Three major problems drive the long-term-care financing crisis:

1. 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 years.

2. Reliance on Medicaid. The middle class, whether consciously or unconsciously, relies on Medicaid for long-term care coverage.

3. 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 living, $26,000.

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 payers.

As 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.

This quadrupling of Medicaid expenditures is not the result of inflation, but a real dollar increase caused by demographics and costs.

PROBLEM #2: Middle-class Americans, whether consciously and unconsciously, rely on Medicaid for long-term care coverage.

When 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 industry.

The 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:

1. The ineffectiveness of its "spend down" provision, and

2. The ability of beneficiaries to transfer (or hide) their assets, which enabled the middle class to qualify as poor.

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 elderly.

Even 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.

It 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.

A 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 thought;

• 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 per month);

• 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 the expenditures.

As 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 costs.

This 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 percent.

The 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.

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 benefits.

The private share of national health expenditures includes: 17 percent from out-of-pocket funds and 31 percent from private insurance.

When we compare national health expenditures to nursing home expenditures, the discrepancy between public and private sources becomes clear.

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.

This 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 percent.

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 CRISIS

The 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 program;

The present federal-state approach to Medicaid continues;

Efforts are made to increase out-of-pocket
contributions (through income and transfer of assets); or

Incentives are created for people to buy long-term care insurance.

The first two proposed "solutions" continue the current entitlement approach by increasing government contributions. The last two are consumer choice plans that would increase private contributions.

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:

Create a 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.

Include long-term 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.

Consolidate all 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.

Allow a 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.

Promote "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 new expenditures.

ENTITLEMENT "SOLUTION" #2: Continue the present federal-state approach.

As 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.:

Revenue 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.

Cost containment 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.

System reforms 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.

The 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

Any of these government entitlement approaches will:

Require massive tax increases;

Make no structural reform;

Fail to address the demographic problem;

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 care/single-payer plan.

That is why there is only one real government entitlement solution, a nationalized single-payer plan. We can do better.

CONSUMER "SOLUTION" #1: Increase out-of-pocket contributions.

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:

Threatening 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.

Threatening 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.

Threatening 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 transfers.

Tapping insurance 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.

Mandating 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.

This 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 insurance today.

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.

The 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:

Threatening 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.

Using tax 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.

Offering traditional 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

We know that:

Additional attempts to increase out-of-pocket contributions or threaten assets are politically unpopular;

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 over time;

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 governments; and

Catastrophic rather than traditional long-term care insurance provides better incentives and protection for individuals and government alike.

A FINANCING SOLUTION BASED ON CONSUMER CHOICE

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:

The federal 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 well.

The state 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.

All individuals 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 over time.

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 and Medicaid.

In 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.

The 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.)

Now, 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.

If 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 long-term care.

If 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.

If 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 care.

RESPONDING TO INCENTIVES

What 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.

What 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?

What 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 limits.

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.

The 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 

The 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.

If 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.

In 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 we do?

FAILED POLICIES 

We 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 savings.

Most 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.

NEW INCENTIVES

We 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 Choice."

The 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.

The 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.

Step 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.

The 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.

If 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

What 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 on deck.

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.

In 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.

To 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 especially.

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 planning lawyers.

I know 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 first.

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 facilities.

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 even tougher.

I know I want my family to be part of the LTC solution, not part of the problem.

Therefore:

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 and investment).

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.

or...

I already own private long-term care insurance.

Note: The mission of the Center for Long-Term Care Financing in Seattle is to encourage private financing of long-term care and to reduce middle-class dependency on Medicaid.