How To Fix Long Term Care Financing

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Executive Summary: Medicaid Matters Most
Medicaid is in the news daily, particularly its expansion under the Affordable Care Act, or ObamaCare. But ObamaCare primarily affected acute care for young people. And while the young are three-fourths (75 percent) of Medicaid’s recipients, they account for only slightly more than one-third (36 percent) of the program’s expenditures. The aged, blind, and disabled, on the other hand, are just one-fourth of the recipients (24 percent) but account for nearly two thirds
(63 percent) of expenditures, mostly for the long-term services and supports that they require. Given its disproportionately high impact on Medicaid costs, long-term care deserves much more attention than it currently receives from policymakers.

With that said, long-term care financing is complicated. Consider all the research studies, journal articles, and special commissions that have unsuccessfully grappled with it for decades. Recall the myriad variables, perplexing questions, noble goals, and stubborn obstacles standing in the way of progress. To name a few:

Who should pay? Are families responsible for payment or is the government? Should planning be voluntary or compulsory? Why do people ignore long-term care risk and cost until it is too late to prepare? How can nursing home bias prevail when people prefer cheaper home care? Why is long-term care fraught with access and quality problems? How can taxpayers spend so much for long-term care but the sector remains starved for funding? Who will provide care when compensation is so low? What is going to happen when the age wave finally crests and crashes in the 2030s?

Most policy analysts respond to these perplexities by wringing their hands. They conclude that the government must compel people to prepare for long-term care by paying higher taxes. But what if public financing caused the long-term care dysfunctions in the first place? What if the questions and problems we face have a simpler answer? Do Occam’s razor and Archimedes’ leverage principle apply to long-term care?

Medicaid is not just a factor in long-term care financing. It is the critical factor. Medicaid is not just a factor in long-term care financing; it is the critical factor. Since its founding in 1965, Medicaid has evolved from a minor funding source to the primary funder of formal paid care. This near monopsony status has serious ramifications. Because it requires state programs to pay for nursing home care, Medicaid has an institutional bias. Because it pays notoriously low reimbursement rates, Medicaid causes caregiver shortages, access, and quality problems. Because it pays for care after it is needed, Medicaid enables the public’s denial of long-term care risk and cost. Because it pays after the insurable event occurs, Medicaid crowds out private long-term care insurance. And because it increasingly pays for home care, Medicaid inhibits the private home care market. Name a deficiency of long-term care service delivery or
financing and you will find Medicaid at the root of the problem.

Many policy analysts will agree with that assessment or at least some parts of it. They too blame Medicaid for numerous long-term care problems but for different reasons. Most analysts claim Medicaid requires impoverishment, that people must spend down their life’s savings to qualify for long-term care benefits, and that wide swaths of the American public are devastated by catastrophic expenditures before they receive help from Medicaid.

What such analysts do not and cannot explain is, if Medicaid requires impoverishment, why do most people ignore such a calamitous risk? Why do they fail to plan, save, invest, or insure for long-term care and end up dependent on a means-tested welfare program to receive nursing home care they would rather avoid? Since they cannot explain this logical contradiction, most analysts evade it.

Therein is the fulcrum strong enough and the lever long enough to render a simple answer to the long-term care financing quandaries: Medicaid long-term care benefits do not require impoverishment. Virtually unlimited income does not obstruct eligibility if medical and longterm care expenses are high enough, as they usually are for people in need of formal, paid long-term care. Virtually unlimited assets are exempt in the form of home equity (between $560,000 and $840,000), one business, one auto, IRAs paying periodically, term life insurance, Medicaid-compliant annuities, life care contracts, prepaid burials, personal belongings, and home furnishings. In addition to these routine exemptions, the use of trusts, “spousal refusal,” disinheritance, divorce, and numerous sophisticated “Medicaid planning” techniques make access to Medicaid long-term care benefits available to nearly anyone who chooses to take
advantage of the program.