PUBLIC AND PRIVATE ISSUES IN LTC FINANCING FOR THE ELDERLYBy Mark J. Warshawsky, Ph.D.Vice-Chairman of the 2013 Federal Commission on Long-term CareRetirement and Savings ForumICIFebruary 25, 2014

Today’s Agenda• What Are the Real Issues?

• Needs (Kaye, LaPlante, Harrington; NHATS research)• Public Finances and Private Resources (CBO)

• Medicare• Medicaid

• Crowd-Out of Private LTC Insurance• Eligibility Rules and Empirical Evidence• Estate Recovery Efforts by the States

• Private Market Solutions (My Gloss on LTC Commission Financing Approach “A”)• Tighten Medicaid Eligibility • Tax Incentives to LTCI• Life Care Annuity• Medicaid Carve-out• Regulatory Relief for LTCI

• Social Insurance Solutions

LTC Needs, 2007Millions with Significant Needs (2+ ADLs) by Age Group and Residential Setting

All Ages <18 18-64 65+

Community 3.2 0.2 1.2 1.7

Nursing home 1.3 0 0.1 1.2

Percent Elderly Needing Assistance from Others, by Age Group, 2011

Age Group Percent Needing Assistance

65-69 11.0

70-74 12.9

75-79 18.1

80-84 26.1

85-89 41.8

90+ 61.7

Percent Elderly Needing Assistance from Others, by Gender, Race and Income Groups, 2011GenderMale 14.7

Female 24.8

Race/EthnicityWhite, non-Hispanic 18.9

Black, non-Hispanic 27.2

Hispanic 32.5

Other 19.0

Income Quartile, $<15,000 30.1

15,000-30,000 21.6

30,000-60,000 12.8

60,000+ 8.8

Major Sources of Help for Elderly Community Residents with 2+ ADLs, by Age Group, Percent, 2005

Spouse Child(ren) Paid Helper60 – 74 51 33 22

75 – 84 31 48 28

85+ 16 54 41

Unmet Needs for Personal Assistance among Community Residents• Based on survey responses and regression analysis• Of those adults with 2+ ADLs, 29 percent have unmet

needs• Very few of these people, though, get no assistance• Rather they get 56.2 hours a week on average and need

16.6 hours more • Overall, only 6.6% of all needed hours of help are unmet

among adults with 2+ ADLs• Adding in residents of nursing homes, the unmet needs

fall to 4.5% of total needed hours• Hence, unmet needs are not a reason for a new social

insurance program, as was claimed for the ACA

Value of LT Care for the Elderly, 2011 $ billions

Informal Care; 234Institutional Care; 134

Com-munity-based Care;

58

Sources of Payment for Formal LT Care for the Elderly, 2011, $ billions

Medica

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Medica

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Out-of-

Pocke

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Private

Insu

rance

Other

010203040506070

37 40 36

10 11

31 20

3

2 1

Institutional Community-based

Projected LTC Spending for the Elderly

• Spending on LTC for the elderly is projected to climb from 1.3 percent of GDP currently to 3.0 percent in 2050 at current prevalence rates.

• From 2013 to 2023, Medicaid spending on LTC will grow 5.5 percent annually.

• From 2013 to 2023, Medicare spending on LTC will grow 6.5 percent annually.

• Considering the rapid growth in our other retiree income and health obligations and their poor funding, public LTC spending for the elderly is not sustainable, although cost-savings technological or medical breakthroughs are always possible.

Private Long-term Care Insurance (LTCI)

• About 11 percent of the elderly have LTCI.• Coverage for the adult population is 3 percent in 2011, up

from 2 percent in 1999.• Coverage grew 12 percent annually from 1999 to 2005,

but increased only 1.5 percent annually thereafter.• Since 2005, many insurers have exited the market,

premiums have risen significantly, and benefit provisions have been tightened (e.g. lifetime benefit is hard to find).

• These problems were caused by insurer misjudgment on lapse rates and Federal Reserve policy on interest rates, as well as, sometimes, higher claims than expected.

Partnership Programs• The Partnership for Long-Term Care is an arrangement

between states and private insurers intended to reduce dependence on Medicaid for financing LTC.

• LTCI offered through a state’s partnership program enables policyholders to maintain larger amounts of countable assets and still qualify for LTC under Medicaid once the private policy is exhausted.

• States have established their own programs in response to the DRA of 2005. By 2009, 30 states had established programs in addition to the original four states.

• Partnership policies accounted for about 10 percent of all LTC policies in 2011, up from 3 percent in 2007.

Medicare• Medicare and private health insurance cover LTC through a post-acute

care benefit that covers rehabilitative care—short-term stays in skilled nursing facilities (SNFs) and home health visits.

• Medicare will pay for SNF care for up to 100 days only after a prior hospitalization lasting at least 3 days.

• Since 1965, overall hospital lengths of stay have declined. Also hospitals are increasingly holding patients in observation status.

• The LTC Commission recommended eliminating the 3-day hospital stay requirement.

• This change could possibly reduce costs. Still, a new and better trigger would be needed to protect against the use of Medicare to pay inappropriate LTC expenses.

• Something else to note: the Jimmo v. Sebelius settlement eliminates the administrative “improvement standard” requirement for determining Medicare eligibility for LTC services.

Medicaid Crowd-out of LTCI• First discussed by Pauly, modeled extensively by Brown and

Finkelstein in comprehensive simulation work• They estimate that Medicaid can explain the lack of private

insurance purchases for at least two-thirds and as much as 90 percent of the wealth distribution, even if comprehensive, actuarially fair private policies were available.

• In another empirical study, they find that states with more generous Medicaid eligibility had lower rates of private LTCI coverage. 

• An implication of their findings is that public policies designed to stimulate private insurance demand will be of limited efficacy as long as Medicaid continues to impose a large implicit tax.

• Other surveys find public confusion about the current extent of social insurance coverage of LTC.

Medicaid Eligibility• Asset and income tests have been thought to require

spend-down/impoverishment to get LTC benefits paid by Medicaid.

• But the rules explicitly exclude housing (up to $802,000), automobile, personal valuables, term life insurance, (in many states) retirement assets in distribution (not necessarily lifetime), and $116,000 for a community spouse.

• Plus there are reports that it is possible to “game” the system further through the use of trusts and life insurance; listen to late night radio and TV ads from attorneys.

Empirical Evidence on Use of Medicaid by the Upper-Income Elderly• Study by deNardi, French and Jones• They estimate that fifteen percent of elderly individuals in

the middle income quintile, 8 percent in the upper middle quintile, and 5 percent in the top quintile receive government LTC benefits.

• Moreover, because they live longer, beneficiaries in the top income quintile receive, on average, double the lifetime payouts of those less well-off.

• Because of the costs of these undeserved benefits to the upper-income groups, Medicaid lowers reimbursement rates to providers and restricts benefits to contain overall costs; the poor, who really have to rely on Medicaid, are thereby tied to lower quality care and decreased provider flexibility.

Estate Recovery Efforts by the States• The asset exclusions and gamesmanship would not matter,

so much, if states tried to recover assets from the estates of decedents who benefited from Medicaid.

• But all the available evidence indicates the states don’t devote much effort to this legally required activity.

• The most recent study on the subject finds that most states recouped less than 2 percent of total LTC spending. Four states even reported no reimbursements whatsoever.

• It is interesting to note as an aside that this has become something of an issue for the ACA, as estate recovery applies not just to LTC benefits but may also apply to health care benefits provided to those age 55 and older.

Private Market Solutions: Tighten Medicaid Eligibility Rules• Require that a reverse mortgage be taken on the home, and

that that cash flow be included in the income test.• Require that an immediate life annuity be taken from the

retirement account and that that cash flow be included in the income test.

• Include the face value of term life insurance in countable assets, as well as personal valuables and cars in excess of de minimus amounts.

• Reinvigorate state efforts at estate recovery by carefully, repeatedly and prominently investigating the extent of their activities.

• Conduct a public education campaign on what Medicaid and Medicare do and do not cover for LTC.

Private Market Solutions: Tax Incentives for LTCI

• Allow withdrawals from existing 401k, IRA, or Section 125 accounts to pay LTCI premiums without triggering a taxable distribution event. This policy change effectively lowers the cost of LTCI, especially for those in higher tax brackets.

• We guess that this change would have minimal net budget implications.

• The tax costs of incentivizing broader LTCI participation would be more than offset over time as those newly covered by private LTCI coverage draw on private rather than public resources to finance their care.

Private Market Solutions: Life Care Annuity• Insurance product innovation proposed and investigated by

Warshawsky and colleagues• Would combine LTCI and immediate life annuity, issued at

retirement ages.• Because those with impaired longevity are generally not able to

get LTCI, but in APV terms are not (much) more expensive than those with normal or superior longevity, they are attractive to and should invited by the superior longevity pool who select into life annuities and who can pass current LTCI underwriting.

• This combination means that underwriting can be minimal for the life care annuity and it can be offered at a slight discount overall.

• The proposal would change the tax law to allow investment and distribution in the LTCI portion of the life care annuity through tax-advantaged retirement accounts.

Private Market Solutions: Medicaid Carve-Out

• Most direct assault on problem identified by Brown and Finkelstein.

• Upon retirement, individuals should have the choice of receiving a lump-sum payment from the government for a significant portion of the expected value of their Medicaid benefits—most for the poor, with little or nothing for the better off.

• Retirees would be obliged to use the payment to purchase private, permanent LTCI in place of Medicaid coverage. This would further reduce Medicaid’s future liabilities.

• One could envision the creation of a LTCI exchange to facilitate this solution. 

Private Market Solutions: Regulatory Relief for LTCI

• Currently regulated tightly at both the federal and state levels

• Relieve state regulations on high-deductible LTCI, thereby providing for catastrophic insurance coverage and for clarity to families about the amount they need to save for deductibles or provide for in their Medigap policies.

• For sufficiently large changes in the macroeconomic environment, allow (in the upward direction) and require (in the downward direction) writers of LTCI to change automatically the pricing of existing outstanding LTCI policies on an actuarially fair basis.

• Similarly, the requirement to offer a 5% COLA for benefits should be softened to reflect recent inflation rates.

Social Insurance Solutions• There were several Commission members who proposed

social insurance solutions – either expanding Medicare or creating a new mandatory federal LTCI program.

• The exact (or even approximate) scope of these programs were not specified. And no CBO scores were obtained.

• But relevant are the following calculations: if the federal government bought every adult (18+) in the US a fairly generous LTCI policy (plan D) from the OPM FLTCIP, it would cost $812.5 billion annually for a 5% ACIO or $378.2 billion for a FPO policy. There is considerable advance savings implicit even in a FPO policy (perhaps there should be term LTCI), but anyways, even in Washington, DC, that is a lot of money!