Robert E. Moffit, Ph.D.
Whether we like it or not, the nursing
homes of the future will be "Rockin' to the Oldies." Why? Because
America is in the midst of an unprecedented demographic revolution.
We are living longer, and our life expectancy is projected to
increase in the 21st century. More immediately, the 77 million baby
boomers, my generation, are scheduled to retire starting in 2011.
Powerful demographic and financial pressures on our Medicare and
Social Security programs are a given, and Washington's policymakers
are starting to debate serious alternatives to these programs for
the next generation of American retirees. Less pronounced, but just
as serious, is the likely impact of America's rapidly aging
population on our long-term care programs, particularly
grasp the nature of the challenges ahead, consider the basic facts.
In 1900, life expectancy for Americans was 47 years of age. By
1935, when President Franklin D. Roosevelt and Congress enacted the
Social Security program, establishing eligibility at age 65, life
expectancy had risen to age 62. By 1998, life expectancy had risen
to 76.6 years, and it is projected to rise to age 81 in 2030,
according to recent estimates by the Social Security
Administration's Advisory Board.
many respects, this is great news. It is a tribute to improvements
in medical science and the quality of American life. Yet, it also
presents us with a challenge to become creative in shaping the
public policies that apply to an aging America.
help us think through the alternatives, we have brought two
outstanding health experts to share their ideas with us today.
Richard Teske is the President of Strategic Advocacy, a
Virginia-based firm that advises political, corporate, and
association leaders on health care policy, including Medicaid and
long-term care. Richard also is a Senior Fellow at the U.S.
Internet Council, a Washington-based public policy institution that
brings together international, national, and state lawmakers with
leaders in high technology industries.
Teske formerly headed the Washington office of Burroughs Wellcome
Company, an international pharmaceutical company. Richard served
almost eight years in the Reagan Administration. He has served as
the United Nations Delegate to the Conference on Economic and
Social Policy, and as official liaison to the White House for the
U.S. Department of Health and Human Services (HHS), Deputy
Assistant Secretary at HHS for Public Affairs, and an Associate
Administrator of the Health Care Financing Administration
(HCFA)--the federal agency that runs the Medicare and Medicaid
programs. Richard was educated at the University of Minnesota and
attended the University of North Carolina Business School and the
London Business School.
Stephen A. Moses, our second speaker, is
president of the Center for Long-Term Care Financing in Seattle,
Washington. The Center promotes a system of universal access to
top-quality long-term care by encouraging private financing through
insurance. As Stephen will explain, for most Americans, a
high-quality program based on private financing would prove
superior to government-based social service.
During his career, Stephen Moses has
served as director for LTC Incorporated, a state Medicaid
representative for the Health Care Financing Administration, and a
senior analyst in the Office of Inspector General at the U.S.
Department of Health and Human Services. Widely recognized as an
expert on long-term care, Mr. Moses has testified before half of
America's state legislatures on the topic and has appeared or been
quoted in such national media outlets as the CBS Evening News,
CNN, National Public Radio, The New York Times, Newsweek, USA
Today, Forbes, The New Republic, and The National Journal.
E. Moffit, Ph.D., is Director of Domestic Policy Studies at
The Heritage Foundation.
A CONSUMER CHOICE ALTERNATIVE FOR
Before we examine the problems and
solutions of the long-term care crisis, it is important to define
two philosophical approaches that will drive the future health care
debate. Regardless of any hybrid solutions, all health care
financing reforms either will be:
A centralized government entitlement
A market-oriented consumer choice
be more specific, every health care financing plan will have three
elements: eligibility requirements, benefits (or coverage), and
costs (or contributions). The two philosophical approaches
fundamentally differ in these elements.
the government entitlement approach, or "defined benefits" plans in
current health care jargon, benefits and eligibility essentially
are fixed. Those who are eligible are "entitled" to all the
benefits, regardless of cost. That is why costs (contributions) in
this approach are variable. No matter what the government has
budgeted for this program, it must pay for all the benefits that
all eligible persons use. This is the chief reason the Medicaid
budget has risen from $1.5 billion in 1967 to more than $200
billion in 2000.
control a government entitlement program, costs must be controlled
(benefits and eligibility supposedly are "fixed"). This is why most
health reforms during the last 35 years have focused on cost
containment and revenue enhancement. Enforcement of these rules
requires an intrusive regulatory system and government
investigators to ensure that providers do not engage in fraud and
the consumer choice approach, or a "defined contribution" plan,
eligibility and costs essentially are fixed. Benefits become the
variable. Consumers choose the benefits they need from a variety of
private plans. Government budgets can be accurately projected
because their contribution is also fixed.
control a consumer choice plan, public policy must focus on quality
assurance and consumer satisfaction, since benefits, not costs,
will vary. To enforce this control requires plan certification and
accurate consumer information. This approach has worked
successfully in the Federal Employees Health Benefits Plan (FEHBP)
for 50 years. (The FEHBP is, as you know, the system of competitive
private insurance that covers federal workers, Members of Congress,
and their families.)
two different policy approaches provide different political
dynamics. For most of the past 35 years, domestic health care
programs have taken the government entitlement approach. The
liberals advocated the expansion of the fixed elements--eligibility
and benefits. The conservatives were left to seek to control the
program by advocating cost containment and reimbursement restraint.
The liberals almost always won this debate.
the few instances in which conservatives offered market-oriented
reforms, the outcome was reversed. The conservatives advocated
quality care and consumer satisfaction, which left liberals to
advocate the expansion of costs and taxes to cover increased
government contributions to the plan. Conservatives could win this
THE LONG-TERM CARE CRISIS
Let's consider how these two paradigms
affect the long-term-care financing crisis. Looking at factual
problems and alternative solutions will prove that a
market-oriented consumer choice solution not only is preferable but
the only one that could be sustained in the future.
Three major problems drive the
long-term-care financing crisis:
Cost. Because of an aging
population and cost increases, the real inflation-adjusted costs of
long-term care will at the very least quadruple in less than 30
Reliance on Medicaid. The middle
class, whether consciously or unconsciously, relies on Medicaid for
long-term care coverage.
A Financing Shortfall. Without
major structural Medicaid reform that addresses its looming and
massive financial shortfall, most state budgets could collapse when
the baby boomers begin to retire.
PROBLEM #1: Long-term care costs will
quadruple in less than 30 years.
Long-term care consists of chronic health
care services, such as that provided in nursing homes, mental
health facilities, home health care, adult day care, assisted
living facilities, respite care, home and community services,
sub-acute care nursing, and custodial and non-medical residential
care. This type of care is not cheap. For example, the average
yearly cost in 1998 for staying in a nursing home was $47,000; for
the services of a home health aide, $36,000; and for assisted
As Chart 1 shows, the older Americans get, the more long-term care
they need. In 1997, the Medicaid program paid an average of $956
for those under age 21; $1,717 for adults; and $8,704 for those
over 65. The difference in spending can be attributed almost
entirely to the use of long-term care by the elderly.
The cost is magnified because the over-85 age group is the fastest
growing segment of our population. As Chart 2 shows, from 1990 to
2030, the number of all elderly will increase 105 percent, the
number of Americans between the ages of 65 and 74 will grow 89
percent, and those between 75 and 84, 119 percent. But the number
of Americans over age 85 will increase 143 percent.
The cost is further magnified because older people need more
nursing home care. The total number of elderly in nursing homes
will climb from about 2.8 million in 2000 to 5.3 million in 2030.
Yet only 330,000 of those aged 65 to 74 will be cared for in
nursing homes, compared with 1.46 million adults over age 85. In
2030, the 65-to-74 age group will have increased to 650,000, but
the over-85 age group in nursing homes will swell to 2.69 million.
Although one in five persons will need long-term care sometime this
year, 65 percent of those who are older than 85 will need long-term
care during this same period (2000-2030).
(See Chart 3.)
Because women generally live longer than men, three out of four
nursing home patients are women. As a result, lifetime long-term
care costs for men average $56,895, but for women they average
$124,370. Now consider, as we see in Chart 4, that over two-thirds
of all nursing home residents are covered by Medicaid, 9 percent by
Medicare, and about 23 percent by all other public and private
we can see in Chart 5, coupling the increase in long-term care
costs with the demographic explosion in the same 2000-2030 period
spells disaster for the Medicaid program. Medicaid nursing home
expenditures--$29 billion in 2000--will climb to $134 billion, a
470 percent increase in just 30 years.
quadrupling of Medicaid expenditures is not the result of
inflation, but a real dollar increase caused by demographics and
PROBLEM #2: Middle-class Americans,
whether consciously and unconsciously, rely on Medicaid for
long-term care coverage.
it was created in 1965, the Medicaid program was supposed to be a
welfare program for the poor. The Medicaid long-term care benefit
was included in the program almost as an afterthought. The
inclusion of this benefit literally created the long-term care
reason for the explosive growth in what was thought to be an
otherwise small benefit can be attributed to how the benefit has
been abused. Although Medicaid was designed to serve the poor, it
unintentionally came to serve the middle class because of two
problems in the program:
The ineffectiveness of its "spend down"
The ability of beneficiaries to transfer
(or hide) their assets, which enabled the middle class to qualify
Trying to restore Medicaid long-term care
to its intended recipients, the poor, has been a struggle from the
start. The spend-down provision allegedly would limit the Medicaid
poor to having only $2,000 in assets. In reality, recipients are
able to shelter more than $80,000 and $2,019 per month in income,
as well as a car, a business, and a house. As a result, this
provision only applies to 15 percent to 25 percent of the
these elderly can escape the spend-down provision if they transfer
their assets to their children. Federal and state governments have
tried numerous ways to detect and stop such transfers, or to have
access to a recipient's estate. The most recent attempts included
(1) the 1993 Omnibus Budget Reconciliation Act (OBRA), which
permitted states to recover long-term care costs from a deceased's
estate; (2) the 1996 Health Insurance Portability and
Accountability Act (HIPAA), which tightened the loopholes in the
transfer of assets; and (3) the 1997 Balanced Budget Act (BBA),
which targeted estate planners. All of these attempts have failed
because of the lack of enforcement or, more probably, the ability
of estate planners to keep one step ahead of the bureaucrats.
is impossible to know how many Medicaid long-term care patients
have transferred their assets or entered nursing homes as
private-pay patients who "quickly" lost all their assets. We do
know this has happened.
recent survey by the American Health Care Association (AHCA)
indicates the size of the problem. Baby boomers were asked, "Who
will pay for your long-term care?" Their answers:
80 percent did not know how they would pay
for long-term care; 50 percent had not given long-term care any
51 percent did not know "poverty" was a
qualification for Medicaid;
41 percent were willing to pay $1 to 49
per month (the real cost for nursing home care is $3,500 to $4,000
25 percent were not willing to pay
anything for long-term care; and
15 percent could identify Medicaid, not
Medicare, as the primary payer of long-term care.
These attitudes, coupled with the
ineffectiveness of the spend-down and transfer-of-asset provisions,
were reflected in a recent survey by nationally known pollster
Frank Luntz. His survey found that 80 percent of all Americans do
not believe the elderly should use any of their assets or spend any
of their savings to pay for long-term care.
PROBLEM #3: Without major structural
reform of Medicaid that addresses its looming and massive financial
shortfall, some state budgets will collapse when the baby boom
generation begins to retire.
Medicaid costs are shared between the
federal and state governments using a complex formula based on per
capita income. The Federal Medical Assistance Percentage (FMAP) is
different for each state. For example, in Mississippi, a state with
a high percentage of poor residents, the federal government pays
76.8 percent of the cost of the Medicaid program. In New York, a
richer state, the federal government pays 50 percent of the cost.
Nationwide, federal contributions average about 57 percent of the
state cost. This translates into about $114 billion in 2000, with
$86 billion picked up by the states. It is not the amount, per
se, that threatens the state budgets, but the distribution of
Chart 6 shows, the elderly comprise only 10 percent of Medicaid
recipients, but they account for 28 percent of the costs. The blind
and disabled constitute about 16 percent of recipients and almost
37 percent of costs. Together, they make up only a quarter of all
recipients but claim almost three-fourths of all beneficiary
expenditures. All other adults younger than 65 and children account
for three-fourths of recipients and only a quarter of the
can be attributed to the expense of long-term care and its abuse by
the middle class.
Looking at it another way, Chart 7 shows that while only 9 percent
of all Medicaid recipients use long-term care benefits, they
account for 43 percent of all expenditures. By comparison, the 68
percent who use the prescription drug benefit account for only 9
percent of the expenditures. This indicates why a drug for
Alzheimer's disease would be such a boon to Medicaid. We could
trade the high cost of nursing homes for relatively cheap drugs.
But unless some miracle drugs appear soon, this particular
long-term care expenditure will continue.
We simply will not have the tax dollars we need to cover the
projected increase in nursing home care covered by Medicaid. As
Chart 8 shows, the Social Security Administration projects revenues
from the available taxable payroll will increase 56 percent from
2000 to 2030, but nursing home expenditures will increase 143
effect is multiplied because the number of taxpayers available to
pay increased taxes will decrease over the same period. (See Chart
9.) In 1980, America had three workers for every retiree. In 2020,
projections estimate there will be two workers for every retiree.
These few workers will be asked to pick up a greater share of
Medicaid acute care, Medicare, and Social Security expenditures.
The so-called tax revolt of the 1970s will look like a tea party
compared with this crisis.
COMPARING HEALTH CARE AND NURSING HOME
can understand the interrelationship of the three long-term care
financing problems--demographics and costs, middle-class spend down
and transfer of assets provision, and the state Medicaid budget
crisis--by comparing how we pay for health care nationwide and
nursing home care. For all national health care expenditures,
public programs pay 46.4 percent of the costs, and private sources
pay 53.6 percent. But for all nursing home expenditures, 62.2
percent are publicly funded and 37.8 percent are privately funded.
The difference is explained within each payer category. (See Chart
National health expenditures from publicly
funded sources account for 46.4 percent of all health care
spending: 20 percent on Medicare, 15 percent on Medicaid, and 12
percent on other sources of care, such as Social Security benefits
(SSA), Supplemental Security Income (SSI), or veterans
private share of national health expenditures includes: 17 percent
from out-of-pocket funds and 31 percent from private insurance.
we compare national health expenditures to nursing home
expenditures, the discrepancy between public and private sources
Nursing home expenditures from public
sources account for: 12 percent of Medicare expenditures (down from
20 percent); other public spending decreases from 12 percent to 2
percent; and Medicaid spending explodes from 15 percent to 48
percent--almost half of all spending.
massive shift in public spending explains who isn't pulling their
fair share of the load, which the private side of Chart 10 and
Chart 11 shows.
Of private sources for
nursing home expenditures: 31 percent are out-of-pocket costs, an
increase from 18 percent; insurance pays for 5 percent; and other 2
The real culprit in
nursing home long-term care costs is the lack of private insurance
expenditures--private insurance accounts for almost one-third (31
percent) of national expenditures, but only a miniuscule 5 percent
of nursing home expenditures. These charts graphically illustrate
how the middle class is taking advantage of Medicaid for its
long-term care "insurance."
FOUR "SOLUTIONS" TO THE LONG-TERM CARE
analysis above suggests that there are four possible solutions to
the long-term-care financing crisis, which would target the four
major payer areas:
The federal government
increases support for Medicaid or nationalizes it in the Medicare
federal-state approach to Medicaid continues;
Efforts are made to
contributions (through income and transfer of assets); or
Incentives are created
for people to buy long-term care insurance.
first two proposed "solutions" continue the current entitlement
approach by increasing government contributions. The last two are
consumer choice plans that would increase private
ENTITLEMENT "SOLUTION" #1: Increase
federal support and nationalize Medicaid into Medicare.
There have been five general approaches to
increasing the federal contribution for long-term care. They range
from suggestions that long-term care be incorporated completely
into a nationalized health care system to proposals for its
incremental inclusion, with payments at the national level:
single-payer system. If structural Medicare and Medicaid
reforms are not undertaken, a national health care system similar
to those in Europe will be inevitable. In technology terms, this is
the "default" position for the health care system.
care in Medicare. This approach is recommended as a new part of
the Medicare program, so reimbursement for long-term care can
increase to Medicare levels. This is the goal of the American
Health Care Association's Secure Care proposal. But this would do
nothing to address the demographic and cost implications of
long-term care. It chiefly seeks to tap into the more generous
federal income tax revenue stream.
long-term care into one federal program. This approach would
place all long-term care elements of Medicare, Medicaid, SSA block
grants, the Older Americans Act funds, and SSI into a single
federal program. Although it would consolidate long-term care
administrative expertise, it would do nothing about the structural
problems of the programs.
federal-state program swap. The goal of this proposal is to see
which level of government--the federal or the state--is gullible
enough to accept responsibility for the long-term care
expenditures. This approach was tried under President Reagan's New
Federalism program, the long-term care acute-care swap of the
mid-1980s and the reverse swap in the late 1980s. The attraction is
that long-term care costs account for 43 percent of total Medicaid
program expenditures, and the states' share of Medicaid is 44
percent. This sounds intriguing except that FMAP makes certain
states huge winners and others huge losers. Escalating long-term
care costs and the FMAP are the chief reasons almost all long-term
care reforms have failed in the past.
"incremental" expansion of caregivers. Replacing "high cost"
nursing home coverage with "low cost" respite care, home health
care, adult day care, assisted living, and so on, is the "fool's
gold" of health care reform. It ignores what is called "induced
demand." Currently, 5.7 million of our 7.3 million elderly
population needs a caregiver, while eight of 10 caregivers are
unpaid. More than 65 percent of the elderly rely on these unpaid
caregivers. Eligibility for government "caregiver" programs usually
is based on the number of assisted daily living functions (ADLs)
required, such as help with washing, feeding, and dressing. Eighty
percent of all elderly require at least one ADL. Two ADLs usually
can qualify a senior citizen for assistance. By offering broadened
caregiver coverage, we may induce demand for these currently
unreimbursed services. This coverage would unleash a tidal wave of
ENTITLEMENT "SOLUTION" #2: Continue the
present federal-state approach.
with all entitlement approaches, supporters would attempt to
control long-term care through revenue enhancement and cost
containment, while making limited system-wide reforms. The
following entitlement approaches have been tried or at least
proposed in the states.:
Enhancement involves raising taxes, increasing federal
contributions, or suggesting block grants or per capita caps. We
have seen--most recently in Tennessee--the difficulty of raising
taxes to prop up the Medicaid program. Block grants and per capita
caps lock in present funding inequities among the states, usually
because FMAP expenditure proportions are used. And this hurts poor
states in real dollar terms, in perpetuity.
involves regulatory efforts that reached their height in the 1970s.
Central health planning and requiring a certificate of need (CON)
were attempts to limit the construction of new nursing homes or
beds. Sadly, these measures did not repeal the law of supply and
demand. They made supply constant while demand increased, which, to
regulators' surprise, caused prices to climb. Cutting
reimbursements is always easy, but it has run its course; Medicaid
reimbursement rates are often a fraction of Medicare's, let alone
private pay reimbursements. Many nursing homes, with no beds
available, have more than 80 percent of their patients on Medicare
or Medicaid, and are going bankrupt.
usually are adopted as regulatory quality-of-care reforms. Easing
access through a single point of entry, good case management,
pre-admission screening, and integration of acute and long-term
care are admirable policies. They will not, however, solve the
financing crisis. Suggesting the one true reform that could
substantially impact the financing crisis--reducing eligibility or
benefits--can be political suicide. Each benefit has someone
receiving it AND someone getting paid for it. This political
combination of eligible/provider forces protecting the status quo
becomes lethal when trial lawyers and patient/elderly rights bills
are added to the mix.
policy underlying all of these efforts, even if adopted in whole by
some states, is not sufficient to solve Medicaid's long-term care
structural problems. These are the very reform efforts that states
have tried during the past 35 years.
What the Entitlement Option Means
of these government entitlement approaches will:
Require massive tax
Make no structural
Fail to address the
Induce demand, which
will exacerbate the financial crisis;
Rely on an intrusive
regulatory system and strict cost containment;
Ensure a massive
transfer of assets and force the system to evolve from a "needy" to
a "universal" long-term care program; and
Inevitably result in
the "default" position, a European-like universal health
is why there is only one real government entitlement solution, a
nationalized single-payer plan. We can do better.
CONSUMER "SOLUTION" #1: Increase
Increasing out-of-pocket contributions for
long-term care will require an effort to gain access to a patient's
savings, wages, assets, estates, or insurance values of individuals
by somehow threatening to seize them. We have seen that spend-down
and transfer of assets provisions continue despite new laws. And we
know that 80 percent of all Americans object to this approach,
which makes it politically impossible to implement.
Consider each possibility:
savings. Most elderly have their savings invested in real
assets, not savings accounts. If there was a way to tap liquid
assets, these assets would quickly evaporate.
Threatening wages or
income. Half of the elderly today have no taxable income and
most of the others pay income taxes at the 15 percent rate. This
explains why income tax deductions to encourage the elderly to
purchase long-term care insurance do not work. Seniors pay little
in income taxes. This situation is also characteristic of the
young, because of relatively low wages. It is the young, however,
who need to purchase long-term care insurance, since premiums (and
therefore government expenditures) would remain low and fixed for
the lifetime of the policy. One incentive for them would be to
offer long-term care insurance when the young get their first job.
The middle aged, with their good incomes and wages, are unaware of
their long-term care needs and will need an education program.
assets. The elderly have more than $1.5 trillion invested in
their homes. Eighty percent are homeowners; of those, 80 percent
own them outright. Laws to use reverse mortgages, to seize the
deceased's estate, and to put liens on the benefits or estate in
order to use the assets for long-term care generally have been
unsuccessful. Laws to prohibit transfer of assets, to link
long-term care expenditures to specific estate reimbursement, and
to liberalize spend-down provisions to encourage the use of assets
have had little success as well.
inheritance. The real nest egg is the $10 trillion in assets
that the baby boom generation owns or will inherit. Some states
have tried to change inheritance laws by earmarking certain sums
for long-term care repayment. Some have proposed changing
inheritance levels. Because baby boomers want to inherit these
sums--and their parents want to give them the inheritance--it would
seem that these amounts would be more transparent (accessible) to
the government. In reality, inheritance is riddled with asset
value. This is the one area that could have some success.
Unlike other assets, few elderly will want to forfeit their life
insurance, medical savings accounts (MSAs), individual retirement
accounts (IRAs), or medical IRAs while hiding other assets. This
approach, therefore, may provide some dollars; but it will not
solve the problem alone. The amount available in these accounts
would provide only a small proportion of the needed funds.
savings. This approach means individuals would either amass
sufficient savings to cover their potential long-term care costs
voluntarily or government would mandate the savings. This approach
holds little promise and will waste capital. A 45-year-old worker
would have to save $3,557 per year to cover a two-year long-term
care program, compared with paying an annual insurance premium of
$417. The out-of-pocket difference of $3,140 per year amounts to
$431,539 in lifetime savings by having this coverage.
CONSUMER SOLUTION #2: Provide incentives
to purchase long-term care insurance.
solution would address the problem of how to increase the minuscule
5 percent share of long-term care costs in nursing home care
covered by private insurance. It would begin to shift the cost from
public to private resources.
Policies purchased when young offer low,
fixed premiums for life, which means overall program costs would
decrease over time. While premiums would remain constant for
today's young workers, the initial high premiums for today's
elderly would be reduced through natural attrition. In addition,
long-term care policies are effective immediately, not at
retirement, which would provide a form of guaranteed universal
long-term care coverage. Finally, surveys reveal that the vast
majority of Americans under age 65 can afford long-term care
Despite all these factors, long-term care
insurance is not being purchased today. The reason is threefold.
The first two reasons we discussed above: People are unaware of
their long-term care needs; but if they are aware, they know
Medicaid will cover their expenses if they transfer their assets.
The first problem is surmounted by an education effort, perhaps
through a neutral broker contracted by the government. However, no
effort seems to block asset transfer effectively.
third reason that long-term care insurance is not being purchased
is the lack of incentive to use private resources for something
people believe will be covered by a government program. Washington
could mandate that people purchase long-term care insurance, but
that approach does not fit a consumer choice plan very well. The
only ways to provide incentives for people to purchase long-term
care insurance are (1) to threaten their assets, (2) to offer tax
deductions, and (3) to use tax credits:
assets. This approach would take the form of a contract--you
purchase insurance or you lose your assets if you need long-term
care. But it will have has all the problems discussed above.
Proponents stress the need for increased vigilance, usually meaning
an intrusive regulatory system. This may be the best approach if
long-term care remains part of a defined benefits entitlement.
deductions. Tax incentives, either deductions or credits, will
be the most successful approach to getting people to purchase
long-term care insurance if it is based on consumer choice. Its
success will vary with age, income, and assets. As discussed above,
the young have income but no assets. Since they do not itemize
their taxes, tax deductions for long-term care insurance would be
less of an incentive. The middle aged have income and assets. They
do not respond to threats about their assets, but they do respond
to tax incentives in other areas. The Health Insurance Portability
and Accountability Act (HIPAA) of 1996 provided tax deductions
adjusted by age for "qualified plans," employer tax deductions, and
a deduction if long-term care costs exceeded 7.5 percent of income
like other medical costs. It may be too early to tell the effect of
this, but there has not been a great increase in long-term care
insurance yet. The elderly have little income, but they do have
assets. Therefore, tax incentives will not work, and threatening
assets probably will not either. The elderly could be left with
traditional Medicaid coverage, or they could be assigned to
insurance companies based on market penetration. However, if the
young can be encouraged to purchase low-premium policies, the
high-cost elderly problem will solve itself over time.
Using refundable tax
credits as incentives. The key to long-term success in
addressing the long-term care financing crisis is to encourage the
young to purchase policies as soon as possible. They rarely respond
to tax deductions because of their tax bracket, which prevents them
from itemizing. They will respond to a refundable tax credit, since
it is not affected by wage size or itemization. Such a plan should
be tied to offering long-term care insurance when they get their
first job. The middle aged would benefit greatly from a tax credit
adjusted by age, and therefore should respond favorably to this
approach. This is even more true for the elderly. The offered tax
credit should decrease over time for those who choose not to
purchase that insurance. All high-cost tax credits would disappear
over time, since they would be replaced by low-premium lifetime
policies that were begun when young. State governments would pay
deductibles and co-payments for the truly needy, providing an even
greater incentive for everyone to use the tax credit. Since a
person's income and poverty classification may vary over a
lifetime, all Americans would be covered.
versus catastrophic long-term care. Traditional long-term care
insurance covers a limited number of years and, even then, may
cover only a portion of the daily costs of care. This is not the
type of coverage that government should support, especially since
we are trying to solve a crisis in a program for the poor.
Long-term care insurance should provide catastrophic coverage for
everything, after a certain dollar amount is reached, for the life
of the patient for unlimited years. Such policies are exceptionally
inexpensive because of the high deductible. And what is most
attractive about such a catastrophic approach is that people will
not need to hide their assets. If they are no longer faced with
open-ended financial commitments, they could budget or self-insure
for the fixed deductible amount. And if they somehow do become poor
at some point in their lives, they would know that the state would
pick up the deductible cost under Medicaid. (If we also provided a
refundable tax credit for catastrophic acute care, we would have
the basis for a market-oriented, consumer choice, universal
coverage plan. But that is a subject for another discussion.) The
result is that the federal costs would be known: It would be the
tax credit sum that is necessary to cover the premiums. States'
costs are limited to deductibles for the needy. Individuals' costs
are fixed to a known amount for deductibles and co-pays.
What the Consumer Solutions Mean
Additional attempts to
increase out-of-pocket contributions or threaten assets are
Current attempts to
threaten assets are not enforced or do not work;
Tax incentives for the
elderly probably will
not work because they lack income, but the problem will be solved
Threatening the young's
assets does not work because they do not have any;
The middle aged do not
believe or do not know that they will need to use their assets to
pay for long-term care;
It may be too soon to
judge the impact of tax deductions, and they may not provide enough
of an incentive;
Refundable tax credits
provide the greatest
likelihood of encouraging the purchase of long-term care, and have
the greatest impact on the fiscal health of federal and state
than traditional long-term care insurance provides better
incentives and protection for individuals and government alike.
A FINANCING SOLUTION BASED ON CONSUMER
There is a better way to tackle the
long-term care problem and transcend both the financially expensive
and bureaucratically oppressive entitlement approach and the
inadequate private-sector alternatives. It is implementing a
consumer choice option with the following key components:
government should provide a refundable tax credit, initially
adjusted for age, to pay the premiums of a catastrophic long-term
care insurance policy selected from a group of private plans, which
are offered through an independent broker in each state. This
broker would be responsible for conducting an education campaign as
government would pay for the deductibles and co-payments for
the truly needy (those who cannot afford them), which would replace
the present Medicaid approach to paying for long-term care.
would be offered long-term care plans. This solution would be more
cost-effective if targeted at the young when they get their first
job. An added incentive to encourage the young to take advantage of
it would be to reduce the tax credit over time.
Middle aged and
elderly would have to pledge to the use their assets if they
refuse to purchase long-term care insurance (although we know from
past experience this probably will be ineffective).
--Richard Teske is President of Strategic
Advocacy, a Virginia-based health care policy firm, and a Senior
Fellow at the U.S. Internet Council in Washington, D.C.
THE LONG-TERM HEALTH CARE CRISIS: HOW CAN
WE SOLVE IT?
by Stephen A. Moses
First, let me say that Richard Teske is
correct when he recommends above-the-line federal tax deductibility
or tax credits as a means to encourage the middle class to purchase
long-term care insurance. Such positive incentives are necessary,
and they will help relieve the pressure on Medicaid and Medicare
The Failure to Plan. Unfortunately,
tax incentives for the purchase of private long-term care insurance
by themselves will not be sufficient to solve the problem. People
do not fail to buy long-term care insurance because it has not been
fully tax-deductible. They do not buy it because they do not think
they need it. They do not think they need it because the government
has been paying for long-term care for 35 years through Medicare
other words, our federal government has anesthetized the public to
the real costs and risks of long-term care. Thus, most of our
problems in long-term care service delivery and financing have been
self-inflicted by well-intentioned but counterproductive public
policy. If we just stop doing what we have always done, we will
stop getting the same negative consequences. On the other hand, if
we keep pursuing the failed policies of the past, we should expect
the disastrous consequences to become much worse as the baby boom
generation ages and their health declines.
evidence to defend my thesis is much stronger than I will be able
to present to you in the short time available. So I would suggest
you visit the Center for Long-Term Care Financing's Web site at http://www.centerltc.com.
We offer two major white papers on this issue: "LTC Choice: A
Simple, Cost-Free Solution to the Long-Term Care Financing Puzzle"
(1998) and "The Myth of Unaffordability: How Most Americans Should,
Could and Would Purchase Private Long-Term Care Insurance" (1999).
These reports are available for free to legislators and the media.
The Center also publishes news and commentary on the long-term care
financing issue in a free online newsletter called "LTC Bullets."
Finally, we prepared an "LTC Pledge for Baby Boomers" for today's
event. The pledge lists facts everyone should know and commitments
everyone should make to prepare for catastrophic long-term care
expenses. (A copy of the pledge is appended to these remarks.)
why has America's long-term care public policy failed? In a
sentence, we have been trying to solve the wrong problem. We have
treated long-term care as if it were a welfare issue. For example,
consider how it is usually described: People are
living longer and dying slower, often in nursing homes, at great
expense. They quickly spend down their life savings and collapse
into the social safety net. Consequently, Medicaid and Medicare
expenditures to cover these costs have skyrocketed; and the only
practical solution is to increase taxes and spend more for publicly
financed long-term care.
this scenario were true, however, consumers would be scared to
death about the danger of catastrophic long-term care spend-down.
Are they? No. The public is notoriously in denial about the risk of
catastrophic spend-down were commonplace, we would expect people
who need long-term care to seek out the lowest cost, most desirable
venues in which to receive care. Do they? No. America's home and
community-based services infrastructure is grossly underdeveloped
and starved for financial oxygen.
their life savings were truly at risk, consumers would delay their
admission to expensive nursing homes as long as possible, and use
institutionalization only as a last resort. Is that what happens?
No. Most people go straight to a nursing home when they require
formal long-term care. The institutional bias in America's service
delivery system is infamous.
Before the elderly would sell their homes
and "spend down" into impoverishment, most would tap their home
equity--which constitutes 70 percent of the net worth of the median
elderly household--through a reverse annuity mortgage, or some
other method of home equity conversion. Do they? No. There is very
little demand for home equity conversion despite strong government
efforts to encourage it.
Finally, with everything at stake, surely
most consumers would protect themselves against the risk of costly
long-term care in the same way they protect against other
catastrophic risks, by purchasing private insurance. Do they? No.
Only 7 percent of seniors and virtually none of the critical baby
boom generation have obtained private insurance for long-term
RESPONDING TO INCENTIVES
is going on? Are aging consumers completely irrational? I do not
think so. Remember, we are talking about the generation of
Americans who struggled through the Depression, fought World War
II, scrimped and saved to put aside a small nest egg, and will not
part with their rainy-day fund without giving that decision the
most careful consideration. These folks--our parents--know the
value of a dollar and they are careful shoppers.
else might explain their failure to take catastrophic long-term
care spend-down seriously? Suppose, just for a moment, that we have
been trying to solve the wrong problem. What if long-term care is
not really a welfare problem as we thought, but is rather just the
opposite, an entitlement problem?
if the following were true? In America today, you can ignore the
risk of long-term care, avoid the premiums for private insurance,
wait to see if you ever become chronically ill, and if you do need
expensive long-term care someday, the government will pay for it.
If this "entitlement paradigm" is accurate, then consumer behavior
makes perfect sense. For example:
People do not worry and
plan early about long-term care because someone else will pay for
it, if necessary.
They tend not to spend
their own money on home and community-based services because
Medicaid pays for nursing home care.
They end up too often
in nursing homes because that is usually the only venue where
Medicaid will pay for long-term care.
They rarely tap the
equity in their homes to pay for long-term care or for insurance
premiums because Medicaid exempts the home from eligibility
Most people do not buy
long-term care insurance because it makes no sense to pay for
something the government is giving away.
Obviously, if the welfare paradigm is
wrong and the entitlement paradigm is right, America's long-term
care financing problem is very different than we have assumed, and
it will be much easier to solve. So, what is the evidence?
Despite the conventional wisdom that
Medicaid long-term care eligibility requires impoverishment, the
truth is quite different. Income rarely stands in the way of
eligibility. Most states have "medically needy" Medicaid programs.
They deduct all medical expenses including the full cost of private
nursing home care from applicants' income before determining their
eligibility. In the remaining states that have income cap
eligibility systems, anyone can siphon excess income into a "Miller
trust" to qualify. Married couples may shelter even more income.
The bottom line is that only approximately the top 10 percent of
elderly Americans are excluded from Medicaid nursing home
eligibility based on income.
infamous Medicaid asset limit of $2,000 is meaningless. Medicaid
recipients also can retain a home and all contiguous property
regardless of value, a business including the capital and cash flow
of any value, other personal property with no practical limit on
its value, and one automobile of unlimited value. Because the car
is exempt, giving it away is not a "transfer of assets for less
than fair market value for the purpose of qualifying for Medicaid,"
so one can give a car away, buy another, give it away, and so on
until the $2,000 asset limit is reached. Medicaid planning
attorneys call this technique the "two Mercedes rule." Of course,
Medicaid planners also have a long list of far more sophisticated
legal gambits, including the use of "Medicaid annuities,"
complicated "income-only" trusts, care-giving contracts, and many,
many others. Numerous best-selling guidebooks provide advice and
boilerplate legal forms to help families self-impoverish their
elders without the help or expense of an attorney. Efforts by the
President and Congress to control and even criminalize Medicaid
planning have been circumvented by the elder law bar.
GROWING TAXPAYER BURDEN
reality is that America's nursing homes contain few residents who
pay privately and could not shift the cost of their care to
Medicaid within 30 days, if they chose to do so. The elastic
loopholes in Medicaid eligibility rules are notoriously easy to
stretch. In fact, even though fewer than 12 percent of the elderly
are poor, Medicaid already pays for two-thirds of all nursing home
patients and for 80 percent of all nursing home patient-days in the
United States. We previously thought that this strain on Medicaid
was caused by the widespread catastrophic spend down of
middle-class Americans who were overwhelmed by the high cost of
private nursing home care. The conventional wisdom was that 50
percent to 75 percent of nursing home residents entered as private
payers, spent down to poverty, and qualified soon for Medicaid. We
know now, because of two dozen empirical studies published in
peer-reviewed academic journals, that only 15 percent to 25 percent
of nursing home patients enter as private payers and later convert
to Medicaid--and that this includes people who spend down by hiring
an attorney to achieve artificial impoverishment.
what I have been saying is true, however, it ought to be possible
to account for the cost of nursing home care in the United States
without dipping significantly into anyone's assets. In 1997, the
latest year for which data are available, Medicaid paid 48 percent
of America's $83 billion annual nursing home bill, about the same
percentage it paid in 1985. Medicare paid more than 12 percent, a
big jump from less than 2 percent in 1985. So-called out-of-pocket
payments contributed only 31 percent toward nursing home costs,
down from more than 44 percent in 1985. The term "out-of-pocket" is
quite misleading, however, because it includes Social Security
income that Medicaid recipients are required to contribute toward
the cost of their care. This Medicare "spend through" actually
accounts for nearly 13 percent of the entire cost of nursing home
care nationally. Now add in 10 percent to 20 percent of nursing
home costs that come from private pension or investment income,
which most people would use to pay for nursing home care before
dipping into their assets.
total, we have indeed accounted for upwards of 85 percent to 90
percent of the entire cost of nursing home care in the United
States drawing only on direct and indirect government payments,
supplemented by private income, but without using even one dollar
of anyone's savings. Furthermore, nursing home care is not the
whole story. Medicare pays generously for long-term home care
benefits as well. Those costs are up from $2 billion in 1988 to $20
billion in 1997. That is an increase from 23 percent of total home
health expenditures in 1985 to 42 percent in 1997. Home care
out-of-pocket costs also have declined commensurately.
Clearly, public financing of long-term
nursing and home health care has risen sharply in the past decade,
whereas private out-of-pocket expenditures have fallen
precipitously. No wonder people can evade the high cost of
long-term care indefinitely. No wonder they end up in nursing homes
on Medicaid or getting extended home care benefits from Medicare.
No wonder people do not plan early and buy insurance. No wonder
they think long-term care insurance is "unaffordable." The only
conclusion we can reach logically is that the welfare paradigm,
which has guided public policy heretofore, is wrong and that the
entitlement paradigm is correct. That being the case, what should
have already tried some pretty draconian measures. The Omnibus
Budget Reconciliation Act of 1993 closed several loopholes and
mandated recovery from the estates of deceased Medicaid recipients.
Subsequent legislation even attempted to throw "granny" and her
lawyer in jail for transferring assets or recommending that step to
qualify for Medicaid. Such after-the-fact penalties did not work.
The eligibility rules are just too porous and politically sensitive
to enforce effectively. By the time people are stricken with
Alzheimer's disease, Parkinson's disease, or a stroke, it is too
late for them to resist the temptation to take advantage of public
programs to pay for their long-term care. By then, the infirm
seniors are no longer in control of their own lives and
experts agree that it is usually the adult children of today's
vulnerable elderly who instigate Medicaid planning to protect their
own inheritances by placing their parents in a nursing home on
welfare. Clearly, we never can solve this problem unless we attack
it before the catastrophic event occurs.
need a positive incentive for most Americans to take the risk of
long-term care seriously, to plan early, to save or insure fully,
and to stay off Medicaid. The public policy proposal we recommend
at the Center for Long-Term Care Financing is called "LTC
first step of LTC Choice is to implement a comprehensive,
government-sponsored education program to apprise the public of the
true risks and costs associated with long-term care.
second step is to offer the public a choice--one either must save
or insure for the risk of long-term care, or sign an LTC Contract
that explicitly acknowledges one's estate is at risk for the cost
of long-term care before government assistance will become
available. So far, this policy is no different than the spend-down
liability presumed to exist already but which in fact does not.
three is to give Americans who fail to save or insure a better way
to obtain long-term care than they have now. We should provide a
fully collateralized, privately administered, federally backed line
of credit on their estates to enable older Americans to purchase
the care they need. This loan would need to be repaid after the
death of the borrower's last surviving exempt dependent relative,
such as a spouse or disabled child.
fourth step is to improve Medicaid and Medicare financing of
long-term care by providing more and better home care, assisted
living, and nursing home care. We will be able to improve Medicaid
and Medicare because far fewer Americans will become dependent on
these safety-net programs for their long-term care needs.
we implement LTC Choice, most Americans will do the right thing and
buy long-term care insurance to protect their estates from spend
down or recovery. Families will pull together, pool their
resources, and help each other insure fully or pay privately for
long-term care. Those who fail to insure will have better access to
higher quality care, because they will be private payers spending
their own money--their income and their estate--in the marketplace.
Having to pay back the line of credit that helps to pay for their
care, however, will cause aging Americans and their heirs to take
the risk of long-term care more seriously, which will lead future
generations to plan and insure even earlier. With most of the
burden of long-term care expenses covered by private insurance, and
much of the remainder financed by the LTC Choice line of credit on
estates, only a small remnant of people will be dependent on public
welfare for care. We will be able to do what is right for the
genuinely needy. The Center's "LTC Choice" report describes this
proposal in much greater detail than I can offer today.
Answering the Critics of Choice
is wrong with LTC Choice? Several criticisms have been lodged
against the plan. Some say it is too intrusive and bureaucratic.
Not so! The line of credit option under LTC Choice requires no more
documentation and enforcement than a bank loan. A bank will not
lend you hundreds of thousands of dollars to buy a home without
collateral and regular payments. Why should the government pay
hundreds of thousands of dollars for your long-term care without
security? Surely we can expect public programs to be at least as
fiscally responsible as a savings and loan.
Others claim social insurance works much
better than private insurance, and that therefore we should
implement a Part D of Medicare for long-term care. To answer that
objection would require a lecture on its own, one a Heritage
audience may not need to hear, but one I will gladly give to anyone
who cares to listen. Suffice it to say that adding LTC to Medicare
would be like rowing back to a sinking Titanic to place more chairs
Still others say long-term care insurance
is too expensive and no incentive, whether positive or negative,
will change that fact. To which I respond, nonsense! Two-thirds to
three-fourths of all Americans can afford long-term care insurance
and would buy it in the absence of the perverse incentives in
current public policy that prevent them from giving long-term care
a high enough priority among their spending alternatives. The
Center for Long-Term Care Financing's report on the "Myth of
Unaffordability" proves this point conclusively.
conclusion, we need to show the American public that the private
long-term care insurance option is viable and affordable and that
they need to consider it seriously. People respond to incentives.
Our current long-term care system rewards irresponsibility in the
same way our welfare system did. If we change long-term-care policy
as we have changed welfare policy to encourage responsible
behavior, and if we implement long-term-care choice to assure a
soft landing, then we will get the results we want.
close, let us acknowledge the debt we owe the World War II
generation. They met their many challenges with courage and
perseverance. We have not served them well in their time of
vulnerability and need. Perhaps our big challenge, as the baby
boomers, is to solve the problem of providing quality long-term
care once and for all. At least, the day has come for us to
confront our great crisis, as the day came for them to confront
theirs 58 years ago today at Pearl Harbor.
--Stephen A. Moses is President of the
Center for Long-Term Care Financing in Seattle, Washington.
Appendix: The Center for Long-Term Care
Financing's LTC Pledge for Baby Boomers
Check if applicable:
I am an American baby
boomer (born between 1946 and 1964).
I know the aging of my
generation will place great stress on America's social insurance
programs, including Social Security and Medicare.
I know providing and
paying for long-term care (LTC) for aged and disabled baby boomers
will be especially difficult for the government and for individuals
and their families.
I know friends and
families provide 80 percent of LTC in their homes, which places a
huge emotional and financial burden on wives and daughters
I know the probability
of needing five years or more of nursing home care after age 65 is
almost 1 in 10 and the need for care in an assisted living facility
may be even higher.
I know the average
annual cost of nursing home care in the United States is more than
$50,000, assisted living costs nearly $25,000 per year, and these
rates undoubtedly will increase.
I know Medicaid pays
for three-fourths of all nursing home patient days, but that it
rarely funds the home- and community-based care or assisted living
that the elderly prefer.
I know Medicaid is a
means-tested public assistance program (welfare) that requires
strict income and asset limits and imposes severe penalties for
transferring assets to qualify.
I know Medicaid is
intended only for the needy and that people who shelter assets to
qualify must repay the program from their estates (including the
value of their homes) when they die.
I know Medicaid's
rules for LTC eligibility are elastic, however, and that the
non-poor often qualify, especially with the aid of Medicaid estate
Medicaid-financed nursing home care has a reputation for serious
problems of access, quality, reimbursement, discrimination,
institutional bias, and welfare stigma.
I know Medicaid faces
severe funding deficiencies and that nursing homes across America
are declaring bankruptcy for lack of adequate public financing.
I know the likelihood
of a new entitlement program to pay for quality LTC is nil because
the government must save the Social Security and Medicare programs
I know people who pay
privately for LTC command red-carpet access to top-quality care and
can choose between the best home care, assisted living, and nursing
I know that discussing
the risk of LTC with parents is extremely difficult and that
considering the possibility I may need such help someday myself is
I know I want my
family to be part of the LTC solution, not part of the problem.
I pledge to start
working on the problem of paying for LTC no later than age 40 and
that I will to have a solution (LTC insurance or a large, earmarked
estate) by age 50.
I pledge to discuss
the risks of needing LTC and the rewards of paying privately for
care with my parents and siblings.
I pledge to explore
the alternatives available to me for financing my family's LTC,
including private insurance or self-insurance (by means of savings
I pledge to help my
parents protect their nest egg (my inheritance) from the ravages of
LTC by contributing to the cost of their insurance premiums or
their long-term care.
I pledge I will not
retain a Medicaid planning attorney to impoverish my parents
prematurely and put them in a nursing home on welfare, if and when
they need LTC.
I already own private
long-term care insurance.