LTC Bullet: What Happened to Long-Term Care?

Friday, March 1, 2024

Seattle—

LTC Comment: I’ve watched our country struggle to improve long-term care since 1982. Observations after the ***news.***

*** ILTCI NEWS:  The 2024 Inter-Company Long-Term Care Insurance Conference convenes in San Diego, CA – March 17-20, 2024 – at the newly renovated Town & Country Resort. This year’s keynote speaker is Dr. Maria C. Carrillo, Chief Science Officer of the Alzheimer’s Association. The program includes 58 educational sessions, the most ever; scores of exhibitors and dozens of sponsors. Late breaking: Lifeline Screening will offer hypertension and osteoporosis risk screenings to all attendees from 8:00am, to 6:00pm on Monday, March 18, and Tuesday, March 19, 2024 at their exhibit booth in the Golden State Ballroom. On Monday, March 18 at 12:30pm, Center for Long-Term Care Reform president Steve Moses will present two papers and preview a third, recounting LTC’s past and forecasting its future. Last year’s conference chair, Steve Schoonveld invites attendees to a discussion on “Building LTC State Reform Proposals for Collaborative Success” on Tuesday, March 19 at 12:30pm.  Finally, suspense is building! Who will receive the 2024 ILTCI Recognition Award? The winner will be announced at the San Diego meeting. Organizers say “If it’s happening in LTC… It’s happening at the ILTCI Conference!” Hope to see you there. ***
 

LTC BULLET: WHAT HAPPENED TO LONG-TERM CARE?

I’ve followed long-term care since 1982. Back then nearly all formal, paid LTC services were provided in nursing homes. Medicaid was the dominant payor, but paid too little to ensure quality care. Nicer private-pay options like assisted living were becoming available, but most people could not afford them. A budding new product, LTC insurance was gaining traction slowly but was constrained by the dominance of subsidized Medicaid nursing home care. Much of the care burden fell on unpaid family members by default.

Before 1980 the Medicaid program allowed unlimited asset transfers to qualify. People ignored LTC risk and cost until care became necessary and then moved seamlessly onto public assistance. Medically needy eligibility rules allowed high income people to qualify by deducting their private medical and LTC expenses, enabling them to become “low income.” Despite its dismal reputation for poor access and quality, Medicaid nursing home care was the path of least resistance for people needing expensive long-term care. Its availability impeded the development of home-based care options and private-pay alternatives like insurance.

At the time, I was working for the Health Care Financing Administration (HCFA), the predecessor of the current Centers for Medicare and Medicaid Services (CMS). As I analyzed the LTC marketplace in the early 1980s, I concluded that easy access to Medicaid nursing home benefits trapped elders in underfunded nursing homes, discouraged service delivery and financing alternatives, and would bankrupt the economy as the age wave crested and crashed over time. Something had to be done to break this cycle of perverse incentives leading to bad outcomes. Why prepare for LTC when you could ignore the risk, avoid insurance premiums, and get the government to pay if and when you needed care?

I conducted a study and wrote a paper for HCFA in 1985 suggesting that Medicaid LTC income and asset eligibility criteria should be stricter, liens and estate recoveries should be mandatory, and consumers should be urged to buy private LTC insurance. The insurance would give them access to quality care of their choice and enable them to avoid Medicaid dependency with its newly required payback from estates. No longer would Medicaid provide a windfall for heirs by protecting their inheritances. Families would instead work together to avoid Medicaid and protect their legacies.

HCFA management suppressed that paper. They didn’t think a mid-level Seattle regional office staffer should be writing national policy papers. But the Inspector General of the Department of Health and Human Services (IG) and the Government Accountability Office (GAO) both picked up on my paper and conducted national studies from the same analytical perspective. The IG hired me out of HCFA to conduct their study and write its 1988 report. I also consulted on GAOs 1989 report. Both national studies recommended tightening Medicaid financial eligibility rules and requiring estate recoveries as a means to reduce expenditures and encourage private LTC financing alternatives.

At first, it looked like this strategy would succeed. Federal legislation passed year after year to target Medicaid LTC to the needy while encouraging the affluent to plan early and avoid public assistance. COBRA ’85 prohibited “Medicaid qualifying trusts”; MCCA ’88 required states for the first time to penalize asset transfers for the purpose of qualifying for Medicaid; OBRA ’93 made estate recoveries mandatory. So by the mid-1990s the key elements were in place to revolutionize LTC policy, eliminate the perverse incentive trapping elders in nursing homes on Medicaid, and breathe new life into the private home care and LTC insurance markets.

Alas, history did not play out as we hoped. The states didn’t implement the new rules fully or aggressively; the federal government didn’t enforce the tighter eligibility and mandatory estate recovery measures; the media didn’t cover the new system’s incentives to plan for LTC and avoid Medicaid; and elder law Medicaid planners found evermore creative ways to circumvent the rules. So consumer behavior didn’t change. People continued to ignore LTC risk and cost, waiting to see if they would ever need expensive LTC, and then turning to Medicaid when high cost care became necessary. That common result relieved the LTC financial burden on heirs further entrenching their tendency to ignore LTC until needed and then rely on Medicaid.

A Republican Congress and President Clinton became so frustrated by skyrocketing Medicaid LTC costs benefiting the affluent as much as the poor that they made it a crime to transfer assets to qualify for Medicaid in HIPAA ‘96. Outrage at this “Throw Granny in Jail” law led to its repeal by BBA ’97 and replacement with the “Throw Granny’s Lawyer in Jail” law. The latter did not survive judicial scrutiny as it was deemed unenforceable to hold attorneys legally culpable for recommending a practice (asset transfers) that were no longer illegal. Nothing more happened to target Medicaid to the needy and incentivize LTC planning by the affluent until a last gasp effort in DRA ’05, which capped Medicaid’s home equity exemption for the first time ever.

Every one of these beneficial federal statutes achieved during the preceding years occurred after and in response to an economic recession. When federal and state budgets were tight during recessions, politicians and policy makers were forced to look for ways to constrain Medicaid expenditures while preventing care access and quality from deteriorating. That’s when the measures recounted above to lengthen and strengthen asset transfer penalties, enforce estate recoveries, and encourage private LTC insurance gained traction. “LTC Partnerships” and LTC insurance tax deductions were also passed in those years and for those reasons. But once the recessions ended, and budget constraints relaxed, the pressure for wiser policies receded, and higher spending to mollify advocacy groups returned.

Then came the Great Recession of 2007-2009 and all progress stopped. This big recession did not lead to beneficial legislation as in the past. Why? Starting a few years before, but accelerating after the Great Recession, the Federal Reserve began pushing interest rates down toward zero. The resulting artificially low interest rates distorted incentives throughout the economy including in the LTC market. Deficits and debt didn’t matter so much when the cost of servicing the debt was nominal because interest rates were negligible. Pressure to control Medicaid LTC expenditures abated and costs grew with few constraints. Medicaid expanded to provide more desirable home and community based services making it more attractive to consumers. The LTC insurance market suffered as carriers could not obtain anticipated returns on their reserves and were forced to raise premiums, thus angering current insureds and alienating prospects.

These conditions continued and worsened until a government spending blow out during the Covid pandemic caused deficits and debt to skyrocket and inflation to spike. A return to artificially low interest rates and continued unbounded spending is unlikely. The national debt currently exceeds $34.3 trillion, a six-fold increase since 2000 and up $200 billion in just the past month. The interest rate to service the national debt doubled between January 2022 (1.56%) and January 2024 (3.15%). Debt service cost is already 18% of total federal spending and 2.4% of GDP. It will increase in tandem with the rising debt. The U.S. government will soon spend more on interest payments than defense. Social Security, Medicare, Medicaid, Obamacare, and other federal health care programs consumed 46% of all federal spending in 2022. These costs will continue to rise at least until statutory entitlement cutbacks begin in the late 2020s and the 2030s. The staggering unfunded liabilities of Social Security ($26.6T) and Medicare ($40.9T) alone guarantee these programs will encumber the productive economy for decades ahead. On top of everything, boomers start turning 85, their age of greatest medical and LTC need, in 2031. 

To paraphrase the late economist Herbert Stein, “Trends that can’t continue, won’t.” The price of irresponsible fiscal and monetary policy that characterized the first two decades of the 21^st century is coming due. State and federal budgets will have to be set again and met. Challenging economic conditions, especially during and after recessions, will compel serious attention to Medicaid LTC spending as they did before the Great Recession. The time is coming again when politicians and policymakers will have to listen to proposals that constrain spending while enhancing LTC access and quality.

Coming up with those policy proposals is the task before us. But we can’t continue doing more of the same. Keeping Medicaid LTC financial eligibility generous, allowing big income and asset exemptions, and threatening estate recovery to persuade the public to plan and insure for LTC did not work. Government gave the carrots but withheld the sticks, so consumers ignored LTC until they needed it and then turned to Medicaid. Consequently LTC services and financing in the U.S. are as bad or worse today as they were in 1982. Long-term care in America remains broken, marked by nursing home bias, too little home care, dubious access and quality, inadequate funding, caregiver shortages, stressed out unpaid family caregivers, and growing complaints of structural racism. A radical new approach to LTC financing policy is needed.

My October 2022 paper for the Paragon Health Institute (PHI) titled “Long-Term Care: The Problem” offered this diagnosis. Easy access to Medicaid LTC benefits after the insurable risk occurs while retaining wealth created a moral hazard that discouraged early and responsible LTC planning and left most Americans dependent on public assistance by default. My October 2023 paper for PHI titled “Long-Term Care: The Solution” proposed a radical change. Eliminate the moral hazard by ending all Medicaid rules that enable people to receive Medicaid LTC benefits while retaining wealth. In other words, turn Medicaid into the program for the poor most believe it was originally intended to be and many believe it still is. What does that mean specifically?

Medically needy income eligibility, which allows high income people to qualify for Medicaid if their medical and LTC expenses are high enough, must end. Likewise Miller income diversion trusts, that achieve the same purpose in states that do not use the medically needy income system, should not be allowed. Such policies divert Medicaid funds that should support the underprivileged to people who could pay a portion, often a large portion, sometimes their entire LTC bill privately. Medically needy policies also mean that nursing home and home health providers receive their revenue at notoriously low Medicaid rates instead of at market rates that are half again as high on average. This heavier dependency on Medicaid impedes care access and quality for the affluent as well as the poor.

Another income policy that needs to end is the requirement people on Medicaid contribute nearly all their income, including their Social Security benefits, to offset Medicaid’s cost for their care. This policy makes Medicaid vulnerable to Social Security’s precarious financial condition. When statutorily required 23% benefit cuts occur in the 2030s, state Medicaid programs and the already financially strained LTC providers they support will be devastated. A better policy is to have all people pay LTC providers at the market rate up to their ability to do so and for Medicaid to make up the difference when recipients fall short. That will ensure higher revenue for LTC providers allowing them to improve care and alleviating caregiver shortages as they are able to pay higher wages.

Asset eligibility rules also need to change. Current rules allow applicants to reduce their countable wealth by purchasing exempt assets. Because exempt assets, including home equity, IRAs, a business, a vehicle, home furnishings, personal belongings, etc. are virtually unlimited, countable assets in any amount are easily eliminated in this way. Medicaid should require that asset spend down be for medical or LTC expenses in order to count as it does for income spend down now. The huge Medicaid home equity exemption, $731,000 in every state where it isn’t $1,071,000, should end. Home equity is easily converted to liquid cash flow to purchase top quality LTC in the private market. Obviously, abusive Medicaid Asset Protection Trusts and Medicaid friendly annuities, that allow even the wealthiest families to co-opt Medicaid to fund their LTC, should end.

Once all income and asset exemptions are eliminated, Medicaid LTC benefits will be available only to the truly needy. More affluent people will pay their own way. The extra private revenue flowing through the system will improve care for everyone and eliminate the caregiver shortage by paying higher wages. Faced with a real spend down requirement, that has never existed in the U.S. before, consumers will take the risk and cost of LTC seriously for the first time. Many will plan early and save, invest or insure for LTC. Others, if they continue to ignore LTC will face serious consequences if they need LTC later in life. These consequences will signal to others that planning for LTC is imperative because the costs of failing to do so are too great.

But isn’t this plan too draconian? Can a humane society really refuse to provide long-term care unless and until people have used up all their own income and assets paying privately? Yes, but only if we reconceptualize LTC and reprioritize it among life’s necessities. As I explained in “Long-Term Care: The Solution,” LTC risk and cost are not as great as we once thought. For example, nearly half of Americans turning 65 will never need paid care. See the paper for more on this point. Likewise, it turns out that aging Americans have much more wealth they could use for LTC if they had a reason to do so, including $12 trillion in home equity, $35 trillion in retirement savings, and $21 trillion in life insurance. See the paper on this point too. LTC is the single biggest financial risk aging Americans face, but it has been treated as an afterthought, easy to ignore, because Medicaid was always there to cover the cost if and when expensive care became necessary. With Medicaid gone as an asset-protecting, long-term care fail safe, people will put a much higher priority on planning for the risk.

So, having created the necessity for people to plan ahead for LTC, what is needed is a way for them to do so without being devastated financially at a time of their lives when other financial responsibilities, such as raising children and making car and mortgage payments, have always taken precedence. In the LTC Solution paper I proposed seven LTC Choices designed to enable people to prepare for future LTC expenses without impinging excessively on their current cash flow. The basic ideas are (1) to focus on preparing people to pay for their average expected LTC liability, instead of their having to plan for the unlikely, but devastating catastrophic cost if the worse happens and (2) to allow savers to earmark a portion of the wealth they are already accumulating to be used for LTC if and only if such care becomes necessary.

So here are the seven LTC Choices in their barest form. See the paper for details. (1) Buy less LTC insurance at lower premiums to cover average LTC risk instead of the full catastrophic risk as now. (2) Establish a new tax-favored account for long-term care. Carve out enough retirement savings (3), home equity (4), life insurance (5), or estate wealth (6) to cover average LTC risk. (7) Incentivize younger people to start LTC planning earlier with easier goals reflecting their longer time to prepare. Each of these LTC Choices is intended to make it easier for people to cover their expected lifetime LTC risk and cost. Private organizations or companies, similar to Underwriters Laboratories (UL), should evolve to help consumers define their average LTC risk and to set goals to achieve it.

With the moral hazard of easy access to Medicaid gone; with consumers expected only to cover their average LTC risk; and with the ability to tap existing sources of funds established, most people will prepare privately for LTC. Private revenue at market rates flowing to LTC providers will improve LTC access, quality and choice. With most people prepared to pay for care, families will be relieved of providing the heaviest and most intimate kinds of LTC. They will be able to focus on giving love and support. Caregiver shortages will disappear as wages for the profession rise from bare minimums now to private market rates. Medicaid LTC expenditures will decline radically as the program refocuses on helping only the remnant who have no other means to pay for private care. With Medicaid program resources relieved, it should pay market rates for care thus improving access, quality and choice for the smaller number of remaining recipients.

An additional benefit of refocusing Medicaid LTC on the needy in this way is that it will end the problem of structural LTC racism. In its current form, Medicaid benefits the affluent to the detriment of the underprivileged. Prosperous people gain access to Medicaid’s best LTC providers by holding back “key money” when they spend down assets to qualify. This key money enables them to pay privately for a time. Nursing homes and home care providers are desperate for private payers, so they roll out the red carpet for anyone who can pay privately even for a while. Poor people don’t have key money. Their scarce savings are quickly consumed. They only have access to the mostly Medicaid facilities and services that have the worst reputations for care. By diverting affluent people to private pay, Medicaid will be able to provide better care to people in need thus eliminating the structural racism that pervades the system now.

The many deficiencies of today’s LTC service delivery and financing system have been self-inflicted by perverse incentives in public policy. Whether well-intentioned or simply unintended, policies that invited prosperous people to ignore LTC until they need it and then qualify for public assistance distorted the LTC marketplace. Efforts to change policy to encourage responsible planning failed. They will always fail as long as consumers can ignore LTC, get government to pay, and retain wealth for inheritances. “Long-Term Care: The Problem” and “Long-Term Care: The Solution” explain what’s wrong and how to fix it in greater detail.

What will it take to achieve this radical transformation of LTC policy and Medicaid eligibility? Most likely it will take a commensurately radical downturn in the economy. Only desperate measures to make budget ends meet will compel change of the magnitude needed. But such measures may soon become unavoidable as servicing the national debt at ever increasing interest rates becomes impossible; more deficit spending, money printing and borrowing further increase the debt relentlessly; and the resulting inflation finally shows the public how it is forced to pay for decades of irresponsible fiscal and monetary policy. As these pressures grow, the oncoming crisis of unfunded entitlement liabilities will hit just as the boomer generation’s greatest medical and LTC need arises in the 2030s, making that decade as bad or worse than the 1930s.

As bleak as the current situation is, it will improve. As economic conditions deteriorate, policymakers will either respond with thoughtful changes along the lines described above. Or economic reality will compel such changes by making the current system fiscally unsustainable and such changes therefore unavoidable. The only remaining question is whether America can fix Medicaid LTC by returning the program to its roots as LTC protection for the needy or whether the current system has to collapse before that happens anyway by default. When and how will this process play out? In the same way Hemmingway described going bankrupt: gradually at first, then suddenly.