The Age Wave is Hitting

When I started studying the long-term care financing problem 25 years ago and conducted the Health Care Financing Administration and Inspector General studies here (PDF) and here (PDF), my message was this:

“If we don’t do something to divert most Americans away from Medicaid-financed LTC and toward private insurance, we’ll face a fiscal crisis of epic proportions in 25 years when the Age Wave hits.”

My message today is simpler: It’s Happening.

Most state and federal officials haven’t figured it out yet, but they are undergoing a sea change in public sentiment and policy that will swamp the old ways of doing things and force government to pull back the benefits that have crowded out the long-term care insurance market.

Here are some items in the news that show Medicaid and Medicare must retrench leaving a huge vacuum for personal responsibility and private LTC insurance to fill.

• Medicaid rolls swell by 3.3 million nationwide, Columbus Dispatch
• States consider Medicaid cuts as use grows, New York Times
• States’ pension plan funds fell $1 trillion short in 2008, USA Today

I’ve always said targeting Medicaid to people truly in need is a good thing because it enables government to provide better services to fewer people and it brings more private financing into the service delivery system which makes care access and choice better for everyone.

Five Myths of Long-term Care

Einstein disdained “unthinking respect for authority,” but he wasn’t alone. President John F. Kennedy said:

“The great enemy of truth is very often not the lie–deliberate, contrived and dishonest–but the myth–persistent, persuasive and unrealistic. Too often we hold fast to the cliches of our forebears. We subject all facts to a prefabricated set of interpretations. We enjoy the comfort of opinion without the discomfort of thought.”

The field of long-term care financing is a perfect case in point. What exactly are the “persistent, persuasive and unrealistic” myths of long-term care? I nominate the following: (more…)

Capitalism Will Save Us

The government is soon going to have to means test Social Security and Medicare, and finally Medicaid, and a lot of people are going to get hurt, especially the poor. The middle class and affluent, once they can no longer get the government to pay for their long-term care, are going to have no place to go but to their savings. They’ll spend that down very fast, and then go to their home equity in an explosion of reverse mortgages. And once we eliminate or radically decrease the $500,000 home equity exemption still available under Medicaid, the public is going to start to realize they need private long-term care insurance to cover this risk and substantial liability.

But it isn’t going to happen because politicians wake up and realize they’ve caused the problem. It’s going to happen because they keep digging the fiscal hole deeper. We’re facing a $107 trillion infinite horizon of unfunded liability on Social Security and Medicare alone, not even counting the problem with Medicaid and long-term care. So we’ve basically painted ourselves into a corner with no exit, and that’s why I think it’s all going to come to a crashing halt.

I’m very optimistic long term, though. The way the United States operates is not to deal with something until it becomes a crisis. But underneath the entitlement mentality that is crushing us remain the fundamental values that made the country great in the first place. Once the government programs collapse, independence, personal responsibility, and hard work are going to come back. We’ll see entrepreneurial ingenuity and the tremendous power of the profit motive and capitalism. That’s what’s going to save us, and what could have saved us all along.

Fixing the Long-Term Care Financing Problem

The State of Rhode Island took a daring leap into radical Medicaid reform last year. The state requested and the Centers for Medicare and Medicaid Services (CMS) granted a “global Medicaid waiver.” Under this unique plan, Rhode Island agreed to a cap on Medicaid matching funds for five years in exchange for more flexibility to administer the program than federal law and regulations otherwise allow. Among other objectives, the state is using the global waiver to increase Medicaid-financed home and community-based services while reducing nursing home utilization.

Rhode Island’s gutsy move and noble goals for long-term care (LTC) are praiseworthy. But will they save money or break the bank? Will offering more services people want (home care) and fewer they’d rather avoid (nursing homes) swell Medicaid ranks? Can Rhode Island get it right and become a model for the rest of the country?

Our new report, titled “Doing LTC Right,” released in collaboration with the Providence-based Ocean State Policy Research Institute, answers all these questions. Read the whole report here (PDF).

With state and federal budgets in crisis, public officials will have to address Medicaid and long-term care costs sooner rather than later. The good news is the problem of financing long-term care is easy to fix. Our report explains the solution. If Rhode Island follows our recommendations, it can become a model for long-term care reform the rest of the country should follow. So, roar Rhode Island, show the rest of America how it’s done. Save the Medicaid LTC safety net and unleash the potential of private market alternatives.

The Irrational World of Long-term Care

In a rational world, people who need long-term care would use their home equity, if necessary, to obtain red-carpet access to top-quality care at the most appropriate level.

In a rational world, to avoid having to use their home equity to obtain quality long-term care, most people would buy insurance against that big, expensive risk.

In a rational world, needy people who lack home equity and can’t afford private insurance would qualify for public assistance that provides excellent home care or institutional care based on their needs and preferences.

But we don’t live in a rational LTC world.

Instead, we live in a crazy, mixed up world in which a welfare program, Medicaid (1) pays for most expensive long-term care, (2) pays mostly for nursing home care which nearly all people would rather avoid, (3) traps millions on public assistance by being the only way to avoid catastrophic LTC costs after the insurable event has occurred, (5) exempts up to three-quarters of a million dollars in home equity from LTC spend down, (6) fails in most cases to recover its cost from deceased recipients’ estates, and (7) therefore operates as free inheritance insurance for heirs, thus anesthetizing the next generation to LTC risk.

It’s a mess created by long-standing perverse incentives in public policy. But all that’s about to change. Medicaid is on its last legs as a major funder of long-term care. It will either collapse altogether or start paying only for people truly in need. Either way, middle class and affluent families will soon have no access to government financed LTC while preserving huge amounts of home equity and other exempt assets.

Once that happens, people will turn to reverse mortgages both to fund the kind of LTC that enables them to remain in their homes and, if they remain financially and medically eligible, to generate supplemental income that will help them afford private long-term care insurance.

What if States Leave Medicaid Behind?

For as long as I’ve studied long-term care financing . . . say 25 years . . . I’ve warned that making Medicaid the dominant LTC payer is dangerous.

Sooner or later, the Age Wave will crest, Medicaid will fail, and the bottom will fall out of our welfare-financed, nursing-home-based LTC system.

Well, folks, that’s no longer an iffy prognostication off in a scary distant future. It’s an immediate likelihood on the cusp of occurring.

The health reform bills in both the House and Senate would load up Medicaid with millions of new welfare recipients at a cost states cannot sustain. So says Dennis Smith, the Bush Administration’s director of the Medicaid side of CMS.

In a Heritage Foundation “WebMemo” titled “Medicaid Meltdown: Dropping Medicaid Could Save States $1 Trillion,” Smith and co-author Ed Haislmaier opine:

“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.” (p. 1)

“If all states withdraw from Medicaid, their collective savings would be $725 billion over the 2013- 2019 period, but they would exceed $1 trillion over 10 years.” (p. 1)

“The cost to the federal government to replace the state share of Medicaid, however, would be greater than $1 trillion as the entire Medicaid population would become eligible for the new, more expensive federal subsidies for premiums and cost-sharing.” (p. 1)

“By piling billions of dollars in new costs onto states and imposing greater federal control over the states, Congress is recklessly increasing the likelihood that states will exert their own authority as sovereign units of government and end their participation in Medicaid entirely.

“The savings to state budgets are so enormous that failure to leave Medicaid might be viewed as irresponsible on the part of elected state officials. The federal government, however, would be left holding a trillion-dollar-plus tab.” (p. 4)

So, what if cash-strapped states respond to health reform by seceding from Medicaid? How could they improve access to and quality of long-term care while saving money in the process?

Simple. Target scarce state LTC resources to people most in need. Eliminate eligibility loopholes and enforce estate recovery. Use some of the savings to incentivize responsible LTC planning and private financing alternatives like reverse mortgages and insurance. Find numerous national and state-level studies that explain in detail how to do this here.

States that follow that formula after they escape Medicaid’s Lilliputian constraints will have fewer people dependent on public assistance for long-term care. They’ll have more private financing at market rates uplifting LTC access and quality for everyone. Their public expenditures for LTC will plummet and their people will enjoy better LTC services across a wider continuum of care. What’s not to like?

No Class in CLASS Act

The extent of smoke and mirrors in both the House and Senate health care bills is frightening. Much mischief is easily concealed in each 2,000-plus-page bill.

One part of the health reform bills that has not garnered much attention is Congress’ expansion into long-term care.

Just a few months ago, this act alone would have been treated for what it is— a massive government expansion that bodes ill for the fiscal health of the country.

The Community Living Assistance Services and Supports Act of 2009 — or CLASS Act — is being touted as a federal long-term care plan. Uncle Sam will use his collective might to ease the increasing burden of aging. In reality, it is a budget device designed to shift dollars to health care spending even as it builds an infrastructure for long-term bureaucratic growth.

The offer is a federally chartered long-term care benefit — a modest payment to offset the costs of retrofitting a senior’s home and paying for someone to stop by and help with activities of daily living.

Americans would pay premiums, the government would administer the program, and — we’re to believe — the specter of losing one’s life savings and dignity to old age will be relegated to the past.

If such an innovative program sounds familiar, it’s because it is. The description is long-term care insurance, which has been available in the private market for many years.

When we analyze the government’s promised version, it’s not clear that the CLASS program offers any advantages, other than those afforded politicians looking to raise revenues and their own profiles. (more…)

Another Time Bomb in the Health Reform Bill

Scott Harrington, a professor at the Wharton School of Business, sees a time bomb hidden in the Senate and House versions of health reform.

The Community Living Assistance Services and Supports Act, or Class Act. would “blow a hole in the federal budget” over time. The act puts the government in the long-term care insurance business. Doing so saves money, on paper, but only for the short term.

He concludes, “it is hard not to conclude that a major motivation for the Class Act is to make ObamaCare look fiscally better over CBO’s official 10-year budget horizon. Without the new long-term care program, CBO’s projected deficit reductions for the House and Senate bills would be $36 billion and $58 billion, respectively, rather than $138 billion and $130 billion.”

Putting Long-Term Care into a Death Spiral

Surely proponents of the government-run LTC financing plan will celebrate its inclusion in the Senate’s health reform bill. See “Long-Term Care Plan to Be in Bill” in the Wall Street Journal here if you subscribe online or on page A-4 in the print edition.

But hold off on the celebration because the Chief Actuary at the Centers for Medicare and Medicaid Services (CMS) says CLASS is a dud. See “CMS Actuary: CLASS Act Would Not Work” posted by National Underwriter here. Some excerpts:

“In a report given to House Republicans Friday, CMS actuary Richard Foster says the Community Living Assistance Services and Support Act, or CLASS Act, program provision in H.R. 3962 would bring in $39 billion in new federal revenue during its first 9 years of operation, but then start to fall apart.

“Foster predicts:

- Average premiums for the program would be $180 per month.

- By 2025, the program would start paying out more than it collected in premiums, resulting in a net federal cost.

- Despite assurances of actuarial soundness, there is a significant risk that the program would be unsustainable.

“‘Voluntary, unsubsidized and non-underwritten insurance programs such as CLASS face a significant risk of failure as a result of adverse selection by participants,’ Foster writes in his report. . . .

“‘This effect has been termed the ‘classic assessment spiral’, or ‘insurance death spiral’,’ he writes. . . .”

You can find the full report of the CMS Actuary here (PDF). And it’s a doozy going much further than nixing the CLASS Act to lambasting the House’s health reform proposal in general.

Ohio Speaker Practices Dubious Art of Medicaid Planning

One of the most egregious Medicaid planning attorneys is from Cleveland, OH and serves as Speaker of the House of Representatives! He is the author of the following quote:

“We have committed an act of piracy–we have broken into the Fort Knox of Government benefits and uncovered the best legal strategies available to you for claiming your share of the gold from the Government’s treasure chest…. We’ll explain how you can ’strike gold’ in the Social Security [including SSI], Medicare, and Medicaid programs…. With this book we are handing you the treasure map, deciphered from a mine of unintelligible government rules and regulations.” (Amy Budish and Armond D. Budish, Golden Opportunities: Hundreds of Money-Making, Money-Saving Gems for Anyone over Fifty, Henry Holt and Company, New York, 1992, p. xiii)