provide a fully collateralized, privately administered, federally backed line of credit on their estates to enable older Americans to purchase the care they need. This loan would need to be repaid after the death of the borrower's last surviving exempt dependent relative, such as a spouse or disabled child.
The fourth step is to improve Medicaid and Medicare financing of long-term care by providing more and better home care, assisted living, and nursing home care. We will be able to improve Medicaid and Medicare because far fewer Americans will become dependent on these safety-net programs for their long-term care needs.
If we implement LTC Choice, most Americans will do the right thing and buy long-term care insurance to protect their estates from spend down or recovery. Families will pull together, pool their resources, and help each other insure fully or pay privately for long-term care. Those who fail to insure will have better access to higher quality care, because they will be private payers spending their own money--their income and their estate--in the marketplace. Having to pay back the line of credit that helps to pay for their care, however, will cause aging Americans and their heirs to take the risk of long-term care more seriously, which will lead future generations to plan and insure even earlier. With most of the burden of long-term care expenses covered by private insurance, and much of the remainder financed by the LTC Choice line of credit on estates, only a small remnant of people will be dependent on public welfare for care. We will be able to do what is right for the genuinely needy. The Center's "LTC Choice" report describes this proposal in much greater detail than I can offer today.
Answering the Critics of Choice
What is wrong with LTC Choice? Several criticisms have been lodged against the plan. Some say it is too intrusive and bureaucratic. Not so? The line of credit option under LTC Choice requires no more documentation and enforcement than a bank loan. A bank will not lend you hundreds of thousands of dollars to buy a home without collateral and regular payments. Why should the government pay hundreds of thousands of dollars for your long-term care without security? Surely we can expect public programs to be at least as fiscally responsible as a savings and loan.
Others claim social insurance works much better should implement a Part D of Medicare for long- term care. To answer that objection would require a lecture on its own, one a Heritage audience may not need to hear, but one I will gladly give to anyone who cares to listen. Suffice it to say that adding LTC to Medicare would be like rowing back to a sinking Titanic to place more chairs on deck.
Still others say long-term care insurance is too expensive and no incentive, whether positive or negative, will change that fact. To which I respond, nonsense! Two-thirds to three-fourths of all Americans can afford long-term care insurance and would buy it in the absence of the perverse incentives in current public policy that prevent them from giving long-term care a high enough priority among their spending alternatives. The Center for Long-Term Care Financing's report on the "Myth of Unaffordability" proves this point conclusively.
In conclusion, we need to show the American public that the private long-term care insurance option is viable and affordable and that they need to consider it seriously. People respond to incentives. Our current long-term care system rewards irresponsibility in the same way our welfare system did. If we change long-term-care policy as we have changed welfare policy to encourage responsible behavior, and if we implement long-term-care choice to assure a soft landing, then we will get the results we want.
To close, let us acknowledge the debt we owe the World War II generation. They met their many challenges with courage and perseverance. We have not served them well in their time of vulnerability and need. Perhaps our big challenge, as the baby boomers, is to solve the problem of providing quality long-term care once and for all. At least, the day has come for us to confront our great crisis, as the day came for them to confront theirs 58 years ago today at Pearl Harbor.
--Stephen A. Moses is President of the Center for Long-Term Care Financing in Seattle, Washington.
To view all THREE speeches from this session in full text. (Robert E. Moffit, Ph.D., Richard Teske and Stephen Moses)
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