Having recently returned from a Long Term Care insurance association conference in Kansas City I wanted to share one of the presentations.
Stephen Moses, who runs the Center for Long-Term Care Reform, has been working for a long time to improve the way long term services and support are provided in the US. In his talk he provided very useful insights on the situation with government long term care programs today and his thoughts on their future.
THE IMPENDING COLLAPSE OF THE ROADBLOCKS TO LTC INSURANCE
by Stephen A. Moses
presented at The 8th Long-Term Care Insurance Producers Summit
Kansas City, Saturday, November 14, 2009
The task before us is three-fold. We need to explain:
(1) Why long-term care insurance remains a niche product covering only 5% to 10% of the people who should have it,
(2) Why the conditions that have prevented the growth of a private LTC insurance market are about to change in a way that will unleash demand for the product, and
(3) What you should do to make the most of this opportunity for your prospects and clients, for yourselves and your families, and for your country.
So, let’s tackle these questions one at a time.
(1) Why hasn’t LTCI taken off already? What’s holding it back?
The usual answers sound plausible.
The public’s in “denial.” They say “I’ll never go to one of those places. I’ll shoot myself first. It costs too much. The kids’ll take care of me. Medicare will pay.” You’ve heard them all.
Now here’s our first critical insight of today so listen carefully.
These are not REASONS. They are EXCUSES not to buy.
Don’t assume the public is too ignorant or too stupid to buy your product. How arrogant is that!
And, by the way, don’t assume tax incentives or more education programs will change people’s minds so more of them buy LTC insurance. They won’t!
What’s really going on is much simpler and, ironically, easier to fix, if policy makers would just wake up and fix it.
Let me explain with this “thought experiment.”
First, consider that the government pays today for the vast majority of all expensive long-term care.
Medicaid pays for almost half; Medicare, a quarter; several percent come from the VA, and over 10% is nothing more than Social Security “spend-through” of people already on Medicaid.
In fact, only about 10 to 15 percent of all expensive long-term care is paid for out-of-pocket from personal income or assets.
Those are the facts. 85 to 90 percent of all expensive LTC in the USA is paid for by direct or indirect government funding or spend-through of Social Security income by current Medicaid recipients.
For details and sources, see our annual “LTC Bullet: So What if the Government Pays for Most Long-Term Care?” See also the “Electronic Handout” at http://www.centerltc.com.
Finally, imagine that the government had never started paying for nursing home or home health care through Medicaid, Medicare, the Veterans Administration or Social Security.
What if every penny ever spent on long-term care since the government interfered in the market back in 1965 had instead come from consumers?
What do you think our service delivery and financing system would look like today?
Would most people end up in nursing homes on welfare? Heavens no.
Our system’s institutional bias is an artifact of Medicaid’s making nursing home care free or radically subsidized.
Would we have an underdeveloped home and community-based services infrastructure? No again.
People spending their own money would have purchased home care, adult day care, respite care and assisted living first, making those kinds of care delivery dominant decades ago.
And finally, if people really were spending down into impoverishment all across America, do you really think private long-term care insurance would be an unpopular product purchased by only a small proportion of the people who need it?
The mess we’re in–a welfare-financed, nursing-home-based LTC system in the wealthiest country in the world where no one wants to go to a nursing home–has actually been self-inflicted, by well-intentioned but perversely counterproductive public policy.
For the proof, check out Jeff Brown and Amy Finkelstein’s research at http://www.nber.org. They concluded that 2/3 to 90% of the market for LTC insurance is crowded out by the availability of Medicaid.
Medicaid alone! Never mind Medicare, the VA and Social Security.
Now before you give me the usual objection: “I don’t think people fail to buy LTCI because they’re planning to go on Medicaid,” let me make this clear.
That is NOT what I’m saying. I’m saying most people don’t know who pays for LTC, don’t care, and never think about it until they’re in crisis.
They have had the luxury of that “denial” because in truth the government has paid for most LTC since 1965.
So quit blaming the stunted LTCI market on the public’s ostensibly irrational denial. Consumers are neither stupid nor ignorant.
They’ve responded with total economic rationality to the perverse incentives in public policy that discourage rational long-term care planning.
Unless and until you grasp that fundamental reality, you will never maximize your LTC insurance sales.
OK, now that you know the real reason they don’t buy, let’s turn to our second question.
What is about to change?
If the real reason most people don’t buy LTC insurance is that the government has always given it away after the insurable event occurs, what do you think will happen if the government stops giving it away?
Of course! People will start buying LTC insurance.
What is the likelihood that the government will stop giving away most long-term care?
This is the question we’ll address next.
But first, a few words on how it can be that the government pays for most LTC even though you always thought people had to spend down into impoverishment for their own care before the government helps.
I’ve spent the last 25 years explaining why “Medicaid spend down” is a myth. I’ve explained it in speeches, in publications, in studies, on the radio and TV until I’m blue in the face. I’m not going to do it again today.
So if you want details, read anything or everything at our website: http://www.centerltc.com.
Suffice it to say here Medicare’s 25% of LTC costs is not means tested.
Medicaid’s massive payments for custodial nursing home care go to people with virtually unlimited incomes (anything below the cost of a nursing home) and unlimited resources as long as assets are held in exempt form (such as a home, business, auto, term life insurance, or prepaid burials).
On top of that, Medicaid planners get even richer people on Medicaid by using sophisticated legal techniques such as trusts, transfers, annuities, life-care contracts, etc.
Furthermore, so called “spend down” doesn’t need to be for care. Legal articles say take a world cruise, throw a big party . . . buy a Rembrandt. When you hang it on the wall, it becomes a home furnishing that Medicaid will overlook.
Estate recovery, made mandatory under federal law in 1993, is as easy to evade as it is to qualify for Medicaid in the first place.
So disabuse yourselves right now of the naïve idea that government-financed LTC requires spend down of life savings for long-term care.
If that were true, as we explained earlier, long-term care insurance would be a mainstream financial product by now.
Again, for the details and the proof, go to http://www.centerltc.com.
All right, so now we know: easy access to government-financed long-term care after the insurable event has occurred is the main reason most people are in denial about the risk and cost of LTC until it’s too late to insure and that’s why so few folks today purchase LTC insurance.
How likely do you think it is that set of conditions will continue? And what’s going to happen if it doesn’t continue?
Consider these facts.
Medicaid is killing state budgets. Other than education it’s the biggest expense states have. Medicaid consumes a quarter of their budgets and LTC is a third to a half of that.
So are states cutting back on Medicaid LTC eligibility, saving their scarce resources for people most in need, and encouraging others to save, invest or insure for LTC?
They’re doing just the opposite thanks to a brand new, perverse incentive imposed by the federal government.
The $87 billion of stimulus funds pumped into subsidizing state Medicaid programs this year were made conditional upon the states NOT tightening their Medicaid eligibility rules.
In other words, the federal government is spending money we don’t have to prop up the very situation–easy LTC eligibility–that has created the LTC problems we face in the first place.
Despite this huge infusion of federal funds, the states are still in a dismal, Medicaid-driven financial condition.
According to Raymond Scheppach, executive director of the National Governors’ Association, in a report published and a statement made just two days ago: “The bottom line is that states will not fully recover from this recession until late in the next decade.”
Hello! That’s like ten years from now.
Do you think the federal government will just keep propping up Medicaid so the status quo can continue? Already there’s talk of another “stimulus” to do just that.
And you’ve all heard about the CLASS Act that if passed would just pump more anesthesia into the body politic further suggesting that somehow government program’s will take care of you if we just create one more “trust fund” for politicians to rob.
Here’s why I don’t think none of this will happen. We’re nearing the financial end game for federal funding of Medicaid.
The feds traditionally have paid about 57% of the cost of Medicaid while the states picked up 43%. With the 6.2% bump in federal matching funds that states received with this year’s stimulus, the federal role has been even greater.
But the feds subsidize Medicaid in other unsustainable ways also.
Social Security, a federal program, props up Medicaid because people on Medicaid have to contribute nearly all of their income to offset Medicaid’s cost for their care.
Old people in nursing homes or receiving home care get a lot of their income from Social Security.
So Social Security, because of this Medicaid spend-through requirement, ends up paying around 13% of the cost of nursing home care nationally. That would otherwise have to be picked up by the states.
But what do we know about Social Security’s financial prospects? The program has a $17 trillion unfunded liability. It will collect less than it pays out starting in just seven years.
Then it will have to rely on its “trust fund” which does not actually exist. All it contains is IOU’s from the federal government which has already spent the money.
Social Security warns future beneficiaries every year that they’ll lose about a quarter of their expected annuity unless this huge fiscal hole gets filled.
When that happens, it will hurt individual beneficiaries, but it will absolutely devastate state Medicaid programs that will have to pick up the difference in LTC costs.
Now, that problem is bad enough. But you haven’t heard the worst of it yet.
Medicare covers nearly a quarter of nursing home and home health costs. That indirectly supports Medicaid’s ability to fund long-term care and hence to crowd out LTC insurance, because Medicare pays very generously.
Nursing homes and home health agencies actually make a profit on their Medicare business, unlike Medicaid where they lose money on every case.
But Medicare has an $89 trillion unfunded liability. That program is hopeless. It cannot continue to go on subsidizing Medicaid in this way.
The feds have been trying for nearly a decade to cut Medicare reimbursements to LTC providers. So far they’ve been unsuccessful, but not for much longer.
Witness the current Administration’s proposal to make the Medicare Payment Advisory Commission, MedPAC, which annually urges Congress to cut Medicare reimbursements, into an executive branch agency with the power to make those cuts if Congress fails to act.
Medicare by the way is already running an annual deficit and will have consumed its own imaginary “trust fund” by 2017.
Bottom line: Medicaid is financially under water already. The only things sustaining its ability to fund LTC are federal funds in the form of stimulus money, Social Security spend-through, and excess Medicare reimbursement to LTC providers.
None of these props can survive much longer.
Consider the mad spending spree the federal government has been on, especially this past year.
Add up the continuing resolution to fund the end of Fiscal ’09 ($410 billion), the Fiscal 2010 budget ($3.6 trillion, $1.6 trillion of which is deficit), a $634 billion “down payment” on health reform, the “stimulus” ($787 billion) and an alphabet soup of public and private bailouts (TARP, TALF, etc.).
What do you get? Call it $10 trillion of money spent or obligated THAT WE DO NOT HAVE.
Besides this and the $107 trillion of unfunded liabilities in Social Security and Medicare, our country is facing other massive liabilities.
The Federal Deposit Insurance Commission is hurting already, but may still have to back up Fannie Mae and Freddy Mac.
Public and private pension funds are in trouble. The Pension Benefit Guarantee Corporation has a $10.7 billion deficit.
According to the U.S. NATIONAL DEBT CLOCK, our country is currently in hock nearly $12 trillion and soon Congress will be forced to lift the cap on that debt yet again.
At some point we have to pay for all this. There are only three ways to do that:
Tax more and you impede the private sector’s ability to generate the profits to tax in the first place. That’s a financial whirlpool.
Borrow more and you begin to run out of lenders, such as China, willing to loan to you. Sooner or later, just like spendthrift consumers, you can’t borrow enough even to make your minimum payments.
Print money and you’ll pay it back in the most pernicious tax of all: inflation.
To make this sad, long story a little shorter, here’s what it all means.
The whole entitlement house of cards created by government since 1935 as a social safety net is about to come crashing down.
It cannot survive the aging of the baby boom. Soon every two working Americans will have one of us aging baby boomers to carry on their economic backs.
In other words, something has to give.
David Walker, the former Comptroller General of the United States and currently head of the Peter G. Peterson Foundation, has been on a “fiscal wake up tour” for nearly a decade.
He says that to preserve Social Security and Medicare alone, not to mention Medicaid and all the other safety net programs, we’d have to double payroll taxes or reduce the benefits by half.
Ladies and gentlemen, I submit to you that will not happen. It’s just not politically feasible. How would you like to run for office with that platform:
“Mr. Jones, I’m running for Congress. I want to double your taxes and reduce your benefits by half. Can I count on your vote?” Come on!
No, something different is going to happen and it has already begun!
The powers-that-be are not going to double your taxes or whack your benefits all at once. Their tactic will be much more subtle and gradual.
They are going to means test the safety net programs including the ones that were originally intended to be social insurance and available to everyone regardless of economic status.
In other words, they’re going to welfarize Social Security and Medicare. And they’re going to convert Medicaid from a defacto entitlement into a true welfare program with really draconian eligibility rules.
As I said, the process has already begun.
How else would you explain the foregoing 27-year process of pulling Medicaid back from the middle class through longer and stronger transfer of assets restrictions, mandatory estate recovery, and most recently a cap on home equity?
That’s a process I predict will speed up soon resulting in middle class and affluent people no longer being able to access Medicaid for LTC quickly and easily after the insurable event occurs.
But what about Social Security and Medicare? How will they be reduced so they no longer prop up Medicaid’s LTC funding and subsidize Medicaid’s crowd-out of LTC insurance?
Wake up! Social Security is means-tested already.
If you decide to take Social Security benefits at age 62, but you want to continue working, after a very low threshold of under $15,000 in annual income, Social Security begins to take away one dollar of your benefit for every two dollars of your earned income.
At $25,000 and $32,000 of income, for individuals and couples respectively, Social Security income is taxed.
The Administration wants to hike Social Security payroll taxes by restarting the levy, which currently ends at $107,000 of annual income, at $250,000.
Get the picture? Social Security has lost its panache and respectability as social insurance. It’s now just another means-tested welfare program and becoming more so all the time.
But what about Medicare? Same thing. Part B premiums skyrocket for higher income people. Premiums for the Part D pharmacy program also go up with income.
So folks, here’s the bottom line. The government safety net is going to be pulled away gradually from the middle class and affluent.
This will not only impact long-term care.
It means people will be much more personally responsible for their own retirement income security and even their acute health care security.
Your take-away from today’s program is this.
You have a moral and fiduciary responsibility to your prospects and clients to wake them up to these new realities. You must open their eyes before it’s too late.