After CLASS, Is Granny Headed to the Ice Floe?

Published November 16, 2011

The failure of the ObamaCare program for long-term care must have been a huge disappointment to fans of Ponzi schemes everywhere. Like Social Security and Medicare, the Community Living Assistance Services and Supports (CLASS) program was designed to collect “premiums” during employees’ working years and spend the money immediately—with no saving and no investment. Then, when the obligations came due, the program would have been forced to seek a taxpayer bailout.

Just because CLASS has been dismissed, however, doesn’t mean the threat has gone away. In fact, in a very real sense, Medicaid itself is a stealth CLASS program. Technically, seniors can qualify for government provision under Medicaid only if they impoverish themselves by “spending down” their assets. However, an entire cottage industry of lawyers is now helping seniors protect their assets and still get Medicaid long-term care coverage.

Long-term care is the fastest growing expense in the Medicaid program. As 78 million baby boomers reach the age of 65 at a rate of 10,000 per day, expect them to take full advantage of the legal opportunities to obtain Medicaid benefits at taxpayer expense.

Meanwhile, baby boomers have done a poor job of saving to pay for their own long-term care needs. There is very little private insurance for this—only 7 million people are so insured.

Here are five ideas, four of which are included in the National Center for Policy Analysis’ Handbook on State Health Care Reform.

Encourage Community Care over Institutional Care.

In most places, Medicaid encourages the most expensive form of long-term care: nursing homes. Once fire and safety standards are imposed along with myriad other regulations, there is literally no such thing as an inexpensive nursing home.

There are many unexploited opportunities to substitute less-expensive home care for institutional care. Home care often costs only half as much as a nursing home, and in some areas, the cost savings from home care may be even greater. Home care in Washington, DC, costs less than one-third of nursing home care. In Manhattan, it’s about one-fifth.

Encourage the Use of Assets to Finance Long-Term Care.

There are more than 13 million households headed by people aged 62 years or older. Many seniors own their homes but are reluctant to tap their equity to pay for nursing home care for fear of losing those homes. A possible solution to this problem is a reverse mortgage. This is a home loan that does not have to be repaid as long as the owner (or a spouse) lives in the house.

By one estimate, more than six million senior households could access more than $72,000 in home equity per household using reverse mortgages. This would pay for a year or more of nursing home care and two or more years of home care in most areas.

Seniors could be required to first tap home equity using reverse mortgages before qualifying for Medicaid. An added benefit is that more people may plan ahead and purchase long-term care insurance if they are not allowed to shelter their largest asset when qualifying for Medicaid.

Increase Estate Recovery.

Federal law permits the states to recover personal and real property in which the individual has an interest or legal title in order to reimburse the government for nursing home costs. Few states are aggressively pursuing estate recovery, however. One problem: the states are hamstrung by federal regulations that tie their hands.

Future legislation should require that any funds placed in a trust be considered income for determining Medicaid eligibility. It could even eliminate the use of trusts that reduce a senior’s current income and help them meet the income qualification.

Encourage Private Insurance.

States now have a way to encourage private long-term care insurance. It is an outgrowth of a pilot project in New York, Connecticut, California, and Indiana called the Partnerships for Long-Term Care. The plan allows people to shelter their assets by purchasing a qualifying private insurance policy with a defined amount of coverage.

When a policyholder enters a nursing home, he or she first relies on the insurance. When the insurance is exhausted, assets equal to the value of the policy are ignored when determining eligibility for Medicaid. The insurance, then, is protecting the senior’s assets rather than protecting Medicaid. For each dollar of coverage, it protects a dollar’s worth of assets.

Since most nursing home stays are less than one year, very few of those who purchase these policies apply for Medicaid benefits. Today, these Partnership programs have spread to about 35 states.

Allow Insurers to Price Risk Accurately.

The principal reason for the failure of CLASS is community-rated pricing. Everyone was going to be charged the same premium, regardless of expected long-term care expenses. In response, actuaries expected healthy people to be overcharged and people more likely to file a claim to be undercharged.

Under such an arrangement, long-term care insurance would appeal mainly to those most in need of it. But if they are the main ones paying premiums, then an “average premium” will be insufficient. Insurers will have to charge much higher premium—leading to what analysts in the trade call a “death spiral,” under which premiums rise progressively higher and enrollees become progressively sicker.

All of this is avoided if insurers can charge a fair premium—one that accurately reflects each individual buyer’s risk.