Medicaid Long-Term Care: The Ticking Time Bomb

The convergence of an aging population, growing fiscal pressures and health care reform’s mandate for increased access to care will have far-reaching consequences for state-administered Medicaid long-term care (LTC) programs, according to Deloitte’s Center for Health Solutions. This paper (PDF) examines the Medicaid expenditures for LTC, in both institutional and community-based settings. If the current trend continues as demonstrated in this paper’s base model, more than 35% of a state’s budget will be needed for Medicaid by 2030, of which half will be for LTC services. The paper also examines how the health overhaul law’s mandate for increased access will worsen Medicaid’s expenditure trend. While the law states that new Medicaid enrollees will be subsidized through 100% federal funds from 2014 to 2016, state budget deficits are projected to be more than $350 billion between 2010 and 2011, a dangerous fiscal scenario for which there is no short-term solution.

Hiding Assets from Medicaid

The Deficit Reduction Act of 2005 closed some of the loopholes in Medicaid eligibility policy that allow affluent people to qualify for the welfare program’s long-term care benefits.

But Medicaid planning continues almost unabated everywhere in the United States and especially in New York. Following are some quotes from a June 13 article in the New York Post titled “Gilded age: How elderly New Yorkers hide their assets to qualify for Medicaid.” Read it here.

“Thelma, 85, has almost $1 million in assets, including the house she owns in the tony neighborhood of Roslyn Heights, and $75,000 in bonds and $50,000 in savings she hopes to leave to her two daughters. She also collects her late husband’s pension and her own Social Security.“Yet Thelma is poor enough to qualify for Medicaid.

“That’s because in 2008, an estate planner advised her to go broke – at least on paper – by divesting herself of almost all of her assets. That way, if Thelma ever needs to enter a nursing home, it would be paid for by the state.

This article focuses on only one Medicaid planning method: transferring a home into an irrevocable trust at least five years before applying for LTC assistance. There remain, however, many methods commonly used all across the country to qualify prosperous people for Medicaid without significant asset spend down.

Reverse Mortgaging on the Chopping Block

In a rational world, and in the absence of perverse government incentives to the contrary, people who need long-term care but failed to save, invest or insure to pay for it, would utilize their home equity by means of a reverse mortgage.

That’s the solution to LTC financing recommended in a 2005 report authored by Dr. Barbara Stucki for the National Council on the Aging titled “Use Your Home to Stay at Home.”

Instead, federal Medicaid rules exempt up to $750,000 of home equity and allow people with substantial incomes and other exempt assets to consume the welfare program’s dwindling LTC resources.

Now there’s a new obstacle to the use of reverse mortgages to fund long-term care. Atare Agbamu writes about recent government policy to reduce the amount of money seniors can pull from their home equity with a reverse mortgage in a blog post here.

More Benefits with Less Money?

The Kaiser Commission on Medicaid and the Uninsured has issued a paper that examines new opportunities under the health reform law for states to balance their Medicaid long-term care delivery systems by expanding access to Medicaid home and community-based services (HCBS) programs. The brief outlines key provisions of the new law that expand HCBS benefit options, broaden financial and functional eligibility criteria, and provide additional financial incentives for states to further shift their Medicaid long-term services budgets to non-institutional settings.

Will the CLASS Act Endure?

It’s obvious from any serious reading of the literature on CLASS that expert opinion on the program is extremely negative. In fact, I think it is fair to say that no one, including the Act’s advocates and sponsors, believes the program is operationalizeable as passed. So, what lessons should we take?

First, there is a very real possibility that CLASS, as it currently exists, will disappear. In fact, opposition to the entire health reform plan is so great and growing, that it may itself be repealed taking CLASS with it. See the latest Rasmussen poll for example: “Health Care Law: 63% Favor Repeal of National Health Care Plan.” Quote: “Support for repeal of the new national health care plan has jumped to its highest level ever.”

Second, whether the CLASS Act survives in some modified and rationalized form or not, you should be fully aware of the risks associated with government “insurance” that lacks (1) underwriting, (2) privately invested reserves, (3) definite premiums, (4) defined benefits, (5) contractual protections, or (6) any realistic prospect of actuarial solvency.

The Problems With Welfare-financed Long-term Care

Incredible as it may sound, Medicaid planning lives on.

In spite of the program’s obvious problems of access, quality, reimbursement, discrimination and institutional bias, many attorneys still help affluent clients shelter or divest wealth to qualify for welfare-financed long-term care.

Here are a few points to keep in mind.

1. Medicaid is public assistance intended for people in need. When scarce Medicaid funds go to middle- and upper-class people for whom they were never intended, poor people lose out.

2. Medicaid is bankrupting state governments and pulling away funds from other critical government responsibilities such as education, corrections, roads, etc.

3. Medicaid crowds out 2/3 to 90% of the potential market for private LTC insurance (Brown and Finkelstein, www.nber.org) thus assuring more strain on Medicaid in the future.

4. Medicaid pays LTC providers less than the cost of delivering the care. Its reimbursement rates are too low to ensure access to quality care at any level.

5. Private payers pay more for long-term care, but they have a better chance to receive quality care and can choose the level of care and the provider they prefer.

That’s enough for starters. Now here are some recent sources to check out that help make the point that Medicaid as a funder of long-term care is on its last legs.

As Medicaid Rolls Rise, State Budgets Will Soar, Access Will Sink, May 14, 2010

Reaction mixed on proposed poverty measure: Critics see higher spending on anti-poverty programs, May 14, 2010

House presses for extension of state Medicaid assistance, May 14, 2010

The welfare state’s death spiral, by Robert J. Samuelson, Monday, May 10, 2010

States Rely On Federal Funds To Buttress Medicaid Programs; Worry About The Future, May 4, 2010

Kansas Panel Suggests Nursing Home Tax

It’s an old shell game: A state imposes (or increases) a tax on nursing home beds or hospitals, with the justification offered that “we’ll get more than that money back in federal matching funds.”

Policymakers in Kansas are considering such a move, this time involving nursing homes. According to the Lawrence Journal-World, a new tax of $1,325 per year on each bed “would raise about $30 million, and draw $57 million in federal Medicaid funds. Almost all of the $87 million would be returned to nursing homes.”

But not everybody would be equally effected: “Homes with more Medicaid residents would get more money, while nursing homes with few Medicaid residents would pay more than they would get back.” And the few people who pay out-of-pocket or with long-term care insurance would … simply pay more. Yet another way to discourage family responsibility for long-term care expenses.

Since money is fungible, there’s even a question whether the “found” money would be of much benefit. The Journal-World mentioned Debra Zehr, president and chief executive officer of the Kansas Association of Homes and Services for the Aging, who “said other states that have approved a similar law end up increasing the tax and diverting the money for purposes other than helping the elderly.”

Big MOE Could Transform Long-Term Care

Medicaid crowds out 2/3 to 90% of the potential market for private long-term care insurance (Brown and Finkelstein, www.nber.org). If Medicaid stops paying most high-cost long-term care (LTC) for the middle class and affluent, prosperous people who now ignore LTC risk will start buying LTC insurance in droves. But as the law now stands, if state Medicaid programs reduce LTC eligibility for the well-to-do, they lose the huge windfall of supplemental federal matching funds granted by the American Recovery and Reinvestment Act of 2009 (ARRA), AKA the infamous “stimulus.” So, states have been tied in knots: damned if they cut eligibility (thus lose the extra federal funds) and damned if they don’t (thus continue paying exorbitant LTC benefits they can’t afford).

Here’s what’s new. The ARRA windfall and its requirement that states do nothing to control their hemorrhaging LTC eligibility were both due to expire on December 31, 2010. If allowed to happen, that would have forced state Medicaid programs to act responsibly and target their scarce public benefits to people truly in need. But, because “health reform” passed, that’s not going to happen after all. Instead, according to Families USA (FUSA): “The health reform MOE [maintenance-of-effort requirement] will effectively extend the ARRA MOE on Medicaid until 2014.” If you want the details, read the FUSA “Fact Sheet” here. I’ll just focus below on the ramifications.

What happens when unstoppable forces (exploding costs) meet immovable objects (constitutionally mandated balanced state budgets)? Nobody knows for sure because we’ve never come up against a state fiscal crisis quite this huge before. But Dennis Smith (who ran the Medicaid side of CMS for eight years under the previous Administration) and Ed Haislmaier of the Heritage Foundation speculated thus in a recent “WebMemo”:

Congress is about to set off a chain reaction that it has not planned for and will not be able to contain. The health care legislation currently in Congress [most of which just passed] not only imposes new costs on states through expansion of the Medicaid program; it also preempts state authority in management of the program. Faced with becoming merely an agent of the federal government, states will likely take the rational and reasoned approach of simply ending the state-federal partnership known as Medicaid.

Read “Medicaid Meltdown: Dropping Medicaid Could Save States $1 Trillion” here. That’s $1,000,000,000,000, folks, a truly tempting payday for getting out from under the federal thumb. Hard to believe that at least some states won’t take the flyer. If even one does, we’ll have a state-level laboratory in which to test the potential of rational LTC public policy. That is, a high-quality public safety net for the truly needy backed up by excellent private LTC insurance for savvy planners with a reverse mortgage fall back for the less responsible non-poor.

If states start bailing out of Medicaid altogether as Smith and Haislmaier predict, Katy bar the door. Everything we ever thought we knew about long-term care financing will be thrown upside down and topsy turvy. It’ll be a Category 9.9 public-policy temblor. Out of the rubble, the free market will build a rational, cost-effective LTC financing system. In the absence of perverse incentives that discourage LTC planning and cause people to end up in nursing homes on welfare, the system will fix itself. Private long-term care insurance will be a critical part of the solution.

Whether it’s this “Big MOE” or the broader impact of our rapidly approaching rendezvous with fiscal reality, big changes are afoot.

CLASS Begins

So I’m eating my granola and fruit, surfing through the TV news channels (CNN, CNBC, MSNBC and Fox) when what do I hear? I paraphrase now, but the gist is:

There’s a sleeper in the new health reform law. It came in under the radar. Hardly anybody knows about it.It’s a new government entitlement program to cover long-term care. They’re going to take the premiums (upwards of $150 per month) out of your paycheck automatically . . . unless you “opt out.”

Advocates, like Jim Firman, head of the National Council on the Aging, think it’s the greatest thing since sliced bread. Finally, a program paying cash (maybe $75) per day, so people can get care at home instead of in a nursing home.

Opponents, like the California Congressman interviewed, think the new CLASS Act will become insolvent before long leaving participants in the lurch. Most people will opt out and those who stay in will be the ones most likely to claim benefits soonest.

Fox News Channel did this one, but I’m guessing all news outlets will put a similar . . . “whoa, where in the world did this come from?” . . . spin on CLASS.

Such early coverage lends strong credence to the argument that CLASS could be the biggest opportunity ever for long-term care insurance. Think of it: every American will be hit with big new monthly payroll taxes unless they opt out. So every American will have to give some thought to the question of LTC risk and cost.

The Actuary for CMS (the Centers for Medicare and Medicaid Services) says all but two percent of Americans will choose to opt out of CLASS. That leaves 98 percent who may be motivated and willing to look at private LTC coverage as an alternative. And the remaining two percent should supplement CLASS with real insurance too if they know what’s good for them.

Handwriting on the Wall for Medicaid Payments of Long-term Care

I always argued that, in a rational world, families would pull together to protect Mom and Dad. If families truly had to incur the catastrophic costs of long-term care, they would save, invest or insure against the risk. In the absence of a social safety net that covers not just the poor but the middle class and affluent as well, prosperous people would plan responsibly for long-term care. Instead of fighting among themselves for the spoils of Medicaid planning, adult children would pool their resource to purchase long-term care insurance for the parents.

Nowadays, with Medicaid going bankrupt, the handwriting is on the wall. More likely sooner than later, Medicaid will be seriously means-tested to eliminate the program’s huge income and asset loopholes. If it survives at all, it will become the kind of program most people thought it always was: a financial floor protecting the truly needy from health and LTC devastation.