Medicaid spending is on pace to crowd out everything else in state budgets within a generation, according to “The Long-Term Care Dilemma, What States Are Doing Right and Wrong,” a new study jointly produced by the American Legislative Exchange Council and Council for Affordable Health Insurance.
Author Steve Moses of the Center for Long Term Care Financing describes fatal flaws in the current financing system for Medicaid long-term care that allow abuse by middle- and upper-income patients. If Medicaid resources are intended exclusively for the truly poor, Moses concludes, policymakers will have to address those flaws.
The study examines the Medicaid policies of 10 states–California, Connecticut, Georgia, Michigan, Minnesota, Nebraska, New Mexico, New York, Oregon, and Texas–and ranks them in order of effectiveness. Even the best state has a long way to go, according to Moses.
High Spending Growth Projected
According to the National Association of State Budget Officers, Medicaid expenditures represented 21.9 percent of total state expenditures in fiscal year 2004. States are projecting a 12.1 percent increase in state funds devoted to Medicaid in 2005.
The Congressional Budget Office projects Medicaid spending increases in the neighborhood of 8 percent annually for the next 10 years. Such growth will create severe pressure on state budgets and the elected officials who oversee them.
Ironically, the study notes, there is a negative correlation between the number of dollars spent on Medicaid and access to care for patients. From 1999 to 2002, the number of physician practices open to “all new Medicaid patients” declined by 23 percent. Over the same three years, total Medicaid spending climbed 36 percent.
Medicaid covers 50 million low-income people. Approximately three-quarters of those receiving Medicaid are children and non-disabled adults. However, that group represents only one-quarter of Medicaid outlays.
The overwhelming majority of Medicaid’s resources go to the one-quarter of enrollees who are elderly or disabled. Care in nursing homes is the primary cost driver.
Medicaid Eligibility Too Easy
Two financial “tests” must be passed in order to achieve eligibility for Medicaid long-term care benefits. One is based on income, the other on assets. Passing both is all too easy, according to the study.
Income test. States administer the income test in one of two ways. Thirty-four states determine whether a person is “medically needy”: If his or her medical costs exceed income, Medicaid will make up the difference.
The remaining states have an “income cap” test of $1,692 per month. Residents in these states, however, can set up a “Miller Trust” (also known as a “Qualified Income Trust”) to hide some of their income so as to qualify for Medicaid.
Only 10 to 15 percent of U.S. seniors have incomes high enough that qualifying for Medicaid might pose a serious problem.
Asset test. The asset test is intended to protect seniors’ homes, cars, and businesses from seizure. Most states allow people to keep $2,000 in non-exempt liquid assets. The problem, however, is that the loopholes are so big seniors can quite literally drive two cars through them. The home and all contiguous property, regardless of value, are exempt. A business, including the capital and cash flow of unlimited value, is exempt. A car of unlimited value is also exempt. Because a car is exempt, giving it away does not qualify as a transfer of assets. Thus, savvy seniors can deplete their cash by buying a car and giving it away, buying and giving away another, and so on–effectively hiding their cash in cars until reaching the $2,000 cash threshold.
Cynics call this the “two Mercedes rule.” Too much of the average senior’s wealth is off limits, the study says.
Assets of Elderly Protected
Seniors hold nearly $2 trillion worth of home equity. Eighty-one percent of U.S. seniors own their homes, and 73 percent of those own their homes free and clear. The key to paying for long-term care under Medicaid, the study contends, is to tap into that pool of wealth. Under current law it is all but off-limits.
The study notes that Medicaid was designed to help finance health care for poor Americans, not to act as “inheritance insurance” for people in the middle- and upper-income brackets. Seniors on the whole, while their monthly incomes may be more modest, are far more asset-rich than, say, couples in their thirties with two children.
One means of tapping into seniors’ asset wealth, the study notes, is home equity conversions, which can be accomplished through reverse mortgages. Seniors could take a lump sum or monthly payments to help defray nursing home costs. Recently, both the Centers for Medicare and Medicaid Services (CMS) and the National Council on Aging have encouraged the use of home equity to cover the cost of long-term care.
The Omnibus Budget Reconciliation Act of 1993 mandated estate recoveries–use of a person’s assets to recoup Medicaid costs–but states do not do so with any significant degree of effectiveness. Oregon led the country in estate recoveries with $13.7 million in 2002. That represented just 6.9 percent of the state’s Medicaid spending on nursing homes that year.
The study suggests Congress require that senior homeowners utilize their home equity in the form of a reverse mortgage before becoming eligible for Medicaid. States also could become more assertive in estate recoveries, seeking a waiver from CMS to extend the “look back” period for transfers of assets. Under current law, states can’t go back more than three years to determine if assets should have gone to the state to reimburse for Medicaid expenses.
Such policy actions, combined with public outreach to educate all citizens on the importance of preparing for future long-term care needs, would lead to greater use of long-term care insurance and other forms of planning and investing.
James Frogue ([email protected]) is director of the Health and Human Services Task Force at the American Legislative Exchange Council in Washington, DC.
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