Excerpt from The Handbook on State Health Care Reform, co-authored by John C. Goodman, Michael Bond, Devon M. Herrick, Gerald L. Musgrave, Pamela Villarreal, and Joe Barnett.
Although it is optional, every state provides a long-term care benefit through its Medicaid program–and not just to the poor. Medicaid is paying for the long-term care of a growing number of middle-income seniors, and this is one of the fastest-growing areas of state spending.
At the time they retire, most seniors do not meet Medicaid income and asset tests for long-term care coverage. But by “spending down” their assets, over time a great many eventually do qualify. In fact, an entire industry of attorneys practicing “elder law” has sprung up in recent years to help seniors transfer assets in order to qualify.
The following four steps would help solve the problems of state long-term care aid.
Step 1: Encourage Community Care
Medicaid encourages institutional care over home care. Although many state programs are changing that approach, they could increase their use of less-expensive home care.
Home care often costs only half as much as a nursing home, and in some high-cost areas, the cost savings from home care may be even greater. In Washington, DC it costs less than one-third as much as nursing home care. In Manhattan, a year of home care costs only about one-fifth as much as a year-long stay in a nursing home. And in-home providers offer a range of medical services, including occupational and/or physical therapy.
Ohio, Oregon, Washington, and Wisconsin expanded home care and community-based care to help control rapidly increasing institutional care expenditures. These states were able to serve more people while controlling the growth in overall long-term care spending. Between 1982 and 1992 the combined total of nursing home beds in the four states declined 1.3 percent while total nursing facility beds nationwide increased 20.5 percent.
Ohio’s Commission to Reform Medicaid proposed rewarding families who choose lower-cost options that save the state money. This reform would allow the elderly living with family members to receive a few hours of home or personal care per week that could delay their entry into a nursing home.
To increase the financial incentives, some assets could be excluded from eligibility tests or shielded from cost recovery.
Step 2: Use Personal Assets
More than 13 million households in the U.S. are 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 (which could include the spouse of a nursing home resident) 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.
Currently, seniors rarely use reverse mortgages for long-term care. Why should they? Home equity is generally an exempt asset when qualifying for Medicaid long-term care, so seniors can obtain long-term care without it. However, the Deficit Reduction Act of 2005 now makes cash-poor seniors ineligible for Medicaid nursing home coverage if their home equity value is greater than $500,000.
Seniors could be required to tap home equity using reverse mortgages before qualifying for Medicaid. However, such a requirement would have to take into account the needs of a spouse who remains in the home after a partner is institutionalized. A possible alternative is to place a lien on property jointly owned by the spouse, so that the state could recover some of its long-term care costs from the couple’s estate.
The spouse would be free to live in the house for the rest of his or her life. An added benefit is that more people might plan ahead and purchase long-term care insurance if they knew they would not be allowed to shelter their largest asset when qualifying for Medicaid.
Step 3: Increase Estate Recovery
When beneficiaries die, states can recover nursing home costs from their estates. Since seniors can own a home and still qualify for Medicaid in most cases, the estate could include a house. Federal law also permits states to recover personal and real property in which the individual has an interest or legal title. Some states are aggressively pursing estate recovery, and all states receive federal funds to do so.
Future legislation should require 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 (which helps them meet the income qualification).
The Deficit Reduction Act of 2005 created a five-year waiting period to apply for Medicaid coverage after making a significant gift of property. In addition, property settlements in divorces made prior to Medicaid eligibility should be subject to the same five-year rule as other divisions of property.
Step 4: Encourage Private Insurance
The states now have a new way to encourage private long-term care insurance. It is an outgrowth of a pilot project in California, Connecticut, Indiana, and New York called the Partnerships for Long-Term Care, which provided financial incentives to purchase long-term care insurance.
The plan allowed people to shelter their assets by purchasing a qualifying private insurance policy with a defined amount of coverage. When a policyholder entered a nursing home, he or she first relied on the insurance. When the insurance was exhausted, special eligibility rules allowed the policyholder to receive Medicaid benefits while retaining assets equal to the value of the policy.
In the California and Connecticut Partnership programs, individuals purchased coverage from competing private insurers. For each dollar of coverage, they protected a dollar’s worth of assets. For instance, a long-term care policy with $120,000 in benefits allowed an individual to shelter $120,000 in assets and still qualify for Medicaid long-term care. Since most nursing home stays are less than one year, very few of those who purchased these policies applied for Medicaid benefits.
The Deficit Reduction Act allows all 50 states to establish such partnership programs. Individuals who purchase such policies can access Medicaid benefits after their insurance runs out–without the means-testing required for uninsured applicants.
Action Urgently Needed
Long-term care is the fastest-growing expense in the Medicaid program. As 77 million baby boomers reach retirement within the coming decade, the program can only continue to grow more insolvent.
However, with proper estate planning–using techniques and programs that are already largely available–the impact on seniors does not have to be that bleak.
John C. Goodman ([email protected]) is president of the National Center for Policy Analysis. His health care blog is at http://www.john-goodman-blog.com/.
For more information …
More information about the State Health Care Handbook: http://www.ncpa.org/pub/special/20071112-sp.html
The State Health Care Handbook: http://www.ncpa.org/email/State_HC_Reform_6-8-07.pdf