SNALFNews.com, February 4, 2002; long interview with SM published on this provider specialty web site with picture. CLTCF published an LTC Bullet the same day announcing where to find the interview on the web.

Expert Opinion

Stephen Moses

President, Center for Long-Term Care Financing

Well, we got into this mess with every good intention. It’s self-inflicted, however, by perversely counter-productive public policy. Back in the mid 60s, we were already aging, living longer and dying slower, and it was getting expensive. Women, the traditional caregivers, were moving off into the workforce and were no longer available in adequate numbers to provide care to elders. It became something of a worry, how we were going to pay for long-term care. With good intentions, but with unforeseen consequences, the government stepped in and said, "If you’ll put Grandma in a nursing home, we’ll pay for it." Back in those days, there were practically no obstacles to eligibility. Virtually anyone who wanted Medicaid nursing home benefits could walk right onto the program.

The nursing home industry isn’t stupid. They saw a big new source of financing and they went after it. They started building beds and practically paved the country in nursing homes. That’s how in the beginning we got a bias toward institutional care, because nursing homes were the only level of care for which Medicaid paid. That’s all you could get for free. And the public isn’t stupid. They figured, "Why should I pay out of pocket for home care or assisted living or long-term care insurance when I can ignore this problem and the government will pay." (Of course, they didn't articulate the issue in those terms. They just took the path of least resistance and took advantage of Medicaid-financed nursing homes.) That’s why home care, assisted living and long-term care insurance never developed back when the market would have demanded they be created. Low-cost, efficient, quality elder care did not have to evolve as an industry because the government co-opted the need by providing basically free or highly subsidized nursing home care.

Well, it didn’t take long before Medicaid nursing home benefits became very expensive. As fast as the nursing home industry could build beds, the public filled them. By the mid-1970s it got out of control. So the government said, "Hey, we’ve got to put a brake on this. We won’t let you build any more nursing homes." They capped the supply, and in response, the nursing home industry said, "If you won’t let us build more beds, we’ll just raise our rates." So the government responded to that by saying, "We’re going to cap the rates. We’re not going to pay you as much for a Medicaid resident as a private payer would have to pay." That was the origin of the infamous differential between Medicaid reimbursment and private-pay rates.

What happens in a market when you cap the supply and the price? The demand is going to go through the roof. Before long, we had 96 percent occupancy in nursing homes across the country, because the nursing homes could fill their beds no matter what kind of care they offered. That resulted in a gradual decline in the quality, which led to the Omnibus Budget Reconciliation Act of 1987, mandating higher quality nursing home care, but without appropriating extra funds to pay for it. In the meantime, with the supply and the price capped, and with the demand high, the public’s looking at this and saying, "Why should I pay $5,000 per month for nursing home care out of my own pocket when the rules are pretty flexible. I can hire an attorney and get the government to pay for my care and it will only cost me my income, which has to be contributed to the cost of care." (Of course, the public wasn't articulating it in those terms, but that was the bill of goods that the Medicaid estate planning bar was selling them.) So through the 1980s, we begin to see this escalation, this explosion of the practice of Medicaid estate planning, which is the artificial impoverishment on paper of middle and upper middle class people so they can get nursing home care paid for by Medicaid.

Consequently, the Medicaid census in nursing homes crept up, from around 50 percent in the 1970s to closer to 70 percent in the 1990s. Today, 70 percent of the residents in nursing homes across the United States are financed at least in part by Medicaid. And if Medicaid pays even one dollar, the nursing home gets the low Medicaid rate, which often is less than the cost of providing the care. According to research I saw recently, Medicaid is about $9 billion short of paying the real cost of care provided to its recipients nationally.

So, as the government clamped down on expenditures for nursing homes while at the same time increasing the pressure for regulation of quality, the nursing home industry got caught between the rock of inadequate reimbursement and the hard place of mandated quality. They finally gave up going along to get along and started putting up a fight. They started filing lawsuits through the Boren amendment, but then Congress repealed that statutory guarantee of minimially adequate reimbursement. In 1997, the change in the reimbursement rules (a new prospective payment system) pulled the rug out from under both the nursing home industry and the home health industry. And that’s how we’ve ended up with the current situation.

Eight nursing home chains are in bankruptcy. Fifteen percent of all nursing home beds in the country are in bankrupt facilities. Assisted living facilities are hurting -- they can’t fill them fast enough to make them profitable. Long-term care stocks plummeted several years ago, even before the dot-coms went under, but the difference is that the nursing home and assisted living stocks show few signs of coming back. Providers can’t pay enough to attract quality staff, so that creates a staffing shortage and a quality problem.

They’re also getting sued more and more often, sometimes by the exact same attorneys who artificially impoverish well-to-do people to get them on Medicaid. Then when Medicaid can’t afford to pay for quality care, these same attorneys turn right around and file a tort liability suit against the nursing homes, which lose millions in lawsuits. As a consequence, nursing homes have such a bad reputation that most seniors would rather die than go to one. I think that’s very unfair, because the industry is actually doing a reasonably good job given the very limited resources with which it has to work. But the reality is that the insurance industry is scared to death to insure nursing homes and assisted living facilities for liability because of what’s happened in the past. So the premiums for liability insurance have skyrocketed, if facilities can get the coverage at all.

The whole system is in the latter stages of collapse, but nobody is addressing the fundamental problem, with the exception of us [the Center for Long-Term Care Financing]. The fundamental problem is excessive reliance on government financing, which is inadequate and will always be inadequate. Because the government pays for most formal long-term care, the public does not understand that each of us is personally and individually responsible for our own long-term care. There should be a safety net, but only after we have genuinely exhausted our resources, not the phony system we have now that allows the well-to-do to qualify for Medicaid benefits. We need incentives to plan early, to save, invest, or insure, so we can pay privately for long-term care.

Now, the market is in the process of self-correcting. What is happening is that as the government financed, welfare-based, institutionally biased system has become so inadequate, the public is gradually realizing that if you want access to quality care at the appropriate level, you must be able to pay for it privately. We’ve seen the evolution of a new level of care for the light care patients -- assisted living -- which people are willing to pay for out of pocket even though they can easily get nursing home care paid for or subsidized by Medicaid.

For the same reason, over the last ten years you’re starting to see some interest in long-term care insurance. You’re going to see more and more of that interest as the baby boomers, of which I’m one, begin to have to take care of our aging parents. We’re becoming sensitized to the risk. We’re seeing that the current system is inadequate, and we’re saying, "It might be too late for Mom and Dad. Maybe all we can do is grab all their money and put them in a nursing home on Medicaid. But at least we had better plan ahead by getting insurance so we can pay for our own long-term care someday, because the government system is collapsing."

We published a report called, "The LTC Triathlon: Long-Term Care’s Race for Survival." I interviewed 119 of the leading financiers, providers and insurers in the country -- the financiers being the people who provide the debt and equity capital to finance the industry, the providers being the providers of home care, assisted living and nursing homes, and the insurers being the agents, brokers and carriers that market private long-term care insurance.

We found that they almost universally agree that the fundamental problem is inadequate government financing through Medicaid and Medicare. None of them think there’s any hope of a new government entitlement to pay for long-term care, so they’re forced to lean in the direction of finding ways to encourage private financing. And while they may not endorse the specific proposal that we’ve recommended, I think there is very widespread agreement that we need to encourage personal responsibility and planning to save, invest, or insure for long-term care.

And yet, there is an almost complete lack of communication, much less cooperation, among these groups, even though the differences they have are mostly superficial. Providers don’t care who pays as long as there’s a deep pocket; they’re just looking at the insurer as another payer. The insurers, on the other hand, have to be diligent about what they pay out. They’re reluctant to cooperate with the providers and work together because they sense that they’re in a competitive relationship. What we need to do is show the providers, insurers and financiers that they have a deeper common interest in working together. They all stand to benefit from public policy that encourages private financing of long-term care. We’ve been trying to promote the needed cooperation through our LTC Triathlon project (you can read the report at http://www.centerltc.com/pubs/triathlon.pdf) and our LTC Summit conferences (read the reports at http://www.centerltc.com/bullets/archives2001/299.htm and http://www.centerltc.com/bullets/archives2001/318.htm). We brought together CEOs from each of the key private-sector stakeholder groups and got them talking. It’s absolutely amazing how little they know about each others’ businesses, and how deep-set the skepticism and distrust is.

Well, our report, "LTC Choice: A Simple, Cost-Free Solution to the Long-Term Care Financing Puzzle" (http://www.centerltc.com/pubs/CLTCFReport.pdf) starts by tracing the history of long-term care the way I did at the beginning of our conversation. Because if you just look at the status quo, you have no idea what to do about it. Abraham Lincoln said, "If we could first know where we are and whither we are tending, we could better judge what to do and how to do it." You have to understand where you are, where you came from, and how you got here, before you begin to look for the solution to your problems.

So we did that, and we came to this conclusion: The fundamental problem in long-term care is that the public doesn’t take the risk seriously until it’s too late. Once someone has Alzheimer’s or Parkinson’s disease, you can hardly blame him or her for going to the only source of financing that’s out there -- in other words, for taking advantage of the big loopholes in Medicaid, preserving their assets, passing something on to their heirs, and getting their long-term care for free. That’s what exacerbates the problem and keeps the status quo in place.

One way you could do it, that is not politically sensitive, is to just stop paying for long-term care for anybody who isn’t destitute. The conventional wisdom is that you have to be poor to get Medicaid. That isn’t true. It’s a complete myth. But if it were true, if you really did have a draconian system, do you think everybody would ignore the risk of long-term care until they went into impoverishment? Heavens, no. They’d be planning 20 or 30 years in advance. They’d be buying insurance. They’d be saving their money. They’d be preparing against the risk. The fundamental problem is that over the last 35 years the government has anesthetized the public to the risk, and now the public isn’t buying it when you tell them they’re at risk, because the reality is that they haven’t been. Never mind the other issue, that the system that has indemnified them before is falling apart. They just haven’t realized that yet. They’re still asleep.

So how do you get their attention, and create a real incentive for them to plan early and save, invest or insure? Here’s what we came up with: a line of credit on the estates of seniors who have income and assets. What do we know about seniors? They’re not poor. They’re the wealthiest cohort in American society. Eighty percent own their homes; 80 percent of those own them free and clear. There’s a trillion and a half dollars in home equity locked up out there in the economy that doesn’t go at all to long-term care. That could be the solution to this problem.

Well, you can’t force seniors to sell their homes before they get any help from the government. That would be politically impossible, and it would be going the wrong direction. Medicaid exempts the home and all contiguous property now, so nobody takes out reverse annuity mortgages or plans ahead, because the house isn’t at risk. What you have to do to solve this problem is put the house at risk, but do it in, to borrow a phrase, a kinder and gentler way. The way you do that is to say to the public, "Here’s the thing. You’re age 50. You’re at risk for your own long-term care. You’ll get help from the safety net, but only after your estate is consumed." And make that a reality. I’ll explain in a minute how to do that in a politically sensitively way.

Faced with a real risk of losing everything to long-term care, most people will buy insurance, they will prepare, set money aside, purchase insurance, etc. So, most people will do the right thing and become part of the solution instead of part of the problem. You’ll have some, however, who can’t take personal responsibility because they either can’t afford to save or insure, or they don’t qualify medically for private long-term care insurance. Those are the people for whom we’re trying to save Medicaid. Medicaid now pays 80 percent of all patient days in nursing homes. If Medicaid were only paying for 20 percent of all patient days instead, it would have the resources it needs to pay adequately. So part of what we’re doing is taking most people out of the Medicaid pool by getting them protected up front, then preserving the publicly financed resources for a smaller group of people so it can do a better job.

We still have 25 percent to 35 percent of the public, however, who are in the middle -- people who maybe could have bought long-term care insurance, but didn’t. They own a home worth $100,000 - $200,000, free and clear. They have maybe $25,000 per year in income from their social security, pension and income on assets. Maybe they have $100,000 in liquid assets. These are the people who routinely walk right on to Medicaid now, because they don’t have enough income to pay for their own long-term care, which makes them income-eligible. At this level, assets are hardly ever a problem in terms of qualifying for Medicaid, because you can have a home and all contiguous property, regardless of value; you can have a business, including the capital and cash flow, regardless of value; you can have a car of any value, which, because it is exempt, you can give away and buy another--the so-called "two Mercedes" rule used by Medicaid planners. (This only scratches the surface of routine ways to qualify for Medicaid even without the advice of an attorney.) That being the case, what we have to do is remove the incentive to go on Medicaid, instead of having a system that gives these people’s children an incentive to take mom and dad’s assets away from them when they are most vulnerable. Currently, adult children of vulnerable elders are making the health care and financial decisions regarding long-term care and Medicaid eligibility, which is a terrible conflict of interests.

Instead, we propose a system that provides an incentive in this way: Mom, Dad, this is your money, your rainy day fund. You put it aside. It’s here for you to use. We recognize that you are house rich and cash poor. You don’t have enough cash flow to pay for that assisted living facility or home health aide. So we’re going to help you use your estate as collateral for a line of credit that will supply you with the extra income, fully collateralized, privately administered (and maybe government-backed just to get the private financial institutions to participate). If you use your money in this way, you will create a debt, but at least you’re not on welfare. You'll go into the marketplace as a private individual with full dignity, shopping like anyone else, and if you don’t like the care you get in one place, you will be able to go to another you like better. You can look for the best deal because you are in control by paying your own way.

By doing this, we would bring market competition back into long-term care marketplace. We would empower the consumer and breathe financial oxygen into the provider spectrum. We would create a brand-new incentive for people to plan for long-term care insurance, because if your estate really is at risk, then you have a reason to buy the insurance. Everybody wins, with the exception of the baby boomer heirs who are now getting a windfall financed by the welfare system when their parents receive free Medicaid care.

Well, one way or another we are going to have to change our entitlement mentality. We’re either going to do it through rational public policy and avoid a crash, or we’re going to keep doing what we’re doing and the whole system will fall apart completely. We’re virtually there already. There’s no way the government is going to pay for quality long-term care for all Americans. People may wish chocolate bars grew on cherry trees, but they don't and no amount of wishful thinking will make it happen. Human nature is what it is. It is certainly not the basis of our economic or political system to convey to people that they’re not personally responsible, that the government will take care of them. That is an aberration of the last 50 years that we need to wean ourselves off pretty quickly. Sixty-two percent of all Social Security and Medicare payroll taxes are paid by us baby boomers today. In about 10 years, we’re going to be taking money out of those programs instead of paying in. If you think we have economic problems now, wait until that happens. It could make the Great Depression look like a walk in the park.

There’s the rub, as Shakespeare said. What I’ve found over the years is we make the most progress on this issue when the economy is bad, ironically. So if there’s any silver lining to the craziness going on in the economy today, it is that the politicians are having to take the Medicaid and long-term care issues seriously about ten years sooner than they otherwise would have.

When the economy is good, as it has been for the last five or six years, and when the tax receipts are up and welfare rolls are down, this politically sensitive issue is easy to sweep under the rug. For reasons you implied in your question, that’s exactly what politicians are wont to do. On the other hand, when the economy goes sour, when tax receipts are down, when Medicaid is going up at double digit rates again, as it is for the first time since 1993 or so, they’re getting caught in the squeeze. It’s looking like 39 of our states are going to have major budget deficits this year. Washington State, for example, is about $2 billion short for its biennium budget. The politicians and bureaucrats are getting scared to death. What encourages me is that the more scared they get, the more they listen to reason.

Now people are finally saying something other than just pump more money in and the problem will go away. We have this problem because we have anesthetized the public to the risk by spending too much for too many people for too long on long-term care. We have thus conveyed the message that you don’t have to plan, you don’t have invest, you don’t have save, you don’t have to buy insurance, and the public hasn’t, and the rest is history. The future will be pretty dismal if we don’t start sending a different message.

The good news is that this LTC problem is 100 percent entirely self-inflicted by perverse public policy incentives that can be changed overnight. If we change the perverse incentives in the system into positive incentives to take responsibility and do the right thing, the system will correct itself. If it gets bad enough and we begin to do the right thing, we can solve this problem, solve it quickly, and relieve the horrific burden on the long-term care providers who are now being expected to make a silk purse out of a sow’s ear.

I am definitely in favor of genuine tax deductibility for LTC insurance. I am also realistic. Tax deductibility will help on the margin, but it isn’t going to solve the problem. The public does not fail to buy long-term care insurance because it hasn’t been genuinely tax deductible. They don't buy it, because they don’t think they need it and they don't think they need it because the government's been giving it away for 35 years. You can make LTC insurance tax deductible and people still won’t buy it. You can make it almost free and they won’t buy it. Until you change the Medicaid eligibility policy so that the public realizes they are at risk if they don’t buy LTC insurance, they won’t buy it. That is the key thing.

Well, I’m optimistic that the problem will be solved, one way or another. I hope it isn’t solved because the whole system collapses and we have no place else to go. I want to implement rational public policy in time to prevent a disaster. Right now, I’m probably more pessimistic than optimistic in that I think we at the Center for Long-Term Care Financing (www.centerltc.org) are one of the few voices with a viable solution out there. Most of the academics and politicians and bureaucrats are just saying, "We have to find a way to spend more government money." We’re saying no, that’s what’s created the problem. We have to find a way to get more people to take responsibility and supply more private financing. And that’s a very hard case to make in a society that has become drugged on the entitlement mentality. To close on a piece of good news, the Center's proposal for a book on how to solve the long-term care problem has been accepted by an important publisher. In a year or so, our argument and our solution, may finally get a full hearing.

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