LTC Bullet: How and How Much Medicaid Reduces Lifetime Medical Spending for Affluent Retirees

Wednesday, October 10, 2018


LTC Comment: Medicaid is welfare, so of course it reduces lifetime medical spending of the poor. But here’s evidence Medicaid radically reduces medical spending by the affluent, especially for those savvy enough to maximize “Medicaid planning.” Evidence and analysis after the ***news.***

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*** THE LTC DISCUSSION GROUP will address the “Potential for Medicaid Savings from New Long Term Care Financing Products: LifeStage and Retirement Plus” as presented by Brian Ulery, LTCG and Vincent Bodnar, Genworth on Thursday, October 25 from 11am to noon EDT. For more information, go to If you have not participated in the LTC Discussion Group’s informative sessions in person or by phone, this would be an ideal time to begin. ***



LTC Comment: Today, we direct your attention to new research that bears on the critical question of why people don’t worry enough about long-term care risk and cost to prepare in advance. Answering that question is not the stated goal of the paper we’ll discuss, so we’ll tease out this meaning from its findings.

“The Lifetime Medical Spending of Retirees” by John Bailey Jones, Mariacristina De Nardi, Eric French, Rory McGee, Justin Kirschner is NBER (National Bureau of Economic Research) Working Paper No. 24599, issued in May 2018 and revised in July 2018. To give you its general direction, we’ll start with the paper’s “Abstract” and then pull representative quotes followed by our “LTC Comments.” Our “Closing LTC Comment” will answer the key questions we raise, but which this paper leaves frustratingly unaddressed. You may purchase the paper on-line in .pdf format from ($5) for electronic delivery.

NBER Paper: “ABSTRACT: Using dynamic models of health, mortality, and out-of-pocket medical spending (both inclusive and net of Medicaid payments), we estimate the distribution of lifetime medical spending that retired U.S. households face over the remainder of their lives. We find that households who turned 70 in 1992 will on average incur $122,000 in medical spending, including Medicaid payments, over their remaining lives. At the top tail, 5 percent of households will incur more than $300,000, and 1 percent of households will incur over $600,000 in medical spending inclusive of Medicaid. The level and the dispersion of this spending diminish only slowly with age. Although permanent income, initial health, and initial marital status have large effects on this spending, much of the dispersion in lifetime spending is due to events realized later in life. Medicaid covers the majority of the lifetime costs of the poorest households and significantly reduces their risk.” (p. 1)

LTC Comment: OK, important information to know, but we see no direct reference to long-term care spending. It’s easy to infer such a connection, however. We know a large portion of late-life medical spending is for long-term care, one of the biggest “events realized later in life.” So, these findings on the wide dispersion of lifetime medical spending, are highly relevant to the insurability of long-term care. Insurance should replace the small risk of a catastrophic loss with the certainty of an affordable premium. Lifetime medical spending ranging from an average of $122,000 to a 5 percent probability of more than $300,000 to a 1 percent chance of more than $600,000 certainly invites mitigation by insurance. But wait, these aggregate numbers include both out-of-pocket spending and Medicaid expenditures. Won’t we have to separate those to understand the impact of medical spending on consumers as opposed to its impact on taxpayers?

NBER Paper: “Our focus is out-of-pocket spending, the payments made by households themselves. High out-of-pocket expenses, however, can leave households financially indigent and reliant on Medicaid, the means-tested public insurance program. Medicaid eligibility depends on financial as well health-related factors (De Nardi et al., 2012), and Medicaid-provided care is widely viewed as inferior (e.g., Ameriks et al. 2011). Our benchmark spending estimates therefore include payments made by Medicaid, to capture all of the medical spending risk that households potentially face. Mechanically, our benchmark estimates measure the medical spending not covered by Medicare or supplemental private insurance. In economic terms, they measure the medical spending risk that wealthier households would face, and the medical spending risk that less wealthy households would face were Medicaid not available (absent any other changes in their insurance).” (p. 3)

LTC Comment: Hmmm. Their focus is out-of-pocket spending, but high costs may impoverish people and leave them dependent on “inferior” care from Medicaid, so they also look at total medical spending including out-of-pocket and Medicaid expenditures. That strategy allows them to identify the medical spending risk that both wealthy and poor households would face in the absence of Medicaid. Very useful and interesting, but I already discern a potential problem. If affluent people can rely on Medicaid without becoming financially indigent (and they can; see the evidence here), how does that affect the calculation and impact of medical spending risk? Will the paper address the myriad ways in which affluent people qualify for Medicaid, thus reducing their vulnerability to out-of-pocket medical spending? That would be very unusual.

NBER Paper: “We find that Medicaid lowers average lifetime expenditures by 20 percent. It covers the majority of the medical costs of the poorest households and significantly reduces their risk. Medicaid also reduces the level and volatility of medical spending for high-income households, but to a much smaller extent.” (p. 5)

LTC Comment: Now that is disappointing. Medicaid lowers expenditures by 20 percent wiping out the majority of medical costs for poor people, but only helps high-income households much less. How much less? Why does Medicaid, a welfare program, reduce spending for “high-income” people at all? Will we learn more as the paper progresses? Only a little more.

NBER Paper: “Our baseline measure of medical spending is the sum of payments made out-of-pocket and Medicaid. A number of recent papers have argued that Medicaid significantly reduces the out-of-pocket spending risk faced by older households. Brown and Finkelstein (2008) conclude that Medicaid crowds out private long-term care insurance for about two-thirds of the wealth distribution. De Nardi et al. (2016a) find that most single retirees, including those at the top of the income distribution, value Medicaid at more than its actuarial cost.” (p. 21)

LTC Comment: This is promising. If Medicaid crowds out private LTC insurance and high-income retirees value Medicaid more than its actuarial cost, this welfare program must be significantly impacting saving, spending, and insuring behavior by affluent people somehow. How? With what effect on the proclivity of the well-to-do to worry about and plan for long-term care? Blank out.

NBER Paper: “The top row of Figure 7, which compares the two spending measures for households at the bottom of the PI [permanent income] distribution, shows that Medicaid picks up a large share of these households' medical expenditures. At age 70, mean out-of-pocket expenditures are about 45 percent lower than mean combined expenditures, meaning that Medicaid constitutes about 45 percent of the total. The share of costs covered by Medicaid rises rapidly with age, however, to around 85 percent. The bottom row of Figure 7 repeats the comparison for the top of the PI distribution. Not surprisingly, Medicaid covers a much smaller fraction of these households' expenditures.” (p. 24)

LTC Comment: Again, proof Medicaid helps poor people a lot (from 45 to 85 percent depending on age), and people with high lifetime incomes, less, but now how much less? No answer. It’s as though the authors want to obscure the puzzling impact of how a welfare program benefits affluent people so they don’t have to explain it.

NBER Paper: “Figure 8 compares lifetime spending totals. The top row of this figure shows that at the bottom of the income distribution, Medicaid covers 57 percent of lifetime costs as of age 70. At older ages and higher percentiles it covers even more. The bottom row shows results for households at the top of the income distribution. Medicaid covers 21 percent of lifetime costs at age 70, with the fraction rising to nearly 30 percent at age 100. While most high-income households do not receive Medicaid, those that do qualify under the Medically Needy provision, which assists households whose financial resources have been exhausted by medical expenses. Such households tend to have high medical expenses and tend to receive large Medicaid benefits (De Nardi et al., 2016a).” (p. 24)

LTC Comment: All right, finally, numbers describing the impact of Medicaid on medical spending of high-income households. From 21 percent of lifetime costs at age 70 up to 30 percent at age 100. That’s huge. How can it happen? What effect has decades of avoiding roughly a quarter of the medical spending liability they’d otherwise have incurred had on the tendency of affluent people to plan responsibly for the health risks and costs of old age? The paper provides no answers but we do get a clue to why it has no answers. We learn that high-income households who get Medicaid qualify under the “Medically Needy provision” when their “financial resources have been exhausted by medical expenses.” Really? What is “Medically Needy”? What evidence proves people must exhaust their financial resources to qualify for Medicaid? If late-life medical spending frequently wipes out life savings, why aren’t consumers more apt to use insurance to abate that risk. Blank out. Our “closing LTC comment” answers those critical questions which this paper ignores.

Closing LTC Comment: This paper accepts the common myth of most academic research on the subject of long-term care financing. To wit, Medicaid eligibility requires impoverishment. But if Medicaid requires impoverishment, how do so many affluent people benefit so much from the welfare program? Scholars who accept the myth of impoverishment unquestioningly, as these do, have no answer. So they dodge the hard question (how Medicaid benefits the affluent) and focus on the obvious (that Medicaid helps the poor) as in this paper.

Let’s demythify this matter. Medicaid does not require impoverishment. Anyone with income below the cost of a nursing home, which averages $7,148 per month, can qualify for LTC benefits anywhere in the country. It’s easier to do in a “Medically Needy” state where health expenditures are deducted from income before determining eligibility, but in “income cap” states, higher income people can divert their excess income into “Miller income trusts” to qualify. So, the fact that high-income people qualify for Medicaid LTC benefits is no surprise, happens routinely and ought to invite explanation and analysis of its impact on consumer behavior.

But don’t the wealthy have to spend down their life’s savings into penury, no more than $2,000 in assets? How quaint and naïve to think so. Experts should know, and every affluent family quickly learns, that Medicaid exempts most wealth from spend down liability. Examples include a home and all contiguous property worth $572,000 everywhere but up to $858,000 in some states; a business including the capital and cash flow of unlimited value, including a second home if rented for income; and with no limit on their value, household goods and personal belongings, including heirlooms; one automobile; prepaid burial plans for the Medicaid recipient and everyone in his or her immediate family; term life insurance; individual retirement accounts if they’re “paying out” as all must at age 70 ½. I listed and sourced the federal laws and regulations supporting these exemptions in Medi-Cal LTC: Safety Net or Hammock? (2011), pages 19-21.

Still dubious? Explore the vast legal literature on how to expand those broad exemptions much further to protect an estate of virtually any size by means of sophisticated “Medicaid planning” techniques. I summarized that literature in a “Supplemental Bibliography of Books, Elder Law Treatises and Law Journal Articles on Medicaid Planning Listed Chronologically,” pages 34-63, in How to Fix Long-Term Care Financing (2017).

Here are the questions and answers long-term care financing scholars should be addressing.

Does Medicaid require impoverishment? No, of course not, open your eyes.

Are the affluent vulnerable to high late-life medical expenditures? Yes, of course. But really wealthy people absorb those easily. It’s the middle class and moderately well-to-do who qualify for Medicaid to offset their biggest liability, long-term care costs. Hence, the 21 percent to 30 percent of lifetime costs avoided through Medicaid by the top of the income distribution as identified by this paper.

Does the fact that Medicaid eliminates much, possibly most, of the long-term care vulnerability of the middle class and moderately well-to-do, affect their savings, investment and insurance behavior? Well, yeah. That explains why “Brown and Finkelstein (2008) conclude that Medicaid crowds out private long-term care insurance for about two-thirds of the wealth distribution” and why “De Nardi et al. (2016a) find that most single retirees, including those at the top of the income distribution, value Medicaid at more than its actuarial cost.” (p. 21)

In what directions should these facts take the study of long-term care financing? Pretty obvious. We need research that acknowledges Medicaid’s true impact on the LTC planning behavior of aging middle-class and affluent Americans. Such research should also address questions like these:

How does the availability of Medicaid after care is needed affect the planning, saving, and insuring behavior of people still in the prime of life?

Does it matter that most people do not know that Medicaid pays for most expensive long-term care if the reality is that it does?

If Medicaid did not exempt relatively high incomes and virtually unlimited assets, would people be more likely to save, invest or insure for long-term care?

If Medicaid protected the inheritances of fewer adult children of infirm elders, would those “kids” be more likely to prepare for their own future long-term care needs?

If Medicaid with its bias toward institutional care were less available to middle class and affluent people, would they be more likely to opt for private-pay home and community-based care?

If the LTC service delivery system had more private-payers at market rates and fewer Medicaid dependents generating reimbursements less than the cost of care, would access and quality of long-term care improve for everyone, rich and poor alike?

The answers to these questions are as obvious as the research needed to address them is barren. Unless and until scholars acknowledge and correct the myth of Medicaid spend-down and explore its ramifications for consumer behavior, progress to improve long-term care services and financing will remain stunted.