LTC Bullet: Long-Term Care: The Solution (The Serial, Part 3)

Friday, November 17, 2023

Seattle—

LTC Comment: Today we offer easy access to a must-read new study by Center president Steve Moses, after the ***news.***

*** PODCAST: “Removing Medicaid Loopholes to Improve Long-Term Health Care,” by AnneMarie Schieber, The Heartland Institute, 11/7/2023
Quote: “Stephen Moses, one of the leading experts on long term care in the U.S. says the nation can dramatically improve the quality of long-term care if we could get rid of the many loopholes that allow just about anyone to qualify for Medicaid coverage. Few people save for long term care because it is widely accepted that the government will pick up the tab. But government paid care has really impacted the quality of care.  Many of the elderly live their last days in nursing homes. Moses, and the Paragon [Health] Institute released their latest report on the problems with long term care in the U.S., called Long-Term Care: The Solution. In October 2022, Moses and Paragon outlined the problems in Long-Term Care: The Problem. … This podcast begins with a discussion on Medicaid loopholes, the response from Congress, whether a solution is workable immediately, and how special interests might respond to closing off loopholes. The conversation then turns to why the public needs to be better educated on long-term care. The idea that it must be debilitatingly expensive isn’t true.”
LTC Comment: Get the essence of the LTC problem and its solution in this 36-minute podcast. Many thanks to Health Care News managing editor AnneMarie Schieber and the Heartland Institute for publishing this important message. ***

*** COLUMN: “The federal Medicaid bait and switch,” by Stephen A. Moses, McKnight’s LTC News, 11/6/2023 
Quote: “How to unleash trillions of dollars in home equity, retirement savings and life insurance lying fallow now and mobilize them to supercharge LTC service delivery is the new paper’s topic. How to do that without unsettling young people and families who have more immediate goals and responsibilities they currently put ahead of LTC planning is the paper’s proposal. I invite McKnight’s readers [and everyone else] to review ‘Long-Term Care: The Problem’ and ‘Long-Term Care: The Solution,’ consider their analysis and recommendations, and share your comments and criticism with the author.”
LTC Comment: Have a look at these two papers and let me know what you think. I believe the opportunity to change LTC financing for the better is coming again. The system described in the first paper is unsustainable and the proposal in the second paper is practical, new, and achievable. Just do it. ***

*** APPEAL: The Center for Long-Term Care Reform, in partnership with the Paragon Health Institute, is embarking on a campaign to improve LTC services and financing. In “Long-Term Care: The Problem,” we explained what’s wrong and why. In “Long-Term Care: The Solution,” we discard the failed policies of the past and propose a radical new approach based on engaging vast sources of private wealth currently diverted from LTC funding. We will reach out to the media, brief federal and state policy and law makers, speak at conferences, and write for publication, all toward the end of achieving the policy goals in “Long-Term Care: The Solution.” Will you help us in this effort? Join the Center or contribute online here. Check out the Center’s “Membership Levels and Benefits” schedule here. Most corporate memberships include a briefing by Center president and “LTC Solution” author Stephen Moses. Call or write for more information: 206-283-7036; damon@centerltc.com; smoses@centerltc.com. LTC policy has floundered for too long. Let’s get this done! ***

LTC BULLET: LONG-TERM CARE: THE SOLUTION (THE SERIAL, Part 3)

LTC Comment: The Paragon Health Institute published “Long-Term Care: The Solution” on October 3. This new report is long and complicated, but important. So LTC Bullets will deliver it to you in bite-sized pieces over several weeks. Published so far: Long-Term Care: The Solution (The Serial), October 20, 2023 and Long-Term Care: The Solution (The Serial, Part 2), November 3, 2023. Today, read “Changing Course: From Failed Threats to Stronger Incentives,” “How to Engage the Public in Long-Term Care Planning While They Still Have Time to Prepare,” “How These Policy Changes Would Impact the LTC Market,” “People Already Have More Funds Available for LTC Than They Are Using Now,” and “Methods to Satisfy Individual LTC Responsibility.” Next time: “Poverty Reconceptualized,” “Managing the Back End,” and “Why Not Social Insurance Instead?” Finally, in Part 4, expect “Summary and Conclusion” and the “Appendix: Exactly How Much Wealth Do People Have and Why Aren’t They Using More of It for LTC?”

Excerpts from “Long-Term Care: The Solution”
by
Stephen A. Moses
President, Center for Long-Term Care Reform

Changing Course: From Failed Threats to Stronger Incentives

Policies intended to scare consumers into planning privately for the risk and cost of LTC did not work. People could always ignore LTC and, if they needed expensive care over an extended period later, easily transfer the liability to Medicaid. The program’s financial eligibility rules allowed (1) ownership of practically unlimited exempt assets; (2) asset transfers five years in advance; (3) very large home equity protection; (4) major trust, annuity, and life estate exemptions; (5) large incomes so long as private health and LTC expenses were also high; and (6) substantial wealth transfer to heirs due to scant enforcement of the estate recovery mandate. Easy access to Medicaid meant the measures taken to encourage LTC planning and policies to encourage the purchase of private insurance for LTC largely failed. This condition will remain unless and until the public is engaged in LTC planning earlier in life.

How to Engage the Public in Long-Term Care Planning While They Still Have Time to Prepare

Step One: Eliminate Moral Hazard

Lawmakers should eliminate the moral hazard that has discouraged early LTC planning. That is, end the ability and practice to (1) ignore the LTC risk; (2) avoid the need to save, invest, or insure to prepare; (3) wait to see if expensive care is ever needed and, if it is; (4) transfer the liability to taxpayers by qualifying for Medicaid while preserving wealth. The methods people use to preserve wealth while qualifying for Medicaid LTC benefits late in life must cease. Those practices include but are not limited to:

a.  Purchase of exempt assets. This is the biggest, most costly, and hardest to measure method of artificial self-impoverishment to qualify for Medicaid. Medicaid requires that personal assets be spent down to a very low level (usually $2,000) before eligibility is granted. But the program does not require that such assets be expended for health or long-term care needs.[29] This loophole allows Medicaid applicants to protect unlimited wealth by purchasing goods or services that are not included among countable resources. Such exempt items include an expensive home and—without any dollar limit—the following: one automobile, prepaid burial plans, one business including the capital and cash flow, term life insurance, household goods, personal belongings, and even individual retirement accounts (IRAs) in many cases.[30] Medicaid planners routinely advise clients to maximize this path to eligibility. They provide long lists of exempt items for clients to purchase in order to reduce their countable wealth for Medicaid eligibility.[31] No study has ever been conducted to measure this very easy Medicaid planning method’s incidence or cost.
Recommendation: Eliminate the exempt asset loophole by requiring that spend down of assets must be for health or LTC expenditures and documented in the case record as is already required and done for income spend down.[32]

b.  Home equity exemption. Current Medicaid law exempts between $688,000 and $1,033,000 of home equity, depending on the state. As home equity is most seniors’ biggest asset, protecting this wealth from LTC liability discourages responsible and early LTC planning. Financial tools and methods such as reverse mortgages and home equity loans enable individuals and families to access otherwise illiquid home equity for the purpose of funding private home-based LTC. As the legitimate purpose of Medicaid is to ensure access to quality LTC for the underprivileged, the program should not shelter home equity from eligibility consideration on behalf of middle-class and affluent applicants. Otherwise, Medicaid operates as free inheritance insurance for heirs instead of a safety net for those in need.
Recommendation: Eliminate the Medicaid home equity exemption according to a phase-in schedule with enough advance warning to incentivize early LTC planning without unduly affecting people already too old to prepare.

c.  Medicaid Asset Protection Trusts (MAPT). “A Medicaid Asset Protection Trust is exactly as it sounds—a trust designed to protect assets from being counted for Medicaid eligibility.”[33] Putting wealth, including real property, into an MAPT five years ahead of application for Medicaid LTC benefits removes unlimited amounts from eligibility consideration or spend down requirements.
Recommendation: Prohibit MAPTs immediately for all applicants and recipients. Once the law is changed, Medicaid legal advisers will self-enforce by no longer using or recommending the practice.

d.  Medicaid Compliant Annuities. “A Medicaid Compliant Annuity is a single premium immediate annuity (SPIA) that contains zero cash value and provides income to the owner. Properly structured, this annuity functions as a spend-down tool that eliminates excess countable assets, allowing the nursing home resident to become eligible for Medicaid benefits.”[34] There is no limit on how much wealth can be sheltered with a Medicaid compliant annuity. A congressional study cited a Rhode Island resident sheltering $400,000 and a Virginia resident sheltering $900,000 this way.[35]
Recommendation: Eliminate Medicaid-compliant annuities as a means to qualify for Medicaid while preserving wealth at any age.

e.  Five-year asset transfer look-back. Assets transferred for the purpose of qualifying for Medicaid within five years of application are used to determine eligibility according to a formula that delays eligibility based on the amount of the transfer.[36] Assets transferred more than five years before application are not considered no matter how great the amount divested. Because the median period of time from diagnosis to death in dementia cases is five years,[37] families that transfer assets at early signs of mental weakening can entirely avoid Medicaid spend down requirements. Because real property ownership and transfers are publicly recorded, easy to check, and represent the largest portion of seniors’ wealth, the look-back period to discourage their transfer for purposes of Medicaid qualification should be much longer. It is unlikely that so many people would become Medicaid eligible and join the most expensive dually eligible recipients of Medicaid and Medicare if they were under notice of asset transfer limits 20 years in advance instead of five.
Recommendation: Expand the Medicaid asset transfer look-back period from five to 20 years. As all real property transfers are recorded and often automated now, checking for a look-back of 20 years is no more difficult than the current five-year look-back requirement. People would be much less likely to initiate asset transfers to qualify 20 years ahead of a potential LTC need as they routinely do five years ahead. In other words, this rule would be self-enforcing and not generally require enforcement 20 years later at the point of Medicaid application.

A systematic review of Medicaid income and asset eligibility loopholes (described and promoted in the vast formal legal literature on Medicaid estate planning[38]) would reveal many more oversights in Medicaid law and regulations that discourage responsible LTC planning and smooth the way onto Medicaid for people who do not plan for LTC. Some of the more egregious examples include spousal refusal, life estates, and half-a-loaf strategies.[39] These should be eliminated as well. At a minimum, the GAO should immediately undertake a systematic study of Medicaid LTC eligibility rules and enforcement to ascertain the incidence and costs of these major loopholes. GAO should examine a valid random sample of Medicaid LTC cases generalizable to the national universe of such cases. Such a study should employ more intense review and verification techniques than are used by state Medicaid agencies. Severe staff and financial shortages cause the state agencies to miss applicants’ unreported income and resources, resulting in eligibility errors that closer scrutiny would reveal. Establishing national LTC financial eligibility error rates would finally reveal how much Medicaid loses as a safety net for the needy and how large its moral hazard impact is on the non-needy due to eligibility loopholes and errors.

How These Policy Changes Would Impact the LTC Market

Without any government program ensuring both the financing of LTC benefits and asset protection in the future, consumers would be far more concerned about LTC risk and therefore much more likely than they are now to save, invest, or insure against the risk. Fewer middle-class and affluent people would end up dependent on public assistance, so the public safety net could do a better job for the truly needy. Adult children would encourage and assist their parents to plan ahead instead of turning to Medicaid for relief when needed. Principles of personal responsibility guided by risk management techniques would prevail. More private financing would flow through the service delivery system relieving LTC providers from the burden of notoriously low Medicaid reimbursement rates. The market would set prices and allocate resources to meet consumer preferences instead of providers offering only what the government is able and willing to finance. Home- and community-based services would dominate—because that is what people prefer—and investors, entrepreneurs, and companies would be rewarded for providing these services. Nursing homes would still have an important role, but they would primarily provide skilled sub-acute and rehabilitative care rather than long-term custodial assistance.

These policy changes should be phased in so that they affect older people less or not at all and give younger people enough time to adapt. For example, people 55 or older and younger people with chronic disability or early onset dementia could be exempted from the change altogether. Current rules would remain in effect for them as they age into their 80s, the time of life when LTC becomes most likely. People 45-54, newly on notice that they can no longer count on easy access to Medicaid LTC while preserving wealth, should be expected to have a minimal level of LTC savings, investment, or insurance in place by age 65 sufficient to offset their average LTC liability. Likewise, people younger than 44 should be on notice that they need to have sufficient resources set aside by age 65 to offset their average catastrophic LTC risk. How each of these age groups can reasonably be expected to achieve these levels of protection is addressed below under Steps Three and Four.

We will need to monitor and enforce compliance with these new expectations regarding LTC planning. Without either, we can expect widespread non-compliance, leaving many unprotected for LTC risk as now but no longer protected against asset spend down in the future as before. Private fiduciary organizations could be tasked with identifying individuals’ LTC risks and to follow up with each person until the risk is covered. There could be a role for some level of government to follow up with people who remain derelict in this responsibility. Artificial intelligence could help monitor and administer a program to incentivize early LTC planning.[40]

Step Two: Publicize LTC Risk and Cost

Once Medicaid is preserved for the truly needy by preventing people from using it late in life and protecting their wealth, that change should be publicized widely. Without the ability to access government programs to finance LTC later in life while preserving wealth, people will have far greater incentives to engage in proper planning. From Washington State’s experiment in payroll-funded social insurance for LTC, we know that individuals will prepare once they are confronted with the urgent need to deal with LTC risk.

Washington Governor Jay Inslee signed a law in 2019 establishing the WA Cares Fund. The program was designed to charge workers a 0.58 percent payroll tax beginning January 1, 2022, to fund a lifetime LTC benefit of up to $36,500 after a 10-year vesting period. It faced strong public opposition, failing twice to receive citizens’ support at the ballot box.[41] To make WA Cares more attractive to voters, an opt-out choice was added that allowed people to avoid the payroll tax by owning private LTC insurance purchased no later than November 1, 2021. As of August 15, 2022, 475,072 Washingtonians had taken that option,[42] overwhelming the private LTC insurance carriers’ ability and desire to supply the product.[43] Carriers, backlogged by the heavy new demand, worried the new policies taken out in minimal amounts to avoid the payroll tax would quickly lapse, creating an administrative headache and expense.

The key insight of the WA Cares Fund experience is that it took forcing people to pay immediately for LTC to get them to purchase private insurance for the risk. Prior to the Washington experience, no amount of scaring people about LTC cost or encouraging them with tax incentives persuaded many to buy the product. After WA Cares offered a way to opt out of its payroll tax, LTC insurance sales exploded. Nationally, more than three times as many people purchased the product in 2021 compared to 2020. Most of these new buyers were Washingtonians seeking to escape the WA Cares program’s payroll tax.[44] Adding the opt out harmed the program by diverting individuals with higher incomes and more favorable LTC risks to private coverage, but it also pointed the way to better LTC policy.

Clearly, an important answer to the LTC challenge lies in making LTC risk and cost real for consumers earlier in their lives. Eliminating Medicaid eligibility loopholes would create this condition, and it does so without threatening all workers with a new, economically harmful payroll tax as in the WA Cares example. Publicizing the change in future Medicaid LTC eligibility across the country, at least as widely and frequently as WA Cares was promoted to Washingtonians, should result in a similar increase in consumer demand for any and all private means to save, invest, or insure against LTC risk and cost.

Step Three: Reconceptualize the LTC Challenge

LTC risk and cost are both frightening and seemingly so distant in the future that most people choose to ignore them, especially in the face of more immediately pressing responsibilities. One key to refocus consumers on LTC is to reconceptualize the problem, with new information that reveals it is less intimidating than usually conceived. In the past several years, new research has suggested that LTC may not be such an overwhelming financial risk for most people as previously assumed.

In 2022, HHS’s Assistant Secretary for Planning and Evaluation estimated “that over half (56%) of Americans turning 65 today will develop a disability serious enough to require LTSS.”[45] But that means nearly half, 44 percent, can expect to have zero LTC need. In fact, “While individuals on average will need 0.8 years of paid LTSS, 55% of older adults will not use any paid LTSS.”[46] Furthermore, on average “an American turning 65 today will incur $120,900 in future LTSS costs, measured in today’s dollars.”[47] This amount could be financed by setting aside[48] the present discounted value of $69,800[49] at age 65.[50] Earmarking $70,000 at age 65 for future LTC expenses does not sound nearly as daunting as insuring against the full catastrophic LTC risk potential of $250,000.[51] If people begin LTC planning earlier than age 65, even less would be needed to set aside.[52] In essence, the burden is much more manageable than previously conceived.

Once the principle is established that every person has a responsibility to cover an objectively determined amount of LTC liability by a certain age, each person’s target amount could be adjusted in a way that treats people fairly based on their sex, income, health status, and other relevant demographic characteristics.

People Already Have More Funds Available for LTC Than They Are Using Now

There is more good news. In June 2019, Johnson and Wang “simulated the financial burden of paid home care for a nationally representative sample of non-Medicaid community-dwelling adults ages sixty-five and older.”[53] They “found that 74 percent could fund at least two years of a moderate amount of paid home care if they liquidated all of their assets, and 58 percent could fund at least two years of an extensive amount of paid home care.”[54] Furthermore: “Nearly nine in ten older adults have enough resources, including income and wealth, to cover assisted living expenses for two years.”[55] So the potential LTC financial burden is much more manageable than we thought. The evidence that people accumulate substantial savings that could be used for LTC if they had more incentive to do so is very encouraging. Assuming the removal of Medicaid’s generous financial eligibility rules that obviate the need to plan for LTC, the path forward will be much less fraught.

Exactly How Much Wealth Do People Have and Why Aren’t They Using More of It for LTC?

This paper’s Appendix answers those questions based on new research and draws the appropriate conclusions for LTC financing policy reform.

Step Four: Show Younger People a Better Way

Even if the LTC financing challenge is not as daunting as previously believed and families possess more wealth than we thought, we still need ways to make it easier for younger people and families to identify and put to use the means at their disposal to prepare for LTC risk and cost. Government should advise all Americans by age 25 that LTC planning is a personal responsibility planning for which should start no later than age 40 and be achieved by age 65. The termination of all methods to qualify for Medicaid LTC benefits late in life while preserving wealth should be disclosed, publicized, and frequently reiterated in state and federal government publications. By age 65, most Americans should be prepared to pay for their expected LTC expenses, which would require them on average to have $70,000 saved, set aside, or insured for that purpose. LTC Choices 1-7 below suggest some methods by which people could fulfill their LTC planning responsibility. Entrepreneurs can be expected to produce many more.

A private fiduciary organization similar to Underwriters Laboratories could counsel Americans on LTC risk and cost, propose methods to prepare, evaluate their proposals to meet their responsibility, and help them achieve the needed protection. Private insurers could estimate individual need and recommend the necessary level of coverage with quality control review by independent actuaries or auditors. Following are several possibilities that could satisfy the need to plan for LTC with minimal financial disruption for individuals and families carrying other financial responsibilities at the same time. The basic strategy is twofold: (1) to aim LTC planning toward a more realistic goal of meeting each individual’s probable risk and (2) to minimize the immediate cost of preparing for LTC risk by earmarking funds already accumulated in retirement savings to be used for LTC if and only if LTC becomes necessary.

Methods to Satisfy Individual LTC Responsibility

LTC Choice #1: Private Insurance. Purchase private LTC insurance that meets minimal coverage standards based on age, sex, health status, etc. Instead of huge premiums to cover potential lifetime coverage of expensive nursing home custodial care,[56] adequate insurance coverage for each individual’s personal risk will prove much more affordable. Most analysts believe private LTC insurance is unlikely ever to penetrate enough middle-income households to become a significant payment source. But they have always assumed that people would need much more coverage at too great a cost to attract enough buyers to make a big difference. That assumption may be wrong.

Smaller, less expensive LTC insurance policies could have a disproportionately large impact on the aging public’s ability to afford senior housing, including home care and assisted living. The National Investment Center reported that reducing the annual cost of senior housing by $15,000, from $60,000 to $45,000 per year, would expand the middle market for senior housing[57] by 3.6 million individuals, enabling 71 percent of middle-income seniors to afford the product.^[58] Where could consumers find that extra $15,000 to bring the cost of senior housing into reach? The premium for an annual LTC insurance benefit of $15,000 would only cost a small fraction of the premium required for the comprehensive coverage that consumers find so financially daunting now. Unfortunately, insurance regulations sometimes forbid carriers from offering coverage with a benefit of less than $18,000 per year. Once again, well-intentioned regulation stands in the way of sensible LTC policy and planning.

LTC Choice #2: Investment Accounts. Establish a new tax-deferred investment account similar to the 401(k) or IRAs already available to cover future predictable LTC expenses. Consider a fully tax-exempt investment account as an even greater savings facilitator. To soften the impact of contributing to an extra retirement account, savers could be allowed to use a portion of their existing retirement accounts or health savings accounts to satisfy the LTC responsibility.[59] The strategy is to use a portion of funds already saved for other purposes by allocating them for LTC if and only if LTC becomes necessary.

LTC Choice #3: Retirement Savings. Allow a portion of retirement savings to meet the LTC planning responsibility. At the end of March 2023, total U.S. retirement assets were $35.4 trillion, including $12.5 trillion in IRAs, $9.8 trillion in defined contribution accounts, and $10.9 trillion in combined government and private defined benefit plans. Annuity reserves outside of retirement accounts add another $2.2 trillion.[60]

LTC Choice #4: Home Equity. Over 78 percent of age 65 and over households own homes.[61] Many could lien their home equity to support LTC or withdraw sufficient funds through reverse mortgages to purchase private LTC insurance as in LTC Choice #1. The $12.4 trillion in home equity held by people 62 years of age and older[62] would both cover the LTC expenses for a large portion of them and send huge waves of desperately needed private revenue into the LTC service delivery system. This new private revenue—at rates 50 percent more than what Medicaid pays—would improve care quality and access for all LTC patients, including those dependent on public financing. Estimating potential savings to Medicaid from this source is difficult. Little is known about current home ownership by Medicaid LTC recipients, because Medicaid exempts most home equity. A dated (but unique) 1989 GAO study found, “About 14 percent of the Medicaid nursing home residents in the eight states GAO reviewed owned a home,” and “By using home equity to defray Medicaid costs as Oregon does, the six states that now lack recovery programs could recover about $85 million [$218 million in today’s dollars] from recipients admitted to nursing homes.”[63] Diverting home equity earlier in life to finance LTC risk later, instead of relying on Medicaid and then attempting to recover from estates after death, would unleash the huge potential of home equity to finance quality LTC for more people.

LTC Choice #5: Life Insurance. Many life insurance policy holders can carve out enough of their cash values or death benefits to meet their personal LTC responsibility. Total life insurance coverage in the United States was $21.2 trillion by the end of 2021.[64] There are several ways to access the cash value of life insurance without dying. They include dropping the policy to collect its surrender value, selling the policy by means of a “life settlement,” and withdrawing funds or borrowing from the policy.[65] Even a term life policy, with no cash value, can sometimes be sold.[66] The current perverse incentive created by government policy when people need LTC is to liquidate cash value life insurance, spend the money on exempt assets, and then apply for Medicaid when the funds are gone. Eliminating that loophole would free up trillions of private life insurance value to offset public LTC expenditures.

LTC Choice #6: The Deferred Reverse Estate Annuity Mortgage (DREAM). This option—a legally binding and officially recorded lien on one’s estate set aside for LTC—does not currently exist, but it is similar to the existing Medicaid estate recovery obligation except that it moves the responsibility forward in time and ensures eventual LTC funding availability. The DREAM mortgage satisfies the LTC planning responsibility only if it is formally executed, is legally recorded, and applies to all property that will pass inside or outside of a probated estate. Unlike asset transfer limitations and estate recovery, this option secures the property so that it is available to pay for care in the private market. This is a way for people to prepare for LTC risk and cost, lock in the ability to pay privately for care, and have no immediate need to expend income. They merely obligate a portion of their estates for their LTC if needed. Any remainder would pass to heirs, although it would be unprotected by Medicaid, as it is currently. This is the easiest and least intrusive of all the methods to satisfy the LTC planning responsibility.

LTC Choice #7: Capture the other end of the age spectrum from estates. People who begin saving, insuring, or setting aside resources for LTC before age 40 could receive a reduced LTC responsibility level. So, in addition to the lower discounted present value of their LTC responsibility, they would have an added incentive to begin LTC planning earlier. Employers could introduce LTC responsibility to job seekers in their early 20s. Increasingly, younger people are having to care for their parents and grandparents. If they become sensitized to the need for LTC planning earlier than others and they take action, their LTC responsibility could be satisfied earlier and at less personal cost than for others who begin preparation later in life.

All seven of these options are manageable by private companies—such as employers, insurers, banks, or brokers—eliminating much of the huge federal and state bureaucracy currently managing Medicaid LTC eligibility determination and estate recovery. Other tools and methods of satisfying the LTC planning objective will evolve naturally in a market not distorted by Medicaid rules that reward failure to plan.