Long-term Care Crisis Builds

Published March 1, 2003

State governments face their worst fiscal crises in 50 years. The federal budget flipped from a triple-digit surplus to a triple-digit deficit. Medicaid, which accounts for 20 percent of state budgets and 7 percent of the federal budget, is a large part of the problem.

Long-term care (LTC) expenditures, consisting of payments for home care and nursing home care, consume a quarter to a half of most states’ Medicaid budgets, and the federal government pays 57 percent of all Medicaid costs. Nevertheless, punishingly low Medicaid and Medicare long-term care reimbursements have driven thousands of nursing homes and home health agencies into bankruptcy.

Is this just the price of providing a long-term care safety net for the poor? Or have state and federal policies crowded out private financing alternatives and exploded long-term care costs unnecessarily? The answer may surprise you.

Medicaid Is Welfare

Medicaid is a means-tested public assistance program. It is welfare. People who need acute, emergency, or preventive health care must be dirt poor to qualify for Medicaid.

For anyone who needs nursing home care, however, the eligibility rules are very different and highly generous. Despite the conventional wisdom that people must be poor to qualify for Medicaid nursing home benefits, income only disqualifies the top tier of seniors.

In 30 “medically needy” states, people qualify if they cannot afford private nursing home care, which averages nearly $5,000 per month. In the remaining “income cap” states, most people with monthly income in excess of the ostensible $1,635 limit can set up Miller income trusts and qualify immediately. As of 2003, married couples are allowed to keep up to an additional $2,267 per month in income for the healthy spouse at home while the ill spouse receives nursing home care paid for by Medicaid.

Nor do assets interfere with Medicaid nursing home eligibility for most people. While Medicaid recipients are allowed only $2,000 in non-exempt assets, they can also retain a home and all contiguous property of unlimited value, a business including the capital and cash flow of unlimited value, one automobile of unlimited value (if used for the recipient’s benefit), a burial trust fund of unlimited value, practically unlimited home furnishings, and many other exempt assets.

For people with really large financial holdings, Medicaid planning attorneys can quickly shelter or divest their wealth to achieve artificial impoverishment by means of sophisticated legal techniques. These include special trusts, annuities, self-canceling installment notes, life care contracts, and many others. Married couples can shelter half their joint assets up to $90,660 in addition to all the other exemptions.

The average American senior qualifies easily for Medicaid nursing home benefits without fancy Medicaid planning, and virtually anyone else can qualify by hiring a Medicaid planner. The legal fee to impoverish even the well-to-do so they can receive Medicaid nursing home benefits is roughly equal on average to the cost of one month in a nursing home as a private payer.

The truth is that no one has to be poor to receive nursing home care paid for by Medicaid. All anyone needs is a cash flow problem. Consequently, many people who could afford home care or assisted living by liquidating real estate or other exempt assets end up in nursing homes on Medicaid because that is the cheapest alternative available to them and their families.

Devastating Consequences

The consequences to America’s long-term care service delivery and financing system have been devastating. The percentage of nursing home costs paid by government (mostly Medicaid and Medicare) has been going up for the past 13 years (from 49.6 percent in 1988 to 61.5 percent in 2001, up 11.9 percent), while out-of-pocket costs have been declining (from 38.5 percent in 1988 to 27.2 percent in 2001, down 11.3 percent).

Thus, the consumer’s liability for nursing home costs has gone down precipitously, while the government’s liability has increased dramatically. No wonder nursing homes are struggling financially. Their dependency on stingy government reimbursements is increasing while their more profitable private payers are disappearing. And no wonder people are not buying LTC insurance as eagerly as insurers would like them to. Only 7 percent of seniors and hardly any of the baby boomers have insured privately for long-term care.

Unfortunately, these problems are even worse than the preceding data suggest. Over half of the so-called “out-of-pocket” costs reported by the Centers for Medicare and Medicaid Services are really just contributions toward their cost of care by people already covered by Medicaid!

These are not out-of-pocket costs in terms of asset spend-down, but rather only income, most of which comes from Social Security benefits, another government program. Thus, although Medicaid pays less than half the cost of nursing home care (47.5 percent of the dollars in 2001), it covers 70 percent of all nursing home residents. Because people in nursing homes on Medicaid tend to be long-stayers, Medicaid pays something toward nearly 80 percent of all patient days.

No wonder the public is not as worried about nursing home costs as LTC insurers think they should be. No wonder nursing homes are facing bankruptcy all around the United States, when so much of their revenue comes from Medicaid, often at reimbursement rates less than the actual cost of care.

Bottom Line

Well-intentioned but perversely counterproductive public policy has anesthetized most Americans to the risk and cost of long-term care. For nearly 40 years, they have been able to ignore the risk, avoid the premiums for private insurance, and expect Medicaid and Medicare to pay for their long-term care if and when it’s needed.

Unfortunately, that old system is falling apart as access to and quality of government-financed long-term care have collapsed over the past decade. Already now, and far more so in the future, access to quality long-term care at the most appropriate and desirable levels (home care or assisted living) will require an ability to pay privately.

We desperately need a change in public policy incentives to encourage Americans to take the risk of long-term care seriously, to plan early, and to save, invest, or insure so they can pay privately when they need long-term care.

Stephen A. Moses is president of the Center for Long-Term Care Financing in Seattle, Washington. He can be reached by email at [email protected], or by phone at 206/283-7036.

For more information …

see “LTC Choice: A Simple, Cost-Free Solution to the Long-Term Care Financing Puzzle,” published by the Center for Long-Term Care Financing in September 1998. The 37-page report is available through PolicyBot. Point your Web browser to http://www.heartland.org, click on the PolicyBot icon, and search for document #11573.